MauledAgain

A recent IRS private ruling, PLR 201318003, illustrates how the special low rates for capital gain adds layer upon layer of complexity to the tax law. Considering that there are other, simpler, and better ways to deal with the taxation of gain from the disposition of property, it is a sign of how unfamiliar most voters are with the mess that hides within the Internal Revenue Code that the folks who continue to add to the mess continue to be re-elected to the Congress.

The proposed transaction on which the IRS was asked to rule is quite simple. A corporation owns a piece of improved land that it wants to donate to a qualified tax-exempt charity. The improvements on the property had been depreciated. The property in the hands of the charity would have an adjusted basis equal to the taxpayer’s adjusted basis. The answer to the technical question posed to the IRS, to be described in a subsequent paragraph, would determine what ultimately mattered to the taxpayer, that is, the amount of the charitable contribution deduction.

Generally, under section 170, computation of the charitable contribution deduction begins with the fair market value of the property being contributed. This amount is reduced if any one or more of several limitations apply, as described in section 170(e)(1) and (3) and in regulations section 1.170A-4(a) and (c). Section 170(e)(1) requires a reduction of the amount of the deduction equal to the amount of gain that would not have been long-term capital gain if the taxpayer had sold the property for its fair market value.

Section 291(a)(1) provides that if a corporation disposes of section 1250 property, it must recognize ordinary income equal to the excess, if any, of the potential section 1245 ordinary income over the actual section 1250 ordinary income. The potential section 1245 ordinary income is the amount of gain that would be treated as ordinary income under section 1245 if the property were section 1245 property. Section 291(a)(1) also provides that it does not apply to the disposition of property to the extent section 1250(a) does not apply because of any exception in section 1250(d).

Section 1245 ordinary income equals the excess of the deemed amount realized over the adjusted basis in the property. Under section 1245(a)(1), the deemed amount realized is the lesser of the recomputed basis of the property or, in the case of a sale, exchange, or involuntary conversion, the actual amount realized, and in the case of any other disposition, the property’s fair market value. Section 1245(a)(2) defines recomputed basis generally as the adjusted basis increased by depreciation and amortization deductions with respect to the property allowed or allowable to the taxpayer or any other person with respect to the property.

Section 1250 ordinary income equals the excess of the deemed amount realized over the adjusted basis in the property. Under section 1250(a)(1)(A), the deemed amount realized is the lesser of the post-1975 additional depreciation with respect to the property or, in the case of a sale, exchange, or involuntary conversion, the actual amount realized, and in the case of any other disposition, the property’s fair market value. Section 1250(b)(1) defines additional depreciation as the depreciation with respect to the property, except that for property held for more than one year, it means depreciation to the extent it exceeds the amount of depreciation that would have resulted if depreciation for each year had been computed using the straight-line method. Section 1250(d)(1) provides that the section 1250 ordinary income rule does not apply to a disposition by gift. Regulations section 1.1250-3(a)(1) provides that the term gift has the meaning given to it by regulations section 1.1245-4(a), which in turn defines gift generally as a transfer of property that in the hands of the transferee has a basis determined under section 1015(a) or (d).

Because the transfer by the taxpayer to the charity would cause the charity to have the same adjusted basis as did the taxpayer, the transfer to the charity is a gift. Accordingly, section 1250 does not apply because of the exception in section 1250(d)(1). Accordingly, section 291(a)(1) does not apply because of its exception for transfers by gift. Though PLR 201318003 describes the section 170(e)(1) reduction, it does not address whether it applies because it was not asked to do so. If the property is fully depreciated, or if the property had been depreciated using the straight-line method, there would not have been any section 1250 ordinary income had the property been sold, and in that case section 170(e)(1) would not generate a reduction.

If you’ve made it this far, it is not unlikely that your eyeballs are spinning, your brain is hurting, and your frustration with tax law complexity is strengthening. None of this nonsense would be required if the tax law taxed income as income, with an inflation adjustment for adjusted basis to prevent taxation of gain that reflected price level changes rather than changes in actual property value. Section 170(e)(1) exists because the capital gains tax break is considered to be too generous, and section 291(a)(1) exists for the same reason. The enactment of those two provisions, along with others that are similar, demonstrates some of the flaws in the capital gains tax break. Rather than patching the problem with a variety of legislative band-aids, the Congress needs to do serious corrective surgery. Otherwise, there is a genuine risk that the tax law patient will die. And when that happens, the nation dies because, as Edmund Burke explained, “the revenue of the state is the state.”

The United States Senate recently passed a bill, which is now under consideration in the House of Representatives, requiring on-line retailers to collect use tax on behalf of states whose residents are failing to pay the use tax when they make an out-of-state purchase using the internet. Most of those who oppose the legislation are attacking it as a “new tax.” For example, Sarah Palin in a Facebook post, “More new taxes? How can we be divided on new taxes? . . . Learn from history or face repeating it: NO NEW TAXES.”

Those who, like Palin, tag this legislation as enacting a “new tax” are making what is now an inexcusable error. The ignorance underlying this error was highlighted out in Tax: Perspective Matters.

The error is inexcusable because there exists more than enough explanations of what this legislation does and does not do. For example, in Confusing Commentary Confuses Tax Discussions, I explained why the position taken by a Philadelphia Inquirer reader in a letter to the editor that Pennsylvania’s attempt to collect the use tax constituted a “new tax” or a “tax hike” was total nonsense. Attempting to collect an existing tax does not create a new tax. It might increase the taxes being paid by a noncompliant taxpayer, but to call it a new tax is as foolish as calling enforcement of an existing speed limit the enactment of a new speed limit law when the enforcement targets drivers who have been ignoring the speed limit. My December 2011 commentary was not the first or only time that I have attempted to educate people about the difference between enactment of a tax and enforcement of a tax. Two months earlier, in Collecting the Use Tax: An Ever-Present Issue, I explained how use tax collection works, refuted the claim that collection of use tax by out-of-state retailers is voluntary, and described how the existence of nexus obligates out-of-state retailers to collect use tax. The Senate legislation extends the reach of this obligation. And that previous commentary was also not my first visit to the world of use tax collection. As I wrote in that post:

This is not my first commentary on use tax collection in an internet age. Seven years ago, in Taxing the Internet, I pointed out that “when it comes to taxing transactions and activities conducted on or through the internet, or taxing access to the internet, those transactions, activities and access should be taxed no differently from the way in which transactions and activities conducted through means other than the internet are taxed” and proposed that states should “tax retail transactions as catalog sales are taxed, imposing use tax collection responsibilities on those with sufficient nexus to the taxing state.” Three years later, in Taxing the Internet: Reprise, I reacted to the introduction of legislation allowing states to shift use tax collection responsibilities to merchants with no connection to the state, noting that despite the claims of advocates for this approach, state 1 has no “independent and sovereign authority” to impose a sales tax on a transaction that takes place in state 2, or to require a merchant in state 2 with no nexus in state 1 to collect use tax on behalf of state 1. I reminded readers that “What’s hurting states is their unwillingness to do what must be done to collect use taxes.” Three years later, in Back to the Internet Taxation Future, reacting to a reappearance of the proposal to permit state 1 to require retailers in state 2 with no state 1 connection to be taxed by state 1, I explained why progress had not been made, pointing out the inability of legislators and others to distinguish between sales and use taxes, the silliness of claims that internet retailers are not required to collect sales taxes at all for any state, the unwillingness of state legislatures and state revenue departments to identify and audit taxpayers not in use tax compliance, the mischaracterizations of the Supreme Court’s 1992 decision in Quill Corp. v. North Dakota, and the inability of legislators, state employees, and citizens to understand the limitations of the Due Process Clause. A week later, in A Lesson in Use Tax Collection, I took a look at California’s approach of requiring in-state business entities to register and report their out-of-state purchases, an approach not without flaws but a step forward in the correct direction.

So clearly the use tax is not a new tax. Objecting to it on those grounds weakens the credibility and effectiveness of the position taken by opponents of the Senate legislation.

A better argument, one that I favor, is to point out the regulatory burden that the legislation imposes on retailers who have no connection with the state imposing the use tax. As I wrote in Collecting the Use Tax: An Ever-Present Issue, “States . . . trying to bring use tax collections closer to what they should be under current law, need to do something more than the cheap ‘shift the work to out-of-state retailers’ approach that violates Constitutional safeguards.” If a resident of State 1 makes a purchase from a retailer in State 2, who has no connection with State 1, State 1 ought not be given the green light to compel the State 2 retailer to engage in tax collection on behalf of State 1. And that brings me to the next argument.

Another better argument, another that I favor, is to point out that compelling out-of-state on-line retailers to do use tax collections while letting out-of-state bricks-and-mortar retailers off the hook, not only is unfair but raises Constitutional concerns. For years, long before there was an internet, residents of states with use taxes have traveled to neighboring states that do not have sales taxes, have made purchases, have returned home, and have failed to pay use taxes. Why are the retailers in the no-sales-tax state not similarly compelled to collect use taxes. For example, working from a situation described in A Peek at the Production of Tax Ignorance, what is the justification for compelling the on-line retailer in Delaware to collect use taxes when selling to a Pennsylvania resident while not similarly compelling the bricks-and-mortar store in Delaware to collect use tax when selling to a Pennsylvania resident? The answer, of course, is that the effort to push use tax collection work onto the backs of out-of-state retailers is a child of the bricks-and-mortars retailers lobby, and that group surely has no interest in compelling their own members to take on the workload they want to put on the on-line retailers.

I oppose the Senate legislation. But in arguing against it, I am not going to rely on the patently erroneous “no new taxes” argument. Nor should anyone else. Instead, the arguments should be based on the unwarranted regulatory burden and the unjustified discrimination against out-of-state on-line retailers in favor of out-of-state bricks-and-mortar retailers.

Does opposition to the Senate legislation leave states at a disadvantage when it comes to collecting use tax? No. As I explained in Collecting the Use Tax: An Ever-Present Issue:

Instead, they need to examine what other states have done, to learn, for example, from California officials whether the California approach worked out, to invite businesses to offer their proposals, to start examining tax returns and other records to identify taxpayers most likely to be deficient in use tax payments in amounts making audit and collection procedures worth the effort, and to publicize these efforts in an attempt to educate other residents of their use tax obligations. Perhaps states might consider paying out-of-state retailers to act as collection agents, as it is likely that retailers would be willing to engage voluntarily in use tax collection if the cost of doing so was defrayed by the state with a wee bit of profit thrown into the payment. Surely there are other ideas that are efficient, effective, and within the bounds of Constitutional restrictions.

It’s time for state legislatures to do something more than to ask the federal government to rescue them from their use tax dilemma.

Leonard Lance, a Republican member of Congress from New Jersey, has added his voice to the ever-growing number of people who make erroneous statements about the length of the Internal Revenue Code. According to Lance, “The Internal Revenue code has ballooned to a 5,600-page, 4 million-word complicated mess that is seven times as long as the Bible with none of the good news. So how does Lance’s claim measure up? The answer is easy. It doesn’t. At least not in terms of accuracy or truth. Perhaps it measures up as a sound bite that appeals to the ignorant, but as an accurate expression of reality at a time when tax reform begs for attention, it is an absolute failure.

First, in order for 4 million words to fit on 5600 pages, there would need to be 715 words per page. Can this be done? A test in Word demonstrates that a five-letter word can be repeated 765 times if the margins are set to one inch, if the lines are single-spaced, the font is set at 12 point, and no paragraph breaks, tabs, or indents are used. The Internal Revenue Code, however, is replete with paragraph breaks, indents, and long words. Fitting 715 words of Internal Revenue Code text on 5,600 pages is possible, but only if a font smaller than 12 point is used.

Second, as I explained in Anyone Want to Count the Words in the Internal Revenue Code?, the Internal Revenue Code consists of roughly 2,000 pages, so fitting 4 million words on 2,000 pages would require 2,000 words per page, which would in turn require the use of a microscopic font point that does not exist.

Third, as I also explained in Anyone Want to Count the Words in the Internal Revenue Code?, there are roughly 400,000 words in the Internal Revenue Code. That’s a lot, but there’s no need to multiply the truth by ten in order to make a sound bite splash in the gullible mainstream media and the wacky world of social media.

Fourth, as I explained in How Tax Falsehoods Get Fertilized, sometimes it is possible to trace mis-information to its source. In this instance, thanks to the folks at this fact-checking site, the root of the problem goes back to the publisher of an annotated Internal Revenue Code. When CCH publishes the Code, it publishes not only the Code, but the text of certain sections of amending acts, and also the text of the Code as it existed before amendment. For example, section 168 of the Code, which deals with the accelerated cost recovery system of depreciation, fills 76 pages, but only 24 of those pages are the actual Code whereas the other 52 pages contain the text of amending acts, the text of provisions not in the Code, and the text of section 168 as it existed before various amendments. In other words, the CCH version of the Internal Revenue Code is much more than the Internal Revenue Code. So when the IRS Taxpayer Advocate Office concluded that the Code contained 3.8 million words, it did so by downloading a zipped file of the CCH version of the Code, which includes enormous amounts of material never in, or no longer in, the Code. Unfortunately, the fact-checking site concluded that the 4-million-word count must be correct. It’s not. I explained why this number is way off the mark in Anyone Want to Count the Words in the Internal Revenue Code?.

I’m not making excuses for a 400,000-word Code. There’s no reason for it to be that long, and much of what makes it long are special provisions for special interest groups. What I am saying is that credibility is important when advocating for tax reform, and it is difficult to place credibility in persons who repeat the same disproven information. It doesn’t take long to take a look at Bush Pages Through the Tax Code?, Anyone Want to Count the Words in the Internal Revenue Code?, Tax Commercial’s False Facts Perpetuates Falsehood, How Tax Falsehoods Get Fertilized, and A Slight Improvement in the Code Length Articulation Problem to separate the gross exaggerations from reality. The Code is enough of a mess – on that point I agree with Lance – without needing to overstate the case in a manner that undercuts the point that needs to be made.

A recent tax court case, Cole v. Comr., T.C. Summ. Op. 2013-34, illustrates the need to retain certain tax-related information for much longer than many people think is necessary. The taxpayers purchased a used Mercedes in 2001. In February of 2007 it was damaged, and they received $15,376 from the insurance company for a total loss of the vehicle. The taxpayers claimed a casualty loss deduction but did not offer any evidence of their adjusted basis in the vehicle or its fair market value on the date it was damaged. A casualty loss deduction generally equals the lesser of the taxpayer’s adjusted basis in the property, or the decline in fair market value of the property due to the casualty, reduced by insurance recoveries, and further reduced by several limitations. If the taxpayer cannot prove the adjusted basis in the property, the casualty loss deduction is precluded, because the possibility exists that the adjusted basis is zero.

Though it is unclear if the taxpayer in this case would have been able to produce evidence of an adjusted basis and fair market value corroborating the claimed deduction, it is unquestionable that failure to produce that evidence closes the door to the deduction, period. Whether the taxpayer in this case had the information but did not know that the information should be produced, or did not have the information, is unclear. One thing, though, is clear, and that is the need for taxpayers to retain records relating to asset acquisition.

In several posts within the past year, including The Importance of Tax Record Keeping and The Aggravation of Tax Paperwork, I have stressed the need to be careful with respect to generating and retaining records for tax purposes. It may be an inconvenience, and it may contribute to paper or digital clutter, but it is essential.

Some commentators, trying to assist individuals who wish to remove as much paper as possible from their residences or offices, suggest that tax returns and related records can be tossed after three years, or in some instances, after seven years. For example, in How Long to Keep Your Tax Returns, the author separates tax returns and tax records into three groups to be disposed of after three, six, and seven years, respectively. In How Long Do I Need to Keep This? - A Guide to Receipts, Statements and Financial Clutter at Home, the author suggests that credit card receipts for major purchases with a warranty be stapled to the owner’s manual and filed for the term of the warranty, and that checks be trashed after seven years, although the author also recommends keeping indefinitely insurance policy information, and keeping annual automobile registration information for one year. If the taxpayers in Cole were following this advice, they may have de-cluttered themselves into the loss of a deduction.

On the other hand, the IRS provides advice explaining that records relating to assets need to be kept until the end of the limitations period for the year in which the taxpayer disposes of the asset. Similarly, other commentators, such as this advisor gets it right.

Nine years ago, in To E-File or Not to E-File: That is The Question, I noted:

Though some people don't hold onto their tax returns for more than say, 3 or 7 years, relying on the statute of limitations, I recommend holding onto all returns, if for no reason other than to maintain records of basis and to guard against the strange day when the IRS claims a return from some years ago was not filed, which would open the statute of limitations, and which can be rebutted quite easily by providing a copy of the return.

With so much conflicting advice circulating on the internet, taxpayers must take care to get good advice and then to follow it. Disposing of tax returns and tax-related records might be appealing to those who detest any sort of clutter, but doing so can be costly.

Two months ago, in Tax Commercial’s False Facts Perpetuates Falsehood, I revisited a topic that I had previously discussed in Bush Pages Through the Tax Code? and Anyone Want to Count the Words in the Internal Revenue Code?. For some reason, the erroneous claim that the Internal Revenue Code contains 70,000 or some other very large number of pages continues to circulate. Two days after publishing Tax Commercial’s False Facts Perpetuates Falsehood, I explored some of the reasons for this surge of misinformation, in How Tax Falsehoods Get Fertilized. We live in a world where an error, a misrepresentation, an exaggeration, or a lie can take on a life of its own and reproduce faster than anyone with the truth can chase it down.

Recently I learned that at about the same time that I published Tax Commercial’s False Facts Perpetuates Falsehood and How Tax Falsehoods Get Fertilized, other commentators were reporting on their prediction of the growth in the page number. In How Many Pages Long is the U.S. Income Tax Code in 2013?, the folks at the Political Calculations Blog explained that they had expected the number of “regular 8-1/2” x 11” sheets of paper to explain the complexity of the U.S. federal tax code” had grown to 73,954 rather than the 77,030 that they had predicted.

This report provides a slight improvement in how commentators articulate the number of pages issue. Rather than saying that the 70,000-plus pages is the size of the Internal Revenue Code, these commentators refine the language to indicate that it is the number of pages used by CCH not only to provide the text of the Code but also the regulations, annotations, and other materials. One quibble on this point is that some of those pages are not used by CCH to “explain the complexity” of the Code or even to explain anything, because some of those pages consist simply of republication of statutory and regulatory text, and not the explanations found in the CCH annotations and other editorial material.

Yet mis-articulation continues. The title of the post is not “How Many Pages Are Needed to Present the Code, the Regulations and Explanations” but “How Many Pages Long Is the U.S. Income Tax Code in 2013?” The post does not answer that question, as it does not purport to measure the length of the Code itself. Worse, the title of the post refers to the “U.S. Income Tax Code.” What is that? There is no such thing. There is an INTERNAL REVENUE Code, and the reason for the use of those precise words is that the Internal Revenue Code includes not only provisions relating to the federal income tax, but also provisions relating to the federal gift tax, the federal estate tax, federal payroll taxes, federal excise taxes, and other items. Someone who wants to focus on the income tax needs to go through the Internal Revenue Code and separate the pages that contain income tax provisions from those that contain provisions relating to other taxes. Similarly, the 70,000-plus pages in the CCH publication to which the Political Calculations Blog commentators refer are not all devoted to the income tax.

The erroneous terminology referring to a “U.S. income tax code” shows up again in the body of the post. That convinces me that the use of this language is not an accident or a typographical error, but intentional. Is it a matter of confusing “internal revenue” with “income tax”? Is it a matter of thinking that the Internal Revenue Code contains only the income tax? Whatever the cause, it makes it more difficult to free the record from errors. Does it matter? Yes. Precision matters.

In his Monday column, Washington Post columnist Charles Krauthammer takes his turn attempting to salvage the legacy of George W. Bush. Krauthammer focuses on military and homeland security issues, but nowhere in his analysis does he mention the horrific collateral damage caused by spending money that did not exist while simultaneously reducing tax revenues that would have dampened the deficit-generating consequences of a don’t-tax-but-spend economic theory crushed by practical reality. No matter where one stands on the many issues wrapped up in the dual-war and homeland security policies, there is no denying that cutting tax revenues while increasing spending creates and enlarges budget deficits. When I point out that cutting taxes during World War Two would have been catastrophic, I’ve had people tell me that “this isn’t the 1940s and the numbers work out differently now.” If nothing else convinces me of the delusional nature of the cut-taxes-raise-spending-and-deficit-goes-down nonsense, the claim that “numbers work out differently now,” and the inference that the laws of arithmetic have been cosmically altered, seal the deal.

In a long series of posts, including A Memorial Day Essay on War and Taxation, Peacetime Tax Policy While Waging War = Economic Mess, Some Insights into the Tax Policy Mess, and What Sort of War is the “Real Budget War”?, I have explained why the decision to cut taxes during a time of increased military and homeland security spending generated adverse long-term consequences for the national economy and the American people. Unfortunately, the way things turned out proved my predictions to be accurate. Had I been wrong, the economy would be booming, unemployment would be low, income inequality would be minimized, and military and homeland security success would be backed up by a robust economic foundation. Time has run out on chances to prove that the foolishness of cutting taxes during wartime was a sensible decision.

Not all legacies are deserving of praise. Surely the cut-taxes-raise-spending legacy is one that future generations will regard as misplaced, unfortunate, and the hallmark of a nation that lost its way.

According to this report, the Pennsylvania legislature is on the brink of enacting yet another exemption to the sales tax. This time, it is about to permit the purchase of airplane parts and aircraft maintenance services to escape taxation. It is predicted that state tax revenues would go down $12 million.

The reason for the proposal is simple. Neighboring states have similar exemptions in place, so airplane owners are taking their planes to those states for repair and maintenance. Proponents of the exemption claim that it will bring jobs and business into Pennsylvania, and that tax revenues from those jobs and businesses will more than make up for any revenue loss. That argument is a recycled variation of the claim that lower tax rates and increased tax exemptions cause tax revenues to increase, but no one has yet explained how that works when tax rates reach zero and everyone qualifies for one or another exemption. I raised this issue in Another Step Toward Elimination of All Taxes?, in which I discussed a similar exemption enacted for sales of helicopters. Interestingly, one of the bill’s sponsors used the “we did this for helicopters” argument to justify doing the same thing for airplanes. Where does it stop? Boats? Cars? Jewelry? Appliances?

Opponents of the legislation point out that it further complicates the tax law. Advocates reply that the tax law is so complicated that more complications won’t make a difference. That mindset is frightening. The criminal who faces potential life imprisonment can rationalize additional crimes on the theory that it won’t make a difference. Logical, perhaps, but certainly wrong.

The stated justification for this proposal demonstrates why state tax revenues will continue to erode, with all of the accompanying adverse effects on citizens. Each state that tries to steal business from another state by lower tax rates or awarding a particular special interest an exemption compels other states to retaliate by in turn lower their own rates or creating similar or bigger exemptions. In response, other states find other exemptions to enact, and the cycle continues, causing tax revenues to spiral downward. Rather than generating new business, states are intent on stealing from each other. Fought with tax policy rather than guns, this modern civil war among the states shows the fundamental flaws of federalism. Constant poaching does nothing beneficial for the national economy. Imagine how much more robust the financial position of the nation and its citizens would be if a uniform tax policy applied throughout the land, and states could focus on enhancing business development rather than re-arranging the deck chairs on the economic titanic.

According to a recent report, two-thirds of Americans oppose increases in state gasoline taxes to fund road and bridge repairs. The poll respondents were asked for their reactions to increases of up to 20 cents per gallon. The response is bipartisan. A majority of Democrats and an even larger majority of Republicans find such tax increases objectionable. There was little variation geographically as well.

A press release from Gallup, which undertook the survey, explains that “It is not clear whether Americans' lack of support for this proposal stems from the type, amount, or purpose of the tax. Americans may be opposed to increasing the price of gas - a necessary commodity for many individuals - during a fragile economy, regardless of how the resulting funds are used.”

My take on the outcome is different. Modern American culture is one that exalts the immediate and short-term over any sense of the long-term. Perhaps it is connected with the inability of many people to understand the time value of money. Most people would rather avoid paying $1 today even if it meant paying $4 two years later. People do not seem to understand the point I made in Liquid Fuels Tax Increases on the Table, when I wrote, “Leaving gasoline taxes at their current levels guarantees more bridge collapses, and pothole-caused front-end alignment repair costs that will take more out of motorists’ pockets than the proposed tax increases.” I had made the same point in You Get What You Vote For, when I predicted that “front-end alignment spending will skyrocket past the small amounts that would have been paid if the [highway repair tax funding] proposal had been enacted.” Perhaps there’s a bit of the “it won’t happen to me” syndrome coloring the rational analysis, if any, triggering poll respondents’ answers to the Gallup question. I shared what I perceive as the narrow-minded thinking that exacerbates this problem in Motor Fuels Tax Holiday Déjà Vu. Is it really that difficult to understand?

And perhaps the short-sightedness and narrow-mindedness is compounded by the “freedom” mentality that has taken such a hold in modern culture. People who grew up getting whatever they wanted without having to pay in some way, whether in money, property, or services, find it very difficult, when they reach adulthood and discover that a price must be paid, to accept the reality that very little in life is free. In the long run, low taxes means low quality. Yes, the “free market” devotees will react with their time-worn theories of private sector glory, but for me, practical experience trumps theoretical wishes. Perhaps people with money are investing in the stock of front-end alignment businesses and collision repair shops. They are going to be increasingly busy. And thus the people with money who so invest will end up with even more money, at the expense of hapless taxpayers who thought they were saving money by fighting tax increases to repair transportation infrastructure. Sounds like a plan, doesn't it?

About a month ago, in The Aggravation of Tax Paperwork, I explained how failure to put into writing an acknowledgement of a charitable contribution caused a taxpayer to lose a deduction that otherwise would have been available. Now comes along another case in which failure to put something into writing has cost the taxpayer a deduction.

In Martin v. Comr., T.C. Summary Op. 2013-31, the taxpayer’s alimony deduction was denied to the extent it exceeded the amount set forth in the divorce decree. Several years after the decree had been entered, the ex-spouse who was receiving alimony from the taxpayer wrote to the taxpayer, requesting additional alimony because she was unemployed, had no health insurance, and was encountering health problems generating medical bills. Although the taxpayer introduced into evidence the letters that his ex-spouse had written, he did not offer any letters by him agreeing to make the payments. It was undisputed that he increased the alimony payments, so the natural inference to be drawn is that he either agreed orally to make the payments, or simply made the payments without any communication other than the additional payments. Neither the taxpayer nor his ex-spouse approached the state court to request a change in the support order it had entered.

To be deductible, an alimony payment must be, among other things, made under a divorce or separation instrument. A divorce or separation instrument is any decree of divorce, written instrument incident to a decree of divorce, written separation agreement, or decree requiring a spouse to make payments for the support or maintenance of the other spouse. Thus, a divorce or separation agreement must be made in writing. An oral agreement to pay alimony is insufficient unless it is memorialized in a written instrument. Letters between spouses or ex-spouses that show a meeting of the minds constitute a written separation agreement, but if there is no meeting of the minds, the requisite writing does not exist.

Had the taxpayer written a letter in response to his ex-spouse’s letter, in which he assented to make the payments, his deduction would have been saved. If he wrote a letter, and did not keep a copy, then he left himself at the mercy of his ex-spouse, though under the circumstances it seems unlikely that she would have withheld his letter. Had he written the letter, keeping a copy would have made sense, just as writing a letter in response would have made sense. Writing the letter and keeping a copy would have made sense not just for tax law purposes but for dealing with any of the several state law issues that could have arisen in which proof of why he increased the payments would have been helpful.

There are all sorts of taxes. Six years ago, in Deconstructing Tax Myths, I shared an email that had been circulating not only a list of taxes but also all sorts of erroneous information about taxation. Nowhere in that list is there a “rain tax.” But according to several commentaries, that’s what Maryland has enacted. What follows is an explanation of what has happened and why it is not a tax.

According to this report, what was enacted by the Maryland legislature is a storm management fee. The fee was imposed because the EPA ordered Maryland to reduce storm water runoff into the Chesapeake Bay. Anyone who has been paying attention to the health of the Bay, and the industries that rely on its well being in order to flourish, knows that the levels of nitrogen and phosphorus in the bay waters have risen so high that they have caused fish and other economically valuable fauna populations to shrink. Anyone wishing to come up to speed on the problems, or someone wanting to learn more, can check out the Chesapeake Bay Habitat Health Report Card.

Because much of the dangerous substances in the bay reach it by way of storm water carrying it through storm sewers, the only way to curtail the destruction of the bay and to prevent its eventual death is to reduce or eliminate storm water runoff. Given the choice between prohibiting runoff, and thus in effect requiring all property owners to install catch basins or their equivalent, or imposing a fee to cover the costs triggered by creating impervious surfaces that cause the runoff, the legislature opted for the fee. The people who don’t like the fee, who apparently want to continue flushing dangerous materials, such as lawn chemicals, into the bay, derisively call the fee a tax. It’s not a tax. And it certainly is not a rain tax, because water can run off of properties for reasons other than rain, such as the washing of vehicles or the watering of lawns using water from a well or a water utility system.

One critic, in this report, asks “But how will tax collectors know how to tax “impervious surfaces”? How will they know how much to charge per square foot?” The answer is easy. They can look to localities in a state such as Pennsylvania, which impose storm water management requirements on construction projects, to learn how to identify impervious surfaces, which actually isn’t rocket science. They can then calculate the total square footage of impervious surfaces in the county, which administers the fee. They know the amount of money that must be raised, which is the portion of the cost of cleaning up the bay that is apportioned to the county by the state. They divide that cost by the total square footage to get the per-square-foot fee. They multiply that per-square-foot fee by the number of square feet of impervious surface on each property. It’s not that difficult.

The fee provides an incentive for property owners to divert runoff into catch basins, down-spout tanks, or similar devices. Property owners have a choice. Let water carry contaminants from their property into the bay, and pay the price for doing so, or find a way to eliminate the runoff. It’s not unlike a traffic fine for going through a red light. The driver has a choice.

The same critic points out that the fee will be used for a variety of purposes. It is designed to provide resources to clean up the bay, to restore wetlands, to maintain streams, to build filters and other devices to trap the contaminants or treat the runoff water before it reaches the bay. But this critic complains that “a lot” of the fee will be used to administer the cleanup. What is the meaning of “a lot”? Ten percent? Eighty percent? And of course there needs to be something expended on collecting the fee, and supervising the design and implementation of the cleanup. Had the private sector been less cavalier about dumping so much contaminant into the bay, the fee probably could have been avoided. Thus, when this same critic complains that some of the fee can be used on “‘public education and outreach’ (whatever that means)” and on “‘grants to nonprofit organizations’ (i.e. to the greenies who pushed the tax through the various levels of government),” he demonstrates that same cavalier attitude. The need for public education is to teach people why it is bad to let contaminants pour into the Chesapeake Bay. The education also needs to include opening people’s eyes to the work done by nonprofit organizations, many of which coordinate volunteers who spend hours and days trying to clean up small parts of the watershed, and who argued for assistance from those who are prefer to be part of the problem without being part of the solution.

Another critic, writing in this commentary, demonstrates his ignorance in the very first sentence of his opinion piece. He claims we are taxed at birth because a birth certificate is required, and when we die because a death certificate is required. The fees paid to file those certificates are not taxes. They are user fees. In the first paragraph, he proceeds to classify as taxes the license fee, the vehicle registration fee, and tolls. Of course, the critic calls all of these things taxes, just as he calls the fee imposed on those contributing to environmental destruction a tax, because it strikes a limbic system chord and makes it easier for those looking for a free ride to generate opposition. I suppose he thinks that the fee paid when receiving a speeding ticket is a tax. It would not be difficult to conclude that his definition of a tax is anything he doesn’t want to pay.

This critic objects to the proceeds of the fee being used to teach people how to implement “rain gardens, conservation landscaping, rain barrels and cisterns, drywells and tree planting.” He derisively notes that “So, I’m supposed to pay a rain tax so the county can train me how to plant a tree?” Yes, because planting a tree is not as simple as many people think. Too many people are ignorant about where and how trees, shrubs, and bushes should be planted. I know that not only from reading, in an effort to avoid slipping into ignorance, but also from first-hand observation of trees and shrubbery that has been planted in places and in ways that cause problems.

This critic points out that the fee will be substantial for property owners that have large impervious surfaces, such as rooftops and parking lots, on their properties. He’s right. The answer is simple. These property owners can take steps to eliminate the runoff, and thus eliminate the fee. Parking lots, for example, can be paved with permeable material. Gardens can be planted on rooftops. There are a variety of ways people can avoid fouling the environment. That doesn’t sit well with the “leave me alone, don’t tax me, let me do whatever I want because I have freedom” crowd, whose adherents never seems to worry about whether their actions impinge on other people’s freedom and rights, for example, to have access to a pollution-free Chesapeake Bay or seafood harvested from it that isn’t a health risk.

This same critic is unhappy that the fee is not imposed on government-owned property. Think about it. If the fee is imposed on government-owned property, the government would need to impose taxes, or fees, to pay the fee. So it’s pointless to impose the storm management fee on government-owned property.

He concludes “Sorry, the environment comes first.” Of course it does. Continue to foul the environment and life on the planet goes extinct. It’s not rocket science. Preserving the health of the planet requires the imposition of a fee, and fines, on those whose behavior is detrimental to the health of the planet. Wrongfully calling the fee a tax doesn’t make the need for planetary health or the discouraging of environmentally bad behavior any less of a need. Wrongfully calling the fee a tax might stir up the emotions of the ignorant, but does nothing to solve the problem.

A new report from the IRS Taxpayer Advocate, Factors Influencing Voluntary Compliance by Small Businesses: Preliminary Survey Results, sheds some light on the characteristics of so-called high-compliance and low-compliance taxpayers, and gives some insight into the sorts of factors that the IRS takes into account when selecting tax returns for audits. Considering that the annual tax gap is $345 billion, and that’s a low-end estimate, it would not be surprising to see the IRS ramp up its efforts to make a dent in a non-compliance effect that, over a ten-year period, has contributed more than $3 trillion to the federal budget deficit.

Some of the findings are not surprising. According to the survey underlying the report, high-compliance taxpayers are more trustful of government, appear to be more intent on minimizing mistakes on their tax returns, viewed government positively, are more likely to rely on tax return preparers, and were motivated by moral concerns and deterrence. Low-compliance taxpayers are less trustful of preparers, are less likely to follow a preparer’s advice when using a preparer, tend to think that other taxpayers have negative views of law and the IRS, are suspicious of the tax system, and are more likely to consider the tax system unfair. All taxpayers viewed the tax law as complicated.

Other findings struck me as unexpected. Low-compliance taxpayers are “more likely to participate in local organizations.” They also asserted that they had a moral duty to report income accurately. Non-compliance is higher among sole proprietors of construction companies and real estate rental firms than sole proprietors of other types of businesses.

Though the IRS explains that geographic location is not a factor in selecting returns for audit, the survey results revealed that low-compliance taxpayers were clustered in specific areas. Towns and neighborhoods near San Francisco, Houston, Atlanta, and the District of Columbia, including Beverly Hills, California, Newport Beach, California, New Carrollton, Maryland, and College Park, Georgia, were among 350 communities in which low compliance taxpayers were clustered. In contrast, very few of the 350 communities were in the Midwest or Northeast. What about high-compliance taxpayers? The top of the list consisted of the Aleutian Islands, West Somerville, Massachusetts, Portersville, Indiana, and Mott Haven, a neighborhood in the Bronx.

It did not take long for stories about the Taxpayer Advocate’s report to focus on the nature of the identified communities. For example, an MSN report noted that the low-compliance clusters were in very wealthy neighborhoods. A Yahoo news story put the conclusion in its headline, “IRS Report Shows Many of Biggest Tax Cheaters Live in Wealthy Areas.”

The Taxpayer Advocate report does not disclose whether the low-compliance taxpayers in these clusters were high-income individuals, but it is safe to assume that at least a significant number of them were. Yet what sort of conclusions can be drawn? Is it possible that most low-income taxpayers are not low-compliance taxpayers because they don’t have much income to begin with, and thus no income to hide? Is it possible that because most low and middle income taxpayers realize most of their income from wages subject to tax withholding they have far fewer opportunities to cheat on their taxes? It would not surprise me to discover that someone will argue that the wealthy do cheat more, but would reduce their cheating if their tax rates were lowered. As logical as that proposition might sound, to the extent that greed and money addiction energize every sort of tax reduction attempt, whether lobbying for special breaks and low rates or taking the cheater’s route, it is unlikely that anything other than a zero percent tax rate will satisfy these folks, and even that probably is not enough.

More information is needed. The title of the Taxpayer Advocate’s report contains the word “Preliminary” so it is quite possible that more information will be released. If it turns out that a substantial chunk of the more than $3 trillion contributed to the budget deficit over the past ten years by non-compliance is attributable to wealthy taxpayers, it makes the campaign for lower tax rates on the wealthy even more of a disgrace.

The Ask Marilyn column in last Sunday’s Parade Magazine addressed a tax question. The question was a good one, though technically it could be construed as asking either for a confirmation of asserted black letter tax law or for an opinion. The questioner wrote, “I donated eggs to a fertility clinic and have to pay taxes on my compensation. The funds were intended to offset the effort and the discomfort involved. Do you think this is right?” As a matter of black letter tax law, the information provided to the questioner by whomever told her that her compensation was taxable is correct. See the discussions of the Garber and Green cases in my February 24, 2006, posting, The Taxation of Kidney Swaps, and my September 4, 2009 posting, Tax Consequences of Kidney Sales. As a matter of tax policy, all sorts of arguments can be made, but the better view is that there’s nothing wrong about taxing the egg donor on her compensation.

Vos Savant, allegedly the world’s smartest woman, made several points. A few, such as the claim that fair taxes require complexity and that simplifying taxes might not be wise, make sense. Many, however, are either flat out wrong, or highly questionable.

Vos Savant claims that taxing the egg donor “demonstrates the unfairness of tax laws.” What’s so unfair about taxing a person who is compensated for providing a service, or who makes money by selling something? The fact that the process of providing the service or selling an item involves “effort and . . . discomfort” means nothing in the tax world. Most people who are compensated for providing services, for example, are making an effort. Many of them would suggest that the work they do involves at least discomfort, if not, in some instances, outright pain. Consider, for example, the compensation earned by a stunt artist and the “discomfort” that the person experiences.

Vos Savant also claims that payments for lost wages are not taxed, even if they would have been taxed had they been earned. As a general proposition this statement is wrong. For example, if a person does not receive a paycheck because of a contract breach, sues, and recovers, the payment is included in gross income. When lost wages are a component of a personal injury damage award, they are not taxed, but that fact is taken into account in determining the amount of the award. If, for some reason, compensation for egg donation was excluded from gross income, the going rate for egg donation would drop to reflect that fact.

Vos Savant further claims that “After all, as selling body parts is against the law, and donating eggs is perfectly legal, the compensation can’t be called income or any other kind of gain.” That is total nonsense. There is no principle anywhere that the proceeds from selling body parts, including eggs, are excluded from gross income and do not constitute gain. In fact, the principles established in the Garber and Green cases, discussed in The Taxation of Kidney Swaps, make it clear that the opposite assertion is the accurate one. A person who sells blood, or hair, or a kidney, whether or not legal under state or federal law, has gross income in the amount of the proceeds or compensation, though there may be deductions available to the person, which is a different issue and one not addressed by the questioner or vos Savant.

When vos Savant offers her opinion that an “exemption” for income from donating eggs makes obvious sense, she is making a tax policy argument that in and of itself is not wrong. There are arguments for excluding compensation for egg donation from gross income, but they are outweighed by the arguments against such an exclusion. Presumably, one argument is that an exclusion would encourage egg donation, but if that is something governments want to do, they ought to do so by paying people to donate eggs, rather than complicating the tax laws with special interest provisions. Presumably, another argument is that it is not “fair” to tax the proceeds from selling eggs, but that approach demands excluding from gross income any income that would be unfair to tax, which opens the door to every person receiving income claiming that it is not “fair” to tax them on the income. There are several strong arguments against an exclusion for egg donation. First, the exclusion, to be fair, would need to extend to sperm donation, blood donation, sale of hair, swaps of kidneys, transfers of bone marrow, and so on, which opens the door to an unlimited exclusion once someone demonstrates, for example, that they are “donating” sweat as they work at their job. Second, as pointed out above, an exclusion for income from the sale of eggs would drive down the price, leaving the person selling the eggs in roughly the same economic position. Third, once the door is opened to the idea that certain ways of making money are more highly valued, not only would the tax law be duplicating what the market place dictates, there also would be too high a risk that those with money and influence would persuade the Congress that their ways of making money deserve tax exemptions not justified for others.

Though how smart a person Marilyn vos Savant is continues to be debated, one thing is certain. When it comes to income taxation, she has more to learn. As I have been told since I was very young, perhaps before I took my first IQ test, being intelligent is not enough to get something right.

They still don’t get it. Every year, about this time, as people struggle with their tax return preparation tasks, the pied pipers selling the claimed benefits of government-prepared tax returns re-appear, trying to convince people that they would save a few dollar and spare themselves aggravation if they turned the tax return preparation task over to the government. Last year, in a fourteen-part examination of the debate between the advocates of government-prepared tax returns and those who see the huge risks inherent in that sort of dangerous step, I dissected the arguments for and against the so-called “Ready Return.” The best way to access the series is to go to the Index. This series supersedes and condenses a series of posts that I had written during the years preceding last summer’s series on the issue.

This year, the latest attempt to sell the Ready Return nonsense to unsuspecting Americans involves blaming the tax return preparation industry for the cost and aggravation of filing tax returns. In TurboTax Tries to Keep Taxes Complicated, a CNN reporter claims that “every attempt to simplify taxes has been beaten back by the tax preparation industry.” What absolute nonsense, and it would not surprise me to learn that this gross mischaracterization of the situation has its origins in the ranks of the Ready Return lobby.

There is no question that the tax law is complicated. The complicated state of the tax law is the work of the Congress and the special interest groups, and their lobbyists, who have turned the tax law into a tool to spend money while claiming that money is not being spent, to provide difficult-to-spot special rules reducing the tax burden of the privileged few, to manipulate social and cultural behavior, and to accomplish indirectly what the Congress and special interest groups dare not to try accomplishing directly and transparently. The tax return preparation industry would not mind seeing the tax law simplified, because it would make it easier for them to help taxpayers.

Assuming the Congress cannot get its act together and reform the tax law into something sensible and reasonable in terms of complexity, having the government prepare tax returns does nothing to eliminate aggravation and cost, other than for those people who are willing to trust the IRS computation and do nothing but pay the amounts demanded by the IRS or meekly accept the refund that is offered. There is no way that the IRS will go through the taxpayer’s receipts, checkbook, online statements, and other paperwork, a task that surely is a major component of tax return preparation aggravation. There is no way the IRS can double-check the information that it assumes exists, such as the number of children that the taxpayer supports. There is no less aggravation or cost in going through a government-prepared return and checking for errors than there is in preparing the return from the outset. In fact, there probably would be more aggravation and cost. Does a taxpayer want to pay a certain amount for tax return preparation or double that amount for the services of a company that checks the accuracy of government-prepared returns?

The ballyhooing of the Ready Return is another example of theory meets practice and reality looms. As I discuss in my previous posts, Ready Return was tried in California and did not live up to its billing. Reporters, tax practitioners, and everyone else involved in taxation, which means everyone, period, need to turn the conversation to an emphasis on the deficiencies of the Congress. The continued attempt to paper over the inadequacies of tax legislation and to remediate rather than cure the problems is not contributing to a solution for the problem.

During a hearing on Tuesday in front of the Financial Services and General Government Subcommittee, Acting IRS Commissioner Steven Miller explained that the budget cuts that the IRS must make on account of sequestration will reduce IRS enforcement levels. In the short-term, revenue will drop because the number of audits will drop and collection activity will decline. In the long-term, the diminishing presence of the IRS will cause the voluntary compliance rate to drop, further reducing revenue.

It seems to me that revenue decreases will bring more cries for spending cuts, those spending cuts will decrease revenue, the decreased revenue will bring even more spending cuts, and the downward spiral will take the government, and thus the nation, into a black hole of fiscal oblivion. Why? To prove that greed and selfishness, in the long run, benefits no one?

After one member of panel finished interrogating Miller about the impact of sequestration, another member of the panel tried to make the point that cutting IRS funding doesn’t necessarily mean revenue will decrease. He tried to make his argument by claiming that increasing IRS funding does not increase revenue. He asserted that funding for the IRS increased from 2001 to 2009 and yet revenue decreased during that period. No kidding. The revenue decreased because in 2001 and again in 2003, the geniuses behind tax cuts succeeded in persuading the nation to accept a cut in its tax revenues at the same time it was pumping trillions of dollars into war expenditures. It was encouraging to hear another member of the party point out that the economic downturn also was a reason for the decrease in revenue collection. Yet it remains deeply disturbing that Americans have elected to Congress someone who thinks that sequestration of IRS funding won’t have an adverse impact on revenue. It is worth pondering whether there is some hope on the part of those thinking in that manner that revenue will, in fact, shrink. That’s their dream, isn’t it?

The attempts to shrink the IRS is part of a larger, pervasive, foundational aspect of the anti-tax crowd’s plans to unchain themselves from any attempt on the part of anyone to get in their way as they exalt themselves at the expense of the society on which they are, no matter their denial, very dependent. I have explored the short-term foolishness of cutting IRS funding in posts such as Another Way to Cut Taxes: Hamstring the IRS. At a time when the Congress has piled dozens of new credits, deductions, and exclusions onto already complex tax law, has turned the IRS into the health care enforcer, and has required the IRS to serve as a collection agency for unpaid child support and other debts, it is absurd to cut IRS revenue collection efforts. When people defending the anti-government agenda claim to take their inspiration from the private sector, they conveniently ignore the fact that if a business wanted to eliminate its operating loss, the prognosis for success would be zero if the business ceased all advertising and left its cash registers and online payments systems unattended and unfunded.

When I posted my recent commentary on the use of dance as a form of tax protest, How to Protest a Tax, I did not think there would be a Part Two. I thought the story on which the commentary was based was a unique one, so unusual it was worth highlighting. But thanks to a well-informed reader, I have learned that I was wrong.

It turns out that dance as a form of protest did not originate recently in Washington State. In fact, more than 80 years ago, when colonial administrators in Nigeria decided to enact taxes on Igbo market women, thousands of Igbo women protested the tax plans by engaging in traditional song and dance rituals in towns across the region. According to this article, some officials resigned and the tax was not enacted, but before the protest was over it had transformed itself into much more than dance, with riots, looting, prisoner releases, the burning down of courts, and the killing of protestors by police and military.

More recently, just last June, people protesting bank bailouts funded in part by higher taxes, took to dance to register their objections. According to this report, a flash mob of flamenco dancers started performing outside a bank. Again, the protest widened into demonstrators marching – not dancing – into banks.

Yet dance as a technique in the tax world is not limited to those protesting taxation. It also has been put to use by tax authorities in attempts to collect unpaid taxes. According to a report from two years ago, tax collectors in Pakistan pay transgender individuals to visit the homes and businesses of delinquent taxpayers, in an attempt to embarrass them to pay. If that doesn’t work, a team of transgender individuals returns to dance in and around the establishment. According to tax officials, if it didn’t work they would not be authorizing its use.

Perhaps those who claim that practicing tax law is more an art than a science are correct. But I’m confident that is not how the step transaction doctrine found its name.

Two recent Tax Court cases demonstrate why it is important to retain receipts and other documents, and, where necessary, to memorialize decisions and transactions, that could affect one’s tax liability. Memories fade, even when a person has not yet reached the stage of life during which memory loss is not uncommon.

In Garcia v. Comr., T.C. Summary Opinion 2013-28, the taxpayer was asked during the trial to explain the amount of car and truck expenses he had claimed on his return. His response? “I have no idea.” In Adams v. Comr., T.C. Memo 2013-92, the taxpayer was asked to explain a business deduction she had claimed for two round-trip train tickets. According to the court, she “testified she could not remember the reason she traveled to Washington, D.C.”

Unquestionably, it is at least inconvenient and sometimes dangerously distracting to write down, or enter into a computer program, information that explains how and why something was done, or how an entry on a tax return was computed. By the time a dispute with the IRS goes to trial, at least several years have elapsed. Information either leaves the brain or burrows into some deep recess from which extraction is almost impossible. Though it is tempting to blame the tax law for encouraging this sort of contemporaneous note-taking, the reality is that there are many other reasons to keep track of one’s financial, business, and other activities. Someone accused of a crime who can demonstrate the impossibility of being the perpetrator because he or she can produce evidence of having been in some other place will be delighted, at least in hindsight, to have had the good sense to retain receipts for travel to some other place. Someone who is sued because he or she allegedly breached a contract can do themselves a great service by having available documentation that disproves the plaintiff’s claims. A person who is billed for a purchase or service for which payment already has been made can avoid all sorts of aggravation by providing proof of prior payment.

In both of the cited cases, and in many others, the taxpayers would have been much better off had they retained or created documentation that they could have brought to trial. In fact, the documentation could have persuaded the IRS to concede an issue, so that the dispute never reached the court. Successfully litigating a case requires good preparation. That principle is no less relevant when the litigation involves a tax matter.

People do not like taxes. People make their dislike for taxes known through an assortment of techniques. Once upon a time, some colonials dumped tea into a harbor. Some people complain by writing letters to legislators, by calling lawmakers, by sending editorial comment to newspaper editors, by writing blogs and other commentary. A few people visit their legislative representatives, or speak up at meetings held by legislators in their home districts. Sometimes people take to the streets, carrying placards and chanting slogans directed at the existing or proposed tax to which they object.

In Washington state, however, a new tax protest technique has caught on. It truly is a movement. According to this report, dozens of people supporting a bill to repeal a state sales tax on amounts charged by dance establishments decided to dance in protest. According to the report, the protestors demonstrated the salsa, the flamenco, the tango, and even a conga line. Considering the speed with which legislatures get things done, perhaps they engaged in some slow dancing, though the report does not mention it.

Those supporting repeal of the tax point out that the tax does not apply to tickets for other entertainment, such as movies, plays, and concerts, and does not apply to other physical activities, such as ball games. Additionally, they claim that enforcement of the tax is directed against smaller establishments, and not against large venues where dances take place, such as arenas hosting concerts at which people dance.

As for the repeal, it has cleared a committee and is waiting for a floor vote. The repeal has bipartisan support. Perhaps the dance-tax-protest movement will try to twist legislators’ arms on tax issues by threatening to do the electric slide on capitol steps or to perform some disco dancing in the halls of the legislature. Considering how legislators worry about vote predictions, they may try to tap dance around the issues by doing some poll dancing. I suppose tax protesters will be focusing on the swing votes.

The damaging tax cuts that reduced national revenue to its lowest levels as a percentage of GDP in decades were hyped as good for the nation because those whose tax bills were significantly reduced would create jobs. And, we were told, they would have more money available to donate to charitable purposes.

The promised jobs did not materialize. In fact, jobs continued to disappear. Some went offshore. Others evaporated as the unregulated Wall Street gamblers and derivatives schemers destroyed industry after industry.

These developments increased the number of people needing financial assistance. The anti-tax, anti-spending, anti-government crowd objected to government programs to assist the unemployed. Some simply argued that unemployment was the result of laziness by “takers” and advised those without jobs to go find employment. Others, a bit more understanding of the realities and cognizant of the reason unemployed people wanting to work could not find jobs, nonetheless argued that charitable relief should be in the hands of individuals and not governments.

So how have individuals responded to this call for removing government from the business of relieving poverty? According to a recent Atlantic magazine article, Americans with income in the top 20 percent contributed an average of 1.3 percent of their income to charity, whereas those in the bottom 20 percent contributed 3.2 percent of their income. Keep in mind that 3.2 percent of income to someone in the bottom 20 percent of the income brackets is far more of a sacrifice than 1.3 percent is to someone in the top 20 percent. The article also noted that whereas those in the lower income brackets “tend to give to religious organizations and social-service charities,” those in the upper bracket “prefer to support colleges and universities, arts organizations, and museums.” Of the 50 biggest individual gifts to charity made in 2012, not one “went to a social-service organization or to a charity that principally serves the poor and the dispossessed.”

The Atlantic article explored why charitable giving plays out the way that it does. One explanation is that the wealthy find “that the personal drive to accumulate wealth may be inconsistent with the idea of communal support.” Suggesting that the “me generation” has matured into full flower, one analyst suggested that “the rich are way more likely to prioritize their own self-interests above the interests of other people.” A series of controlled experiments confirmed that poor people “were consistently more generous with limited goods than upper-class participants were.” But another explanation emerged, one that explains not only the lower rate of charitable giving among the wealthy but also the tendency for the wealthy to be more self-focused rather than empathetic to others. In an additional experiment, in which both the wealthy and the poor groups were shown a “sympathy-eliciting video on child poverty,” the wealthier group’s collective willingness to help increased, almost to the point of matching that of the poor group. The conclusion drawn from this experiment is that the wealthy approach charitable giving differently because they are isolated from mainstream America, both physically and culturally. This conclusion was supported by additional studies that indicated charitable giving rates were higher among wealthy individuals who lived in mixed-income areas than they were among wealthy individuals living in high-income neighborhoods.

The charitable contribution deduction exists, at least in part, to encourage individuals to donate to charities. In theory, the higher the tax rate, the greater the incentive to giving. Yet, in reality, higher tax rates do not cause proportionately higher charitable giving. Something more is at work, and it is more than enough not only to offset, but also to counteract, the effect of tax deductions for charitable contributions. As I have often pointed out, tax deductions and credits are not the best way to advance social policy, and probably don’t do much of anything to influence social behavior.

This study of charitable giving suggests why the substantially increased annual cash flow benefitting the wealthy did not find itself directed into job creation. It explains why the deduction for compensation paid is not triggering job creation. What’s the point of hiring someone if there is nothing for that person to do? There is nothing for that person to do because the 99 percent who are not in the top one percent cannot afford to spend money on goods and services that would give the wealthy reason to hire someone to do something. Yet the private sector has failed to re-balance the economy, even while free-market private sector advocates claim that it is a more efficient instrument than government wealth adjustment.

So what happened to the tax cut money? It did not flow into substantial numbers of new jobs. It did not flow into pay raises for the rank-and-file. It did not flow into charities in the business of assisting the poor, the temporarily unemployed, or the disadvantaged. It did not generate new infrastructure or repairs to deteriorating public facilities. It piled up. Somewhere. Where?

Almost two years ago, in Julian Block: On the Road Again, I shared my reactions to Julian Block’s “Tax Deductible Travel and Moving Expenses: How To Take Advantage Of Every Tax Break The Law Allows!” To borrow a once-overused phrase, “He’s back!” He’s back with a new edition, slightly renamed as “Tax Tips for Travel and Moving Expenses: How to Take Advantage of Every Tax Break the Law Allows.” The exclamation point is gone. I don’t think that suggests Julian has lost enthusiasm for the topic, because he once again has produced a tax guide that, like its predecessor, is “no less concise, readable, and helpful.”

This time around, Julian begins his journey with an introduction that emphasizes the need for taxpayers to avoid paying taxes that they do not owe, the wisdom of structuring decisions and keeping records in ways that minimize the chances of overpaying taxes, and the woeful pervasiveness of tax ignorance among American taxpayers. These observations could serve as an introduction to just about any tax book.

Julian begins his substantive discussion by explaining standard mileage rates, making certain to differentiate between those that apply to business trips, those that apply to medical travel, and those that apply to travel undertaken on behalf of a charity. He mixes in tips, such as the warning to keep track of tolls and parking fees because those are not built into the standard mileage rates.

He then turns to moving expenses. He delineates the distance test and the time test, explains how these apply differently to employees and self-employed persons, gives examples, notes how the rules apply to a person heading off at a distance for his or her first job. Because most moving expenses are incurred in connection with a new job, Julian reviews the principles applicable to the deduction of job search expenses. He gives examples of what types of expenses would be deductible, and the conditions under which they would qualify.

Returning to travel expenses, Julian considers those incurred by investors, the difficulty of identifying a person’s tax home for purposes of computing deductions for travel away from home, and the consequences of taking a spouse along for a business trip. He provides advice on being prepared for possible audits by keeping good records, and on what to do if a mistake in an already-filed return is discovered.

Commuting expense deductions get detailed treatment, though for most taxpayers the opportunities to deduct local transportation expenses is quite limited. On the other hand, transportation expenses of going from one work location to another work location do qualify, and Julian analyzes the scope of and limitations on these deductions.

Vehicle expense deductions have long been an area of controversy, taxpayer error, and confusion, and so it is not surprising that Julian focuses on these issues in depth. He explains the difference between using actual expenses and the standard mileage rates. He discusses how having a home office affects the analysis. Again, he emphasizes good record keeping. In a twist rarely discussed, Julian explains the tax considerations affecting the decision on whether to put a vehicle in a child’s name or to let a child use a vehicle titled in the parent’s name. One factor to be considered is the deduction for casualty losses, which Julian explains so that the titling question can be understood.

Another form of travel expenses that trigger trouble for taxpayers is the so-called educational travel expense. After explaining how some education expenses, though not travel costs, might justify a deduction or credit, Julian explains why it is no longer possible to deduct travel expenses on the theory that the travel itself is educational.

Under certain circumstances, a travel or transportation expense qualifies for the charitable contribution deduction. Julian’s book includes a discussion of when this sort of travel so qualifies, the requirements that must be satisfied, and the limitations that apply. The discussion includes explanations of other charitable-related expenses that are not travel or transportation expenses, as well as the ins-and-outs of travel away from home overnight on behalf of a charity, including the rules designed to prevent deductions for disguised vacations. Though the issue is factual, the taxpayer must have responsibilities to do things that benefit the charity, but the deduction is not lost simply because the taxpayer enjoys performing these tasks for the charity. Julian includes a wonderful quote from a Tax Court case, that “suffering has never been made a prerequisite to deductibility.”

When taxpayers must travel in order to obtain medical treatment for themselves or their dependents, the expenses, including meals and lodging costs, can qualify for the medical expense deduction. The rules are complicated, and Julian goes through the various requirements. He provides a list of different travel situations in which the IRS and the courts have allowed deductions. He also points out situations that don’t qualify, such as the cost of making a religious pilgrimage to seek a miracle cure.

Julian’s book includes a series of questions and answers, with the questions reflecting the sort of situations in which taxpayers often find themselves. Julian’s answers are like the rest of his book. They read as though someone recorded a conversation between Julian and a taxpayer in his office, in the taxpayer’s living room, or in a quiet restaurant. His style is, as I’ve mentioned in the past, folksy. He is down-to-earth. He doesn’t overwhelm the reader with technical terminology, complex sentences, abstract theory, or convoluted explanations. This makes his book, like his others, valuable for the taxpayer who wants to understand what’s going on when using tax software, or what needs to be collected and brought to the tax return preparer.

The tax treatment of damages depends on what the damages represent. In the basic federal income tax course, students learn that the first step in determining the tax treatment of damages requires an exploration of what the damages replaced. Thus, an employee who sues an employer for wages and recovers damages has compensation gross income. A creditor who sues a debtor for unpaid interest has interest gross income. Yet if the same creditor sues for repayment of the loan principal and recovers, the damages are excluded from gross income because they are a recovery of capital. In the case of damages for personal physical injury and sickness, section 104 provides an exclusion that overrides the substitution principal, and thus a taxpayer who is injured and receives damages that reflect, in part, lost wages can exclude that portion of the damage award from gross income. Of course, because jury or the settling parties know this, they take the nontaxable nature of the award into account when computing the damages.

So what happens if a person sees an on-line advertisement for an automobile for an attractive price, and yet when arriving at the seller’s venue is told that the advertised price was an error and that the actual price is $20,000 higher? The taxpayer in Cung v. Comr., T.C. Memo 2013-81, sued and settled for a payment of $17,000. The taxpayer ended up in the Tax Court because the taxpayer did not include the $17,000 in gross income. In the words of the Tax Court, the taxpayer’s argument “appears to be more along the lines that the settlement proceeds represent lost value or a constructive reduction of the improperly asserted price of the car.” In the complaint filed by the taxpayer against the seller, the taxpayer “The complaint in the civil suit alleged four causes of action: (1) violation of California unfair competition law; (2) violation of California false advertising law; (3) violation of the California consumer legal remedies act; and (4) breach of contract,” and “sought specific performance, compensatory damages, and punitive damages.” As too often is the case, the parties did not include in the settlement agreement any sort of allocation of the $17,000 among the claims or between the compensatory and punitive damages.

The Tax Court resolved the matter by concluding that the taxpayer had failed to carry his burden of showing that the damages represented lost value, and that he failed to show how much of the damages represented compensatory damages. The court thus did not need to address the doctrinal question of whether damages received on account of a lost opportunity, in this case, purchasing a car for $20,000 less than its actual price, must be included in gross income. It is clear that when a person does not earn profits because of a lost opportunity caused by someone else, and the person successfully sues, the damages are included in gross income because they represent the profits that would have been earned and that would have been taxed. The ultimate test is whether the person is economically wealthier. In this instance, the taxpayer was $17,000 wealthier than he had been before he successfully sued the seller. The $20,000 savings that the taxpayer thought that he was going to incur but did not obtain do not represent a loss to the taxpayer because the taxpayer’s economic assets remained unchanged when he was told by the seller that the car would not be sold for the advertised price but only for a price $20,000 higher. A similar principle would apply if a person instructed a stock broker purchase stock, the broker neglected to do so, the stock doubled in price, and the person successfully sued and recovered the gain that would have been obtained. The damages would be included in gross income.

In this case, it would not have done the taxpayer any good to divide the $17,000 among the four claims or between compensatory and punitive damages. In all events the damages would have ended up in gross income. In many cases, however, it does matter, and it is essential that the parties who are settling, or the judge or jury determining damages, specify how the total amount of damages is apportioned among the various claims for recovery. It may not matter to the case itself, but it surely will matter to the plaintiff – and in some instances to the defendant with respect to possible deductions – when it is time to file a tax return.

And how did the IRS discover that the taxpayer had received $17,000? The taxpayer’s attorney who had handled the lawsuit against the seller issued a Form 1099-MISC to the taxpayer, with a copy to the IRS, for the $17,000, characterizing it as nonemployee compensation. The taxpayer, who claimed to have done some research, concluded that the $17,000 was not taxable, and did not give the Form 1099-MISC to his tax return preparer. Two bad decisions rolled into one tax case. Not only did the taxpayer end up with tax liability with respect to the damages, he also ended up getting hit with penalties.