Tuesday, March 25, 2025
When Tax Advice on Facebook is Dangerous
So it was rather surprising to see a facebook reel that states: "If you're an animal lover you're gonna wanna hear this in 2025 the IRS is allowing certain tax deductions for your pet so for example money you spend on boarding or grooming going to the vet food or transporation for your dog make sure you take advantage of these tax benefits in 2025." This advice is simply wrong. It fails to explain that the deductions are available only in situations that fit within the aforementioned limited circumstances.
Is it possible that the reel was cut short? I don't think so, because the ending of the message fits a typical closing without any indication that any clarification will follow.
Is it possible that the reel reflects the unfortunate cultural phenomenon of sound bites, tweets, and other unnecessarily shortened and oversimplified summaries? That certainly could be the case. Too often people mention a general rule as though it has no exceptions, or offer a conclusion without sharing the predicates.
What will happen to people who watch this reel and proceed to take deductions for their pets that are not allowable? If they are caught by the IRS or a state Revenue Department, they face not only a tax deficiency but also interest and penalties and in some instances even the risk of criminal prosecution. Unfortunately, with the anti-tax crowd ripping apart the IRS, the chances of being caught are very low, though the same cannot necessarily be said about state Revenue Departments.
It's not just tax advice that should not be taken as correct simply because it shows up on the internet. The same can be said of assertions, claims, advice, and explanations found on the internet with respect to every possible topic imaginable. There is no substitute for independent research, critical thinking, and reliance on vetted professionals in every instance where the question is of paramount importance.
Wednesday, March 12, 2025
Washington State Mileage-Based Road Fee Proposal Changes: Is It Better?
Today reader Morris alerted me to a development in Washington state with respect to a proposed mileage-based road fee. According to this report, bills have been introduced in both the Washington Senate and the Washington House to impose a vehicle miles traveled tax, a different name for a mileage-based road fee, though using the word tax is disappointing because what is being considered is in most respects a user fee. Reader Morris directed my attention to two previous commentaries, both arising from reports he noticed and shared with me, dealing with similar proposals in Washington, Getting Technical With the Mileage-Based Road Fee and A Much Bigger Forward-Moving Step for the Mileage-Based Road Fee.
Reader Morris asked me two questions. He asked, “Does the proposed legislation solve the problems mentioned in [those two commentaries]? He also asked, “What do you think about this proposed legislation?”
I answer the first question in two steps. First, in a href = https://mauledagain.blogspot.com/2020/02/#5924033084063958184>A Much Bigger Forward-Moving Step for the Mileage-Based Road Fee I didn’t mention problems. I explained that the Washington State Transportation Commission had released a studying “the feasibility of transitioning from the gas tax to a road user assessment system of paying for transportation.” I noted that “It’s time to acknowledge that it’s time for change.” Second, it’s in Getting Technical With the Mileage-Based Road Fee that I criticized legislation that was at that time proposed in Washington. I criticized plans to use a portion of mileage-based road fees for purposes other than those stated in the Eighteenth Amendment to the Washington Constitution, which requires that all license fees, fuel excise taxes, and other highway revenue be used “exclusively for highway purposes.” I noted that:
The overriding issue is not one restricted to the use of revenues generated by a mileage-based road fee. It is an issue that affects every tax or user fee enacted by a legislature other than, perhaps, taxes destined for a “general fund.” To make certain that the revenues from a mileage-based road fee are not diverted as has happened with gasoline tax revenues and other user fee revenues, those drafting the implementing legislation must be certain to restrict the uses of those revenues. For Washington state, and other jurisdictions with similar restrictive language, the concern is that the 18th amendment does not apply to mileage-based road fees. That means an amendment to the amendment is necessary, though perhaps the same outcome could be accomplished by inserting expenditure restrictions into the enacting statute. I don’t know Washington constitutional law well enough to conclude what specifically would need to be done. As the writer of the News Tribune article put it, “State lawmakers, therefore, shouldn’t mess around with a mileage tax unless they have a parallel discussion about preserving the original intent of the gas tax.” I totally agree.The most recent proposal attempts to circumvent the limitation in the Washington Constitution by adding a ten percent surcharge to generate funds for other purposes. It seems to me that the surcharge is nothing more than breaking the fee into two components, re-labeling the ten percent portion as something else, and then funneling monies paid by road users to other purposes. As I have pointed out many times, it’s one thing to impose taxes to generate monies for general funds, but it’s a very different, and improper, approach to charge people a user fee for something they are not using. Imagine setting up a municipal landfill and charging 10 cents for every pound of refuse deposited and another 15 cents per pound that is used to pay for snow removal. If snow removal is going to be funded by a separate fee it ought to be imposed on everyone who benefits from snow removal, which is a group much larger than those using the landfill. So, no, the proposed legislation does not solve the diverted funds problem.
To the second question, I reply that in general I support any steps to shift from fuel taxes to mileage-based road fees. If some changes are made, the proposed legislation is a good starting point. Some people are criticizing the proposed legislation as a violation of privacy because it requires reporting mileage to the state either by odometer readings or GPS tracking. Reporting odometer readings does not violate privacy. Many, perhaps all, states require those readings each time vehicle registration is renewed. They also require reporting of insurance coverage information, including the name of the insurance company and the policy number. It appears that what concerns people is the use of GPS tracking. I suppose the reason for including it in the legislation is a lack of confidence in self-reported odometer readings, though odometer readings are also taken when vehicles undergo state safety inspections and thus there is a check on misreported readings. GPS tracking would be an almost necessity if states limited the fee to miles driven on state roads and imposed the fee on out-of-state vehicles but that fine-tuning requires a national compact that isn’t yet close to fruition. To deal with privacy concerns, some states let private companies run the mileage-based road fee programs, but that doesn’t solve the privacy issue because it puts data in the hands of non-accountable private sector operators rather than in the hands of government personnel who ultimately are subject to accountability at the ballot box. The Washington proposal would permit law enforcement to access “personally identifying information reported” through court order, but it’s unclear what information would be available that isn’t already available, as even GPS information can be obtained by court order. So the surcharge needs to be jettisoned, and the collection and sharing of information needs to be redesigned so that abuses are foreclosed.
So again we wait to see what happens.
Monday, March 03, 2025
The Joys and Sorrows of Teaching
Throughout my life I have known and spoken with many teachers. I have had discussions with those who taught me, friends and relatives who are or have been teachers, former students who are or have been teachers, and colleagues, neighbors, and others who are or have been teacehers. The are people who taught not only law school and undergraduate classes, but also K through 12 classes. When I heard their stories, I realized I was lucky. I was spared most of the challenges they faced.
I was forutunate that in all of my teaching situations, almost all of the students I encountered wanted to learn. Few were being educated against their will. Almost all of them were capable of learning what they were studying, though some did so easily and some needed to make much more of an effort. More than a few grumbled, but many of those students, months or years later, took the time to explain that they finally understood what was required of them to learn. These are some of the joys of teaching, helping those who want to learn accomplish what they set out to do.
But there are sorrows in teaching. In my formal and informal teaching roles over the years, I rarely encountered someone who did not want to learn. But most of the teachers I have known, particularly those in the K-12 schools, have not had the comfort of trying to educate people who want to learn. They must deal with those who don't want to learn because they'd rather spend their time playing or doing things that get them into trouble. Whether they are that way because they are being wilful or because they are dealing with emotional or other issues doesn't remove the challenge, though it can affect how the challenge is met. Many of these teachers also encounter students who lack the requisite abilities, often because they are misplaced in terms of grade level or curriculum, either through school system flaws or, worse, parental denials of reality.
The impetus for this post is the culmination of what I have read and observed over the past 15 years. It seems to me that a disppointing number of people do not want to learn. Many of those people have the capability to learn but choose not to make the effort. Some lack the desire to think for themselves, and many lack the ability to think for themselves. Perhaps some never had the opportunity to learn to think for themselves, having been through a limited education process of receiving and regurgitating words and paragraphs. Others had that opportunity but chose to let it slide by, choosing instead to cut class, ignore homework, cheat, and use parental influence to obtain approvals of which they were not deserving.
Why does this matter? It matters because the inablity to think for one's self causes a person to be more susceptible to misinformation, lies, scams, the wiles of con artists, and the propaganda of domestic and foreign adversaries. Those who pay attention to what is now happening and who have and use the ability to think for themselves surely can see the consequences of failing to think for one's self, failing to distinguish between fact and opinion, and failing to analyze allegations and information.
The ability and willingness to learn is what has fueled the evolution of the species. It is what generates progress, a word that meets antipathy when expressed as its adjective. Its absence generates the opposite, the adjective formed from the verb regress. And that is what is going to happen if society fails to persuade itself that education matters, that the ability to engage in analysis is important, and that the ability to think for one's self is essential.
I don't regret having been a teacher for a long time. I do not regret having spent a good part of my life engaged in education. I do regret that what I and others have been doing will turn out to have been insufficient to prevent society from backsliding into what some of us thought had been put behind us.
Thursday, February 13, 2025
Tax Rates -- Just Two Generations Ago
Just two generations ago, federal income tax rates ranged from 14 percent to 70 percent. Now they range from 10 percent to 37 percent.
Just two generations ago, the top one percent of Americans owned 23 percent of the nation's wealth. Now the top one percent owns 37 percent of the nation's wealth.
If the trend continues or, as expected, accelerates, it won't be long before federal income tax rates range from 1 percent to 10 percent and the top one percent owns 60 pecent or more of the nation's wealth.
It's sad that the people who are the unhappiest about their own economic situation continue to encourage and support policies that make their own economic situations increasingly worse.
It's a wonder what the lack of education cand do to a person. It's also a wonder what a bad education can do to a person. What's sad is what it does to everyone else.
Monday, February 10, 2025
When Allegations Go Unproven: Did a Television Court Show Involve Tax Fraud
This show comes from The People’s Court and carries the title, Being One Wicked Aunt. The plaintiff sued her biological aunt who raised her, alleging that the defendant aunt committed tax fraud and stole the plaintiff’s tax refund check. The plaintiff explained that the defendant filed state and federal income tax returns on which she claimed the plaintiff’s daughter as a dependent.
The defendant alleged that the plaintiff committed tax fraud, pointing out that she, the defendant, did not know that a tax refund had been direct deposited into her, the defendant’s, bank account. She further alleged that the plaintiff stole information from the defendant and used it to claim the defendant’s two children on the plaintiff’s tax returns, using the social security numbers of the two children that the plaintiff had stolen from the defendant. She also counterclaimed for unpaid rent, the cost of damages that happened to the defendant’s car when the plaintiff was driving it, and the cost of oil changes the plaintiff failed to procure for the car.
The plaintiff explained that she did not know how to do her tax returns so she asked her aunt for help. She alleged that she gave her aunt all her information and that her aunt put her two children on the plaintiff’s tax returns that the aunt prepared for the plaintiff. The judge asked the plaintiff why the defendant did not claim her two children on her own return and the plaintiff replied that she did not know, and when the judge asked if the defendant had talked with the plaintiff about it, the plaintiff replied in the negative. The judge then asked the defendant if she filed tax returns for that year and the defendant replied that she had not, and added that she had not prepared the plaintiff’s tax returns. The plaintiff also alleged that when the defendant prepared the plaintiff’s returns, she routed the refunds into the defendant’s bank account.
The judge asked the defendant if the refunds went into her account, and the defendant explained that she found out in October of 2016 when the plaintiff told the defendant that the IRS had deposited money into the defendant’s account. The judge asked the defendant if the plaintiff prepared her own returns how would the plaintiff know the routing and account numbers for the defendant’s account, and the defendant replied that the plaintiff had stolen the information when she was living in the defendant’s home. In response to a question from the judge, the plaintiff explained that when she told the defendant about the refunds being deposited into the defendant’s account the defendant at first wanted to make things right but after being give a December deadline to pay the plaintiff stopped responding to the plaintiff.
When asked about the plaintiff living in the defendant’s home, the defendant replied that the plaintiff was supposed to pay rent but didn’t. She admitted there was nothing in writing. The plaintiff denied having agreed to pay rent. When asked about the car, the plaintiff alleged that the owner of the car, the defendant’s son, the defendant’s daughter, and the defendant’s boyfriend also drove the car, but the judge explained that both instances of damage the car occurred when the plaintiff was driving the car. The plaintiff admitted to not getting oil changes for the car.
The judge held that there was “no dispute” that the tax refund money belonged to the plaintiff. The judge held that the defendant did not prove that the plaintiff had agreed to pay rent. After confirming that title to the car is in the defendant’s name, the judge held that the defendant was entitled to recover the cost of repairs to the car and the cost of the oil changes that were not done.
It is puzzling to me that the judge concluded the plaintiff was entitled to a refund that was generated on a tax return that included as dependents two children who were not children of the plaintiff. My guess is that the judge simply decided to have the refund transaction go through as it would have gone through had whomever prepared the return used the plaintiff’s bank account information rather than the defendant’s. That would leave the situation in the hands of the IRS when and if its screening process identified two children who had been on the defendant’s previous returns showing up on the plaintiff’s returns.
Reader Morris commented, “In my opinion both parties had unclean hands. The judge should have dismissed the case,” and asked, “Does the judge have an ethical or legal requirement to report this case to the IRS?” I disagree that both parties had unclean hands. No one admitted tax fraud. The plaintiff claimed that the defendant prepared the return and put the defendant’s daughters on the plaintiff’s return. The defendant claimed that the plaintiff prepared her own return and put the defendant’s daughters on the return. The judge did not determine who was telling the truth. She simply concluded that a refund payable to the plaintiff should have gone to the plaintiff. Whether that refund was correctly computed was not an issue in front of the judge. It’s possible one or the other of the parties was telling the truth, so it’s not necessarily the case that both had unclean hands.
There is no evidence that tax fraud was committed because the returns were not entered into evidence. There were allegations, but no evidence, just as there was no evidence with respect to the rent claim. For all we know, the defendant’s daughters were not claimed on the plaintiff’s return (though they probably were). There is no evidence of who prepared the plaintiff’s returns. The judge probably suspected that the plaintiff did what the defendant alleged, and by granting the plaintiff the recovery for the tax refund made it impossible for the plaintiff to allege to the IRS, if ever asked, that she did not receive the refund. But suspicion is not something that the judge is required to report, though there is nothing stopping the judge (or someone on the staff of the court or show) from sending to the IRS the link to the show. It’s unclear whether the judge and the staff are precluded from using information obtained during the show when there is no legal obligation to share it.
But as the judge noted, this was a sad case. As the show host noted, it was a tragic case. It was sad and tragic in many ways. I suspect it is possible that the moving force behind whatever may have been done on the plaintiff’s tax returns may have been someone that was not a party to the case, but I’ll leave that for readers to decide for themselves.
Friday, January 24, 2025
Will a Revisit of Philadelphia’s Soda Tax Bring Me an Invitation?
Now comes a Philadelphia Inquirer story letting us know that Philadelphia has decided to hold hearings on the soda tax. One member of Council noted that the tax “disproportionately affects the poor” and that Council should look for other sources of revenue. As I pointed out in some of my commentaries, if the soda tax was truly about improving health, the tax should and would be a tax on sugar and similar substances and not just beverages. Instead, the tax is about revenue, and the large amount of sugary beverages sold in Philadelphia was, and to some extent still is, low-hanging tax revenue fruit.
Interestingly, according to a study reported in this Philadelphia Inquirer story, the tax has had an impact on Philadelphians’ health. Whether that impact is positive is questionable, considering that the study showed Philadelphians’ body mass index increasing though at a slightly slower rate than for people outside of the city. Supporters point to substantial drops in soda sales within the city, but that doesn’t demonstrate purchases of soda have declined substantially. It only proves that purchases made within the city, rather than across the street in other municipalities, have decreased.
The Council member who noted that the tax adversely affects the poor then explained that, “I just want to look at [the tax.] I’m not saying we’re going to do anything with it. I just want to make sure that I bring everybody in that has an opinion about it.” It doesn’t hurt to review periodically all sorts of laws and taxes. Of course, I have an opinion about the tax. I’ll let you know if he brings me in.
Tuesday, January 14, 2025
A Foolish Tax Proposal That Surely Isn't Fair
Replacing an progressive income tax with a consumption tax, which is a fancy name for a sales tax, would eliminate the corporate income tax. It would reduce the amount of federal taxes paid by the wealthy. It is a regressive tax, which means that the percentage of income paid in taxes would decrease as income increased. Even with the absurdly complicated rebate system proposed for people living under the poverty level, the consumption tax would hit the middle class, or what’s left of it, while letting the wealthy pay a token amount of tax. The tax would not apply to investments. That, of course, is quite a relief to those who have investments but is an exception of no use to those struggling to get by on poverty wages. On a Myth v. Fact release, Carter rejects the claim that the “FairTax will hurt the poor and give the rich a huge tax cut” by pointing out the rebate system for the poor, and then argues that “the FairTax is not riddled with shelters and loopholes, meaning wealthy taxpayers cannot minimize what they pay in taxes,” but without mentioning that the wealthy spend very little of their income and wealth on consumption compared to everyone else in the country. The exception in section 102(a)(2) of the proposal is pretty much a shelter if not a loophole. It’s actually a flaw in the consumption tax, and it makes ridiculous the claim that the “FairTax is the only progressive tax reform bill currently pending before Congress” because it’s not a progressive tax.
If you are interested in how the mechanisms for people to qualify for a rebate that would be mailed to individuals qualifying for consumption tax relief, read the details in the bill. The definitions, the reporting, the hoops through which people must jump are no less complicated and in some instances more complicated than existing federal tax law.
The bill shifts to the revenue departments of states that have sales taxes the task of administering the federal consumption tax, which surely cannot delight existing overworked state revenue department employees. The federal government, through the use of some sort of IRS replacement agency, would remain the administrator of the tax in states that do not have sales taxes. Considering the difficulties states face in collecting the backup use tax, relying on a system that provides just as many compliance and enforcement challenges as does the existing federal income tax is unwise, even foolish.
Though the press release claims that the Fair Tax would eliminate the need for taxpayers to have “a team of lawyers or accountants to fill out their taxes,” the bill contains language that contemplates the need for professional advice to deal with the inevitable mistakes, overcharges, erroneous poverty rebates, and other glitches sure to arise. Worse, some taxpayers may not realize that they have been overcharged or under rebated, and so they wouldn’t know they need professional assistance, which is not a good reason to not retain professional assistance.
One of the co-sponsors claims that a national consumption tax would “make the American Dream affordable again.” He doesn’t understand, or perhaps does but does not want to admit, that the unaffordability of the American dream for almost everyone who isn’t attaining it rests on the income and wealth inequality caused by the reduction of income tax progressivity. Eliminating that progressivity with a regressive consumption tax guarantees that the American Dream will be out of reach except for the several hundred families that would eventually own 99 percent of wealth in this country. Progressivity means progress, which encompasses the American Dream. Regressivity means regression, which encompasses the flaws that this nation has been trying to remediate for the past 90 years.
Sponsors of the proposed legislation, as quoted in the press release, keep tossing around words and phrases such as prosperity, pro-growth, and fair share. These buzz words are the hallmark of the Oligarchic Dream, which is the antithesis of the American Dream. It is legislation welcomed by the ruling oligarchy and that will make the economic position of most Americans even worse than what it currently is.
Representative Carter went so far as to claim that the legislation is “the only tax proposal out there that is pro-growth, simple, and allows Americans to keep every cent of their hard-earned money.” If Americans keep every cent of their hard-earned money, then no one would be paying taxes, except perhaps for those who have easy-earned money. So who has easy-earned money? Certainly not the hard-working electricians, police officers, farmers, engineers, bookkeepers, caregivers, nurses, and other workers. The easy-earned money accrues to those who sit around living off trust funds and inherited wealth. Yet I am confident that the Fair Tax is not designed to remove tax obligations from those who work hard or have worked hard.
Carter goes even further, telling us that he is “proud to lead this Georgia-grown legislation that puts the American people, not bureaucrats, in charge of their tax rate.” If that is what he intends, put the tax rate to a popular vote. If I were to bet, I would bet that zero percent would win. Not only would it reflect the ubiquitous distaste for taxation shared by most people, it would also reflect the efforts of the oligarchy that wants to eliminate government or reduce it to a structure under the control of the oligarchy, and replace it with a nation whose economy is totally, or close to totally, a private sector under the control of oligarchs who are not subject to votes, recall, or impeachment. In that world, the services currently provided by government would either be eliminated or would be available for purchase from oligarchs who own highways, hospitals, banks, police and fire departments, grocery stores, clothing stores, and everything else, and who can refuse service to whomever they want to push aside, who can charge whatever they want to charge, who can damage the environment however they wish, who can sell defective and dangerous products if doing so enhances their net worth, who can use false advertising to procure customers, who can be the marketplace capitalist bullies that is their oligarchic dream.
Thursday, January 02, 2025
A New Year, An Old Problem: Misinformation and Lies About Taxes
There is no question that all sorts of “scams and bad advice” circulate with promises of lower taxes and refundable credits for taxpayers who fall for these scams and bad advice. Though some of these misleading claims are the product of an ill-informed person thinking they are helping others, most are designed to funnel money to the perpetrator of the arrangement. According to the IRS and is Security Summit partners, these scams include the “Fuel Tax Credit” claim (misleading people who are not eligible for the credit to claim it), the “Self-Employment Tax Credit” plan (a limited credit that existed only for several years and hasn’t been available since 2022), “pig-butchering” crypto scams, and “investments in fake cryptocurrencies.” Other bad advice encourages taxpayers to invent fake household employees and claim refunds based on sick and medical leave wages never paid, to create fake W-2 forms with inflated income and withholding amounts from a fake employer and to use these for filing returns to get refunds, to claim deductions equal to the entire amount of their wages and labeling the deduction as an expense for the production of income.
There is no question why the people who deliberately market these suggestions do so. They know that a large proportion of Americans are easy prey for misinformation and lies. They know that too many Americans are unwilling to do research to verify what they hear, see, or read. They know that too many Americans let their initial emotional reaction suppress critical thinking and analysis. They know that the chances of getting caught and prosecuted are low, and that the chances of meaningful punishment if convicted are even lower.
An interesting twist to the IRS statement is its reference to “social media.” What is social media? According to Merriam-Webster, it consists of “forms of electronic communication (such as websites for social networking and microblogging) through which users create online communities to share information, ideas, personal messages, and other content (such as videos).” This definition is so broad that it includes the IRS website itself, a place where users, that is, IRS employees, create an online community through which it shares information. The IRS announcement itself explains that “a better option for taxpayers to learn how to properly use tax forms and claim credits is to go to IRS.gov and follow IRS social media channels.” So it’s not a matter of concluding that all information obtained through social media is necessarily bad. It’s a matter of learning how to separate truth from lies. More on that in a moment.
On the other hand, limiting the warning to “social media” ignores the other means by which misinformation and lies are disseminated. The misinformation and falsehood communication problem existed long before electronic communications and, for example, the internet, came into existence. People with bad intent offered bad advice and spread lies in social clubs, churches, schools, taprooms, business offices, and on public transport. What the internet had done is to provide an environment in which bad advice tossed up at a local club and that circulated among perhaps hundreds or a few thousand people to find its way to billions of people all over the planet.
What’s the answer? The IRS gave the same advice I’ve been offering for decades: “We urge people to do some research before falling for these scams. Finding a trusted tax professional or visiting IRS.gov is a better way to research a tax issue than relying on someone talking in their car or their kitchen about a non-existent tax hack.” Following advice from an online stranger, or even a well-known friend or family member that turns out to be bad advice can be costly. When taxpayers accept the misinformation or bad advice without verification, the IRS explains that “they could face audits and expensive fines [and] in some cases, they could be subject to federal criminal prosecution and imprisonment.” In other words, do deep research. Do background checks on tax return preparers. Ask the friend or relative where they are getting the information they are sharing and to direct you to its source. Their refusal or inability to do so is a red flag. If there is a source, go to it. Research it. Analyze it. Protect yourself.
Friday, December 13, 2024
Analyzing the Federal Income Tax Consequences of a Crappy Barter Proposal
Reader Morris asked, “What are the federal tax consequences of this barter exchange to each party on gross income, capital gains or losses, and ownership of the property?” In other words, reader Morris is asking, if the landlord accepted the offer, what would be the federal income tax consequences? It surely is a hypothetical question because I would be shocked if the landlord accepted the offer that is alleged to have been made.
If the parties went through with the proposed barter, the outcome would depend on the resolution of a fact question. The question is, what is the value of the “art” that is offered in satisfaction of the debt? Though the answer could be anything between $0 and the amount of the back rent, let’s consider two possibilities, one at either end of that spectrum.
If the fact finder determined that the value of the “art” was equal to the back rent, then the landlord, if on the cash method, would have rental gross income. If the landlord were on the accrual method and had already accrued the rental income, then receipt of payment would not have any tax consequences. No matter the outcome to the landlord, the tenant would be treated as having “sold or exchanged” property, which is a realization event. The tenant would have amount realized equal to the amount of the unpaid rent. The tenant’s adjusted basis in the “art” would be zero, a conclusion consistent with case law holding that the basis of blood and other body products sold by a taxpayer is zero. The resulting income would not be a capital gain because body products are not capital assets, a conclusion consistent with that same case law.
If the fact finder determined that the value of the “art” was less than the back rent, say zero or some token several dollars, and that the landlord accepted it in satisfaction of the unpaid rent, the landlord would have rental gross income equal to the value of the “art,” say zero or the token several dollars, unless the landlord was on the accrual method in which case there would be no income. The landlord would be treated as having released the balance of the debt (either the full amount or slightly less than the full amount), and would claim a bad debt deduction if the rent had already been accrued. The consequences to the tenant would be determined by application of the rules applicable to forgiveness of indebtedness. There would be gross income in the amount of the balance of the debt (either the full amount or slightly less than the full amount) unless one of the five exceptions apply. Was the debt discharged in bankruptcy? Under the assumed facts, most likely not. Is the tenant insolvent? We don’t know. The debt is not qualified farm indebtedness or qualified real property business indebtedness. Is the debt qualified principal residence indebtedness? No, because the debt related to rent and not to the acquisition cost of purchasing a residence.
The proposed transaction is about as likely to take place as the payment of a debt in the manner proposed by Shylock in the Merchant of Venice. And if Shylock had succeeded (for those unfamiliar with the story, he ended up with money and not flesh), and if the federal tax system or one identical to it applied, the analysis would be the same as that presented for the situation in the “art” for rent story.
Critics might wonder why invest intellectual capital in analyzing a transaction that did not happen and almost certainly will not happen. The answer is simply that doing this analysis, for example, on a federal income tax exam, strengthens one’s intellectual skill set just as running prepares the runner for an actual race. But to be honest, I analyzed the question posed by reader Morris not so much to strengthen or maintain the strength of my intellectual skill set as to explore a totally bizarre situation. A situation that adds to the long list of proofs that support what I, and other tax law professors, tell students, “We don’t need to invent hypotheticals, they’re out there just waiting for us.”
Wednesday, December 04, 2024
When Tax Fraud Is Admitted in a Civil Arbitration Proceeding Known As a Television Court Show
This latest examination of a television court show is happening thanks to reader Morris. He directed me to this Judge Pirro episode from . Most of the facts were very evident despite disagreement on one point, but what wasn’t clear was the basis for the plaintiff’s claim because the case never reached that point.
The plaintiff and defendant knew each other because they had worked together as servers for several catering events. The defendant mentioned to the plaintiff that she, the defendant, was not going to file a federal income tax return because she had earned less than the filing threshold. She had mentioned on more than a few occasions that she had two children, and that her boyfriend/fiancé was not the father of the children. It is at this point that the parties disagreed. The plaintiff testified that the defendant proposed that the plaintiff claim the defendant’s children on the plaintiff’s tax return, causing a tax savings/refund (the facts aren’t clear on that point) that would be shared by the parties. The defendant denied making that proposal but insisted she only told the plaintiff to “check the procedure,” whatever that means. However, the defendant admitted that she provided the plaintiff with her children’s social security numbers.
The plaintiff filed her federal income tax return, claiming the defendant’s children. It appears that the IRS paid the plaintiff a refund and then requested repayment, because at some point it noticed that there was a problem with the return. What is clear is that the IRS asked the plaintiff for corroboration with respect to the children, specifically, birth certificates and school letters. The plaintiff asked the defendant for those items. Though unclear, it appears that the defendant did not provide those items to the plaintiff. The plaintiff sued the defendant for breach of contract, though it isn’t clear what constituted the breach. The case did not get to that point.
Judge Pirro made it clear to the parties that what they did was federal tax fraud. The plaintiff claimed children who were not hers, and the defendant made that possible by providing the plaintiff with the social security numbers of the defendant’s children. When the plaintiff claimed that she did not know it was fraud to claim someone else’s children, and that “people claim other people’s kids all the time.” To that remark, Judge Pirro said, “They do?” and the plaintiff replied, “Well, in New York they do.” Judge Pirro responded, “Really? Who do you know that does that?” and the plaintiff declined to identify anyone due to “privacy.” Judge Pirro rejected that excuse, and said, “Do you know why? Because it’s illegal.” Eventually Judge Pirro threw out the plaintiff’s suit, because courts do not enforce illegal contracts.
There are several lessons to be learned from this case. First, once a person files a federal income tax return, they should continue to file even if their income is below the filing threshold. This lets the IRS know that the person has not died, and also makes it more difficult for identity thieves to file under the person’s name. Of course, it also would have made it even easier for the IRS to notice the fraud committed by the plaintiff in this case. Second, claiming children on a tax return when the requirements of the Internal Revenue Code are not met is wrong. It is fraud. Even if a person doesn’t end up convicted of a crime, it can wreck their credit report, impair their employment prospects, and make their life miserable.
Reader Morris asked, “Does Judge Pirro have a legal obligation to send the video or transcript to the IRS Criminal Division?” That is a great question. For any law faculty reading this who are teaching the Legal Profession course (or its equivalent) and who need exam question ideas, this case and the question posed by reader Morris is worth considering. What is the answer? It depends. On most television court shows, the judges are not acting as judges even though some have been judges in the past. They are acting as arbitrators, dealing with cases that are removed at the parties’ consent from the judicial system to binding arbitration that is marketed as a courtroom proceedings. The judge on the television court show might be a former judge, but also could be a former or active attorney, or law school professor. Several have no legal background. Are these “judges” legally required to report the admitted crime? It depends on the nature of the crime, the existence of statutes requiring mandatory reporting, including mandatory reporting by any person serving in a particular capacity. Beyond the issue of being legally required to report the crime, they may be ethically required to report the crimes, particularly if they are active members of the state bar. Again, it depends on state and federal statutes, ethics codes for active and retired judges, ethics codes for active and retired attorneys, and similar provisions.
If reporting is legally or ethically required, the next question is identifying the person or office to which the information should be reported. Again, it depends on the crime, the jurisdiction, and whether there are in place procedures for reporting that must be followed. In many instances, if the information is reported to the wrong office, that office will forward it to the appropriate authorities or advise the reporting person where the information should be reported.
The interesting twist in this particular Judge Pirro episode is that the IRS already suspected, or knew, that tax fraud had been committed. I am guessing that it figured this out when two children showed up on a tax return that was filed by a taxpayer who was not the taxpayer who had claimed the children for the previous taxable year. Knowing that, the only practical question is whether the existence of the arbitration, as evidenced by the video, must be brought to the attention of the IRS Criminal Division or the US Attorney. Why not? There is downside to not reporting it and no downside to reporting it. It is publicly available, and it would not surprise me if the IRS accessed the video sooner than any reporting information would reach it, thought that is not a reason to not report it.
Does Judge Pirro have an ethical obligation to alert the IRS Criminal Division or the US Attorney? I don’t know. I don’t know if she is still subject to New York’s code of conduct for judges. I don’t know what provisions exist in the contracts that the parties enter into with the show’s producers. I don’t know if any of the staff of the show are active or retired members of the bar who have an obligation to report it. And that raises more interesting questions. Do all of the active and retired attorneys who watched the show when it first aired have an ethical obligation to report the crime? What about those who watch the video at some much later date when the IRS cases against the parties have been closed? What about any viewer who sees reporting the crime as an opportunity to pick up a whistleblower reward? Does the fact that the video is publicly and widely available suggest that the answer is different from what it would be if knowledge of the crime was obtained through channels not open to the public?
Reader Morris also asked, "Why are people so stupid they admit tax fraud on national television? Why would you come to court and admit to a federal crime?" I don't think I need to answer these questions. They answer themselves. Yet I will succumb to the temptation and reply, “It’s another indication of how flawed the American education system has become when it’s a matter of understanding government, public policy, crime, citizenship responsibilities, and critical thinking.”
Thursday, November 28, 2024
On Thanksgiving, There Always Are Reasons to Be Thankful
As I have noted in each of the past eleven years, “I have presented litanies, bursts of Latin, descriptions of events and experiences for which I have been thankful, names of people and groups for whom I have appreciation, and situations for which I have offered gratitude. Together, these separate lists become a long catalog, and as I have done in previous years, I will do a lawyerly thing and incorporate them by reference. Why? Because I continue to be thankful for past blessings, and because some of those appreciated things continue even to this day.” When I re-read those lists, I realized that the people, events, and things for which I am appreciative are far from obsolete.
So once again on this one day I will look back at the past twelve months, and remember the people, events, and things for whom and for which I give thanks and have given thanks throughout the year. If some of these seem repetitive, they are, for there are gifts in life that keep on giving:
- I am thankful for a wonderful son, daughter, daughter-in-law, grandson, and granddaughter.
- I am thankful for my siblings, nephews, nieces, grandnephews, grandnieces, cousins of various degrees, and their families.
- I am thankful for my friends who listen to my stories, and tell me even better stories.
- I am thankful that I was finally able to make the journey planned for 2020 that was postponed for reasons I need not explain.
- I am thankful my sister and brother-in-law were able to join in part of that journey.
- I am thankful for the gracious hospitality and kindness that our cousins in Italy extended to the three of us.
- I am thankful that I returned with four 32GB USB sticks filled with additional genealogical data that I have been transcribing and will continue to transcribe.
- I am thankful for all the people who continue to help update the multiple family trees I develop, maintain, update, and publish.
- I am thankful for the cousins I have met through FTDNA, ancestry, 23andme, and myheritage who I did not know existed, and for the opportunity to get in touch with cousins who I knew existed but with whom I had no contact until they showed up on one or more of those genetic genealogy sites.
- I am thankful that a half dozen Maule men agreed to take BigY700 DNA tests, which showed that the Kings Sutton Maule family group and the Glastonbury/Somerset Maule family group share a common Maule ancestor with the Delaware Maull family group and the Thomas Maule of Salem, Massachusetts, family group, an ancestor who lived about 450 years ago, even though we learned that two other Maule family groups don’t connect in what is called “genealogical time” but link several thousand years earlier.
- I am thankful that my congregation’s choir has been able to continue singing.
- I am thankful that we continue to gather in the sanctuary for worship, and, yes, that I continue to ring the narthex bell.
- I am thankful for all the people in the world who continue to fight ignorance, crime, terror, evil, and corruption.
- I am thankful that awareness of what needs to be done to fight ignorance and corruption has not diminished.
- I am thankful my health is holding steady.
- I am thankful for people being willing to read the things I write.
Have a Happy Thanksgiving. Set aside the hustle and bustle of life. Meet up with people who matter to you. Share your stories. Enjoy a good meal. Tell jokes. Sing. Laugh. Watch a parade or a football game, or both, or many. Pitch in. Carve the turkey. Wash some dishes. Help a little kid cut a piece of pie. Go outside and take a deep breath. Stare at the sky for a minute. Listen for the birds. Count the stars. Then go back inside and have seconds or thirds. Record the day in memory, so that you can retrieve it in several months when you need some strength.I am thankful to have the opportunity to share those words yet again. And I am thankful that it is possible for even more of us to do all of those things, and for others of us to most of those things.
Tuesday, November 12, 2024
It Turns Out the Supreme Court Didn’t Put An End to a Bad Tax Practice
About a year and a half ago, in Supreme Court Puts An End to a Bad Tax Practice, I explained that the United States Supreme Court handed down a decision, Tyler v. Hennepin County, Minnesota, that involved a similar practice in Minnesota in which the excess of the sales price over the delinquent taxes was not returned to the property owner. The Court held that the property owner plausibly alleged that the retention of the sales surplus violated the Takings Clause. The Court explained that a government cannot take more from a taxpayer than is owed, and that this principle has its origins at least as far back as the Magna Carta, and that most states had statutes adopting this principle. Minnesota did not provide a way for the property owner to recover the excess in the case of delinquent real property taxes even though it did provide for return of the excess when property was seized on account of delinquent income taxes and personal property taxes. The Supreme Court rejected Minnesota’s argument that the property owner did not have a property interest in the excess sales proceeds because she constructively abandoned her home by failing to pay the property tax.
I wrote that the outcome was not, to me, surprising. I noted that the “obvious impropriety of what Minnesota and the other states have been doing is apparent from the fact that the Supreme Court’s opinion was unanimous, something that doesn’t happen very often these days.” I also noted that the decisions of the district court and the Eighth Circuit, which rejected the homeowner’s argument that the Supreme Court accepted, indeed was surprising. One expects better.
When it came time to put a headline or caption on my post, I chose “Supreme Court Puts An End to a Bad Tax Practice.” I was wrong. Reader Morris directed my attention to report from Reason explaining that states had found a loophole to get around the Supreme Court’s holding. The Supreme Court held that “a government cannot take more from a taxpayer than is owed.” The authorities in Oakland County, Michigan, decided to seize the home of a person who owed real property taxes and to give that home to a private company. The private company sold the house, remitted the unpaid taxes to Oakland County, and kept the balance. None of the proceeds went to the homeowner. The homeowner sued, claiming that the Takings Clause had been violated. The judge dismissed the case because “the government itself didn’t make a profit.” According to the report, quoting the lawyer who represented the homeowner, the private company is operated by the mayor and the city administrator. Apparently the company collected $10 million in selling houses in this manner.
If this practice disturbs you, good. Perhaps you will never find yourself owing back taxes on your home. Perhaps you don’t live and will never live in a jurisdiction where this circumvention of the Supreme Court’s holding is practiced. But perhaps you will end up as did these homeowners. What would be your reaction? Dismay? Anger? Frustration? Disappointment? Would you wonder why this happens? Would you be concerned about corruption in government? If corruption in government offends you, understand that there are tens of millions of people who are willing either to turn a blind eye to this sort of corruption or to actively support it because they see some sort of benefit to themselves from its application.
As readers of MauledAgain know, I’m not a fan of public-private partnerships. Too often, the private wins and the public loses. So now there is another public-private arrangement that does not bode well for taxpayers who should be protected by governments, but who end up losing when government officials ignore law.
I don’t know if the judicial decision that approved the use of a private company to circumvent the Supreme Court’s holding has been or will be appealed. Surely there is an argument that the private company is acting as an agent of, or in collusion with, the government that is prohibited from failing to return the excess proceeds to the homeowner. Perhaps it will take another visit to the Supreme Court to get the message across to the officials who are doing this. Perhaps the Supreme Court needs to recognize that it, surely unintentionally, did not succeed in putting an end to a bad tax practice.
Friday, November 01, 2024
Is Tax Neutrality an Achievable Goal?
Tom begins by pointing out that both presidential candidates are trying to acquire votes by making promises to provide tax breaks to particular groups of people or for certain types of income or expenditures. He mentions the proposals to eliminate taxes on tips and social security benefits, to eliminate the SALT cap, to provide tax breaks for families with children, first-time home buyers, and African American men starting businesses. Tom notes that these promises have been made in response to where a candidate was campaigning, the audience the candidate was addressing, or particular poll results.
Tom notes that using the tax code to encourage or discourage behavior violates the concept of tax neutrality. He is correct. He writes that “[t]ax neutrality is a key principle of tax reform that was at the forefront of the Reagan tax policy in the 1980s, and that continued through the 1990s and the 2000s.” I disagree. Tax neutrality has been honored in the breach for many decades. For example, tax breaks for families with children and tax breaks for first-time homebuyers have been in and out of the Internal Revenue Code for many years. Every revenue act that has been passed since long before World War II has included a variety of tax breaks for one or another, in fact, many different, activities and statuses.
Tom writes, “[T]he tax code should not encourage or discourage individuals from buying a home, from going to college, from having children, from marrying, and it should not reward or punish businesses for whether they choose to purchase equipment or lease equipment, etc.” He is correct. For decades I have advocated letting agencies other than the IRS deal with these sorts of issues.
But then Tom writes, “The core philosophical idea behind tax neutrality is that in a free economy, it is not the government’s job to direct you to behave in a way that it prefers.” I totally disagree. Governments at every level must necessarily direct people to behave in certain ways under certain circumstances. With several exceptions, drivers are required to stop at red lights and stop signs. People are directed to refrain from littering. People are prohibited from robbing banks. Laws exist to enforce these rules and even though enforcement falls short of sufficiently comprehensive, using the tax law as a form of enforcement is inappropriate, and in the examples I provided the tax law has not, at least until now, been used to encourage compliance with these rules.
However, Tom then points out, “ You should be able to run your household, and run your business, based on your own criteria, and not based on the details of the tax code.” I do agree that the tax code should not be used to control how people run their households and businesses. But I disagree that people should run their households and businesses based on their own criteria, because without rules that protect people from harm, at least some people would run households and businesses in ways that harm people both directly and indirectly. A business owner’s “own criteria” might include dumping waste into nearby rivers but that is and must be prohibited. However, enforcement needs to be done through means other than cluttering the tax code with breaks and penalties dealing with those violations of law. And so, when Tom writes that “government does NOT know best,” he is overstating a proposition. There are matters on which government does not know best, but there also are matters on which government – provided it is not under the control of a dictator, oligopoly, or cabal – knows best because it reflects the wishes of society, such as the desire for clean water free of waste dumped into rivers by business owners operating by their “own criteria.”
Tom then writes, “Essentially, tax policy should raise the necessary revenue for government while introducing as few distortions as possible.” He is correct. This is a point that I have made consistently for a long time. I doubt it will happen, and though Tom doesn’t offer a prediction, I suspect that if pushed, he would admit that the likelihood of cleaning up the tax law and stripping the Internal Revenue Code of its various incentives and tax breaks is extremely low if not zero.
Tom concludes that “politicians should not use the tax code to buy votes or to reward favored constituencies,” and that this “would require candidates who operate from principle, and sadly that’s out of fashion in 2024 America.” I agree with Tom. Again, I doubt politicians will change their messaging, especially and as long as dark money is used by a handful of people to control the nation and to dictate what they want the tax law to be (which is something that enriches the wealthy and frustrates everyone else).
Thursday, October 31, 2024
A Sad Task: Computing the Halloween “Parent Tax”
In 2019, in The Halloween Parent Tax: Seriously?, and last year, in Does This Halloween Practice Foretell a Scary Future?, I shared my thoughts about the Halloween “parent tax,” which also goes by the name of “dad tax.” I dislike the idea of parents summarily taking candy from their children. I prefer that parents, throughout the year, teach and encourage their children to share, so that when they return from collecting candy they offer some to their parents without being prompted. Children who are taught to share grow up to be different sorts of adults than children who are ordered to do things without explanation or efforts to deepen understanding so that behavior reflects inner conscience. Too many children raised in authoritarian environments grow up lacking an ability to think critically and end up wanting to live in an authoritarian world.
Sadly, a quick google search reveals that the practice of imposing a parent tax on children not only continues but is being practiced by increasing numbers of parents. That is sad. There even is a parent tax form. And it now has reached the point where the computation of the tax now generated disagreement. As noted in this parent tax advocacy, some parents take a set amount of candy no matter how much the child collects and other parents take percentage, with some taking as much as 50 percent and others advocating percentages such as 33 or 20 percent. If this trend continues, the parent tax will become increasingly complicated, not unlike actual taxes. That’s yet another reason to set aside imposition in favor of teaching children to share.
It is worth repeating what I noted in The Halloween Parent Tax: Seriously?:
So although some people think Halloween presents an opportunity to teach children that “the government” is going to “take some of what you earn,” I think it provides an even better opportunity to teach children the concepts of generosity, empathy, and sharing. Those character traits are disappearing too rapidly among certain segments of society.Now, five years later, in a world increasing afflicted by self-centeredness, I wonder what lessons are actually being learned by children who observe their parents taking substantial portions of their candy, not through sharing but by fiat. Thirty years from now, how will today’s children raised under those circumstances treat their children? How will they treat other people? Will generosity, empathy, and sharing be part of their worldview? The reality could turn out to be scarier than Halloween.
