Wednesday, April 23, 2014
When the taxpayer divorced, she and her husband entered into an agreement that he would pay her property settlement payments totaling $200,000, plus maintenance payments of $5,000 per month for 60 months followed by $2,500 per month for 48 months. The maintenance payments would terminate if the taxpayer died, cohabited, or remarried. The agreement made no mention of tax consequences of the payments. After making ten maintenance payments, the taxpayer’s husband failed to pay the amounts due for the remaining two months of the year, causing the taxpayer to bring an action in state court against her former husband. The taxpayer reported the $50,000 as alimony gross income.
During the Tax Court trial, the taxpayer argued that the $50,000 was not gross income, claiming that “her divorce decree ‘even states that it’s not alimony, it’s just separating marital property, and * * * [my husband’s and my] money.’ ” The Tax Court explained that the ten payments totaling $50,000 were alimony gross income under section 71(b) of the Internal Revenue Code because they were in cash, were received by the taxpayer under a separation instrument, were not the subject of a provision characterizing them as not alimony, were not made between spouses occupying the same household, were not due for any period after the death of the taxpayer, and were not replaced by payments required to be made after her death. The Tax Court noted that the taxpayer reported these payments as alimony on her income tax return. It also pointed out that she brought a state court action against her former husband for the two unpaid payments, making it possible to infer that he made the other ten maintenance payments, consistent with what the taxpayer reported on her return.
Though the taxpayer was subjected to a section 6662 accuracy-related penalty, that penalty did not apply with respect to the alimony because she had correctly reported the alimony. The taxpayer was fortunate. No penalty was asserted against her for trying to back out of a correct return position by arguing that what clearly constituted gross income was not gross income. A taxpayer does not earn points with a court by taking this sort of stance, which is quite different from bringing up a deduction accidentally omitted from a return under audit or claiming and demonstrating that a gross income item was mistakenly computed. Reading the opinion gave me the sense that the taxpayer, anticipating losing on most or all of the other issues, brought up the “it’s not alimony” claim in the hope that removing it from the return would offset the increased taxable income generated by the adjustments being made by the IRS with respect to the other issues. The taxpayer represented herself in Tax Court, so she was bereft of the advice that competent counsel would have provided, namely, “Nothing can be gained from making that argument.”
Monday, April 21, 2014
The changes, effective for 2013, were enacted more than a year ago. They were enacted amid a flurry of objections, arguments, lobbying, negotiations, press coverage, social media complaints, and an assortment of other discourse. It is a good guess that most, if not all or nearly all, of the taxpayers facing these issues have tax advisors. What sort of advice were they getting? Were they not listening? Were they not listening to their advisors? Were they not reading the news? Were they not paying attention?
The report describes the situation as one in which these taxpayers “have been surprised to learn the Internal Revenue Service was taking a larger bite.” Nonsense. It’s the CONGRESS of the United States that decided to amend the tax laws. The Congress. I suppose paying attention in civics courses, where they still exist, also has not been on the agenda.
Friday, April 18, 2014
The taxpayer divorced his wife in 2006. The divorce decree required him to pay spousal maintenance of $6,068 each month. In addition, he was required to pay her 40 percent of his gross bonus. Both the monthly payments and the bonus percentage payments terminated on the earliest of any of three events. They terminated when the youngest child graduated from high school. They terminated when the taxpayer’s ex-wife remarried. They terminated when the taxpayer or his ex-wife died. The decree stated that the payments were deductible by the taxpayer and includible in the ex-wife’s gross income. The decree also required the taxpayer to pay $500 per month, adjusted for inflation, in child support until they graduated from high school or certain other events occurred. In 2008 the state court reduced the fixed amounts to $4,000 and $200 per month, respectively.
On his 2008 federal income tax return, the taxpayer deducted $54,788 as alimony. A certified public accountant prepared the return. The IRS disallowed the deduction and issued a notice of deficiency, including an accuracy-related penalty. After the taxpayer filed a petition in the Tax Court, the CPA amended the return, increasing the deduction to $70,848, to reflect the bonus percentage payments not claimed as a deduction on the original return.
The Tax Court held that the payments were not deductible as alimony because they were subject to a contingency involving a child, specifically, graduation. The provision in the divorce decree for child support payments did not prevent classifying the other payments as child support payments because of the contingency.
The Tax Court also held that the taxpayer was not subject to the accuracy-related penalty because he had reasonable cause and acted in good faith. The taxpayer gave his preparer complete and accurate information, the preparer was at fault in preparing an erroneous return, and the taxpayer believed in good faith that he was relying on a competent return preparer. The court noted that the record did not indicate whether the CPA was incompetent or inexperienced, and that the taxpayer was not required to second-guess the preparer’s advice.
The opinion does not discuss whether the preparer reimbursed or planned to reimburse the taxpayer for the costs of going to Tax Court to resolve the issues, or for the interest that accrued on the tax deficiency. Even if reimbursement is made, the aggravation and inconvenience of dealing with the audit and the judicial proceedings is something most taxpayers would prefer to avoid. One way of increasing the chances of avoiding these sorts of problems is to check out one’s tax return preparer before engaging the preparer to prepare returns. Until and unless there is some central clearing house that rates and reports on tax return preparers, taxpayers must rely on recommendations from reliable friends and relatives to identify competent and experienced tax return preparers.
Wednesday, April 16, 2014
Now comes a story about “tax policy adjustments” in Governor Chris Christie’s proposed budget for New Jersey. His administration claims that the adjustments are not new taxes or tax increases. The nomenclature mess is taking a back seat to the claim that Christie previously accused political opponents of doing what he now proposes to do.
Christie wants out-of-state sellers to collect use tax on online sales to New Jersey residents. In fairness to Christie, the use tax already exists but, as is the case in many states, enforcement is lax. The sellers who would be required to collect the tax would not be paying it, because their customers would be charged for the tax. The customers would be paying a tax that they owe under current law.
Christie also wants to extend the tax on tobacco products to e-cigarettes. No matter what policy arguments can be made to support the proposal, a tax on e-cigarettes would be a new tax, because e-cigarettes are not tobacco products.
Another idea from Christie is to repeal the sales tax exemption for Urban Enterprise Zone businesses for certain purchases. The repeal of a tax exemption is a tax increase. Calling it a “tax policy adjustment” is a ploy designed to preserve a claim of not having raised taxes.
Grover Norquist thinks all of the proposals are new taxes or tax increases. I agree with him on two of the three. Taking steps to collect a tax that already exists is not the enactment of a new tax and it’s not a tax increase. Calling it a tax increase is deceptive, and it’s worse because it’s done for political purposes.
Monday, April 14, 2014
The story does not disclose when this happened. But although the definition of dependent has changed, under both the old and the current definitions, one of the requirements is that the taxpayer provide over half of the person’s support. That’s found in section 152(a) before the amendment, and in section 152(d)(1)(C) of the current statute. Support for a person who is dead is zero. The amount of support provided to the dead person is zero. Zero is not more than one-half of zero.
This is not to say that a person who is dead cannot be a dependent. If a dependent dies during the taxable year, the exemption is available for that year because the dependent was alive during part of the year.
The position taken by the taxpayer was at best, clever and creative, but like most clever and creative things, it went nowhere. The tax return preparer’s decision to refuse to claim the deceased parents as dependents is consistent with a ruling that no dependency exemption is available for a stillborn child, and a case holding that no exemption is allowed for a child not born by the end of the year. In contrast, the IRS has ruled that a child who lives momentarily after birth qualifies as a dependent if the other requirements are satisfied.
Friday, April 11, 2014
The other day, Gallup releases a poll measuring the extent to which people “gripe” about their state tax burden. With only a few exceptions, taxpayers who thought that their state taxes were too high lived in the states that pay in more federal tax dollars than they take out in federal expenditures, and taxpayers who were the “least negative” about their state taxes lived in the states that pay in fewer federal tax dollars than they take out in federal expenditures. That makes sense. To the extent that taxpayers in one group of states are financing those in another group of states, taxpayers in the first group need to pay more state taxes in order to make up the shortfall caused by the shifting of federal tax dollars from the first group to the second group. And of course the taxpayers who are footing the bill for the expenditures of states that refuse to carry their own financial weight are going to gripe. Unfortunately, unlike the wealthy who can buy votes throughout the country no matter where they live, the taxpayers who live in the maker states are unable to cast votes in the taker states to put an end to this travesty.
It’s easy for politicians in taker states to lower state taxes and assume the role of an anti-tax hero their state is being financed by the taxpayers of another state. How much more evidence needs to be put forth before Americans recognize that no matter what state they live in, they are being taken for a ride?
Wednesday, April 09, 2014
The column in question pointed out several realities that deserved attention. All are interrelated.
First, though the government collects revenue, it also puts money back into the economy. In other words, it’s not a matter of tax revenue falling into a black hole and exiting the economic arena.
Second, funds flowing into the government don’t flow back in a balanced manner. For some states, the amount of federal expenditures that inure to the state’s benefit is less, sometimes much less, than the revenues going to the federal government. For the other states, tax payments turn out to be a good investment, with the state taking back as much as three, four, five, and six times as much as it pays in to the federal government. How does this happen? Though the column doesn’t go into the details, it surely is attributable, at least in part, to federal politics, with Senators and representatives from the “taker” states having serious clout in Washington, often because of seniority rules. Those seniority rules are rather detrimental, and are another reflection of why some sort of term limit is worth serious consideration.
Third, the portion of state budgets that are funded with federal expenditures also varies considerably. In some states, federal funding constitutes about a quarter of the state budget. In the “taker” states, almost half of state expenditures are funded with federal dollars.
Fourth, it is unlikely that the “taker” states would be pleased with proposals to equalize federal funding inflows and outflows. It is quite likely that they would resist any attempt to reduce their dependency on the federal government, especially as that would require them to raise state taxes, and thus incur the wrath of state taxpayers.
Fifth, according to a WalletHub study, the states that fall into the “maker” category are pretty much so-called “blue states,” and the states that fall into the “taker” category are pretty much “red states.” It’s rather ironic, that if federal expenditures were cut as desired by the anti-tax, anti-government crowd, red states would experience economic turmoil far more severe than what would hit the blue states. Letting the emotion of anti-tax, anti-government feelings trump the logic of rational analysis is foolish, and yet that is what succeeds so well in pulling people into the irrationality of the anti-tax, anti-government movement.
Monday, April 07, 2014
By reading the story I learned that those who had been charged own a chain of pizza shops, that they are “landmark” stores, and that three are in Ocean City, New Jersey. The indictment alleges that the owners concealed almost $1,000,000 of the $4,500,000 in sales that they generated mostly during the three months of summer. The owners, a married couple are charged with conspiring to evade income taxes, making false statements to the IRS, and tax evasion. The husband also is charged with 23 counts of structuring financial transactions to avoid reporting as required.
I think that my cousin’s reaction was not one of shock at the idea of someone being charged with tax evasion. My guess is that it’s WHO has been charged. Incidents like this chip away at people’s faith in society, that is, their faith in each other. And when that societal bond deteriorates, anarchy is not all that far down the road. When the glue that holds society together, that is, a mutual trust and fidelity that comprehends the importance of adhering to norms and pitching in, is eroded, society crumbles. And so the answer to the question, “what’s the world coming to?,” is not a pleasant response to consider.
Friday, April 04, 2014
After reading the blog post, it made more sense. The chairman of the Pennsylvania Democratic Party criticized Republican Governor Corbett for signing legislation that funded transportation infrastructure repairs and improvements by, among other things, increasing fuel taxes and vehicle-related fees. The long and twisted path that this legislation took on its way to enactment was discussed by me in If They Use It, Should They Pay?, The See-Saw World of Legislating Infrastructure Funding and Noticing a Tax. Many Democrats supported the proposal, and thus it is puzzling that the chairman of the party would criticize the governor for signing it.
The criticism directed at the governor took the form of pointing out that he had violated the infamous “I won’t raise taxes” pledge pushed by Americans for Tax Reform. This pledge has been the subject of several of my posts, including Tax Pledges: Never Say Never and Never Say Never. Corbett signed the pledge when he ran for governor in 2010. He has been criticized by Democrats, and others, for having done so. The chairman of the Democratic party stated, "This is a man who campaigned on and most likely won on that pledge, and then he turned around and broke it." When he signed the bill, Corbett pointed out that it was the result of a bipartisan effort.
Not only has the Democratic party chair lashed out at Corbett, Americans for Tax Reform characterized his signing of the bill as a violation of the pledge, and conservative Republicans have been so upset that one has decided to challenge Corbett in the Republican primary for the governor’s race. A Corbett spokesman apparently labeled the criticism from the Democrats as an April fool’s joke.
So what’s up? Is the chair of the Democratic party being silly? I don’t think so. I think the underlying message is a simple one, namely, making the point that Corbett ought not be trusted because he changed his mind, violated a pledge, and broke a campaign promise. But seriously, if someone should be denied public office because of broken campaign promises, most, if not all, public offices would be vacant.
There are all sorts of bases on which to criticize Governor Corbett. But to find fault with his seeing the light on taxation simply deters others who have made the wrong choice from recognizing the error of their ways and reforming themselves. As I wrote in Tax Pledges: Never Say Never, “It takes a good deal of courage to confess to having signed a foolish pledge. It takes a good deal of wisdom to understand that the pledge is foolish. It takes a good deal of honesty to explain to America why the foolish pledge is causing so much harm.”
Wednesday, April 02, 2014
The husband and wife purchased a principal residence on December 1, 2009. The wife owned and resided in a principal residence from April 1, 2004, until November 17, 2009. The husband rented a residence during the three years preceding December 1, 2009, and did not own a principal residence during that time.
Section 36(a) allows “an individual who is a first-time homebuyer of a principal residence in the United States” a tax credit for the taxable year in which the residence is purchased. Section 36(c)(1) provides that a first-time homebuyer is “any individual if such individual (and if married, such individual’s spouse) had no present ownership
interest in a principal residence during the 3-year period ending on the date of the purchase of the principal residence to which this section applies.” In 2009, Congress added section 36(c)(6), which provides: “Exception for long-time residents of same principal residence.--In the case of an individual (and, if married, such individual’s spouse) who has owned and used the same residence as such individual’s principal residence for any 5-consecutive-year period during the 8-year period ending on the date of the purchase of a subsequent principal residence, such individual shall be treated as a first-time homebuyer for purposes of this section with respect to the purchase of such subsequent residence.”
The IRS argued that in order to satisfy section 36(c)(6) both the husband and the wife must own and reside together in the same residence for the required five-consecutive-year period. The IRS conceded that the wife would have satisfied section 36(c)(6) but for the fact that the husband did not co-own and live in the residence with her. The IRS also conceded that the husband would have satisfied section 36(c)(1) but for the fact that the wife owned a residence during the three-year period preceding the purchase of the new residence.
The Tax Court reasoned that section 36(c)(6) expanded the scope of the credit by widening the definition of first-time homebuyer. The court explained that the language should be given its plain and ordinary meaning unless doing so generated an absurd or futile result. The court concluded that “it is clear that Congress wanted to restrict the first-time homebuyer credit to only those married couples where both spouses qualify as first-time homebuyers. When Congress amended section 36(c) to add an
exception to the definition of first-time homebuyer that would include longtime residents of the same principal residence, it presumably also sought to restrict the
first-time homebuyer credit to only those married couples where both spouses qualify as first-time homebuyers, and it therefore borrowed the same parenthetical
phrase from section 36(c)(1). However, we cannot believe that Congress intended to restrict the first-time homebuyer credit to only those married couples where both
spouses qualify under the same paragraph of section 36(c).
The IRS appealed, and the Eleventh Circuit reversed and remanded the case. The court reasoned that originally, before section 36(c)(6) was enacted, both a husband and a wife were required to satisfy section 36(c)(1) in order to qualify as a first-time homebuyer. The court also reasoned that when Congress added section 36(c)(6) it used the same parenthetical language to require that in order to fall within the exception, both the husband and the wife were required to satisfy section 36(c)(6). The court pointed out that “The ‘preeminent canon of statutory interpretation’ requires the court to ‘presume that the legislature says in a statute what it means and means in a statute what it says there.’” The court concluded that the language of both section 36(c)(1) and section 36(c)(6) is unambiguous, and that a married couple can qualify as a first-time homebuyer only if both the husband and wife satisfy section 36(c)(1) or if the husband and wife satisfy section 36(c)(6). The court rejected the Tax Court’s reliance on the absurdity exception, noting that it “only comes into play where the absurdity is ‘so gross as to shock the general moral or common sense.’”
In other words, according to the Eleventh Circuit, a married couple is treated as a single unit and must satisfy either section 36(c)(1) or section 36(c)(6) in order to qualify as a first-time homebuyer. According to the Tax Court, the husband and wife can qualify even though one satisfies section 36(c)(1) and the other, section 36(c)(6), or vice versa.
The language of the statute is not as crystal clear as it could be. What would Congress select if asked to choose from the following two provisions?
1. “A married couple does not qualify as a first-time homebuyer unless the husband and the wife both satisfy paragraph (1) or unless the husband and wife both satisfy paragraph (6).”
2. “A married couple qualifies as a first time-homebuyer if the husband satisfies either paragraph (1) or (6) and the wife satisfies either paragraph (1) or (6), without regard to which paragraph is satisfied by the other spouse.”
Because it is highly unlikely that the Congress considered the question, it is foolishness to try to predict which of the two provisions it would select. Could Congress have done a better job when it amended section 36 and added section 36(c)(6)? Of course. That ought not come as a surprise to anyone who pays attention to the last decade and a half of Congressional tax writing.
Monday, March 31, 2014
The concern about welfare takes on a new twist, according to this report. Though the accusations are, at the moment, just that, there’s good reason to believe that they are true and nothing at this point to conclude they are false. A prosecutor in Minnesota filed charges against a married couple who collected food stamps and welfare provided by the state of Minnesota. According to the complaint, the husband was the CEO of a satellite television and broadband services company and the wife operated a championship dog breeding business. They managed to deposit several million dollars into bank accounts. They resided in luxury homes and drove expensive vehicles. They purchased and lived on a $1.2-million yacht in Florida at about the same time they applied for, and collected, food stamps and welfare, omitting their million-dollar bank accounts from the application, and claiming that they were living in Minnesota. Until officials discovered what had been happening and cut off the payments, the couple managed to pull in more than $165,000 in benefits designed to assist the poor.
Perhaps the movement favoring income inequality has reached new heights, or more accurately, depths. It’s not enough to make it difficult for poor people to put food on the table and care for their children, it’s time to pretend to be poor in order to grab some of what little food is being provided. Is there any better indication that so much of income inequality is the consequence of addiction and greed? I wonder if the prosecutors plan to investigate how the millions that the couple accumulated before pretending to be poor were generated. Perhaps from successful business operations. Perhaps not.
Friday, March 28, 2014
Some argue that so long as only one tax rate is applied, a graduated income tax does not exist. Others point out that under the plan, which would provide an exemption or deduction, when taxpayers divide tax liability by their total income, they would find themselves being taxed at different rates. Some in fact would pay no tax.
What makes this complicated is that under current law, the Pennsylvania personal income tax provides “tax forgiveness” for lower-income individuals in the form of a tax credit. This credit also has the effect of creating, in effect, a graduated income tax. Does it make a difference if the effect of a graduated income tax is accomplished through a credit rather than an exemption? If the answer is yes, then how difficult would it be to switch from the proposed exemption to a larger credit available to more individuals? That is, in fact, what another of the candidates for the nomination has proposed.
It will be an interesting campaign season in Pennsylvania. And depending on who is elected in the fall, it should be an interesting tax legislation season as 2015 opens. Stay tuned.
Wednesday, March 26, 2014
Last week, I received an email directing me to the results of a GoBankingRates poll reaching the same conclusion. The poll results are, of course, distressing, because they indicate that Americans have not become any wiser, educated, or informed about the uses to which federal income taxes are put. What was also at best confusing, and at worst troubling, was the inclusion of Medicare among the expenditures funded by the federal income tax. Medicare, as this explanation informs us, is funded by the Medicare portion of the federal payroll tax and by premiums charged to Medicare participants. Interestingly, social security payments were excluded from the list, but yet even though Medicare is also administered through a trust fund, it was not similarly excluded.
One of many disadvantages of a tax system as complicated as the one that lobbyists have created is that it’s too easy to be confused, to reach erroneous conclusions, and to spread intentionally misleading or incorrect information. The GoBankingRates error surely is not intentional, but it suggests how even those more familiar with the tax laws can be caught by tax law complexity. Productive debate and progress with respect to tax policy cannot be accomplished until citizens know how the tax law works and how tax revenues are used. And at the moment, that does not appear to be happening for enough people.
Monday, March 24, 2014
Now comes an observation that the provision generating the mess that the proposal is designed to fix also prevents the proposed remedy. According to this story, Article 3, section 27 of the Pennsylvania Constitution provides that “No law shall extend the term of any public officers, or increase or diminish his salary or emoluments, after his election or appointment." So when the compensation of the board members was reduced, the incumbents were protected. That created the compensation differential that some think accounts for the board’s sluggish response to the roughly 24,000 property tax appeals that have been filed with it. But solving the problem by raising the compensation of those earning less also appears to be prohibited.
There are two solutions. One is to clean house and appoint an entirely new board. Politics surely gets in the way of that solution. The other is to abolish the board, which is what the city tried to do, but the courts blocked that move. Finding a solution is going to require putting the well-being of the city and its residents over the interests of politics and politicians. The chances of that happening are low enough that I can again predict with confidence that the story will continue.
Friday, March 21, 2014
The confusion is indicative of how much Americans don’t know and understand about taxes. This issue isn’t a matter of complex rules and computations. It’s simply a matter of knowing that taxes are imposed not only by the federal government, but also by state and local governments. This outcome of insufficient education also manifests itself when people complain about “the government,” as though there is one monolithic government. My response to these sorts of complaints is a simple, “Which government?” It often brings a silent stare. Is it any wonder that the misinformation merchants thrive in this country?