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Wednesday, June 20, 2018

A Hidden Tax Question 

Reader Morris alerted me to something of which I was unaware. He began by directing my attention to this story written by the city manager of Milford, Delaware, explaining why he accepted Domino’s Pizza’s offer to provide $5,000 of assistance in filling potholes in the town. Like most local jurisdictions, especially those constrained by the siren song of the anti-tax crowd, Milford faced highway repair and maintenance costs that exceeded its revenue resources. So why is Domino’s Pizza doing this? According to another article to which reader Morris alerted me, the pizza chain has embarked on a “Paving for Pizza” campaign, ostensibly to “smooth the ride home” for pizza deliveries. And, yes, from a third story noted by reader Morris, Domino’s Pizza is “enjoying a feast of national media coverage.” The cost to the pizza company is low, because it is making $5,000 grants to as many as 20 cities or towns. That’s $100,000. For Domino’s Pizza, that is close to petty cash. Wherever a pothole is fixed with grant money, the put their tagline and logo on the asphalt. They also ask for cellphone photos of the work being done, to be used in advertising campaigns.

Reader Morris posed two questions to me. First, “Is there anything wrong with Domino's Pizza or other large corporations fixing potholes for publicity?” Second, “Should basic maintenance of public roads be handed off to corporations for marketing stunts?”

My response to reader Morris was short and simple, though it consisted of two parts. First, “Why not? Think of all the groups that get a sign (publicity) for taking over the litter cleanup for a stretch of highway. It’s a fair trade-off. “ Of course, some of the people picking up litter on designated stretches of highway aren’t running a business and thus whatever publicity they get is, at best, local fame. Some people who do this volunteer work are anonymous, and often decline having their names on a sign. Sadly, they are outnumbered by those who want the recognition, for business or other reasons. Even more unfortunate is the fact that both of those groups are outnumbered by those who can but fail to pitch in, thinking that their taxes are sufficient to cover the costs. Of course, that’s not the case.

Yet lurking behind that tax policy question was another one. The second part of my reply to reader Morris was probably inspired by decades of writing exam questions. “Another question is whether someone doing a service in exchange for publicity/advertising has compensation gross income.” Why do I think the answer is yes? A person who wants publicity in the form of a billboard, sign, a logo painted on a wall or street, or an advertisement on a web site or in a magazine or newspaper can pay cash, giving the owner of the billboard or other media gross income and giving the person making the payment a possible business expense deduction if the person is carrying on a trade or business. But suppose the person seeking the advertising offers, not cash, but goods or services. In this barter situation, the owner of the billboard or other media still has gross income, and the person who performs services has compensation gross income for performing services, or sales revenue if exchanging goods.

The key is valuation. Suppose a private construction company, instead of providing cash, offers the services of several of its employees to fill potholes. Keeping it simple, and ignoring the question of who provides the asphalt and the likelihood that all sorts of other legal questions, such as liability for injuries, complicate the picture, the construction company would have gross income equal to the value of the services, and an offsetting business expense deduction, for advertising, in the same amount. Computing the amount would be fairly easy, because it would reflect the hourly wages of the employees doing the work. But suppose several private individuals not operating a business enter into an agreement to pick up litter along a highway every week, and the state or locality posts one of those signs that acknowledge the work that those individuals are doing. There’s no offsetting deduction to the gross income. What is the value of the sign? Does it even have value? As a practical matter, even if it has value, it is probably so low that it’s not worth the IRS or a state revenue department paying attention.

But suppose the persons doing the litter pickup or filling potholes are provided with a real property tax credit for their services. What are the consequences? Presumably, the lower real estate tax bill would reduce the deduction for taxes paid. In light of the newly enacted, tax-raising provision of the tax “cut” legislation, perhaps a way around the new $10,000 cap is to permit people to reduce their real estate taxes by performing services that state and local governments would otherwise need to underwrite. Or would those sorts of arrangements cause revenue officials to treat these individuals, and companies, as performing services for compensation?

Monday, June 18, 2018

Should There Be Limits on Tax Credits? 

When I ask if there should be limits on tax credits, I am not referring to dollar or percentage caps that limit the amount of the credit. I am referring to subject matter limitations. The Internal Revenue Code is packed with credits. State tax laws duplicate many of those credits, and then add hundreds more. I am not referring to payment credits, such as the credits for income taxes withheld from wages or estimated income tax payments. I am referring to what could be called policy credits. Federal and state tax laws provide credits for adopting children, for purchasing energy-efficient appliances, for purchasing certain alternative energy vehicles, for purchasing homes, for engaging in research, for clinical testing of certain drugs, for hiring veterans, qualified ex-felons, and other members of “targeted groups,” for making contributions to environmental protection funds, for producing movies, for purchasing automated external defibrillators, for producing musical and theatrical performances, and for being an active volunteer fire fighter or ambulance worker, to name but a few.

Proponents of these sorts of tax credits argue that these credits are financial incentives encouraging people to engage in behavior considered beneficial for society. One of my objections to using tax credits for these purposes is that it requires IRS and revenue department personnel to become experts in all sorts of activities, giving an advantage to taxpayers who choose to abuse the credits. If behavior is to be encouraged, it ought to be regulated and administered through agencies staffed with experts in the behavior in question. Another objection is the selectivity of the activities chosen for tax credits. Most, if not all, of the purposes for which tax credits are available surely qualify as worthy. But for every activity generating a tax credit there are five or ten or twenty activities that are no less worthy but that have not been deemed deserving of a tax credit. Another problem with policy tax credits is that we do not know who is taking advantage of the tax break, whereas direct spending programs permit taxpayers to identify the recipients.

People who read MauledAgain know that I am not a fan of policy tax credits. For example, in More Criticism of Non-Tax Tax Credits, I explained how the use of policy credits permits legislators to escape accountability for spending taxpayer money.

So it was no surprise when, several days ago, reader Morris directed my attention to a report about a new tax credit in New Mexico for hiring foster children, and asked, “Is this a good idea for a tax credit.” I doubt my reply was unexpected. “Of course not. What’s next, a tax credit for coming to a full stop at a stop sign?” To that I could add proposals for tax credits earned for driving without texting, opening doors for people carrying babies, picking up trash in the streets, reading to disadvantaged children, and that doesn’t even begin the list.

One of the objections raised by the anti-tax crowd to income and wealth taxes is the redistribution of money from those who are taxed to those who benefit from government spending. Yet the same crowd is comfortable with, and rarely criticizes, policy tax credits, which are simply another form of spending disguised in ways that permit legislators to hide their giveaways under the radar. Every dollar shelled out in a policy tax credit either comes from a taxpayer today or from a taxpayer tomorrow when the budget deficits come home to roost.

Of course it is a good thing to hire foster children. It’s also a good thing to hire veterans, and disadvantage individuals, and the homeless, and and and. But programs to encourage targeted hiring ought to be administered by agencies with employment expertise, not revenue departments, and funded with grants and payments that permit all taxpayers to identify the recipients.

My prediction is that the list of tax credits will continue to grow. Professional politicians and their lobbyist companions aren’t going to surrender what is a good thing for them until America wakes up. That’s unlikely to happen anytime soon.

Friday, June 15, 2018

Trickle-Down Variation Is No Better Than Trickle-Down 

Reader Morris sent me a link to an article of a little more than a week ago. In the article, Joseph Lawler reports on comments made by JPMorgan Chase CEO Jamie Dimon. Dimon was defending the December tax cuts against criticism that most companies are using most of their tax breaks to pay dividends and buy back stock, which puts most of the tax break money in the hands of the wealthy. Dimon argued, “"I think it’s a tremendous error for people to think there’s something wrong with stock buybacks and dividends. That is a natural function of capital markets and the proper deployment of capital." He continued to explain that “Companies return money to investors when they don’t have a good use for it.” Investors then “put the money to a higher and better use." He capped his defense with this gem, “"For the life of me, I don’t understand how anyone can say that’s a bad thing. That is coming from people who are basically ignorant of how capital markets function."

Reader Morris asked me, “Is Jamie Dimon correct by stating ‘criticism of stock buybacks is basic ignorance of economy?’” My response to Morris was a short one:
Dimon’s defense of dividend increases and stock buy-backs is a variation on trickle-down. The company could (1) reduce its prices (helps the average person), (2) raise wages (helps the average person), or (3) increase payouts to the wealthy (helps the wealthy). The notion that the wealthy who get these funds would then do things that benefit average people is, well, about as accurate as the notion that tax cuts for the wealthy help the average person.
To that I add the following:

To the extent that “companies . . . don’t have a good use for” the tax break money, it demonstrates that the begging and lobbying for the tax breaks on the basis that the money was needed to create jobs and raise wages was yet another empty promise to which too many people either succumbed or adopted as their own in exchange for votes, money, or some other consideration. If capital markets cannot recognize the need to put the money in the hands of consumers who will buy the companies’ goods and services, then the capital markets are flawed. But, of course, those who carefully study capital markets know that they are flawed. The experience of a decade ago proves that point.

As far as the ignorance question goes, I didn’t answer Morris directly. Those who criticize how capital markets function are fully aware of how they function, but also are aware of how the way capital markets function benefits a handful of people and leaves everyone else behind. Economic data showing the trends of the last 37 years proves that point. None of this is a matter of ignorance. Supporters of tax breaks for the wealthy riding on nonsensical trickle-down economic theory and supporters of demand-side economic theory all know quite well the practical reality of the marketplace. Left unregulated, it spirals in the direction in income and wealth inequality and the destruction of civilized society in favor of oligarchies free from resistance in the voting booth.

Wednesday, June 13, 2018

A Tale of Taxes and Bridges 

Sometimes stories teach lessons much more efficiently, and interestingly, than do recitations of law and policy. In his recent report Daniel C. Vock shares a sad tale of how tax aversion is causing misery for everyone, including those who detest taxes and resist them at all costs.

The story takes place in Mississippi. It begins 31 years ago, when those opposing the governor’s plan to eliminate elected transportation commissioners and put control of highways under the governor’s control devised a plan to raise the gasoline tax by five cents and use the revenue to build four-lane highways, which at the time were far and few in the state. The prediction was that the improved highways would attract businesses that could not ship good using the state’s antiquated two-lane roads. The legislature passed the bill, the governor vetoed it, and the legislature overrode the veto. More than a thousand miles of four-lane highways were built and, indeed, businesses, including Nissan and Toyota, opened facilities in Mississippi.

But there was a problem. The revenue was sufficient to build the roads, but there were no sources of funding to maintain and repair the roads. Over the years, gasoline tax revenues decreased for the same reason they did in other places, namely, vehicles became more fuel efficient. Like too many jurisdictions, Mississippi did not index its gasoline tax for inflation. So while inflation increased by 108 percent during those 31 years, and construction costs rose by 217 percent, gasoline tax revenues increased by a barely noticeable 1.6 percent.

The outcome could have been, and should have been, predicted. Roads and bridges began to fall apart. Many are in such bad shape that they need to be rebuilt rather than simply repaired; rebuilding costs roughly ten times the cost of repair. State transportation officials have told legislators that fixing the roads and bridges requires at least a $400 million annual permanent revenue increase. Expansion of existing roads in areas where the population and business are growing isn’t happening. Congestion spreads. Motorists face more costs from sitting in traffic.

So transportation officials, supporters, some members of the public taking advantage of sitting down and letting themselves get educated about the facts, business groups, and some others have lobbied the Mississippi legislature. They failed. Within a week, the state shut down 83 bridges because they are deficient and unsafe. During the ensuing weeks, more were closed. As of the time Vock wrote his report, about 500 bridges are closed. Many are in rural areas, perhaps where anti-tax sentiment breathes most strongly. Mississippi motorists face 40 to 50 mile detours. First responders cannot get to incidents as quickly as necessary.

Putting it mildly, Volk writes, “Today, anti-tax groups like Americans for Prosperity are very influential in Mississippi. That organization, for example, spent at least $10,000 last year on direct mail and digital marketing to praise Lt. Gov. Tate Reeves, who presides over the Senate, for thwarting efforts to raise the state’s gas tax or to use tax proceeds from online purchases to fund transportation. Eleven of the state’s 52 senators attended an Americans for Prosperity event last year where several promised not to raise the gas tax.” Grover Norquist must be proud. I wonder if these folks cheer when a house or barn burns down because the firefighters could not get there in time, or when a child hit with a seizure or an adult suffering a heart attack dies because the ambulance needed to go 40 miles out of the way. The state director of Americans for Prosperity defends the legislators failure to deal with the problem because they, along with the governor, “all campaigned on being for lower taxes, smaller government and less regulation. People are living up to what they promised voters. Voters are overwhelmingly opposed to increasing the gas tax.” Of course they did, because they fell for the propaganda. Or perhaps they, too, are cheering the house fire and the deaths, and luxuriating in those 50-mile detours. Or perhaps they live in areas where those afflictions become something that “is someone else’s problem.”

A county engineer concludes his explanation of how, over the years, the lack of funding has caused things to deteriorate, by saying, “We’re going backwards.” Indeed. That’s what insufficient public revenue to support public services will do. It reverses the path of civilization and nations and opens the door to barbarism.

The idea of reducing or eliminating taxes, to say nothing of opposing tax increases, is one of those grand theories that rests on foolish assumptions that shrinkage and eventual elimination of government – to be replaced of course, by an authoritarian oligarchy beyond the reach of the voting booth – and that carries enough “buzz” to resonate well in sound bites. People are sucked in. Yet when practical reality raises its head, it crushed theory. In this case, it very well may crush not only those whose anti-tax cult addiction threatens the lives of Mississippi residents but also those who recognize the danger but whose words of warning are ignored.

So I add Mississippi to the list of states whose subscription to the anti-tax movement has caused nothing but pain and misery. It joins Kansas, Louisiana, and Oklahoma as experiments whose outcomes should cause all Americans to resist following their example and imposing those failed ideas on the entire nation. I have my doubts that enough Americans will understand the danger until it’s way too late.

Monday, June 11, 2018

Tax Law Aggravation: Is It the Theory or the Practical Application? 

A recent case, Johnson v. Comr., T.C. Summ. Op. 2018-31, provides an opportunity to examine whether it is the theory or the practical application that makes tax law so aggravating. Of course, it could be both.

On his 2014 federal income tax return, the taxpayer claimed dependency exemption deductions for his two children and a child tax credit. He also claimed an earned income tax credit but that’s not within the focus of this discussion. In support of his claims, the taxpayer attached a schedule EIC on which he represented that the children resided with him for seven months during the year. The IRS disallowed the claimed dependency exemption deductions, the child credit, and the earned income tax credit.

The taxpayer had been married, and he and his then wife had two children, born respectively in 1999 and 2000. The taxpayer and his wife divorced in or about 2008. The support and custody agreement into which they entered provided for the taxpayer and his former wife to have joint legal custody of the children, with the former wife having sole physical custody but with the taxpayer having “access to the children” for one weekend per month, for one month during the summer school vacation, and on Christmas, New Year’s, and Easter in “odd” years and on Thanksgiving in “even” years. The agreement also provided that “every year, the children’s birthday shall be spent with Mom if it’s during school or during the week. And, if it happens to fall on a weekend, then Dad has a right to have the children on the children’s birthday.” The agreement also provided that “Mother’s Day will always be spent with Mom; Father’s Day with Dad.” At trial, the taxpayer testified that although there were no formal modifications made to the agreement by, or under the auspices of, the family court, he and his former wife informally made “adjustments as needed” between themselves.

The taxpayer and his son, no longer a minor at the time of trial, testified that the children stayed with their mother during the school week but that the children otherwise stayed with petitioner every weekend and holiday and throughout summer vacation. They testified that the children were picked up after school on Friday and dropped off Sunday night. The taxpayer acknowledged that “every once in a while” the children “might go to California for a holiday with their mother,” that they saw their mother during the summer, though “very rarely, and that he had the children for “the majority” of the holidays but not every holiday, although according to petitioner it was “a very rare occasion” when he did not. During 2014 the taxpayer’s former wife lived in Gaithersburg, Maryland, where the children attended public school. During 2014 the taxpayer lived in Baltimore, Maryland.

The Court explained that the parties agreed that the taxpayer met the requirements for treating each children as a qualifying child, except for the requirement that the children have the same principal place of abode as the taxpayer for more than one-half of the taxable year. The taxpayer argued that the children spent both a majority of hours and a majority of days with him in 2014. However, the court characterized the record as “much too wanting to support an analysis by hours, as any such analysis requires supposition and assumption.” Instead, the court decided that “only an analysis by days is possible.” But then the court concluded that “at best, given the meager record, any meaningful analysis can be based only on the number of nights that the children slept in the home of each parent.

In his brief, the taxpayer claimed that the children spent every weekend, every holiday, and the entire summer break with him and that the children were never with their mother other than during the school week. The court characterized this as “improbable.” For example, the court wondered why the children, who were teenagers in 2014, “were so willing to be away from school friends for so much of the time,” and whether it was likely that “a boy and a girl” were so inseparable “that each always slept in the same parent’s home as the other.” Although the court noted that it is not bound to accept testimony that is improbable, unreasonable, or questionable, it would nevertheless, “indulge” the taxpayer and proceed with the analysis advocated by the taxpayer. The court, however, concluded that it was more likely that on school holidays in the middle of the school week the children “continued to reside with their mother in order to more conveniently complete the school week” and that it was unlikely the children would travel to Baltimore for just one night.

The court pointed out that the number of nights that the children slept in the home of each parent could not be decided with certainty or any degree of incontestable precision on the limited record in the case. Each party’s analysis and the court’s independent analysis demonstrated that the issue was exceptionally close. However, after weighing all the available evidence, and keeping in mind the taxpayer’s burden of proof, the court concluded that the children spent 175 nights at the taxpayer’s home in 2014, and that, because 175 nights is less than one-half of the calendar year, the taxpayer had not proved that children had the same principal place of abode as he did for more than one-half of the taxable year. Because the taxpayer was not the custodial parent, and because there was no evidence of a written declaration by the taxpayer’s former wife who was the custodial parent agreeing to shift the dependency exemption to the taxpayer, the disallowance of the dependency exemption deduction and the child tax credit were upheld.

The theory is not particularly complicated. One requirement for classifying a child as a qualifying child is that the child have the same principal place of abode as the taxpayer for more than one-half of the year. Yet determining a person’s principal place of abode requires counting nights, and proving to the IRS and to a court that the number of nights equals or exceeds 183, or, in a leap year, exceeds 183. This is where the practical reality shows up. How many separated and divorced parents know that it is essential, for tax purposes, to keep logs or similar records of which children spent which night with which parent? How many, know that it is essential to do this, actually do this? How many intend to do this, and try, but caught up in the whirlwind of life with children, with school events, doctor appointments, sporting, dance, literary, musical, and other lessons, vacations, and other activities, forget to make a notation? I can almost hear some people advocating the use of Alexa or similar technological “assistants” to keep track of this sort of information, and I suppose the advocates of ReadyReturn would suggest that the information Alexa and similar devices gather from people’s homes be transmitted to the IRS so that the IRS can prepare the taxpayer’s return with the data needed to determine if the taxpayer is entitled to the various tax benefits related to a child.

So what is most aggravating? The theory? Or the need to keep track of just about everything one’s child does? We are spending more time reporting what we are doing that we spend doing what we are doing. Surely there is a better way. Unless it is found soon, the tax system will collapse of its own weight. So, too, will everything dependent on taxes.

Friday, June 08, 2018

Some Tax Zappers Have Been Zapped, Lightly 

It has been more than six years since I wrote about tax zappers in Zap the Tax Zappers. Briefly, a tax zapper is software that is connected to a checkout register to eliminate some of the retail establishment’s sales. The establishment’s owner not only pays income tax on an amount lower than the actual taxable income, but also pockets any sales taxes paid by customers on sales deleted from the owner’s tax reports to state and local tax authorities. When I wrote that commentary, I suggested that “the acts of designing, programming, marketing, and producing this software” and that “It’s time not only to criminalize ownership, use, design, production, sale, or other activities with respect to tax zappers, it’s time to make the penalties sufficiently harsh that others are deterred from engaging in this sort of dishonest behavior.”

A few days ago, according to this article, Pennsylvania honored some Department of Revenue employees whose careful audit and investigation work generated roughly $6.3 million in taxes avoided by business owners using zapper software. That’s a small portion of the estimated $100 to $200 million that the state loses each year because of zapper use. Considering how much it costs to hire and train revenue auditors, it might make sense to hire several dozen more of them because the return on that investment would be quite high. According to the article, the sale, possession, and use of zappers is now illegal in Pennsylvania, though the maximum penalty is only one year in prison and a $10,000 fine. I found interesting the fact that those who were caught operated businesses in the restaurant industry, because in Zap the Tax Zappers I had noted, “Some establishments, such as restaurants, are evading so much tax that they are paying their employees in cash under the table, permitting the employees to report income low enough to qualify for welfare assistance from the state.”

According to the article, the Department of Revenue has not yet identified any of the taxpayers who were discovered to be using zappers, nor have any of them yet been charged with a crime, though a spokesperson for the Department explained that charges would be filed “when feasible.” In Zap the Tax Zappers. I explained why those who are caught using tax zappers ought to be identified:
For the most part, tax cheats are not acting from a philosophical approach. People who object to taxes and fail to file returns, or who file returns tagged with all sorts of anti-tax or other rebellious messages, aren’t hiding their position or their actions. They’re much easier to identify and may want to be identified so that they can make a statement. There’s a perverse sort of courage in behaving that way. Tax cheats who use tax zapper software do not want to be identified. They simply want to let others bear the burden while they take a free ride. They are probably among the folks who don’t want to pay for health insurance but demand free treatment when they have an emergency and show up at the urgent care clinic. The behavior exhibited by the tax cheats and free riders is about as far from courageous as one can get.

* * * It’s also time to publicize the names of those who are convicted, the names of their businesses, and the amounts that they have stolen from the public.
. Though some anti-tax individuals might view zapper users as heroes, consider the impact of tax evasion, as I explained in Zap the Tax Zappers:
Taxpayers who comply with the tax law but who are concerned about high tax rates ought to think about the impact on the tax system of tax cheaters. When a tax cheat fails to pay tax, one or more of three things can happen. Taxes on honest taxpayers are raised to maintain revenues. Spending is cut, leaving honest citizens with deteriorating roads and bridges, inadequate safety inspections, reduce police patrols, longer waits for fire fighters and EMTs, and all other sorts of deprivations that jeopardize the existence of civilized society. Governments incur deficits as revenues drop and programs are maintained because the impact of spending cuts is so devastating.
It is for those reasons that I suggested that those who think publishing the identities of tax zapper users and increasing criminal penalties might be too harsh instead “think of the person who dies when their vehicle hits a pothole and goes out of control, a pothole not repaired because of revenue shortfalls and spending cuts triggered by the actions of a group of people who refuse to pitch in and fulfill the obligations of citizenship.” Though $6.3 million is a good start, it’s nowhere near enough. It’s time to ramp up anti-zapper efforts.

Wednesday, June 06, 2018

Can A Tax Stop Gossip? 

According to this recent report, Uganda’s parliament has enacted a daily tax, equivalent to 5 cents, on people who use internet messaging platforms, because, according to the nation’s president, those platforms allegedly encourage gossip. The nation’s minister for finance explained that the tax and others in the same legislation were needed to reduce the country’s national debt.

This tax is an excellent example of a theory destined to meet practical reality. When that happens, theory rarely, if ever, prevails.

The challenges of implementing the tax are daunting. For example, according to the report, Uganda “is struggling to ensure all mobile phone SIM cards are properly registered.” Yet phones are not the only devices with which a person can access the internet. In Uganda, 30 percent of phone users do not access the internet, let alone use social media sites. Identifying the individuals who should pay the tax will not be an easy task, and it is likely that some who are taxed will be individuals not using social media and that some who escape taxation are people using social media.

When the nation’s president proposed the tax, he also suggested that internet data ought not be taxed because it was useful for "educational, research or reference purposes." Does the president of Uganda not realize that information exchanged on social media is data? Does he not understand that information of any sort, whether educational or gossip, consist of zeroes and ones?

There is no proof that a tax on social media would stop gossip. Aside from the fact that some users would consider a tax amounting to roughly $1.50 per month to be a nuisance and that others would not even contemplate the existence of the tax when posting to a social media account, there is no evidence that the tax would change the content of what people post to social media accounts.

During the last presidential election, Uganda shut down access to social media platforms, in order to “stop spreading lies.” Though this action surely reduced an important channel for the false information that propaganda devotees, trolls, and other miscreants use to dupe people, lies also can be circulated in newspapers and magazines, on television “news” shows, by word of mouth in schools and offices, and at the neighborhood tavern.

Stopping lies is a noble goal. A tax is not going to get the job done. There are other possibilities. Tanzania requires bloggers to pay a license fee and disclose their financial backers. Incidentally, MauledAgain has no financial backers. Again, determining that a blogger is giving truthful information about the identities of those underwriting a blog is no easy task. In fact, it is pretty much impossible. Kenya has criminalized the spread of false information, though that law has been suspended by a court while opponents challenge it. The time and effort required to determine if information is false, to identify the source of the falsehood, and to decide which parties in the chain of distribution from the liar to the posting, will far surpass any revenue generated from fines and penalties.

There is no one antidote to lying. Surely it is not a tax. It is a combination of early childhood learning in the home, education of children in the schools, continued self-education by adults, imposition of adverse consequences in appropriate situations, cultural unwillingness to tolerate lies, social willingness to ostracize liars, and adherence to truth-telling by politicians, candidates, campaigns, and national leaders. For every smoker or would-be smoker who stopped smoking or declined to pick up the habit because of tobacco taxes, there surely are hundreds if not thousands who distanced themselves from smoking because of education campaigns teaching why smoking is dangerous and unhealthy for the smoker and those with whom the smoker interacts. Imposing a tax is, in some ways, much easier than educating people. In the long run, though, it is education that carries the day.

Monday, June 04, 2018

Getting Past Nexus and Into Voluntary Use Tax Collection Compensation Plans 

Last week, in a Washington Examiner commentary, George Pieler presented arguments against permitting states to compel nonresident vendors to collect use tax on their behalf. In one sense, now that the Supreme Court has a case under consideration that deals with this issue, the time for arguments has gone by, at least for the moment. On the other hand, it would not surprise me if the Supreme Court’s disposition of the case re-opens the need to continue debating the issue.

In terms of outcome, I agree with Pieler. I do not think out-of-state merchants should be required to do work for a state with which they have no meaningful connection. I have written about this issue and shared my reasoning in a long string of posts, starting with Taxing the Internet, and continuing through Taxing the Internet: Reprise, Back to the Internet Taxation Future, A Lesson in Use Tax Collection, Collecting the Use Tax: An Ever-Present Issue, A Peek at the Production of Tax Ignorance, Tax Collection Obligation is Not a Taxing Power Issue, Collecting An Existing Tax is Not a Tax Increase, How Difficult Is It to Understand Use Taxes?, Apparently, It’s Rather Difficult to Understand Use Taxes, and Counting Tax Chickens Before They Hatch, A Tax Fray Between the Bricks and Mortar Stores and the Online Merchant Community, and Using the Free Market to Collect The Use Tax.

Pieler makes several arguments. First, he points out that if South Dakota, the state whose attempt to force nonresident merchants to collect taxes on its behalf is being considered by the Supreme Court, prevails, it will open the door to hundreds of states and localities subjecting nonresident merchants to the rigors of collecting use tax. In several of my posts listed above, I have explained why that outcome would be disadvantageous to businesses, consumers, and the national economy.

Pieler points out that South Dakota has admitted drafting a statute that reaches to the far ends of the nation “in order to test how far t coul dgo while keeping enough of a semblance of a nexus to get the court to change its precedent.” That’s not a reason for South Dakota to lose. There are times when the best way to identify the limits of legislative prerogative is to draft a statute that can be tested. The problem isn’t the way South Dakota maneuvered. There’s no rule requiring legislatures to be timid, though at times it might be politically prudent to be careful. The problem is what he statute enacted by the South Dakota legislature requires.

Pieler takes apart the claim by South Dakota that it is losing tax revenue because purchase transactions are increasingly shifting from brick-and-mortar stores within the state that collect sales tax to online shopping sites that don’t collect use tax if they lack a meaningful connection with the state. Pieler explains that South Dakota’s actual revenue loss might be only one-fourth, or perhaps even less than one percent, of its claimed estimate. Another factor in why the estimate is much higher than the actual revenue loss is the fact that there have been steady increases in the number of online merchants who do have sufficient connection with the state. In other words, as Pieler puts it, perhaps South Dakota does not have the revenue loss problem it claims it has.

Pieler laments that the economic arguments presented to the Supreme Court were “so narrowly drawn.” I agree. They were. Dealing with the economic arguments requires analyses that weren’t undertaken, which Pieler describes in his commentary.

My lament is that there was no focus on a more vital aspect of the question. In Tax Collection Obligation is Not a Taxing Power Issue, I explained:
Because states cannot compel a business to do use tax collection for it unless the business has nexus with the state, some states are attempting to expand the definition of nexus so that it makes nexus exist under pretty much all circumstances. For a variety of reasons, it is wrong, both as a matter of policy and as a matter of efficiency and administration, to require businesses lacking a real connection with a state to do use tax collections for the state. * * * What is being imposed on the retailers is the aggravation and financial cost of being required to collect taxes for a state with which the only connection is the ability of a resident of that state to view a retailer’s web site on servers not located in that state.

Compelling a business to collect use tax for a state * * * force[s] out-of-state retailers to function as tax collectors for the state. It constitutes a radical expansion of government police power. In that context, objections can be raised that might not find strong ground if the proposal to expand nexus is viewed as an expansion of the taxing power. * * *

* * * Compelling a business to collect use tax for a state is “forcing a business to do work without representation.” That is, in some ways, a more serious matter. The use tax itself, like a sales tax, can be passed along to customers, because they are the ones with an existing legal obligation to pay that tax, though few do. The cost and aggravation of functioning as a tax collector for a state in which the retailer does not do business can be passed along to customers only if the retailer wants to risk losing customers because of the price increase.
States, of course, could avoid the problem by cooperating with nonresident merchants rather than trying to exercise jurisdiction over them. I offered one possibility in Tax Collection Obligation is Not a Taxing Power Issue:
Perhaps a better approach is for states to seek voluntary contracts with out-of-state retailers, compensating them for serving as tax collectors. There may be state Constitutional provisions or legislation that prohibits contracting tax collection to out-of-state individuals or entities, though I doubt that is the case. For some businesses, being compensated to engage in use tax collection might help the bottom line.
If state governments and out-of-state merchants found a way to communicate productively, the problem could be resolved rather easily. It’s not too late, though depending on what the Supreme Court decides, getting the parties to sit down and work out something that is practical could turn out to be more or less challenging than it would have been a year or two or five or ten ago. I do doubt, though, that the Supreme Court’s decision will resolve this ongoing disagreement over who should be enforcing a state’s use tax law.

Friday, June 01, 2018

Most Taxpayers Do Not Know They Are Handing Out Billions to Corporations 

The other day, reader Morris presented me with a question that is the title of a New York Times editorial by Nathan Jensen. The article headline asks, “Do Taxpayers Know They Are Handing Out Billions to Corporations?” My answer is not a simple yes or no. My answer is that most taxpayers do not know. And of those who do know, there are some taxpayers who are quite pleased, because what is coming into their corporation is far more than what is going out of their pocket as a share of the burden imposed on all taxpayers. And, of course, there are those who do know but who don’t care, because “it’s too complicated” or “it’s politics” or “I have other things to worry about.”

Jensen points out that “Every year, states and local governments give economic-development incentives to companies to the tune of between $45 billion and $80 billion.” He explains that the wide range reflects the inability of the public to know exactly what is being shoveled into corporations by government officials. He describes some of the ways that taxpayer money ends up in the hands of those who have far less need of money than just about every other American. They include cash grants, reductions in every sort of tax, construction of facilities for the corporation using public funds, and even rebating taxes paid by corporate employees so that those funds end up in the corporate treasury.

Jensen notes that in many instances these deals are being negotiated by lobbyists and not by legislators or executive branch officials. That’s no surprise. Who do you think wrote the federal tax law enacted in December? If you respond with the old civics course answer, “the Congress,” you are way behind the times in terms of the reality of governance. Increasingly, in my opinion, governance is shifting from elected representatives to employees of, and consultants to, the oligarchy. And those folks surely want as many of these deals kept secret, and when deals become known, they still want as many details and components kept under wraps as they can manage to hide. Jensen explains that one reason for the secrecy is the unwillingness of corporations getting these handouts in exchange for their promises of economic benefits inuring to the state or locality to subject themselves to post-handout examinations to determine if the promises were kept. Is this yet not another reason to make tax breaks available only after the tax break recipient performs what has been promised, as I suggested in How To Use Tax Breaks to Properly Stimulate an Economy, How To Use the Tax Law to Create Jobs and Raise Wages, Yet Another Reason For “First the Jobs, Then the Tax Break”, and When Will “First the Jobs, Then the Tax Break” Supersede the Empty Promises?.

Jensen sees hope in a recent Elon University poll that surveyed residents of the twenty locations making the finalist list for the Amazon tax break giveaway contest. According to the poll, the percentage of respondents supporting the proposition that Amazon should be offered as much as possible ranged from 8 percent in Austin to 21 percent in Los Angeles, whereas the percentage supporting either the proposition that there should be no financial incentives or nothing more than other businesses receive ranged from 32 percent in Indianapolis to 59 percent in Denver. When asked if they would be willing to pay more taxes to fund financial incentives for Amazon, those responding in the affirmative ranged from 14 percent in several cities to 26 percent in Indianapolis, and those responding in the negative ranged from 74 percent in Indianapolis to 86 percent in several cities.

Those taking a theoretical view claim that these issues can be resolved in the voting booth. I disagree. The practical reality is that taxpayers rarely get the opportunity to vote on these deals because many of the deals are hidden, and most of those that are disclosed aren’t put to a vote. In the latter situation, the best that taxpayers can do is to vote out the politicians who agree to the deal, though that comes too late for the deals already in place, and comes at the cost of voting out a politician whose position on other issues, or even a single issue, gets the attention come election time.

Changes are needed. Yet changes cannot be made until enough people realize changes are needed. Unfortunately, with too many people elevating ignorance to the position of a deity, the chances of this plundering of taxpayer dollars happening before the oligarchs own and control everything are diminishing rapidly.

Wednesday, May 30, 2018

The Tax is Not Axed 

Several days ago, while working on a family history project with the television in the background, my ears picked up during a commercial to hear the phrase, “Axe the tax.” Having not paid attention to the beginning of the commercial, I failed to identify the vendor. The gist of what I did pick up was that one of the pitches involved avoiding payment of sales taxes. The end of the commercial brought a disclaimer to the effect that the sales tax would be paid by the vendor by reducing the item’s price. My search of the television station’s website failed to identify the vendor.

The addition of the disclaimer caused me to consider the commercial differently from the one I discussed in What Is a Retailer’s Obligation Not to Provide Misleading Tax Information?. In that commercial, a vendor characterized sales as “tax free” because the vendor is in Delaware, a state without a sales tax, but the vendor failed to point out that the out-of-state customer faced a use tax in the customer’s state.

In trying to find the identity of the vendor in the television commercial, I discovered that the vendor was not the only one using the “Axe the Tax” slogan. Those who are curious can see and example at this site, although I could not find on that site, or any others using the slogan, a disclaimer or explanation.. Of course, when the “Axe the Tax” phrase grabbed my attention during the commercial, my first thought, which lasted for less than a second, was focused on a political anti-tax theme. There are anti-tax sites using the phrase, but “Axe the Tax” is being used by retailers in an effort to attract customers.

Of course, the tax is not axed. The retailer is reducing the price so that the amount paid by the customer equals the amount that would have been paid had there been no tax and thus no price reduction. For example, if an item is priced at $100 and the sales tax would be $6 because the rate is 6 percent, the retailer charges $100. The retailer isn’t neglecting to collect or remit the sales tax. Instead, the retailer is reducing the price to $94.34, making the sales tax $ 5.66, which bring the total cost to $100.00.

The tax is not axed. The slogan is simply an admittedly catchy way to get people’s attention. It is a marketing gimmick. It’s not much different from the perpetual going-out-of-business or liquidation sales pitches. It’s another version of the everything-must-go-by-tomorrow claim. Retailers can reduce prices for all sorts of reasons, and are under no obligation to explain why. But savvy retailers find something that will entice people to visit their store or website. So long as customers aren’t misled into thinking they aren’t paying sales tax when in fact they are, no harm seems to have been inflicted.

Monday, May 28, 2018

How Not to React to a Bad Tax Law 


Three Months Ago, in Will My Reaction to Their Tax Plan Break Their Hearts?, I shared my opinion that attempts by states to avoid the $10,000 limitation on the deduction for state and local taxes by providing taxpayers the option of making payments to state-controlled charities in lieu of paying state and local taxes won’t work. The goal of these attempts is to shift the payments from the category of state and local taxes, which are subject to the limit beginning this year, to the category of charitable contributions, which are not limited in that manner. I explained that the charitable contribution deduction is not available because the payments are not voluntary and because the payments are a quid pro quo. The payments are not voluntary because they are made in lieu of a mandatory tax. The payments are a quid pro quo because making the payment to the charity absolves the taxpayer of the mandated state or local tax payments, and because the payment is in return for the state or local services funded by the payments.

I also pointed out that I am not alone n reaching this conclusion. Jared Walczak of the Tax Foundation, put it this way, “IRS and Treasury officials weren't born yesterday. They will see right through these proposals, recognizing the contributions for what they are: payment of taxes."

So it came as no surprise that last week the IRS issued Notice 2018-54, in which it stated:
In response to this new limitation, some state legislatures are considering or have adopted legislative proposals that would allow taxpayers to make transfers to funds controlled by state or local governments, or other transferees specified by the state, in exchange for credits against the state or local taxes that the taxpayer is required to pay. The aim of these proposals is to allow taxpayers to characterize such 2 transfers as fully deductible charitable contributions for federal income tax purposes, while using the same transfers to satisfy state or local tax liabilities.

Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.

* * * * * The Treasury Department and the IRS intend to propose regulations addressing the federal income tax treatment of transfers to funds controlled by state and local governments (or other state-specified transferees) that the transferor can treat in whole or in part as satisfying state and local tax obligations. The proposed regulations will make clear that the requirements of the Internal Revenue Code, informed by substance-over-form principles, govern the federal income tax treatment of such transfers. The proposed regulations will assist taxpayers in understanding the relationship between the federal charitable contribution deduction and the new statutory limitation on the deduction for state and local tax payments.
Reading between the lines, I am convinced that Treasury and the IRS will characterize the payments to the state-controlled charities that are made in lieu of state or local taxes as failing to qualify for the charitable contribution deduction.

Jared Walczak and I are not the only ones suggesting that the Treasury and IRS will torpedo these plans. According to this Bloomberg report, Kevin Brady, chair of the House Ways and Means Committee, and Mark Klein of Hodgson Russ, have chimed in, with Brady calling the plans “tax evasion schemes,” and Klein noting that taxpayers going along with these plans “could be subject to tax, interest and penalties” if the IRS takes action against these plans and those taxpayers.

I wonder how many taxpayers adversely affected by this “cut deductions for the middle class to finance tax cuts for corporations and the wealthy” had been supporting those who promised tax “reform” thinking that those promises would be helpful to them. Surely the wealthy don’t care, because their tax cuts more than make up for the lost deductions, but for those getting little or nothing in the way of tax cuts face tax increases. Trying to falsely claim mandatory taxes are voluntary charitable contributions isn’t an effective, or morally upstanding, way to deal with the problem. People who understand what is happening in Congress, and how income and wealth inequality are incremented by this deduction limitation, should know what needs to be done in the voting booth to fix the problem. Are there enough of those people? Will they act? Or will they throw their hands up in surrender and pave the way for even more wealth and income shifting in the wrong direction?

Friday, May 25, 2018

When Will “First the Jobs, Then the Tax Break” Supersede the Empty Promises? 

A little more than a week ago, in Yet Another Reason for “First the Jobs, Then the Tax Break”, I reiterated the need to tie tax breaks to the performance of promises rather than to promises. In that post, and in the earlier ones that it references, I have described instances in which companies funnel most of their tax break money to shareholders, through dividends and stock repurchases, while adding little or nothing to the incomes of their workers. While supporters of the tax cuts get ecstatic over small bonuses that, after taxes, truly amount to crumbs, they ignore the fact that the amounts not being used to increase jobs and wages far exceed the small bonuses. It’s even worse, because some of these companies not only pass very little of their tax breaks to their workers, they also are cutting jobs and shifting jobs overseas.

Now comes news of a particularly galling example of how foolish it is to dish out tax cuts simply because the recipient of the tax break promises to do something. According to this story, and others, Harley-Davidson is closing a factor in Kansas City, Missouri, laying off 800 workers, while expanding operations at a site in York, Pennsylvania where it will hire 450 workers. It’s easy to do the math. The nation’s workforce is shrinking by 350. Although that doesn’t seem like much more than a drop out of the job bucket, it’s just one company. The bucket empties quickly when taking into account the tens of thousands businesses getting tax breaks and cutting jobs and wages. It’s not just the reduction in jobs. At least some, perhaps many or all, of the jobs being created in York are temporary jobs. Worse, the jobs being created in York pay less than the jobs being eliminated in Kansas City. That’s not all. At the same time, Harley-Davidson has increased dividends and is embarking on a stock repurchase plan. On top of that, the company is opening a factory in Thailand, which it claims is being done in order to avoid another unwise Administration decision, tariffs on materials the company needs to manufacture motorcycles to sell abroad. On the one hand, the company is trying to cut costs, presumably because it needs to improve its financial situation, and on the other hand it is handing out dividends and stock repurchase payments as though it is drowning in cash, which it is, thanks to tax cuts the cost of which will be borne by future generations.

Why is this example any worse than the others that have been discussed? Last September, while hawking the Republican tax giveaway, Paul Ryan, one of its, if not its, chief architect, spoke at a Harley-Davidson factory in Wisconsin He claimed, “Tax reform can put American manufacturers and American companies like Harley-Davidson on a much better footing to compete in the global economy and keep jobs here in America.” Seven months earlier, the President told Harley-Davidson’s executives and representatives of its workers’ union that his planned tax cuts would cause the company to create more jobs. If that is what Ryan, the President, and the rest of their tax-cut crew wanted, then why not tie the tax breaks to performance? Logically, if companies get tax cuts for creating jobs, or even promising to create jobs, ought they not face tax increases when they cut jobs or fail to create jobs?

If Congress is willing to provide some tax breaks after the taxpayer performs an activity or engages in a transaction, such as the residential energy credit, why not condition all tax breaks as responses to taxpayer performance? What’s the point of handing out tax breaks based on promises that the recipients are not required to keep? Empty promises are worthless. Empty promises ought not bring the maker of the false promise any sort of reward. That is one reason I refer to the tax cuts as giveaways, and continue to consider them undeserved. It’s why they need to be repealed with respect to every recipient that has failed to keep its promises.

Wednesday, May 23, 2018

Incorrectly Breaking Down the Internal Revenue Code 

Reader Morris asked me if I agree with the following claims in this article:
What most people don't realize, in fact, is that 99 percent of the Internal Revenue Code is a series of incentives, primarily for businesses and investors to fuel the economy. There are only about 30 pages in the Code that actually raise revenue; they include charts and tables that tell you how much tax to pay. There is one line that basically declares, "All income is taxable unless we say it isn't," and another that basically says, "No expenses are deductible unless we say they are."

Then, there are about 6,000 pages that tell you how to reduce taxes through tax deductions, tax credits and other incentives.
The answer is no.

First, the claim that the Internal Revenue Code contains 6,000 pages is sad proof that once an error or falsehood goes viral, it is impossible to eliminate it, or to prevent further spread. The ignorant claims with respect to the size of the Internal Revenue Code have been exposed and refuted by me in many posts, beginning with 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, Not a Surprise: Tax Ignorance Afflicts Presidential Candidates and CNN, The Infection of Ignorance Becomes a Pandemic, Getting Tax Facts Correct: Is It Really That Difficult?, and Reaching New Lows With Tax Ignorance. Though the claim of 6,000 pages is not quite as erroneous as the wildly outlandish, totally false, intentionally misleading, and warped claim that the Internal Revenue Code consists of 70,000 or 74,000 or seventy-thousand-whatever pages, it nonetheless contributes to the nation’s descent into what I called in Reaching New Lows With Tax Ignorance the New Stone Age.

Second, the portion of the Internal Revenue Code devoted to incentives is far from 99 percent. Far more than one percent of the Code deals with procedural matters, such as filing requirements, deadlines, information reporting, interest, penalties, audits, and litigation. Far more than one percent of the Code deals with exclusions from gross income, most of which cannot be fairly characterized as incentives. Of the Code sections providing for deductions and credits, more than a few are not incentives. For example, neither the credit for withheld taxes nor the deduction for trade or business expenses are incentives, the first because it is a true credit in the accounting and retail sense, and the second because business entrepreneurs pay and incur expenses for business reasons. Yes, there are incentives in the Internal Revenue Code, and yes, there are too many of them, and yes, they ought to be relocated into the statutes dealing with the federal agencies charged with oversight for the activities and transactions in question, but it is absurdly incorrect to consider 99 percent of the Internal Revenue Code as consisting of incentives.

Ignorance of this sort is appalling. It is dangerous. It is unjustified. It needs to be identified, and discredited. Unfortunately, we live in a world with this sort of misinformation flourishes and spreads. How sad.

Monday, May 21, 2018

Adverse Possession, Basis, and Gross Income 

Reader Morris directed my attention to a Philadelphia Inquirer article from several weeks ago that apparently I missed. I think, though, the reason I did not see it was its inclusion in a different Regional section of the paper, because I live to the west of the city and the story involves a situation in the northeastern part of the city.

The facts are simple. About thirty years ago, Frank Galdo and his wife purchased a home in the Fishtown area of Philadelphia. Across the street is a vacant lot, which, when the family moved in, was filled with trash and used by prostitutes and drug addicts. So Galdo cleaned up the lot, and added a concrete parking slab, fire pit, picnic tables, and a tree house. Many years later, the city, which owns the lot, told Galdo his use of the lot was unauthorized and ordered him to remove the improvements. So Galdo sued, claiming that he had acquired title to the property through adverse possession. He lost, because the trial court held that the city is immune to losing real property through adverse possession. He appealed. The Commonwealth Court held that, indeed, the city is not immune from adverse possession. If the city appeals to the Supreme Court, the Commonwealth Court decision could be affirmed or reversed. If the city does not appeal, or if it appeals and loses, the case goes back to the trial court for resolution of the fact question of whether adverse possession occurred.

So reader Morris asked a good question. Actually he asked several questions, and characterized them as “silly.” They’re not silly. They could be used as exam questions in a basic federal income tax course. Reader Morris asked, “If the man in the article is victorious after appeals , what is the tax basis of the lot? Would the new owner need to allocate basis of the property between the land and the tree house? How do you determine tax basis of property acquired by adverse possession? Does it matter that the city was the original owner?”

To answer those questions, one must back up and ask a preliminary question. Is the value of real property acquired by adverse possession included in gross income? The answer, I think, is yes. There does not appear to be any case dealing with the question. So I reach my conclusion through analogy. A person who finds something of value and takes possession of it has gross income equal to that value. In turn, to prevent double taxation, the person takes a basis in the item equal to the value at the time the item is found and taken into possession. Of course, as a practical matter, many taxpayers fail to report the income, and the basis question does not arise because the item eventually is consumed, thrown out, or sold for an amount less than what it was worth when found. Real estate, though, is different, and the basis question is an important one.

The basis in the tree house is the cost of the materials used to construct it. The tree house was not acquired by adverse possession so there is no reason to allocate to it any of the basis arising from including the value of the lot in gross income. And it does not matter whether the previous owner is the city, a corporation, an individual, a trust, a partnership, a limited liability company, or some other entity.

Friday, May 18, 2018

What Does It Mean to Be Retired for Tax Purposes? 

When people ask me if I am retired, I tell them, “Not really.” Yes, I’m retired, because I stepped down from my full-time tenure-track position on the law faculty. But I continue to teach, as a part-time employee, and I hold another small part-time position, as an employee, the proceeds of which I donate back to the organization; I’d rather be a volunteer but that’s a tale for another day. So it was interesting to me to encounter a recent Tax Court decision, Voight v. Martin, T.C. Summ. Op. 2018-25.

The taxpayer has worked for Tulane University from February 8, 1985, to June 7, 1991. When Tulane encountered financial difficulties, it eliminated the taxpayer’s job. As part of the arrangement, the taxpayer received a severance package that included an extended tuition waiver for himself and his dependents. The separation notice showed the petitioner’s reason for leaving as “Elimination of Position,” and neither the box “Not Physically Able to Work” nor the box “Retirement, Pension” were checked. Because the taxpayer had six years of service, the taxpayer was granted six annual tuition waivers. After leaving Tulane, the taxpayer worked at Cornell and at America Online before becoming self-employed.

In the fall of 2012, the taxpayer’s daughter entered Tulane, and attended through the spring semester of 2015. The taxpayer filed applications to apply the tuition waivers for the spring and fall semesters of 2013. On the application, he identified his eligibility for the waiver as “Laid Off-Benefits Package.” Tulane granted a waiver of $21,575 on August 6, 2013. In 2014 Tulane sent a Form W-2 to the taxpayer, showing wages of $21,575, social security tax withheld of $1,338, and Medicare tax withheld of $313. Tulane also billed the taxpayer $1,650 for “2013 Waiver FICA Taxes.” The taxpayer did not report the $21,575 on the joint income tax return he filed with his spouse.

At some point before April 4, 2016, the taxpayer sent an email to Tulane asking about the Form W-2. On that date, a Tulane payroll department official replied, explaining, “[b]ecause you were not an employee with the University, and you received the Tuition Waiver Benefit, the waiver is considered income to you”. On the next day, the taxpayer responded and asked, “Please send me something that shows my dates of employment when I was actually working for Tulane as a staff member.” On May 16, 2016, the payroll official replied, “Per your request; your dates of employment were 02/08/85-06/07/91.”

The IRS issued a notice of deficiency, and among the adjustments was a determination that the taxpayer had failed to report the $21,575 tuition waiver as income for 2013. The taxpayer and his spouse timely filed a petition in which they made two assertions. First, the tuition waiver benefit is not taxable. Second, the IRS determined that a similar tuition waiver benefit for 2012 was not taxable.

At trial, the taxpayer argued that including the tuition waiver benefit as income in 2013 would be improper because the tuition waiver benefit represents “money that I earned 20 years ago,” apparently claiming that the benefit should have been taxed in 1991. The Tax Court determined that the benefit would be included in income in the year in which it was actually or constructively received, that it was actually received in 2013, and was not constructively received in 1991 because in that year neither the taxpayer nor his dependents had satisfied Tulane’s admissions standards and enrolled in the university. Therefore, unless an exclusion applied, the year in which the income would be included was 2013.

The taxpayer argued that the section 117 exclusion for scholarships and qualified tuition reductions applied to the waiver. The Tax Court explained that under section 117(d)(2), in order for the waiver to be a qualified tuition reduction, it must be provided to an employee of a qualified education institution for the education, below a graduate level, at a qualified education institution of either the employee or someone treated as an employee under section 132(h). Persons treated as employees under section 132(h) are former employees who separated from service “by reason of retirement or disability” and the dependents of employees, spouses and surviving spouses, and others not applicable to the taxpayer’s situation. Because the parties agreed that the taxpayer’s daughter was his dependent in 2013, that Tulane is a qualified education institution, and that the taxpayer did not end employment with Tulane by reason of disability, the issue was whether the taxpayer was either a current employee of Tulane in 2013 or was treated as an employee because he had separated from service by reason of retirement under section 132(h).

The taxpayer argued that he was an employee because he received a Form W-2, because the references on that form to “employer” and “employee” suggested to the taxpayer that sometime in 2013 “Tulane University thought I worked there.” The Tax Court noted that the issuance of a Form W-2 does not create an employment relationship, and that a Form W-2 may be required even when there is no longer an employment relationship, such as when social security and Medicare taxes are imposed on wages as defined in section 3121, which can include payments for employment “even though at the time paid the relationship of employer and employee no longer exists.” Thus, whether the taxpayer was an employee in 2013 is a factual question, resolved under common law rules. Aside from the Form W-2, the taxpayer did not present any evidence of an employment relationship. The taxpayer conceded he did not work for Tulane after 1991, and Tulane’s records confirm that he had not been an employee since 1991.

The taxpayer next argued that because the term “retired” in section 132(h) is not defined, being “laid off” as he was constituted early retirement. The Tax Court concluded that the taxpayer’s employment with Tulane had not terminated because of retirement. Because there is no definition in the Code of the term “by reason of retirement,” the court applied the principles that the plain language of a statute must be enforced, and that words must be construed so that they are not superfluous or insignificant. Turning to Black’s Law Dictionary, the court adopted the definition of “retirement” as the “[t]ermination of one’s own employment or career, esp. upon reaching a certain age or for health reasons; retirement may be voluntary or involuntary.” The court explained that this definition’s specific mention of termination of a career and special focus upon age or health as reasons for termination conforms with the ordinary meaning of the term “retirement” to refer to a time after an individual stops working. Thus, to give meaning to the inclusion of the term “retirement” requires that retirement be recognized as different from other methods by which an employee may separate from service, including being laid off, because otherwise the term “retirement” as used in section 132(h) would be is rendered superfluous or insignificant. The court also noted that this definition of retirement was consistent with the definition applied by the Supreme Court in the context of bankruptcy.

The Tax Court explained that the taxpayer had not retired because Tulane identified the reason for the termination of employment to be “Elimination of Position” even though retirement was a preprinted option, because the taxpayer’s severance package included assistance in finding further employment, and because the taxpayer testified that he was laid off because Tulane was having “money troubles.” Thus, the termination of the taxpayer’s employment was not contingent on age, years of service, or health considerations. Additional proof that the taxpayer was not retired was found by the court in the taxpayer’s continuing to work for a variety of other employers and for himself after he was laid off by Tulane.

So in order to be retired, at least for purposes of section 132(h) and the provisions that reference it, a person needs to leave employment on account of age, years of service, or health, without thereafter undertaking self-employment or employment with the same or a different employer. By that definition, I am not retired. Perhaps someday I will be. Check back later.

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