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Monday, October 22, 2018

The Dangers of Ignorance, Present and Eternal 

Ignorance is high on my list of dislikes. Unlike some things that I don’t like, ignorance can be avoided, and in most instances it is easily avoided. When ignorance is prevalence, liars find it easier to do their evil work. Readers of this blog know that dislike ignorance of any kind, and though I tend to focus on tax ignorance, I also pay attention to financial ignorance and some other types of the malady. I’ve written about it so often that I doubt I can find every post in which I described the ill effects of ignorance. Some of them include 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, Tax Meets Constitutional Law Ignorance, Ignorance in the Face of Facts, Ignorance of Any Kind, Aside from Tax, Reaching New Lows With Tax Ignorance, and Rampant Ignorance About Taxes, and Everything Else, Becoming An Even Bigger Threat.

What prompts me to write today is a new manifestation of ignorance circulating on social media. Typeset in various solid color backgrounds are these words: “Were any of you aware that ALL the Democrats voted AGAINST the 2.8% Social Security cost of living increase?” My distaste has nothing to do with the political party that is mentioned, for surely the same nonsense with a different political party being mentioned will surface someday, but reflects my disgust at the inability of Americans who vote to understand that there has been no vote against Social Security cost of living increases. As an aside, note that the clown who wrote this message doesn’t bother to specify whether those allegedly voting against the increase were members of the House, the Senate, a state legislature, or participants in a referendum. That, of course, is a red flag that can be noticed by those who understand what they ought to understand.

Social Security cost of living increases are automatic. As described in the Social Security Administration’s explanation, legislation enacted in 1973 provides a formula that measures the increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers, known as CPI-W, which is calculated each month by the Bureau of Labor Statistics. The cost of living adjustment equals the percentage increase, if any, in CPI-W from the average for the third quarter of the current year to the average for the third quarter of the last year in which there was a cost of living adjustment.

This is not the first time nonsense about social security cost of living increases has circulated. A few years ago, when inflation was so low there was no increase, someone or some organization tried to pin the outcome on Congress, as described in this rebuttal of that ignorant claim. And a decade ago, another, or perhaps the same, person or organization tried to pin the lack of an increase on certain members of Congress, even though the reason for no increase was the fact that the cost of living had gone down due to plunging oil prices, as noted in this FactCheck article.

Why does this ignorant nonsense keep popping up? Notice that it pops up when there is no increase and now, even when there is an increase. Someone or some organization or group of organizations with an agenda is behind this, just as someone or some organization or group of organizations is behind all of the nonsensical and ignorant misinformation being spewed into modern culture. My guess is that the goal is distraction, to avert people’s eyes and ears from the now openly expressed plans to cut or eliminate Social Security, Medicare, and Medicaid. Perhaps it is some sort of damage control.

The antidote, as I’ve expressed for decades, is education. It’s a question of whether enough humans, who insanely call themselves sapiens sapiens, can figure out how to use their brains to think for themselves and to ponder the likelihood of a claim being true, false, or half-baked before spreading it among others. Being theological for a moment, I consider the Last Judgment not so much the “here are a list of your sins” authoritative approach preached by some denominations, but a matter of educational discourse beginning with a statement and question, “I gave you many gifts, including a brain. What did you do with them?” We will have all eternity to ponder the responses. Heaven may be the satisfaction of realizing we did our best despite occasional failures, and Hell may simply be the realization that we didn’t take full advantage of the ability to think for ourselves, recognize truth, and despise ignorance and lies.

Friday, October 19, 2018

Surrender of Tax Breaks Not a Philanthropic Move 

Three years ago, in When the Rich Beg, for Tax Breaks, I wrote about the request by Disney Corp. to extend by 30 years a tax break it negotiated in 1996. As I explained in that commentary:
The exemption provides that if the city of Anaheim ever enacts an entertainment gate tax, it will not apply to Disneyland. Anaheim has not enacted such a tax, but faced with increasing financial pressures, it’s not guaranteed that it would not enact such a tax in the future.

So what is the basis for Disney escaping the tax? Apparently it plans an expansion of Disneyland, which it promises will several thousand construction jobs and about 2,000 permanent jobs.
I criticized this reasoning as follows:
The problem with this justification is that every business and every individual contributes to the creation of jobs, and those jobs benefit the economy because the individuals holding the jobs earn money that they spend, in turn infusing economic energy into businesses. Even self-employed individuals ratchet up the economy. If creating a job justifies tax breaks, then everyone is entitled to being exempt from taxation. Of course, that’s part of the plan. Without taxes, there is no government. Necessary services would be privatized, far beyond what already has been put into the hands of the back-room oligarchs, and instead of paying taxes, citizens would be paying fees to enormous enterprises who could charge what they want, as there would be no government to regulate them or district attorneys or attorneys general to prosecute them for mistreating the citizenry, oh excuse me, the serfs.

So if Disney doesn’t receive its desired tax break, what would it do? Pack up and leave? The cost of doing so far exceeds the value of the tax break. Refuse to expand its facility? Perhaps, but again, it would be cutting off its nose to spite its face. No, what it would do is add the tax to the cost of a ticket. And that makes sense. It shifts to those making use of the services provided by Anaheim to Disney a cost that otherwise would be imposed on all taxpayers, including those who do not benefit from, or make use of, Disneyland.
Reader Morris has alerted me to news from a few weeks ago that the exemption preventing Anaheim from subjecting Disney to a gate tax, along with other tax breaks, will not be renewed. What’s interesting about this development is that the city council voted unanimously to terminate the exemptions and tax breaks after Disney officials asked them to do so. The president of Disneyland Resort called the tax breaks “divisive.” It appears, though, that by relinquishing those tax breaks, Disney qualifies for an exemption from a question on next month’s ballot that would raise the minimum wage to $18 per hour by 2022 for employees of companies receiving tax breaks from Anaheim. Disney has financed opposition to the ballot question.

Though some expressed hope that the request to terminate the tax breaks “signals a new era of goodwill and trust between Orange County’s largest city and its largest employer,” continuing debates among city officials about the role Disney plays in Anaheim politics suggests that goodwill is not in the spotlight.

When I read the headline of the article reader Morris sent me, “Anaheim council accedes to Disney’s request, nixes tax breaks,” I thought, “Great. A large corporation has seen the light.” Then I read the article. Oh, well, they say hope springs eternal. Perhaps it is foolish of me to think that those focused on the acquisition of dollars and infinite growth of the “bottom line” would discover the wisdom of moderation and balance.

Wednesday, October 17, 2018

So How’s That Supply-Side Trickle-Down Theory Working Out For You? 

Readers of this blog know that I am not a fan of supply-side trickle-down economic theory and the tax policy based on it. One of my many commentaries on the topic closely analyzed the failure of the theory in Kansas, as described in Kansas Demonstrates Again Why Supply-Side Economics Fails. As I had written in an earlier post, The Tax Fake That Will Not Die, “Supply-side economics is a fake.”

Several days ago, Noah Smith looked at the results of the latest federal supply-side trickle-down exercise. In his Philadelphia Inquirer article, Smith examined the impact of the 2017 tax cuts. He explains that those cuts, particularly the corporate tax cuts, were supposed to generate wage increases. Like its predecessor supply-side tax cuts, this tax cut also failed to do what tax cut advocates expected and advertised. Despite those previous failures, the supply-side acolytes claimed that corporate tax cuts would be more effective because corporate tax rates were relative higher, corporate taxes affect not only the wealthy but also employees and customers, and corporate taxes are more harmful to investment than individual taxes. How did that work out?

At first glance, tax cut proponents shine the spotlight on an apparently booming economy, a small uptick in corporate investment, and unemployment is low. Smith points out that perhaps some, or even much, of the economic growth is doe to “demand-side fiscal stimulus effects.” Yet wages remain stagnant. Higher employment among low-wage job holders doesn’t do much for those who are trying to make ends meet. Smith describes studies showing that “Two common measures of real wages are still below the peaks they hit in the third quarter of 2017.” Another study concluded that a comparison of “the size of the effective tax cuts received by various industries with the change in their wages between the first half of 2017 and the first half of 2018” did not reveal any correlation between the two. The same study concluded that there was “no correlation between tax cuts and employment changes at the industry level.” According to Smith, “That's bad news, since more hiring and tighter labor markets should be the mechanism by which corporate tax cuts raise wages.” Yes, it’s bad news for wage earners, and it ought to be bad news for supply-side theory devotees.

Smith then dismisses those bonus payments praised by the tax-cut folks. Smith concludes that the bonus trend was “exaggerated,” and that an economic study demonstrated that the bonuses did not generate a significant increase in 2018 compensation. Smith notes that the study implies that the bonus claims “were mostly a publicity move.” No kidding. Again, readers of MauledAgain know that I have consistently characterized the bonus payments as what they really are, namely, crumbs, as explained in posts such as Those Tax-Cut Inspired Bonus Payments? Just Another Ruse, That Bonus Payment Ruse Gets Bigger, Oh, Those Bonus Payments! Much Ado About Almost Nothing, Much More Ado About Almost Nothing, You’re Doing What With Those Tax Cuts?, Arguing About Tax Crumbs, and Don’t Want a Crumb? Here’s Dessert But Give Back Your Appetizer and Beverage.
.
Smith asks, “So, what's going on? Why isn't the tax cut raising wages?” He gives two answers. First, he suggests, “Perhaps the impact of tax cuts will be felt only over a period of years rather than months. After all, it's important not to read too much into short-term economic data.” Second, he explains, “ But, it also might be the case that the supply-siders are simply wrong. Perhaps those who believed that a substantial amount of the corporate tax cut would go to workers were doing their empirical studies incorrectly, or plugging the wrong numbers into their models. Or maybe U.S. corporations were simply so successful at avoiding taxes before the tax cut that the new lower rate hasn't really done anything other than to allow them to save money on accountants and lawyers.” Or perhaps the belief that people grabbing tax cuts will share what they took from the buffet with the people at the back of the line ignores the practical reality of greed and money addiction among the oligarchs.

Smith closes with a prediction. He writes, “ Either way, if Trump's corporate tax cuts end up having no observable effect on workers' pay, it will be the final blow to the supply-side worldview.” Putting aside the fact that these aren’t Trump’s corporate tax cuts but a tax giveaway to corporations advocated by many Republicans long before Trump arrived on the political scene, the question is, will the next inevitable economic and financial crash dissuade the supply-siders and convert them to the realistic demand-side approach? Two years ago, in Tax Perspectives of the Wealthy: Observing the Writing on the Wall, I wrote, “The death of supply-side, trickle-down economic theory is a slow one, but its final breath draws nearer.” Yet a year later, the title of one of my posts revealed my dismay at the inability of supply-siders to recognize the failure of their dream: The Tax Fake That Will Not Die. I now worry which dies first, stubborn supply-side ignorance or the American economy and the nation and dreams that depend on it.

Monday, October 15, 2018

How Not to Solve a Tax Issue: Don’t Talk About It 

A few days ago, the Philadelphia Inquirer ran an article that discussed how the two candidates for the state’s governorship were dealing with tax issues. The article began by noting that in response to a recent poll asking voters to identify the most important issue in the race, the most popular answer was “taxes.” I expected to learn that 30, 40, 60 percent of voters considered tax issues to be the most important. I was surprised. Only 12 percent identified taxes as the most important issue. Next on the list, at 10 percent, was education.

The most disliked tax in Pennsylvania is the real property tax. I’ve written about this antipathy toward real property taxes in several posts, including Killing the Geese, Taxes and School Funding, A Perplexing Tax Vote Decision, Which Do You Prefer: Income Tax, Earned Income Tax, Sales Tax, Property Tax?, and Pennsylvania’s “Eliminate the Property Tax” Effort Surfaces Again. The underlying theme is the series of proposals to eliminate that tax, and as I have pointed out repeatedly, the challenge is finding replacement revenue.

According to the Philadelphia Inquirer article, the two candidates, who have slightly different approaches to the issue, apparently have not put the question in the spotlight. The Republican candidate supports eliminating the real property tax to the extent imposed by school districts, but not those imposed by municipalities and counties, but does not reveal the extent to which he would raise other taxes to make up the lost revenue. Four years ago, the incumbent Democratic candidate, while campaigning, advocated reform or repeal of the real property tax, but since his proposal in his first budget to replace the tax with an increase in sales and income taxes was rejected by the legislature, he has been silent.

Commentators explain that solving the real property tax problem is difficult. One problem is that the governor cannot dictate what local governments and school districts do with the tax, in terms of rates. State funding for education can affect what school districts do, but those spending decisions are primarily the bailiwick of the legislature. Even though Pennsylvania voters approved an amendment to the state constitution permitting the legislature to exempt primary residences from the real property tax, the legislature has done nothing in response.

Not surprisingly, though the Democratic incumbent’s budget proposal four years ago, the one that was rejected, increased sales and income taxes, the Republican challenger co-sponsored legislation along the same lines, though he also has claimed that he would reduce government spending to reduce the need to increase other taxes. Oddly, the incumbent governor does not support the legislation co-sponsored by his opponent because he does not want to raise the sales tax rate on certain items nor subject certain tax-exempt items to the sales tax.

What the state needs is a serious conversation about how its citizens want to pay for the services that they demand. The discussion requires evaluating the impact of different types of taxes, identifying which segments of the citizenry are most affected by different permutations of the various taxes, considering the fairness of how tax burdens are distributed, and estimating the revenues generated by different taxes. It is a complex topic, it does not lend itself to sound bites and tweets, and needs to be free of hyperbole, misstatements, propaganda, and the influence of special interest groups and lobbyist money.

Friday, October 12, 2018

Don’t Want a Crumb? Here’s Dessert But Give Back Your Appetizer and Beverage  

In my criticism of the 2017 tax legislation that handed large tax breaks to big corporations and the wealthy at the cost of exploding federal budget deficits and unsustainable increases in public debt, I used the word “crumbs” to describe the tiny net tax breaks handed to the typical taxpayer. I also used the word “crumbs” to describe the puny bonus payments and alleged pay increases that were held up by the tax cut acolytes as “proof” that their failed supply-side trickle-down economic policy works. Some of the commentaries in which I explained the difference between feasting at the table and being a dog to whom crumbs are tossed include Those Tax-Cut Inspired Bonus Payments? Just Another Ruse, That Bonus Payment Ruse Gets Bigger, Oh, Those Bonus Payments! Much Ado About Almost Nothing, Much More Ado About Almost Nothing, You’re Doing What With Those Tax Cuts?, and Arguing About Tax Crumbs. In Arguing About Tax Crumbs. I defended the use of the term, by myself and others, against outcries from those who disliked the characterization even though the relationship between the size of a crumb or two to a full loaf is pretty much in line with the relationship between the size of tax cuts provided to the wealthy and the size of tax cuts and bonus payments available to typical Americans.

Recent news about Amazon’s pay hikes for its workers sheds even more light on the smoke-and-mirrors aspect of the buffet table greed of the oligarchy. As reported in this story, many Amazon workers, overjoyed at the initial disclosure of a new $15 per hour Amazon minimum wage, discovered that Amazon will stop giving its workers stock options and has terminated its monthly bonus payments. Workers who did what I suggest everyone do when dealing with financial decision, that is, “run the numbers,” discovered that after getting a wage increase but losing stock options and bonus payments, their total compensation will go DOWN, not up. I wonder which Amazon employee figured out the public relations stunt that essentially permits the company to cut pay for some employees, leave pay the same for others, but yet proclaim it is raising worker pay. Some workers are not getting raises because their pay already exceeds $15 per hour but they will be losing their bonuses and stock options. Others are getting increases of $1 or $2 per hour, which is insufficient to offset the loss of bonuses and stock options. The pay raises will consume less than one percent of Amazon’s revenue, and will be more than offset by the curtailment of bonus payments and stock options. Some part-time workers will benefit from the changes.

It appears from the reactions of Amazon employees that increasing numbers of people are finding a way to look past the smoke and mirrors and to see the reality hidden by the tweets and sound bites, to discern the truth from inside the maze of misrepresentations, exaggerations, and out-of-context claims. The worship of the bottom line, considered almost divine the closer it gets to infinity, is a manifestation of the calamitous consequences of money addiction. Something is very wrong and hopefully not only is here a quick diagnosis of the disease by enough people but also a fast discovery of a cure.

Wednesday, October 10, 2018

If Trickle-Down Works, Why the Huge Increase in Consumer Borrowing? 

So now comes the latest report on consumer spending, as discussed in this article. The increase in consumer borrowing in August was much more than predicted, and much more than the July increase. Increases occurred in auto loans, student loans, and credit card balances. Why? If those December 2017 tax cuts, touted as benefitting all Americans, worked as their advocates claim, cash would be trickling down, and the need to borrow would decrease, and surely not increase. What about those bonus payments that the tax cut advocates held up as proof that trickle-down economic theory works? When I and others described them as crumbs, as discussed in Arguing About Tax Crumbs, we were criticized, yet it seems that in order to buy cars, get an education, or purchase anything else, Americans who are not members of the economic elite must resort to ever-increasing amounts of debt. So it turns out that one of the biggest assets in the portfolios of the oligarchy is the debt owed by everyone else (too many of whom continue to adore, support, vote for, and defend the very folks to whom they are indebted).

Almost three-quarters of economic activity is fueled by household spending. Household spending has increased because consumer borrowing is increasing at a rapid rate. In other words, when people rejoice at economic growth reports, they are rejoicing at increases in the amount that poor and middle-class Americans owe to the billionaires. Anyone who studies economic history knows how this story plays out. Good luck.

Monday, October 08, 2018

If a Person Pays One Tax, Does That Prove the Person Did Not Evade Another Tax? 

Reactions to the New York Times story about the Trump family alleged tax fraud and related tax schemes has brought a flood of demands for release of Donald Trump’s tax returns, demands that he be charged with tax fraud, inquiries about the likelihood of IRS audits, and discussions about the implications of the report and the possibility of additional information being uncovered. None of that is surprising, either the information that has been disclosed, the allegations, or the reactions.

What did surprise me was the reaction of John Crudele in his New York Post commentary. The headline for the commentary, “Why I doubt Trump evaded paying taxes” reflects his conclusion that “I don’t know whether Donald Trump was screwing around on his income taxes like The New York Times alleges or not.” That’s the only logical position one can take. Yes, one can guess, suspect, believe, wonder, and perhaps even worry. But to “know” is not yet possible. More information is needed. What surprised me is not the doubt, but the justification for the doubt.

What convinces Crudele to doubt the conclusion reached in the New York Times story? Crudele describes information from “a very good source” that when New York investigated a large group of taxpayers in the 1980s for possible sales tax evasion, Trump came out clean, having paid all of the sales taxes that he owed. Apparently at the time, “a lot of rich folks were having their purchases shipped to states with lower sales taxes.” If I were to guess or speculate, I would hesitate to think that people who were not “rich folks” might also have been engaging in this approach. Perhaps people, rich or not, are still doing this.

But should the fact that a person paid sales taxes weaken the claim that the person did not pay all of the income, estate, gift, or other taxes that the person should have paid? Should the fact that a person pays her electric bill be interpreted as meaning that she pays her lawn care bill? Should the fact that a person does not rob banks carry weight in arguing that the person does not embezzle? Should the fact that a person has never been issued a speeding ticket be a factor in concluding that the person did not fail to stop at a stop sign?

Almost every criminal has obeyed some laws. Almost every law-abiding person has violated some law, ordinance, or regulation, perhaps unknowingly. The fact that someone paid sales tax is irrelevant in determining whether that person did or did not pay an income tax, a gift tax, an estate tax, or even a highway toll.

Friday, October 05, 2018

Tax Law Poses Difficult Wedding Question 

Several days ago, Carolyn Hax was presented with a question that she answered in her advice question. The question caught my eye because the word “legally” was in the first line. But the question did not reveal the tax aspect. Here is what the person wrote:
Is it tacky or deceitful to legally get married as much as nine months in advance of a wedding ceremony? I'm recently engaged (yay!) to a great guy. We chose a date nearly a year from now because my fiance travels for work all through the spring, and we want to accommodate parents, stepparents, and family traveling from many other states.

However, we're both small-business owners and it looks like it would benefit us financially to marry before 2018 is over. I recently told a friend this idea and she was appalled, that it amounted to us putting on a "show" wedding. For me and my fiance, getting legally married as a business/tax decision doesn't have any of the emotional meaning that standing up in front of our friends and family would.

We're having a "no gifts" wedding, so it doesn't feel like we're even asking friends for anything other than joining us for a celebration of vows. Is my friend right, could it be perceived as dishonest? Should we keep this idea to ourselves?
What mattered more to me than Carolyn’s response was the fact that the tax law was putting two people in what they perceived to be a quandary, causing them, or at least one of them, anguish, and motivating at least one of them to write a letter to an advice columnist. It would not be surprising if the two people invested time in discussing what they ought to do.

Carolyn’s answer made sense. So what if the celebration ceremony takes place at a time after the marriage ceremony. She pointed out that getting married one day and having the celebration at a later date “doesn’t hurt anyone.” She noted that it is not uncommon for memorial services to be held months after a burial. She also explained that no matter what the couple decided, there will be people who are critical of the decision, so why bother “chasing approval.”

Yet it is unfortunate that the tax law put this couple in a bind. Accelerating the marriage in order to reduce taxes probably has happened more than a few times. Usually, if the decision to move up the date is made in time, it doesn’t create the logistical problems facing the couple in question. Or, if all or almost all of the guests live nearby, the logistical challenge might not be so overwhelming. I suspect that this couple was put into this time-crunched decision situation because the changes in the tax law were rushed through the Congress, and put into effect before people and businesses have had a chance to adjust. Note that this couple is not alone in trying to make decisions because of the tax law changes, though for most businesses dealing with this conundrum the problem is lack of guidance to interpret a badly written tax law. Hopefully the couple has had good advice and doesn’t discover a few months or a year later when filing their tax return that they would have been better off not accelerating the wedding.

We need a tax law that does not make the marital status of a taxpayer relevant. That can be done by treating people as individuals and not using the tax law to encourage or discourage marriage. The issues of marriage penalty and marriage bonus have been discussed by tax commentators for decades. Congress, however, continues to be mired in the distant past when it comes to the interaction of tax with present-day relationships. I doubt we will see any repairs in the near future.

Wednesday, October 03, 2018

Return of Overpayment Not Subject to Income Tax (and a ReadyReturn Lesson) 

When I taught the basic income tax course, one of the questions that popped up early in the semester was, “What is income?” That question must be answered before turning to the question of whether an item of income is included in, or excluded from, gross income. One of the elements in the definition of income is the principle that there needs to be an accession to wealth. It is for that reason when a person borrows money there is no income, and thus no gross income, because the increase in cash is offset by an increase in the obligation to repay, and thus the person is not wealthier. Similarly, withdrawing previously taxed money from a savings account does not generate income because the taxpayer is simply moving money from one pocket to another.

These principles came into play in the recent case of Park v. Comr., T.C. Summ. Op. 2018-46. The taxpayer, a member of the military, purchased a house in 2208 and took out a first and second mortgage with a bank. In 2011, the taxpayer fell behind in making payments on the mortgages but he resumed making payments in May 2012. During 2014, the taxpayer received a $13,508.58 check from the bank, and cashed it. The check was accompanied by a letter that stated, “[b]ased on a recent review of your account, we may not have provided you with the level of service you deserve, and are providing you with this check.” The letter suggested that the taxpayer might wish to consult with someone about any possible tax consequences of receiving the funds, and included a telephone number for him to call if he had any questions. The letter thanked the taxpayer for his military service. The taxpayer called the telephone number several times, but was unable to obtain any additional information. The taxpayer concluded that he had overpaid his mortgages during the time he was deployed overseas, and so he did not report any portion of the $13,508.38 on his 2014 federal income tax return. The bank sent the IRS a Form 1099-MISC, reporting other income of $12,789, and a Form 1099-INT, reporting interest income of $719 from the bank to the taxpayer for 2014. Because the taxpayer did not report those amounts on his return, the IRS issued a notice of deficiency on June 6, 2016, determining that the taxpayer had failed to report income from the bank. Several weeks later, the taxpayer filed a petition with the Tax Court.

The taxpayer explained that it was his understanding that the funds were not taxable income because they represented a return of overpayments on the mortgages. He issued a subpoena to the bank for records related to the check, but the bank replied that it was “unable to locate any accounts or records requested with the information provided.” The IRS argued that the taxpayer failed to provide credible evidence that its determination was incorrect.

The taxpayer argued that the bank’s issuance of the Forms 1099 was a mistake. The Tax Court noted that the letter from the bank indicated that it had made a mistake and was “correcting a wrong it had committed” with respect to the taxpayer’s accounts. The Court concluded that the taxpayer presented credible evidence that $12,789 of the payment was a return of an overpayment, and that the other $719 was interest on the overpayments that was required to be included in gross income. In other words, the taxpayer, by overpaying on the mortgage, moved money from one account to another, and when the bank returned the overpayments, the taxpayer, in effect, moved the money from the second account back to the first.

The taxpayer had to endure this judicial proceeding, investing time and energy, and probably some funds, because the bank made a number of mistakes. The bank failed to explain in its letter how it computed the amount of the check and why it concluded there had been an error. Perhaps the bank was taking money out of the taxpayer’s checking account to apply to the mortgage at the same time that it was receiving checks from the taxpayer. The bank failed to maintain records and thus was unable to reply to the subpoena with any information useful to the taxpayer. Or perhaps the bank had the records but was unable to find them. Or perhaps the bank had the records but did not want to become involved in the case. The bank failed to explain the basis on which it concluded that a Form 1099-MISC had to be issued. In other words, the bank inconvenienced its customer. The issuance of a Form 1099 is a serious matter and ought not be left to computers and software, which is surely what happened in this instance. Just wait until the robots start decided to issue Forms 1099. Can a robot be sued? That is an issue I’ll leave for others to discuss on blogs dealing with torts, contracts, and crimes. Incidentally, imagine what could have happened to this taxpayer had the IRS prepared his return based on the information it had.

Monday, October 01, 2018

Tax Cheats, Toll Cheats 

Readers of this blog know that I am an advocate of user fees in situations where user fees make more sense and are more efficient than using general tax revenues. Perhaps the most widespread user fee is the highway, bridge, and tunnel toll. It is no surprise that just as people try to find ways to avoid general taxes, they also look for ways to avoid user fees, including tolls. Most income tax evasion methods aren’t material for great movies, and evading user fees on tobacco and liquor often involves smuggling, which has found its way into movies and television shows.

Though evasion of income taxes and tobacco and cigarette duties has inspired all sorts of creativity, toll evasion seems to have taken the art of creativity to a new level. Reader Morris pointed me to a YouTube video in which Florida state troopers stop toll evaders using a variety of tricks in attempts to escape the photographing of their license plates by toll plaza cameras. Take a look, it’s eye opening, and as warned at the end, don’t try any of these “techniques.”

I can attest that the license plate photography system works. Recently I drove to Massachusetts and Rhode Island, and when I drove through the New Jersey Turnpike exit to get on the Garden State Parkway the E-Z Pass sign said “GO TOLL UNPAID.” Huh? I knew I had enough funds in the E-Z Pass account. I encountered the same message at the Garden State Parkway toll booths, but of course there’s no messaging in high-speed E-Z Pass lanes. So on my return I checked with the E-Z Pass folks. It turned out that my transponder was more than 16 years old, and the customer service representative said to me, “You have a transponder from the Stone Age. We’ll swap it out for a new one.” In the meantime, the Pennsylvania Turnpike Authority, the New Jersey Turnpike Authority, the agency that operates the Garden State Parkway, and the New York Thruway Authority (which collects the Tappan Zee Bridge toll) used the photo of my license plate to charge my E-Z Pass account. There were no penalties, and it was obvious I was not evading tolls. The new transponder is smaller and different from the old one. I had not known that transponders can “go bad,” so a tip: if your E-Z Pass transponder is more than five years old, ask for a replacement. It’s free of charge.

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