Monday, July 22, 2024
Internal Revenue Code Component (aa) Has Been Given a Name
Yesterday reader Morris sent me an email captioned, “The search of 14 years is over.” I must confess that during those 14 years I had not been actively searching for an answer. But reader Morris came upon what appears to be an answer.
According to this Wikipedia article, the name for (aa) and (bb) is item, and the name for the next component, (AA) and (BB), etc., is subitem. The Wikipedia article, apparently written in 2018, and updated in 2021, cites two sources, one of which I cannot find though it has been archived. The other source, the Detailed Guide to the United State Code Content and Features from the Office of the Law Revision Counsel for the United States Code, states, “Sections are often subdivided into a combination of smaller units such as subsections, paragraphs, subparagraphs, clauses, subclauses, and items.“ The Guide does provide a date for its creation or updates. The Wikipedia article citation to the Guide states, “Archived from the original on November 26, 2022. Retrieved February 2, 2021.”
It appears that the designation of “item” and “subitem” for the (aa) and (AA) components of the Internal Revenue Code is a fairly recent development. I’m certain that when the Guide was first written there was no need for those designations because legislation had not become as complicated as it now is, creating the need for deep levels of substructures.
If I were still teaching the introductory federal income taxation course, I would need to update the materials I provided to the students. Though I am no longer teaching that course, I decided to provide this update to the question so that those who do teach the course and give attention to the structure of the Internal Revenue Code (and Treasury Regulations) can update their materials. Because I know that there are at least a handful of law faculty using parts of the materials I developed it made sense to me to share this new information (that came to me thanks to reader Morris). I also figured that readers of this blog, many of whom are tax professionals or otherwise interested in tax, would benefit from knowing that (aa) and (AA) have been given names.
Friday, July 12, 2024
So You Want to Pay Zero Taxes?
So who can set up their finances to fit within the advice? Someone who earns their income by working? No, because wages are not long-term capital gains and they aren’t qualified dividends. Someone who adds to their wages by putting money in the bank an earning some interest? No, because interest payments are not long-term capital gains and they aren’t qualified dividends.
So who can arrange their finances so that their income consists of long-term capital gains and qualified dividends? Someone who has sufficient capital to generate $94,050 of those items. How much capital is required depends on the rates of return that one assumes would apply. A safe guess would be somewhere in the vicinity of $1.5 to $2.0 million.
But there’s another catch. If a person with sufficient capital to generate this sort of income also has wages, interest, or other ordinary income, some or all of the untaxed $123,250 will be taxed. So who’s still eligible to do the “pay zero taxes” thing? Someone with sufficient but not too much capital, who keeps their qualified long-term capital gains and qualified dividends within the zero-tax range, who doesn’t need or have any other type of income. There aren’t very many people who will end up taking advantage of the “pay zero tax” arrangement.
So it’s understandable when most Americans consider the federal income tax to be skewed in favor of the investing class and not workers. It is so skewed. What is missing in most instances is taking the next step, from recognizing the biases in the federal income tax, understanding how and why they came to exist, and then taking steps to vote for legislators who are willing to change the law so that it doesn’t disfavor those who need to work to make a living. That’s a tall order, because those who benefit from the skewed income tax law are the ones with the wherewithal to finance the campaigns of legislators who are unwilling to balance the income tax law but rather want to make it even more favorable to those who benefit from the imbalance. And, no, throwing a few crumbs to low-income wage earners does very little to help them and does nothing for the disappearing middle class.
I understand why people don’t want to pay taxes. People don’t want to pay for anything, at least until (and unless) they think about the consequences of trying to get something for nothing. Most people understand that trying to get a person to mow their lawn for free, or serve them a restaurant meal for free, is wrong for so many reasons, both legally and morally. Yet they don’t have the same hesitation when it comes to trying to get public services for free. I think the reason is that there is a more attenuated connection between taxes and public services than there is between the direct payment to the lawn mowing person or the restaurant. And that is where the education system has failed the nation, because too many people do not realize the extent of the public services they receive without being aware that they are benefitting. Why? Because they take them for granted.
So, no, I have no interest, if even I could somehow fit within the suggested financial structure, in paying zero taxes. Why? Because I know that if I pay no taxes I ought not expect anyone else to pay taxes. And I know what would happen if no one paid taxes. I do wish everyone else also would know what would happen. Then the “pay zero taxes” ploys would fall on deaf ears.
Wednesday, June 26, 2024
A Mileage-Based Road Fee by Any Other Name?
What caught my attention wasn’t the pilot program, but something written about it by Andrew Leahy in Week in Insights: California ‘Road Charge’ Is Sensible, if Flawed. He wrote, “The ‘road charge’ should really be a ‘transportation charge.’ And it should transparently break down how the funds raised will be allotted to road maintenance, public transit, climate change initiatives, and state remediation programs.” I tried to find information about the intended use of the California road charge revenue other than for road repair and maintenance, but I was unsuccessful. If indeed some of the revenue is earmarked for public transit, climate change initiatives, and state remediation programs, then it violates the principle that user fees should be directed to the goods or services for which the fees are being paid. I understand, for example, that one might argue that a person using a highway ought to pay for the “privilege” of avoiding the use of public transit, but considering the awful state of public transit in this nation, that sort of reasoning would lead to the concept of public transit riders paying road users for refraining from overburdening inadequate public transit facilities.
Of course, changing the word “road” to “transportation” doesn’t change the underlying question of the uses to which the revenues are put. The word “transportation” would make sense if the fee were to be applied not only to the use of roads, but also the use of airports, air space, rivers, ports, and railroad tracks. Of course, the use of the word “road” neglects the fact that drivers also use bridges, tunnels, and rest areas. But “road” suffices to convey the message. The word “transportation” would suggest uses for other transport functions and if the revenue is directed to non-transportation purposes would be as inadequate as the word “road.” Directing revenue to other purposes would give the fee too much of a resemblance to a tax. And changing the word “fee” to “tax” would make it even more challenging to persuade people and legislatures to adopt the mileage-based road fee.
Monday, June 10, 2024
More Attempts to Squash the IRS and the 98 Percent
According to many sources, including this report, the most recent maneuver in this attempt to put more money in the pockets of the wealthy is legislation that would cut the IRS budget by 18 percent. Most of the cut would affect IRS enforcement spending. At the moment, the legislation has no chance of being enacted, but that will change in 2025 if Republicans manage to take control of Congress and the White House.
This is far from the first time I have written about the efforts of wealthy individuals to escape taxation. In Cutting Off the Tax Revenue Nose to Spite a Political Face, I explained how similar legislation was introduced last year was defended on the false claim that the IRS focuses its enforcement efforts on taxpayers with less than $400,000 of annual income. This claim is intended to rally support among those who, if they understood what is happening, would vote overwhelmingly to remove from office these friends of the wealthy. In a previous commentary, Fear Mongering, Tax Style, I explained why that claim, and the claim that the IRS would hire nearly 100,000 new auditors, were lies, and why they find “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.”
I’ve previously pointed out how Republicans plan to offset some of the revenue loss created by their intended shrinkage of the IRS and gifting of more tax breaks to the wealthy. They plan to go after Social Security and Medicare. In January the same crew that is trying to cut the IRS enforcement budget pushed through another doomed effort, that is, doomed until and unless Republicans take control in 2025, to cut Social Security, Medicare, and Medicaid, in the enticingly but deceptively named Fiscal Commission Act.
It continues to amaze me how so many people will vote for candidates who plan to support legislation that works to the detriment of most of their supporters. Will they ever learn?
Monday, May 27, 2024
Freedom To Do or Freedom From or Both?
Three years ago, in The Price of Freedom Is Much More Than Taxes. I addressed the connection between the payment of taxes and the things people take for granted as part of their “freedom.” More than a decade ago, 2011, I had written, in Free, Freedom, Fees, and Taxes, that “In order for a person to have something for free, someone else must pay.”
Last year, in Indeed, Freedom Is Not Free, I explained why freedom is not the same thing as unregulated behavior, pointing out that people who think they are free to drive 90 miles per hour on a 55-mile-per-hour highway, free to run red lights, free to shoplift, free to do whatever they want no matter what have a warped sense of the meaning of freedom. I wrote this about unregulated freedom:
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? Today the nation is being tormented by “freedom lovers” who are trying to prevent Americans from learning the truth about the hypocritical Puritans whom they not only worship but whose hypocrisy they emulate and imitate.I then asked a question, specifically, “What sort of ‘freedom’ will this nation embrace?” I contrasted two models. One is the “freedom” to escape torment and persecution only to torment and persecute others. The other is the “freedom” to welcome those with different perspectives while refusing to adopt the methods of those from whom freedom was sought.
It is the first model that I want to consider. It requires a contrast between “freedom to do” and “freedom from.” In some respects those two phrases express the same concept. “Freedom to do” is, after all, simply “freedom from” regulation and “freedom from” authority. Yet there is a conflict, because one person’s “freedom to do” whatever they want conflicts with another person’s “freedom from” whatever it is the first person is doing. In realistic terms, “freedom to do” 90 miles per hour on the highway conflicts with another person’s “freedom from” injury and death while driving.
What makes the analysis particularly difficult on Memorial Day is a troubling tension between “freedom from” and “freedom to do.” On Memorial Day we remember and honor those who died to give this nation “freedom from” authoritarianism, dictatorship, repression, and ethnocentrism. Yet we also seem increasingly complacent when those who benefitted from the sacrifice of those we honor claim to have the “freedom to do” the very same behaviors the suppression of which was the purpose for which those we honor fought and died. It is particularly disturbing when people who profess a deep admiration for those who gave their lives to protect the nation from those enumerated evils are at the same time supporting people and policies that nurture and enlarge those same evils in this nation. What was the point of so many sacrifices to eliminate authoritarianism, dictatorship, repression, and ethnocentrism when there are people who want those same attributes to become the linchpin of this nation’s existence?
So there is both a freedom to do and a freedom from, but both freedoms are, as I pointed out, two sides to the same coin. And whether considered as one or two, freedom not only is not free, but it also is not unlimited. One person’s freedom exists within the boundary created by the freedoms of other persons. Removing that boundary invites and fuels chaos, catastrophe, and ultimately freedom for no one because no one will be left. This time around the end of civilization is the end of the species. All the parades, picnics, hot dogs, beach trips, ceremonies, and social meme posting will mean nothing if the meaning and scope of freedom is misunderstood by increasing numbers of people. It’s time to remember that rights only exist if responsibilities thrive.
Tuesday, May 14, 2024
A Public-Private Partnership Highway Toll Fiasco Narrowly Averted
Today, reader Morris directed my attention to yet another very big mistake made by the legislature in Texas. In a story about an increase in the number of toll roads in Texas,** a former Texas state representative admitted that “Texas made a mistake.” According to the story, in 2007 Cintra, a private toll company, won its bid to build part of a new toll road in Collin County. The road would cost $500 million to build. The company, based in Spain, offered $2.7 million to take over the project, in exchange for its right to receive the next 52 years of tolls. Eventually someone figured out that the expected revenue stream from only the first 40 years of tolls flowing to the Spanish company would amount to $34 billion. In other words, Texas would be giving up $34 billion of revenue in exchange for $2.7 billion up front. Even taking into account the costs of operating, maintaining, and repairing the road would cut into the net revenue from the project, this clearly was a “private sector wins, state of Texas and its residents lose” deal. Worse, the contract prohibited Texas from increasing the capacity of free roads that connected to the toll road, and also prohibited the state from buying back toll roads from the private companies. Fortunately, these problems were caught in time by the administrative agency that handles transportation in Texas and it rescinded the contract.
Why are these deals bad? The reason is simple. The public-private deal creates profits for the private sector, and to fund those profits taxpayers and toll payers are required to pay more than they would if the public function remained public. Why do legislatures fall for these deals? Because they want to be re-elected and that requires support from the private sector, specifically the segment of the private sector that controls the huge amounts of money involved in these deals.
There’s another lesson lurking in this story. It was the administrative agency, not the legislature, that listened to people who understand the complexity of these deals and saved Texas residents. It’s no surprise, therefore, that certain legislators across the country, including some in the nation’s capital, are trying to eliminate, disempower, and curtail administrative agencies. Those agencies are where the expertise resides. It doesn’t reside in legislatures, in part because legislators need to allocate time among thousands of issues which leaves them no time to get into details, and in part because far too many legislators invest increasing amounts of time to re-election attempts and distracting political theater.
** The entire article (and its scheduled follow-up) is worth reading for an examination of what happens when the refusal to impose or increase taxes coupled with handing over government functions to private domestic and foreign companies causes a variety of problems extending beyond the question of who pockets toll revenues. Highway fatalities, erroneous loss of vehicle registrations, criminal prosecutions controlled by toll companies, and a long list of other problems plague the state.
Monday, April 29, 2024
Taxpayer’s Argument in Sales Tax Case Falls Flat
Reader Morris has directed my attention to a decision by the Commonwealth Court of Pennsylvania that addressed the question of whether Perrier carbonated natural mineral water is water exempt from the sales tax or a soft drink subject to the sales tax. The court explained that the product is a soft drink because it is carbonated using the same process used to carbonate soft drinks. The court relied on the definition of “soft drink” in the statute, which includes “carbonated water.”
As I’ve also pointed out, those who practice tax law learn, and must learn, all sorts of things that are beyond the statutes, regulations, and other authorities that set forth the law of taxation. In this instance I learned that Perrier carbonated natural mineral water isn’t simply natural carbonated mineral water extracted from underground. Instead, the mineral water and the carbonic gas are extracted separately from the same geological formation and then are combined through a process that involves removing impurities, chilling the water, and removing air from the water. Surprisingly, any carbonation in the harvested water is removed before the carbonic gas extracted from a different area in the geological formation is added.
This case is an interesting illustration of why legislatures need to do what attorneys need to do. Before drafting legislation, and while reviewing legislation as it moves through the legislature, legislators should acquire as much information as possible so that they can craft statutes that answer questions. In this situation, because of the arguable ambiguity in the statute concerning the differences between water and soft drink, the legislature could have simply inserted the word “noncarbonated” before the word “water” in the section of the statute exempting water from the sales tax or the phrase “artificially” before the phrase “carbonated water” in the definition of “soft drink.” Either of these tweaks, or any other that would align with what the legislature intended once it made itself aware of the uncertain status of Perrier water would have spared the litigants the cost and time invested in the litigation, and would have reduced the court’s docket by at least one case. On the other hand, if the statute had been so drafted, I and others might have continued with our ignorance with respect to how Perrier carbonated natural mineral water is produced unless some other reason caused us to research the question.
I close by tipping my hat to the court for its clever work with the English language. No, I’m not talking about the word “water” and the phrase “soft drink.” I’m referring to this sentence from the court’s opinion: “The issues raised before this Court bubble down to one question.” With the court’s decision, barring a reversal on appeal, the ongoing dispute between the taxpayers and the Department of Revenue over this issue has fizzled out.
Tuesday, April 23, 2024
When Preparing False Tax Returns Seems to Lack a Financial Motive
Today, the Department of Justice issued a press release describing the sentencing of a woman who had prepared more than 900 false tax returns. According to the press release, these fraudulent returns were prepared from at least January 2017 through June 2023. By claiming unjustified deductions, the preparer obtained for her clients larger refunds than they otherwise would have received. The IRS paid roughly $1.3 million in these fraudulent refunds.
The preparer charged at least $300 for each return that was prepared. That means that over seven tax preparation seasons the preparer collected at least $270,000. That’s only $38,571 annually. It is unclear if this was the total income collected by the preparer over those years from preparing returns, or if other returns also were prepared for which the preparer charged but did not subject to false deductions and credits. It also is unclear if the preparer had other income. I mention this because trying to live on $38,000 annually is difficult.
The preparer was sentence to one year and one day in prison, and to serve one year of supervised release. The preparer also was ordered to pay $1,349,314 in restitution to the IRS. The sentence leaves me with two questions.
First, was the preparer prohibited from resuming the tax return preparation business when released from prison? If not, why not?
Second, did the IRS recover from the preparer’s clients the $1.3 million in fraudulent refunds, and if so, then will the Treasury receive those amounts along with the restitution that the preparer has been ordered to pay? If so, does this constitute a sort of “double dipping” that ought not be permitted? Or should the $1.3 million that the preparer has been ordered to repay as restitution be more properly characterized as a fine or penalty, which would remove the specter of “double dipping” from the situation?
Other questions are not prompted by the sentence. Would the preparer have charged less than $300 for a return if the return did not include false deductions? Did the clients know about the false deductions? If the answers to those questions are “no,” then why not simply prepare false-free returns? I ask, because being required to pay more than $1.3 million and to sit in prison for a year is quite the price to pay in order to collect $270,000 in income, especially if that income could have been collected by preparing false-free returns. Something doesn’t add up.
Friday, April 05, 2024
Are Taxpayers Figuring Out the Games Played by the Starving Oligarchs?
Almost all of the time, until recently, owners of professional sports teams have succeeded in obtaining the public funding and tax breaks that they seek. It’s not as though they cannot make their enterprises profitable without public funding and tax breaks. It’s that they can make their enterprises even more profitable by increasing revenue through public funding and decreasing expenses through tax breaks. They often use the threat of moving to another location in an attempt to persuade public officials and, when the question is put to a referendum, voters. That works because there are locations eager to have a professional sports team even though many of those locations lack a population sufficient to support a professional team.
Now comes what might be good news, though in a complicated situation it may turn out to be short-term rather than long-term. According to this report, voters in Jackson County, Missouri, voted by a margin of 58 percent to 42 percent to reject a proposal to extend a sales tax to benefit the Kansas City Chiefs and the Kansas City Royals. What makes the situation complicated? The proposal was a combination of renovations to the Chiefs’ stadium and construction of a brand new stadium for the Royals. The former is much less expensive than the latter. Some predict that the Chiefs will now move forward by supporting a new proposal focused solely on renovations and thus requiring less public financing than demanded by the defeated proposal, freeing their issue from the more confusing situation enveloping the ever-shifting plans advanced by the Royals. If the separate sought the same amount as the Chiefs sought in the defeated proposal, it would seek $400 million from the taxpayers. Others suggest that if the Chiefs don’t get the requested $400 million, they should or could move across the border to Kansas City, Kansas and seek public financing and tax breaks from that state’s taxpayers though surely in amounts far exceeding $400 million.
Rodney Fort, professor emeritus of sport management at the University of Michigan, notes that owners of professional sports teams are increasingly failing to obtain the public financing and tax breaks that they have been seeking. He cites “the principle of taxpayers supporting venues where billionaire owners rake in profits seemingly one of the damning blows.” That characterization of the issue is in tune with what I have been writing for years.
David Carter, a sports consultant and business professor at the University of Southern California, asks, “Why not go after public subsidies?” He answers his own question: “Teams in (smaller markets) like the Chiefs, they’re delivering huge value for the residents in the community at large…You can argue that the taxpayers should pay for the benefit in their own backyard. That brand is so big and so important that there is some public value. And the owners try to gain that value through tax measures.” That answer resembles the defense offered by the governor of New York after agreeing to funnel $850 million of public money into the coffers of the Buffalo Bills, a few days before proposing a state budget that cut $800 million from the funding of the Office of Children and Family Services, as I explained in Tax Breaks For Starving Team Owners. New York’s governor praised and justified what was done with what I called “the typical ’doing good for the public’ and ‘creating lots of jobs’ claims. I reply to Carter the way I reacted to the governor of New York: “As I explained in Grabbing Tax Breaks, Sports Franchises, Casinos, and Now, a Water Park. ‘but this reasoning would support tax breaks for almost everyone, thus destroying government and civilization.’”
In an era when so many people vote against their own interests, it is refreshing to learn that some voters understood that billionaires don’t need tax breaks and public funding. It seems likely that the voters in Jackson County, Missouri, will have another opportunity to think critically about the impact of diverting taxpayer dollars to oligarchs who can survive, and do quite well, without those dollars. Time will tell.
Sunday, March 24, 2024
The Freedom Caucus Doesn’t Understand that the Mileage-Based Road Fee is “PRO-Freedom,” Not the Opposite
Thanks to Reader Morris, I have now learned that Freedom Caucus members in Arizona are trying to prohibit mileage-based road fees. For the moment, the good news is that their efforts have been, at least temporarily, blocked. The bad news is that they intend to reintroduce the bill, and I suspect they will continue pounding this agenda item until the populace acquires sufficient understand of mileage-based road fees and makes it clear that the prohibition attempt is pointless.
Interestingly, it was a Republican whose opposition to the Freedom Caucus effort that caused the legislation containing the prohibition to stall. The Republican who refused to go along with the Freedom Caucus proposition explained that he tried to get the text of the legislation changed to preclude what he saw as “multiple unintended consequences,” but was “met with flat-out refusal.” That’s no surprise, is it?
The proposed legislation “would ban government entities from tracking vehicle miles traveled by its citizens, bar taxes based on miles traveled and would stop government bodies from attempting to limit vehicle miles traveled in any way.” Supporters “described the freedom to travel by motor vehicle as fundamentally American.” One Republican explained, “Getting behind the driving wheels of our cars and driving without the burden of calculating a mile cost truly feels like freedom, because it is freedom,” and that there is a “looming threat to limit how much people drive.”
What these Freedom Caucus zealots fail to understand are the facts underlying the need for mileage-based road fees and how those fees fit into existing conditions. Arizona drivers already pay for the miles they travel, through an 18-cent-per-gallon fuel tax, which is, in effect, a tax on miles driven though it varies from driver to driver based on the fuel efficiency of the vehicle. Opponents of the mileage-based road fee don’t understand this, mostly because they are peppered with misinformation. Arizona, like other states and the federal government, faces decreased collections from fuel taxes because of fuel efficiency gains and increasing numbers of electric vehicles on the roads. The mileage-based road fee rebalances the burden of paying for necessary highway, bridge, and tunnel maintenance and repairs.
The Freedom Caucus either ignores or is unaware of Arizona Administrative Code section 18-2-1011, which provides
Ariz. Admin. Code § 18-2-1011Though I don’t know if every state has this requirement, I do know that Pennsylvania has the same requirement. So much for boo-hooing about the state knowing how many miles a vehicle has been driven. It is also important to note that the mileage-based road fee, like the state vehicle inspection requirement, reflects how many miles a vehicle is driven and not how many miles any specific driver has driven, a distinction that seems to have eluded the thinking process of the Freedom Caucus.
A. The Department shall provide a vehicle inspected at a state station with a uniquely numbered vehicle inspection report of a design approved by the Director that contains, at a minimum, the following information, as applicable to the tests required for the vehicle under R18-2-1006:
* * * * * 7. Odometer reading ;
When I hear these claims about “freedom” being tossed about whenever any proposal that is designed for the betterment of society and the people generally is put forth, I cannot help but think of what many parents hear from their adolescent children, what most middle and high school teachers hear from their students, and what police, prosecutors, and judges hear from law-breakers: “It’s a free country, I can do what I want,” “You are taking away my freedom,” and similar exaggerated uses of the word “freedom” and the concept it represents. To see this same abuse of the word and concept by people entrusted with doing what is best for society is beyond disappointing.
Nothing in the mileage-based road fee imposes a limit on how many miles a vehicle can be driven. Nothing in the mileage-based road fee imposes a limit on how many miles a person can drive in a year. The mileage-based road fee is not, as one of the supporters of prohibiting the fees claims, “anti-freedom.” If anything, it is “pro freedom,” because by rebalancing the burdens of paying for highway, bridge, and tunnel maintenance and repairs, it ensures that drivers will be free to travel without the fear of tire blowouts, broken suspensions, interrupted trips, injuries, and deaths that would become even more common in the absence of appropriate progression into the twenty-first century.
Thursday, March 21, 2024
The Misinterpretation and Misrepresentation of Economic Information
Let’s first look at retail store closings. Why do stores close? They close for a variety of reasons.
One significant cause is the transfer of shopping from retail store browsing and purchasing to online browsing and purchasing. That doesn’t mean the economy is slowing down or speeding up. It simply means that the marketplace has been moving. As older generations accustomed to in-person shopping depart this life and younger generations who are growing up in an online world turn to online shopping, the trend will continue.
Another significant cause is relocation of retail outlets. When people move from one area to another, retailers will follow. For example, when I saw a commentary claiming that Outback’s decision to close stores was due to “Bidenomics,” I did what too many people don’t do. Perhaps it is curiosity, but perhaps it also involves verification preferences. According to a spokesperson for Outback, as reported in this this report, while Outback is closing 41 stores it is opening 40 to 45 replacements. The spokesperson explained, “a variety of factors resulted in the decision, including sales and traffic-trade areas, which means how close customers live to a business location and how far they might travel to patronize it.” Similar closings and new openings also are happening with other retailers. Those who try to score debate points by taking information out of context or omitting all of the facts are, unfortunately, adept at swaying the opinions of those who don’t make any effort to thing through the information being highlighted.
Another cause, perhaps not as significant, is the closing of a store so that it can be renovated or upgraded to keep pace with societal expectation and demands in the in-person shopping environment. When the renovation is a gut-and-rebuild event, the closing appears to be permanent because of the length of time the project requires. I’ve yet to see a meme claiming that the opening or re-opening of a store is a manifestation of a healthy economy. It’s so much easier to criticize than to praise.
Another cause is the cyclical nature of certain sectors of the economy. For decades restaurants have closed and new ones have opened. Why? Sometimes the restaurant is dependent on a particular ownership. But often, people simply get bored or dissatisfied and, as is the case with fashion, music, art, and other cultural manifestations, eagerly turn to whatever is or appears to be new. That pattern doesn’t mean the economy is good, bad, or indifferent.
Another cause, the significance of which is debatable, is the closing of stores because of shoplifting and crime. Yes, this is happening, but only in certain places and not as a widespread national economic collapse. Is this a problem? Yes, of course. Can it be fixed? Yes. Are those responsible for curtailing shoplifting and crime doing their job? No. Is it their fault? In some instances, yes, but in many instances, they have been handcuffed by a variety of well-intended theoretical but pragmatically unworkable attempts to deal with crime in ways that don’t work.
Let’s put aside the “sky is falling” panic fueled by misinformation and incomplete or out-of-context reports and look at the economy. Is the economy a mess? That question masks two questions, namely, how is the economy now, and how is it expected to be in the future. Much like the same two questions concerning a person’s health, the first question can be answered by looking at existing conditions, whereas the second question involves the dangerous exercise of predicting the future and generates answers that are clouded by risks, probabilities, and generalities. I’m not about to join the seers and prophets who think they know what the economy will do, for the simple reason that I don’t know what the economy will do and have no desire to pile onto the growing mass of hedged and conditional forecasts.
What is the current state of the economy? What measure should be used? One can look at gross domestic product, employment, inflation, and consumer confidence, to mention four that get a lot of attention.
Fourth quarter 2023 GDP, the latest for which there is data, increased at an annual rate of 3.3 percent. The forecasts had been for a lower increase. By this measure, the economy is doing well.
When it comes to employment, again the economy performed better than what was predicted. In January, more than 350,000 jobs were added. During 2023, about three million jobs were created. The unemployment rate was 3.7 percent, below 4 percent for 25 months in a row. When was the last time that happened? In the 1960s. An unemployment rate between 3 and 5 percent indicates that the economy is at or near capacity. In other words, it is doing very well. Another employment measure is wages. Average hourly earnings increased from December to January, and increased 4.5 percent over the past year.
Inflation, which was terrible a few years ago, has cooled to 3.4 percent for 2023. It increased 0.3 percent in January, equivalent to an annual rate a bit higher than the 2023 rate, but still within the range of what is acceptable for a strong economy.
Consumer confidence for 2023, as measured by retail sales, increased by almost 5 percent. Disposable income increased more than 4 percent. Those are not signs of a sick economy.
So why do so many people think that the economy is a mess? In a few instances it’s a person’s reaction to their own experience, though too often a person’s economic situation isn’t entirely the fault of everyone but the person, and the person’s own choices surely affect their economic experience. The primary reason so many people are perceiving the economy as in a condition inconsistent with reality is the effectiveness of propaganda. Propaganda works best when it isn’t analyzed and challenged. It works best when it is gobbled up because it resonates with emotional predisposition, thus bypassing the prefrontal cortex. Add to this the woeful state of education in this country and a large segment of the population is a ready market for those who want to hide reality and create an environment of falsity. Where is this propaganda sourced? Much of it arrives from overseas, from countries that include admitted enemies and some countries that pretend to be friendly, because it benefits these nations if the United States is fragmented by creating a population segment that believes in the falsity. There also is a domestic source that puts political gain above national economic health, some of whom are fearful of the nation learning that supply-side, trickle-down economic nonsense shows its falsity when compared to a more sensible management of the economy.
Resisting the siren call of propaganda, misinformation, and misrepresentation is difficult. If it doesn’t happen, the false reality will become true, and the unpleasantness of that sort of environment will generate an understanding that comes too late to do anything about it.
Sunday, March 03, 2024
The Genealogy of My House
Until now.
On Friday, the weekly Delaware County (Pennsylvania) Council Public Relations newsletter arrived with an item explaining that it had upgraded its online property records search engine. The website permits a person to deeds, mortgages, and other documents online rather than making a trip to the courthouse in Media.
I knew I purchased my house from John and Elise Tucci. John was a Villanova Law student a year or two ahead of me. He also was a graduate of the University of Pennsylvania.
I knew the Tuccis bought the house from Ronald E and Iris D Frank, because shortly after moving in a postcard arrived from Japan from a young woman seeking to reconnect with a childhood pen pal who was one of the Franks’ daughters. Ron Frank was on the faculty at the University of Pennsylvania Wharton School when I was a student there, and by the time I spoke with him about the postcard he had taken a faculty position at Emory University.
Until Friday I had not tried to identify the person or persons who sold the house to the Franks? Once I accessed the deed that conveyed the property to them, I learned that the house was sold to them in 1965 by William Laurens Van Alen III and his wife Sydney Purviance Van Alen. So much for the realtor websites that state that the house was built in 1968.
Of course, I was curious about the Van Alens, so I did a bit of research. I discovered that William Laurens Van Alen III also was a Villanova Law graduate, in the class of 1962. In the yearbook (also online) his address was the same as mine now is: 219 Comrie Drive. I learned that like me, John Tucci, and others, he attended the University of Pennsylvania before entering Villanova Law. He then clerked for Chief Justice Bell of the Pennsylvania Supreme Court, practice law, and was a sportsman with championships in lawn tennis, court tennis, and golf. I became curious, sidetracked myself into exploring the Van Alen family, and learned he died in 2010 at his residence in Newtown Square, the nearby town where I grew up. His mother was the daughter of Atwater Kent, pioneer radio manufacturer, and a descendant of the Brinton family of Chester County, some members of which married into the Maule family (or is it the other way around?). His father was a well-known Philadelphia architect, attended the University of Pennsylvania, served on the boards of many Philadelphia institutions, and was appointed to the National Council of the Arts.
One last point before getting back to the house. William Laurens Van Alen III, who sold the house to the Franks, married twice. His second wife’s family name is the same as the family name of the husband of one of my nieces. So there’s another side track to explore.
So who sold the house to the Van Alens? They purchased it from the builder, Villanova Construction Company, owned at the time of the deed by William McCue, the surviving owner of the company. The house was built after the subdivision of a larger parcel of land purchased by the Villanova Construction Company from Howard F. and Charlotte Comrie.
And that answered a question that had been batted around for many years. Why Comrie Drive? I knew there was a town in Scotland with the name Comrie. What was the connection? There was the answer. It was named after Howard and Charlotte. Did they require that as a condition of the sale? I don’t know. So, off I went to see if my hunch was correct. It was. Howard Comrie’s great great grandfather was born in Comrie, Perthshire, Scotland and carried the surname Comrie. No, I didn’t try to trace back his ancestry to see if it connected with the Maule family of Panmure, Scotland.
How did Howard and Charlotte Comrie acquire the larger parcel of property? They purchased it from a trust company who held the property on behalf of Alice Rawle Geyerlin, who, if I am properly reading the deed handwriting acquired part of it from Cornelia L. Ewing and part from Charles Quigley.
Then I encountered a problem. The deed books changed from numbers to a combination of letters and numbers. But the website refused to accept letters as part of the book number. There is another path I can follow when I get the time. In her wonderful book, “Radnor: A Rare and Pleasing Thing,” the late Katharine Hewitt Cummin, a member of the Radnor Historical Society, traced the property history of each parcel in the township as defined for purposes of the 1798 federal window tax (that eventually did not get collected). I should be able to trace the property ownership back through the deeds that she researched.
Property genealogies have been done for numerous properties. What interested me was not the fact that the property ownership can be traced, as that is true of all the properties in this part of the country. It’s the connections between the owners of the house and myself. What are the odds that three of the four owners would be Villanova Law graduates? What are the odds that all four would either be graduates of or on the faculty of the University of Pennsylvania? And then there are the court tennis connections but I’ll leave that for another time. And somehow the word tax found its way into this post. Not quite a big surprise.
In a time that history will record as having been flooded with division and divisiveness, it’s nice to find yet another example of connections.
Thursday, February 22, 2024
Does Anyone at the IRS Read This Blog?
My March 2020 commentary addressed an experience reader Morris had when he went to his “regular Chinese restaurant,” and found in his fortune cookie a message, “Tax tip # 8 Travel could be considered a business expense. Even that island vacay. TaxAct Surprisingly legal. Start for Free: TaxAct.com” Doing some research, I discovered that marketing firms are purchasing space on the flip side of fortune cookie slips to print their messages.
The story that reader Morris shared with me explained that the IRS Director of Stakeholder Liaison announced at a conference that the IRS would be using space on the flip side of fortune cookie slips for messages to taxpayers. Fortune companies are making the space available to the IRS without charge. The IRS plans to provide tax advice, including reminders about deadlines. I suppose the last thing someone wants to put into their brain at mealtime is taxation, though I am confident that some people are thinking about deductions when they pay for a meal.
As for the suggestion from reader Morris that perhaps the IRS reads my blog posts, maybe that happens. But I doubt that my post in March of 2020 generated the IRS fortune cookie plan. My guess is that a professional marketing/PR type of company approached the IRS or was approached by the IRS Tax Outreach, Partnership, and Education Team, and someone suggested making use of the fortune cookie messaging approach.
Now if links to this blog or posts on this blog begin to show up on fortune cookie slips carrying the IRS logo, I will want to know. Then I can revisit the question that I asked in the title to this post.
Wednesday, February 07, 2024
Is the Tax Return Preparer or the Client Responsible For Unjustified Deductions?
From time to time, the two topics meet. Thanks to reader Morris, I’ve learned of this sort of situation in a People’s Court case from several years ago. The facts are simple. The plaintiffs returned to the tax return preparer they had used the preceding year with no issues. The preparer told the plaintiffs to save all their receipts, though it was not clear that the plaintiffs understood that the preparer would go through the receipts to identify those that were relevant for income tax purposes. Though there had been no deductions on the previous year’s return prepared by the preparer, deductions were claimed on the return in question that amounted to 50 percent of the husband-plaintiff’s W-2 income. The deductions in question consisted of employee business expenses. The husband-plaintiff worked for a railroad and so deductions were taken for meals, lodging, uniforms, and similar expenses. The IRS determined that there was a deficiency, which with interest, amounted to about $5,000. The plaintiffs sued the preparer, asserting that the preparer should pay the taxes and interest, in effect blaming the preparer for the problem. When the IRS audited the return, it asked for a letter from the husband-plaintiff’s employer stating the employer’s reimbursement policy and details about its reimbursement plan, a letter that in theory could substantiate some or all of the deductions. The plaintiffs failed to request the letter because by the time the IRS asked for it the husband-plaintiff no longer worked for the railroad. The judge found that response to be questionable, and proposed that the husband-plaintiff did not ask for the letter because he knew that the return was claiming excessive amounts of deductions.
The judge concluded that the preparer was not responsible for the taxes owed by the plaintiffs. She also concluded that the preparer was not responsible for the interest, stating that the plaintiffs would otherwise have obtained an interest-free loan for several years.
The judge then admonished the defendant, telling the preparer that she was aggressive. The judge also told her that she had an obligation to manage her clients’ expectations. The judge told the preparer that she knew what she was doing. I interpret that as a warning to the preparer to do something more than simply prepare a return with deductions so high that it would be, in the judge’s words, a “red flag” for the IRS.
When a preparer prepares a return that shows “red flags,” which may or may not turn out to be an indication that something is wrong, the preparer should asked clients for evidence. In this case, the preparer, after seeing the amount of the deductions, should have asked the plaintiffs for the letter from the employer at that point. Then, if the IRS did audit, which in fact it did, the supporting evidence would be at hand. Of course, in this case, it is highly unlikely that the letter from the employer, if obtained, would have supported the deductions in question. And, as the judge told the plaintiffs, when a client looks at a return and sees something extraordinary, such as deductions amounting to 50 percent of income, the clients should know something isn’t quite right.
Saturday, January 27, 2024
Is There Ever a Free Lunch, Even in the Tax Return Preparation Business?
Recently, reader Morris directed my attention to a case involving the third-largest tax return preparation business, Liberty Tax. According to the Attorney General of the District of Columbia, an action was brought against Liberty Tax, alleging that it “misled and overcharged” at least 7,300 residents of the District of Columbia who obtained tax return preparation services from Liberty tax. The case rested on a Liberty Tax “cash in a flash” marketing angle. According to the Attorney General, Liberty Tax offered $50 in cash to anyone who filed their returns through Liberty Tax, and described the cash as coming with “no catch.” The Attorney General alleged that Liberty Tax charged customers who accepted the $50 an average of $200 more than what it charged customers who did not accept the $50.
The case did not go to trial because the parties settled. Under the settlement, Liberty Tax must pay $550,000 to the District of Columbia residents who accepted the $50 and then were overcharged. It must also pay $200,000 to the District of Columbia. The settlement requires Liberty Tax to stop using the “cash in a flash” program throughout the nation, and prohibits it “from creating new incentive programs that impact the prices the company charges for tax prep for those consumers who receive the incentive.” To ensure that these settlement provisions are followed, Liberty Tax must report to the Attorney General’s office “any incentive programs implemented to attract consumers, including submitting all of their marketing and training materials,” along with information that enables the office to determine whether incentive programs are affecting the fees charged to customers who accept the incentives.
Lest anyone think that this sort of “cash up front, we’ll get it back and more on the back end” arrangement was invented by, or used solely by Liberty Tax, or that it is specific to the tax return preparation business, rest assured that it is a marketing technique used for decades or longer and used across all sorts of industries and economies. If anyone enticed by this sort of promotion stops to think about it, they would realize that the cash incentive must come from somewhere. Putting aside the possibility of a business printing counterfeit money, there are four possibilities. First, the business does what Liberty Tax did, simply increase the price charged to recipients of the incentive. Second, increase the price charged to customers who don’t receive the incentive. Third, let profits decrease by the amounts paid out in incentives. Fourth, reduce salary and benefits paid to some or all employees. Perhaps there is a fifth, which is to somehow get one or more governments to subsidize the incentive, which shifts the economic burden onto those who pay taxes to those governments, those who receive other benefits from those governments, or a combination of both.
The bottom line is that oft-repeated axiom, “there is no such thing as a free lunch.” The enticement of quick cash or some other benefit, coupled with a lack of understanding of how economics works, makes it easy for marketing ploys such as the one used by Liberty tax to succeed. How can this be stopped? One approach is what happened in the District of Columbia. Government, acting under laws enacted to protect consumers, step in to stop the practice and in some instances provide a remedy. The disadvantages of this approach are that not every deceptive practice is identified, some legislatures are anti-consumer and refused to enact such laws or fund enough oversight, and the chorus of “we don’t need no regulation” from the anti-government, pro-I-have-freedom-to-do-what-I-want crowd continues to grow in volume and intensity, making it increasingly difficult to protect people from deception. Another approach is to educate people, starting from an early age, so that they indeed understand that there is no such thing as a free lunch, learn to spot these come-ons, and develop skills to make economic and financial decisions rationally rather than impulsively or emotionally. The challenges with this approach are the lack of time and resources dedicated to enlightening people and the ever-increasing trend of prohibiting schools from teaching skills and materials that enable people to learn how to think for themselves.
