MauledAgain

A reader commented in response to my post earlier this week, Highways Are Not Free, by pointing out that the mileage-based road fee poses a risk that the system would be privatized, and also poses a risk to privacy.

The reader is correct. Yes, there is a risk that the mileage-based road fee system would be privatized. Indeed, there is a risk that every government function will be privatized. To date, many government functions have been privatized, too often with bad results. So long as there exists a group of people with money to burn who want to make a killing, there will be attempts to find a way to obtain government revenue streams on the cheap in ways that appear to be, but aren’t, economic windfalls for governments and their citizens. The response is not to shy away from something because there is a risk of privatization, but to move forward in a manner that makes it clear privatization needs to be resisted.

And, yes, there is a risk that a mileage-based road fee system can be used to determine where a vehicle has been. Vehicles, of course, do not have privacy rights. But because people assume that an owner of a vehicle is wherever the vehicle happens to be, it is understandable that knowing where a vehicle has been might reveal where the owner has been. Of course, a mileage-based road system need not track location, though those being considered and those in place do so, provided that the fee did not change based on the road being used. Connecting to the odometer would suffice. It also is important to remember that for many decades, the location of vehicles has not been a private matter hidden behind the sacrosanct walls of a person’s home. For a long time, law enforcement officials, investigative journalists, and even nosy neighbors have been able to determine where a vehicle has been, aided by the existence of license plates, bumper stickers, and other identifying characteristics. There’s nothing private about being in public.

Though I don’t remember when, how, or why I decided to give a special place in this blog every October-end to the connection between Halloween and taxation, I do know it has developed into a MauledAgain tradition. Beginning with Taxing "Snack" or "Junk" Food (2004), and continuing through Halloween and Tax: Scared Yet? (2005), Happy Halloween: Chocolate Math and Tax Arithmetic (2006), Tricky Treating: Teaching Tax Trumps Tasty Tidbit Transfers (2007), Halloween Brings Out the Lunacy (2007), and A Truly Frightening Halloween Candy Bar (2008), Unmasking the Deductibility of Halloween Costumes (2009), Happy Halloween: Revenue Department Scares Kids Into Abandoning Pumpkin Sales (2010), and The Scary Part of Halloween Costume Sales Taxation (2011), I have aimed for the light-hearted, the ridiculous, or the goofy when describing how Halloween and taxation can intersect. Last year, I set the silliness aside, in Halloween Takes on a New Meaning and It Isn’t Happy, because Hurricane Sandy brought misery, death, and destruction to millions of people, in a disaster that was a treat for no one.

This year, frightening meets ridiculous. The IRS has announced that the start of the 2014 income tax filing season will be delayed, to as late as early February, to give the agency time to do the work that wasn’t accomplished during the shutdown of the government earlier this month. Consequently, taxpayers who are entitled to refunds will be waiting longer to receive their money. Perhaps they ought to send thank-you notes to the Congress. I wonder how many people who gripe about delayed refunds next spring will confess to cheering the closing of the government for three weeks. What’s so frightening about this? There are taxpayers who will be harmed, economically or otherwise, when and if their refunds arrive several weeks later than expected. Those tempted to suggest better cash flow planning might not quite understand the challenges of cash flow budgeting when the cash isn’t flowing very much. But there’s something even more frightening. The legislation that ended the shutdown is a temporary fix, and come January 15, spending once again ceases to be authorized, and by February 7, the Treasury runs up against the debt limit. In the likely event that the dysfunctional governance syndrome isn’t fixed by then, it would not be surprising to see the government, including the IRS, once again shut down. A shutdown at that point in time will create havoc far worse than what already has been foisted on the American people by a handful of sore losers.

And what’s so ridiculous? What’s ridiculous is that it need not be this way. Some catastrophes are unavoidable. Letting the nation suffer through an avoidable catastrophe, particularly when the possibility and even possibility of a repeat looms large, is simply ridiculous. Using the tactics of two-year-olds throwing temper tantrums, the attitudes of adolescents sulking in response to life generally, or the bullying of spoiled brats grown up into obnoxious adults is no way to govern a nation. What’s worse is that when level-headed, sensible legislators try to prevent or minimize the damage caused by their irresponsible colleagues, the latter do everything in the power to push aside rationality, common sense, and fiduciary duty.

Yes, it’s “only” Halloween, though I’m told that some mercenary commercial outfits are already doing the “countdown ‘til Christmas” thing. The countdown ought to be focusing on the number of days until January 15. Seventy-seven days seems like a long time to many people, especially politicians and procrastinators, but once the holidays, weekends, and legislative recesses are taken out of the computation, time is running short. Procrastinating politicians, and that might be a redundant phrase, are at high risk of letting the nation careen wildly into another, far more serious, disaster. Hopefully, American citizens will not continue to be tricked by the nonsense of politics and will treat their legislators with messages that demand placing loyalty to nation above loyalty to political party.

A letter to the editor in last Monday’s Philadelphia Inquirer reminded me of how difficult it is to get people to understand that highways are not free, and that some sort of funding, preferably in the form of the mileage-based road fee, is necessary, unless some ultra-wealthy person donates to the government a sufficient amount of money to create a permanent endowment that fully funds the cost of transportation. That, of course, is highly unlikely.

Stephanie Fleetman, president of Mustang Expediting, Inc., argues that it is a “terrible idea” to add tolls to “existing interstate lanes that we have already paid for.” Ms. Fleetman’s conclusion that the existing interstate lanes have already been paid for overlooks the fact that the need for repair and maintenance funding is separate and apart from the cost of constructing the existing highway. As any business owner knows, the cost of buying a building or a vehicle does not make the cost of repairs and maintenance zero.

Ms. Fleetman then claims that “our taxes continue to pay for” highways. The problem, as anyone who examines the situation knows, is that the highway taxes currently being imposed are insufficient to pay for the cost of repairs and maintenance. Gasoline tax revenue has declined because vehicles are more fuel-efficient, increasing numbers of vehicles do not use liquid fuels, and the Congress has refused to increase the per-gallon tax rate to keep up with inflation.

Ms. Fleetman then takes a jab at those whose job it is to study and determine why our highways are falling apart. She claims “for some researcher to come along and say ‘Just put tolls up and everything will be fine’ would be laughable if it were not so ridiculous.” Surely Ms. Fleetman hears reports from her drivers about the cruddy condition of our nation’s highways. Potholes, raised seams, washboard surfaces, dangerously pooling rainwater, congestion, malfunctioning traffic signals, closed bridges, bridges restricted to low-weight vehicles, leaking tunnels, and scores of other problems plague the highway transportation infrastructure. It’s not just “some researcher” but a large number of experts from a variety of professions who have studied the problem. Engineers, economists, cost accountants, highway safety officers, and other trained individuals have worked through the data, observed the realities, and have analyzed the problem. Even amateurs with a rudimentary knowledge and simple understanding of reality on the highways understands that the highways are falling apart and it costs money to repair them and maintain them so that Ms. Fleetman’s trucks, and the rest of us, can use them.

Ms. Fleetman does make a good point. She claims that “[t]olls push traffic onto local roads that weren’t built for that type of volume.” This is true. I’ve made that point repeatedly, in support of my position that tolling should apply to all roads in the form of the mileage-based road fee. This would “level the playing field” in terms of highway use choices, pushing long-distance traffic back onto the interstates, and truck traffic onto the roads best suited for those types of vehicles.

Ms. Fleetman makes another point. She claims that “[t]olls increase the cost of goods that ship by truck.” Of course they do. But the shipping of goods by trucks imposes a burden on the nation’s highways, and someone needs to pay for the damage caused by those shipments. Shippers need to pass along the cost to the person whose decision to make a purchase of something shipped by truck, or any other vehicle, generates a need for money to keep the highway in safe and efficient condition. The shipping of goods by trucks also requires the payment of wages and benefits to the truck drivers, fuel for the vehicle, and maintenance of the trucks. It’s called a cost of doing business. First-year business students often need to learn the difference among receipts, gross profits, and net profits. All businesses would be delighted if net profits equaled receipts but that isn’t going to happen. All businesses would prefer that the cost of shipping be zero, and some would like the cost of employing workers also to be zero,. It isn’t going to happen, and it ought not happen.

In conclusion, Ms. Fleetman claims that “tolling is by far the most inefficient and harmful way to raise money.” It isn’t. The most inefficient and harmful way to raise money for highways is the current system of a per-gallon liquid fuels tax that fails to keep up with inflation, raises insufficient revenue, and will increasingly become antiquated and useless. If Ms. Fleetman’s point is that there are better ways to raise highway funds than tolls, she’s correct. But she does not offer any suggestions.

It is unclear whether Ms. Fleetman would support a mileage-based road fee. She might very well prefer that her company use the highways without paying any sort of tax or fee, or by paying a tax or fee that, like what currently is being paid, is insufficient to maintain the highways. Perhaps she fails to mention the mileage-based road fee because she is unaware that such a system exists. In that case, I invite her to read the series of posts I have written on the topic, beginning with Tax Meets Technology on the Road, and continuing through 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, Liquid Fuels Tax Increases on the Table, and Searching For What Already Has Been Found, Tax Style. Every other road user, whether or not owning a business, needs to read these posts, look at the reports to which these posts link that explain the outcomes in localities using the mileage-based road fee, and examine the studies and reports also linked in my posts. An informed citizenry is one that benefits, and an uninformed citizenry is easily misled. Don’t take my word for it. To use a colloquial translation of a phrase found in the seal of the Augustinian order that operates the university of which the Villanova University School of Law is a part, and that appears throughout the campus, Tolle Lege, go and read.

What we did not need is more bad news, especially of this sort, so near to Halloween. According to this report, the price of chocolate is going up. During the past 12 months, the price of cocoa butter has risen 70 percent. The principal causes are increasing demand in emerging markets and bad weather in cocoa-producing areas.

If the price of chocolate increases along the same lines, almost doubling, the impact could be alarming. Aside from reductions in the size of chocolate bars and the adverse effects on Halloween hauls, other, even more, undesirable consequences loom. Six years ago, as I explained in Should the Tax Law Provide a Fix for This Looming Catastrophe?, increases in the price of cocoa triggered a request to the Food and Drug Administration by chocolate manufacturers to redefine chocolate, so that they could sell “mockolate” as a substitute. Of course, I opined that it is better to sell “Fake Chocolate” by that name and let consumers decide if they want to trade price for taste.

Earlier this week, in Looking at Numbers, I compared price increases for things such as cars, houses, tuition, and World Series items. Out of curiosity, I tried to find similar information for chocolate. I discovered, courtesy of FoodTimeLine, that in 1956, a 1.5 ounce Hershey bar cost 5 cents, whereas in 2011 and 2013, and thus presumably in 2012, a 1.55 ounce bar cost 99 cents. The cost of the chocolate bar in 2012 was roughly 20 times what it cost in 1946. That’s on the low end of the list, close to the increases in the cost of cars and houses, and far below the increases for World Series tickets and rings.

So the price of chocolate would need to quintuple, to a $5 chocolate bar, before it presented the same sort of price increases that have been demonstrated by World Series items. I doubt this is going to happen anytime soon.

Maybe it’s a mistake. Perhaps it’s some sort of digital error. Or perhaps the equipment isn’t working. But it’s almost certainly not an error. According to this report, a man and woman from a Texas town near Austin have managed to rack up $236,026.32 in unpaid tolls and fines. The vehicle registered in their name has passed a toll booth 14,358 times without paying. Blowing through a toll booth without paying on one occasion could be a mistake or a misunderstanding. Zooming through more than 14,000 times without coming up with the toll is not a mistake or misunderstanding. It’s something else.

What’s new about this story isn’t the story. More than nine years ago, in Money: The Root of All Evil?, I reacted to the report that the Delaware River Port Authority had caught a “toll cheat” whose trucking company’s vehicles had been driven through E-Z Pass lanes 2,559 times without paying more than $20,000 in tolls. More than five years ago, in If We're Special, Can We Ignore Taxes and User Fees?, I commented on a report from the state of Delaware identifying its “top E-Z Pass violator” as a driver who made 633 illegal drive-throughs without paying, racking up $4,748 in unpaid tolls, and $30,000 in fees and penalties. I also noted a report from New Jersey about a violator with 1,444 violations who owed $1,700 in unpaid tolls and $36,000 in administrative costs.

What’s new about the story from Texas is that, like a lot of things Texas, it is Texas-sized. To accumulate 14,358 unpaid toll events a person needs to use the toll road 4 times a day, every day, for roughly ten years. My guess is that one or both of the owners of the vehicle are using it for a business that has them making multiple trips each day. The state of Texas is owed $27 million by drivers who have failed to pay their tolls. Even for Texas, that’s not loose change or petty cash.

In If We're Special, Can We Ignore Taxes and User Fees?, I wrote:

There's no doubt that the people who are evading tolls on a regular basis aren't dealing with a momentary brain failure, or an unsuccessful attempt to hold up the transponder as they drive through the toll booth. These indeed are people who think they are special and therefore above the law. As a spokesperson for the Delaware Department of Transportation summarized the situation, this is someone whose mindset is "I'm going to violate the law, and I don't care what anyone thinks." An indication of how deliberate are their actions is the account given in the Inquirer story about one driver "who hooked his license plate to a rope inside the car," and as he went through the tool booth, would "tug the rope, causing the plate to flip up so that the cameras couldn't catch the tag number." As I was told when I was a child, being smart doesn't mean much if it's used in the wrong way. The prisons, I was told, are full of smart people and people who thought they were smart.

But it’s more than just a matter of being smart and trying to evade a law. In Money: The Root of All Evil?, I suggested that the cause of the problem is selfishness and greed:

What's this fellow's mindset (assuming that the allegations are true)? Was it curiosity or a dare to see if it was possible to avoid the toll, that ripened into an addiction? Was it greed? Was it an attempt to avoid financial problems? Was it an attitude of "me first and the rest of the world isn't as important as I am?" My guess is that it is another instance of selfishness and greed, reflecting outlooks on life that are learned somewhere and that somehow escape reformation as a person grows and develops. Under almost every moral code, it simply isn't right.

I followed up in If We're Special, Can We Ignore Taxes and User Fees? with these thoughts:

I continue to think it is a manifestation of selfishness and greed, though I think selfishness is the stronger of the two catalysts. That there aren't even more selfish people who think they are so special that they can ignore laws is a blessing, considering the examples that are set and the messages that are delivered by society, and people in highly visible positions, to the residents of the planet. Once upon a time, not so long ago, someone whose law-breaking interfered with my professional activities said to me, "I don't care about no law." I didn't think I'd succeed in creating a teaching moment by trying to get the person to understand the disadvantage they'd face if I, or anyone else, took the same approach. If for all of her life, this person was told, "You are special," would it not indeed be difficult to understand that she, too, must obey the law? Perhaps it's time to change the refrain, and when necessary, explain that "You're no more special than anyone else, and like everyone else, you will pay the toll."

And now I wonder, if the folks who evade tolls are among those who oppose government expenditures because they think too many people rely on entitlements. Would it not be a transformative discovery for this nation to learn that opponents of entitlements consider themselves entitled to use a toll road without paying, letting the cost fall upon others? Perhaps then the citizenry would understand that complaints about entitlements really have very little to do with entitlements.

In recent years, increases in college tuition have brought complaints and criticism, as noted in this report, and have generated stress for students and their families. Similar complaints and concerns have arisen with respect to health care costs, food costs, and energy costs.

Late last week, while reading the AARP Bulletin for October, an article caught my eye because of its title, “A Boomer’s History of the World Series.” It turned out not to be a history, aside from noting that in 1946, the year that the boomer generation “dawned,” the St. Louis Cardinals beat the Boston Red Sox. The article provided another historical tidbit, the cost of World-Series-related items in 1946, along with a comparison to the cost of the same things in 2012.

In 1946, tickets to the World Series ranged in price from $1.20 to $6.25. In 2012, the price ranged from $110 to $1,040. The 2012 prices ranged from 92 times to 166 times the 1946 prices.

In 1946, a hot dog and a beer cost 50 cents. In 2012, the cost was $10.25. The 2012 price was 20.5 times the 1946 price.

In 1946, a program cost 25 cents. In 2012, it cost $15. The 2012 price was 60 times the 1946 price.

In 1946, the bonus for a winning player was $3,742.54. In 2012, it was $377,002.64. The 2012 bonus, which represents a cost to someone, was 101 times the 1946 bonus.

In 1946, the World Series ring cost $100. In 2012, it is estimated to cost $10,000. The cost of the 2012 ring was 100 times the cost of the 1946 ring.

Rarely do I hear or read complaints about the size of the winning player’s bonus, the cost of a program, or the cost of tickets. So, out of curiosity, I decided to take a look at the cost of college, cars, houses, and energy items in 1946 and in 2012.

In 1946, undergraduate tuition at the University of Pennsylvania was $475. In 2012-13, it was $39,088. The cost of tuition is 2012 was 82 times what it was in 1946. That’s not quite as good a deal as the hot dog and beer, or program, but it’s a better deal than the cost of the tickets, the ring, and the bonus.

According to The Cost of Living, in 1946 a car cost $1,120 and a house cost $12,304, whereas in 2011 (the most recent year for which information was provided), they cost, respectively, $28,150 and $218,200. The cost of a car in 2011 was 25 times what it was in 1946, and the cost of a house was about 18 times what it was in 1946. That’s worse than the hot dog and beer, but better than what happened with the program, and far better than what happened with the cost of the tickets, the ring, and the bonus.

According to InflationData.com, the price of a barrel of crude oil in 1946 was $1.63, and in 2012 it was $86.46. The cost of a barrel of oil in 2012 was 53 times what it was in 1946. That’s about the same as the change in the cost of the program, but far less than the cost of the tickets, the ring, and the bonus.

The same site tells us that the consumer price index in January 1946 was 18.2 and in January 2012 it was 226.665. The 2012 index was 12 times what it was in 1946. That’s nowhere near the increase for any of the World Series items, and much closer to the increases for cars and houses.

Had I been quizzed before looking for these numbers, I would have pegged crude oil as the winner of the “highest increase” prize. I would have projected the cost of the program as increasing far below what actually took place. From all the complaints about college tuition prices, I would have expected the increase to have surpassed everything but crude oil. And I would have been wrong. Some things just seem worse than they are, perhaps because they’re encountered more often and more directly.

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.”