Archive for the ‘ In the News ’ Category

Wells Fargo: Worst Bank Ever? Part IV…

I’m cheered to see that others out there share my opinion of Wells Fargo Bank. For my prior screeds against this bank, see here, here, and here.  My rants against Wells Fargo may soon have as many volumes as the Harry Potter books.

Seriously, I worried that my dislike of the bank might be overblown but obviously not when ever-more-harrowing details of their practices keep coming to light, such as those recently provided by The Atlantic and Rolling Stone.

We should all be riding on the Wells Fargo stagecoach: to get as far away from that bank, as fast as possible.

Two Good Reasons to Avoid Post-Bankruptcy Loans

A client sent me a letter he got from a car dealership touting the financing he can get even though he is currently in bankruptcy.  You can find a copy of the letter here.

How does a car dealer think of a person going through bankruptcy? Desperate? A victim?  I do not see any financing terms here.  However, I would almost guarantee that this is not a good deal for anyone.  I have seen financing companies impose 8 percent interest on car loans – per month.  That’s almost 100 percent per year.  The letter suggests getting rid of your current car and getting a new one, so that you can re-establish your “good” credit.

A good credit rating, of course, just means that you will pay less to borrow money in the future.  I recommend that my clients avoid borrowing a lot of money after bankruptcy, because borrowing got them into trouble in the first place.  When there is a real need to re-establish credit, there are better ways than to buy a new car on credit.  Take a look at this article for better ideas.

So the first good reason to avoid this solicitation is because it is unlikely to be a good deal.  The second reason? This guy is in Fontana. I don’t care if you are bankrupt; I don’t want my clients to need to go to Fontana for a car.

Payday Lenders

Here is a very amusing and outraged report on “payday lenders” from John Oliver, the British reporter who apprenticed with Jon Stewart and Steven Colbert.

He’s accurate in presenting the problem: desperate and unthinking people can get money easily, but they will pay astronomical interest and the lenders are unscrupulous when it’s time to collect.

Few of my clients have “payday loans” to discharge, but one in particular stands out because the creditor threatened to arrest her. Actually, the creditor still threatens arrest today, but also gives no return address so I can’t serve it with papers to get an injunction and an award of attorney’s fees.

John Oliver bemoans the lack of regulation against these predators. I don’t see that better regulation will do much; industries almost always “capture” the governments trying to regulate them. Any industry has more capital and focused energy than the members of the general public who are exploited by the industry. Lawmakers will always listen respectfully to the industry’s side of the story, no matter how unconscionable their actions, because the industry can show results at election time.

On an issue like this, I become somewhat libertarian. The best defense against these predators is education, not regulation.

I love having my 18-year-old daughter work in my law firm.  She’s smart and motivated.  She gets to see law in action.  She’s done wonders for my website, and she gets the mail out.

She keeps a timesheet.  I pay her through a payroll company, which withholds funds for income and social security taxes, among other deductions.

Not every employer is as honest and real-world as I am about the employment relation with a child.  Hiring your child is perfectly legal, in fact, I encourage it, but it must be done carefully and transparently.  Some parents mistakenly believe that if they take some of their income and pay a child, they may take a deduction on the payment to the child and the child will pay tax at a lower marginal rate than the parent: a seeming win-win. Not so.

The IRS frowns on these schemes. The latest person to fall foul of the rules is a Ms. Patricia Diane Ross, who took her case to the Tax Court and lost: T.C. Summary Opinion 2014-68.

Ms. Ross owned a Schedule C business, Ross Professional Services, LLC, that helped government agencies staff their operations.  She had three children, ages 8 through 15.  The children, according to Ms. Ross, shredded paper, stuffed envelopes, copied, sorted checks, filed documents, put out the trash, carried equipment, and helped her shop for supplies. For these tasks, she paid the children.  But she made some mistakes that came back to haunt her:

  1. She paid the children in pizza.  Rather than give the children a paycheck, she claimed she kept a ledger of how much they had earned and deducted the cost of their restaurant meals and a tutoring/play activity service from that ledger.  These expenses sounded to the IRS and the Tax Court judge more like the regular kind of a support that a parent is expected to give to her children.

When I represented the Commissioner of Internal Revenue, I came across a family that paid their minor children a very regular wage: $5,000 twice a year, two days before the children’s private tuition bill was due.  The tuition bill got paid out of the children’s accounts.

Lesson one: if you employ your children, pay them in money rather than support.

  1. She did not pay a regular hourly wage.  Dividing “wages” paid by the hours Ms. Ross reported for each kid resulted in an hourly wage varying from $4 to $30 with little correlation between the child’s age, skill, or task, and the wage paid.

Lesson two: if you hire your child, keep good timesheets and pay a regular wage.

  1. She did not withhold Federal income tax or other deductions, saying that the children did not need to file tax returns.  But anyone who makes more than the standard deduction ($6,200) plus the exemption amount must file a tax return.  When the child is being claimed as a deduction on Mom’s tax return, the exemption amount is zero.

Lesson three: treat your employed child as a real employee subject to withholding.

  1. The children got paid for chores: “the activities performed by petitioner’s children seem analogous to . . . washing windows, cleaning screens; shoveling snow; moving grass; tending shrubs, trees, and underbrush; assembling papers; picking up mail.”  The Court found these activities sounded more like parental training and discipline, not services performed by an employee for an employer.

Lesson four: pay your children only for tasks that advance the business, not for tasks that advance the household.

  1. She did not give the children their own bank accounts.  Well, the children actually had bank accounts about 200 miles away (where their father lives?), but Ms. Ross said she was too busy to open local accounts for them.  Thus, she said, it was “more convenient” to pay for things as the children directed her to, matching spending against their “earnings.”  It does not appear that the judge found this explanation convincing.

Lesson five: give your employed children real accounts in a real bank.

I am pleased to say that, if the IRS were to audit my law firm, it would find that my daughter’s earnings are real earnings and a real deduction from the income I collect.




IRS and the Tea Party

A few months ago, the United States saw the political theater of Congress outraged at the IRS’s targeting of Tea Party organizations for special scrutiny on determinations of whether they qualified for tax-exempt status. It looked like the IRS was politically biased against conservative causes.
The IRS, however, had a great defense that it didn’t use. It’s the same defense that Colonel Jessep (Jack Nicholson) uses in the movie A Few Good Men: “You want me on that wall!”
The Internal Revenue Code grants tax-free status to “social welfare” organizations. What is a “social welfare organization?” Congress left that unclear, so the IRS cleared it up somewhat with a regulation 40 years ago: among other criteria, these organizations can’t spend more than 50 percent of their time on political campaigns for candidates (as opposed to ballot initiatives).
In the absence of congressional guidance, and with the regulation standing the test of time, the IRS chose recently to devote its scarce resources to organizations that it thought were most likely to be spending more than 50 percent of their time on political activities. After all, many Tea Party entities loudly and publicly proclaim anti-government, smaller-government, and anti-tax sentiments. From the IRS enforcement side, this probably seemed like sensible profiling.
So why didn’t the IRS provide this defense? Because the IRS engages in a dysfunctional relationship with Congress. Congress didn’t worry itself with giving the IRS any guidance on what a “social welfare” organization is. This allows Congress to occasionally step in, showing public outrage at the IRS overstepping its ill-defined bounds, and rescuing freedom from the jaws of the bureaucratic beast it created.
Members of Congress always want to show their constituents that they side with the common man against the big, bad government. And yet congress members depend on the IRS to collect the money that pays their salaries and funds the government the congress members are a part of. Congress needs the IRS, but doesn’t want to admit it. The IRS, of course, needs Congress; the IRS gets almost but not quite all the funding it needs to function (so Congress members can show that they control the IRS, not the other way around).
In a showdown with Congress, the IRS will almost always appear submissive, because everyone wants it that way.

Large local business files chapter 11

I often ride my bike past the headquarters for THQ, a large video-game company in Agoura Hills, California.  In fact, it’s the third-largest employer in the city, after Bank of America and the local school district.   Two days ago, it filed for bankruptcy protection under Chapter 11 of the code (click here to view the LA Times article).  The debtor’s attorneys listed on the filing are Gibson, Dunn, and Crutcher in Los Angeles, and Young Conaway Stargatt & Taylor, a local firm in Wilmington, Delaware, where the corporation filed its case.

Even though world headquarters for this company are down the street, the Delaware filing is a reminder that the venue provisions for bankruptcy courts allow a filing in the debtor’s district of (1) residence, (2) domicile (residence and domicile are not the same thing), (3) principal place of business in the United States, (4) principal site of assets in the United States, or (5) incorporation.  The first four work for people as well as corporations: I once filed a case for a U.S. citizen residing in Switzerland by showing that he owned a bank account and shares in a corporation doing business in Agoura Hills.

THQ’s president spins the chapter 11 filing as an opportunity, and I admire that.  The company faced undeniable problems (which, having almost no interest in video games, I am happily ignorant of) and had lost $2 billion in market capitalization over the last six years.  That’s a lot of mojo down the drain.  If, as the company and the LA Times report, the company found an investor to purchase its assets, bankruptcy will be a great vehicle for it to strip off the liens attaching to those assets and allow it to continue doing business and catering to the tastes of hard-core action gamers.  We’re probably all better off in that case, because those guys will stay off the streets, to blow up zombies on their electronic screens, rather than interact with the rest of society.

Lenny Dykstra sentenced for bankruptcy fraud

He had a great mansion in Lake Sherwood, near Thousand Oaks, but when his financial-services firm fell apart, so did his life.  Lenny Dykstra thought he could pocket the money from selling his memorabilia, but the bankruptcy court thought differently.

Lesson here: it makes no sense to try to hide any assets from the bankruptcy court.  As a debtor, you are seeking a legal determination that you don’t owe the debt; in return, you are supposed to turn your pockets inside out and let the court tell you what you can keep.  What Dykstra did would have allowed him to get the benefit of bankruptcy without the burden of turning in all his assets; it ain’t fair to his creditors, and it ain’t fair to honest debtors who would have to face their creditors’ suspicions that they might be getting away like Dykstra tried to.