MauledAgain

The headline on an inner section of Wednesday’s Philadelphia Inquirer caught my eye. Considering my interest in family history and genealogy, it is not surprising that 'Where did I come from?' Donor eggs, sperm and a surrogate made me want to read the article. The fact that I am once again going to be teaching the Wills and Trusts course, and had just finished preparing the segment in which intestacy issues involving children of assisted reproduction are discussed, gave me another reason to read the article.

The article discussed what I think can be reduced to several questions. “What do I tell my child?” “When do I tell my child?” and “How do I tell my child?” As the article points out, it can be confusing, because it is now possible for five individuals to be involved, “a sperm donor, an egg donor, a gestational carrier, and the intended parents.” That’s not to discount the contributions of the reproductive endocrinologist, the obstetrician, and the delivery room staff.

As the article explains, “In 2010, 58,727 babies conceived through assisted reproductive technology were born in the United States. That's a lot of kids eventually asking, ‘Where did I come from?’”

To the questions discussed in the article, I add another. “Why does it matter?” It matters because a substantial part of who a person is, ranging from personality and talents to health characteristics and risks, depends on genetics, specifically DNA. As a professor of bioethics points out, “There is no legal right to know your biological roots.” I think that needs to change. The professor also explains, “I think there is an ethical right.” Indeed there is. And, as a practical matter, current and soon-to-be-current biotechnology will make it possible to figure out one’s genetic origins.

When I started working on my family tree, roughly forty years ago, I soon realized I had to make a decision. How does one deal with adoptions? The answer, for me, was easy. A child who is adopted becomes part of the adopting family and thus ought to be included. That’s the “family history” part of the process. Yet, genetically, the child is of a different origin, and that is the “genealogy” part. Thus, when coding the family tree, I included an “a” if I knew the child was adopted. As a practical matter, sometimes the genetic origins of someone in a family tree are not known to the compiler. That is becoming very evident now that DNA matching has become a tool used by genealogists. It’s long been known that a certain percentage, some say as little as 2 percent and others suggest as high as 10 percent, of children recorded as offspring of a married couple are not, in fact, the biological child of both spouses.

My answers to the questions raised in the article are, for the most part, consistent with what others suggest. But I’m confident there are many people who disagree, or who, though in agreement, cannot bring themselves to handle the child’s question as they think they should.

“What do I tell my child?” My answer is simple. “The truth.” The American Society for Reproductive Medicine reached the same conclusion in an ethics opinion issued nine years ago. As one physician noted, secrets have a way of coming out, and “You don’t want to have a kid find out in a way they shouldn’t.”

“When do I tell my child?” My answer is simple. “As soon as the child has the intellectual ability to understand.” That probably means introducing the child to the truth in stages, as there is no need to get into technical details at the outset. Some experts answer “early and often,” but in some instances waiting a bit might make more sense.

“How do I tell my child?” My answer is not so simple. It depends on where the child and parent are when the question is asked. For example, it’s easier to respond when alone at home than if the child blurts the question out in a setting teeming with strangers. Some parents might find it useful to use the many visual aids, books, and other tools that are available.

As I have discovered doing genealogy and family history research, almost every child at some point wants to know about his or her origins, both specifically in terms of identified people and generally in terms of culture and ethnicity. For the most part, this inquisitiveness fades into the background until the child becomes a parent. That’s when I, and others who dig into the specifics of a family tree or trees, get the phone calls, emails, and facebook messages. That’s when I feel as though I’m doing something useful and helpful.

When I wrote my first genealogy book, I chose as the title “The History and Genealogy of the Maules". Some people suggested the title was redundant. That gave me the opportunity to describe the differences between, and the coherence of, family history and genetics. That parallel will endure for quite some time, perhaps forever, but I will spare readers of this blog the theological side of the question. Perhaps I will share those thoughts some other day.

One of my concerns about the susceptibility of citizens to the promises of tax cuts and tax elimination by the anti-tax, let-the-private-sector-take-charge-of-you crowd is that the propaganda focuses people on a narrow, short-sighted perspective of taxes and user fees. In Liquid Fuels Tax Increases on the Table, 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 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.” In Zap the Tax Zappers, I explained why tax evaders need to face the consequences with these words, “Lest this be thought too rough, think of the person who dies when their vehicle hits a pothole and goes out of control, a pothole not repaired because of revenue shortfalls and spending cuts triggered by the actions of a group of people who refuse to pitch in and fulfill the obligations of citizenship.” In Potholes: Poster Children for Why Tax Increases Save Money, I noted that a study in the United Kingdom determined that the cost of damage caused by potholes exceeds the cost of fixing the potholes, a road hazard that had afflicted one-third of UK motorists. Now comes a report from a national transportation research organization that each driver in this country is paying as much as $800 a year because America’s roads are in bad shape. The cost reflects not only pothole damage but also additional fuel costs from driving on rough roads and fuel wasted sitting in traffic jams.

It boggles my mind that people complain about a $100 annual increase in the gasoline tax but willingly shell out $800 on account of problems that would be mitigated by spending funded by the $100 increase. Surely it isn’t simply a matter of people not understanding that they are paying $800 a year that they could avoid paying. People complain constantly about the need for, and cost of, front-end alignments and the dollars they are paying for fuel. The awful condition of the nation’s transportation infrastructure makes the news every few days, and though some people may be clueless, most are aware of how bad the roads are, because they also complain about that problem.

My guess is that three factors are at work. One is the phenomenon of blind principle. Those who adhere to a principle, even to the point where the principle becomes self-destructive, make bad decisions. Thus, the “no new taxes at all” mindset generates a need for even more taxes than would have been required had a rational, reasonable approach been taken to the question of taxation. Another is the tendency of people to think that they can game the system, and somehow escape the cost of a bad decision by having it fall on everyone else. The notion that it makes more sense to refuse to pay for road improvements because the pothole damage will happen to someone else is the same warped thinking that causes people to think that paying for emergency room health insurance is for others because they don’t have the invincibility of the cost-avoider. The final factor is the ability of the anti-government manipulators to craft the interaction of blind principle with invincibility exceptionalism into sound bites used to deceive people into thinking that it is possible to have excellent roads, safe bridges, and an efficient transportation system without paying for them. The truth of the matter is that the anti-tax, anti-government crowd does want people to pay, but they want the payments to go into the hands of the ultra-wealthy who want to buy or lease, and control, the nation’s transportation system, part of their overall plan to buy and own the nation and its citizens.

This nation needs a tax comprehension wake-up jolt not unlike the one rattling the teeth of drivers and passengers when vehicles hit potholes and other road defects. Unfortunately, it is going to take a monstrously catastrophic event before the light bulbs go on in most brains.

Once a person dies, the person’s obligation to pay taxes ceases. Tax obligations accrued during lifetime must be paid, of course, and that’s an issue for the executor or administrator of the decedent’s estate. And although there are taxes on a decedent’s estate, and taxes on an heir or beneficiary with respect to the privilege of inheriting or receiving something from the decedent’s estate, the dead person does not pay taxes. Dead people actually cannot do much of anything in this life.

This proposition generates a long list of questions, tax and otherwise, when considered in light of the news in this CNN report. In 1986, Donald Miller, an Ohio resident, disappeared after he lost his job. He owed roughly $25,000 in child support. He had a wife and two children. Eight years later, there having been no contact or sighting, he was declared dead, and his social security number was “retired.” In 2005, Miller returned to Ohio, and tried to resume his life. He was unaware that he had been declared dead. When he found out and tried to have the declaration revoked, he was stopped by a law that prohibits courts from making changes to death rulings after three years have elapsed. The judge, not surprisingly, said, “In over 40 years, I’ve never come across a case like this.” If the death ruling were to be reversed, the mother of the two children probably would be required to pay back to the Social Security Administration the benefits paid to her to support the two children, benefits based on the declaration of Miller’s death. It is not known whether Miller will appeal.

When I posted this story on facebook, one of my friends from high school noted that this was the sort of thing that will tie up courts and agencies in knots. Indeed. There are all sorts of questions. Some involve tax, some don’t. They arise in just about every area of the law. If Miller commits a capital crime, can he be put to death if he is already dead? Will he be permitted to marry, considering that marriage licenses aren’t issued to dead people? See Kirsten Rabe Smolensky, Rights of the Dead. Will he be permitted to serve on a jury or testify as a witness? The situation isn’t a new one. When I teach the course in wills and trusts, I pose a question along these lines, namely, what if the wife of a man who disappears subsequently marries and then a few years later dies intestate, at about the same time that the first husband re-appears? Who is the spouse for purposes of the intestacy laws?

Turning to taxes, will Miller be required to file tax returns? Because his social security number is on the list of those assigned to dead people, what does he put on the return? Does he apply for a TIN not based on social security numbers? Will the Social Security Administration issue him a new number? If he gets a job and pays social security taxes, to whose account are they credited? When it is time for him to retire, will he be denied credit for the social security taxes he paid before he disappeared?

One wonders if Miller tries to file a tax return, whether it will be tagged as a highly likely incident of identity theft or fraud. Criminals are know to use the social security numbers of dead people to file returns on which earned income tax credits are claimed for fictitious income.

With all of these problems awaiting him, and already afflicting him, Miller’s life easily can become a living hell. And if he appeals and succeeds, will he be tagged as an undead person? Not only the tax practitioners and lawyers, but also the theologians and philosophers, the politicians and mystics, the doctors and computer engineers, are going to have quite a time with this situation.

So what will YOU do and say if Miller walks into YOUR office and asks, “What do I do about tax returns?” Sit there, stupefied, as though you have seen a ghost?

Back in July, I commented on the City of Philadelphia’s attempt to impose its amusement tax on fees paid for lap dances. In Lap Dance Tax?, I suggested that “If a fee is paid for the lap dance is in addition to the admission fee, then the amusement tax should be computed not only by taking into account admission fees but also by including amounts paid for lap dances, if in fact the lap dance is an amusement.” I concluded that the first issue to be decided is whether a lap dance constitutes amusement. I explained that the attorney representing the establishments providing lap dances clubs argued that the amusement tax applies only to the admission fee, on which the establishments had been paying the amusement tax. I pointed out that the statute applies the taxa to “the admission fee or privilege to attend or engage in any amusement.”

Now comes news that the city’s Tax Review Board unanimously concluded that the amusement tax does not apply to lap dances. After holding six hearings, the Board concluded that the tax is “generally understood” to apply only to the cost of admission to an establishment, and that the city’s rationale for taxing lap dances was “vague and inconsistent.” The Board took note of the fact that the city had audited the establishments in prior years without raising the issue of subjecting lap dance fees to the amusement tax.

The Board accordingly did not reach the issue that I think needs to be decided, which is whether the lap dances constitute amusement. If the tax applies only to admission fees, then why is the statute not phrased in those terms? The language “to attend or engage in” is broader than “to be admitted to,” but rather than focusing on dissecting the language in that manner, the city argued that the lap dance fee was the equivalent of a new admission fee, an argument rejected by the Board. Because the Board concluded that the amusement tax did not apply to lap dances, it did not reach the issue, raised by the establishments, of whether the lap dances are exempt from the tax on the basis of being theatrical performances. The City has yet to decide if it will appeal the Board’s decision.

A reader asked me to examine what the IRS has done in its attempt to reduce section 280A(c) to something easier for taxpayers to understand. Section 280A(c) describes the exceptions that apply to the section 280A(a) restriction on deductions with respect to the use of a dwelling unit used by the taxpayer as a residence.

Specifically, the reader focused on the section 280A(c)(1) exception that applies to certain business use. Section 280A(c)(1) provides:

Subsection (a) shall not apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis --

(A) as the principal place of business for any trade or business of the taxpayer,

(B) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business, or

(C) in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer’s trade or business.

In section 2.02 of Rev. Proc. 2013-13, the IRS described the scope of section 280A(c)(1) as follows:

Section 280A(c)(1) permits a taxpayer to deduct expenses that are allocable to a portion of the dwelling unit that is exclusively used on a regular basis (A) as the taxpayer’s principal place of business for any trade or business, (B) as a place to meet with the taxpayer’s patients, clients, or customers in the normal course of the taxpayer’s trade or business, or (C) in the case of a separate structure that is not attached to the dwelling unit, in connection with the taxpayer’s trade or business.

There are several problems with this attempt to simplify the statutory language. First, section 280A(c)(1) does not allow deductions; it simply is an exception to a provision that disallows deductions that otherwise would be allowable, and thus fitting within section 280A(c)(1) is insufficient unless there is another provision, such as section 162, that allows the deductions in question. Second, the description in the revenue procedure writes the phrase “or dealing” out of the picture; if Congress had intended that the exception be limited to “meeting,” as is suggested by the language in the revenue procedure, it would not have included the words “or dealing with” in the statute.

The IRS also attempted to explain this exception in its FAQs - Simplified Method for Home Office Deduction. The answer to question 8, “What is a qualified business use of a portion of the home for purposes of the simplified method?,” provides “ A qualified business use of a portion of the home generally means: 1) Exclusive and regular use as the main place in which you conduct your business, or meet with customers, clients or patients. . . ” This further simplification adds to the confusion, in addition to continuing the flaw of omitting any reference to “or dealing with.” First, it removes the requirement that the meeting or dealing with customers, clients, or patients occur in “the normal course of [the] trade or business.” Second, it completely omits the “separate structure” exception found in section 280A(c)(1)(C).

Though it is a worthwhile objective to “translate” statutory language into something understandable by most people, a task to which I have devoted myself for decades, simplification ought not take place at the expense of accuracy or precision. There are ways to dissect section 280A(c)(1), or any other provision in a tax statute, that do not simplify by turning to the simplistic. It is this sort of “dumbing down” that generates the misinformation afflicting twenty-first century political discourse. The search for the infantile sound bite creates false impressions that trigger misrepresentations, which in turn breeds a nation teeming with ignorance.

Simplification cannot be achieved by pretending complexity does not exist. Simplification requires elimination of the complexity. The tax law would be simplified, but perhaps not enhanced in fairness terms, by repealing the “separate structure” exception. Pretending that it does not exist so that an explanation can be limited to a handful of words does not change reality, but simply misleads those who read the simplification attempt. At the very least, use of modifiers such as “In general” or “For the most part,” and use of place-holders such as “and other exceptions ” or “and similar situations” alerts the reader or listener that there is more to the rule, exception, or explanation that meets the eye or ear.

Nuance matters. Precision matters. Accuracy matters. Simplification is a noble goal and a productive outcome. Going simplistic is neither noble nor productive.

According to a story in Friday’s Philadelphia Inquirer, “New proposals to place tolls on the nation's interstate highways have stirred the debate on how to pay to rebuild the aging network.” The story describes a proposal for tolling interstate highways, with inflation-adjusted rates of 3.5 cents per mile for cars and 14 cents per mile for trucks. The director of transportation policy for the Reason Foundation concludes that these amounts would raise the $983 billion that is required to “reconstruct and expand the interstates.”

The need for the funding isn’t open to much debate. Most of the highways in the interstate system are at the end of their 50-year design lives. The Highway Trust Fund is running out of money. The federal gasoline tax generates insufficient revenue because vehicles are more fuel efficient, fewer vehicle miles are being driven, and Congress refuses to increase the tax to keep pace with inflation.

Toll increases are opposed by the American Trucking Association, which claims that “the public continues to see tolls as an intrusive and inefficient tax.” The problem is that tolls are not taxes. They are user fees. They reflect the amount of use, which in turn reflects the amount of wear-and-tear imposed on the road being used. The American Automobile Association also objects to the proposal, claiming that “all roads should be toll-free.” If all roads are toll-free, how are they to be funded? The current system of using gasoline taxes doesn’t work. According to AAA polling, more than half of motorists object to tolls, and three-quarters object to liquid fuels taxes. Of course the public will side with these organizations, fueled by the cultural sense that someone else should pay. The same polls that show opposition to tolls, taxes, and other funding sources also show huge support for spending money to maintain and improve highways. This sort of inconsistency reflects a deep flaw in the way this country deals with problems.

State transportation officials favor the proposal. So, too, does the Bipartisan Policy Center and the organization Building America’s Future. These enterprises were founded by the sort of moderate, sensible politicians rarely found in legislatures nowadays, people like Howard Baker, Tom Daschle, Bob Dole, George Mitchell, Ed Rendell, Arnold Schwarzenegger, and Michael Bloomberg. In other words, people who know how to get things done rather than how to obstruct progress by demanding that money be spent while objecting to any attempt to raise that money.

The downside to the proposal is that it’s not just the interstate highway system that needs maintenance, repair, and reconstruction. Most of the nation’s highways, tunnels, and bridges are in need of attention. Though some are in acceptable shape, way too many are falling apart, and some have been severely restricted or closed. There is a problem. It needs to be solved. The answer that I put forth, as readers of MauledAgain know, is the mileage-based user fee. I have discussed this approach extensively, , in posts such as Tax Meets Technology on the Road, Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, and Liquid Fuels Tax Increases on the Table. As I wrote in Another Look at Highway Privatization, “The bottom line is that the notion of driving on highways without paying tolls or any sort of sufficient fuels tax is a recipe for the deficiencies afflicting American interstate highways. Because the problem isn’t limited to interstates, but afflicts all sorts of roads, the solution is the mileage-based user fee.”

The rest of America seems to be catching up with those of us who, for decades, have found fault with the manner in which the United States Congress operates. Focused more on retaining power, and letting national interests take a back seat, if at all, most legislators demonstrate no concept of fiduciary duty, trust, and commonwealth, to say nothing of common sense, dignity, or truth.

According to a new CNN/ORC poll, described in this story, only 10 percent of Americans approve of the manner in which Congress is meeting its responsibilities. The number disapproving is at 87 percent. These ratings are, respectively, the lowest and highest in the history of the poll. Considering that the poll was taken before the shutdown triggered by exaltation of party politics over the well-being of the nation, it would not be surprising that a poll taken this week would generate even lower approval ratings and higher disapproval ratings.

When pundits claim that the solution is to vote legislators out of office, they ignore the political realities. First, the incumbents amass huge war-chests of money because they have done things that benefit the moneyed interests that pretty much own the Congress. Second, the federal legislators’ state colleagues have gerrymandered legislative districts in ways that make it almost impossible to remove an incumbent. Third, the manner in which primary elections are managed in most states gives the edge to the radicals, who are far less ability or inclination to engage in the requisite negotiations and compromise than do the moderates who for the most part have been sidelined. Is it merely coincidence that the demise of moderate, in-the-middle, politicians corresponds to the demise of the middle class?

When historians study the fall of the Roman Empire and try to pinpoint the cause or the turning point, they offer a variety of suggestions, ranging from environmental and public health issues to the hiring of barbarians as mercenaries. For me, the turning point was the Roman Senate’s turning away from public service to private gain. When a legislature rolls over and its members focus on their individual concerns to the detriment of the public, it does not bode well for the survival of the nation it holds in trust.

Not long ago, in The Aggravation of Tax Paperwork, after describing a case in which the taxpayer’s failure to keep records undermined the taxpayer’s position, I recommended that taxpayers do three things: “Determine what records need to be generated. Take steps to have those records produced. Keep those records.” Now comes another case that illustrates why record keeping is important.

The case, Haskett v. Comr., T.C. Summ. Op. 2013-76, involved a married couple who stepped up to help the wife’s mother. During taxable year 2008, the wife’s mother lived with the taxpayers from January until May, when she moved into a nursing home. She died three months later. The taxpayers produced four invoices from the nursing home addressed to the wife’s mother care of the wife. The total of the invoices was $10,756. During 2008, the wife’s mother received $7,824 in social security benefits, Medicare benefits in unspecified amounts, $740 a month from the U.S. Department of Veterans Affairs paid to the nursing home, and $419 a month from the State of Florida paid to the nursing home. According to the opinion, these two sources provided roughly $3,000 during 2008 to or for the benefit of the wife’s mother. The taxpayers testified that during 2008 they paid the daily living expenses of the wife’s mother, some of her medical expenses, property taxes and insurance on her home, $1,743 per month to the nursing home for four months, and $4,529 toward funeral expenses. The taxpayers’ bank records show payments to the nursing home of $1,743, $60 to a medical aide, and $249 for a walker.

The taxpayers claimed a dependency exemption deduction for the wife’s mother. Though it was agreed that the wife’s mother met the relationship, gross income, and not qualifying child requirements for being a qualified relative under section 151(d), the IRS took the position that the taxpayers did not provide more than one half of her support. Because the funeral expenses do not qualify as support, the Court concluded that the taxpayers had provided $2,052 for the support of the wife’s mother. The Court took into account the amounts corroborated by the bank records but disregarded the testimony because no documentation was provided. For example, although the taxpayers claimed that the social security benefits were used solely to maintain the wife’s mother’s residence and to pay for medical care, rather than being used to cover the nursing home monthly charge and other daily living expenses. The court made it clear that it would not rely on the taxpayers’ testimony alone.

It is not implausible that the taxpayers paid more than $2,052 for the support of the wife’s mother. Certainly during the time when she was living with them, a portion of the costs of maintaining the taxpayers’ residence constituted support of the wife’s mother. But apparently the taxpayers did not offer any evidence of those costs. It is unclear whether the taxpayers had the documentation that would have persuaded the court that the taxpayers had paid property taxes, insurance, medical expenses, and nursing home fees on behalf of the wife’s mother. If it existed, they failed to bring it to court. If it did not exist at the time of trial, either it never existed, which is highly unlikely, or the taxpayers failed to retain it.

Though keeping records adds to some extent to the clutter that afflicts many of us, there is quite a high cost to tossing it away. With the advent of digital technology, records can be maintained in ways that demand far less space than was required when documentation existed only in paper form.

Philadelphia’s public schools are in dire financial straits, to the point where closing schools and showing employees to the door won’t solve the problem. Though a variety of factors have contributed to the situation, one component of the deficit is a reduction in state funding. Those who understand the long-term view of cost benefit analysis realize that the so-called savings being implemented in Harrisburg for the benefit of corporations and wealthy individuals will be more than offset by a serious price ten, twenty, and even thirty years down the road. Why? Because failing to educate the next generation is a bad investment.

Last week, a letter was published by “a group of people in our 20s and 30s with inherited wealth and class privilege” advocating tax reforms for the benefit of the Philadelphia schools. Yes, they did write, “Tax us more!,” pointing out that “Wealthy individuals and corporations are not paying our fair share of taxes.” Whether the vast majority of their peers agree with them remains to be seen.

This group, however, also offered an very interesting argument against the claim that the additional funds available to the wealthy on account of tax cuts can be used for philanthropic purposes to accomplish what governments cannot do on account of revenue shortfalls. They explain that there is a huge difference between education and similar public endeavors being financed with tax money and those same activities being financed with private philanthropic funding. Funding financed with tax dollars is subject to public scrutiny, control, and input, whereas privately-funded alternatives, the existence of which is another cause of the public school system financial distress, contributes to the “root causes of inequality.” As they point out, “It weakens the democratic process.”

Those who signed the letter suggest that when the wealthy give away money, they feel they are making a difference, but by retaining the power to decide what gets funded, they “perpetuate the injustice we think we’re addressing.” Indeed, one of the great risks of the ever-increasing inequality that afflicts this country is that democracy is in danger of being replaced by oligarchy.

Another suggestion from this group deserves deep consideration. “Make policies that require businesses to respect people over profit. Until wealthy people’s means of making money are just, no amount of charitable philanthropy will cancel out the exploitation that initially created the wealth.”

One of their sentences caught my eye. I like it. “Require us to opt in to the public sphere, not choose to pay to set our lives apart.” The days of nobles in castles and peasants on the land, of plantation owners on porches and slaves in the field, of wealthy in gated communities and poor in slums need to be part of history taught as reminders of why democracy matters and how fragile it is. Those days ought not be present-day conditions of society.

A recent Tax Court case, Cahill v. Comr., T.C. Memo 2013-220, illustrates why cleverness alone not only can be insufficient to win the argument but also why it can backfire. The taxpayer attempted to demonstrate that a payment from a partnership was a loan, whereas the IRS treated it as a guaranteed payment. The taxpayer rested his argument on the claim that he was not a partner in the partnership and thus could not be the recipient of a guaranteed payment.

The taxpayer attempted to prove that he was not a partner in the partnership by showing that he did not sign the partnership’s amended and revised operating agreement. The Tax Court explained that determining whether a partnership exists and whether a person is a partner in a partnership are questions of fact, resolving the issue of whether “the parties intended to join together in good faith with a valid business purpose in the present conduct of an enterprise.” To answer the question, the court noted the importance of the agreement between the parties, the conduct of the parties, the parties’ statements, testimony from disinterested persons, the relationship of the parties, the abilities and capital contributions of the parties, the actual control of income, and the purposes for which the income is used.

The Court focused on a variety of facts. The taxpayer and the partnership acted as though he was a partner. The taxpayer testified that he contacted the other partners because he wanted to pool his resources and develop business jointly with them. The taxpayer entered into a memorandum of agreement and a revenue sharing agreement with the partnership, and both agreements set forth a mechanism for letting the taxpayer share in the profits. Both agreements also provided that the partnership would issue a Form 1099-MISC or a Schedule K-1 to the taxpayer with respect to any money paid to the taxpayer, and there was nothing in the record indicating that the taxpayer objected to receiving a Schedule K-1 on the grounds he was not a partner. In addition, the revenue sharing agreement referred to the taxpayer and the other partners as “producers,” thus putting the taxpayer on the same footing as the other partners with respect to revenue sharing. One of the other partners testified that they intended for the taxpayer to be a partner in the business. After the taxpayer joined the partnership, it changed its name so that the taxpayer could tell clients that the name of the partnership included the first letter of his surname, and there was nothing in the record indicating that the taxpayer objected to this change of partnership name to include a reference to him.

Though it can be considered clever to argue that one is not a partner because one has not signed a revised partnership agreement, the law makes it clear that there is much more to determining whether someone is a partner than the mere appearance of the words of the person’s name in signature form on an agreement. Actions, not surprisingly, speak much louder than do words. If a person acts like a partner, is held out to the world as a partner, and is treated as a partner without objection, that person ought not claim that he is not a partner.

The movement attempting to reduce or eliminate federal taxation and to reduce or eliminate the federal government presents, as one of its justifications, the allegedly overbearing presence of the federal government in matters that ought to be left to state governments. The fallacy of this position is demonstrated by the failure of state governments to comply with fundamental principles of fairness and public fiduciary duties when handling or ignoring important public issues. Recently, an example of why states cannot be trusted to get it right has moved back into the spotlight.

Readers of MauledAgain know that I am very critical of the decision of the Delaware River Port Authority to use toll revenues for purposes other than the building, maintenance, repair, and operation of the bridges and other port facilities under its management. As I pointed out in posts such as Soccer Franchise Socks it to Bridge Users, Bridge Motorists Easy Mark for Inflated User Fees, Don’t They Ever Learn? They’re At It Again, A Failed Case for Bridge Toll Diversions, and DRPA Reform Bandwagon: Finally Gathering Momentum, the DRPA has a long history of using toll revenues for projects such as a private sector major league sports team, private restaurants, a medical school, and other endeavors generating income for the private sector, including those who insist on reducing or eliminating taxes while feeding on tolls paid by motorists coping with inadequate bridges and other public facilities.

Recently, the Government Accounting Office issued a report, INTERSTATE COMPACTS: Transparency and Oversight of Bi-State Tolling Authorities Could Be Enhanced, and presented it to the Chair of the United States Senate’s Committee on Commerce, Science and Transportation. The report concluded, not surprisingly, that multi-state toll agencies have not been sufficiently accountable to those paying the tolls, and are not complying with a federal law that requires the tolls to be “just and reasonable.” The reason for the non-compliance is that the federal government is not enforcing the requirement. The lack of enforcement stems from the fact that Congress repealed the authority of federal agencies to enforce the requirement. It doesn’t take a degree in political science, or the brain of a rocket scientist, to figure out that if funding and authority for enforcement of a requirement is eliminated, the requirement has no meaning. Is it any wonder that the DRPA has gone on a spending spree with tolls, and has raised those tolls on several occasions to finance the spending that is not related to the facilities under its care? Relying on the states to correct the problem has proven to be impractical, as entrenched private sector interests have blocked attempts at reform. The situation is a classic example of why federal intervention is necessary in order to advance justice.

The motorists who object to repeated toll increases used to enrich private sector enterprises, rather than being used to care for the tolled facilities, might consider how they have ended up in the objectionable situation in which they find themselves. Is it possible that they would have been spared these financial burdens had federal oversight of multi-state toll facility agencies been left in place? Is it possible that cries for deregulation, translated as letting the private sector run roughshod over the public, were not the pathways to individual freedom for all as touted, but were devices to assist in the financial oppression of the middle class and the enrichment of the well-connected financial elite? Those who claim that “the federal government is not your friend” fail to point out that “the state governments and the multi-state agencies under their supervision are our friends, not yours.” If states continue to fail in their fiduciary responsibilities, it’s time to restore federal agency authority, and funding, to rectify the injustices being done to motorists.

With the tax law drowning in credits and deductions, it’s no wonder that the IRS has characterized two deductions as credits. On its Credits and Deductions page, the IRS lists, under credits, the “Business Depreciation Credit” and the “Casualty, Disaster & Theft Losses Credit.” Clicking the link for these two items brings the reader to pages that describe the depreciation deduction and the deductions for casualty, disaster, and theft losses.

When I taught the basic federal income tax course, one of the concepts in the group of principles that a student needed to master in order to earn a passing grade was the difference between a deduction and a credit. For the curious, others included the difference between an exclusion and a deduction, the difference between a personal exemption and a dependency exemption, the status of the standard deduction as an alternative to, rather than supplement to, itemized deductions, the difference between income and gross income, the difference between gross income and adjusted gross income, and some other similar concepts.

Thanks to a sharp-eyed reader who brought the IRS page to my attention. When even the agency charged with administering the tax law is confused, that’s a clear signal to the Congress that it ought to turn its attention to constructive endeavors, such as repairing the tax law. But I suspect that’s asking just a bit too much of our legislators.

A recent Tax Court decision, Linzy v. Comr., T.C. Memo 2013-219, grabbed my attention for two reasons. One is substantive, the other is procedural.

The first aspect of the case that caught my eye was the attempt of a tax return preparer to deduct a vacation as a business expense. She explained that she operated her tax return business from her home, and explained that “living in her neighborhood was stressful and that she felt harassed by her clients who would call her home at any hour.” Accordingly, she concluded that she needed to travel “just to get rest so that . . . [she] could function.” The Court, not surprisingly, denied the deduction, characterizing the cost of the vacation as a personal expense. The decision is consistent with the holdings that the cost of food cannot be made deductible by arguing the lack of food prevents a person from engaging in any activities, including income-producing activities.

The second aspect of the case that caught my eye was the outcome with respect to the taxpayer’s home office deduction. The taxpayer claimed a home-office deduction based on one-half of her residence expenses, explaining that she operated her tax return business on the entire first floor of her two-story residence. The Court upheld the IRS disallowance of the deduction on the ground that the taxpayer had not proven that one-half was the appropriate fraction. Two years ago, in Linzy v. Comr., T.C. Memo 2011-264, in a case involving the same taxpayer – though with the name Joyce Ann Linzy rather than Joyce A. Linzy as in the recent decision – the taxpayer was permitted to deduct one-third of the expenses for the building in which she lived. Though the facts are unclear, it appears that the building used in the earlier case was a different building, because it is described as having a basement in addition to two floors and as having an apartment on each of those two floors. It appears, though this is an educated guess, that the IRS and the taxpayer stipulated as to the usage of the building in the earlier case, whereas in the recent case no such stipulation appears. Presumably, in the earlier case, the taxpayer provided sufficient evidence to the IRS to obtain its agreement to the stipulation, and thus the question is why, knowing how to generate a stipulation, the taxpayer did not provide equivalent evidence in the more recent case. The question is particularly interesting because the taxpayer is a tax return preparer.

The taxpayer’s argument with respect to the first point, though unsuccessful, reveals some degree of cleverness. Why that cleverness did not carry over to the procuring of a stipulation with respect to the home office deduction remains a mystery.

Earlier this year, in Getting Smart About Tax Questions, I criticized Marilyn vos Savant, allegedly the world’s smartest woman, about some errors she made in her response to a question about the taxation of egg donors.

This time, Vos Savant took on a question about selling an encumbered residence. The questioner described a situation in which two people owned a home, presumably equally. The home is worth $200,000 “with $10,000 in equity.” Owner #1 will retain title to the house, and offers Owner #2 $5,000. Owner #2 wants $100,000. The questioner asked, “What’s the fairest thing to do?”

It is unclear from the question whether Owner #2 will remain liable on the mortgage loan, or whether Owner #1 will assume responsibility for repaying the loan. Vos Savant did not take that factor into account. Instead, she pointed out that a “key factor” to consider was the amount remaining on the loan. She suggested that, “Maybe the house was bought when it was worth half as much. Or twice as much!” She then presented two examples. In the first, she hypothecates that the house was purchased for $150,000, with $140,000 “left on the loan.” Thus, she concludes that the co-owners “would gain $60,000” if they sold the house for $200,000, requiring Owner #1 to pay $30,000 to Owner #2. In the second example, she hypothecates that the house was purchased for $250,000, with $240,000 remaining on the loan. She concludes that the co-owners would lose $40,000 if they sold the house for $200,000, requiring Owner #2 to pay $20,000 to Owner #1.

Here’s the problem. The facts presented by the questioner make it clear that the balance on the loan – whether the unpaid portion of the loan taken out at the time of the purchase or a subsequent loan, or a combination – is $190,000. The house is worth $200,000, the equity is $10,000, and thus the loan balance is $190,000. The loan balance is not $140,000, and the loan balance is not $240,000. Thus, the examples Vos Savant provides don’t answer the question. They answer questions not asked about situations not confronting the questioner.

Here is the answer that I would have provided. If Owner #1, with the consent of the lender, assumes full responsibility for the loan, Owner #2 should be paid $5,000 by Owner #1. That is the value of Owner #2’s interest in the residence. If, on the other hand, Owner #2 is required by the creditor to remain liable on the loan, then Owner #1 should pay $5,000 to Owner #2, plus any amounts paid by Owner #2 to the lender should be reimbursed by Owner #1 because Owner #1 is taking full ownership of the residence.

To demonstrate why this is correct, consider several possibilities of how the owners ended up in this situation. Assume that they purchased the residence for $200,000, each paying $5,000 in cash, and together borrowing the $190,000. Assume further that the residence did not change in value. Owner #2 invested $5,000, and would be getting that $5,000 from Owner #1, and thus is whole. Or suppose that they purchased the residence for $100,000, each paying $5,000 in cash, and together borrowing $90,000. Assume further that the residence increased in value to $200,000, and that the owners jointly borrowed another $100,000 and split the proceeds. Economically, the owners together have a gain of $100,000, the residence having been purchased for $100,000 and having increased in value to $200,000, and thus each owner should emerge from the transaction with their $55,000, the sum of the $5,000 that was originally invested plus $50,000, one-half of the gain. If Owner #1 pays $5,000 to Owner #2, Owner #2 ends up with $55,000, with $50,000 coming from the proceeds of the second mortgage loan and $5,000 coming from Owner #1.

No matter how one slices it or how many factual variations are constructed – of course, without changing the original facts that at the present time the equity is $10,000 and the loan balance is $190,000 – Owner #2 would incur a windfall if paid $100,000 by Owner #1. There are no factual variations – putting aside gifts from Owner #1 to Owner #2, something beyond the scope of the question – that justifies Owner #2 walking away with $100,000, or $30,000, or that justifies Owner #2 paying anything to Owner #1.

I concluded Getting Smart About Tax Questions with this comment, “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.” I conclude this post with “Though how smart a person Marilyn vos Savant is continues to be debated, one thing is certain. When it comes to residential financing, she has more to learn.”

Several years ago, in Are Private Tolls More Efficient Than Public Tolls?, I described why it is wrong to put public assets into the hands of private sector entrepreneurs so that they can enrich themselves at public expense, and how attempts in the distant past and the recent past to provide travel access through private highways failed. I explained, citing earlier posts, how privatization of public highways works for the entrepreneur only by disadvantaging the public. Aside from raising tolls, the entrepreneurs play all sorts of political games to force motorists to use their highways, such as “persuading” legislators to enact laws lowering the speed limits on public highways, adding unnecessary traffic lights and stop signs, and forbidding the widening of, or other improvements to, public highway alternatives to the privatized toll road.

About a year ago, in When Privatization Fails: Yet Another Example, I explored the adverse consequences of putting a public bridge into private hands in Michigan. Earlier this year, in How Privatization Works: It Fails the Taxpayers and Benefits the Private Sector, I examined a similar failure, though with parking garages and not highways or bridges. Two months ago, in More Proof of How Privatization Harms Taxpayers, I explained how privatization of the tax refund process in Virginia did more harm than good.

Last month, I had the opportunity to see privatization, United Kingdom style, and privatization, France style. The difference in terms of highway conditions was notable, and as I drove I thought about the difference. In the United Kingdom, motorways for the most part are congested, even at times one would expect that not to be the case. During my ten days of driving, I often encountered stopped or crawling traffic in remote areas. Service areas exist, though in some places they are few and far between. Residents with whom I discussed the motorway situation complained that they expected to get more for their road tax dollars than they were getting. In contrast, motorways in France are congested for the most part only at the times and places one would expect. They are in such good condition that the speed limit is roughly 10 miles per hour higher than in the United Kingdom. Rest areas exist every ten kilometers or so, and service areas every 40 kilometers. Given the choice of which system I would want to use for a road trip, setting aside issues of destination and weather, I would select France.

I noticed two differences. First, in the United Kingdom, only a very small fraction of the motorway system is in the hands of the private sector. Second, the tolls in France, though high by American standards, are lower per-mile than the tolls charged on the few miles of United Kingdom motorways. An peek at what happened in the United Kingdom opens the door to understanding the differences. Because of severe congestion on one motorway, the United Kingdom government decided that a bypass needed to be constructed. Rather than building it with road tax funds, the government granted the construction rights to a private company that was permitted to charge tolls. What happened? The road was built, but the motorists didn’t show up. Motorists continued to use the severely congested motorway. Because of the insufficient revenue, the private company increased the tolls several times, and consequently road usage declined even more. I drove the toll road, out of curiosity and because my routing sent me that way. For a one-time use, I wasn’t very concerned about the toll. There was very little traffic on the toll road, and when it reconnected with the motorway it bypassed, traffic slowed to a crawl.

If privatization is going to work, it needs to be structured so that the public, through government representation, has overall control of the system. Tolls need to be imposed so that the alternatives, such as French regional roads, are sufficiently less attractive in comparison that most motorists will use the motorways. Toll revenue needs to be plowed back into the highways and not diverted to other uses such as has happened in Pennsylvania and other states. The bottom line is that the notion of driving on highways without paying tolls or any sort of sufficient fuels tax is a recipe for the deficiencies afflicting American interstate highways. Because the problem isn’t limited to interstates, but afflicts all sorts of roads, the solution is the mileage-based user fee, an approach that I have discussed extensively, in posts such as Tax Meets Technology on the Road, Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, and Liquid Fuels Tax Increases on the Table.

Though some Americans perceive France as the antithesis of the capitalistic ideal, its experience with motorways suggests that there are ways to rescue America from the highway infrastructure deterioration that threatens its economy and security, without selling out to the private sector. The history of highway privatization failures in the United States and in the United Kingdom suggests that there are some lessons to be learned in those nations.

The definition in section 753 of income in respect of a decedent refers only to section 736(a) payments. If section 736 is repealed, section 753, as presently structured, becomes meaningless. Section 753 does not define income in respect of a decedent, because there are other payments made in respect of a decedent partner that constitute income in respect of a decedent. Even if section 736 is not repealed, it makes no sense to characterize 736(a) payments as income in respect of a decedent. The portion of section 736(a) payments that would be characterized as income in respect of a decedent under the general income in respect of a decedent rules would remain so characterized. Any other portion of section 736(a) payments ought not be characterized as income in respect of a decedent. Thus, no matter what is done with respect to section 736, section 753 ought to be repealed.

If section 736 is the most criticized provision in subchapter K, the anti-abuse regulations might be the most criticized regulations under subchapter K. The criticism extends not only to the substance of the regulations but also to the authority of the Treasury to issue them. With the enactment of the section 7701(o) economic substance provision, the need for the anti-abuse regulations is even less than whatever it may have been at the outset. In just about every ruling and judicial decision in which the anti-abuse regulations were invoked as a reason for the conclusion, alternative grounds under other provisions also were set forth. Repeal of the anti-abuse regulations would be an improvement.

Section 708 provides that a partnership terminates for federal income tax purposes if “within a 12-month period there is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits.” The consequences of a termination of a partnership by reason of sale of a partnership interest are for all intents and purposes negligible. Because of the seven-year time periods in sections 704(c)(1)(B) and 737, the regulations were amended to provide that the terminated partnership transfers its assets to a new partnership, which is an impossibility because the new partnership cannot have just the old partnership as a sole partner. The old partnership is then treated as transferring the interests in the new partnership to the new group of partners, another impossibility because the old partnership cannot have multiple interests in the new partnership. The new partnership ends up with the same assets, adjusted bases in its assets, and other attributes as were held by the old partnership. Considering that large partnerships that qualify for the special rules in sections 771 through 777 do not terminate on account of sales of interests, there is no need to terminate any partnership on account of sales of interests, and particularly no need to engage in a sequence of impossible transactions that amounts to nothing more than a charade that in effect keeps the terminated partnership, for all intents and purposes, in existence.

Section 736 is one of the most frequently criticized provisions in subchapter K. Proposals for its repeal have been in place for decades. It is difficult to get across to students the fact that section 736 does not provide for substantive outcomes but merely separates liquidating distribution payments into segments, each of which is subject to different provisions elsewhere in subchapter K. The regulations under section 736 provide rules to deal with liquidating distribution payments received over multiple years, but those situations ought to be subjected to the provisions applicable to installment sales.

Considering the extensive explanations provided by advocates of repealing section 736, there is no need to duplicate those efforts. Suffice it to say that section 736 is a maze of exceptions, exceptions to exceptions, and exceptions to exceptions to exceptions, is a trap for the unwary who do not realize there are opportunities to affect the outcomes by putting goodwill provisions into the partnership agreement, and adds layers of unnecessary complexity to the taxation of partnerships.

The provisions in section 724 that retain the character of gain or loss in unrealized receivables, inventory, and depreciated capital assets contributed to a partnership, and the provisions in section 735 that retain the character of gain or loss in unrealized receivables and inventory distributed by a partnership, apply not only to those items but also, under section 724(d)(3) and section 735(c)(2) to substituted basis property. In other words, if the partnership or partner exchanges the property and the adjusted basis in the replacement property reflects in whole or in part the adjusted basis in the exchanged property, sections 724 and 735(a) apply to the replacement property.

In contrast, if the partnership or partner transfers the property to another person under circumstances that cause the other person to obtain a transferred basis in the property, sections 724 and 735(a) do not apply. In other words, if a partner, for example, transfers distributed inventory by gift to a another person, the other person holds the property as an investment and subsequently disposes of the property within the five-year property, section 735(a)(2) does not apply. The other person’s gain would be capital gain, not ordinary income. For sections 724 and 735(a) to be fully effective, they need to apply not only to substituted basis property but also to transferees with transferred basis in the property.