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Wednesday, October 22, 2014

Tax Complications Often Mask Tax Breaks 

On Monday, a reader of the Albuquerque Journal sent an inquiry to a columnist who carefully answered the question. The reader wanted to know why it would be better to make a charitable donation of stock rather than a donation of cash in the same amount as the value of the stock. The reader pointed out that, whichever choice was made, the charitable contribution deduction would be the same. The columnist explained that there was a big difference. By donating the stock, the reader avoids paying the capital gains tax that would be due if the reader sold the stock and donated cash proceeds.

The donation of stock to a charity in lieu of cash clearly is a tax break. It is a complicated tax break because not all stock donations qualify, and in some instances the capital gains tax does apply. It is not unusual for tax breaks to be complicated, because most are designed to benefit a very narrow group of taxpayers, sometimes even one person or company or a handful of family members, but complicated definitions serve to disguise the identity of the tax break beneficiaries.

The tax break for donating stock, though theoretically available to all taxpayers, is, as a practical matter, of value only to those persons who are sufficiently wealthy both to own stock and to be in a position to make a charitable donation of that stock. People who have lost jobs in the interest of boosting shareholder profits, disabled veterans trying to live on meager public benefits, retirees scraping by because a billionaire bought out their former employer and cancelled pension payments, the working poor, a good chunk of the declining middle class, and those afflicted with unplanned medical bills not covered by insurance either don’t own stock or, if they do, can’t afford to give it to charity. In other words, this tax break primarily benefits the rich. It’s a tax break that doesn’t show up in the list of government expenditures criticized by the puppets of the rich, nor is it among the outlays that the same critics label as giveaways to “takers.”

To find out who benefits from this tax break, propose its repeal. Then watch and listen for the response.

Monday, October 20, 2014

Putting the Brakes on Tax Breaks  

Philadelphia City Council has approved legislation giving yet another tax break to employers. According to this story, city officials are using a tax break to do what state law prohibits them from doing directly. They want private sector employers to pay workers at least $12 an hour rather than the current $7.25 minimum hourly wage. The legislation would provide each employer an annual $5,000 tax credit for each new full-time worker hired at a rate of at least $12 an hour.

Some math is in order. An employer who would otherwise pay $7.25 per hour to an employee who works 2,000 hours but who raises the rate to $12 per hour faces an additional compensation outlay of $9,500, aside from other costs associated with the increase. How does a $5,000 tax credit persuade the employer to hire someone, and if hiring someone, to incur a $4,500 out-of-pocket cost? Even with the federal income tax savings from the deduction, the employer’s net cash flow would be negative.

A policy question is in order. Unless the employer otherwise would be hiring, of what use is the tax break? It isn’t triggered by raises handed out to existing employees working for a wage based on less than $12 per hour. Employers hire if they need help delivering goods and services, which requires the existence of a consumer class with money to spend, but we know how that’s been working out under policies set by the “we worship the wealthy and disdain the middle class” crowd.

Perhaps some insight comes from another aspect of the legislation. The tax break technically is the greater of $5,000 or 2 percent of the new employee’s salary. So if an employer brings in a new employee who would have been hired anyway, at a salary of $500,000, the tax credit is $10,000. Justifying the tax break on the theory that it is designed to increase wages paid to low-income workers is impossible when the tax break is of more value to employers when hiring high-end employees.

Advocates of this approach to dealing with the low-wage problem point to an existing tax break. They claim that 1,057 new jobs were created. Employers hiring those new employees claimed $1.8 million in tax breaks. What’s unproven is the connection between the tax break and the hiring. How do we know that the hiring would not have otherwise happened even without the tax break? Again, employers hire when they have a need that justifies the salary outlay, and a tax break that does not pay for the worker’s salary isn’t going to generate hiring in and of itself.

It is understandable why the city council took this path. Blocked by state law preventing it from raising the minimum wage paid in the city, and unlikely to get that law changed by a legislature dominated by friends of the wealthy, it wanted to try something, anything. But making a tax break available for the hiring of employees whose salaries are nowhere near minimum wage makes no sense. Nor does the tax break do anything for current employees. And unless the tax break picks up the entire cost of hiring someone, whether that cost is $9,500 or somewhat less on account of income tax deductions, it is insufficient incentive for employers to increase salaries. Worse, the tax break might tempt some employers who already pay $12 per hour or more to have their employees quit, only to be hired by an affiliated company and claimed as new employees, though hopefully the legislation would be written in a way to prevent that sort of game.

All of this brings me back to one of the core principles of how I would design a tax system. Never do indirectly through taxes what can and should be done directly. Put the brakes on tax breaks.

Friday, October 17, 2014

Fighting Over Pie or Baking Pie? 

Four months ago, in When the Poor Need Help, Give Tax Dollars to the Rich, I criticized the decision by New Jersey’s Governor Christie to dish out tax credits to the Philadelphia 76ers in return for the team moving its practice facility to Camden. The state claimed that by giving away $82 million over 10 years it would get back $77 million over 35 years. That doesn’t add up, except for the private sector corporations and wealthy individuals who pocket the difference, which surely is much more than it appears to be. Why? Although these sorts of giveaways to the wealthy are defended by claims of job creation, the fact of the matter is that they simply move jobs from one state to another. In some cases, such as the 76ers, employees simply go to a new work location. In other cases, for every unemployed person who ends up with a job, someone, somewhere, finds himself or herself on the unemployment line.

Now comes news that New Jersey is getting ready to hand out more than $100 million in tax breaks to Lockheed Martin, in an effort to persuade it to move some jobs from wherever they are to Camden. This comes on top of a $260 tax break giveaway to Holtec International, which in turn added to the almost $4 billion in tax credits handed out by the state during the past ten years.

From a national standpoint, from the perspective of what is good for the nation, this is nothing more than a zero sum game. States fight over pieces of the private sector by using tax dollars to increase the size of the economic pie that they can grab, while the small business entrepreneurs who actually bake pie struggle because they cannot afford to put huge campaign contributions in the pockets of the politicians using tax dollars to enhance their power. If state governors and legislators continue down this path, eventually there won’t be any pie for them to fight over. Not that I advocate using tax breaks to encourage the private sector to do what it should be doing on its own, but if public money is going to be handed out, it ought to be limited to helping those who create jobs and not those who move jobs around in a tax break shell game.

Wednesday, October 15, 2014

A Bad Tax Pun 

I like puns, and word games. The other day I came across one that meshed with taxation. It’s bad, so it’s appropriate for hump day.

We know that taxes are used both to discourage activities on which society allegedly frowns, as well as to generate revenue to pay for the social cost of those activities. Thus there are taxes on tobacco, on gambling, on alcohol, and on inappropriate activities by private foundations, to name a few. So would it not make sense to develop a tax for another practice on which at least some part of society frowns.

And thus, it has been proposed that when people make grammatical errors, they should be subjected to a syn tax. Perhaps the suggestion is a joke. But in a country in which taxes are levied on just about every item and every behavior, it might end up as something not quite a joke.

Monday, October 13, 2014

So What Would You Have Advised? 

A recent Tax Court case, Kalapodis v. Comr., T.C. Memo 2014-205, presents an opportunity to explore how the tax law affects the manner in which people decide to implement a plan. The taxpayers, a married couple, had a son who died. They received $75,000 of life insurance proceeds on his life. They decided they wanted to use the money to establish scholarships for deserving students. So they put the money into a trust, gave it a name, and directed the trust to pay $2,000 in scholarships to each of three high school students. The money came from investment income on accounts owned by the trust, and was paid with checks written on the trust’s account to the recipients. The trust did not apply for tax-exempt status.

The taxpayers claimed a charitable contribution deduction for the $6,000 paid to the three students. The IRS disallowed the deductions, and the Tax Court upheld that decision. The court gave several reasons. First, the $6,000 was paid by the trust, not the taxpayers, and there was no justification for treating the trust a grantor trust. Second, the payments were made to individual students, who do not qualify as charitable donees for purposes of the charitable contribution deduction. Third, the taxpayers did not provide evidence of a contemporaneous written acknowledgement of the payments.

Nothing in the opinion indicates whether the taxpayers sought professional advice on how to set up the scholarship program. Presumably, if they had done so, it would have been included in the facts provided by the court, but there’s no guarantee of that. If they did what they did based on professional advice, it would be troubling. Would it not have made more sense to set up a charitable entity, such as a trust or non-profit concern, that obtained tax-exempt status? Would that not make the contributions to the trust deductible, and leave the trust tax-exempt on its investment income? There’s no indication of whether the taxpayers deducted the $75,000 that they transferred into the trust. Granted, setting up a tax-exempt scholarship foundation isn’t something just anyone can do, as there are details that must be taken into account, record-keeping that is required, and safeguards that must be implemented. Would it have cost a few thousand dollars? Probably. But in the long run, the tax savings would have made the investment in professional advice worthwhile.

So is that what you would have advised? Or am I wrong and did the taxpayers set up the scholarships in a sensible way? Are there alternatives that would make more sense? I am confident that the taxpayers are not the last folks to decide to set up a fund for a charitable purpose, whether scholarships or some other good purpose. Hopefully, the next group of people to take this route follow the right path.

Friday, October 10, 2014

Who’s to Blame for Failure to Withhold? 

Many Pennsylvania towns impose a local services tax, which is limited to $52. Most localities have opted to impose the maximum amount. The tax is imposed on all individuals who are employed or self-employed within a jurisdiction. Employers are required to withhold and remit the tax for their employers. See, for example, the regulations for Radnor Township.

What happens if the employer fails to withhold and pay the tax? According to this story, that’s what happened to employees of the United States Postal Service in Scranton, Pa. Actually, it happened to some of the employees but not all of them. For eight years, going back to 2006, the tax was not withheld and paid on behalf of at least 50 employees. Eventually Scranton’s tax office figured out that the tax has not been paid, and has sent bills to the employees. One employee received a bill for $669, including interest.

Now a dispute has arisen as to who is responsible. The employee in question stated that if he knew the tax had not been paid, he would have paid it, but no one told him. The Postal Service claims that it’s the employee’s responsibility to point out errors in withholding. The employees’ union disagrees, and has filed a grievance seeking to have the employees reimbursed.

Here is how I would resolve the dispute. The employees owed the tax, and to the extent it was not withheld and paid, they took more money home. They had the use of that money for the period during which the tax was not paid. Thus, as for the tax amounts, the employees should pay. As for the interest, the employees had use of the money, but the interest rate charged by Scranton probably is more than the interest rate that the employees could have earned on the money. The difference should be picked up by the employer, who has the obligation under the tax ordinance to withhold and remit the tax payments.

Of course, one of the underlying problems with this situation is that the tax is a nuisance tax. It’s a small amount. In Radnor, a sole proprietor who is not an employee is required to make four $13 payments and is not permitted to pay in one $52 lump sum, increasing the chances that a payment will be missed. It’s also a silly tax, because it is levied for services, and yet is not imposed on people receiving services who are not employed or resident in the locality. It also imposes an administrative cost on the locality, and the fact that it took Scranton eight years to discover that some of the employees of one the locality’s larger employers demonstrates the challenges facing tax collectors. It also is a regressive tax. I commented on this tax back in 2005, in Stealth Tax, Type Two, and Spotlights Now Turn to That Penna. Stealth Tax. Nothing in this recent story from Scranton suggests that my criticisms of the tax are misplaced.

Wednesday, October 08, 2014

The Tax-and-Spending Thing 

My last comment concerning the Philadelphia cigarette tax was two months ago, in Delaying a Questionable Tax. Aside from my criticism of a legislature that delayed its decision on a question that needed immediate attention, I shared my concern that the cost of educating tomorrow’s voters ought not fall on a very narrow group of individuals. The legislature eventually approved the tax, which is projected to generate $83 million for a cash-strapped school system.

The tax went into effect on October 1, several weeks after the school year opened. How did the School Reform Commission, the group that oversees the operation of the Philadelphia school district, react? It cancelled its contract with the school’s teachers, in order to compel the teachers to increase contributions to their health plans, thus cutting the district’s compensation costs by almost $44 million. The Commission justifies its actions by pointing out Philadelphia teachers belong to one of only two school districts whose teachers do not contribute to the cost of their health plans. The Commission did not mention the relative pre-contribution salaries of school teachers in the various districts. Working with the data at OpenPAgov.com, it is easy to see that Philadelphia teachers do not earn as much as their suburban counterparts. So, in effect, the move by the Commission is the equivalent of a pay cut.

Had the Commission announced it was intending to cut pay, would all of the legislators who voted for the cigarette tax have nonetheless voted for it? Or would enough of them have balked in light of the Commission’s overall plan? The burden of education tomorrow’s voters is being placed on narrow slices of the population rather than on everyone. Until and unless the funding of public education is fixed, the performance of American students in a competitive global marketplace will continue to suffer.

Monday, October 06, 2014

Do Squatters Have Gross Income? 

A reader pointed me in the direction of an article about an Indiana woman who has been living rent-free for eight years in a house that she does not own, and that no one claims to own. Property taxes have not been paid, and yet the taxing jurisdictions apparently have made no effort to collect the taxes by filing a lien on the property. No bank or other possible owner has asked for rent. The article does not explain whether anyone has done a title search to determine the identity of the last recorded owner, or to learn what happened to that person.

The reader’s question, though, was no one of real estate law but one of income tax law. He asked, “Is this gross income?” He also asked if she was required to pay income taxes, but I cannot even begin to address that question because I don’t know enough about her other income tax attributes to determine her taxable income, her tax liability before credits, and her credits. But the first question is a good one, the sort I would ask in the basic federal income tax course if I were still teaching it.

There do not seem to be any cases or rulings directly addressing the income tax consequences of squatting. At first, that is surprising, because squatting is not a recent phenomenon, and during the past decade it has increased in frequency. On the other hand, there is no easy way for the IRS to know that a person is squatting, and it is unlikely that a squatter would seek advice from the IRS or anyone else. There is no one to issue a Form 1099. In other words, the activity is under the tax radar. Even when a squatter is detected by local authorities or a bank, and is ejected, no attention is given to the squatter’s income tax consequences.

So is there gross income? One would think so. Although the squatter does not come into ownership of the property aside from the rare situations in which they are there long enough to take title by adverse possession, the squatter is acquiring something of value, namely, the use of the property. First-time tax students, and many others, sometimes struggle with the notion that the use of property has a value and that income is not limited to actual ownership of property itself. What the squatter has is the equivalent of what the finder of property has, namely, windfall gross income. Some might argue that the squatter is not wealthier and thus has not had an accession to wealth, but it is well settled that reduction of an outlay is the equivalent of an accession to wealth. A person who escapes the payment of rent is better off than she would have been had she paid the rent.

Do any of the exclusions from gross income apply? If the facts indicated that the person was living rent-free in the house because the owner, a relative, permitted them to do so, it is possible to fit the transaction within the gift exclusion. That does not appear to be the case in the situation described in the article, nor in pretty much every other squatting event. None of the compensation exclusions, such as fringe benefits, apply, nor is the rent-free use a prize, award, scholarship, or damages for personal injuries.

The analysis would be different if the squatter is the owner, who has stopped making mortgage payments. That analysis would involve the tax consequences of debt forgiveness, and involve the owner’s adjusted basis in the property and the amount of the debt. The situation described in the article involves a different sort of squatter, a person with no connection to unoccupied property and who moves in and makes herself at home.

I would be interested if anyone knows of a case or ruling involving a squatter of this sort, or if anyone has dealt with the situation under circumstances not generating a case or ruling. I know at least one reader shares my interest.

Friday, October 03, 2014

What to Do with Old Tax Receipts 

Thanks to a reader alerting me to this story, I now know what someone 1500 years ago did with an old tax receipt. Perhaps this discovery will generate a new fad.

A research fellow at the John Rylands Research institute at the University of Manchester was going through papyri stored in the library’s vault when he spotted what may be one of the oldest Christian amulets. On one side are verses from a Psalm and the Gospel of Matthew. On the other side is a receipt for payment of a grain tax an Egyptian village. The research fellow explained that papyrus was a tax receipt, the reverse side of which was used to create a charm probably kept within a locket or pendant. I suppose there was a papyrus shortage, or perhaps the person creating the amulet was not unlike those of the present day who preserve old papers to use the reverse side as scrap.

Surely all sorts of tax receipts have been used in modern times as scrap paper. It’s easy to guess the sorts of things that might be written on the reverse side, but it is almost impossible to know what are the more prevalent uses. Shopping lists? Phone numbers? Email addresses? Directions? Doodling? To-do lists? Reminders? And how many will survive to be discovered 1500 years from now?

Wednesday, October 01, 2014

So Who Really To Be Helped with Taxpayer Dollars? 

One of the arguments advanced by the anti-tax, anti-government crowd is the supposed inappropriateness of using taxpayer dollars to help people in need. Using terms such as lazy, shiftless, and taker to describe these recipients of taxpayer assistance, these advocates of eliminating taxes and government fail to recognize that most people rescued by government safety nets are in need because of matters beyond their control. Veterans neglected by the government, victims of diseases many of which are caused by corporate pollution and chemical mis-use, people out of work thanks to short-sighted short-term focus on profits, and children who did not ask to be born into poverty present a challenge that gives people the opportunity to show the temperature of their hearts.

So one might think that if governments are being pressured to cut back on assistance to the needy, they would not be dishing out tax dollars to help those who are not in need. Yet that is what is happening, with the most recent absurdity of this sort, according to this report, taking place in New York. The governor’s office has explained that the state will shell out $750 million to build facilities and buy equipment for the solar cell manufacturer SolarCity. The state also will provide tax incentives of unknown magnitude. Solar City will be required to pay utility costs plus $1 per year in rent for the facilities. SolarCity will be required to pay $410 million over 10 years if it does not generate the promised jobs.

SolarCity is owned in part by Elon Musk, a billionaire. Surely he and his fellow shareholders can afford to pay for the cost of constructing buildings to run a business, to pay rent, and to pay taxes. If SolarCity cannot make this work using its own dollars, it ought not try. The average person starting a business is on his or her own. Why a different set of rules for SolarCity? Even if required to pay $410 million as a penalty for not creating jobs, Elon Musk and the other owners of SolarCity will have made out like bandits, with taxpayer money. Can someone explain how it is inappropriate to provide a few dollars to help those genuinely in need, often because of societal breakdowns, but a wonderful idea to dish out money to the rich?

How does this sort of nonsense happen? It’s easy to understand the answer. The rich have the money to pay lobbyists and other operatives to push these sorts of Great Treasury Raids through legislatures and agencies. The poor can’t afford to hire people to advocate for them, especially when they are being condemned for causing government spending that comes out per-person in amounts far less than what is being served up to the wealthy.

The tougher question is this: why do people who complain about taxes and government spending keep voting for politicians who insist on spending tax dollars to help the very folks who are causing the tax and spending problem? Is it that difficult to figure out the foolishness of voting for those who do not have the voter’s best interests at heart? This nation had best straighten out its priorities, and quickly, or it will spiral even more quickly into a medieval arrangement of heartless nobility and impoverished peasants.

Monday, September 29, 2014

When Two Are Cheaper Than One 

Many years ago, while discussing entry-level law practice jobs, I suggested that it would make more sense for law firms to hire two law school graduates at half the salary they were dishing out to one new employee. I saw, and continue to see, many advantages. This approach would increase the number of jobs, it would increase diversity in terms of finding good lawyers just as having more draft picks helps a professional sports team increase the chances of finding an athlete with a sustainable career, it would reduce the stress associated with the 80-hour work weeks connected to those salaries, and it would provide more scheduling flexibility. A variety of defenses of the status quo were offered, and I’m not going to bother rebutting them because they’re all variations of the theme that it’s better to have one highly paid individual and one person out of work than it is to have two moderately paid individuals.

Now comes news, in this Philadelphia Inquirer article, that the Philadelphia City Controller is suggesting that city agencies hire more employees rather than paying overtime to existing employees. Calculations by Alan Butkovitz show that the city could have saved more than $700,000 in one year alone had it hired more employees. In one instance, an existing employee received $220,000 in overtime salary and benefits for taking on additional work that could have been done by a new employee costing $58,000.

I wonder if reforming this approach to getting government work done is on the “cut spending” list of the anti-government forces. I doubt it.

Friday, September 26, 2014

Tax Protesting: A Bad Idea No Matter How One Views It 

More than two and a half years ago, in Tax Advice With No Teeth, I pointed out that one of the risks encountered by tax protesters who rely on advice from people who are not tax professionals and who know little to nothing about tax. When tax protesters are charged with criminal tax fraud, relying on rumors and false claims does not provide a sustainable defense. Tax protesters also run a serious risk of civil penalties, in addition to interest accruing on the unpaid tax liability.

A recent Tax Court case, Salzer v. Comr., T.C. Memo 2014-188, provides another disadvantage faced by tax protesters. In Salzer, after the IRS computed the tax protester’s tax liability using married filing separately rates, the protestor argued that the joint return rates should be used because, had he filed a return, he would have filed a joint return. The Court correctly noted that the outcome must be based on what the taxpayer did, not what the taxpayer would have done had he not failed to file returns in the first place.

The letter sent by the tax protester to the IRS to explain why he did not file returns contains the usual tax protester boilerplate, which propagates the way the flu virus spreads during an epidemic. It’s bad enough there are people who generate this nonsense, but it’s far worse and rather sad that there are many more people who think it’s good advice, get duped, and end up worse off than they would have been. The worst part is that there is no practical way for the duped protesters to track down the source of the bad advice and sue for the damages incurred by their misdeeds.

Wednesday, September 24, 2014

The Dangers of Earmarking General Tax Revenue 

Earlier this month, in Tax-Exempt Status Benefits Aren’t Necessary Unless There is Net Income, I noted that calls to tax the NFL, and other tax-exempt sports leagues, make sense only if those leagues generate taxable income, but if those leagues are genuinely non-profit organizations simply bringing in dues from member teams to offset league expenses they wouldn’t be generating any sort of profit or taxable income. But, I added, if they are generating taxable income, they ought not be tax-exempt.

Now comes a Philadelphia Inquirer story, reporting that Senator Cory Booker has introduced legislation to repeal the tax exemption for professional sports leagues and to use the revenue to fund programs designed to reduce domestic violence. Though I agree with the first part of the proposal, the second presents a bad precedent.

Why should revenue raised from certain professional sports leagues, namely, those currently exempt, but not from other leagues that currently pay taxes, be devoted to a particular cause? If one suggests that some professional athletes are responsible for domestic violence incidents, are the ones who act that way confined to the currently exempt leagues? And what of Hollywood celebrities, rock stars, attorneys, architects, plumbers, sales personnel, police officers, clergy, insurance agents, landscapers, automobile dealers, pilots, nurses, mechanics, computer programmers, and others who engage in domestic violence. Why would the taxes paid by their professional associations or fraternal organizations not be devoted to ameliorating domestic violence? As a further demonstration of why Booker’s idea is illogical, what about the other crimes committed by professional athletes playing for teams in the currently exempt leagues? Some of them, far from most of them, have been known not only to engage in domestic violence but drunken driving, handgun offenses, and murder.

The idea of associating a particular group of people with a particular social infraction is what leads to prejudice and stereotyping. The idea of singling out one particular offense as though the others did not matter as much, or focusing on a select group of individuals as though people who are not professional athletes in those leagues do not engage in domestic violence is outright silly. It’s simplistic, it is designed to get attention rather than dig at the root of the problem, makes for politically useful sound bites, but does not present any sort of long-term solution.

Repeal of an indefensible tax exemption is a matter of tax law. Dealing with domestic violence is a matter of criminal law. The idea of tax law once again riding to the rescue of another area of law that doesn’t work well simply perpetuates the same thinking that has the IRS handling the work that other federal agencies ought to be doing. All the tax revenue in the world isn’t going to cut down domestic violence if the offenders are allowed to walk away with few or no consequences. Perhaps instead of spending most of their time complaining about taxes and the IRS, these critics can start focusing on the criminal justice system, and the underlying educational deficiencies that fertilize this bad behavior.

Monday, September 22, 2014

Yet Another Danger of Tax Complexity 

When the phrase “tax complexity” shows up in a conversation, most people think about the complications of a particular tax. It’s no secret that the federal income tax is absurdly complex. Most people know that the lists of items subject to, and exempt from, a particular sales tax do not fit any particular pattern and separate similar items based on the most miniscule of differences.

But tax complexity can also refer to the confusing array of taxes that affect institutions and individuals. There are income taxes, sales taxes, transfer taxes, gift taxes, excise taxes, to name but a few. These taxes can exist at the federal level, state level, county level, and local level.

So when someone engages in a transaction and is told there is a tax, the likelihood of the person being familiar with the tax depends on the tax and the person’s experience. When the amount in question is huge or when the person has professional advisors, the tax can be researched and taken into account. But what happens when someone is told that a tax exists, and pays that tax, only to discover that the tax does not exist?

Several days ago, the Attorney General of New York announced that Walmart has agreed to pay penalties and costs for charging $3.50 for Coca-Cola products advertised for $3.00. In some instances, Walmart employees told customers that the national advertising did not apply in New York, a violation of New York law. In other instances, Walmart employees told customers that the 50 cent increase was on account of a New York sugar tax, a tax that does not exist.

The investigation determined that Walmart cash registers were programmed to charge the higher price. Walmart did not fix the problem when customers complained, but did so after the Attorney General stepped in. The overcharge was imposed on roughly 66,000 sales of the Coca-Cola product in question.

The settlement between Walmart and the Attorney General requires Walmart to pay $66,000 in penalties and other costs. I doubt that this money will find its way back to the people who were overcharged. For Walmart, $66,000 is like a middle-class individual losing a penny. Why not impose a penalty of an amount sufficient to send the message that needs to be sent, and then distribute that amount, net of costs, to low-income individuals in New York?

This series of incidents demonstrates not only why it is risky to have so many different jurisdictions imposing so many taxes that a multi-billionaire company tries to sneak in a fake tax, but also why government regulation of the so-called free market is a necessity so long as this sort of behavior, intentional or otherwise, persists.

Friday, September 19, 2014

An Epidemic of Tax Ignorance 

Of course it’s not the worst mistake someone can make, if in fact it is a mistake. But when a person makes a mistake with respect to a simple thing, one’s confidence in that person’s ability to avoid mistakes doing other things is undermined.

Perhaps it’s not the worst deliberately misleading comment, if in fact it is a deliberately misleading comment. But when a person makes a deliberately misleading comment about something that isn’t complicated, one’s faith in that person’s ability to tell the truth is undermined.

Yes, I’m talking about that horrific phrase, “IRS Code.” More than six years ago, in Is Tax Ignorance Contagious?, I wrote:
Now the governor of Pennsylvania has jumped on the tax misunderstanding bandwagon. A few days ago, as reported in Hidden Costs Will Make Turnpike Deal a Bad One, Ellen Dannin and Phineas Baxandall explain that Governor Ed Rendell, in pushing for his turnpike leasing plan, "called for using a 'tax-exempt, public benefit corporation under IRS code 63-20.'"

Simply put, there is no such thing as "IRS code 63-20." First, there is no such thing as an IRS code. There is an Internal Revenue Service. There is an Internal Revenue Code. The IRS does not create nor does it own the Internal Revenue Code.
Less than a year ago, in Intentional Misleading Tax References, I returned to this problem, explaining:
Last week, a tax colleague at another law school pointed out the use of the term “IRS Code” in a Wall Street Journal story. This misleading reference, though common, surely cannot be accidental every time it occurs. On at least two previous occasions in Is Tax Ignorance Contagious? and Code-Size Ignorance Knows No Boundaries, I have criticized the use of the term “IRS Code” by people from whom I expected better.

Though sometimes the use of IRS Code is accidental, and in most of those instances probably a matter of someone uneducated in tax picking up the term from someone else, in too many instances the use of the term “IRS Code” is intentional. Why would someone intentionally make an error? The answer is simple. Someone who intentionally uses this term, knowing full well that the proper term is “Internal Revenue Code,” does so in order to sucker people into thinking that the IRS is responsible for what is in the Internal Revenue Code. Who benefits from shifting public unhappiness with the tax law to the IRS? Why, the people who are responsible for the Internal Revenue Code, specifically, members of Congress, their staffs, and the lobbyists who have procured much of what pollutes the tax law.
Several days ago, in a report titled IRS regulations prevent sleeping pods at Anchorage airport, the phrase “Internal Revenue Service codes” or “IRS code” was used six times. This, despite the headline referring to IRS regulations, a phrase that is technically incorrect because the regulations are issued by the Treasury Department. Yet the article cites, not a regulation, but the Internal Revenue Code, specifically, “section 142.C.2.a” (a rather novel way to cite an Internal Revenue Code provision).

The impact of this erroneous use of an invented phrase is to cause people to think that it is the IRS that is responsible for the problems with sleeping pods at the Anchorage airport. That removes the spotlight from the Congress, which is responsible for the enactment of the restrictions in section 142(c)(2)(A). If the cause is ignorance, the question matrix begins with asking whether the person writing the article is sufficiently familiar with taxation. If so, the question is why such an error would be made. If not, the question is why the person did not consult with someone who is sufficiently familiar with taxation. If the cause is deliberate misstatement, the simple question, for which the answer is easy, is why is this being done.

Even if the error is simple ignorance, the ramifications are serious. As instance upon instance of using this erroneous and misleading phrase pile upon one another, it becomes easier for those whose goal is to mislead people into shifting blame for the nation’s tax mess from the Congress to the IRS. This is particularly serious to the extent these folks are trying to eliminate the IRS, tax revenue, and the federal government in order to permit states to engage in the egregious behavior that only the federal government has been able to curtail.

In Intentional Misleading Tax References, I noted:
Unfortunately, the term “IRS Code” is going viral. More than 350,000 hits appeared when I put the term into a google search. The faster this nonsense spreads, the more difficult it becomes to eradicate its use. Unlike some errors, which are annoying but not particularly harmful, this error causes great harm and is particularly nefarious because it is the product of deliberate attempts to manipulate people. Until Americans get themselves educated about what matters, they will continue to be played and continue to complain about afflictions within their ability to eliminate. It is time to speak up and object whenever someone uses the misleading “IRS Code” term.
Today, eight months later, the number of google hits when searching for “IRS code” has grown by 14 percent. As I promised, I will continue to hammer away at this not-so-subtle intentional and unintentional attempt to shift the focus away from a failed Congress that has increasingly betrayed its fiduciary duties.

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