MauledAgain

A reader pointed me to an article describing something that rarely happens. The author of the article points out that when someone does what happened in this instance, “[p]eople wonder if you’re crazy.” Indeed.

Mat Ishbia, the CEO of United Shore, a wholesale mortgage lender, explained what happened. His company, located in Troy, Michigan, needed more space. It eventually found a suitable location in Pontiac, Michigan. In Michigan, tax breaks are handed out like candy to “almost any company making a major move to or within Michigan.” The tax break industry in Michigan is huge, involving hundreds of politicians and lobbyists.

After deciding on the move, United Shore learned that it qualified for $1.9 million in tax breaks. Thinking that government regulations would require it to invest money in environmental and other features that its officers did not think were necessary, United Shore applied for and received the $1.9 million, intending to use it to finance these features. But as rehabilitation proceeded, United Shore discovered that it didn’t need to install those features. That’s when the allegedly crazy decision was made.

According to Ishbia, once it was determined that the tax break money wasn’t necessary, because the company did what it was planning to do from the outset, the company returned the $1.9 million. Ishbia explained, "We feel it’s better for the city to give that money to schools, children or other causes that need the money more than we do. It was disingenuous to take money that we were going to spend anyway. It wasn't our place to spend it. Once we figured out that we weren't doing anything above and beyond, it was thanks but no thanks." Ishbia rejected suggestions that the money be donated to charity, because, "It's not my place to take their money to donate to charities. We didn't take any handout as a business to get to where we are today and we're not starting today. Let them use it for the right thing. It's not my money. It's the taxpayers' money, and it shouldn't be coming to United Shore."

This nation needs more CEOs like Mat Ishbia, and fewer that resort to what I call the blackmail approach. Too many companies threaten to move out of an area if they don’t get tax incentives. Ishbia explained that United Shore was going to stay in Michigan no matter what.

Supporters of these sorts of tax breaks claim that doing business “still requires a helping hand from the government to overcome rising construction costs and a negative image.” In a free market, if the business produces worthwhile products or offers worthwhile services, it will flourish without needing corporate welfare. If its prices are too high for its consumers, it ought to use that huge lobbying industry to promote demand-side tax cuts and move-up economic policy. The only redeeming factor about Michigan’s tax breaks is that they are “performance-based, meaning the company gets nothing if it doesn't build the expansion and hire all the promised workers.”

To quote Ishbia again, “Hopefully, we kick-start a trend of companies not taking money when it’s not needed. That’s how cities can really grow.” There’s a lesson for the stubborn supply-side trickle-down acolytes who like to keep pretending they have the key to economic prosperity but lack the ability to see the failure of their economic ideology. Failure, at least, for all but the oligarchs who benefit from it.

Most American anti-tax advocates understand and usually admit that they have a choice. Cutting taxes requires increasing budget deficits, cutting spending, or doing some of both. What’s interesting is that most anti-tax advocates also disdain budget deficits, so when they cut taxes they are implicitly signaling that they plan to cut spending. Of course, tipping one’s spending cut proposals would generate overwhelming resistance to the tax cuts, so, as we’ve seen, it was only after the recent tax cuts were enacted that increasing numbers of tax cut advocates own up to their specific spending cut plans. That’s not going to end well.

In the meantime, according to this report, the government of China promised to simultaneously cut taxes, increase spending, and reduce the budget deficit. The only way something this promise could be fulfilled is if the tax rate cuts generated so much more economic activity that tax revenues increased in an amount sufficient not only to offset the revenue losses caused by the rate cuts but also to provide funds for the additional spending, to say nothing of even more revenue to eliminate the budget deficit. Considering that every American attempt to increase taxes by cutting tax rates, justified by reliance on the totally failed and flawed supply-side economic theory and trickle-down nonsense, it is truly mind-boggling that anyone would claim that they could cut taxes while increasing spending and reducing budget deficits.

Sensible economists understand this. According to the report, one top Chinese economist said, “It’s impossible to cut tax, maintain government expenditure growth but not adjust the deficit at the same time." That some people don’t understand this demonstrates the dangers of fiscal ignorance.

Now it’s getting closer to “from famine to feast.” After going quite some time between opportunities to comment on television court show episodes, I was presented with a third Judge Judy case within the span of a week and a half. An indication of how often these opportunities pop up is evident from the parade of commentaries I have written, starting with Judge Judy and Tax Law, and continuing with Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other, One of the Reasons Tax Law Is Complicated, An Easy Tax Issue for Judge Judy, and Another Easy Tax Issue for Judge Judy.

One layer of facts in the case were simple. Father and mother married, had a daughter, and later divorced. Mother remarried, to stepfather. The stepfather and the mother sued the daughter’s father, claiming that he owed them half of his tax refund for 2017. Why? They argued that the father took the dependency exemption deduction for the daughter even though he had agreed that the mother and stepfather could do so.

The mother claimed that there was an agreement for her to claim the dependency exemption deduction for the daughter so that she could keep the daughter on the mother’s health insurance. It is at this point that the facts get murky, if not downright impossible to figure out. According to the mother, the daughter was on the mother’s health insurance for 2016. The father testified that the daughter was on his insurance for part of 2016. The parties seemed to agree that the daugher lived with the father in 2017, but was covered by the mother’s health insurance for first three months of 2017.

In response to questions from Judge Judy, the mother admitted that she did not pay child support to the father. The mother’s claim that she supported the daughter because she purchased clothes for the daughter was tossed aside by Judge Judy. Judge Judy asked if the father paid child support for the brief periods when the daughter lived with the mother and stepfather, and the answer was yes.

Judge Judy dismissed the mother’s and stepfather’s claim, noting that she thought the stepfather was the moving force behind the litigation. She explained that the father was entitled to the dependency exemption deduction because he supported the daughter, the daughter lived with him, and though she didn’t specifically mention it, there was no written evidence of the alleged agreement.

Then Judge Judy dismissed the father’s counterclaim. The father was claiming that the mother owed him damages because the mother had claimed the daughter on her 2016 return even though the daughter had lived with the father for that year and he had supported her. Judge Judy pointed out that the father had not sued the mother, despite the passage of time, until he was sued by the mother and the stepfather. The father admitted that he would not have sued the mother had he not been sued.

Several lessons pop up from this case. First, when divorced individuals deal with dependency exemption deductions, they need to get professional advice. Though the dependency exemption deduction has been suspended and might even be removed permanently, determining whether someone is a dependent continues to have relevance for other purposes of the tax code, so it continues to make sense to get professional help. Second, every financial agreement between divorced parents should be in writing and also should be reviewed by a professional. Third, it can be unwise to hold a claim in one’s back pocket for use only if facing a lawsuit, for the reason Judge Judy explained. If the claim matters, bring it. If it’s not brought, it’s difficult to show at a later time that it matters.

Reader Morris contacted me last week with a question and a controversial answer. He asked, “Is yoga considered exercise for sales tax purposes?” he included some additional information, which permitted me to learn that six years ago, in a decision that escaped my attention at the time, the New York State Department of Taxation and Finance issued an advisory opinion describing the meaning of “weight control salon, health salon, or gymnasium” for purposes of the New York City sales tax.

New York City imposes its sales tax on receipts from “every sale of services by weight control salons, health salons, gymnasiums, Turkish and sauna bath and similar establishments and every charge for the use of such facilities.” The Department concluded that “A gymnasium is commonly understood to be an indoor facility where sporting and/or exercise activities take place.” It concluded that if facilities provide Pilates classes they are gymnasiums, because Pilates classes constitute exercise activities. However, if a facility provides only yoga instruction, it is not a “weight control salon, health salon, or gymnasium” because “instruction in yoga is not an exercise activity because yoga generally includes within its teachings not simply physical exercise, but activities such as meditation, spiritual chanting, breathing techniques, and relaxation skills.”

Two years later, in a Tax Bulletin, the Department made its position clear. “A facility that provides yoga instruction only is not considered a health and fitness facility. * * * However, if yoga classes are taught in a facility that also provides exercise equipment or Pilates classes and otherwise qualifies as a health and fitness facility, the charges for yoga instruction are subject to New York City’s local sales tax.”

The decision has met contrasting reactions. According to an article that appeared shortly after the advisory opinion was issued, some yoga studio owners were delighted, claiming that paying the sales tax would put them out of business, and that if they raised their prices to cover the tax they would lose customers. One owner claimed that the 4.5 percent tax would require raising the $18 fee to $22. It is unclear why a 4.5 percent tax would require a 22 percent increase in the fee. Some yoga instructors defended the decision by explaining that the physical activity aspect of yoga is a “bonus” because yoga is “a holistic discipline” and that the benefit to health “comes not from physical activity, but the practice of meditation and breathing."

But other yoga instructors were unhappy with the decision. One explained, "To say that yoga isn't fitness is absurd." This person pointed out that Pilates and yoga share the characteristics of not being “a mindless series of exercises as one would follow in a gym or a fitness center.” Both use “practices of breathing and concentration, as well as a focus on the connection between mind, body and spirit.”

So when my physician asks me if I am getting exercise, do I limit my response to the time I am working out at the gym? If I were taking yoga classes, would I not count that time as exercise time? When my physician asks me if I am getting exercise, I relate not only the time at the gym and the time I spend walking in the neighborhood primarily to burn calories and get exercise and secondarily to see what’s going on in the neighborhood, but also the walking I do in connection with other activities for which the primary purpose of moving isn’t to get exercise, but to get someplace, to walk through a store warehouse, to do home repairs, and to accomplish a variety of other tasks that require me to move my body. True, for sales tax purposes, the focus isn’t on “exercise” but on facilities that provide the opportunity to exercise. To conclude that yoga is not exercise simply because it also involves mental and spiritual aspects would require the logical corollary that working out at my gym doesn’t constitute exercise because of the intellectual aspects provided by ongoing conversation and intellectual discussions in which I, and others, engage while we are moving our bodies.

All of this demonstrates the futility of trying to design sales taxes that have exceptions, because every exception opens up debate about its scope, and tempts people to craft transactions in ways that fall within an exception. It also demonstrates yet again that tax law is packed with issues that don’t involve numbers.

Some months ago, Philadelphia’s City Council passed legislation, by a bare 9-8 vote, described in this article, to impose a one percent tax on new construction. The rationale for the tax was the need for revenue caused by revenue shortfalls arising from property tax abatements on new construction. The mayor had until last Thursday to decide whether to approve the legislation or to reject it. Instead, as explained in this report, the mayor and City Council reached a compromise and the pending legislation was withdrawn.

Under the compromise, as the property tax abatement expires on properties, the revenue generated by that expiration will be funneled into the city’s Housing Trust Fund. Revenue from the proposed one percent construction tax would also have been directed into that fund. Additional revenue for the fund will come from voluntary contributions made by developers who want zoning allowances for height, floor area, or density.

This entire drama illustrates the problems with tax breaks. To often, the amount of revenue given up by the break exceeds the actual revenue generated by whatever it is the tax break is encouraging. It’s not enough that the advocates of the tax break make promises. They must deliver. In the case of the Philadelphia tax abatement, the determination that something needs to be done ought not generate an offsetting tax. It ought to generate a reduction or elimination of the tax break. Several Philadelphia officials made that clear throughout the debate. To quote one, "There need to be changes in the 10-year tax abatement." Of course.

Taxing a tax break makes no sense. It’s goofy.

In a recent case, Gartlan v. Comr., T.C. Summ. Op. 2018-42, the taxpayer asked the Tax Court to create an exception to the statute based on policy but the Tax Court declined to do so. Unfortunately, the case demonstrates yet again the deteriorating state of legislative drafting skills in the Congress.

In 2015 the taxpayer was enrolled in a health insurance plan offered through an insurance exchange created under the Affordable Care Act. He paid monthly health insurance premiums of $383.45, totaling $4,601.40 for the year. In January 2016 the Department of Health and Human Services issued to the taxpayer a Form 1095-A, Health Insurance Marketplace Statement, reporting that in 2015 no advance premium assistance payments had been made on his behalf. On October 16, 2016, the taxpayer timely filed a Form 1040
for 2015, reporting business income of $1,163, deductions of $82 and $1,880 for self-employment tax and student loan interest, respectively, and adjusted gross income of $799. The taxpayer attached to his tax return a Form 8962, Premium Tax Credit, and claimed a premium tax credit of $3,156. The taxpayer reported a household size of one person and modified AGI of $799.

The IRS determined that the taxpayer was ineligible for the premium tax credit because he is not an “applicable taxpayer” within the meaning of section 36B(c)(1). The taxpayer asserted that he was entitled to the credit under a special rule for taxpayers with household income below 100 percent of the Federal poverty line and should be treated as an applicable taxpayer consistent with the policy objectives underlying section 36B.

Under section 36B, a refundable premium tax credit is available to applicable taxpayers. An applicable taxpayer is a taxpayer whose household income for a taxable year equals or exceeds 100 percent, but does not exceed 400 percent, of the Federal poverty line for the taxpayer’s household size. For this purpose, household income is the taxpayer’s modified AGI plus modified AGI of family members for whom the taxpayer properly claims personal exemption deductions and who were required to file a Federal income tax return. Modified AGI is adjusted gross income increased by certain items of income normally excluded from gross income.

Section 1.36B-2(b)(6)(i) of the regulations provides an exception to the general definition of an applicable taxpayer. It provides that a taxpayer whose household income for a taxable year is less than 100 percent of the Federal poverty line for the taxpayer’s
family size is treated as an applicable taxpayer for the taxable year if four conditions are satisfied. First, the taxpayer or a family member must enroll in a qualified health plan through an exchange for one or more months during the taxable year. Second, an exchange estimates at the time of enrollment that the taxpayer’s household income will be at least 100 percent but not more
than 400 percent of the Federal poverty line for the taxable year. Third, advance credit payments are authorized and paid for one or
more months during the taxable year. Fourth, the taxpayer would be an applicable taxpayer if the taxpayer’s household income for the taxable year was at least 100 but not more than 400 percent of the Federal poverty line for the taxpayer’s family size.

The taxpayer and the IRS agreed that the taxpayer’s household size was limited to one person and that his modified AGI for 2015 was $799. Because his modified AGI was below $11,670 (100 percent of the Federal poverty line for 2015), he does not qualify as an applicable taxpayer under the general rule. The court concluded that the taxpayer did not qualify for the regulatory exception because the second and third conditions were not satisfied.

The taxpayer claimed that he should be treated as an applicable taxpayer who eligible for the credit because he falls within the class of persons that the statute was intended to assist, even if, because of circumstances beyond his control, he did not satisfy the regulatory exception. The taxpayer argued that the policy behind the credit is to provide advance premium assistance payments to taxpayers, like him, who cannot afford to pay some or all of the cost of health insurance. He explained that advance premium assistance payments should have been made on his behalf, but were not so made because there was no relationship between the State of Delaware, the exchange, and his insurance carrier that could facilitate the contribution and receipt of advance payments.

The Tax Court explained that although it was not unsympathetic to the taxpayer’s situation, it is bound by the statute as written and by the accompanying regulations consistent with the statute. Thus, because the taxpayer’s modified AGI was below eligible levels and he did not satisfy the conditions for the regulatory exception, no other outcome was possible. The court then suggested that the taxpayer’s recourse was to eek a legislative remedy. The chances of the taxpayer succeeding in that effort are pretty much the same as the taxpayer’s chances of prevailing in his Tax Court litigation. It is unfortunate that increasingly Congress enacts legislation drafted by uncoordinated lobbying groups and pushed through at a pace that prohibits careful examination that would reveal the sort of flaw that tripped up the taxpayer in this case. But until Congress puts the nation over political party, this style of legislation is unlikely to be replaced with an approach beneficial to all Americans.

Several weeks ago, according to this report, the corporation that owns the New York Islanders National Hockey League franchise has been given a tax break. The Nassau County Industrial Development Agency approved a reduction of almost half a million dollars in sales taxes that are due on items it is purchasing for renovation of the arena in which the team plays. The tax break comes on top of a $6 million grant from the state of New York. The corporation that owns the team plans to shell out the other $3.9 million of the project cost.

The chair of the agency granting the sales tax break justified the action by expressing a desire to have the team play in the arena, and claimed that the sales tax break was “moderate enough that it won’t have any major impact on the county taxpayer.” If the agency can handle a half-million dollar revenue decrease, why not reduce the taxes being paid by ordinary taxpayers who aren’t rolling in seven-digit-incomes and who don’t own professional sports franchises?

So it’s not enough that taxpayers are shelling out more than 60 percent of the cost of a private corporation’s project. The corporation obtained an additional handout, raising the taxpayers’ share of the project to roughly 65 percent. Perhaps the corporation and its owners want the taxpayers to foot 100 percent of the bill.

If the owner of a sports franchise wants to build, renovate, or expand facilities, it has three acceptable choices. It can use its own money, it can borrow money, or it can increase ticket and concession prices. If it uses its own money, it will earn it back if the project is viable. If it borrows the money, it will be able to repay the loan, with interest, if the project is viable. If it increases ticket and concession prices, it will generate additional revenue if the public demonstrates that the project is viable by willingly stepping up and paying for those tickets and other items. Resorting to the use of taxpayer dollars suggest that the owner either has little or no faith in the ability of the project to generate sufficient revenue or is simply looking for a quick and easy handout to satisfy avarice.

As long as taxpayers put up with these sorts of giveaways to corporations and wealthy individuals, they should get no sympathy for their complaints about tax rates and tax increases. If they truly want tax reform, they need to step up and vote out of office the politicians who engage in these transactions.

It’s not unlike “from famine to feast.” After going quite some time between opportunities to comment on television court show episodes, I was presented with a second Judge Judy case within the span of a week. An indication of how often these opportunities pop up is evident from the parade of commentaries I have written, starting with Judge Judy and Tax Law, and continuing with Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other, One of the Reasons Tax Law Is Complicated, and An Easy Tax Issue for Judge Judy.

This time around, in episode 260 of season 22 (second half of the linked programs), Judge Judy again faced an issued involving dependency exemption deduction. The plaintiffs were a boyfriend and girlfriend suing the girlfriend’s mother on a number of issues. The boyfriend and girlfriend had lived with the girlfriend’s mother. Both of them worked, but the girlfriend’s mother did not. The boyfriend contributed $300 each month for household expenses, including room, utilities, and food. The boyfriend and his girlfriend’s mother reached an agreement by which the boyfriend claimed the mother’s two other, younger, children as dependents on his tax return. They did this because the mother, having no income, had no need for the dependency exemption deductions. Claiming the deductions generated a $1,700 refund for the boyfriend who, pursuant to his agreement with the girlfriend’s mother, delivered $1,000 of the refund to the mother. Not surprisingly, the boyfriend was audited, the IRS denied the deductions, and the boyfriend was required to repay the IRS. In addition to other unrelated claims, the boyfriend sued his girlfriend’s mother for return of the $1,000.

Judge Judy correctly described the agreement between the boyfriend and his girlfriend’s mother as a scam, and told the boyfriend that what he did was something that he “should not have done in the first place.” She explained that the boyfriend had no right to claim the deductions because he did not support his girlfriend’s mother’s two younger children. She dismissed the claim.

In the post-trial interview, the boyfriend asserted that his girlfriend’s mother had approached him with the idea of having him claim the dependency exemptions. He said he “didn’t know any better,” and that he thought it would be ok because he was the only one in the house filing a tax return, the only one working, and was therefore considered to be the head of the household.

So the boyfriend is out $1,000 and his girlfriend’s mother has the $1,000. Unfortunately, there is no recourse for him under the law, and it is no surprise, considering how the other issues played out, that the mother had and has no intention of repaying her daughter’s boyfriend. How much better off the boyfriend would have been had he done some research or consulted someone with adequate knowledge with respect to dependency exemption deductions. Ignorance is dangerous, and it can be costly.

Is it simply greed? Is it money addiction? Is it a deep insecurity that no matter how much money one has, even when it is more than enough multiple times over, the risk of ending up in the poorhouse appears to be way too high? It might seem that after receiving monstrous tax breaks at the expense of the average American, large corporations and wealthy individuals would not need to come begging for even more. This time, it’s the owners of a major league soccer franchise who are grabbing public land from Nashville. In other words, an asset that is worth more than $20 million, that belongs, in effect, to the citizens of Nashville, is being handed over to these owners already rolling in money.

What is it about these professional sports franchise owners? What makes them so intent on having others pay for their desires? I have written about wealthy sports franchise owners going after taxpayer funds in posts such as Tax Revenues and D.C. Baseball, Public Financing of Private Sports Enterprises: Good for the Private, Bad for the Public, So Who Are the Takers of Taxpayer Dollars?, Taking and Giving Back, If You Want a Professional Sports Team, Pay For It Yourselves; Don’t Grab Tax Dollars, St. Louis Voters Say “No” to Proposed Tax Increase to Fund Private-Sector Proposal, Is Tax and Spend Acceptable When It’s “Tax the Poor and Spend on the Wealthy”?, and When “Cut Spending” Doesn’t Mean “Cut Spending”.

According to this recent article from Reason’s Hit and Run Blog, which reader Morris brought to my attention, the city of Nashville has agreed not only to hand over 10 acres of public land to a private sports franchise, but also to toss in another 10 acres of public land in order to persuade the owners of that franchise to accept the initial handout. What? “Here’s $10 to persuade you to accept a $10 tax cut.” Something is way out of whack in American politics. But we knew that.

The justification is that the land in question isn’t “ideal,” namely, it isn’t in downtown Nashville. I suppose if the city had 10 acres of contiguous public land in the downtown area, it would hand that over to the apparently impoverished franchise owners. Of course, those 10 acres would be worth at least what the 20 acres are worth.

What will the owners of the sports franchise do with the extra 10 acres? Supposedly they will build apartments, offices, bars, restaurants, and a hotel. Whether Nashville needs those buildings in a “less than ideal” area remains to be seen. Would it be surprising if, when and if they are built, those structures end up with high vacancy rates?

If, indeed, it is good to have that development constructed on those 10 acres, why not sell the land to a private developer? If the answer is that the developer can’t turn a profit if the developer must pay for the land, then it is clear that there is no need for the development, for if there were such a need, sufficient revenue would be generated. If the answer is that the developer CAN turn a profit if the developer must pay for the land, then what’s the justification for not charging the developer for the land?

What makes this situation even worse is that Nashville is facing a budget crunch. One of the reasons is that the city is obligated to shell out $300 million for improvements to the stadium used by the city’s NFL team. Why not use that stadium for professional soccer? The soccer league insists that its teams have their own dedicated-to-soccer stadiums, yet two of its teams in other cities play in NFL stadiums, and a third team plays in, of all places, a baseball stadium. Professional soccer matches have been played in Nashville’s NFL stadium by teams from the world’s best soccer league. So why is that stadium insufficient for a low level soccer team such as the one that has been playing in downtown Nashville?

That budget crunch has Nashville officials contemplating holding back on raises due to teachers. Heaven forbid that Nashville insist on being paid for the land it is handing over, for free, to rich sports franchise owners, and investing the proceeds as an endowment to support teacher pay. Perhaps they think that playing soccer and watching soccer for a slightly lower ticket price is far more important than the education of Nashville children. Perhaps they fear that educated Nashville children will grow up to see through the charades that are being played by the seedy relationship between politicians and the oligarchy.

Eventually Nashville will need a tax hike to fix its financial problems. Of course, the anti-tax crowd will show up, barking its usual silly claims about the dangers of taxation. Their rants against government spending will make no mention of the handing over of public assets to private enterprises surely in no need of even more handouts.

Two of the individuals planning to take over the team if the stadium deal goes through are billionaires. One of them already managed to get Minneapolis to shell out $500 million to build an arena for that city’s NFL team. That robbery of public funds was one of many that I discussed in So Who Are the Takers of Taxpayer Dollars?. Why can’t these guys use their very large federal tax cut funds to pay their own way?

There is enough opposition to this awful scheme that the outcome is not yet inevitable. Opponents have showed up in meaningful numbers at the hearings already heard, and initial votes suggest that getting enough members of the city’s council to vote in favor of the handout might not be possible. As one member of the council put it, "It's taking from one group to give to an in-favor group. It's pretty ruthless." No kidding. And the oligarchy continues to complain about, mistreat, and rip off the people they castigate as “takers” while it members, loaded with wealth, bloated with tax cuts, and scheming for even more tax cuts and “gifts” of taxpayer-owned property, go on a taking rampage. At what point will Americans wake up and realize what is happening? Or will they figure it out the day they realize they’re just serfs laboring on the fields of the nobility? It’s sad what greed and money addiction can do.

It has been a while since I commented on a television court show episode. It’s a combination of not seeing very many new episodes, and the absence of any tax issue popping up in the episodes that I did see for the first time. It’s not as though there has been an overall shortage of episodes providing material, as can be seen in the long list of posts I have written about television court shows, starting with Judge Judy and Tax Law, and continuing with Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other, and One of the Reasons Tax Law Is Complicated.

In this particular episode, for which I do not have a web link, an unmarried couple appeared before Judge Judy. They had two children, one of whom lived with the mother and one of whom lived with the father. The mother had no income other than welfare. The father had a job. The father paid support for both children, and claimed both children as dependents on his tax return. The mother sued the father, raising a variety of claims. Among her claims was that she should be entitled to one of the dependency exemptions because allegedly she and the father so agreed. She apparently wanted damages based on one-half of the tax reduction that the father obtained by claiming the dependency exemption deductions.

Judge Judy said to the mother, “Why do you need the deduction? You have no income. You have no use for the deduction.” The facts demonstrated that Judge Judy nailed it. The deduction in question was of no use to the mother. No mention was made of any credits arising from the status of the children as dependents, almost certainly because there were none applicable. Certainly the mother was not eligible for an earned income credit. It is unclear why the mother made the claim, but considering all the claims she had compiled against the father, she either received bad advice or thought that the more claims she added the better her chances of recovering on at least some of them. Her approach didn’t work, and it didn’t get past Judge Judy.

Reader Morris alerted me to a report of a Chester Co., Pa., Orphans Court decision. My attempts to find an online publication of the court’s opinion have been unsuccessful. So I am relying on the report’s description of the decision.

The facts are simple. Lesley G. King’s will established a trust for her many animals, including horses, dogs, cats, and chickens, for the duration of their lives. All of her property was transferred to the trust. Trust income and principal is to be used for the care of the animals. When the last of the animals dies, any remaining funds would be distributed to King’s brothers and sisters and their children.

Pennsylvania imposes an inheritance tax on the value of assets transferred to any person who is an heir or beneficiary. The rate varies; it is zero percent, for transfers to surviving spouses and to parents from children 21 or younger, 4.5 percent for transfers to descendants, 12 percent for transfers to brothers and sisters, and 15 percent on transfers to others. The tax does not apply to transfers to charities and other tax-exempt organization.

The Pennsylvania Department of Revenue assessed a 15 percent inheritance tax on the entire estate. The Department’s position is that because the trust in question is not a tax-exempt entity, the inheritance tax applies to the transfer from the estate to the trust. It applied the 15 percent rate because the trust is not a surviving spouse, a parent of a child 21 or younger, a descendant, a brother, or a sister.

The executors of King’s estate argued that transfers for the benefit of animals are not subject to the tax because animals are not persons. They relied on an earlier case from Westmoreland County, in which the court held that a trust for the benefit of horses was not subject to the tax because there was no “person” to whom the property was transferred. The Chester County Orphans Court, however, concluded that although the animals are not persons, transfers to the trust for their benefit are taxable because there is no statutory provision exempting the transfer from the tax.

Though I agree with the conclusion, I disagree with the reasoning. Logically, the question of whether an exemption applies is not relevant unless there is a transfer to a person. The animals are not persons, and thus the tax does not apply, and thus the applicability of an exemption does not matter. The flaw, however, is the conclusion that the transfer was made to the animals. The transfer was made to a trust, the beneficiaries of which included not only animals but also the brothers, sisters, nephews, and nieces of the decedent. Those individuals are persons. Another approach is to treat the trust as a person, though doing so would simply move the analysis back a step, because determining the applicable rate would require identifying the beneficiaries of the trust. In this instance, the trust has human beneficiaries.

It probably is distressing to some to learn that under the law animals are not persons. Outside of the legal world, there are many instances in which people consider animals to be persons, whether pets who are considered to be children or chimpanzees and dolphins who can reason and communicate using human language. The debate about the status of animals, both inside and beyond the legal world, has been intense and ongoing. It is not one I address today.

What matters is how, if at all, a different outcome could have been reached with different planning. As the author of the report points out, the decedent could have avoided this outcome by setting up a similar irrevocable trust more than a year before death, because the tax does not apply to lifetime transfers not within one year of death. Another consideration would have been to determine more carefully the amount of money that would be needed for those animals, and to transfer that amount, rather than the entire estate, into that trust. King’s estate exceeded $400,000, and unless that amount, plus income on that amount, is required for the care of two horses, two dogs, two cats, and some chickens, putting all of that money into the trust exposed too much to the highest rate of inheritance tax.

So, technically, the answer to the question is, no, animals do not pay taxes but trusts set up for their benefit do end up paying taxes. The next question is whether robots pay taxes. I discussed that issue in Taxation of Androids and Robots, and Similar Pressing Issues. It’s only a matter of time before someone sets up a trust for a sentient robot. Who said tax is boring?

It is not unusual for students about to embark on a semester’s journey in a basic tax course to worry that their perceived inability to “do math” will get in the way of successfully completing the course. Much to their surprise, a substantial portion of what they encounter in the course does not involve math, and when math does show up it’s pretty much simple arithmetic.

Two months ago, the Pennsylvania Commonwealth Court delivered its opinion in a tax case. Neither math nor arithmetic were part of the analysis.

The core question faced by the court in East Coast Vapor, LLC, v. Penna. Dept. of Revenue, was whether e-cigarettes that do not deliver tobacco, and e-liquids that do not contain nicotine or contain nicotine from non-tobacco sources, are “tobacco products” under the Tobacco Products Tax Act. Specifically, the court was asked to decide if the legislature, by including these items within the definition of “tobacco products,” violated the due process clauses of the United States and Pennsylvania Constitutions. After disposing of procedural issues, the court turned to the basic question facing it.

The taxpayer argued that items not used to deliver tobacco nor manufactured from tobacco “are both logically and scientifically not a tobacco product.” I have told my students that by studying tax, one can learn quite a bit about many other things, and this case provides another example. I had not known that nicotine can be extracted not only from tobacco, but also from eggplants, potatoes, and tomatoes.

The Department of Revenue argued that there is a rational basis for treating e-cigarettes and e-liquids as tobacco products because they contain nicotine, nicotine is addictive, and the use of e-cigarettes opens the door to smoking tobacco cigarettes. The tax paid on e-cigarettes and e-liquids, according to the Department, helps bear the costs of harm caused by tobacco products, including e-cigarettes.

The Court concluded that there is a rational basis for including an “electronic oral device,” or e-cigarette, in the definition of “tobacco product” because, even as the taxpayer admitted, it can be used to vape e-liquid that contains nicotine derived from tobacco. The court also concluded that there were “legitimate state objectives” for including in the definition of “tobacco product” any e-liquid containing nicotine not derived from tobacco. The court explained that because the plaintiff did not argue that the nicotine derived from products other than tobacco is any different from nicotine derived from tobacco, it is not “unreasonable, unduly oppressive or patently beyond the necessities of the case” to tax something that is similar to tobacco, contains nicotine, and is addictive, as a tobacco product. The court noted that the tax is designed to increase the cost of e-liquid in an effort to discourage consumption of e-liquid.

The court also concluded that the Department of Revenue’s attempt to tax separately packaged component parts of e-cigarettes went beyond the statute. The court explained that the Department’s concern about sellers disassembling e-cigarettes and selling the components separately for consumer reassembly raised a problem that only the legislature could solve.

Because the case can be appealed, it is likely that the Commonwealth Court’s decision is not the end of the story. How will the Supreme Court of Pennsylvania react to the conclusion that something not containing nor derived from tobacco is a “tobacco product” simply because it resembles tobacco? Is a goose a duck because geese resemble ducks? Why isn’t the definitional problem also one for the legislature, which, I think, could impose a nicotine tax rather than, or in addition to, a tobacco tax? Candy cigarettes resemble real cigarettes and can encourage children to shift from sugar-based to tobacco-based cigarettes, so does that justify including candy cigarettes within the definition of “tobacco products”?

There are two related analyses required to deal with this situation. One is the policy analysis, namely, what should or should not the legislature encourage or discourage people from doing. The other is whether the legislature, after making that determination, has properly drafted the language of a statute to implement what it has decided to do.