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Monday, January 16, 2017

Who Pays the Price for Trickle-Down Tax Policy Failures? 

Readers of MauledAgain know that I consider demand-side economics to be far superior to supply-side economics. As a recent facebook meme put it, put $100 in the hands of a poor person, and that person will spend it because that person needs to do so. Put the $100 in the hands of a rich person, and the rich person doesn’t do anything, because that person doesn’t need to do anything. The $100 gets stuffed in a bank overseas. The theory that it is used to finance economic growth fails, because the only people who qualify for borrowing the $100 are those who already own sufficient collateral and have enough income to pay the interest on the loan.

Those who support shrinking the federal government and putting more power into the hands of the states present, as one argument for that position, the value of states as “laboratories” in which policy theories can be tested on a smaller scale rather than imposed on the entire nation. There is some value in this view, because as the instructions for some cleaning substances often advise, use it on a small out-of-the-way portion of the item to be cleaned to see if there are any unexpected unwanted consequences.

One of the best laboratories demonstrating the total failure of trickle-down supply-side economics and its resulting tax policy is Kansas. I’ve written about the Kansas debacle several times. In A Tax Policy Turn-Around?, I explained how the Kansas income tax cuts for the wealthy backfired, causing the rich to get richer, the economy to stagnate, public services to falter, and the majority of Kansans to end up worse than they had been. In A New Play in the Make-the-Rich-Richer Game Plan, I described how Kansas politicians have been struggling to find a way to undo the damage caused by those ill-advised tax cuts for the wealthy. In When a Tax Theory Fails: Own Up or Make Excuses?, I pointed out that the Kansas experienced removed all doubt that the theory is shameful. In Do Tax Cuts for the Wealthy Create Jobs?, I described recent data showing that the rate of job creation in Kansas was one-fifth the rate in Missouri, a state that did not subscribe to the outlandish tax cuts for the wealthy that Kansas legislators had embraced. In Kansas Trickle-Down Failures Continue to Flood the State and The Kansas Trickle-Down Tax Theory Failure Has Consequences, I described how large decreases in tax revenue, the opposite of what is promised by the supply-side theorists, triggered cuts in public education, and in turn stoked the fires of voter frustration. The voter reaction, however, did not push out of office enough supply-side supporters.

Now comes news that in order to deal with the almost one billion dollar budget shortfall confronting Kansas, its governor, Sam Brownback, architect of the state’s fiscal disaster and prominent supporter of the trickle-down theory, has proposed a series of debilitating spending cuts, impractical sin tax increases, and golden-goose killing. These proposals, if enacted, would simply push the underlying problem down the road, to loom even more catastrophically after Brownback leaves office and cannot be held responsible for the damage. Brownback wants to take money out of the state highway fund. He wants to sell off a future income stream from a tobacco litigation settlement. He wants to increase alcohol and tobacco taxes. He wants to postpone the increases in the state’s payments to an underfunded state employee pension fund. He wants to ignore the planned decrease in the income tax rate on the lowest tax bracket.

The consequences of these proposals, if enacted, adversely affect middle and low income Kansans. For example, failing to lower the income tax rate on the lowest tax bracket harms low and middle income taxpayers much more than it hurts the wealthy taxpayers. The spending cuts would reduce the quality of rural highways and adversely affect hospitals. State employees would suffer from the failure to increase payments to their pension fund. Selling off the tobacco settlement income stream would mean loss of funding after 2018 for programs supported by that income, programs such as Early Head Start.

Nor is there any guarantee that the revenue increases projected in the budget would materialize. As discussed in this story focusing on the proposed alcohol tax increase, Kansans living near the Missouri border would simply make their purchases in that state. A sizeable portion of the Kansas population lives in that area.

Even some Kansas Republicans recognize the problems with the governor’s attempt to fix the mess he created by cutting taxes for the wealthy. Democrats call it the worst budget ever.

Yet the governor refuses to repeal the income tax exemption for limited liability companies, S corporations, and other closely held businesses. The cost of this exemption is roughly 25 percent of the budget shortfall. Some Kansas legislators want to repeal the exemption, pointing out that it would reduce the shortfall by as much as could be obtained by selling off the tobacco litigation income stream.

So what has the nation learned from the trickle-down economics experiments in Kansas? It depends. Some people, including some former devotees of supply-side economics, recognize what I’ve argued for quite some time. As I explained in A Tax Policy Turn-Around?, tax cuts for consumers are more valuable than tax cuts for money stashers. Improving the economic posture of the middle class and the poor generates more sales, which drives up sales tax revenue, and increases corporate profits, which increases corporate income tax receipts as well as shareholder return. As I explained in Job Creation and Tax Reductions, people don’t create jobs unless they need workers. They don’t need workers unless they have customers who want to purchase the goods and services that they would provide. If the American middle class and those living in poverty or near-poverty don’t have money, they don’t make purchases. In fact, they cut back on purchases. And that, understandably, causes the owners of capital and the entrepreneurs of the business world to cut, not create, jobs. In Kansas Trickle-Down Failures Continue to Flood the State, I explained that those who think more tax cuts for the wealthy will solve the problems created by tax cuts for the wealthy are suggesting, in effect, that the solution to flash floods is more rain, that the solution to car theft is more car theft, and that the solution to food poisoning is eating more spoiled food. Seriously, that sort of thinking is not what made the nation’s economy great, nor is it a pathway to future prosperity.

Unfortunately, there still are people, and politicians, who subscribe whole-heartedly to supply-side trickle-down economics and tax policy. Despite the disaster in Kansas, and in other states that also took this approach, the Congress is readying itself to move forward on the same catastrophic path. Unable to learn from facts, unable to break away from devotion to the oligarchy, and unable to think critically, the national legislature is about to plunge into a tax and economics adventure that makes the disastrous budget insanity of 2001-2008 pale in comparison. Who will be hurt? Not the oligarchy. Spending cuts have little or no effect on oligarchs. But they can harm, agonize, sicken, and kill the poor and middle class. Yet some of those people continue to vote for politicians and policies that cause, and will continue to cause, all sorts of problems for them. Why? It comes back to ignorance. There’s a reason scammers pretending to be Nigerian princes, IRS auditors, and FBI agents persist. Their con games work. For a reason. Ignorance. Ultimately, the ignorant pay the price.

Friday, January 13, 2017

Ignorance, Tax or Otherwise, Is Dangerous 

Early in the week, as I was reading my facebook newsfeed, I noticed a post that had been placed on a friend’s facebook wall by a third person. The person wrote, “My daughter told me today that she was sitting in a doctor’s waiting room and overheard a woman say to her friend, ‘I thought they wanted to get rid of Obamacare, not the Affordable Care Act.’ “ My friend replied, “Ignorance reigns supreme in the U.S. nowadays.”

Several thoughts raced through my brain. First, “does it ever!” Second, my friend’s comment is not unlike many I have made while complaining about the rapid spread of the ignorance infection throughout post-modern culture, in posts such as Tax Ignorance, Is Tax Ignorance Contagious?, Fighting Tax Ignorance, Why the Nation Needs Tax Education, Tax Ignorance: Legislators and Lobbyists, Tax Education is Not Just For Tax Professionals, The Consequences of Tax Education Deficiency, The Value of Tax Education, More Tax Ignorance, With a Gift, Tax Ignorance of the Historical Kind, A Peek at the Production of Tax Ignorance, When Tax Ignorance Meets Political Ignorance, Tax Ignorance and Its Siblings, Looking Again at Tax and Political Ignorance, Tax Ignorance As Persistent as Death and Taxes, Is All Tax Ignorance Avoidable?, and Tax Ignorance in the Comics. Third, there are enough tax provisions in the legislation to consider it as part of the tax family, and thus eligible for inclusion in the tax ignorance list.

A day later, another facebook friend posted a link to an article that touched on the same subject though it did not involve someone in a doctor’s waiting room. It was enough to make me think that yet another piece of misinformation is making the rounds on social media. According to the article, someone happy with the Senate vote to repeal “Obamacare” rejoiced that the nation is “One step closer to fixing this mistake.” A second person then complained about Republicans “celebrating the ACA’s repeal in the senate.” The first person then tried to correct the second person by explaining, “First, we’re talking about Obamacare, not the ACA. Secondly, my health insurance is through the ACA, so I’m definitely not the kind of person to look down on others for needing help.” A third person points out, “If you’re on Obamacare why * * * are you celebrating the outcome of this vote? If the Republicans get what they want you’ll lose your insurance.” The first person replied, “My insurance is through the ACA (Affordable Care Act), which is what they had to come up with after Obamacare crashed and burned as bad as it did. So I’m gonna be fine.”

This is beyond frightening. Is there not a civic duty on every citizen of voting age to be informed and to do what is necessary to become, and stay, informed? According to the article, the first person, apparently realizing that he was rejoicing at his own health care demise, “fell silent,” but additional individuals jumped in to point out the first person’s “stupidity.” It’s not stupidity. It’s ignorance. Once the first person had been exposed to the facts, that person did not lack the ability to understand. There was enough intellectual ability to process the facts. What was lacking was the set of facts necessary to reach a logical and intellectually sound conclusion. It turns out that voting for those promising to repeal “Obamacare” was the same as voting for those promising to repeal the ACA. Someone dependent on the ACA and not wanting it to be repealed ought not vote for those promising to repeal it. The person did demonstrate a bit of intellectual deficiency, because their belief that the ACA replaced Obamacare ought to have caused the person to question why there was a need for certain politicians to campaign on promises to repeal Obamacare, considering that in this person’s mind, Obamacare had already been repealed and replaced with the ACA.

The article points out that whoever shared the exchange redacted the names, making it extremely difficult, if not impossible, to verify that the online conversation occurred. Similarly, it’s unclear if the comment overheard in the doctor’s office was real. My guess is that both the conversation and the comment did take place. It’s simply very consistent with the sort of illogic that has overtaken the nation as the ignorance infection does its work. These are not isolated instances. The writer of the article suggests, “Millions of individuals in the United States believe exactly as the individual in the conversation does.” I agree. Consider how widespread the foolishness and ignorance about the size and name of the Internal Revenue Code has become, as I have pointed out in posts such as Bush Pages Through the Tax Code?, and continuing with Anyone Want to Count the Words in the Internal Revenue Code?, Tax Commercial’s False Facts Perpetuates Falsehood, How Tax Falsehoods Get Fertilized, How Difficult Is It to Count Tax Words, A Slight Improvement in the Code Length Articulation Problem, and Tax Ignorance Gone Viral, Weighing the Size of the Internal Revenue Code, Reader Weighs In on Weighing the Code, Code-Size Ignorance Knows No Boundaries, Tax Myths: Part XII: The Internal Revenue Code Fills 70,000 Pages, and Not a Surprise: Tax Ignorance Afflicts Presidential Candidates and CNN.

The degree to which ignorance is dangerous varies. Despite my annoyance at the false claims about the name and size of the Internal Revenue Code, the ignorance of those who get it wrong is more disturbing as a symptom than it is in terms of the particular risks it poses. The Code exists, its name is set forth at the beginning, and its size is there for anyone with a smattering of intellect and diligence to compute. If the exaggeration is designed to promote calls for reduction in size, it does not detract from the reality of the Code’s actual size, which is big even using the true page count, and complexity, which is very real. On the other hand, thinking that the ACA will remain in place, providing health care coverage for tens of millions of Americans, if “Obamacare” is repealed, is dangerous because it generates support for the repeal of the ACA. That, in turn, will harm tens of millions of Americans many of whom thought that they would not be hurting themselves by supporting those who want to repeal the ACA, a/k/a Obamacare. Then again, way too many Americans do things that harm themselves because they are unaware that what they are doing is harmful. That is the price paid for ignorance. It’s only a matter of time, given the current cultural climate, for collective ignorance about something existential to exact an ultimate price.

Wednesday, January 11, 2017

With Humor, Taxes a Little Less Deadly 

The headline of a recent Philadelphia Inquirer commentary caught my eye. It read, “With humor, life a little less taxing.” My immediate thought was, “Of course. Humor makes all sorts of things tolerable. And sometimes, absent humor, a person’s reaction, be it anger, frustration, or anxiety, can be deadly.

Bob Martin, the author, opened his commentary by pointing out something that had already been publicized but that deserved another moment in the spotlight, especially for the benefit of those who had not caught on. If a person at the Philadelphia International Airport s in Terminals B through F and purchases a soda or other beverage subject to the “soda tax,” the price is increased by the 1.5-cent-per-ounce exaction. But if a person is in Terminal A-West or A-East, the tax does not apply. Does that seem strange? Perhaps. The reason is simple. The latter two terminals are not within the city limits. The Philadelphia International Airport occupies land on both sides of the border between Philadelphia and Tinicum Township in Delaware County. I wonder if officials in that township are eyeing the revenue potential and pondering the possibilities of cashing in on what might appear to them to be a sweet deal.

One of the other tidbits Bob Martin addresses is the traffic jam at the Breezewood Interchange of the Pennsylvania Turnpike. That’s where interstate 70 intersects with the Turnpike, and from that point heading west, Interstates 70 and 76 are aligned on the same highway, namely, the Turnpike. To get from interstate 70 to the Turnpike, or vice versa, motorists must travel through a congested quarter-mile-long strip of hotels, restaurants, fueling station, and other stores. Why not a direct connection? Years ago, a federal law, since repealed, prohibited a non-toll road, such as interstate 70, from terminating at a toll road, such as the Turnpike. A similar situation exists for motorists trying to get from Interstate-95 to the Turnpike in Bucks County, or vice versa, but that mess will be alleviated soon when the new interchange that is being built is opened. Will that happen in Breezewood? Bob says there is no plan for doing so. He doesn’t expect one. Neither do I. So I laugh. I laugh at the foolishness and the short-sightedness.

The closing entry in Bob Martin’s list of insanities for which humor appears to be the only effective immediate remedy is the best of the bunch. It doesn’t involve taxes, at least not directly, nor highways, nor chocolate chip cookies, nor model trains, nor family histories, so I’ll simply recommend highly clicking on the link and investing a quick minute. The entire commentary provides a good dose of laughs and smiles useful at the start of tax season.

Monday, January 09, 2017

Don’t Forget to Sign the Return 

It’s an easy mistake to make. It’s not a matter of deliberate noncompliance. A taxpayer fills out a federal income tax return but forgets to sign it before mailing it to the IRS. The taxpayer has a balance due, so the taxpayer includes a signed check for the amount due. A few months later, the IRS sends the return back to the taxpayer, pointing out that it is not signed. The taxpayer signs it and returns it to the IRS.

Problem fixed? Not really.

Does this happen? Yes. It happened to the taxpayer in Sullivan v. Comr., T.C. Memo 2017-2. Despite fixing the error and despite paying the tax, the taxpayer was hit with a late filing penalty.

The Tax Court upheld the penalty, reasoning as follows. The penalty applies if a taxpayer fails to file a return on time. An unsigned return is not a return, so what the taxpayer initially sent to the IRS was not a return. The taxpayer argued that because it was an honest mistake, there was reasonable cause and no willful neglect, thus negating the penalty. The Tax Court concluded that, although the circumstances did not indicate willful neglect and appeared to be a reasonable attempt to correct the lack of signature, it was bound by an earlier decision that “overlooking” a signature is not reasonable cause.

It appears to be, and is, a harsh result. Most instances of failing to file income tax returns are deliberate and accompanied by other violations, such as failure to pay the tax that is due. Simply forgetting to sign is something that can happen to anyone, especially when stressed from working on an income tax return. Yet, sometimes in life, being forgetful can be dangerous or lethal. The key is to find a way to remember the things that cannot be forgotten without bad consequences. Taxpayers using tax return preparation software are reminded and assisted with the signing process. Perhaps taxpayers still using paper forms can make the very first thing that they do the placing of a yellow post-it note next to the signature line, and the placing of another on the envelope with a “don’t forget to sign” message.

Friday, January 06, 2017

Fighting Math (and Tax) Ignorance 

One theme that runs consistently through my years of writing for MauldAgain is my how deficiencies in arithmetic skills nurtures tax and other ignorance. For example, in Doing Arithmetic: An Insight into Tax Policy Conundrums, I wrote:
Sometimes, in trying to help people understand the facts beneath tax policy issues, I wonder why many have difficulty grasping the essentials, and thus being misled or even duped by the sound bit and buzz phrases tossed about by politicians and lobbyists. The inability of so many people to understand why flattening tax rates does just about nothing to simplify tax law, or to comprehend how phase-outs cause tax rates on middle incomes to be higher than those on high taxable incomes, probably correlates with deficiencies in arithmetic understanding.
In other words, it is essential that Americans understand arithmetic, which is, of course, a subset of mathematics.

In a recent commentary in the Philadelphia Inquirer, Melissa E. Libertus and and Roberta Michnick Golinkoff examined the arithmetic skills deficiency problem. They begin by pointing out, “Educators and parents alike are alarmed over the persistent gaps between 15-year-olds in the United States and their international peers on science and math outcomes.” They then share some of the overwhelming evidence of the problem. No matter what the “science is irrelevant” folks might claim, there is no doubt that Americans, including American children, do not fare well when it comes to math. The problem is not a secret, and it’s something I noted almost a decade ago, in Who Should Test the Students?:
I wonder how many people are going to take offense at my thoughts on what is turning out to be a major legislative battle in Pennsylvania. A while ago, the governor of Pennsylvania proposed that high school diplomas be awarded only to those students who passed state high school graduation tests in ten subjects. * * *

The governor's motivation rests on several concerns. First, even though tens of thousands of eleventh graders fail one or more state school assessment tests, almost all receive diplomas at the end of their senior years. Considering that as many as 45 percent of juniors have fallen short on one or more of these tests, either an amazing amount of catch-up is being accomplished or students are graduating high school deficient in particular skills. Second, increasing numbers of college students are being funneled into remedial courses to learn what they ought to have learned by the time they graduated high school. Third, employers complain that many high school graduates whom they hire have little or no reading skills, are incapable of doing arithmetic, or both. Are these believable accounts? I think so. Why? Because among law students whom I teach, far too many cannot spell, cannot write well, do not understand grammar, and struggle with simple arithmetic. Considering that law students are drawn from college graduates with grade point averages on the high end of the scale, it is rather disappointing and worrisome that among the very best there is so much deficiency.
So the issue isn’t whether there is a problem, but what should be done.

Libertus and Golinkoff offer an important insight. They write:
Evidence suggests that the road to strong STEM education starts not in elementary or middle school, but at home and in preschool with very young children. Some parents and teachers talk about numbers and math frequently so that their children are hearing words such as two, twelve, more, less, count, and add repeatedly in various contexts. Other parents and teachers, however, rarely use number and math words or engage children in meaningful math-learning activities.

* * * We must bring math into our homes and preschools.

To be specific, research indicates that some parents of toddlers use an average of more than 30 number words every hour * * * Other parents, however, use only one number word every two hours, on average. This creates close to a 6,000 percent difference in math input at home. * * *

* * *

Numbers can be a natural part of parents' talk with their children. At the grocery store, for example, parents can talk about the number of bananas in a bunch and how many would remain if you picked off two, the cost of a child's favorite cereal, and what it means to be "on sale." At home, they can count the number of plates needed to set the table, and they can weigh and measure flour and salt when they bake together. When children ask how long it takes for the cookies to bake in the oven, parents have another opportunity to use number talk.

When traveling by car or bus and children ask the perennial "Are we there yet?," parents can talk about the number of miles and minutes to reach their destination. Board games like Chutes and Ladders that require counting give numbers real meaning as they correspond to how many spaces children can advance with each throw of the dice. Building with blocks or doing puzzles together can fuel the spatial skills that undergird math knowledge.
I am in total agreement with Libertus’ and Golinkoff’s suggestions. There is no doubt that children absorb the environment in which they are raised. Children who are surrounded – or as I put it in Doing Arithmetic: An Insight into Tax Policy Conundrums, immersed – in numbers grow up to be better at arithmetic, just as children who are exposed to, and immersed in, books grow up to be better readers, children who watch and help their parents cook are better chefs, and children who are engaged in cerebral activities at home develop better critical thinking skills. The challenge, as I see it, is that too many of America’s children are growing up in environments lacking in literacy, numeracy, and cerebral activities. They absorb the prejudices of their parents, and too many fail to get past those barriers. When parents send the message that “book learning” is for fools, that reading is unimportant, and that numbers don’t matter, they are depriving their children of the opportunity to do well in life. Though Libertus and Golinkoff also suggest that the pre-school numeracy environment also needs to be improved, there is only so much that can be accomplished by educational institutions when the tide at home is pushing back in the wrong direction. What the nation needs is an improvement in the parental environment, and that requires parental education. Though some adults who failed to complete high school eventually see the light and return to school, too many do not do so. It’s time to tackle this growing illiteracy and innumeracy problem. Nothing less will do in the fight against ignorance.

Wednesday, January 04, 2017

Trying to Make Cents of Two More Coin Payment stories. 

On Friday, in It Still Doesn’t Make Tax Cents, I commented on two more stories of someone trying to use coins to pay an amount owed to a government. This post was a follow-up to an earlier one, Does It Make Tax Cents?, in which I commented on several stories about taxpayers trying to pay tax bills with pennies.

Now, thanks to a reader, another story can be added to the list. The reader directed my attention to this story about the mayor of Hialeah who, back in November of 2015, tried to pay a $4,000 fine entirely in coins. The fine had been imposed by the Miami-Dade Commission on Ethics and Public Trust for intentional breach of commission rules, when he lied about collecting interest from someone who had set up a Ponzi-type arrangement. The mayor brought in 28 buckets filled with 360,000 nickels and pennies. The commission rejected the payment because it was “commercially unreasonable” and ran afoul of yet another commission requirement that fines be paid by check. So the mayor, claiming that he was unaware of such a requirement, suggested that the commission sue him, arguing that he was making payment in valid United States currency. The commission proceeded to sue the mayor. And that is where the story ended.

Curious, I decided to discover the outcome of the litigation. According to this report, the case settled when the mayor agreed to count and box the coins himself. He did so, and delivered 140 boxes of pennies and five boxes of nickels. He made the delivery to a bank where the commission has an account.

My immediate reaction was yet more questions. Did anyone double-check the mayor’s counting? Did the bank take the coins out of the boxes and run them through a coin counter? If so, why not skip the boxing process? Did the bank weigh the boxes? Perhaps someone has the answers. I don’t.

Monday, January 02, 2017

When Tax Legislation Fails: Who Pays the Price? 

Several months ago, in Getting a Tax Statute Right the First Time is Much Easier Than the Alternative, I discussed a decision by the Supreme Court of Pennsylvania to strike down the state’s slots tax because it, in effect, subjected casinos to varying rates of taxation in violation of the uniformity clause of the state’s constitution. The court gave the legislature 120 days to fix the statute, by staying its order for that length of time. One reaction, from almost every direction, was a prediction that fixing the statute would be difficult, because, among other things, the legislature would be tempted to do more than simply redraft the slots tax provisions. For example, the emergence of video-gaming terminals and online gambling during the years since the statute was originally enacted most likely will entice legislators to offer provisions dealing with those activities.

Shortly thereafter, in An Ever-Expanding Tax To-Do List, I discussed reports that the legislature would face competing suggestions and conflicting interests when it tries to fix the problem. I pointed out that the localities depending on the tax revenue from the casinos must prepare budgets for 2017 long before the 120-day suspension period set by the Supreme Court expires. Once again, bad drafting years ago planted the seeds of public finance crises in the present day.

So while the legislature fiddles with the issue as the clock winds down, two different approaches appear to be taking hold among localities. According to one report, Valley Forge Casino will continue paying an amount to Upper Merion Township, calculated as though the overturned tax were still in effect. The agreement between the casino and the township has permitted the township to move forward with its 2017 budgeting process, and has eased concerns that it would need to raise other taxes or severely cut services to balance that budget. The report also points out that several other casinos have agreed with the localities in which they are located to continue making payments along the same lines.

But according to another report, the Sands Casino Resort Bethlehem, rather than agreeing to continue making payments, will wait to see what the state legislature does. That leaves Northampton County in a quandary as it tries to establish its financial and services plans for 2017. In response, the county district attorney has informed the casino that he “can’t justify the use of his office’s resources to help a profitable corporation that isn’t a good corporate citizen,” and thus “may not prosecute cases involving bad checks or chip thefts” at the casino. It is unclear whether a public official can refuse to perform services that the official is required by law to provide simply because a taxpayer has not paid taxes. There are two variants at work in this instance. Consider a homeowner who is delinquent in paying real property taxes. Does that justify the police in not responding to an armed break-in at the residence, or the fire department from showing up to put out a blaze? I think not, on both legal and common sense grounds. The comparison breaks down, though, for two reasons. First, the prosecutor has discretion when it comes to pressing charges and investigating crimes. Second, and perhaps this is more important, the casino is not under a legal obligation to pay the overturned tax or any amount in lieu thereof. Unfortunately, Northampton County cannot sue the legislature or the individual legislators who haven’t solved the problem, nor can they sue the legislators who in 2004 enacted a badly drafted statute.

There is an important lesson to be learned, and it isn’t a question of how a county or its officials should deal with a potential revenue shortfall. The lesson is that those who enact legislation, or promulgate regulations, need to do as good a job as neurosurgeons, welders, engineers, and others must do. In other words, get the required education and experience, think, think again, think it through, visualize what will happen, focus on the job at hand, obtain third-party oversight, inspect the work, and monitor the outcome. The nation’s federal and state legislatures and executive departments are increasingly filled with people who think they know what they are doing but who have not much of a clue, and who generate more and more laws and regulations that don’t work, that cause hardship, and that fail to address the underlying problem. The reason is simple. People are turning more to their limbic systems as they push aside their critical thinking systems. The mess in Pennsylvania is a harbinger of what the nation risks in the near future.

Friday, December 30, 2016

It Still Doesn’t Make Tax Cents 

Sixteen months ago, in Does It Make Tax Cents?, I commented on several stories about taxpayers trying to pay tax bills with pennies. I noted that the basic question of whether it is permissible to pay one’s taxes with pennies sometimes develops into more volatile situations, such as the taxpayer who was arrested after dumping the pennies all over the tax office, and the taxpayer who got into an argument when he tried to record the payment transaction. The story that triggered that commentary in August of 2015 involved a taxpayer who was unable to find 83,160 pennies after visiting 15 banks over a three-day period, and who ended up paying his real estate property tax bill with an assortment of coins and paper currency.

Now comes another story involving the use of coins to pay a government bill to the city of Lancaster, though in this instance it is a $20 parking ticket and not a tax. The parking offender tried to pay the ticket with loose change that he had accumulated, but the clerk refused to take the money unless he rolled up the coins. When asked for a copy of the policy, the clerk sought a police officer. The director of administrative services for Lancaster claims that it is not the city’s job to count out $20 in loose change. What’s next? Because the person who received the ticket refuses to pay unless Lancaster accepts the coins, the dispute will end up in magistrate’s court. By trying to pay the $20, the parking offender pretty much has admitted he owes the $20, so all he can do when in front of the magistrate is again to offer to pay with his loose change. I do hope we find out what happens.

Another jurisdiction in Pennsylvania refuses to accept home-rolled coins. It’s easy to understand why. That same jurisdiction had been refusing to accept pennies and nickels for transactions exceeding 25 cents, relying on a federal law that had been repealed decades ago. Fortunately, the jurisdiction relented when it learned, though efforts by a newspaper and members of the public, of the obsolescence of its policy, which it quickly changed. [Yes, I know, I know, and it was unintentional!]

For the curious, it is permissible to pay taxes, debts, dues, and other charges with coins. According to 31 U.S.C. section 5103, “United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues.” It also is permissible for private businesses and organizations to refuse to take currency or coins as payment for services or the sale of goods. The difficult question, which continues to be debated, is whether a person, business, organization, or government agency can refuse to accept currency or coins as payment for a debt, a public charge, a tax, or dues. Though debates continue to flourish over this question, the answer is no. The tougher question is whether the parking fine is a debt or public charge? The answer isn’t clear. It makes sense to conclude that when the offender’s obligation to pay the fine is established, for example, through admission or by trying to pay the fine, the fine become a debt.

This entire set of question could easily be resolved through a well-drafted statute. I wonder how long it will take for that to happen.

Wednesday, December 28, 2016

Looking for an Exclusion That’s Not in the Documentation 

Section 104 excludes from gross income damages received for physical sickness and injury. It is axiomatic that for these purposes the language of any settlement document is a significant factor in determining the nature of the claim for which the damages have been received, and in the absence of any definitive language in the agreement, the language of the complaint seeking damages becomes significant. In Contracting a Tax Outcome, I explained the importance of paying attention to language when drafting settlment documents.

A recent case, Arkow v. Comr., T.C. Memo 2016-87, reaffirms the importance of documentary language in evaluating a taxpayer’s assertion that damages received by the taxpayer fit within the exclusion. The taxpayer entered into a settlement agreement with a defendant sued by the taxpayer, in which the taxpayer released all claims in exchange for $3,000, which was then paid to the taxpayer. The taxpayer did not include the $3,000 in gross income, arguing that it represented damages for physical injury. Nothing in the settlement agreement mentioned physical injuries or physical sickness. The taxpayer had sued the defendant alleging violations of the Telephone Consumer Protection Act. Nothing in the complaint mentioned physical sickness or injury, nor does the Telephone Consumer Protection Act allow for damages based on physical injury or sickness. The taxpayer admitted that nothing in the complaint or the settlement agreement referenced any physical injury suffered by the taxpayer. Unsurprisingly, the Tax Court upheld the determination by the IRS that the $3,000 was not excluded from the taxpayer’s gross income under section 104.

It is unclear what the taxpayer was thinking. Did the taxpayer think that all damages are excluded from gross income? That is not, of course, the case. Did the taxpayer think that someone adversely affected by a violation of the Telephone Consumer Protection Act automatically suffers a physical injury? Did the taxpayer decide, when it came time to file a tax return, to classify the damages payment as compensation for physical injury because it would reduce the taxpayer’s tax liability? The Tax Court’s opinion does not indicate if the taxpayer or a tax professional prepared the tax return. The taxpayer and his wife represented themselves in the Tax Court case, but that does not mean that a tax professional did not prepare the return. Nor is there any guarantee that all return preparers would have properly reported the $3,000 payment.

To the extent this issue appears to be complicated, it really isn’t very complicated. For those who think that tax law is complicated because it involves numbers, this is yet another example of the many tax issues that do not involve numbers. For those who think that tax law can be simplified by reducing the number of tax brackets, this case provides yet another example of a situation in which the number of tax brackets is completely and totally irrelevant to the level of tax complexity. The case also demonstrates the need for careful attention to the language of documents, the need for all citizens to learn basic tax law, and the danger of falling victim to gross oversimplifications and the misinformation infecting the postmodern world.

Monday, December 26, 2016

Updating Two Tax Cases 

During the past week, two judicial decisions have been handed down that deal with issues I have previously discussed on MauledAgain. It is likely these are not the last chapters in either story.

During the past eight years, I have described the various failings of the so-called “soda tax” enacted by Philadelphia, which applies to items other than soda, does not apply to certain soda products, and also applies to some, but not all, products containing sugar. The commentaries started with What Sort of Tax?, and continued with The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, What Gets Taxed If the Goal Is Health Improvement?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, and Gambling With Tax Revenue. Last week, according to this report, a Philadelphia Common Pleas judge dismissed a challenge to the soda tax. The judge rejected the argument that the tax was preempted by the state sales tax and violated state law requiring items to be taxed at the same rate. He decided that the soda tax and the sales tax are fundamentally different because one is imposed on sales and the other on distribution. He also rejected the argument that applying the tax to items purchased through food stamps would violate the prohibitions on subjecting food-stamp-financed purchases to sales tax, by reasoning that the soda tax is not imposed on purchases but on distributions of soda. The losing plaintiffs promise to appeal.

Earlier this month, in So How Long Does It Take to Determine a Tax Liability?, I described a tax dispute between Comcast and the state of California that had dragged on for 17 years. Last week, according to this report, Comcast’s challenge to the tax asserted by California was denied. The court concluded that the termination fee received by Comcast on account of a losing merger bid constituted business income subject to California tax. Comcast is considering an appeal. In the meantime, Pennsylvania tax authorities continue to review the extent to which Comcast owes tax to Pennsylvania on account of the transaction.

Just as tax is a sure thing, so too are tax disputes and tax litigation. And that’s part of the reason tax professionals are busy. I expect them to continue to be busy.

Friday, December 23, 2016

How Not to File a Tax Return 

There are all sorts of things that taxpayers ought not to do when filing a tax return. There also are all sorts of things that taxpayers ought to do when filing a tax return, but which some taxpayers occasionally fail to do. Doing what ought not be done, or failing to do what ought to be done, doesn’t bode well for the taxpayer. This is particularly true when the taxpayer is an attorney.

A recent Tax Court case, Mack v. Comr., T.C. Memo 2016-229, illustrates how a tax return preparation and filing process can go haywire. The taxpayer is an attorney admitted to practice law in New York. He is a partner in a law firm. In 2011, the law firm and a related entity, both partnerships, issued Schedules K-1 to the taxpayer. They reported, respectively, income shares for the taxpayer of $18,357 and $461,386, totaling $479,743. The taxpayer explained that because of the 2008 recession, other partners of the firm could not cover their shares of the firm’s expenses, putting the firm into “significant negative capital”. The taxpayer decided that under New York partnership law he had a fiduciary obligation to cover those other partners’ expense shares. The expenses that the other partners were unable to cover were, in fact, reflected in the computation of the partnership income, and the taxpayer agreed that no partnership expenses were omitted from the partnership returns and the Schedules K-1.

The taxpayer concluded that because the partnership used its cash to pay the expenses rather than paying to the taxpayer his share of the income, the cash that was not paid to him ought not be treated as his income. The taxpayer consulted the firm’s accountants and tax return preparers. They advised him that the law was “unfair and unjust under the circumstances,” and that his options were to report the income or, instead, dissolve the firm, take a distribution of what remained of the firm’s capital, let the other partners “fend for themselves,” and “let the employees go on unemployment.” The taxpayer was also told that if he did not report the income, the IRS likely would disregard “the financial realities of the firm and not respect the state law fiduciary partnership duties.” The taxpayer ignored this advice and instead reported income from the two partnerships of $75,000, rather than the actual total of $479,743. On December 23, 2013, the IRS issued a notice of deficiency for 2011, determining that the Schedule E omitted $454,743 of income, asserting that only $25,000 of partnership income was reported on the return. The notice also determined an accuracy-related penalty of $28,060. In the petition to the Tax Court, the taxpayer argued that New York partnership law imposed a fiduciary duty on the taxpayer not to make the law firm fail, and that the expenditure of law firm funds to pay the firm’s expenses left the firm with no money to pay the taxpayer his share of the income and left him with no money to pay his Federal income tax liability. The IRS moved for summary judgment, to which the taxpayer essentially offered the same two arguments as set forth in the petition.

The Tax Court explained that under section 702(a), the taxpayer was required to include on his Schedule E his distributive share of the firms’ income as shown on the Schedules K-1. The distributive share of income is taxed to the partner even if no distributions are made to the partner. Because the taxpayer did not dispute the firm’s income or the computation of the taxpayer’s share shown on the Schedule K-1, there was no outcome other than a conclusion that the taxpayer had failed to report his distributive share of the firm’s income. By leaving his share of the income in the partnership, the taxpayer in effect made a capital contribution to the firm, but no deduction is allowable for capital contributions to partnerships. The Tax Court rejected the taxpayer’s argument that he could not reasonably be expected to pay tax on money never paid to him. The Tax Court noted that inability to pay might be relevant in a collection due process case but has no effect on determining the amount of income that must be reported on the Schedule E.

The taxpayers tried to avoid the accuracy-related penalty by showing that there was a reasonable cause for the omission and that he acted in good faith. Though most taxpayers who try to avoid the penalty in this manner offer proof that they relied on a tax professional, this taxpayer consciously ignored the advice provided by the tax professionals with whom he consulted. The court upheld the penalty.

Most lawyers do not take partnership tax courses when they are in law school. Most law students do enroll in a basic business organizations law course, but only in some of those courses do students get even a superficial overview of how corporations and partnerships are taxed. So it is not unusual for lawyers to rely on tax professionals to prepare their law firm tax returns and their individual returns. In this instance, the taxpayer deliberately chose to disregard the tax law and the advice provided by the tax professionals. It did not turn out well. Nor would it be surprising that more bad news is in this lawyer’s future, because filing a tax return on which significant amounts of income are deliberately omitted will not sit well with the New York State Appellate Court Attorney Grievance Committee with jurisdiction over this attorney.

Wednesday, December 21, 2016

Ignorance Reaches a New Low 

Wow. Just wow. There is an epidemic of ignorance sweeping through the nation, and tax does not escape the tide. What has me so astounded?

It’s a meme circulating throughout Facebook and elsewhere. You can see it here. Designed as a graphic, it says this:
Let’s say milk costs $1.00
and let’s say
You make $1.23 a day.
After taxes, you bring home $1.00
Right now you can afford
one gallon [of milk] per day.
So now you get a minimum wage raise to $18.45 a day. That’s awesome!! You have more money, right? Well, now in order to stay in business the milk man has to pay his employees that same $18.45, so the cost of milk goes to $15.00 a gallon. No big deal, but you can still afford it, right? Well, no, you can’t.
You see, thanks to the minimum wage increase that you are begging for, you’ve moved up to a new tax bracket. Now, instead of 23%, you pay 29%. 18.45 – 29% = $13.10. You can no longer afford the milk you once could. Let that sink in a minute.
The only winner in raising minimum wage is THE GOVERNMENT!
The errors in this analysis come in a flood.

First, without an indication of whether the writer is referring to a gallon, a quart, a pint, or some other quantity of milk, the figure of $1.00 makes no sense. Perhaps the intent was to refer to a quart of milk, but it’s pretty clear that the writer simply invented a round number.

Second, the writer then makes up another number, and this one is absurd. About the only way to make $1.23 in a day is to do some small chore for a neighbor who hands you the change in his or her pocket. Considering that the writer is making an attempt, feeble as it is, to prove that the minimum wage should be cents per day, let’s go with a minimum wage of $15 per hour. For someone working a standard work week, that amounts to an annual wage of $30,000, allowing for 40 hours per week and two weeks of vacation.

Third, the writer things that the tax on a $1.23 daily wage is 23 cents. Is the writer referring to the federal income tax? Federal and state income taxes? Federal, state, and local income taxes? Income and sales taxes? Twenty-three cents is 18.7 percent of one dollar and twenty-three cents. Even if the person earns $1.23 every day, the person’s annual wage would be so low that no income taxes would apply.

Fourth, the writer, however, claims that the person earning $1.23 per day is in the 23 percent bracket. That’s simply wrong. It is totally wrong. If the applicable bracket were 23 percent, and clearly it would not be, the tax would be 28 cents, not 23 cents.

Fifth, the writer then decides to create a minimum wage of $18.45 per day. That is nonsense. Minimum wage is set per hour, because “per day” has too many interpretations. Translated into an hourly minimum wage using an eight-hour day, the minimum wage assumed by the writer is the equivalent of $2.30 per hour. More nonsense.

Sixth, the writer then decides that the milk vendor needs to increase the cost of milk from $1.00 to $15.00 per gallon. Is that an increase from $1.00 per gallon to $15.00 per gallon? Or an increase from $1.00 per quart to $15.00 per gallon? Why does the cost of milk increase? Does not the per-item cost depend on the quantity of milk sold and the number of employees? Even assuming that the milk vendor sells nothing but milk, the increase is much different if the milk vendor has one employee and sells thousands of gallons per week compared to having ten employees and selling hundreds of gallons per week.

Seventh, the writer then decides that the tax on an $18.45 wage would be $5.35. Where does that number come from? Is it simply invented? Someone earning $18.45 per day, and working 250 days per year, based on five days per week and two weeks of vacation, would earn $4,612.50 per year. This person would encounter no federal income tax, would almost surely encounter no state income tax, and might encounter a one percent local earned income tax in some jurisdictions.

Eighth, using a $15.00 hourly minimum wage, and thus an annual wage of $30,000, the federal income tax liability of an employee claiming the standard deduction and one personal exemption would be, in 2016, $2,484. That is the equivalent of an average rate of 8.28 percent. That’s far from the 23 and 29 percent rates tossed about by the writer of the meme.

Ninth, using the current minimum wage of $7.25 per hour, the employee would earn $14,500 annually. The federal income tax on that amount, assuming the employee claims the standard deduction and one personal exemption, would be, in 2016, $415. So, an increase in the minimum wage from $7.25 to $15 per hour would increase the employee’s take-home pay from $14,085 to $27,516.

Tenth, would an almost-doubling of the minimum wage cause the cost of milk to increase to fifteen times its cost? No. Nor would it cause the cost of all items sold by the employer to go up by a multiple of fifteen, or even by a multiple of two. Wages are only a portion of the employer’s cost, and the chief component of the retail cost of the milk is the wholesale price.

Eleventh, the employee who takes home the additional amount is almost certain to spend that money, thus injecting more stimulus into the economy. The employee is unlikely to stash the cash in a Swiss bank. This, by the way, is why demand-driven economies perform at much higher levels than those infected with supply-side nonsense and trickle-down false promises.

Twelfth, it is true that government tax collections increase, though tagging the government as the only winner ignores the impact on the minimum wage worker is silly. Yet the increase in government tax collections means a reduced budget deficit, or perhaps better services for the employee, such as improved roads, more public safety, or other benefits of living in a cooperative society.

Readers of this blog know that dislike ignorance of any kind, and tax ignorance is particularly bothersome to me. I’ve written about it time and again, in posts such as Tax Ignorance, Is Tax Ignorance Contagious?, Fighting Tax Ignorance, Why the Nation Needs Tax Education, Tax Ignorance: Legislators and Lobbyists, Tax Education is Not Just For Tax Professionals, The Consequences of Tax Education Deficiency, The Value of Tax Education, More Tax Ignorance, With a Gift, Tax Ignorance of the Historical Kind, A Peek at the Production of Tax Ignorance, When Tax Ignorance Meets Political Ignorance, Tax Ignorance and Its Siblings, Looking Again at Tax and Political Ignorance, Tax Ignorance As Persistent as Death and Taxes, Is All Tax Ignorance Avoidable?, Tax Ignorance in the Comics. So it ought not be a surprise that my reaction to this goofball meme is one that goes beyond annoyance. There is no doubt that the writer made up numbers that would fit a preconceived, though thoroughly incorrect, perception of how economies and minimum wage increases work. This sort of behavior is no different than making up, and inventing, false news stories, false accusations of criminal behavior, and false promises while negotiating business contracts.

Why does this meme and its writer deserve the criticism to which I subject them? Because people see it, read it, and believe it. Then, based on this ignorant belief, they make decisions that disadvantage other people. They make decisions that adversely affect the nation. They make stupid decisions. And if the nation, its leaders, and its people continue to make enough stupid decisions, none will survive for very long. Ignorance is a destructive force, and it must be resisted. And resist it I do and I will.

Monday, December 19, 2016

Music, Medicine, and Tax 

A long-time reader pointed me in the direction of a report about the impact of music on performing a task. A study by a team from Imperial College London and the Royal College of Music invited 352 visitors to play the game Operation, which involves removing body parts from a model. I haven’t played that game, but I suppose it is derived from the “Invisible Man” toy that was around the house when I was a child. The researchers compared the outcomes when three different background sounds were played while the volunteers undertook their tasks. One was Mozart’s Andante from Sonata for Two Pianos, the second was AC/DC’s Thunderstruck, and the third was the sound of an operating theatre. It turned out that men who listed to AC/DC were slower and made more mistakes compared to those listening to the other two background tracks. On the other hand, it made no difference for women which of the three tracks were playing. Though there is no explanation for the difference, researchers are guessing that rock music causes more auditory stress in men. It also turned out that hearing Mozart reduced mistakes only if they acknowledged deep appreciation for the Sonata.

According to the Centre for Performance Science, a joint project between the two colleges, nusic is played in operating rooms 72 percent of the time. Some research shows that Jamaican music and hip-hop increases operating speed and surgical instrument manipulation, whereas one in four anesthesiologists reported that it reduced their vigilance. One bit of advice from the research is to avoid rock music when operating or playing a board game.

So my long-time reader then pointed out how he selects music when preparing for the tax season and while doing tax returns:
In the weeks leading up to a new tax season, I do the opposite in which the article recommends to increase my concentration. I play loud music from Billy Joel concerts and albums of Maynard Ferguson a phenomenal trumpet musician while I am studying the tax laws. I do this for the following reasons: the tax offices I work in are far from quiet, the kids are running around and yelling, the clients sometimes argue , the multiple phones are ringing, the copiers and printers are working, the television is blaring, and other tax associates are working with their clients and asking me questions about their returns, while I am concentrating on completely my client's tax return while other clients are waiting to prepare their tax returns. Listening to Mozart just won't cut it.
I have colleagues who play music, of various genres, while they are in their offices preparing for class or working on their research and writing. There are tasks that I can do while music is playing, but there are other activities which I do not perform well if music is in the background. However, because I am often performing multiple tasks, it could be that my brain cannot handle music when I am undertaking two or more tasks. Perhaps it is time to experiment.

I do know that the reverse is true, at least for me. I have sung several Mozart compositions as part of my church choir, and it required my complete concentration during rehearsal and during the service for me to even have a chance of getting it right. On the other hand, singing “Happy Birthday,” which I do fairly often – as we sing to each choir member on his or her birthday – is something I can do while multitasking.

All of this leaves me wondering. How many tax return preparers have music playing in the background while preparing returns, or interviewing clients? How many tax practitioners put on music while studying changes in the law, researching an issue, or writing a letter or memorandum? Perhaps some foundation or other organization would be willing to underwrite a study. I’m confident it would be easy to find participants and to experiment with all sorts of music.

Friday, December 16, 2016

No Deduction for Sanctions Imposed on Lawyer 

A recent Tax Court decision, Chaganti v. Comr., T.C. Memo 2016-222, following up on an earlier opinion, Chaganti v. Comr., T.C. Memo 2013-285, rejected an attorney’s claim that he was entitled to deduct fines imposed on him by a court for the way in which he conducted litigation. The outcome is not surprising, but serves as a lesson for other attorneys.

The dispute between the taxpayer and the IRS reaches more than a decade, and involves a long list of issues, only one of which is the focus of this post. The taxpayer is a licensed attorney practicing since 1998. In 2004, the taxpayer began performing legal services for a client who was the plaintiff litigating in a case filed in the U.S. District Court for the Eastern District of Missouri. On November 14, 2005, the district court order the taxpayer to pay a $262 fine for opposing counsel attorney’s fees and court reporter charges as a result of the taxpayer’s role in his client’s failure to appear at a deposition. The taxpayer did not pay the fine, and accordingly was held in contempt at a hearing on December 29, 2005. He was ordered to pay the $262 on or before January 2, 2006, and if it was not paid by that date, a daily fine of $100 would be imposed until the fine was paid. The taxpayer paid the fine on January 26, 2006. During the remainder of the litigation, petitioner engaged in behavior that the district court deemed unnecessarily protracting and contentious. The district court ruled against the taxpayer’s client and for the defendant on a motion for summary judgment in March 2006. The taxpayer, as plaintiff’s counsel, filed a motion to reconsider, vacate, and set aside the judgment, which was denied on April 12, 2006. The taxpayer appealed the ruling to the U.S. Court of Appeals for the Eighth Circuit, which affirmed the District Court’s decision on April 26, 2007.

After judgment was entered, the defendant filed a motion for attorney’s fees and bill of costs. The defendant’s motion requested that the taxpayer, as opposed to the plaintiff himself, pay the excess attorney’s fees incurred as a result of the taxpayer’s “bad faith, unreasonable, and vexatious multiplication of the proceedings”. On August 22, 2007, the district court granted this motion in part, allowing the award of excess attorney’s fees of $18,125 which it specifically attributed to the taxpayer’s misconduct. The district court ordered the taxpayer to pay $18,125 to opposing counsel and also ordered the taxpayer to pay to the clerk of the court a $2,300 fee for late payment of the original $262 fine, representing $100 for each of the 23 days that the payment was overdue. The taxpayer paid these amounts on December 28, 2007.

The taxpayer did not timely file federal income tax returns for 2006 and 2007. After the IRS prepared substitutes for returns on March 22, 2010, and June 15, 2009, respectively, the taxpayer eventually filed delinquent returns for 2006 and 2007 on May 26, 2010. On the 2007 return, the taxpayer petitioner claimed a business expense deduction of $20,425 for the court-ordered payments. This amount was the sum of the $2,300 fee for late payment of the $262 deposition fine, plus the $18,125 the taxpayer was ordered to pay for opposing counsel attorney’s fees. On January 6, 2012, the IRS mailed to the taxpayer a notice of deficiency for tax years 2006 and 2007. The determination of deficiencies was based on, among other things, a denial of the deduction for the court-ordered payments. On March 19, 2012, petitioner timely filed a petition in the Tax Court for review of the IRS determination.

On March 4, 2013, the taxpayer filed a motion for partial summary judgment, requesting the Court find in his favor in regard to several issues, including the deduction of the court-ordered payments, believed to be questions of law about which there existed no genuine issues of material fact. On March 12, 2013, the IRS filed a cross-motion for partial summary judgment on the same issues. Also on March 12, 2013, both the taxpayer and the IRS filed objections to each other’s respective motions for partial summary judgment.

Because section 162(f) bars the deduction of fines or penalties paid to a government or government agency for the violation of any law, and is not limited to criminal fines and penalties, the Tax Court held that the $2,300 was not deductible. It was a sanction for the violation of the taxpayer’s duties as an officer of the court in being held in contempt and failing to pay in a timely manner the $262 sanction, and it was paid to the clerk of the court for the district court, a governmental agency responsible for collecting these types of fines and penalties.

In contrast, the other two sanctions were not paid to a government or governmental agency but to opposing counsel. The Tax Court held that a genuine dispute of material fact existed with respect to the $262 amount, because the taxpayer argued that it was ordinary and necessary to keep his client from appearing at the scheduled deposition due to a unidentified unforeseen circumstance, because it was not known under which statute the taxpayer was ordered to pay the $262, what criteria were applied, and whether the imposition in and of itself indicated that the expense was not ordinary and necessary to the practice of law. Accordingly, the motions of the taxpayer and the IRS for summary judgment on this question were denied. The Tax Court held that the taxpayer was not entitled to deduct the $18,125 amount paid to opposing counsel because it was imposed under 28 U.S.C. section 1927 on account of the taxpayer’s improper conduct. The Tax Court concluded that the mere fact the taxpayer was ordered to pay that amount under the statute demonstrated that it was not ordinary and necessary to the practice of law, noting that the district court separately identified an additional amount paid to opposing counsel in the ordinary and necessary conduct of the practice of law.

But things did not end there. The parties continued to deal with the unresolved issues in the case, and went to trial on some of them. The IRS conceded the deductibility of the $262 payment. Ten days short of three years after issuing its earlier opinion, the Tax Court decided the remaining issues, including the deductibility of the $18,125 sanction. Though the court had decided it was not deductible as an ordinary and necessary business expense, it left open for the taxpayer the opportunity to justify the deduction on another theory. In this round, the taxpayer argued that the payment was deductible as a loss under section 165. The Tax Court held that because the sanction was penal in nature it could not fit within section 165(a)(1) as a loss incurred in a trade or business or within section 165(a)(2) as a loss incurred in a transaction entered into for profit. Nor, by its very nature, did it fit within section 165(a)(3) as a loss incurred because of a casualty or from theft. Prior case law established that loss deductions are denied if allowing the deduction would frustrate sharply defined national or state policies proscribing particular types of conduct. Allowing the deduction would, to paraphrase the Supreme Court, substantially dilute the actual punishment.

The taxpayer’s experience was a cascade of problems. It began with behavior sanctioned by a federal district court. It was compounded by failing to pay the sanction and being held in contempt. It was worsened by failing to pay the sanction by a deadline set after being held in contempt. It was made even worse by the consequences of imposing additional costs on opposing counsel, which were ordered to be paid along with an additional sanction. It was intensified by failing to file tax returns. It was exacerbated by claiming a deduction for amounts clearly not deductible.

Sometimes attorneys, particularly those who haven’t practiced for a long time, are disadvantaged by having absorbed bad lessons from the behavior of attorneys in movies and television shows and by the failure to grasp, or perhaps to have the opportunity to grasp, words of caution as they travel their educational path. It is important to understand that the consequences of inappropriate behavior include not only the direct response of a court but also the unwelcome tax consequences.

Wednesday, December 14, 2016

So How Long Does It Take to Determine a Tax Liability? 

People have long complained about the amount of time it takes to do a tax return. Not only is there the time required for entering numbers on a return, there is the time required to dig up receipts and other information, and the time to learn what to do, particularly when the law has changed from the previous year. Tax preparation software has reduced the time somewhat, but, still, it takes time to file one’s taxes. And if a person is audited, that’s more time, even if a tax professional is paid to do the heavy lifting. And if the dispute goes to court, even more time is required.

Overlaying this concern is another aspect of time. Most people prefer certainty, so most people prefer that once they file their returns, they are done with it. A few people, who understand the statute of limitations, let themselves relax once enough years have passed by. But what if a return is audited and litigation ensues? Tax attorneys know that these things can drag out. It’s not unusual for a Tax Court opinion released in 2016 to involve taxable year 2009 or 2010.

Yes, that’s right, it can take six or seven or more years from the time a return is filed until a dispute with the IRS, or a state revenue department, is resolved. But it can take even longer. According to this report, Comcast has been embroiled in a tax dispute for 17 years, and it’s still not resolved.

How can it take that long? In 1999, Comcast was paid $1.5 billion by Media One after Media One backed down from an agreement to sell itself to Comcast and instead sold itself to AT&T. Comcast assigned the payment to a Delaware subsidiary. Delaware does not subject income from intangible sources, such as this payment, to its income tax. It took ten years for the IRS and Comcast to reach agreement that the payment constituted income for federal income tax purposes. Once that happened, it triggered review by California. California claimed that Comcast owes California income tax on the payment because the agreement and eventual termination of the agreement took place in California between Comcast and a California-based business. So another few years go by, and in 2014 a California court ordered Comcast to pay income taxes on the payment, which Comcast has done. Comcast now has filed an appeal. California argues that Comcast assigned the payment to its Delaware subsidiary in order to avoid Pennsylvania tax on the payment. Pennsylvania is now waiting to see what the California court decides. So the saga very well may continue, in Pennsylvania, after the California chapter of the story plays out. And apparently several other states in which Comcast does business are eyeing the possibility of taxing an apportioned amount of the payment.

It shouldn’t take 17 years to resolve a dispute, tax or otherwise. Ten of those years are attributable to working out a question that can be answered in a few minutes. The payment is gross income for federal income tax purposes. There’s no record of what arguments were made or why it took so long for that issue to be resolved, but until it was resolved, the state tax issues where in abeyance. When a case takes a long time to be resolved, it usually isn’t the complexity of the facts or the murkiness of the law. It’s often a matter of delays for other reasons.

Oh, if 17 years and counting seems high, consider the case that has been open since 1972. More than 72 percent of the people alive today weren’t alive when that case began. Wow.

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