MauledAgain

It’s been quite some time since I wrote about the tax troubles of former Pennsylvania State Senator Vincent Fumo. In Real Property Tax Assessment System: Broken and Begging for Repair, How to Fix a Broken Tax System: Speed It Up?, and Not the Sort of Tax Loss Taxpayers Prefer I described the Philadelphia real property tax woes that beset the former Senator.

Now comes a Philadelphia Inquirer story that explains Fumo is now facing federal income and gift tax troubles. On Monday, the United States Tax Court will hear Fumo’s petition to set aside an IRS notice of deficiency seeking roughly $3 million in back income taxes and penalties. The IRS asserts that Fumo received economic benefit from the transactions that were at the root of his 237-count criminal conviction 13 years ago. Examples provided by the IRS include “overpaying his Senate staff while using them as personal servants and campaign foot soldiers, and * * * hiring a taxpayer-paid private eye to investigate political enemies, an ex-girlfriend, two strippers and even his own son,” along with “other abuses.” The IRS notice of deficiency also includes penalties for “exploiting the South Philadephia nonprofit he created, the former Citizens Alliance for Better Neighborhoods, tapping its money to pay for political polls, a stealth lawsuit against a legislative enemy, a campaign to protect the ocean view at his shore home, for tools and consumer goods, and more.” In another proceeding, he IRS is seeking more than $300,000 in unpaid gift taxes on a transfer from Fumo to his son, which Fumo contends was not a gift.

Fumo’s lawyer claims the IRS position is “fundamentally flawed because the money in question went to people other than Fumo.” The lawyer gave as an example roughly a quarter of a million dollars paid to pollsters and “not Fumo,” but taxpayers can have gross income even when payments go to a third party if in turn the taxpayer benefits from something done by the third party.

Though the notice of deficiency was issued in 2012, while Fumo was in prison, an assortment of delays, including the pandemic, has let the suit stagnate for a decade. Those sorts of delays are not unusual in the American justice system. Hopefully the trial doesn’t take a decade, even though the IRS has listed 80 witnesses it plans to call to testify. Sadly, ten of the 80 have died since the memo was filed and the IRS intends to use their testimony preserved in transcripts from the criminal trial.

If the IRS succeeds, the outcome will put Fumo in a difficult financial position. During the criminal investigation he surrendered his $900,000 annual salary and position as a member of a law firm. The conviction cost him not only prison time but also his $100,000 state pension and his law license. He was required to pay roughly $4.5 million in restitution. His net worth, estimated to be $11 million when he went to prison, has fallen to $3 million. A few weeks ago, he put up for sale the 29-room mansion that was the subject of those real property tax woes. The asking price is almost $4 million.

According to his lawyer, Fumo is “tired of being a punching bag,” and “would like to move on with his life.” When asked by the Inquirer for comment on the Tax Court case, “Fumo replied by email: ‘have you no shame!!!’ ”

It is more likely than not that the outcome of the Tax Court trial will be known in less than a decade. Perhaps the case will settle. Perhaps the Tax Court’s opinion won’t be appealed. Perhaps there will be continuances. No matter, what is certain is that at least for another year or two or three, Fumo’s tax troubles will not be going away. Perhaps they will never go away.

If I were still teaching a basic federal income tax course, I would use a quotation from this press release to set up one of the examination questions. The press release was brought to my attention by reader Morris, who asked, tactfully, “Is the IRS agent misstating a basic federal income tax principle?” The answer is, “Yes.”

The press release announced the charging by information of Michael Garrison, accused of conspiracy to commit wire fraud, conspiracy to destroy an energy facility, wire fraud, destruction of an energy facility, and filing a false tax return. The information “alleges that * * * Garrison broke into shuttered coal-fired power plants that had been decommissioned * * * in order to steal copper wire and other metal, which he then sold to scrap yards.” Garrison allegedly failed to report the amounts received in 2020 for the scrap metal on his 2020 federal income tax return.

With respect to the charge of filing a false tax return, the press release quotes IRS Criminal Investigation Special Agent in Charge Yury Kruty as saying, “No matter the source, all income is taxable.” If indeed he said that, he is flat out wrong. The language of Internal Revenue Code section 61(a) clearly states, “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived.” The Internal Revenue Code contains various exclusions, which provide that certain types of income are not included in gross income and thus not taxable, because something not included in gross income does not find its way into taxable income. The exception language at the beginning of section 61(a) highlights the existence of those exclusions.

So the exam question would be along these lines: “Someone says, ‘No matter the source, all income is taxable.’ Is this statement correct? Why or why not?” It would fall into the category of “question placed in the exam to determine if the student passes the course,” in contrast to the more challenging question in the category of ‘question placed in the exam to determine if the student has attained the level of an A grade.”

If you use the question, feel free to credit MauledAgain.

Today I received an email from the utility company that supplies me with electricity and natural gas. The email was titled, “Your monthly energy usage is higher than usual.” The email told me that my projected bill for the month (presumably a billing period ending at some time in September) was projected to be $73 more than the same time last year. All but $6 was attributable to the electricity portion of the bill.

The email then posed the question, “What caused your bill to change?” It provided this answer: “The weather has been similar to this time last year, and may not have affected your bill. Factors like heavy appliance use or household guests may have contributed.” The email suggested that I could reduce my bill if I would “Run your pool pump during off-peak hours to lower demand,” and “To lower your demand, use a timer on your pool pump so you can time it to only run during off-peak hours. If you have to run your pool pump during peak hours, avoid running large appliances at the same time.”

Of course, I’ve had no household guests and my appliance use is either unchanged or so little changed as to be negligible. And there is no pool.

It took me far less time to figure out the problem than it has taken me to type out this commentary. The reason my bill is more this year than the same period last year is that the cost per unit of electricity and natural gas has been increased, by that utility company, at a rate that explains the price increase.

So what is happening? I have identified three possibilities. Perhaps there are more.

The first possibility is that someone at the utility company thinks that there is a direct correlation between cost and usage that does not take into account price variations. Though one might think no one would miss that point, it does not surprise me. Recollect my many previous comments about the state of education in this country.

The second possibility is that the utility company decided that fear – your bill is jumping up – will encourage people to engage in energy saving practices. Yet why suggest to me, someone without a pool, that I need to run a pool pump during off-peak hours? Perhaps the company doesn’t know who owns a pool, a fact it could easily determine, and sent the pool pump message to everyone because it thinks pool pumps are the, or a, significant reason for excessive energy usage.

The third possibility is that the utility company wants people to think that their higher utility bills are because they have increased their energy usage and not because of rate increases. Yet rate increase notices accompany almost every monthly bill.

What puzzles me is that every month the utility company sends me a chart showing my monthly electricity and natural gas usage for the 12 preceding months, matched against “all neighbors” and “energy efficient neighbors.” I don’t know how they determine who are my energy efficient neighbors, though I’ll guess that it’s the neighbors whose energy usage falls in the bottom 10 or 20 or 25 percent of all my neighbors. My usage usually falls between “all neighbors” and “energy efficient” neighbors though in some months matching or slightly falling below “energy efficient neighbors,” with a month here or there matching “all neighbors.” Yet the company nonetheless decided to warn me that my utility bill is projected to be higher than for the same period last year.

Surely there is some logical explanation. Surely. I hope.

When reader Morris sent me a link to this story, he gave the email an appropriate subject line. He wrote, “You get what you pay for!” He makes a good point.

Mike Brant, the writer of the story begins by noting, “Who would've thought our ridiculously high taxes could actually cause more good than harm? Apparently, there are benefits to paying higher taxes after all.” That is a point that I have made in my posts in which I explain why the privatization of government functions rarely work out well for anyone who isn’t in on the deal. When the privatization is structured as a monopoly, the situation is even worse.

Brant notes that although in his opinion New Jersey taxes are too high, he admits that “higher taxes do allow for more benefits when it comes to quality of life.” He gives as an example a story he heard from a New Hampshire couple he met on vacation in Cape Cod. The New Hampshire couple moved to New Hampshire from a town where taxes were higher. One of the benefits they had received in their former town is that they put out their trash and the town picked it up. When they arrived at their new home in New Hampshire, they discovered that if they wanted their trash picked up they needed to enter into a contract with, and pay, a private trash removal company. The first time they put out trash, they put out a many boxes, a consequence of the trash generated by moving into a new home. The private contractor told them it was too much, and that “it was not allowed,” refusing to take anything until the amount of trash at the curb was reduced. He refused to take any of the trash. So they had to take most of the trash back into the house. The following week they had another run-in with the private contractor though exactly what triggered it is unclear from the story.

The New Hampshire couple had no other options. There is no other private trash removal company operating in the town. The town does not have a dump, so they cannot do their own trash removal. They were compelled to comply with the terms and conditions imposed by what their neighbors called “the garbage can monopoly.” They have no ability to vote the company in or out of the town. The writer of the story notes that because the town had no control over the situation, it and its residences are at the mercy of the private contractor. He explains, “It's the unfortunate side of very low taxes sometimes.” He advises New Jersey residents, “So before we go complaining too much about our taxes, be glad we don't have to worry about things like a garbage can monopoly.”

My guess is that “free market” advocates would argue that the solution is someone starting another company and offering residents a better deal, not only in terms of price but also service. Yet why has that not happened? Monopolies don’t surrender territory, unless forced to do so by government. That’s why antitrust laws have been enacted, and why they are opposed by “free market” advocates who have been successful in recent decades in taking the teeth out of antitrust laws. As I’ve pointed out many times, there’s not much free in a “free market” when that market lets monopolists and oligarchs be free to run roughshod over those who are less powerful and less wealthy. It is the government, local in this sort of situation, state or federal in others, that exists to keep the powerful from taking advantage of those less fortunate. And to do that, government requires funding.

So for the anti-tax group, or more specifically, for those who are attracted by the siren songs of the anti-tax advocates, imagine a world in which there are no taxes, and thus no government. What happens when one or perhaps two or three, or even several dozen, mega-oligarchs own and control every activity and function that affects every facet of your life? The situation in New Hampshire gives us a peek into what that sort of world would be.

This commentary isn’t about tax law, legal education, the First Amendment, religion, genealogy, theology, music, model trains, or chocolate chip cookies. It’s about that “and law generally,” mentioned in this blog’s subtitle.

It’s about a sad example of financial illiteracy and the sort of incomprehension that generates disagreements and unnecessary litigation. It comes from a television court show. I’ve written about television court shows many times, in posts such as Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other, One of the Reasons Tax Law Is Complicated, An Easy Tax Issue for Judge Judy, Another Easy Tax Issue for Judge Judy, Yet Another Easy Tax Issue for Judge Judy, Be Careful When Selecting and Dealing with a Tax Return Preparer, Fighting Over a Tax Refund, Another Tax Return Preparer Meets Judge Judy, Judge Judy Identifies Breach of a Tax Return Contract, When Tax Return Preparation Just Isn’t Enough, Fighting Over Tax Dependents When There Is No Evidence, If It’s Not Your Tax Refund, You Cannot Keep the Money, Contracts With Respect to Tax Refunds Should Be In Writing, Admitting to Tax Fraud When Litigating Something Else, When the Tax Software Goes Awry. How Not to Handle a Tax Refund, Car Purchase Case Delivers Surprise Tax Stunt, Wider Consequences of a Cash Only Tax Technique, Was Tax Avoidance the Reason for This Bizarre Transaction?, Was It Tax Fraud?, Need Money to Pay Taxes? How Not To Get It, When Needing Tax Advice, Don’t Just “Google It”, Re-examining Damages When Tax Software Goes Awry, How Is Tax Relevant in This Contract Case?, Does Failure to Pay Real Property Taxes Make the Owner a Squatter?, Beware of the Partner’s Tax Lien, Trying to Make Sense of a “Conspiracy to Commit Tax Fraud”, Tax Payment Failure Exposes Auto Registration and Identity Fraud, A Taxing WhatAboutIsm Attempt, and When Establishing A Business Relationship, Be Consistent, as the Alternative Can Be Unpleasant Litigation.

In this Judge Judy episode – Season 21, Episode 245 – the plaintiff sued the defendant to compel the defendant to put a headstone on the grave of the plaintiff’s grandson. The grandson and the defendant were engaged and had lived together for at least a year. The story begins when the plaintiff took out life insurances policies on the lives of her four grandsons. When asked by Judge Judy why she did that, the plaintiff explained that she and her husband were getting older and if something happened to them they wanted their grandchildren to have some money. It was evident that Judge Judy was as puzzled as I was, because protecting the grandsons from something happening to their grandparents would be accomplished by life insurance on the lives of the grandparents, not the grandchildren.

Then, when the one grandson and the defendant became engaged, the plaintiff changed the beneficiary on the life insurance policy on that grandson to the defendant. Sadly, that grandson then took his own life. The insurance company paid proceeds to the defendant. The defendant paid the cost of the funeral, though it wasn’t clear whether the defendant offered to do so or did so at the request of the plaintiff. The plaintiff took the position that she had the right to dictate how the defendant used the proceeds but Judge Judy pointed out that there was no contractual obligation giving the plaintiff that right.

The plaintiff was upset that the defendant had not purchased a headstone. The defendant explained that a headstone was already in place, paid for by the grandson’s father and his wife, who was the grandson’s stepmother. The plaintiff complained that her grandson’s name on the headstone was incorrectly spelled. The defendant provided a photograph of the headstone, with the name correctly spelled, and Judge Judy pointed out that the plaintiff’s father and stepmother apparently had caused the headstone to be corrected.

At that point, Judge Judy asked the plaintiff, “Are you satisfied?” but the plaintiff said, “No.” Judge Judy asked, “So why are you here?” The plaintiff responded, “I want a headstone on my grandson’s grave.” Judge Judy replied, “There is a headstone.” The plaintiff came back with a claim that the name was misspelled. Judge Judy rejected that assertion, asking the bailiff to show to the plaintiff the photograph of the headstone with the name correctly spelled. Judge Judy asked, “So what do you want?” The plaintiff stated, “I want a headstone with my grandson’s full name.” Judge Judy read the name from the headstone and asked, “Did he have more names than those?” The plaintiff replied, “We wanted the stone to include ‘loving grandson, . . . ‘” and at that point Judge Judy cut her off and dismissed her case.

I wonder who convinced the plaintiff and her husband to purchase life insurance on the lives of her grandsons, when there was no indication that she and her husband were dependent on the grandsons for financial support. Parents sometimes purchase term insurance on their children to cover the cost of funerals and burials, but because the chances of a child dying are very low, those policies are very inexpensive and usually expire when the child attains majority or can be turned over to the child at that point. I wonder if some salesperson saw an opportunity to sell four insurance policies by convincing the plaintiff and her husband that they needed to do so. Sad.

The plaintiff’s inability to understand that someone other than the defendant had paid for a headstone and her insistence that the defendant purchase one is bewildering. It is sad. The plaintiff’s misunderstanding of the facts and their significance, even after the judge explained it several times, is troubling. It’s sad.

A recent Southern District of New York decision, the text of which is presently behind a paywall, involved an employee suing his employer because the employer failed to issue a Form W-2 or even a Form 1099 to the employee. The plaintiff was hired by a parking garage company in 1980 to work as a porter. Decades later, he was fired, and filed an age discrimination complaint against the employer. The case was settled in 2014. The plaintiff’s attorney in that case took one-third of the settlement. The attorney sent the plaintiff a Form 1099 rather than a Form W-2. The plaintiff alleged he “did not sign any papers” nor give anyone permission to sign on his behalf. He alleged that he “cannot get a 1099 form without someone don’t sign my name so then I am asking this court to have my employer give me my” Form W-2.

The court held the plaintiff’s complaint did not comply with federal pleading rules because “his allegations do not suggest that he is entitled to relief from” the former employer. The court explained that if the employer had failed to issue a Form W-2 when required to do so, it would be the IRS that had a right to proceed against the employer by assessing penalties. According to the court, “[i]n other words, an individual citizen has no right to sue over an employer's failure to provide a W-2,” citing previous cases similarly holding. The court pointed out that it could find “no authority suggesting that money received in connection with a settlement qualifies as ‘remuneration . . . for services performed by an employee,’ such that a W-2 would issue.” And, according to the court, even if the former employer should have issued a Form W-2, the plaintiff “does not have a private right of action against his former employer for failing to provide one.” The court also noted that the plaintiff did not allege any damages or harm caused by the non-issuance of a Form W-2 by the former employer, and that the IRS provides Form 4598, “Form W-2, or 1099 Not Received or Incorrect,” to be filed if an employer fails to issue a Form W-2.

Should the plaintiff have sued in state court for breach of contract? That path would be possible only if the contract imposed on the employer an obligation to reimburse the employee for the cost of paying a professional to assist in filing a Form 4598 if the employer failed to issue a Form W-2. I doubt that the plaintiff’s contract contained any provision of that sort. I doubt that sort of provision has been included in any employment contract. If the failure to issue the Form W-2 is the fault of the employer’s tax professional or the developer of the payroll software used by the employer, can the employee sue that person or company? There are privity of contract issues standing in the way, and also the simple matter that the cost of litigation almost certainly exceeds the cost of paying a professional to assist with Form 4598.

What happens when someone wants to stop an activity, a proposal, or the consequences of a decision that adversely affects that person? One approach is to present arguments, based on actual facts, that convince enough people to oppose the activity, reject the proposal, or seek reversal of the decision. But too many people are unable to do that. They cannot accept actual facts or they lack the ability or training to argue well based on facts, or they suffer from both afflictions. This often is the case when the persons affected by the activity, proposal, or decision are few in number compared to those who are unaffected.

So what do these people do? They turn to another tactic. They try to convince the vast numbers of unaffected people that they are affected. To do this, they need to distort reality, twist the facts, and lie. They manipulate information not to present arguments about the value or worthlessness of the activity, proposal, or decision, but to instill fear in the hearts and minds of those who in reality have nothing to fear.

The latest stunt consists of two parallel scare tactics. One is to claim that the IRS is going to go after people with incomes under $400,000 and small businesses. The other is to claim that the IRS plans to hire 87,000 additional agents. Both claims are false, but they are finding fertile ground in the hearts and minds of those who react quickly to emotions and fail for one reason or another to think critically and dissect the absurdity of the claims.

The recently enacted Inflation Adjustment Act specifically provides that the funding it provides for improved IRS audit rates is not to be used to increase audits on taxpayers with taxable income under $400,000. As a practical matter, the bulk of the tax gap that the legislation is designed to reduce isn’t generated by these taxpayers. Many taxpayers receive income as employees, reported on Forms W-2, which makes it almost impossible to underreport income. IRS computer systems engage in matching what employers report with what employees report, and because that matching program includes all Forms W-2, there isn’t much, if any, opportunity for increased audits in those situations. The same can be said for income reported on various Forms 1099. Similarly, many of these taxpayers claim the standard deduction. Even though some taxpayers with incomes under $400,000 overstate some deductions and credits, the revenue increases attainable by increasing audits of these taxpayers is a drop in the bucket. It’s not worth it to the IRS to invest in additional audits that bring in several hundred dollars. The bulk of the missing tax revenue is elsewhere.

The Department of the Treasury has denied claims that the IRS plans to hire 87,000 additional agents. The funding provided to the IRS to increase audit rates will be used to bring its employment from the current 78,000 employees back up to the 94,000 it had in 2010, and to offset the 20 percent reduction in funding that it has incurred since 2010, which led to a 30 percent reduction in tax enforcement.

Let’s do some arithmetic. The legislation increases IRS funding by $80 billion, spread over 9 fiscal years. That’s an average of roughly $9 billion a year. Some of that funding is dedicated to improvements in IRS computing facilities, to taxpayer services, and to operations support. Of the $80 billion, $45 billion is dedicated to bring enforcement back to 2010 levels. That’s an average of $5 billion per fiscal year. IRS agents earn salaries between roughly $32,000 and roughly $96,000, with a median of roughly $51,000. Of course, the cost of employing an agent includes not only the salary but also contributions to retirement plans, health care premiums, and other fringe benefits. Fringe benefits cost employers roughly 30 percent. So the median annual cost of hiring an agent is roughly $66,300. That makes the cost of hiring 87,000 agents almost $5.8 billion, and that doesn’t take into account the cost of hiring people to do the hiring, hiring people to do the initial training, and hiring people to supervise the agents. When taking those costs into account, there’s barely enough funding to make up for the employees lost since 2010. And that computation doesn’t take into account inflation, causing those costs to increase while the funding remains the same.

So should people who are complying with the tax laws be worried? Absolutely not. Who should be worried? The people whose noncompliance will be uncovered by the application of additional resources to ferret out the tax avoidance schemes in which noncompliant taxpayers engage. And those people have every reason to have tried, unsuccessfully, to block the legislation and now to whip compliant taxpayers into a frenzy to derail the plans to increase compliance among the noncompliant. Because these noncompliant taxpayers have the monetary resources to hire politicians, lobbyists, public relations spokespersons, and others to spread fear among those with no reason to be afraid, they continue to use the manipulation playbook and scare tactics.

The intensity with which these noncompliant taxpayers and their hired hands are spreading these false claims tells us quite a bit about what concerns them. Of course there is fear, and there should be, among the noncompliant taxpayers. Compliant taxpayers should ignore these howls of horror.

During the past many years, I have written about some of the tax return preparers who have gotten into trouble because of their misdeeds, in posts such as Tax Fraud Is Not Sacred, More Tax Return Preparation Gone Bad, Another Tax Return Preparation Enterprise Gone Bad, Are They Turning Up the Heat on Tax Return Preparers?, Surely There Is More to This Tax Fraud Indictment, Need a Tax Return Preparer? Don’t Use a Current IRS Employee, Is This How Tax Return Preparation Fraud Can Proliferate?, When Tax Return Preparers Go Bad, Their Customers Can Pay the Price, Tax Return Preparer Fails to Evade the IRS, Fraudulent Tax Return Preparation for Clients and the Preparer, Prison for Tax Return Preparer Who Does Almost Everything Wrong, Tax Return Preparation Indictment: From 44 To Three, When Fraudulent Tax Return Filing Is Part of A Bigger Fraudulent Scheme, Preparers Preparing Fraudulent Returns Need Prepare Not Only for Fines and Prison But Also Injunctions, Sins of the Tax Return Preparer Father Passed on to the Tax Return Preparer Son, Tax Return Preparer Fraud Extends Beyond Tax Returns, When A Tax Return Preparer’s Bad Behavior Extends Beyond Fraud, More Thoughts About Avoiding Tax Return Preparers Gone Bad, Another Tax Return Preparer Fraudulent Loan Application Indictment, Yet Another Way Tax Return Preparers Can Harm Their Clients (and Employees), When Unscrupulous Tax Return Preparers Make It Easy for theblo IRS and DOJ to Find Them, Tax Return Preparers Putting Red Flags on Clients’ Returns, When Language Describing the Impact of Tax Fraud Matters, Injunctions Against Fraudulent Tax Return Preparers Help, But Taxpayers Still Need to Be Vigilant, Will the Re-Introduced Legislation Permitting Tax Return Preparer Regulation Be Enacted, and If So, Would It Make a Difference?, Can Fraudulent Tax Return Preparation Become An Addiction?, Tax Return Preparers Who Fail to File Their Own Returns Beg For IRS Attention, Using a Tax Return Preparer? Take Steps to Verify What Is Filed on Your Behalf, When Dishonest Tax Return Preparers Are Married, There Was Nothing Magical About This Tax Return Preparation Business, Don’t Get Burned By a Tax Return Preparer, Tax Fraud School: When It’s Not Enough to Be a Fraudulent Tax Return Preparer, It’s Not Just Tax Return Preparers Assisting in the Preparation of Fraudulent Tax Returns, and Overused Fraudulent Tax Return Preparation Ploys. I don’t write about all the tax return preparers whose ill-advised actions put them in the news because I would not have time to do anything else. But when a different sort of situation arises and comes to my attention, I try to find time to do some writing.

What caught my eye about the case of JTH TAX, LLC d/b/a Liberty Tax Service v. Stephen A. Gilbert and G-QTS, Inc. was the identity of the party proceeding against the tax return preparer. It was the franchisor, Liberty Tax Service, that sued its franchisee tax return preparer because of actions taken by the franchisee that violated both the franchise agreement and federal law. The principal transgression was the allegation that the franchisee permitted one of his employees to use the franchisee’s PTIN, a violation of federal law and thus by the terms of the franchise agreement a violation of that agreement. The franchisee did not deny allegation. The franchisor accordingly terminated the franchise agreement. The franchisor also sought to enforce a non-compete agreement that barred the franchisee from directly or indirectly preparing or filing income tax returns within the territory of the franchise or within 25 miles of the territory for two years following the termination of the franchise, and an agreement that barred the franchisee from directly or indirectly soliciting any person or entity served in any of the franchisee’s prior offices in the last twelve months of holding the franchise, for the purpose of offering that person or entity income tax preparation or filing or financial services, within the territory or within 25 miles of the territory for two years following the termination of the franchise.

Under the terms of the franchise agreement, the termination of the franchise required the franchisee to surrender to the franchisor the leases on the locations where the franchisee operated the tax return business. The franchisee refused to sign the documents required for the surrender, and changed the locks on the premises. The franchisee notified the franchisor that he intended to continue offering tax preparation services at those locations. The franchisor alleged that the franchisee removed two printers belonging to the franchisor, removed the franchisor’s “Liberty Tax” sign and replaced it with the sign of a competitor, Fast Tax, and operated a competing tax preparation at those locations. The franchisor also alleged that the franchisee took client files and other confidential information.

The franchisor sued the franchisee, claiming breach of the franchise agreements, common-law conversion, and violation of the Defend Trade Secrets Act. The franchisor requested a preliminary injunction stopping the franchisee from operating a tax return preparation service at the former franchise locations until March 5, 2024, from operating competing tax return preparation businesses within 25 miles of the franchise territories until March 5, 2024, requiring the franchisee to assign to the franchisor the leases for the former franchise locations, to refrain from interfering with the franchisor’s right to act as the lawful agency and attorney-in-fact for the franchisee for the purpose of taking necessary action to complete assignment of the leases, stopping the franchisee from causing, or attempting to cause, the changing of locks at any franchise location, stopping the franchisee from removing property from any franchise location, stopping the franchisee from using any of the franchisor’s confidential information, stopping the franchisee from entering onto or otherwise interfering with the operation of the franchisor’s franchise locations, ordering the franchisee to return all franchisor confidential information, including client files, ordering the franchisee to return the franchisor’s equipment, including printers and computers, and other property that was removed from Liberty’s franchise locations, and ordering the franchisee to provide the franchisor with a key for any new locks installed at the former franchise locations.

Put simply, the franchisor prevailed. The franchisee lost.

The lesson is simple. A tax return preparer who fails to comply with applicable law, regulations, and other requirements faces not only action by law enforcement but also by private parties, including not only client taxpayers but franchisors if the preparer is doing business under a franchise.

I must admit I was surprised when I saw the headlines claiming that the pending Inflation Reduction Act of 2022 will increase taxes on all or most taxpayers. The claims are based on a Joint Committee on Taxation Distribution Table of the pending act. Indeed, that table shows increased taxes on taxpayers in every income category, though the total increase on taxpayers with modified adjusted gross income under $400,000 is much less than what some of the headlines claim. Squaring that Table with the Senate Finance Committee’s estimated budget effects” doesn’t seem possible.

The Joint Committee on Taxation Distribution Table does not explain how it computed these estimated increases. It clearly states that it “[d]oes not include indirect effects.” So which tax provisions in the pending legislation cause these increases? Most of the tax provisions increase credits, extend credits, expand credits, or establish new credits. So it can’t be those provisions. Of the five revenue-raising provisions, one clearly does not apply to individuals. That’s the proposed 15 percent alternative tax on corporations with net profits exceeding $1 billion. The second is increased funding for the IRS to improve audit rates, but that provision contains an exception for taxpayer with taxable income under $400,000. The third is denial of low long-term capital gain rates on partnership carried interests. That provision, however, contains an exception that permits partners with modified adjusted gross income under $400,000 to avoid the restriction by holding the interest for three years rather than the five-year period applicable to other taxpayers. How many taxpayers with modified adjusted gross income under $400,000 own partnership carried interests? Some, but not enough to justify claiming that all or most taxpayers with income under $400,000 will be hit with tax increases. The fourth, reinstatement of the Superfund, if it affects low and middle income taxpayers at all, surely affects very few of them. The fifth, extension of the Black Lung Disability Trust Fund tax rate, is another provision that affects few, if any, taxpayers in the lower brackets.

So I’m at a loss trying to identify the provisions in the legislation that increase tax liabilities for taxpayers in the excepted categories, let alone increased by the claimed many tens of billions of dollars that some opponents of the legislation claim. I have not found anything that tags any specific provision or provisions as the cause of the increases that the Joint Committee identifies.

It’s unfortunate that the Joint Committee doesn’t share how it arrived at these numbers. It is important for Americans to know, because it would permit taxpayers, or their advisors, to determine if they are affected. I suspect that very few taxpayers in the low and middle income brackets would be among those facing tax increases. If the increases are caused by the carried interest changes, would it not be helpful to know that, so that the vast majority of low and middle income taxpayers who do not own carried interests can breathe a sigh of relief and realize that their taxes are not going to increase under the legislation?

What does this lack of information do? One consequence is that it permits opponents of the legislation to make all or most Americans think that they will be adversely affected by the legislation, because that helps the opponents drum up support for opposition even if it is based on misplaced apprehension and fear.

Perhaps the information will be forthcoming? But will it arrive in time to dispel the fear and anxiety currently being marketed?

But perhaps I am missing something. Is there a sixth revenue raising provisions? Do increased and expanded credits cause tax increases? So I invite anyone who has the answer to how taxes on low and middle income taxpayers are increased by the legislation to let me know.

So the Congress appears to be ready to pass a a compromise bill designed, among other things, to combat the impact of inflation on consumers. That dealing with inflation is its primary purpose seems apparent from the title of the proposed legislation: The Inflation Reduction Act of 2022. Whether the provisions in the proposal will reduce inflation is a discussion I leave to others.

If the Congress truly wants to help people dealing with inflation, perhaps it should go through the Internal Revenue Code and provide inflation adjustments for fixed-dollar amounts that currently are not adjusted for inflation. Without trying to doing the work of Congressional staff, here are two examples where adjusting fixed-dollar amounts would help people. One is the limit above which the $25,000 active-management exception to the passive loss limitations phases out. Currently it remains at $100,000 of adjusted gross income, and amount that when it was enacted targeted the taxpayers who were not low-income or middle class. Now, many middle-class families have adjusted gross income above $100,000 and are caught by a phase-out not intended for persons in their position. The other consists of the fixed-dollar amounts used in computing the amount of social security benefits included in gross income. Those amounts were designed to exempt low-income and low-middle-class taxpayers from being taxed on social security. As I pointed out in Taxation of Social Security Benefits: Inexplicable Inconsistency and Hidden Tax Increases, “None of the amounts [in section 86] -- $25,000, $32,000, $34,000, or $44,000 – have changed. They are not indexed to increase with inflation.”

Would adjusting these fixed-dollar amounts reduce income tax revenue? Yes. Would the amount of that reduction pale in comparison to the tax breaks enacted for the wealthy? Yes. Could the amount be offset by tweaking those tax breaks? Yes. Will any of this happen? I’m not holding my breath.

The headline in this morning’s Philadelphia Inquirer caught my eye: "City tax-relief programs cause confusion" Curious, I read the article.

When I went to the newspaper’s web page, I could not find the article by searching for the text of the headline. I finally found the on-line version, which appears to be the same article but for a change in the headline: “Philly officials touted tax relief efforts. But some homeowners stand to lose money.“ Perhaps because web sites don’t have the space limitations that afflict print versions, the headlines are different. Which came first? I don’t know.

The gist of the article rests on the fact that the city of Philadelphia has two programs in place to assist taxpayers in reducing their real property tax bills. Because there is an overlap, some property owners qualify for both programs. But a property owner is permitted to sign up for only one of the programs. One of the programs is a homestead reduction, and because City Council increased that amount from $45,000 to $80,000, some property owners would save more using that program rather than the other program, which reduces tax bills for property owners who have owned their homes for a long time. Fortunately, property owners are permitted to switch programs from year to year, though those who leave the longtime ownership program cannot rejoin unless they satisfy certain requirements. Unfortunately, thousands of them don’t even know that they can do so, or that they are limited to one program, or that due to the recent changes they should be recalculating how much each program saves them in property taxes.

Take a look at the article for examples of how several specifically identified taxpayers have had to cope with the changes. Until this year, the city automatically blocked property owners from enrolling in the longtime property owner program if doing so would save them less money than enrolling in the homestead exemption program. Now, the city no longer does that computation. My guess is that the city realized that selecting between the two programs is not simply a matter of arithmetic. Another factor is what the property owner thinks the property valuation changes would be in the upcoming year and in future years, which requires making an estimate that should reflect the property owner’s degree of optimism or pessimism and intentions with respect to continued ownership. Those are factors unknown to the city and its computers. Another factor is the number of people signing into the longtime ownership program, because as the number of enrollees increases, the tax reduction for all enrollees decreases based on the fixed dollar amount available to the program. That is a factor unknown to the property owner and to the city at the time the “pick one program” decision is being made.

The reporter described the situation as a “web of relief programs” and a “matrix of complex, evolving options.” The reporter pointed out that it would make more sense to stop fiddling with the programs and simply reduce the overall tax rate. Along with others, over the years I have advocated a similar approach to the federal and state income tax systems, arguing that ditching all of the special breaks, lobbyist-engineered incentives, and complex deductions and credits would permit lowering the overall rates to levels that would generate much less fuel for anti-tax groups and much less aggravation for taxpayers.

It’s the headline in the print version that made me smile. “City tax-relief programs cause confusion.” It’s quite similar to another headline, “Water is wet.” The online headline is far more descriptive, considering that every tax-relief provision in federal, state, and local income, property, sales, estate, and inheritance tax programs is confusing. And they need not be, for the simple reason that those provisions would not be needed if all of the clutter were removed and rates were reduced to amounts that did not create the need for tax-relief provisions.

Five years ago, in So Who Should Pay Taxes for Police Protection?, I discussed a proposal by the governor of Pennsylvania that Pennsylvania towns relying on state police for all of the policing in the town pay a $25-per-person tax for those services. That proposal went nowhere. That outcome occurred despite the fact that even legislators opposed to tax increases supported the idea, in part because these towns had reduced local taxes, or avoided increasing them, by eliminating police departments and relying on state police services funded by taxpayers not living in those towns. To finance the increased costs incurred by the state police, Pennsylvania took money from the road and highway safety fund. That also adversely affected taxpayers not living in the towns that shifted to others the costs of benefits their residents receive.

Now for some good news. According to this report, the budget legislation signed last night by the governor will “reestablish the Motor License Fund’s purpose as the main account caring for the state’s roads and bridges.” Funds previously diverted to financing state police protection for towns that eliminated their police departments will now be used to fix transportation infrastructure. In turn, the general fund will be tapped to continue funding that state police protection for those towns.

Of course, though this is good news because more roads and bridges will get the repairs they need, it is bad news because residents of the towns without police departments will continue to get the benefits of police protection by shifting the cost to taxpayers throughout the state. That is wrong. And it is a growing problem. Half of Pennsylvania’s towns have eliminated their police departments, and the number is growing. The proposal made five years ago failed even though the per-resident tax of $25 pales in comparison to the $300 to $400 per-person cost of providing police protection.

Most of these towns are filled with voters who oppose public welfare programs and thus subscribe to the argument that “everyone should pay for what they use,” which is a quote from officials in several of the towns that eliminated police departments because they wanted the benefits but wanted others to pay the cost. Of course, this sort of hypocrisy isn’t limited to the cost of police protection. It’s no secret that some of the counties in this country with the highest rates of dependence on government assistance are also vote in force for politicians who claim to oppose government assistance. Until hypocrisy is removed from the political arena, progress, rather than regress, will continue to elude the nation.

When I saw the story in this morning’s Philadelphia Inquirer, I thought to myself, “If Reader Morris sees this story, and I don’t know if he did, I can guess at the question he would ask if he decided to forward it to me. He would ask, ‘Does she have gross income?’ Or perhaps he would ask a broader question, ‘What are the tax consequences?’”

The story is a tale of catastrophe, sadness, frustration, and finally joy. Six years ago, a tree fell on Linda Smalley’s fence and deck. The tree was growing on an adjacent lot. She tried to contact the owner of the empty lot next door but failed. Beset by injuries from an auto accident, she looked for help by contacting the officials and departments of the city of Philadelphia and the Commonwealth of Pennsylvania. She struck out.

Several weeks ago the Philadelphia Inquirer published a story about her plight. In addition to the flood of emails from readers who were no less frustrated with the inability of public officials to deal with the situation, offers to pay for removal of the tree were received. Some offered to contribute though unable to cover the entire cost. A few offered to take out the tree through their own labor. Eventually, one unidentified woman footed the bill for removal of the tree and repair of the deck. Her response and offer arrived very quickly after the first story was published. Smalley was elated. In addition, a local company is paying for removal of a tree in Smalley’s yard that threatens to fall on its own at a time of its own choosing.

So what are the tax consequences to Smalley? The answer depends on a fact that is not known, that is, whether she took a casualty loss deduction for the damage. If she did, then the tax benefit rule would kick in to the extent the deduction generated a reduction in her tax liability for the year in question. My guess is that she did not take the deduction, but I could be wrong. If she did not take the deduction, the next question is whether she has income. Yes, she has income because the removal of the tree and the repairs have increased the value of her property and thus has increased her economic wealth. But that doesn’t mean she has gross income, because gifts are excluded from gross income and there is no question that the money provided by the unidentified woman arises from detached and disinterested generosity.

So what are the tax consequences to the unidentified woman? Does she get a deduction? No, because Smalley is not a charity and there are no other deductions that are even plausibly relevant.

And what about the company paying to take down the tree in Smalley’s yard? Technically, the company is paying its landscaper to do the work. It’s unclear if the landscaper is an employee or an independent third party. If an employee, then the company would simply continue to deduct the employee’s salary. If an independent contractor, arguably the expenditure qualifies as advertising for the company because it already is getting positive publicity for its actions.

The study of law, including tax law, changes how law students and lawyers look at the world. After sitting through my first-year Torts class, I began to notice potential and actual tort litigation every which way I turned. Conversations with other students and over the years with other attorneys assured me that I am far from alone in this reaction. And, of course, after sitting through my first tax course, and probably even sooner considering that I learned a good chunk of tax law before I entered law school, I do see tax issues in many of the activities and transactions I observe or encounter in my reading. Reader Morris, like many others, surely has the same reaction. And it’s not just that tax law is everywhere. Law is everywhere, even when it’s not noticed.

The President has proposed a three-month federal liquid fuel tax holiday, and has encouraged states to do the same. According to the White House fact sheet on the proposal. He wants the Congress to enact this cutback in liquid fuel tax revenue “without taking any money away from the Highway Trust Fund.” That would be accomplished by “using other revenues” to reimburse the Highway Trust Fund for the estimated $10 billion in lost revenue that the proposal would cause if enacted. According to the fact sheet, the President “understands that a gas tax holiday alone will not, on its own, relieve” the impact of the cost of liquid fuels. Of course it won’t.

Apparently the President and his aides have not read my explanation, in Suspending the Federal Gasoline Tax Won’t Blunt Inflation And Will Harm Some People, of why reducing or suspending gasoline and other fuel taxes is an unwise idea. I explained that doing so would cause delays in road, bridge, and tunnel maintenance and repair, in turn generating more accidents, property damage, personal injuries, and deaths when vehicles hit potholes or other unrepaired structural elements. But perhaps the President and his aides did read my explanation and decided to include in the proposal a shift of revenues from other sources into the Highway Trust Fund (and presumably similar actions by state governments) so that my prediction of increased “bills for new tires, repaired suspensions, refurbished wheels, medical care, and funeral expenses” would not come to fruition. Yet the proposal to replace the missing Highway Trust Fund revenue means that the price will be paid by those who face cutbacks in programs whose revenues have been diverted. Will $10 billion be taken from health care for the poor? From food and nutrition services for the poor? From FEMA disaster relief?

In a follow-up to my commentary in In Suspending the Federal Gasoline Tax Won’t Blunt Inflation And Will Harm Some People. the not-surprisingly titled Yet Another Reason Fuel Tax Suspensions and Reductions Are Unwise, I seconded Saket Sundria’s observation in Costly Gasoline Spurs Tax Cuts That May Delay Demand Destruction that liquid fuel tax holidays will discourage people from taking steps to reduce demand for gasoline. Demand is one of the three major factors driving up liquid fuel prices. The other two are, of course, supply and transportation problems along with extraordinary increases in the profits of companies in the liquid fuel supply chain.

I learned of the President’s proposal today while listening to a news station on the radio while driving from Rhode Island back to Pennsylvania. Tellingly, as I listened I continued to observe two distinctly different driver reactions to the liquid fuel price increases about which so many people are complaining. I observed a handful of drivers lowering their speed to 15 to 20 miles per hour below the posted speed limit of 55, 65, or 70 miles per hour in order to increase fuel economy, of course, while driving not only in the right lane but in the center and left lanes. The sweet spot for ideal fuel economy is about 55 miles per hour, so there isn’t much benefit to driving at 35 or 40 miles per hour on a 55-mile-per-hour highway, or at 45 to 50 miles per hour on a 65-mile-per-hour highway. Worse, the impact of driving at such an inefficient speed causes other drivers to slow down to get a chance to pass and then to accelerate to return to a sensible speed, actions that are fuel inefficient. But I also observed that most vehicles were being driven in excess of the speed limit, often 15 to 30 miles per hour higher. There must be a lot of people who don’t care about what they are paying for gasoline, or who don’t understand that doing 80 or 90 miles per hour is the equivalent of paying an extra 75 cents per gallon, an amount much higher than the President’s proposed measly 15 cent-per-gallon temporary reduction. Perhaps the President’s efforts would be better spent getting the Department of Education, in collaboration with the Department of Energy, to do some educating.

In Suspending the Federal Gasoline Tax Won’t Blunt Inflation And Will Harm Some People, I noted that suspending a tax that would save people less than $100 in a full year “is like using a garden hose to fight a forest fire.” I characterized these fuel tax suspensions as “window dressing,” simply “a maneuver designed to help as elections approach,” with a “ ‘look what I did for you’ boast rest[ing] on a $97 savings,” offset by whatever reductions in payments or services that people suffer as funds are taken from the programs on which they rely in order to replenish the Highway Trust Fund.

After hearing about the proposal on the news, I thought about how I might put together something that would explain the situation in a style that might catch people’s attention and help them understand the shallowness of tossing a few dollars at a problem to soften the symptom of a much bigger problem. When I sat down to write this post and looked at previous commentary, I discovered that I had done that more than 11 years ago, in Motor Fuels Tax Holiday Déjà Vu. I share it here because it definitely is déjà vu all over again:

Richard: “Hey, Monica, did you hear the good news?”

Monica: “No, what?”

Richard: “Legislators in New York have introduced a bill to suspend the gasoline and other fuel taxes for Memorial Day weekend, Independence Day weekend, and Labor Day weekend.”

Monica: “That’s great. I’ve been paying a lot for gasoline. Maybe they'll do that in every state.”

Grady: “Can’t help but overhear. I think it’s a bad idea.”

Richard: “Why? How can something that reduces what we pay for gasoline be a bad idea?”

Grady: “Whatever the state doesn’t collect in fuel taxes means that much less it has to spend on fixing roads and bridges.”

Monica: “So what? The state has lots of money.”

Richard: “Well, THAT’S not true. The state is in financial difficulty.”

Grady: “Exactly. Less fuels tax revenue, less road repair.”

Monica: “We don’t need new roads. That just encourages people to drive.”

Grady: “I’m not talking about new roads. I’m talking about all those potholes.”

Richard: “Yeah, they’re all over the place. Why are they so slow in fixing them?”

Grady: “It costs money to fix potholes. There’s not enough fuels tax revenue as it is, and a so-called tax holiday means that there’s less money.”

Monica: “So what’s the big deal about potholes?”

Richard: “Well, if you hit one, it can be bad.”

Grady: “Exactly. Worse case, you lose control of the car, perhaps die, kill someone, injure somebody. But even without that sort of tragedy, it knocks the front end out of alignment.”

Monica: “The what?”

Richard: “The way the tires are set matters, and a jolt can make the various parts holding them in the correct angles go awry.”

Monica: “So?”

Grady: “It wears out the tires faster, and causes the car to burn more fuel per mile.”

Monica: “Can it be fixed?”

Grady: “Sure, but it will cost way more than the few pennies you saved from the gas tax holiday.”

Richard: “So you’re saying that saving a few pennies on gasoline in the short-term is a long-run bad idea?”

Grady: “Absolutely. The gas holiday takes people’s attention away from the clash between growing demand for fossil fuel and diminishing supply.”

Monica: “But I HAVE TO HAVE my gasoline!”

Richard: “So what do we do?”

Grady: “Perhaps it would help if people drove in a manner that reflected their awareness of how precious and expensive gasoline really is.”

Monica: “What do you mean?”

Grady: “Here’s an example. Last week I was driving on a road with a 55 mile-per-hour speed limit. I was speeding, doing about 62. EVERY CAR on that road passed me. I passed no one except an old truck.”

Monica: “So? You’re holding up traffic.”

Grady: “They passed me like rocket ships. Imagine if they slowed down, if not to 55, perhaps to 60 or 65, instead of the 75, 80, 85, 90 that many of them are driving. They’d reduce their gasoline consumption by 10, 20, 30 percent. They could drive the same distance on 10, 20, 30 percent less gasoline. That’s the equivalent of cutting 40 cents, 80 cents, even $1.20 off the cost of a gallon of gasoline. Much more than three weekends of knocking 20 or 30 cents off the cost of a gallon of gasoline.”

Monica: “Oh.”

Richard: “So if people really cared about the cost of gasoline they wouldn’t waste it?”

Grady: “Exactly. Actions speak louder than words. When I see fewer people driving at 80 on roads posted for 55 miles-per-hour, when I see fewer people driving children to school while school buses are half empty, when I see people bundling their errands into fewer trips, when I see people keeping their tires inflated to the proper level, then I’ll believe that these high gasoline prices really matter.”

Richard: “You should explain this to everyone.”

Grady: “Someone already has. Five years ago, the guy that writes MauledAgain, in A Tax Trifecta: Gas, Enforcement, and Special Interests, explained why it makes no sense to reduce gasoline taxes. A year later, in Raise, Don’t Lower, Gasoline Taxes, he explained again why gasoline tax reductions and holidays make no sense in the long term. Three years after that, he wrote, in Tax Holidays, “Going on a tax holiday is one of the worst things that this nation could do. That would be the equivalent of spending hours in a tanning booth before going out into the sun without sunscreen.”

Monica: “Never heard of the guy. Never read his stuff.”

Grady: “You and most other people.”

Richard: “And if they did, they wouldn’t like what they read.”

Grady: “No kidding. I guess he’s not running for office or looking for votes.”

Monica: “If he did, he’d lose.”

The message didn’t get through 11 years ago when complaints about high gasoline prices were no less vociferous as they are today, and I suspect the message won’t get through now. If I were to use the ratio of excessive speeders to the rest of the drivers as a benchmark, it seems to me that most American drivers are either not disadvantaged by today’s liquid fuel prices or are oblivious to the fact they are contributing to their own pain. Sadly, the tendency of Americans to contribute to the agonies of which they complain has become a feature of today’s culture. So sad.

An announcement by New Jersey’s governor and legislative leaders that they plan to expand and revamp the state’s current Homestead Benefit Program caught my eye because it explained that refundable income tax credits to offset property taxes would be made available to homeowners and renters. Renters do not pay property taxes so why would they be getting refundable credits? The answer is rather simple.

The existing program provides tax relief to homeowners but not renters. There is an unfairness in that omission because renters pay property taxes because they pay rent to the landlord, which in turn is used by the landlord to pay for a variety of expenses including property taxes. The existing program denies the tax relief to landlords because only homeowners qualify, and homeowners are defined as individuals who own and occupy their homes.

The proposed expansion would include renters. It would not include landlords. That makes sense because if the tax relief were to be extended to landlords rather than renters, a complex procedural and administrative enforcement structure would be needed to make certain that landlords used the tax relief to refund rents paid by tenants rather than reaping a windfall.

The proposal also includes changes in the amount of the tax relief and increases in the income caps on eligibility. Those changes are the focus of partisan debate but do not bear on the landlord-tenant aspect of the proposal.

A few days ago, reader Morris pointed me to this story about the use of “Friends Of” organizations to circumvent the denial of charitable contribution deductions for donations to foreign entities. What caught the eye of reader Morris was the article’s background explanation of the charitable contribution deduction: “The value of donations to qualified U.S. charities can be deducted from your gross taxable income.” What, asked reader Morris, is “gross taxable income”? He noted that he had never seen that term in the Internal Revenue Code. Nor had I. But perhaps I missed something.

So I did a bit of research. I looked at the text of the Internal Revenue Code to see if the term “gross taxable income” was in it. It turns out that the search function returned results from the entire law.cornell.edu site, so I narrowed the search to the U.S. Code, and the outcome was, as expected, zero.

Curious, I then widened the search to include state statutes and eight results popped up. So if the term is used, surely it must be defined? I poked around a bit. I could not find anything from the law.cornell.edu search so I turned to google. What an eye opener.

When I entered the term “gross taxable income” into google, it returned 53,800 results. Not having the time or the desire to look at all of them, I did some spot-checking and learned that the term is used in the tax systems of some foreign countries, including the Philippines, Finland, India, and Australia. For purposes of understanding why someone would use the term “gross taxable income” when explaining the United States federal income tax system, I did not need to examine the use of the term in the tax systems of other countries.

I then looked more closely and noticed that several American states use the term “gross taxable income” in various instructions to their tax forms. Pennsylvania even used the term “federal gross taxable income” in its 2017 Instructions to its Form PA-40 in describing how to handle amounts on a Form 1099-R. More on that in a few paragraphs.

That gave me an idea. I googled the term “federal gross taxable income” and got 63 results. The first result was a link to the text of proposed legislation in Montana. Proposed section 28 refers to “federal gross taxable income as defined in section 1” but when I examined section 1 I discovered there was no definition of that term. My first thought? Sloppy drafting. I looked at more of the proposed legislation Section 34 refers to “federal adjusted gross taxable income” but doesn’t even give a cross-reference let alone a definition. Leave out the word “taxable” and it makes sense, but that’s not the case.

Further research showed that the term “federal gross taxable income” was used in some state judicial opinions. Did the courts get that term from the briefs submitted by the parties? I didn’t see any references to statutes. So perhaps they were borrowing the term from revenue department instructions or commentaries written by those who are confused about federal tax terminology.

Then I got another idea. I went back to the law.cornell.edu web site and searched the Code of Federal Regulations. I wasn’t expecting anything but to my surprise there was one result. In an example in section 1.6041-1(f) of the regulations the term appears:

(f) Amount to be reported when fees, expenses or commissions are deducted -

(1) In general. The amount to be reported as paid to a payee is the amount includible in the gross income of the payee (which in many cases will be the gross amount of the payment or payments before fees, commissions, expenses, or other amounts owed by the payee to another person have been deducted), whether the payment is made jointly or separately to the payee and another person. The Commissioner may, by guidance published in the Internal Revenue Bulletin, illustrate the circumstances under which the gross amount or less than the gross amount may be reported.

(2) Examples. The provisions of this paragraph (f) are illustrated by the following examples:

EXAMPLE 1.

Attorney P represents client Q in a breach of contract action for lost profits against defendant R. R settles the case for $100,000 damages and $40,000 for attorney fees. Under applicable law, the full $140,000 is includible in Q's gross taxable income. R issues a check payable to P and Q in the amount of $140,000. R is required to make an information return reporting a payment to Q in the amount of $140,000. For the rules with respect to R's obligation to report the payment to P, see section 6045(f) and the regulations thereunder. (emphasis added by me)

How could this be? My guess: The drafter made an error and used the phrase “includible in Q’s taxable income.” A reviewer marked up the draft by inserting “gross” and using strike-through for “taxable” but something in the formatting went haywire, a not unusual event when multiple people work on one document. And no one caught the result, which was the addition of “gross” and the non-removal of “taxable.” Nowhere else in the Code of Federal Regulations did the term appear. Nor was any definition provided. The example was picked up verbatim in Chief Counsel Memo 20133501F.

I shared my findings with reader Morris. He, too, is curious, and he soon replied to tell me that he searched google scholar federal courts and found 163 results. Like me, he didn’t have time to read all of the cases but selected a few to examine. Though he found the term “gross taxable income” being used, he did not find a definition. In some instances the court was simply repeating the use of the term as appearing in arguments made by the parties, and in at least some instances the courts used the term “gross income” when reacting to the parties’ arguments. In other instances it appears courts were paraphrasing stipulations without correcting the language of the parties.

He did share an observation, that many of the cases dealt with transactions before the enactment of the Internal Revenue Code of 1954. He asked if it was possible that the term was used before being abandoned in the 1954 statute. Good question. I tried to answer the question, and I failed to discover any use of the term “gross taxable income” in earlier statutes.

After I shared that with reader Morris, he then referred me to an article that offers a sort of definition of “gross taxable income.” The article, titled “Gross vs. Net Income in the United States” explains:

Understanding Taxable Income

It’s vital to understand these differences between gross vs net income when it comes to doing your taxes.

While you start off calculating the taxes you owe or are owed by the IRS with your gross income minus your deductibles, it’s important to remember your gross income is not the same as your taxable income.

Not all income streams that make up your gross income are taxable, for example. Things like inheritance, gifts, and life insurance payments aren’t taxable.

Gross taxable income is instead called adjusted gross income (AGI) after you’ve subtracted tax deductibles like Child, Education or Earned Income Tax Credits.

When you are working out your AGI, the IRS gives you the option of taking the standard deduction based on your family status (single, married, or head of household) or you can itemize your tax-deductibles. Itemizing your tax-deductibles might reduce your tax bill more.

In the end, your gross income might be far less than your taxable income or AGI.

My goodness! If this were an exam answer in a basic federal income tax course it might earn a D because a few concepts seem to come through the misuse of terminology, for example, the warning that “it’s important to remember your gross income is not the same as your taxable income.” But it’s “deductions” not “deductibles.” But to claim that not all income that make up gross income are taxable is to assume that income goes into gross income. The point of an exclusion is that the excluded item is not included in gross income. Then comes the whopper. “Gross taxable income is instead called adjusted gross income.” What? Where does the author get this nugget of misinformation? Worse, the author claims that adjusted gross income is “after you’ve subtracted deductibles like Child, Education or Earned Income Tax Credits.” That is so wrong. Credits are NOT deducted in computing adjusted gross income or in computing taxable income. Credits are not “deductibles” nor are they deductions. And if that’s not sufficiently erroneous, try the mathematically impossible “your gross income might be far less than your taxable income or AGI.” How? How can one go from a particular amount of gross income to a larger amount of adjusted gross income or taxable income? What would be added? So, no, this article does not provide any insight into the origin of the term “gross taxable income.”

And it gets worse. Reader Morris directed me to a case study in its VITA program materials. In that case study, which is simply an example, the material states that “The formula for calculating the allowable portion of a deduction is: (Gross taxable income subject to U.S. tax / Gross income from all sources) x Deduction = Allowable portion of deduction.” Curious, I used google to see if the term “gross taxable income” appeared elsewhere in the VITA program material. It appears one other time, in the summary of the lesson preceding the case study:

Summary
This lesson showed how to:
Identify the correct standard deduction
Determine when to allocate the standard deduction
Calculate the allowable portion of a taxpayer's standard deduction
For Puerto Rican taxpayers who do not itemize, the standard deduction must be allocated based on total gross income from all sources (including Puerto Rico source income).
To calculate the allowable portion of a taxpayer's standard deduction, use:
The Worksheet for Puerto Rico Filers with Exempt Income under Section 933 Who Do Not Itemize Deductions, or
(Gross taxable income /gross income from all sources) x standard deduction = Allowable portion of the standard deduction

Aside from the fact that the term “gross taxable income” is not used in the lesson until it reaches the summary, the term is used in the formula even though the formula does not reflect the prefatory language. That language states that the standard deduction is allocated using gross income. Yet the formula uses the term “gross taxable income” though that term is nowhere else defined or used except in the case study example that follows.

Reader Morris then directed me to a recent article that uses the term (once). The sentence reads, “The term "gross income" has been interpreted for this purpose to mean ‘gross taxable income,’ specifically excluding tax-exempt income, which separates this from the legal concept of fiduciary accounting income.” Interpreted by whom? Curious, I looked to see if perhaps I had missed something in the trust tax area. So I looked for “trust’s gross taxable income.” In this commentary, the following sentence appears: ”When calculating the income distribution deduction, DNI is computed only with items of income and allowable deductions included in the trust's gross taxable income (Secs. 651(b) and 661(c)).” Aha, a clue. Perhaps the term is in the cited Code sections. No, it is not. The text of section 651(b): “(b)Limitation on deduction. If the amount of income required to be distributed currently exceeds the distributable net income of the trust for the taxable year, the deduction shall be limited to the amount of the distributable net income. For this purpose, the computation of distributable net income shall not include items of income which are not included in the gross income of the trust and the deductions allocable thereto.” No mention of “gross taxable income.” How about section 661(c)? Here’s the text: “(c)Limitation on deduction. No deduction shall be allowed under subsection (a) in respect of any portion of the amount allowed as a deduction under that subsection (without regard to this subsection) which is treated under subsection (b) as consisting of any item of distributable net income which is not included in the gross income of the estate or trust.” Again, no mention of “gross taxable income.” The same sentence with the citations to sections 651(b) and 661(c) also appears in this article.

Reader Morris then directed me to this web site, which in two places stated that “The 1099 Form will reflect gross taxable income. . .” So off I went to see if I could find the term “gross taxable income” on a Form 1099. I found a variety of commentaries that used the term in connection with a Form 1099, but in most instances claiming that a particular amount on the Form must be reported in gross taxable income even though that term was not on the form. For example, this commentary, in describing a Form 1099-SA, states in several places that the taxpayer would need to “include [an amount] in gross taxable income.” Yet the Form 1099-SA does not include the term “gross taxable income.” Perhaps the confusion arises because the Form 1099-R has an entry for “Gross distribution” and a separate entry for “Taxable amount.”

Perhaps the confusion arises from the sort of sentence found on this web site. It states, “Section 61(a) of the Internal Revenue Code provides that gross (taxable) income includes ‘all income from whatever source derived.’” Actually, section 61(a) defines gross income. It does not define something called “gross (taxable) income.”

Precision matters. When drafting legal documents, whether statutes, regulations, judicial opinions, contracts, wills, or any other writing, and a word or phrase is used that does not exist in the language or that is being used other than in its common meaning, definitions are required. Otherwise, confusion abounds, mistakes are made, litigation ensues, and unhappiness and frustration afflict people. Has anyone using the term “gross taxable income” in the federal income tax context provided a citation to its statutory or regulatory definition?

I sat down planning to write another Memorial Day essay. I had some ideas in my head, but before putting finger to keyboard – pen to paper having become more of an historical concept though I still do that from time to time – I looked at what I wrote last year (The Price of Freedom Is Much More Than Taxes). I realized that what was in my head now was pretty much what had been in my head last year when I sat down to write (or should I say, sat down to type, even though that, too, has become a reference to an old technology).

During the past 48 hours or so, I have seen on social media and news outlets the claim that those we honor today paid the ultimate price for freedom. That is true. What matters, though, is what is meant by that freedom. What does it mean to be free? And that takes me to what I wrote last year, which in turn incorporated some of what I had written in even earlier Memorial Day essays. Here is what I wrote:

On Memorial Day ten years ago, in Free, Freedom, Fees, and Taxes, I examined the extent to which Americans understand the meaning of the oft-heard and oft-written sentiment that those we are honoring today served to protect the freedom of the nation. I wrote:

Americans surely understand the word “free,” for it shows up frequently in the phrase “free market” and in the slogan “free to do what I want.” Yet when asked to pay for freedom, too many Americans balk, even when the cost facing them is far less than their time, their physical well-being, and their life. The notion that freedom is free is becoming ever more omnipresent in the culture.

I focused on a New Jersey Sea Grant Consortium contest in which beaches that did not charge a user fee emerged as the winner, even as other reports explained that even beach communities charging a fee were struggling to provide the services demanded by visitors, perhaps in part because the fees were nominal. The towns with free beaches were facing even steeper financial challenges. I suggested that these towns charge fees, even though officials worry about the risk of visitors not returning if fees are imposed but also threatening to stay away if services are diminished in quantity or quality. These same officials are aware that most visitors don’t care about the fiscal woes of the town they are visiting, and that their only interest is in having fun. The notion of “let’s have fun but let someone else pay for the things we get for free” is pernicious. I then shared these observations:

In order for a person to have something for free, someone else must pay. * * *

The question of who pays the bills to use a free beach would be irrelevant but for the fact that this nation exists, has beaches, and has a citizenry that is free to go to the beach. In some countries, people aren’t free even to travel outside their home village, let alone jump in a car, train, or plane to head for some resort. There are people who paid for that freedom with something far more than suitcases full of cash, namely, with their lives, and they deserve recognition and thanks on this Memorial Day. Paying taxes or beach fees pales in comparison to paying the price that has been paid by the veterans whom we cannot thank in person. The best we can do is to honor their memory. And the best way to do that is to respect freedom and to acknowledge that freedom is not free.

Though in that essay I centered my attention on the fiscal aspect of freedom, it is important to understand that the cost of freedom is not only the lives of those who have fought to defend it and the taxes and fees paid by those who enjoy it, but also other costs, costs too often ignored or at least noted without any reference to the impact on freedom.

Consider those who think that freedom means “free to do what I want.” This is the perception often heard from those making the transition from childhood to maturity, a transition that unfortunately does not happen for everyone. When someone making that proclamation is asked to describe what happens when encountering someone who makes the same proclamation but who wants to do something that interferes with the first person’s desires, the back-and-forth eventually results in what can best be described as a philosophy of “I am free to do what I want, and that means I am free to prevent others from doing what they want.” It is the essence of selfishness, self-centeredness, and immaturity. And it has been increasingly going viral.

Consider two examples. The person who claims that they are free to drive at whatever speed they select, regardless of speed limits, can end up imposing the cost of that “freedom” on the people they kill and injure when they learn, too late, that there are reasons a person should not, and cannot, drive at whatever speed they select at any time, in any place, and under any conditions. The person who claims that they are free to go maskless and unvaccinated can end up imposing the cost of that “freedom” on the people they sicken and even kill who are unable to be vaccinated or wear masks. It is no comfort that the person claiming the right to be free might also end up paying the price of injury, sickness, or death.

Too often, those who claim that this unregulated “freedom” is sacrosanct point to the arrival of Puritans in what is now Massachusetts. They are idolized as seekers of freedom, trying to escape religious and political persecution. Yet when they arrived in the Massachusetts Bay Colony, they immediately started acting in the same manner as had their tormenters, in turn suppressing those whose religious beliefs or political positions conflicted with those set down by the Puritans. The contrast with Pennsylvania, also settled by victims of religious persecution, but where those of diverse origins and religions were welcomed, is startling. I didn’t learn this in school because it isn’t taught in this manner, nor is this lesson noted. I learned this when I did the research to write the biography of Thomas Maule of Salem, reading not only his works and those of others, both in his day and thereafter, but also studying the social and cultural environment in which his fellow citizens, of a different religious persuasion, acquitted him of the seditious libel charges brought by Puritan authorities who resented being tagged as hypocrites. And they truly were. Seem familiar?

The question at the moment is what sort of “freedom” will this nation embrace? To ignore this question is to dishonor those who fought and died for freedom, because answering the question incorrectly makes the price they paid a price paid in vain. Will the model be the “freedom” to escape torment and persecution only to torment and persecute others? Or will the model be the “freedom” to welcome those with different perspectives while refusing to adopt the methods of those from whom freedom was sought?

Indeed, freedom is not free. It comes with a cost. The cost is more than monetary. The cost can be the reduction of speed, the stopping at a red light or stop sign, the obedience to the yield sign, the wearing of a mask, the ceasing of the 1 a.m. fireworks, the toning down of the party noise at 2 a.m., the picking up of the pet’s poop, the use of a trash or recycling container rather than the gutter when disposing of trash, the extinguishing of the cigarette when in a closed space or close to others, the use of words rather than weapons when in a disagreement, telling the truth, and learning to think critically.

Freedom is not free. It disappears when the cost, whether in lives, taxes, or proper behavior, no longer is paid. Memorial Day means little if the freedom for which the fallen fought is disregarded, abused, or limited to fewer than everyone. The cost of freedom is much more than taxes.

As I re-read last year’s commentary, I developed a deeper appreciation for those who chose to enact laws and regulations that require stopping at red lights and stop signs, limiting noise in the wee hours of the morning, using trash and recycle containers rather than the neighbor’s law to dispose of unwanted material, prohibiting smoking in certain areas. Surely there was opposition to those sorts of rules, most likely from the handful of people who wanted to be “free to do whatever they wanted wherever they wanted.” Their howls of protest gave way to the common sense of the populace. It took rational, critical thinking to figure out how to balance freedom to breathe clean air with the freedom to smoke, the freedom to drive without stopping with the freedom to drive without being killed, the freedom to party with the freedom to sleep. It took courage to act despite the objections of the selfish few. Now, however, the selfish few have grown in number, emboldened and empowered by funding from shadowy people and places, common sense is far less common, and critical thinking continues to take a pounding from the emotional manifestations of greed, insecurity, and trauma. And now, the price for the "freedom" to behave in greedy, selfish, and immature ways is being paid by people who ought not be paying a price for that sort of "freedom." Worse, the decision to make people pay that price is being made by self-centered individuals rather than by those who hold have been charged with the resposibility of enacting and enforcing rules that balance and protect everyone's freedom, including the freedom to be free from the actions of greedy, selfish, and immature individuals who have no respect for anyone else's freedom. So what is the freedom for which those we honor today paid the ultimate price?

The headline to this story caught my eye. It read, “Some PS Plus Players Are Seemingly Getting Hit With A Giant Upgrade Tax. Perhaps there was some sort of unexpected tax increase, or the reclassification of something from exempt to taxable, or the enactment of a new tax.

So I read the article. It describes the roll-out of a PlayStation upgrade, for which players are required to pay a fee. The fee equals the fee for the upgraded service minus the amount paid by a player for existing service. Many players obtained their existing service at a discount, so the upgrade fee is the difference between the new fee, which is not discounted, and what the player paid, rather than the difference between the new fee and the pre-discount fee for the existing service. The article quotes a social media post in which someone explained, “For example, If you purchased 1 year plus for 25% off, which is $45,[t[o update to extra plan, you need to pay 100 - 45 = 55$, not 100-60=40$” To clarify this explanation, a player who paid $45 rather than $60 for existing service because of a discount must now pay $55 to get the upgrade. For some reason, there are players who think the upgrade should only cost them $40 to get them from $60 to $100. Though I can see merit in that position, because paying $55 amounts to a de facto revocation of the original discount, I will leave that discussion to others.

What puzzles me is why the headline writer refers to the $55 amount or the $40 amount or the increased $15 amount as a “tax.” Nowhere in the article does the word “tax” appear. So it is unclear if someone called one of those amounts a “tax” or if someone simply put the word “tax” in the headline. Perhaps there is some sort of sales or transaction tax on the payment required to acquire the upgrade but that is not mentioned in the article. A tax is an amount imposed by a governmental authority, even though the word gets misused as it is, for example, in Major League Baseball’s collective bargaining agreement, which imposes a “competitive balance tax” on teams paying more in salary than a specified amount. Why the word “tax” rather than a more appropriate term such as “fee” or “charge” was used is a question for which I do not have the answer. It probably has something to with the fact that the word “tax” generates more fear and resentment than do the words “fee” or “charge.”

I have previously written about the use and misuse of the terms “tax” and “fee,” in commentaries such as Please, It’s Not a Tax, So Is It a Tax or a Fee?, Tax versus Fee: Barely a Difference?, Tax versus Fee: The Difference Can Matter, When is a “Tax” Not a Tax?, When Use of the Word “Tax” Gets Even More Confusing, Sometimes It Doesn’t Matter If It Is a Fee or a Tax, It’s Not Necessarily a “Tax” Just Because It’s an Economic Charge You Don’t Like, Court of Appeals for the First Circuit: Tolls Are Fees, Not Taxes, The “Tax or Fee” Discussion Gets a New Twist, Is It a Tax? Is It a Fee? Does It Make Sense?, Can the Proper Use of the Terms “Tax” and “Fee” Be Compelled?, and It’s Not a Tax, It’s Not a Fee, It’s a . . . Yeah, OK.. And it cuts both ways. Often, the word “tax” is used for things that are not taxes. But words such as “fee” and “surcharge” have been used to describe what actually is a tax, by people who are trying to raise taxes while giving the appearance of complying with a claimed opposition to tax increases.

There are instances in which precision matters. Whether it’s a matter of words, measurements, or movement, using the wrong word, measurement, or movement, no matter how closely it appears to resemble the correct version can cause all sorts of damage. The damage can range from the adverse consequences of misinformation to injury and death. Though some might dismiss adherence to precision as “nit picking” or some similar term, when precision matters, it matters. It is possible to debate whether in a particular instance precision matters, but clearly using the word “tax” to describe what is essentially a price charged by a seller for upgrading a service can mislead people into thinking they are being hit with a tax. That isn’t what’s happening.