Friday, December 30, 2016

It Still Doesn’t Make Tax Cents 

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

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

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been refusing to accept pennies and nickels for transactions exceeding 25 cents, relying on a federal law that had been repealed decades ago.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

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

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

Wednesday, December 28, 2016

Looking for an Exclusion That’s Not in the Documentation 

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

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

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

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

Monday, December 26, 2016

Updating Two Tax Cases 

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

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

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

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

Friday, December 23, 2016

How Not to File a Tax Return 

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

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

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

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

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

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

Wednesday, December 21, 2016

Ignorance Reaches a New Low 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Monday, December 19, 2016

Music, Medicine, and Tax 

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

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

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

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

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

Friday, December 16, 2016

No Deduction for Sanctions Imposed on Lawyer 

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

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

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

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

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

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

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

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

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

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

Wednesday, December 14, 2016

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

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

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

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

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

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

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

Monday, December 12, 2016

If You Want a Professional Sports Team, Pay For It Yourselves; Don’t Grab Tax Dollars 

The wealthy continue to line up for financial assistance. A profitable business conjures up arguments for why the public should contribute to an increase in its profits. The sales pitch is a claim that the business benefits the public at large. Omitted from the discussion is the admission that if and when the public benefits the public will patronize the business and generate revenue for the business through cumulative individual decisions rather than through political shenanigans that force all taxpayers to underwrite a business than a majority do not want to support. I wrote about this scheme twelve years ago in Tax Revenues and D.C. Baseball, four years ago in Putting Tax Money Where the Tax Mouth Is, Taking Tax Money Without Giving Back: Another Reality, and Public Financing of Private Sports Enterprises: Good for the Private, Bad for the Public, and a little more than a year ago in Taking and Giving Back.

My commentary last year focused on the attempt by the very profitable NFL to persuade taxpayers in St. Louis, Missouri, to fund a new stadium for the Rams. That didn’t work, and the Rams are now in Los Angeles. Apparently the message, that the taxpayers do not want to finance profitable private sector enterprises, did not get through to everyone. A recent report explains that a major league soccer ownership group is doing its best to get the city of St. Louis to provide $80 million of funding, and to get the state of Missouri to dish out $40 million in state tax credits, to finance the construction of a soccer stadium. The group is parading forth the usual arguments about job creation and economic benefits to the community, but no one has demonstrated that using the $120 million in other ways would not provide even more jobs and economic benefits. One of the would-be owners claims that “the stadium needs public investment for the deal to be a good private investment.” My translation is that the project is a bad investment unless the investors can make money by grabbing public revenues. The claim that the project will generate $44.8 million in tax revenues over the next 33 years is laughable, because only a fool would invest $120 million to earn back $44.8 million over 33 years.

The cost of acquiring a team and building a stadium comes in at $405, but the folks who want to join the ranks of the elite professional sports franchise ownership group are willing to put up only $280 million of the $405 million. If they want to be major league owners that badly, why can’t they put in all $405 million? The people on the list surely have more than enough assets to buy what they want. The answer is simply, why spend your own money when you can find a way to get other people to pay for your wishes? Of course, when others do this sort of thing, they are called takers even if they have little or no money. When the oligarchy does this, they are called clever, brilliant, resourceful, and admirable. The same would-be owner admits, “I don’t think other people are going to come up with $400 million of private money and believe that’s a reasonable investment.” My translation is that the idea of a $405 million major league soccer team in St. Louis isn’t economically worthwhile, for if it were, investors would be knocking on the door trying to get in on the deal, but it is a wonderful investment if it becomes a pathway for private sector investors to grab public funds.

The public financing of this private enterprise must be approved by the taxpayers in a referendum. It remains to be seen how the taxpayers react. Careful analysis might cause them to realize that the woes of which they complain are endemic to a system that is reinforced and enabled if the methods used to perpetuate the system are supported. It would make much more sense for this group of would-be owners to do some fund-raising among soccer fans in St. Louis, giving them partial ownership of the team and stadium. If that raises the $120 million that the would-be owners are unwilling to put in, fine. If it doesn’t raise the required funds, then the message that St. Louis doesn’t want a professional soccer team and stadium should be easy to understand.

Friday, December 09, 2016

Uncle Sam Does Not Collect California Income Taxes 

For some reason, the fact that professional athletes must pay income tax to a state in which they play a game seems to disturb some people. Though I understand the disagreements over how an athlete’s income should be apportioned to a state in which an athlete plays one or more games, I don’t understand why the idea of paying income tax to a state in which a person does work or sells items in order to generate income is disturbing. Tens of millions of Americans, who aren’t headliners or stars, work in states other than the ones in which they live, either through cross-border daily commutes or through extensive or occasional out-of-state business travel, and yet little attention is paid to their state income tax situations compared to the angst demonstrated over what athletes face.

A few days ago, John Breech of CBS Sports published an article, “The Panthers have stayed the week in California during their West Coast trip, and that gets pricey, in which he points out that the team’s decision to remain in the state between their two regular-season games, along with its presence in the state for the Super Bowl, will cost Cam Newton $220,000 in California income taxes. Though the prospect of paying that sort of tax bill might overwhelm most Americans, it’s petty cash to a person earning, as Newton does, $20,000,000 in 2016, and $103.8 million over five years.

But what caught my eye and left me shaking my head was the first sentence of the article: “Panthers quarterback Cam Newton doesn't live in California, but he's going to be playing a lot of taxes there when Uncle Sam comes calling in April.” Uncle Sam is short-hand for the federal government. The federal government, through the Treasury Department, and more specifically, the Internal Revenue Service, collects federal income taxes. California state income taxes are collected by the California Franchise Tax Board. I’m unaware of any nickname for the California FTB, but perhaps a reader in that state can enlighten us. It is important to distinguish the federal government from state governments, and to distinguish the IRS from the FTB.

Wednesday, December 07, 2016

When Taxes Go Down or Don’t Go Up, Other Taxes Go Up 

The advocates of tax cuts claim that cutting taxes puts more money in taxpayers’ pockets. Not only do tax cuts not benefit the economy if they are not appropriately distributed, as we saw fifteen years ago and are going to see again, tax cuts that require spending cuts shift the burden of those expenditures to other governmental units, requiring those governments to raise taxes. Until and unless legislators measure the true cost of what taxpayers want and then spread that cost in a manner that benefits the economy, the downward economic spiral will continue no matter what false promises or well-intended futilities are tossed about.

An example of this whack-a-mole tax shift was described in a recent report about the inability of the Pennsylvania legislature to enact a budget on time. One of the snags that caused the nine-month delay in setting out the state’s finances is the insistence by some legislators that taxes not be increased under any circumstances whatsoever. One of the effects of this approach to governance was the need for the state’s counties to raise taxes in order to make up the shortfall in revenue and the cutbacks in services provided to the citizens. Because the state relies on a variety of taxes, but counties and school boards rely primarily on real property taxes, the effect of this tax shift is to move overall revenue collection in the state in the direction of a less equitable and less efficient revenue-generating system.

The situation will worsen. The anti-tax crowd that will have unfettered freedom in the nation’s capital to curtail spending on things other than their pet projects while cutting taxes for the wealthy is proposing to shift responsibility for citizen services to the states. And states, in turn, either will raise taxes, or, where anti-tax crowds are in control, require localities to raise taxes. All that will trickle down from Washington through the states and into counties and localities are tax cuts for the wealthy and tax increases for everyone else. The nation went down this path fifteen years ago, and about seven years into the journey it all came crashing down. When that happens again, about seven years from now, the damage will be even worse, because what will be enacted dwarfs what was done in 2001.

Monday, December 05, 2016

Why I Don’t Have a Family Foundation 

One of the emails that bring me daily tax updates included, among its more than a dozen headlines, this one: Trump Has a Family Foundation. Why Don’t You? Though I didn’t think the question was aimed at me personally, I did stop for a moment and think about it. It would be nice, I suppose, to have a family foundation, if for nothing more than to preserve the genealogical and family history materials, books, pamphlets, maps, photographs, charts, and other data, in both physical and digital form, that I have accumulated. Surely it would be a benefit to the several hundred thousand individuals who have or will have a direct interest in the collection. But before I began seriously considering whether such a foundation would or could qualify for tax-exempt status, I answered the question. The answer is simple. I don’t have the financial resources.

According to the full article, as of 2014 there were about 40,000 tax-exempt family foundations making grants. That’s a lot, until it is contrasted with the number of people in the country, which is in the hundreds of millions. In other words, almost everyone does NOT have a family foundation. But perhaps that is because most of us aren’t anyone, as the article starts off, “Everyone who is anyone, it seems, has a family foundation.” Apparently there aren’t very many anyones in this country. But then the article notes that, “The vast majority of family foundations are headed by people you’ve never heard of.” But those people are still someones, because they have the clout that money brings, even if they are content to work in the shadows and don’t seek the publicity of tweets and political campaigns.

According to the article’s lead, most of these foundations have less than a million dollars in assets. What does that mean? Specifically, the median asset amount in 2014 was $735,000, and the average was $9.6 million. Three out of five family foundations held less than a million dollars in assets. Years ago, the benchmark for setting up a family foundation was a $5 million investment. In recent years, it has become possible to set up a foundation with $250,000. The reality is that most Americans, who struggle to make ends meet, who are in debt, and who find it difficult if not impossible to set aside savings, aren’t in a position to put $250,000 into a family foundation.

Operating a family foundation is complicated. There are a variety of restrictions, and anyone who pays attention to the news knows that the president-elect’s foundation recently confessed that it had engaged in self-dealing, which is a prohibited activity. The reason for these restrictions is to prevent someone from using tax-exempt status to avoid income and other taxes. To ensure compliance, it is necessary to retain experts who can assist the foundation and its trustees in avoiding missteps. That costs money. Foundations with millions of dollars in assets generate enough income to afford the cost of the experts. It’s a different story with a foundation holding $250,000 in assets.

So that’s why don’t I have a family foundation. Do I fret about this? No. But there’s the answer, in case the question had been aimed at me.

Friday, December 02, 2016

Another Flaw in the New Jersey Tax Break Giveaway 

In a series of posts, I have criticized the New Jersey tax policy of dishing out tax breaks to companies that it entices to move to New Jersey, or to move to Camden from within New Jersey. Though the claim that handing out tax reductions ultimately raises tax revenue is offered as justification for these deals, the reality is that these sorts of tax breaks are as effective as trickle-down tax cuts, that is, they’re not. I have written about these giveaways many times, most recently in The Tax Break Parade Continues and We’re Not Invited, and previously in When the Poor Need Help, Give Tax Dollars to the Rich, Fighting Over Pie or Baking Pie?, Why Do Those Who Dislike Government Spending Continue to Support Government Spenders?, When Those Who Hate Takers Take Tax Revenue, and Where Do the Poor and Middle Class Line Up for This Tax Break Parade?

A recent article about a company denied a giveaway revealed, at least to me, another flaw in the tax break giveaway. It’s bad enough that taxpayer dollars are handed out to companies that are far from struggling economically, but now it turns out that if your company is too small, it’s barred from the tax buffet table.

After meeting with the Economic Development Authority, which guards the door to the tax breaks, the owners of the company were left with the impression that all was going well with the application. By merging, they had created a company with 42 employees, which was more than enough to meet the “number of employees” requirement for obtaining the tax break. But then the owners were told that their application was rejected. Why?

The Economic Development Authority rejected the application because it did not want to set a precedent that would encourage small companies to merge “for the sole purpose of securing tax incentives.” The company explained that it understood the decision because they guessed that the Authority was concerned that the merging firms would operate as four individual companies. Though one of the companies ended up dropping out of the merger, the others continued and moved into Camden despite the lack of the tax giveaway.

So the tax break is designed for large companies that already exist as large companies. Small fry need not apply. That makes no sense. First, it is an inappropriate and senseless distinction. If the goal is the creation of jobs, who cares whether a company with 15 employees creates 2 jobs for a $100 tax break or a company with 5,000 employees creates 20 jobs for a $1,000 tax break? Well, it doesn’t quite work that way, as the tax break isn’t measured by the number of jobs created, particularly considering few jobs have been created and even fewer for residents of economically distressed Camden. Second, most job creation is generated by small businesses. So if there is going to be selectivity, it ought to be in favor of the small business.

It would not surprise me that in the end, this newly created small business creates more jobs, at least proportionately, than the big companies have generated. The firm denied access to what the big companies get has already announced plans to engage in a variety of activities designed to help the neighborhood and city in which they are locating. If this is what happens without the tax breaks, why have the tax breaks?

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