MauledAgain

Readers of MauledAgain know that I have long criticized the handing out of tax breaks based on promises that are broken, such as claims that the tax breaks will create jobs, reduce or eliminate some undesirable situation, or contribute to economic improvement for those in most need of financial assistance. I have written about the need to require delivery on these promises in posts such as How To Use Tax Breaks to Properly Stimulate an Economy, How To Use the Tax Law to Create Jobs and Raise Wages, Yet Another Reason For “First the Jobs, Then the Tax Break”, When Will “First the Jobs, Then the Tax Break” Supersede the Empty Promises?, No Tax Break Until Taxpayer Promises Are Fulfilled, When Job Creation Promises Justifying Tax Breaks Are Broken, Broken Tax Promises: When Tax Cut Crumbs Are Brushed Away, Why the Job Cuts By Tax Cut Recipients?, Broken Tax Promises Should No Longer Be Accepted, Tax Breaks Done Correctly in Indiana, and Tax Break Recaptures and Claw Backs: Contracts, Conditions, and Language.

In Tax Break Recaptures and Claw Backs: Contracts, Conditions, and Language, I described how Ohio officials want General Motors to repay $60 million of tax breaks it received in exchange for its promise to keep open a facility in Lordstown, Ohio, until 2027. Instead, last year General Motors shut down that facility. The contract between the Ohio Tax Credit Authority, which is part of the Ohio Development Services Agency, and General Motors included a recoupment provision, but General Motors does not want to repay the tax breaks.

There now is more news about the situation. According to this report, the Ohio Tax Credit Agency could have moved forward with recoupment decisions at its July 27 meeting but decided instead to deal with the issue when it meets on August 31. The Development Services Agency is recommending to the Tax Credit Authority that it seek recoupment of the tax breaks because General Motors breached the agreement.

In turn, General Motors has rejected repaying the tax breaks. It has argued that repayment “would be inconsistent with the spirit of economic development and our significant manufacturing presence” in Ohio and the Mahoning Valley. Consider the precedent that would be set if this sort of argument is accepted. Suppose a retail company with ten locations hires a cleaning company to clean each of the ten stores every evening after closing. The cleaning company fails to clean one of the stores. The retail company, having paid in advance for the cleaning services, seeks a refund of what it paid for cleaning the store that the cleaning company failed to clean. If the cleaning company argues that it ought not be required to refund the payment because it is cleaning the other nine stores, the retail store management should laugh in the faces of the cleaning company management. And when, and if, the matter reached a judge, the outcome should be obvious, whether or not the judge laughs at the absurdity of the argument.

Ohio’s Attorney General has filed a brief with the Tax Credit Authority, demanding that General Motors repay the tax credits. He described the amount in question as “1 percent of its savings from closing the plant” and rejected General Motors’ position that repayment would be punitive.

As I wrote in Tax Break Recaptures and Claw Backs: Contracts, Conditions, and Language, it would have been better to set up the agreement so that General Motors received a prorated portion of the tax breaks each year the old facility was open. Under that arrangement, if the facility closed, the tax breaks would stop. If General Motors wanted tax breaks for its new facility, it could negotiate another agreement, with the tax breaks being delayed until the facility opened and employees were hired, again with the tax break being prorated and made available at the end of each year, or calendar quarter, that General Motors complied with fulfillment of its promises. I also wrote:

There are lessons to be learned from what Ohio is facing. The Congress and legislatures in other states, including local officials, should examine what Ohio has done, note what has worked, what has not worked, and what can be improved, and act accordingly in the future. They are welcome to read my MauledAgain posts on this topic, easily located by referring to the links at the beginning of this commentary. After all, I am an educator and I have always welcomed the opportunity to educate legislators, though they rarely welcome my instruction. There’s still time to fix the tax break giveaway mess. Let’s see if any of them have learned anything.

Hopefully, legislators and taxpayers throughout the nation are watching the Ohio situation closely and learning why tax break giveaways based on future promises need to be ditched, preferably entirely, but if not, replaced by tax breaks based on past performance.

Perhaps they are turning up the heat on tax return preparers gone bad. They being investigators and attorneys at the Department of Justice, though they usually work in cooperation with agents and auditors from the Internal Revenue Service.

Back in March, in More Tax Return Preparation Gone Bad, I reacted to a United States Department of Justice news release, that described how a former operator of a Liberty Tax franchise in Florida was permanently barred from operating a tax return preparation business and preparing federal income tax returns for others, and how he also was ordered to pay back $175,000 he received from filing false tax returns on behalf of clients. The news release noted that the court ordering these restrictions had previously issued similar orders against two other Liberty Tax franchise operators.

Now comes news, from another United States Department of Justice news release, that a grand jury has indicted seven tax return preparers in North Carolina. In one indictment, seven tax return preparers in Charlotte were charged with conspiring to defraud the United States. Four of the preparers named in the indictment had also been previously charged in another indictment.

According to the indictment, over a period of years the owner of Kapital Financial Services and six employees “allegedly conspired to falsify clients’ tax returns by claiming deductions, business losses, American Opportunity credits, education credits, and earned income tax credits that the clients did not incur, in order to fraudulently increase refunds to be paid by the IRS.” Two of the employees also were charged with filing false tax returns in their own names for some of the years in question.

For a long time there has been widespread concern, among taxpayers and officials of federal and state tax agencies, that too many tax return preparers not only are insufficiently trained and deficient in tax knowledge and understanding and that too many preparers engage in fraud, often without the knowledge or cooperation of their clients. Sadly, efforts to protect people from unscrupulous tax return preparers have not been as successful as one would hope. I addressed this issue in Tax Return Preparer Regulation: What About Attorneys and CPAs?. I concluded that commentary with these words:

If the goal of preparer regulation simply is to stop preparers from stealing refund checks, then limiting examination and certification to preparers who are not attorneys and CPAs might be defensible. But if the goal is to produce more accurate returns, and thus improve revenue and compliance across the board, as it ought to be, I maintain that most lawyers and many CPAs aren’t as expertised as they need to be. In all fairness, Congress has created a tax law that rivals quantum physics in terms of difficulty, which surely makes attaining competence just that much more elusive, but that does not diminish the need for tax competence by all preparers. Demonstrating that competence ought to be accomplished by actual testing and not by erroneous presumption.

As I wrote in More Tax Return Preparation Gone Bad, “The lesson at the moment? Choose a tax return preparer as carefully as choosing a surgeon or child care provider. In other words, do research, talk to friends and neighbors, look at online reviews, and interview the preparer.” This most recent indictment does nothing but corroborate the wisdom of that advice.

Learning is a life-long process, at least for most people. It is, for me. My impression about the disposition of surplus proceeds from a tax sale has been altered.

It helps to begin with background. When an owner of real property fails to pay real estate taxes, the property eventually is put up for sale by the jurisdiction to whom the taxes are owed. This, of course, is a very simplified statement of a process that can take months, if not a year or two, and that can involve several stages of sale attempts. Once the property is sold, the proceeds are used to pay the taxes that are owed and the costs of the sale. What happens if, as often is the case, the proceeds exceed the unpaid taxes and the costs of the sale? I had always been under the impression that the surplus proceeds belong to the owner of the property. That is true in many states, including the one in which I live.

To my surprise, under Michigan law, if there are surplus proceeds from the sale of real property on which taxes have been unpaid, those surplus proceeds are taken by the jurisdiction that sells the property. In 2014, Oakland County sold a property because $8.41 of real property taxes had not been paid. The property sold for $24,5000, and the county kept what was left after the costs of the sale had been paid. The property owner sued. On July 17, the Michigan Supreme Court issued a decision, holding that the county was not permitted to keep more than the taxes that had been unpaid. Because the lawsuit was brought as a class action, the decision affects not just the sale in question but others within the state.

Apparently, according to the property owner’s lead attorney, about twelve states have laws permitting the taxing jurisdiction to retain not only an amount to pay the unpaid taxes but also any surplus proceeds from the sale. Whether the Michigan decision will influence legislatures and courts in those other states remains to be seen. Comments from the property owner’s attorney suggest that attempts will be made in those other states to get similar rulings from those states’ highest courts.

When the Michigan Supreme Court stated, “The government shall not collect more taxes than are owed,” it was saying something that most people, including myself, would take as obvious and sensible. Thus, it was a surprise to learn that some states have laws permitting the state to collect far more than what a delinquent taxpayer owes, even after adding interest and penalties.

If statutes permitting taxing jurisdictions to take, in effect, all of a property owner’s equity if taxes are unpaid are intended to function as incentives for property owners to pay real estate taxes, then those statutes are not well designed. Few property owners are aware of this draconian provisions. These statutes, in effect, impose on the delinquent property owner a penalty equal to the excess of the property owner’s equity over the unpaid taxes and costs of sale. In the Michigan case, the property owner was being subjected to a penalty of near $24,000 because of an $8 unpaid tax debt. That is unconscionable. And as the Michigan Supreme Court concluded, a violation of the Michigan Constitution.

Several months ago, in Taxes and the Virus, I criticized a proposal by the current Administration to cut payroll taxes as a solution to deal with at least some of the economic problems caused by the spread of the SARS-CoV-2 virus that causes the Covid-19 disease. I pointed out that anyone who understands economics, taxation, and tax policy knows that this approach is ineffective, and that I was not alone in my criticism. The current Administration is not the only one to have proposed payroll tax cuts as a response to economic turmoil, and in fact the previous Administration succeeded in temporarily cutting the payroll tax. And, yes, I also criticized that proposal, and explained its failures, in Do Lower Taxes, Less Regulation Create Jobs? Do Payroll Tax Cuts, Employment Credits, More Section 179 Expensing, Unemployment Benefits Create Jobs?. I wrote, “The payroll tax cut did little, if anything, to fix the problems, because the economy is no better at this point than it was when that cut was enacted, and it might even be, by some measures, worse. As a short-term band-aid, it was worth the attempt. As long-term surgery, it fails. It costs too much. It undermines funding for the Social Security program.” In other words, though I did not think it would work, I accepted the failure of that Administration to take a position consistent with mine, and viewed what it did as an experiment. But the experiment failed, and there is no need to engage once again in the foolishness of a payroll tax cut.

The current Administration apparently doesn’t know when or how to adapt to reality. Having failed several times to convince Congress to cut payroll taxes, the current Administration, according to many reports, including, for example, this one from The Hill, again is trying to push through a payroll tax cut. Fortunately, according to several reports, including this Philadelphia Inquirer story, the payroll tax cut proposal has been kept out of the most recent legislation proposed by Republicans, at least for the moment.

Why is a payroll tax cut a bad idea? Its effects are too slow, it does not increase cash flow to the unemployed, it does not help employers closed or operating under limited conditions because of the pandemic re-open or expand operations, it devastates the Medicare and Social Security programs, and it hurts workers in the long-term because it reduces their Social Security and Medicare payments when they retire. It has no positive effect on long-term hiring and business decisions. It creates additional cash flow to those who are not in need of additional cash flow.

There are ways to fix the economic mess that has been worsened by the pandemic. Those in power, however, are unwilling to do what needs to be done, because those who keep them in power, namely, those who really are in power, are loathe to admit that the root of the problem is the decades-long shift of income and wealth to the economic elite. They are, of course, the ones who really are in power, and refuse to admit that the income and wealth shift not only has failed to provide the benefits advertised each time tax breaks are handed out to those who are far from needy but also has damaged the economy so that it has been less positioned to weather the storm of a pandemic.

As I wrote in Taxes and the Virus, “It is becoming increasingly disappointing and dangerous that every time an economic crisis pops up, proposals are made that in the short-run and long-run shift wealth to the oligarchy. The sales pitches made for these proposals are disturbing. And every time they are bought by legislators they cause another crisis, which then provides the opportunity for yet another bad proposal to be made. Yes, I do think it is all part of a much bigger plan. But when plans backfire, as this one will, it’s not the planners who pay the price. That’s wrong, sad, and unacceptable.” And so it’s déjà vu time, as once again a failed experiment is trotted out and hyped by an Administration totally over its head when it comes to fixing the economic mess, other than fixing things so that the economic elite continue to prosper. This time, though, because there is bipartisan opposition to the foolishness of a payroll tax cut, the current Administration is threatening to hold hostage other economic legislation that is necessary. This is not the sort of appropriate governing style needed in a time of crisis.

About a month ago, in A Reason Not to Run for Tax Collector (or Any Other Office)?, I commented on a story about an incumbent tax collector who stalked and impersonated a political opponent and impersonated a student in order to make false allegations about the opponent. He also created a fake Twitter account, pretending to be his opponent and making his opponent appear to be a segregationist and white supremacist. As a result, the tax collector faces federal charges.

In that post, my focus was on the refusal of many otherwise qualified individuals to run for public office. The lies, ignorance, dirty tricks, altered images, fake videos, and false allegations permeating political campaigns are deterring those who would bring much-needed ideas and accomplishments to the public arena. I lamented the disappearance of “the days when politicians, candidates, and office holders engaged in rational, intelligent, honest, and sensible discussions and arguments about issues.” I rued how “mentality of win-at-any-price, devoid of critical thinking and cogent analysis, and reflecting any sense of quality values, has infected the political process.”

Now comes news that the same tax collector, using information from surrendered drivers’ licenses, manufactured fake IDs with his picture on it. This, too, had triggered a federal indictment. Apparently, in Seminole County, individuals wanting to replace or renew a driver’s license could do so at the tax collector’s office, where they would surrender their old licenses, expecting them to be shredded. The tax collector, instead, created fake IDs. It is unclear why he wanted the fake IDs.

The tax collector has resigned his post. Many good, decent people stay out of politics. One of the least liked positions in government is that of tax collector. Most people don’t like taxes, and pay them grudgingly, and certainly don’t hold the tax collector in high regard. So finding good, decent people to run for that office is difficult enough without having people in that office behave in ways that make the tax collector even more disdained in the minds of voters. Political corruption does damage in some man ways, not the least of which is deterring good, decent people from seeking public office.

Every business day I receive several emails from different tax publishers summarizing the previous day’s developments. These include cases, rulings, announcements, and stories. I have noticed that over the past few years, and increasingly over the past few months, that developments have shifted away from action to talk.

The other day, as I was perusing the summaries in one particular email, I noticed the verbs that described the developments. Curious, I categorized them.

Those that indicate action were these, with the number of instances in parentheses if exceeding once:

has updated; has released, releases (9); extends deadline (2); issued guidance; unveiled; announces (4); affirms; dismissed

Those that indicated talk were these, with the number of instances in parentheses if exceeding once:

discusses; explains (2); had offered; doesn’t worry; isn’t concerned; is urging; echoes calls; lays out suggestions; has requested comments (2); likely to be; will likely include; reminds (2); needed; cautions; criticizes (2); says (2); proposes (2); urge

Most of the 20 developments involving action reflect IRS announcements, releases, and decisions. The 24 developments involving talk reflect an increasing flood of suggestions, requests, criticisms, and predictions.

There’s nothing wrong, of course, with suggestions and criticisms. I offer those on a regular basis, and not only on this blog. The problem is the inadequate number of actions. Tax practitioners, for example, continue to struggle with issues for which there are no definitive answers. Some of their questions have been percolating for years, even decades. The same sort of problem afflicts other areas of life, too many suggestions, and too few resolutions. I’d like to see more developments using verbs such as fixes, solves, clarifies, decides, and unravels.

Criticism works best when it is constructive, that is, when it is accompanied by a proposal to solve the problem underlying the criticism. I try to do that when offer criticism, though every now and then I don’t have a solution to offer. Yes, it is good to encounter a flood of proposals, suggestions, and criticisms, but when nothing is done, and the criticisms continue, or when something is done but in way that brings more criticisms and yet remains uncorrected, the lack of progress poses even greater risks. Though many want to be “in charge,” too few are able and willing to make decisions and to fix decisions that turn out to have been unwise. As I was told when I was a child, “Talk is cheap but actions speak louder.” Indeed.

It wasn’t a television court show. It was the Maury Show, season 22, episode 115, on a rerun. It showed up when the previous show ended and I didn’t pay attention to changing channels. I turned my total attention to the television when I heard the word “tax.” How did tax become relevant to a show that focuses mostly on paternity issues?

A woman claimed that a man is father of her child, She wants him to help raise the child. He denied he is the father. The woman exclaims that of course he is the father, and he knows it because he claimed the child as a dependent on his tax return.

The man replied that he never denied being the father. He claimed that he was unsure, and thus was not ready to admit being the father. He didn’t say anything about the woman’s allegation that he claimed the child as a dependent on his tax return. Because the show focused on DNA testing, the tax issue apparently was ignored as irrelevant. So there was no lie detector test focusing on that issue, and no determination of what he did or didn’t do on his tax return. The DNA test established that the man indeed was the father of the child. So if he did claim the child as a dependent, and yet was unsure that he was the father, why did he claim the child? We don’t know.

What’s the tax lesson? There are several. First, any person claiming not to be the parent of a child ought not take an inconsistent position by treating the child as a child for income tax purposes, whether for an exemption or a credit. Second, if there is any doubt that the taxpayer is the parent of a child, establish parentage before treating the child as a child for income tax purposes. Third, understand that treating a child as a child for tax purposes can create problems if it subsequently is determined that the child is not the taxpayer’s child. Fourth, understand that treating a child as a child for tax purposes makes it a foolish thing to deny parentage, because it erodes credibility.

There’s another more general lesson. Don’t make allegations about what someone has done on a tax return without some sort of proof. Had the show pursued that issue, it would have been interesting to find out why the woman made the assertion she made about the man’s tax return, and how she was able to learn what he did. The two were not married, so the return was not a joint return. So how did she get her hands on the return? Or was she simply relying on something he said? Or was she making it up?

Ultimately, claiming someone as a child on a tax return doesn’t establish that the person is the taxpayer’s child. But it does prove what the taxpayer was thinking in terms of the taxpayer’s relationship with the person claimed as a child.

On Friday, in Tax Practice What You Tax Preach?, I criticized Grover Norquist and his Americans for Tax Reform Foundation for taking Paycheck Protection Program Funds even though he and his foundation are zealous opponents of government handouts, government, and taxes. I noted that “people, companies, and entities that are opposed to taxes and the disbursement of tax receipts by the federal government . . . exhibit. . . a significant degree of hypocrisy when they join the crowd” lining up for government assistance. I also wrote, “After all, to build a program based on objections to government “handouts” and the cutting of taxes in order to eliminate “handouts” should require consistency in behavior by not asking for that assistance.”

Recently, news reports, such as this Reuters story, have brought to public attention the fact that the Ayn Rand Institute applied for, and received, Paycheck Protection Program money. The Institute has produced an attempted justification, but its reasoning is pitiful. Essentially, the Institute argues that although it opposed government involvement in the economy, nonetheless the money from the program is simply a “restitution” of taxes that have been paid to the government under threat of force. Why is this argument pitiful? According to its own web site, the Institute is tax-exempt. If it doesn’t pay taxes, why the “restitution?”

As I wrote in Tax Practice What You Tax Preach?, “If you don’t like taxes and government handouts, don’t ask for one and don’t accept one.” To that, I would add, “Especially if you don’t pay taxes.”

As I also wrote on Friday:

Perhaps there is a silver lining in what has happened. Perhaps Americans will come to understand that the anti-tax, anti-handout, anti-government crowd isn’t simply against taxes, government, and handouts. They’re against paying taxes, against handouts for others, against a government that cares for the truly needy. They are, however, in favor of others paying taxes while themselves benefitting from tax breaks and handouts directed to themselves, all the while turning government into government of the few, by the few, and for the few.

Each day that goes by, increasing numbers of Americans are beginning to peek behind the curtain, and realizing the fallacies preached by the anti-tax, anti-government crowd.

The stupidity continues, and grows. Not quite a month ago, in Another Unwise Tax Proposal, I criticized a proposal by the Administration for a tax credit of as much as $4,000 for “vacation expenses.” The goal, according to its supporters, is to revive a segment of the economy hard hit by the pandemic. My criticism focused on several flaws. First, the proposal addressed only one of many segments of the economy suffering from pandemic-related issues. Second, I noted that Americans who are suffering economically, enduring job losses and running out of funds, aren’t about to head off for a vacation. Third, I noted that a tax credit, if not refundable, means little to Americans who have little or no tax liability. Fourth, I pointed out that many Americans are hesitating to go on vacation because they are concerned about contracting the CoVid-19 virus, a concern that surely has sharpened during the surge since I posted my Another Unwise Tax Proposal commentary. Fifth, I suggested that any industry that wants customers and clients to return must invest in the things that need to be done to minimize the risks, such as sanitizing facilities, implementing distancing, requiring masks, and pushing for legislation mandating national contact tracing, adequate supplies of PPE, accurate reporting, punishment of officials who hide information in order to enhance their own political agendas, restoration of national pandemic teams, and other steps.

I closed my criticism of the proposal to pay people to take unnecessary health risks by sarcastically asking, “What’s next? Tax credits to encourage people to drink alcohol, watch movies, and party?” Perhaps I should have made it clear I was being snarky. Why? Because now, as reported in this Philadelphia Inquirer article reprinted from the Washington Post, the Administration is proposing tax breaks for people who attend baseball games.

The stupidity of a tax break for attending baseball games is astounding. In no particular order, here are the reasons the proposal demonstrates a complete lack of intelligent thinking. First, attending events at which there are large gatherings is very high on the list of most risky CoVid-19 transmission activities. Second, with the shutdown of minor league baseball, the number of places where baseball games are scheduled to be played is much lower than usual. Third, it isn’t even definite that major league baseball will return or, if it does return, that it will complete its planned shortened season. Fourth, under current plans, there will be no fans at the games, making it rather impossible for someone to do what is needed to claim the proposed tax break.

What’s even more bizarre is that, unlike the tourism and hotel industries lobbying for the proposed “vacation tax break,” a major league baseball official described the “baseball tax break” idea as “a little weird.” To me, that suggests that the proposal is not a consequence of lobbying by major league baseball. Perhaps some team owners are lobbying outside major league baseball’s official channels? Or perhaps this is another one of those bizarre thoughts that pops into the mind of the Administration and is emoted before it goes through the frontal cortex filter? In short, it should not take much intellectual effort to realize that tax breaks encouraging activities that people do not want to do or cannot do are a waste of time and money.

Clearly the Administration, like everyone else, wants life to be normal. It isn’t and it cannot be. So the Administration, unlike most people, wants to make life appear to be normal by carrying on life as though a dangerous pandemic did not exist. Most people are aware, or becoming increasingly aware, that ignoring the pandemic is stupid. So the Administration takes the approach that tax breaks, or more simply, money, will encourage people to do something they do not want to do, or even something they cannot do. But there are limits to the power of money, at least for the majority of Americans who understand the importance of integrity, common sense, empathy, kindness, and generosity. It is not surprising that someone who worships money but is bereft of integrity, common sense, empathy, kindness, and generosity can come up with no other pandemic remedial plan that using money to encourage people to act stupidly rather than showing leadership and supporting what needs to be done to deal with the health problem that underlies the difficulties afflicting the economy. After all, the troubled economy is but a symptom of a deeper problem, and tossing would-be band-aids at a hemorrhaging economy while neglecting attention to treating the malady is the hallmark of stupidity, in medicine, in economics, in politics, and in life.

Though Grover Norquist and I agree that it is futile to put tax return preparation in the hands of the Internal Revenue Service, we part ways on a long list of issues. I have written about his dangerous anti-tax campaigns in posts such as Debunking Tax Myths?, If the Government Collects It, Is It Necessarily a Tax?, Tax Policy, Elections, and Money, Tax Ignorance or Tax Deception, and Clamoring for Tax Basis Indexing AND Special Low Rates: Inspired by Greed. To me, it is unfortunate that he has used bullying tactics in trying to force his anti-tax ideology onto the nation. I have dissected his anti-tax, anti-government arguments and demonstrated the deep flaws in his premises and his reasoning. I have also pointed out the atrocious outcomes in places where his anti-tax and anti-government philosophy has prevailed.

Norquist, at least, unlike others who disguise their purposes, had never hesitated to proclaim his crusade against taxes and his efforts. To use his words, his goal is to “drown [government] in the bathtub.”

So it’s mind-boggling to learn, as reported in this Bloomberg report and many similar stories, that Americans for Tax Reform Foundation, one of Norquist’s political arms, applied for, and obtained, a loan of between $150,000 and $350,00 from the Paycheck Protection Program. How is it that an opponent of taxes and federal spending is willing to let one of his entities grab tax dollars dished out by the federal government?

Unquestionably, there are flaws in the Paycheck Protection Program. Norquist is not the only participant whose readiness to grab some dollars has disturbed and even angered some, perhaps many, Americans. Lobbyists for friends of the Administration, companies owned by or connected to Cabinet members and member of Congress, billionaires and millionaires, cash-deep corporations, and others who surely were not in need of assistance have jumped on the gravy train. Many small businesses, the ones most in need of paycheck assistance, have received pittances, and some ended up with nothing.

It is admirable to assist businesses that faced two problems. Operating day to day and depending on revenue flow to pay the bills, the shutdown triggered by the pandemic cut off that revenue flow. In the absence of reserve capital, these businesses would be forced to furlough or terminate employees, with a cascading negative effect on the economy. These businesses needed and need assistance. Businesses with deep cash reserves did not and do not need assistance. Nor do businesses that continued to operate, including some whose revenue increased.

Businesses in need of assistance include barber shops, hair salons, arts and cultural entities, transportation firms, entertainers, tattoo artists, sports equipment manufacturers, restaurants, hotels, theaters, dentists, amusement parks, pet sitters, mobile notaries, house cleaners, and other companies and self-employed individuals whose revenue depends on getting out and about. In contrast, the coronavirus created a boom for some businesses, such as delivery firms, online sellers, and, yes, lobbyists. See this Fulcrum article (“But as millions of Americans struggle to pay their rent on time, one industry is booming. Lobbyists on Capitol Hill are in sky high demand.”) Indeed, Norquist’s foundation is not the only lobbyist that lined up for government assistance. Surely the folks opposed to tax increases, panicking at the thought of tax increases necessitated by the pandemic, and flush with cash, continue to pump their resources into the Americans for Tax Reform Foundation to help it continue to pursue its the goals.

It is understandable that when something is being handed out, people and companies will show up with extended hands. But people, companies, and entities that are opposed to taxes and the disbursement of tax receipts by the federal government are exhibiting a significant degree of hypocrisy when they join the crowd. After all, to build a program based on objections to government “handouts” and the cutting of taxes in order to eliminate “handouts” should require consistency in behavior by not asking for that assistance. Do participants in anti-smoking campaigns light up cigarettes and cigars? Do advocates of restrictions on gambling go to casinos and lay down money? Do prohibitionists drink alcohol? There probably are a few anti-smokers, gambling opponents, and prohibitionists who don’t practice what they preach, and that is unfortunate for them and for their campaigns. It makes the message ring hollow. If you don’t like taxes and government handouts, don’t ask for one and don’t accept one.

Perhaps there is a silver lining in what has happened. Perhaps Americans will come to understand that the anti-tax, anti-handout, anti-government crowd isn’t simply against taxes, government, and handouts. They’re against paying taxes, against handouts for others, against a government that cares for the truly needy. They are, however, in favor of others paying taxes while themselves benefitting from tax breaks and handouts directed to themselves, all the while turning government into government of the few, by the few, and for the few.

Two years ago, in Raising Tax Revenue By Encouraging Risky Behavior, I criticized the Pennsylvania legislature for repealing certain restrictions on the purchase and sale of fireworks by non-professionals in order to rake in additional revenue based on both the sales tax applicable to fireworks and the special, additional 12 percent sales tax on “amusement products.” I noted the foolishness of encouraging people to engage in risky behavior in order to raise revenue from the taxes that are imposed on risky behavior in order to reduce instances of that risky behavior. I compared the legislature’s action to the passing of laws encouraging people to smoke in order to increase revenue from tobacco taxes.

The legislation that permits just about anyone to purchase and set off fireworks had several restrictions reflecting the danger involved in fireworks activity. Yet even though the legislation forbids the use of fireworks by minors or intoxicated individuals or within 150 feet of buildings, these restrictions are difficult to enforce and apparently aren’t being enforced in most cases involving noncompliance. I predicted this outcome, pointing out that laws against firing guns into the air to celebrate events is rarely enforced. When I wrote, “An increase in fireworks sales and use surely will be accompanied by an increase in explosions, fires, personal injuries, and even death. Yes, it’s only a matter of time before someone loses a hand or gets blown up,” I had little hope that the legislature would reverse course but I did admit to myself that I would not mind being proved wrong. Sadly, at the end of June, as reported by many sources, including this one, a Scranton, Pennsylvania, man was killed when a firework exploded on the ground. Earlier in June, a homeowner was killed and his friend badly injured when two tractor trailers parked in his backyard and filled with fireworks exploded, terrifying neighbors.

According to this recent Philadelphia Inquirer story, not only are people complaining about fireworks being set off close to their homes, they are also annoyed and even irate at the noise, especially at night. For example, between May 29 and June 29, Philadelphia received more than 8,500 complaints about fireworks being set off near buildings, at night, or under other circumstances creating noise or other problems. And this is before the July 4 weekend, which made those 30 days seem tame.

Some municipalities are lobbying for permission to enact local laws prohibiting the use of fireworks by non-professionals and imposing restrictions on the use of fireworks by licensed professionals. Opposition comes from those who do not want the state to lose revenue from fireworks sales. Nonetheless, the state Senate voted 48-2 to permit certain municipalities to prohibit use of fireworks by non-professionals. However, the General Assembly adjourned for the summer without considering the legislation.

As I pointed out two years ago, these sorts of unintended and tragic consequences, surely foreseeable by anyone using common sense, are the outcome when “legislation is rushed, squeezed into other bills, and enacted without public hearings and discussion. This is what happens when revenue policy is a patchwork of concepts rather than a reflection of an overall analysis of taxes, the economy, behavior, and social benefits.” Rather than letting the danger continue through the summer, members of the Pennsylvania General Assembly need to hurry back to Harrisburg and pass the legislation that has already cleared the Senate. Additional delays mean more deaths, more injuries, more explosions, more disruption, more complaints, and more risk of unhappy neighbors taking the law into their own hands.

Readers of MauledAgain know that I have long criticized the handing out of tax breaks based on promises that are broken, such as claims that the tax breaks will create jobs, reduce or eliminate some undesirable situation, or contribute to economic improvement for those in most need of financial assistance. I have written about the need to require delivery on these promises in posts such as How To Use Tax Breaks to Properly Stimulate an Economy, How To Use the Tax Law to Create Jobs and Raise Wages, Yet Another Reason For “First the Jobs, Then the Tax Break”, When Will “First the Jobs, Then the Tax Break” Supersede the Empty Promises?, No Tax Break Until Taxpayer Promises Are Fulfilled, When Job Creation Promises Justifying Tax Breaks Are Broken, Broken Tax Promises: When Tax Cut Crumbs Are Brushed Away, Why the Job Cuts By Tax Cut Recipients?, Broken Tax Promises Should No Longer Be Accepted, and Tax Breaks Done Correctly in Indiana.

Though I don’t prefer using the tax system to encourage or discourage specific social behavior, I prefer, if the tax system is to be so used, that the tax breaks be handed out after the promised job creation, pollution reduction, or other benefit has been delivered. Another possibility, better than the promise-based handout, is some sort of recapture or claw back, but the problem with this approach is the high risk of noncompliance, perhaps because the taxpayer no longer has funds, perhaps because political pressures block or hinder collection of what is required to be repaid, or perhaps because political pressure retroactively reduces or eliminates the recapture or claw back.

A reader brought my attention to a recent situation involving a state’s attempt to recoup tax breaks. According to this story, in 2019 General Motors shut down a facility in Lordstown, Ohio, that it had promised to keep open at least through 2027 in exchange for tax breaks. Now the Ohio Attorney General wants General Motor to replay $60 million of those tax breaks.

Apparently a recoupment was included in the contract signed by General Motors. Though kudos are in order for the Ohio officials who included this provision, current officials are now facing the challenge of collecting the $60 million. Though the Attorney General stated, “Accountability is the key to good business and we’re holding GM accountable for not living up to its end of the contract,” the governor, who is of the same political party as the Attorney General, gave a different message, explaining that “the state is not actively seeking the money's return but is focused on how the automaker can create Ohio jobs.”

In the meantime, General Motors is building a new facility next to the one it closed, though it will eventually employ fewer than one-third of the workers formerly employed at the closed facility. General Motors wants the state to take into account “its significant manufacturing presence in Ohio.”

I have not read the agreement into which Ohio and General Motors entered when the tax breaks were handed out. Perhaps there is language that provides for some sort of offset to the claw back that reflects the construction of a new facility. Perhaps only two-thirds of the tax break should be recaptured. Perhaps more should be recaptured because there is a period of several years between the closing of the old facility and the opening of the new one during which employment drops to zero or near zero.

Of course, the ideal would have been to enter into an agreement that made available to General Motors a prorated portion of the tax breaks each year the old facility was open. Once the facility closed, the tax breaks would stop. If General Motors wanted tax breaks for its new facility, it could negotiate another agreement, with the tax breaks being delayed until the facility opened and employees were hired, again with the tax break being prorated and made available at the end of each year, or calendar quarter, that General Motors complied with fulfillment of its promises.

There are lessons to be learned from what Ohio is facing. The Congress and legislatures in other states, including local officials, should examine what Ohio has done, note what has worked, what has not worked, and what can be improved, and act accordingly in the future. They are welcome to read my MauledAgain posts on this topic, easily located by referring to the links at the beginning of this commentary. After all, I am an educator and I have always welcomed the opportunity to educate legislators, though they rarely welcome my instruction. There’s still time to fix the tax break giveaway mess. Let’s see if any of them have learned anything.

There is a discussion underway in the state of Washington that involves the classification of taxes. According to this report written by Jason Mercier, advocates of enacting a capital gains tax are up against Washington Supreme Court decisions holding that, for purposes of the Washington Constitution, income taxes are property taxes and thus are subject to the restrictions on property taxes contained in the Washington Constitution. One legislator who supports the capital gains tax proposal stated, “Republicans and Jason Mercier and company have been agitating for years that a capital gains tax is an income tax, and expressing horror and disbelief that anyone could claim that it’s not an income tax. That’s not actually the question. We don’t care whether a capital gains tax is an income tax because an income tax is not something that shows up in our constitution.”

Confusing? Yes. What appears to be happening is that proponents of a capital gains tax hope that the inevitable challenge to it would reach the Washington Supreme Court, providing an opportunity to argue that the Court’s treatment of income taxes as property taxes is wrong and that it should overturn its previous decisions. It appears that one argument might be that the treatment of income taxes as property taxes subject to restriction in the Washington Constitution does not apply to capital gains taxes because capital gains taxes are not income taxes. The argument that capital gains taxes are not income taxes is baseless. There is no question whatsoever that capital gains constitute income and that a tax on capital gains, even if not imposed on any other sort of income, is an income tax.

On the other hand, it is not a given that income taxes are property taxes. This question has been around since income taxes were first proposed. When the question has reached state courts, some have held that income taxes are property taxes and some have held that they are not. Of course, applicable language in a state constitution, if it exists, can differ from language in another state constitution, to the point where the language necessitates one conclusion or the other. This means there is no universal “income taxes are property taxes” or “income taxes are not property taxes.” It depends. A good, though very dated, explanation can be found in Rottschaefer, “A State Income Tax and the Minnesota Constitution, 12 Minn. L. Rev. 683 (1928). At the time, income taxes were held to be property taxes in Alabama, Delaware, and Massachusetts, and were held not to be property taxes in Arkansas, Georgia, Mississippi, Missouri, and Wisconsin, though Henry Rottschaefer made the same point I have made, which is that the language in the state constitutions differ and can constrain the reasoning and result. The two lists are short because at the time many states did not have income taxes, or the question had not reached the courts. For example, it wasn’t until six years after the article was published that the Washington Supreme Court addressed the issue and answered in the affirmative. Twenty-six years later, in Lockyer, “The Legal Nature of the State Income Tax,” 43 Ky. L. J. 215 (1954), Charles Lockyer, in analyzing whether state income taxes are property taxes, added California, Illinois, Pennsylvania, and Washington to the list of states whose courts treated income taxes as property taxes. I have not found a current comprehensive listing, though I have not invested the many hours of research that would be required to determine which states’ courts have addressed the issue, the results those courts reached, and the extent to which the reasoning in each case dovetails with other cases.

The point is that slapping a label on a tax does not necessarily dictate or preclude a particular result in a particular situation. The analysis is more complex. Adding to that complexity is the existence of other taxes, such as wage taxes, occupation taxes, unearned income taxes, and the like, and other possible classifications, such as excise tax. Getting hung up on labels, or on simple equations that a certain type of tax falls within a particular category, is rarely helpful in the tough cases. And when there is a simple equation, such as the conclusion that a capital gains tax is an income tax, though it makes it easy to decide easy cases, it offers little to help resolve difficult cases.

This can be illustrated by what would happen in Washington if the issue comes before the court. An argument that a capital gains tax is not an income tax would be dismissed quickly. An argument that if a capital gains tax is an income tax it nonetheless is not a property tax would require some discussion though ultimately it, too, would be dismissed. But the arguments and the court’s opinion would not be simple sentences of a few words, but multiple paragraphs of complex sentences. Continued efforts to push legal arguments into tweets and social media posts is no less damaging than trying to squeeze complex scientific studies, engineering designs, psychological analyses, or software code into tweets and sound bites. For those who prefer something like a tweet, here’s one. Classifying taxes is not a simple matter.

In a way, it’s sad. In a way, it’s puzzling. In a way, it’s foolish. In a way, it’s infuriating. What am I describing?

According to this Wisconsin State Journal article, a Wisconsin couple, owners of a bowling alley, has been sentenced to federal prison, each serving six months at different times, after having pleaded guilty to tax fraud and filing false returns. What exactly did they do?

According to the Assistant U.S. Attorney handling the case, Dan Graber, Dudley Hellenbrand worked out an arrangement with Thomas Laugen, the owner of a vending machine company, to set up a cash skim on a video gambling machine that Laugen had installed at the bowling alley in 2010. Dudley’s wife Cherie wife claimed that she did not find out about the arrangement until 2017. At that point they terminated the bowling alley’s business connections with Laugen and allegedly entered into a contract with another vending machine company and tried to enter into a similar arrangement. The arrangement was discovered when the couple tried to sell the bowling alley, met with an undercover IRS agent posing as a potential buyer, and touted the gambling machine skim as a selling point.

Though the judge agreed that Cherie did not know about the scheme until 2017, he wondered why she hadn’t noticed the additional money being brought into the household. He emphasized that when she discovered what was happening, rather than persuading Dudley to stop and pay back taxes, she participated in continuing the arrangement and in trying to create another one.

Laugen was sentenced to a year in prison for tax evasion. The Hellenbrands asked for probation, but the judge concluded that what they had done was “serious enough, calculating enough and intentional enough” to justify prison terms, and decided to impose “a sentence proportional to their responsibility compared to Laugen’s.” The couple also was ordered to pay the back taxes, and they already have repaid the more then $350,000 they had managed to evade.

The judge described the couple as “decent people” who tried to compartmentalize their lives by using a different set of rules for how they operated their business from the set of rules they used in the other aspects of their lives. Dudly Hellenbrand helped and mentored youth through sports organizations and Cherie Hellenbrand was a high school business education teacher. The judge remarked, “It greatly concerns me that the people in Mrs. Hellenbrand’s business classes who would have seen her teach the idea that you should run a business with integrity, when in fact what she did was cheat the government once she found out that they had underreported their income.” The judge also pointed out that they “undermined what I think is a lifetime of service.” Both Dudley and Cherie Hellenbrand have apologized. Cherie Hellenbrand noted that “she hopes other bar owners will learn from her mistake, ‘how not respecting and following the law can ruin your life and hurt the ones you love.’”

It’s sad because two people who otherwise did good for the community and served as role models for youth let it all fall apart because of the lure of money. Based on how much back taxes they repaid, the amount skimmed must have been a significant sum.

It’s puzzling because two people who knew better and understood how a business should be run broke rules and surely knew that at some point the IRS would come knocking on the door. If at the time the arrangement was set up, the question had been posed, “Why are you doing this considering the risks?” I wonder what the answer would have been.

It’s foolish because it makes no sense to try to use a tax evasion scheme as a selling point when trying to find a buyer for the business. A potential buyer could be anyone. The person with whom negotiations are undertaken not only could be an undercover IRS agent or some other official, but a person sufficiently concerned about what has been revealed that he or she becomes a whistle-blower.

It’s infuriating because it tempts others to do the same thing, as a challenge to prove that they can pull it off without getting caught. It contributes to the anti-tax disease that is ripping apart the civilized facets of society. It sends a message, and makes cynics out of the very youngsters they were trying to influence in a good way. The damage caused when a person learns that the person telling them to do or not do something is, in fact, acting to the contrary. It destroys trust and fuels resentment, anger, protest, and rebellion.

Graber disclosed that the IRS is also investigating other taverns and restaurants that are not paying their taxes in full, with an emphasis, it appears, on video gambling machines. So will others who are doing what the Hellenbrands did stop and come clean or will they continue to gamble, hoping they are not caught? It depends, I suppose, on how clever they think they are.

As readers of MauledAgain know, I am not a fan of tax breaks. Of course, the fact that I do not think they should be enacted doesn’t mean they won’t be enacted. But if they are being enacted, they ought to be drafted in ways that return something to the taxpaying community. A tax break, after all, is nothing more than a jurisdiction handing money to a taxpayer. Think of the taxpayer paying the tax that would have been paid absent the tax break and then having some or all of that tax handed back. It’s worse, of course, because some tax breaks are nothing more than handouts that exceed what the taxpayer would have paid absent the tax break.

A good example of bad tax break statutory drafting is illustrated by a recent decision of the Pennsylvania Commonwealth Court, Dechert LLP v. Pennsylvania Department of Community and Economic Development. The tax break in question involves Keystone Opportunity Zones (KOZs), Keystone Opportunity Expansion Zones (KOEZs) and Keystone Opportunity Improvement Zones (KOIZs), all of which can be called Keystone Zones (KZs). Properties in a KOZ are exempt from property taxes and qualified businesses within a KZ are “entitled to all tax exemptions, deductions, abatements or credits set forth in [the statute] for a period not to exceed 15 years.” The administration of the tax breaks, including participation in designation of KZs and related matters, is in the hands of the Pennsylvania Department of Community and Economic Development (DCED).

Dechert LLP, a qualified business, leases space from Brandywine Realty Trust in the Cira Center. The Cira Center is within a KOIZ whose designation has expired. From 2004 through 2018, Dechert received almost 15 years of tax breaks. Dechert plans to terminate its lease and enter into a new lease in a new office complex being built by the landlord in a different KZ. Dechert requested a letter ruling from DCED regarding the availability of tax breaks if it should relocate from its current location to the new office complex. Dechert claimed that moving from an expired zone to a different, but active zone, should not limit the tax breaks it would receive by locating its office within the new KZ. The DCED responded by explaining that it interpreted the statute to preclude a taxpayer who received tax breaks in a now-expired KZ from obtaining a new set of tax breaks by moving into a new active KZ. The DCED explained that the KOZ program “is designed to encourage businesses to
locate in economically distressed communities; to become economic anchors of the communities; and to re-enter the state and local tax rolls at the end of the KOZ term.” Accordingly, the DCED denied Dechert’s request. Dechert filed a petition challenging the DCED’s conclusion and seeking a declaration that it would not lose tax breaks by relocating into a new KZ.

The statute, however, does not address the treatment of a business that relocates from one zone to another. The DCED argued that failure to prevent taxpayers from “zone hopping” in order to extend KZ benefits infinitely conflicts with the legislative intent that the benefits of KZs are intended to be temporary tax relief. That failure would encourage “mass exodus from one zone to another in an attempt to retain tax exemptions, and thus frustrate the purpose of the statute.”

The statute provides for the treatment of businesses that move from outside a KZ into a KZ, requiring them to meet certain conditions in order to obtain the tax breaks. These conditions involve increases in employment, investments in property, and entry into leases in the KZ. The Court concluded that because the statute did not address movement from one KZ to another, that nothing in the statute prohibits Dechert from obtaining the tax breaks available by moving into the new active zone. The Court explained that Dechert would be moving into a KZ from outside that KZ, even though it already was in a different KZ. The Court noted that there is no prohibition on zone hopping in the statute. It granted summary relief to Dechert and entered the declaratory judgment sought by Dechert.

As the Court pointed out, fixing what the DCED considers to be a problem requires a legislative remedy. Put another way, the problem exists because the legislature failed to consider and address the question one way or the other. Apparently no one asked, “What happens if a taxpayer or business stays in a zone until it expires and then moves to another zone that is active? Should the taxpayer or business get another batch of tax breaks?” Answering the question would then cause the legislators and their staffs to realize another provision in the statute was necessary.

The case illustrates the problem with tax breaks. Once the taxpayer experiences the tax break, the taxpayer wants more, and more. Unless the KZ tax breaks are repealed, sometime in the late 2030s Dechert will be moving again. And it’s not just Dechert. Dechert’s attorney noted that he has “additional clients seeking the same relief.”

It is possible that the DCED will appeal the decision to the Pennsylvania Supreme Court. However, given the way the statute is drafted, it is difficult to envision the Supreme Court reversing the decision. As the Commonwealth Court pointed out, it’s the responsibility of the legislature to fix the problem. Of course, my preference is a provision that limits a taxpayer to 15 years of tax breaks, not 30 or 45 or eternity. Actually, my preference is total repeal but that’s not going to happen. Too many people are deeply invested in this tax break.

There are many reasons that an otherwise qualified individual declines to run for public office. Political campaigns are filthy. Lies abound. Ignorance flourishes. A variety of dirty tricks, altered images, fake videos, and false accusations are used by those so desperate to win and so insecure in their chances if they run a clean campaign deter those who would bring much-needed ideas and accomplishments to the public arena.

A recent news report now adds to the list of improprieties that can afflict candidates. According to the report, the tax collector for Seminole County, Florida, stalked and impersonated a political opponent and impersonated a student in order to make false allegations about the opponent. He now faces federal charges. The tax collector posed as a student at the school where his opponent worked, and used that status as a fake student to file a false complaint that the opponent was engaging in sexual misconduct with an unidentified other student. He also created a facebook account pretending to be a teacher at that school, repeating the false complaint. He also set up a Twitter account pretending to be his opponent, and used that account to issue tweets making his opponent appear to be “a segregationist and in favor of white supremacy.”

Gone are the days when politicians, candidates, and office holders engaged in rational, intelligent, honest, and sensible discussions and arguments about issues. Instead, a mentality of win-at-any-price, devoid of critical thinking and cogent analysis, and reflecting any sense of quality values, has infected the political process. It is not unlike the money-at-any-cost approach that has ruined businesses, nourished income and wealth inequality, damaged the health care system, and weakened the nation’s economy and national security.

Is it any wonder that many good, decent people stay out of politics? When I hear or read someone asking, “Why can’t there be better candidates?” I tell them that the system is broken and that one of the symptoms is the inability of the system to flush away the misguided, misdirected, money-addicted, selfish, unempathetic, power-hungry authoritarians that have been taking over the political process. But who wants to enter the political arena and face being impersonated, subjected to false claims, insulted, misrepresented, stalked, and otherwise abused? Yes, there are some good politicians and office holders out there, but they are far and few between, and are a dying breed. It’s no wonder the good ones are disappearing.

Last week, according to this news release from the Kansas Attorney General, a Topeka resident pleaded no contest to a charge of failing to remit sales tax on vehicles that he sold. He pleaded guilty to one felony count of making false information and one misdemeanor count of failure to remit sales tax.

According to the news release, the defendant was identified after an investigation by the Kansas Department of Revenue Office of Special Investigations. The investigation revealed that the defendant “was illegally selling cars by knowingly representing incorrect sales prices on KDOR sales tax forms and shortchanging the state $454.16 in sales tax.”

The dollar amount is rather low, compared to most tax fraud cases. The sales tax rate in Kansas on automobiles varies by location. Assuming the sales took place in Topeka, the sales tax rate is 9.15 percent. A bit of arithmetic determines that $454.16 is the sales tax on $4,963.50 of automobile sales.

My guess is that there is more to the story. There are several possibilities. Perhaps the defendant shaved a few dollars off the reported sales price of many car sales, for example, selling 100 cars and reporting each sale at roughly $50 less than the actual sales price. That’s an attempt to avoid $5 of sales tax on each sale. It makes no sense. Another possibility is that the defendant sold many cars, and reduced the reported sales price by roughly $5,000 per sale, but in the plea agreement only one such sale was the subject of the sale. In other words, perhaps one count was alleged for each sale, resulting in multiple counts, but the plea agreement focused on one count. I was unable to find any background information, such as an indictment or similar document.

The amount involved in the plea is a rather small amount. It is less than the cutoff in many states for treating a theft as a felony. Sentences for felony convictions usually are substantial, so it would make no sense to plead no contest to a charge of tax fraud involving $454.16 in sales tax unless the amount evaded was much more. Not that understating the sales price of items is a wise move, but it seems unlikely that a department of revenue would pursue felony charges when the amount involved is just shy of $500. There surely is much more to the story. Risking jail and heavy fines for $454 makes no sense.

First, some background will help. When taxpayers are unable to pay their federal income taxes they can enter into installment agreements with the IRS to replace immediate payment with a schedule of periodic payments over a period of time. Usually, these arrangements are made after taxpayers are audited and are found deficient in tax payments but are unable to pay back taxes because they have spent all or most of their money, including the amounts that should have been paid in taxes. From time to time, these arrangements are made when taxpayers are filing a return, determine they owe additional tax, know that they lack the resources because of intervening financial problems such as job loss or illness, and file the return with a request for an installment agreement rather than including payment. This is, by the way, the reason people who owe tax but are unable to pay are advised to file the return to avoid additional penalties for failure to file.

A recent Tax Court case, Strashny v. Comr., T.C. Memo 2020-82, is a useful example of why installment agreements are designed to help taxpayers who are in difficult financial situations. The taxpayers, a married couple, filed their 2017 federal income tax return but did not pay the additional tax that was due. The IRS thus assessed that amount on June 4, 2018. The taxpayers proposed an installment agreement that would permit them to pay the amount due in installments over a six-year period. Their proposal on Form 9465, accompanied by Form 433-A, was delivered to the IRS on Friday, July 27, 2018, and recorded by the IRS as pending on Monday, July 30, 2018.

The amount owed by the taxpayers, including interest, exceeded $1.1 million. In an attempt to collect this amount, the IRS issued a Notice CP90, Intent to Seize Your Assets and Notice of Your Right to a Hearing. The taxpayers timely requested a collection due process (CDP) hearing, expressing interest in an installment agreement and attaching a copy of their previously submitted Forms 433-A and 9465. They did not check the box indicating that they could not pay the balance, and they did not dispute their underlying liability for 2017.

The case was assigned to a settlement officer in the IRS Appeals Office in Baltimore, Maryland. After reviewing the taxpayers’ administrative file the settlement officer confirmed that the 2017 liability had been properly assessed and that all other requirements of applicable law and administrative procedure had been met. On April 17, 2019, she sent the taxpayers a letter scheduling a conference for May 29, 2019. The settlement officer reviewed the Form 433-A, which showed that the taxpayers owned substantial investment assets, consisting chiefly of cryptocurrency. She also received from the taxpayers’ representative a copy of their 2018 tax return, which reported wages exceeding $200,000, and investment statements showing cryptocurrency assets valued over $7 million. During the conference with the taxpayers the settlement officer noted that the taxpayers were currently withdrawing $19,000 per month from the cryptocurrency account. She asked the taxpayers’ representative why they could not liquidate or borrow against those assets in order to pay the tax liability in full. The representative replied that he would discuss that point with the taxpayers and contact the settlement officer. The settlement officer emphasized that the taxpayers could not qualify for an installment agreement if they had the current ability to pay their tax liability in full and simply chose not to do so.

The taxpayers’ representative argued that the IRS should not have issued the notice of intent to levy while the taxpayers’ installment agreement request was pending. The settlement officer explained that the IRS would not levy on the taxpayers’ assets until the installment agreement request had been resolved. If and when that request was denied, levy would occur 30 days thereafter. In a follow-up communication, the taxpayers’ representative did not provide any evidence that the taxpayers were unable to draw on their cryptocurrency account to pay their tax liability. The representative insisted that the taxpayers could still qualify for an installment agreement by agreeing to pay their liability in full over a six-year period. The settlement officer explained that the six-year rule applies only if a taxpayer lacks the ability to pay the entire liability currently. The representative then spoke with the settlement officer’s manager, who confirmed the officer’s analysis.

On June 25, 2019, the IRS issued a notice of determination sustaining the proposed levy, and rejected the taxpayers’ request for an installment agreements. The notice stated that “[l]evy action is permitted 30 days after the rejection.” The taxpayers filed a timely petition with the Tax Court for review. On February 13, 2020, the parties filed cross-motions for summary judgment.

The Tax Court reviewed the settlement officer’s determinations and concluded that she had discharged all responsibilities. She properly verified that the requirements of applicable law or administrative procedure had been met, considered any relevant issues raised by the taxpayers, and considered “whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayers that any collection action would be no more intrusive than necessary.”

The Tax Court concluded that the settlement officer did not abuse her discretion in concluding that the taxpayers were not entitled to an installment agreement. The court declined to substitute its judgment for the settlement officer’s conclusion, nor would it recalculate the taxpayers’ ability to pay or independently determine what would be an acceptable offer. By following guidelines in the Internal Revenue Manual, the settlement officer did not abuse her discretion. The guidelines in that manual provide that absent special circumstances such as old age, ill health, or economic hardship, a taxpayer must liquidate assets in order to qualify for an installment agreement. The settlement officer concluded that the taxpayers were ineligible for an installment agreement after determining that they could fully satisfy their tax liability by liquidating a portion of, or borrowing against, their cryptocurrency assets. The taxpayers did not demonstrate economic hardship or other special circumstances, and in fact reported annual wages exceeding $200,000 and monthly withdrawals from the cryptocurrency account of $19,000. They supplied no evidence that they were unable to withdraw from that account sufficient additional sums to pay their tax liability in full.

The taxpayers argued that the IRS erred in issuing the notice of intent to levy while their Form 9465 request for an installment agreement was pending. They relied on on section 6331(k)(2), which provides that no levy shall be made while a taxpayer’s request for an installment agreement “is pending with the Secretary” or, if the request is rejected, “during the 30 days thereafter.” The Tax Court explained that though section 6331(k)(2) “bars the IRS * * * from making a levy” during this period, it does not bar the IRS from issuing notices of intent to levy. Thus, it was permissible for the IRS to issue the Notice CP90.

The taxpayers also argued that the IRS failed to comply with an Internal Revenue Manual provision stating that a taxpayer’s request for an installment agreement should be recorded within 24 hours of receipt. The Tax Court treated the recording of the request on Monday, July 30, after receipt on Friday, July 27, as harmless error. The delay because of the weekend did not cause a levy that violated section 6331(k)(2), and the taxpayers were give full consideration of their installment agreement proposal during the collection due process hearing. The court concluded that granting the taxpayers’ request for a supplemental hearing would serve no useful purpose.

The Court granted summary judgment for the IRS and denied the taxpayers’ motion for summary judgment. Presumably, the IRS will levy on the taxpayers’ cryptocurrency account unless the taxpayers quickly borrow against it or sell a portion of it and pay their tax liability.

What struck me about this case was the audacity of taxpayers worth at least $7 million, with at least that much in liquid assets, trying to make use of a provision intended to assist taxpayers in difficult financial straits. It’s not as though paying the tax would have wiped out the taxpayers’ assets. The amount owed was roughly 15 percent of what their assets, and would have been a smaller percentage had they paid the tax before interest and penalties accrued.

It is too common to encounter people who are able to pay but who feign inability to pay or otherwise find ways to avoid paying a legitimate obligation. It is not unlike refusing to pay contractors for work done in building a hotel or casino. Fortunately, in this case, the misuse of the installment agreement process was stopped by the Tax Court.

Tax return preparers are entrusted with helping people file tax returns that comply with the tax laws. Most tax return preparers fulfill this obligation. Unlike attorneys and CPAs who prepare tax returns, tax return preparers are not subject to professional licensure and discipline. Though tax return preparers who prepare federal tax returns must obtain a Preparer Tax Identification Number (PTIN), they are not required to hold professional credentials. Some, for example attorneys and CPAs do have those credentials, most do not.

It is for this reason that the Treasury Inspector General for Tax Administration (TIGTA) undertook an examination of tax compliance by tax return preparers. In a report issued last week, TIGTA revealed some startling statistics. The title of the TIGTA report, almost says it all: “Tax Return Preparers With Delinquent Tax Returns, Tax Liabilities, and Preparer Penalties Should Be More Effectively Prioritized”

TIGTA examined the Return Preparer Database as of November 2018. It identified 10,495 tax return prepares who, though preparing more than 2,000,000 tax returns for 2016, did not file their own tax returns. TIGTA identified “the top 100 nonfiler” tax return preparers from the 10,495, and determined that they prepared from approximately 1,000 to 6,000 tax returns for clients for 2016. These 100 preparers collected from more than $189,000 to more than $1,000,000 in client fees. TIGTA calculated that if the IRS pursued 6,903 tax return preparer nonfiler cases, it could collect roughly $45.6 million in tax revenue. The IRS informed TIGTA, after reviewing a draft of the report, that it had added 449 of these nonfiler preparers to its Fiscal Year 2020 Examination Plan. What about the other 6,454 preparers? TIGTA determined that they either had been classified as currently not collectible or were waiting to be assigned to the collection process. TIGTA determined that “there were high-priority preparer penalty modules in [currently not collectible] shelved status, preparers in [currently not collectible] hardship status likely earning significant income, and high-dollar [cases]” waiting to be assigned to the collection process.

Worse, TIGTA determined that “the IRS’s new nonfiler strategy does not include specific items to address preparers who have failed to file their own tax returns that are due, and the current preparer misconduct strategy does not provide specific direction on how the IRS might address preparers who are nonfilers or have balances due for their own tax accounts.”

The answer is simple. Identify non-compliant tax return preparers. Notify these preparers that their PTINs are being suspended. Notify each taxpayer whose last three filed returns contain that PTIN that the preparer’s PTIN has been suspended, that the IRS will not accept a return prepared by that preparer, and that the taxpayer’s next return must be prepared either by the taxpayer or a preparer whose PTIN has not been suspended. Ask the Congress to enact legislation that gives taxpayers a cause of action against preparers who prepare a return even though their PTIN has been suspended. This approach is in addition to the administrative changes suggested by TIGTA, some of which the IRS adopted and some of which it rejected. Those changes, however, don’t pack the punch that PTIN suspension and notification would provide.

It appears that another unwise tax proposal has been put on the table. According to numerous reports, including this one, the idea is to provide a tax credit, perhaps as much as $4,000, for “vacation expenses.”

It is unclear what is meant by “vacation expenses.” Surely it would include hotel fees, admission fees for resorts and amusement parks, and airfare. It probably would include rental car and restaurant costs if incurred more than a sufficient number of miles from home to be considered a vacation. It would be limited to amounts spent within the United States.

The justification for the proposal, according to its supporters, is to revive a segment of the economy hard hit by the pandemic. However, the proposal is focused on one segment and not on a related ones. For example, the pandemic has also hit the dining and rental car industries. If the travel and tourism industry is to get a boost, why not other hard-hit segments of the economy? I suppose those industries can fend for themselves and do their own lobbying. This “us and let them worry about themselves” approach to tax policy reeks of the same “me and mine first” tribalism, an offshoot of the “me generation” attitude, that is ripping the country apart. So what happens if Congress decides, after handing out credits to one industry, that there are budget concerns requiring shutoff of the credit tap? Is it first come first served? While industries with the means to hire lobbyists quickly grab food at the tax buffet, other industries that aren’t so well off will find, by the time they raise enough money to hire lobbyists, that the buffet is closed. Congress should work for all the people and all industries, not just those with the most money, the stronger lobbyists, and the faster run to the buffet table.

The rationale for the proposal, according to its supporters, is to encourage Americans to go on domestic vacations. There are two reasons that the tourism industry faces a potential slow recovery, a concern that has sparked the proposal. First, Americans as a group have been hit economically and have had to cut spending. The first expenditures to go are discretionary items, and vacations are high on that list. If tax credits are going to be used to help Americans cope with budget woes, ought they not be used to help with necessary expenditures such as housing, food, and health care? The only people who could afford to go on vacation are those with sufficient resources to cover their necessary expenses, and that cuts a lot of people out of the vacation tax credit buffet. And certainly a tax credit, if nonrefundable, is of little value to taxpayers with little or no tax liability because they have been unemployed or underemployed. Second, many though not all Americans are hesitating to go on vacation because they are leery of the CoVid-19 virus, have concerns about its resurgence, are aware of spikes currently beginning to show up in health department reports, and have good memories of what happened to vacationers in February and March when the virus ran wild. Considering that a significant portion of vacationers in “normal” times are older Americans, the fact that they are presumably more at risk of serious health consequences from contracting the virus causes one to wonder if a tax credit will entice them to leave the house. If the tourism industry wants to encourage Americans to travel, it needs to invest in, and support, the things that need to be done to minimize the risks. The focus should not only be on sanitizing facilities, implementing distancing, requiring masks, and the like, but also on pushing for legislation mandating national contact tracing, adequate supplies of PPE, accurate reporting, punishment of officials who hide information in order to enhance their own political agendas, restoration of national pandemic teams, and other steps to make certain that progress with tourism facilities isn’t negated by problems in other areas of human activity.

There are reports that the Administration is looking at the proposal favorably. Is it any wonder? At least one member of the Administration owns a variety of tourism facilities, particularly hotels and golf courses.

Nowhere is there mention of income limitations on the credit. It makes no sense for the wealthy who are not suffering economically from the pandemic, or even doing better because of it, to get another $4,000 put in their pocket because they took their usual summer vacation to their usual posh resort. Haven’t they already grabbed enough from the buffet when tax breaks and loans intended to help small business have been diverted to recipients whose names are being kept secret?

As readers of this blog know, I do not support using the tax code to do what can be done through other means. But if there are to be tax credits, ought they not first, for example, go to people who are scraping by as they do volunteer work during the pandemic or are working in low-paying health-care-related positions? Ought they not go, as another example, to hard-hit small businesses to assist in covering the costs of deep cleaning and other health mitigation steps?

What’s next? Tax credits to encourage people to drink alcohol, watch movies, and party? Seriously, the tax policy system in this country is so far down the wrong road it would be a miracle if a U-turn could get it back to where it ought to be.