MauledAgain

Last month, in Why This Tax Break?, I described legislation pending in Philadelphia City Council that gives a multi-million-dollar tax break to a private sector development company planning to build two hotels in center city Philadelphia. I criticized the proposal, because the hotels ought not be constructed if they are not economically feasible without tax breaks. Other hotel owners in the city assert that these two new hotels will put the other hotels, or at least some of them, out of business. Advocates of the legislation claim that the hotels will increase the tax revenue from the property compared to what is being generated from its current use as a parking lot. The flaw in that argument is that if the property promises to be financially successful to the extent of generating tax revenue, there ought not be any need for a tax break from the city.

It is highly unlikely that members of City Council read my post, or any similar commentary, because last week it voted, with one dissent, to favor these developers with a tax break not available to the general public. As explained in this report, the approval took place after the developers and union representatives worked out a deal “that would make it easier to organize future hotel workers.” Because details of the back-room deal are not available, it is impossible to analyze the extent to which the deal will have any sort of lasting or binding effect. Even if it turns out to be beneficial for workers, obtaining it by imposing the cost of a tax break on taxpayers with no say in the process is not a good way to govern.

The arrangement would be a little less unappealing if it came with a funded guarantee. If the project does not reap the benefits that the developers claim it will, then the developers should be obligated to make good on the difference. It’s time to put an end to empty promises for which there are no adverse consequences to the promisors when the promises are broken.

Though I don’t always agree with the folks at the Institute for Policy Innovation, occasionally I do. A recent essay by Bartlett D. Cleland gets my endorsement.

Cleland agues for elimination of the current practice of enacting tax breaks – exclusions, deductions, credits, and the like – with expiration dates, which creates a need for renewal legislation. He posits that this is not “a good way to run a tax system.” He is correct. He points out that the tax breaks are designed to “level a playing field” or encourage activity, but that they cannot have that effect when they are “uncertain or routinely reinstated after [they have] expired.” He also clarifies that the tax system would be better without the breaks, but that if they are going to be part of the tax system, they need to be permanent. Again, I agree.

The uncertainty generated by the annual or biennial “extender dance” harms the economy. It is difficult for taxpayers to plan when they don’t know what the tax rules will be. I wrote about this several years ago in Tax Politics and Economic Uncertainty. I explained:

The bottom line, no pun intended, is that it is easier for businesses to make decisions if they know what lies ahead, regardless of what lies ahead, than if they don’t know what lies ahead. Businesses can react to higher tax rates and to lower tax rates, if they know what the tax rates will be, but their decision modeling suffers when virtually everything in the tax law remains open to change, perhaps retroactively, sometimes at a moment’s notice.

Almost two years ago, in Tax Punting, Tax Uncertainty, and Tax Complexity, I disapproved of Congress permitting short-term provisions to expire at the end of 2011, leaving taxpayers in doubt as to what the rules would be. As I explained, “Unfortunately, for taxpayers who are trying to make plans for 2012, they are in tax limbo, uncertain of what the rules will be. Many tax-paying individuals and businesses will play it safe, waiting until the Congress clarifies what the rules will be. This waiting process will inject some degree of stagnation into the economy.” Taxpayers deserve better.

Cleland notes, perhaps in a tribute to tactfulness, that the tax breaks with expiration dates are “for whatever reason . . . not made permanent and thus expire periodically, often annually.” As my readers know, I don’t worry too much about being tactful when it comes to describing the flaws of the Congress and its processes. In Tax Politics and Economic Uncertainty, I addressed the situation in this way:

Why is the Congress unwilling to provide America with a sufficiently certain tax law for the future? Notice that I did not ask why it is unable. Congress is capable of doing so, but chooses not to do so. The answer is that uncertainty provides members of Congress with the opportunity to use the promise or threat future tax law changes as bargaining chips in their continued pursuit of political power for the sake of power. Greed, it should be noted, isn’t restricted to the desire for money per se, although one significant consequence of holding political power is, as has too often been demonstrated, access to money. Perhaps, once business leaders realize that the very conditions of which they complain that are making business decisions so impossible to make are generated by a Congress grown addicted to campaign contributions and lobbying efforts with respect to specific tax provisions, they will turn their attention to fighting for more certainty, even at the expense of those who profit by pushing for continual changes in the tax rules.

Cleland proclaims that “This annual ‘Festival of the Tax Extender” needs to end.” Yes, indeed. It is time to stop extending the practice of tax extenders.

Advocates of minimizing or reducing taxation and government regulation claim that the economy prospers when the marketplace is left alone to fend for itself. Of course, centuries of experience teach that the free market is not free, and that an unregulated market leads to fraud, deception, defective goods, shoddy services, and economic difficulties. But even if the free market were truly free of those afflictions, the capitalist nature of the marketplace inevitably leads to its own demise, or at least a near-demise that invites government rescue and bailouts, thus shifting the cost of market failure from those who cause it to those who already are suffering from it. By its nature, capitalism is a game in which the players try to acquire maximum capital ownership and maximum profits, which can be used to obtain additional capital. Its natural trajectory is a shifting of capital from a wider population to an increasingly narrow group. One need only watch the game of Monopoly being played to observe how this works.

The downside to the natural trajectory of capitalism is that once one person owns the market, there no longer is a market. A marketplace requires more than one person, and ideally requires a large number of participants. In a global economy, the marketplace requires an enormous membership. Once the capitalism game reaches the point that one person, or one cooperative family, owns pretty much everything, the economy collapses. I made this point, for example, in Tax Policy Converts, in which I explained, “It’s simple. Destroy the middle class and let the nation’s infrastructure fall apart, and the top one percent will succeed in owning 99 percent of everything, but the everything that they will own won’t be much more than a trash heap.” Three years ago, in Job Creation and Tax Reductions, I explained that sustaining the economy requires a robust consumer segment, anchored on a robust middle class, and that enriching the rich at the expense of the middle class and making it more difficult for the poor to enter the middle class is contradicted by letting the monopolistic and oligarchic economic trajectory continue to spiral into economic destruction.

A week ago, in There Are Now Two Americas. My Country Is a Horror Show, David Simon suggests that the flaw in capitalism that threatens itself is its disregard of labor. In other words, capitalism fails to recognize the value of human capital, instead focusing on financial and monetary capital. He posits that by letting that financial capital, measured by profit, become the measure of societal health has been a grave mistake. He explains that when the American economy was thriving, it was because neither capital nor labor was permitted to dominate the marketplace. Using his words, it’s “in the tension, it’s in the actual fight between [capital and labor], that capitalism becomes functional, that it becomes something that every stratum in society has a stake in, that they all share.” In other words, when the economy becomes a huge Monopoly game and people are kicked out, eventually the winner is left sitting there with a pile of money and no one with whom to negotiate or trade. The problem is that, unlike a game that can be put back on the shelf, the national economy cannot be permitted to come to such an end. Simon’s article continues, to explain how that end will come.

So how does taxation come into play? Taxation is the brake on the downward spiral of unchecked capitalism. It is the tempering effect on the monopolistic and oligarchic trajectory. It provides a way for everyone to stay in the Monopoly game so that the game does not end. Because if the game ends, the outcome will be far worse than the horror show described by Simon in his article. It’s a long article, it isn’t a sound bite fest, and it is essential that people invest more than 30 seconds to read and understand what has been masked by the slogans of politicians and the clichés of the media.

An article in Sunday’s Philadelphia Inquirer asked whether the premise of the movie Delivery Man, that a man could father 533 children, “could . . . really happen?” The answer not only is yes, in theoretical terms, but yes, in practical terms. A Toronto filmmaker has explained that after researching his origins, he discovered that he is one of approximately 1,000 children of the same sperm donor, a man who some decades ago operated a fertility clinic in Great Britain. And, of course, there is Genghis Khan, who almost certainly sired more than a thousand children, making him, as explained in this article, someone who claims 16 million direct male descendants and hundreds of millions of descendants through non-patriarchal lines.

There is no limit in the tax law on the number of dependency exemptions that a person can claim on account of having children, provided the requirements are met. Generally, the children of sperm donors do not qualify as dependents of the sperm donors, and thus there surely has never been a tax return on which hundreds of dependency exemption deductions have been appropriately claimed. The several returns on which taxpayers have claimed the entire population of the country as dependents, as an expression of protest against one thing or another, must be dismissed as irrelevant. Similar issues can exist with respect to the child credit, the earned income credit, and medical expense deductions.

All sorts of non-tax issues present themselves with respect to sperm donation, egg donation, and other forms of assisted reproduction. One question, or for some, a serious concern, is that one man becoming the father of numerous children raises the possibility that, absent knowledge of the identity of their biological fathers, people who meet, date, and marry could be having intimate relationships with a half-sibling without realizing it. Again, this is not a theoretical concern. It has happened. In Ireland, according to this story, an unmarried woman became pregnant, had a son, but did not tell the father, who married another woman, and had a daughter who some years later met the son, and had a child by him, not knowing he was her half-brother. According to another story, twins who were separated at birth met, married, and later had their marriage annulled. Some years ago, a similar situation happened in Massachusetts though I cannot find the story.

Though the question was posed in the Philadelphia Inquirer article on account of sperm donation, the issue can arise in other situations, as the two previous articles indicate. In England, legislation has been proposed to include on birth certificate information about both parents, and information about sperm donation and biological parents. Though sperm banks have rules in place intended to prevent these problems, those rules are based on statistical chance. Because sperm donation is not the only way children with the same father can grow up not knowing they are biologically related, the solution needs to rest with identifying the child’s DNA. Two people who want to confirm that they are not closely related ought to have the ability to compare parental DNA. Currently, people do not have legal rights to identify their ancestral DNA. That needs to change. That proposition surely will trigger objections, arguments, questions, and concerns. Of course it will. The same wave of technological advances that have revolutionized reproduction also has revolutionized information access. The two go hand-in-hand. One wonders how, if at all, the tax law will be implicated. If legislators do not hesitate to get the IRS and state revenue departments involved in health care law, energy law, education law, environmental law, and just about every other area of law, it is not unlikely that if legislators decide to deal with a growing problem they will involve the tax law to some extent.

A recent Tax Court decision, Katz v. Comr., T.C. Summ. Op. 2013-98, demonstrates the importance of filing forms in a timely manner. In this case, the form in question was Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent.

The taxpayer married in 1989. He and his wife had two children. The taxpayer and his wife divorced in 2005. The state court awarded join legal custody of the children to the taxpayer and his former wife, and awarded primary physical custody to the former wife. The decree also stated that the taxpayer and his former wife were each “entitled to claim one child for tax dependency exemption purposes” on their tax returns, and also provided that “[e]ither party may purchase the income tax exemptions awarded to the other party by paying to said party an amount equal to the tax savings received by said party as a result of utilizing the exemptions in the tax year. In 2009 or early 2010, the taxpayer and his former wife agreed that the taxpayer would pay $908 to her for the dependency exemption for 2009. On the 2009 federal income tax return, the taxpayer claimed a dependency exemption deduction for each of the two children. The former wife did not execute or deliver to the taxpayer a Form 8332 for 2009, until the day before the Tax Court trial, and immediately before trial the taxpayer furnished that form to IRS counsel. On her 2009 federal income tax return, the former wife claimed a dependency exemption deduction for each of the two children. The IRS did not audit her return nor disallow her claimed dependency exemption deductions. However, it disallowed the taxpayer’s claim for the two dependency exemption deductions.

The Tax Court began its analysis by pointing out that under section 152(e)(1), the child who is in the custody of one or both of the child’s parents for more than one-half of the calendar year and receives more than one-half of his or her support from parents who are divorced is treated as the qualifying child of the custodial parent. Section 152(e)(4)(A) provides that the custodial parent is the parent having custody for the greater portion of the calendar year. Under section 152(e)(2)(A), the child is treated as the qualifying child of the non-custodial parent if certain criteria are satisfied, including the signing of a Form 8332, or its equivalent, releasing the custodial parent’s claim to the dependency exemption deduction. Section 152(e)(2)(B) requires the non-custodial parent to attach that signed Form 8332 to his or her federal income tax return.

The Tax Court agreed with the IRS that the special provisions of section 152(e) applied because the taxpayer and his former wife were divorced, and that the former wife was the custodial parent in 2009. The Tax Court also agreed that the taxpayer was not entitled to claim the dependency exemption deduction unless a Form 8332 was signed, delivered to the taxpayer, and attached to his 2009 return. The Tax Court rejected the claim that the Form 8332 signed the day before trial and delivered to IRS counsel at the outset of the trial satisfied the requirement. It explained that because the former wife had claimed both dependency exemption deductions on a return for which the statute of limitations had expired, permitting the taxpayer to claim the deductions for the same two children “would contravene the intent of the statute by allowing both parents to claim a dependency exemption deduction” for the children. Quoting from another recent decision, the court explained that once the statute of limitations expired, “the custodial parent’s claim of the child as a dependent is not susceptible to being disturbed,” and thus “any statement by her that she ‘will not claim such child as a dependent’ for that year would be absurd.”

The Tax Court also rejected the taxpayer’s argument that he was entitled to the dependency exemption deductions because the divorce decree stated that each of the two parties was entitled to claim one exemption and permitted him to purchase, as he did, the other exemption. The court made it clear that “it is the Internal Revenue Code, and not State court orders or decrees, that determines a taxpayer’s eligibility for a deduction for Federal income tax purposes.”

There is a lesson here for those who prepare divorce decrees in cases where the parties want to make one or more of the exemptions available to the non-custodial parent. Whether the decree is prepared by the judge, prepared by lawyers and signed by the judge, or prepared by the parties using self-help software or forms found on the internet, the key to making the desired provision work as intended is ensuring that the Form 8332 is executed and delivered in a timely manner. Thus, the decree ought to impose a requirement that the Form 8832 be so executed and delivered, and as an incentive, provide that failure to do so requires the non-complying party to pay to the other party the amount of federal and state income tax liability increases to which the other party is subjected because of the failure of the non-complying party to sign and deliver the Form 8832.

Two separate experiences have caused me to think that the tide may be turning. Both experiences involve attitude changes by those who advocate reducing or eliminating taxes.

The first experience was stumbling upon a post on the Addicting Info blog. In Rich People Do Not Create Jobs – Wall Street Vulture Henry Blodget Has Epiphany, Egberto Willies describes how Henry Blodget, barred from the securities industry for “pumping up the value of stocks even as he privately expressed negative views of the companies the stocks represented” published Sorry, Folks, Rich People Actually Don't 'Create The Jobs', in which he repudiated the mantra espoused by so many of his peers that cutting taxes for the wealthy creates jobs. Instead, Blodget points out that jobs are created by “A healthy economic ecosystem — one in which most participants (especially the middle class) have plenty of money to spend.” His analysis builds on the perspective provided by another tax policy convert, Nick Hanauer. Interestingly, before Hanauer stepped forth, I had made the same point in Job Creation and Tax Reductions. A little more than a year later, when Hanauer came out with his revelation, I applauded Hanauer’s stand, and re-iterated my position. In Not All Wealthy Individuals Support Tax Cut Preferences for the Wealthy, I again pointed out that “What will create jobs is an increase in demand, 90 percent of which comes from the 99 percent who are not in the economic top one percent.”

The second experience occurred at the gym, one of my favorite spots for sounding out a cross-section of Americans on a variety of issues, including tax policy. On Wednesday, a friend who has been supportive of tax cuts commented that “they’re trying to double the federal gas tax, and Pennsylvania just raised it, so we’ll probably be paying four or five dollars per gallon.” Of course, I interjected to point out that the choice is between paying $100 in additional gasoline taxes or $500 in front end alignment fees, wheel balancing expenses, and new tire costs. His reaction surprised me. He said, not in these precise words, “The roads are a mess, they need to be fixed, and the people who use the roads should pay for the roads.” Indeed. I made this point in Potholes: Poster Children for Why Tax Increases Save Money and in several earlier posts cited in therein.

Perhaps America is waking up. Perhaps the tide is turning, and at least some of people formerly buying into the sales pitch of the anti-tax crowd and the ultra-wealthy whom they adore are now seeing what those awful “don’t tax but spend” policies of the first decade of this century have wrought. The Blodget article should be required reading in every home, in every business, and in every classroom in which economics is being taught. It’s simple. Destroy the middle class and let the nation’s infrastructure fall apart, and the top one percent will succeed in owning 99 percent of everything, but the everything that they will own won’t be much more than a trash heap.

Two weeks ago, in If They Use It, Should They Pay?, and its follow-up, The See-Saw World of Legislating Infrastructure Funding, I described the long and twisted path taken by Pennsylvania legislation that provided transportation infrastructure funding through, among other things, elimination of the cap on the wholesale liquid fuels tax. During the debate, some politicians suggested that at least part of the resulting increase in the cost of gasoline and diesel fuel might be absorbed by oil companies. According to this report, it is very unlikely that the resulting tax increase will be absorbed by oil companies, suppliers, or retailers. The increase will show up at the pump.

The report also noted that the price of gasoline is expected to drop by as much as 20 cents per gallon. The removal of the limitation on the wholesale tax translates to a 9.5-cent per gallon increase in the price of gasoline. Putting those two facts together caused me to consider the different reactions one sees among consumers when a tax is increased or decreased. For example, if the 9.5-cent tax increase kicked in at the same time gasoline prices were rising, or even if gasoline prices were steady, there would be much more unfavorable reaction than if the increase is offset or even exceeded by a reduction in product price. In the former instances, the tax increase is very noticeable. In the latter instances, it isn’t noticed at all by most consumers. Although people presumably are happier if the price of gasoline drops by 20 cents per gallon than if it drops by 10 cents per gallon, most people react happily when the price drops by 10 cents per gallon. Only a few are miserable because the price did not drop by 11 cents, 15 cents, 20 cents, or more, and of course some people are distressed and angry because the gasoline, unlike the food and other items provided to them by their parents when they were children, is not free.

The temptation facing savvy politicians is to raise taxes when prices are dropping. The increase is much less likely to be noticed. Consumers are fixated on the bottom line. Who thinks they have the better deal, the person who pays $106 for an item based on a price of $100 plus a 6 percent sales tax, or the person who pays $96.30 for the same item based on a price of $90 plus a 7 percent sales tax? Though it is not uncommon to find people driving to another state to make a purchase because the sales tax is lower in the visited state, do consumers drive to states with higher sales tax rates if the price of the product is lower? I think so.

Though timing an increase in sales taxes based on price fluctuations is difficult because the sales tax applies to such a wide variety of items that the price fluctuation is varied, it is easier to time increases in specific taxes because such a tax, such as a gasoline tax, applies to just one product or perhaps a handful of products. Thus, I wonder if part of the delay in getting the legislation through the Pennsylvania legislature reflected a decision to wait until gasoline prices were headed downhill. It’s not that the funding was unnecessary, it’s just that the timing makes it more palatable. And when it comes to taxation, that matters.

A recent Tax Court case, Tucker v. Comr., demonstrates how one word, in this instance, the word “may,” may make a tax difference. The taxpayer and his wife were married in 1985 and separated in 2004. In April of 2009, the state trial court issued a memorandum that identified and distributed the marital estate, established child support, and awarded spousal support. The memorandum ordered the taxpayer to pay $2,414 to his soon-to-be former wife, and also ordered him “to provide for [her] health insurance in the amount of $1,400 per month.” In August of 2009, the state trial court issued the final divorce decree, which affirmed, ratified, and incorporated by reference the memorandum. The court ordered that the taxpayer ‘shall pay to [the former wife] the sum of $1,400 per month in addition to spousal support to assist [her] in paying health insurance premiums. This is not in the nature of spousal support and shall not be taxable to [her] nor deductible to [taxpayer] for income tax purposes.” The taxpayer appealed the order, seeking to remove the “not in the nature of spousal support” language, arguing that the trial court did not have authority to order health insurance premium payment not in the nature of spousal support. The state appellate court affirmed the lower court’s decision with respect to the health insurance premiums, explaining that the lower court may designate a payment as “in the nature of spousal support” for bankruptcy purposes but as “not in the nature of spousal support” for income tax purposes. Because the case was remanded on other issues, the trial court issued a final decree, which retained the same language with respect to the health insurance premiums.

The taxpayer claimed an alimony deduction for the health insurance premium payments that he made to his former wife. The IRS disallowed those deductions. The taxpayer and the IRS agreed that the payments satisfied three of the four requirements for a payment in cash to be deductible alimony. They agreed the payments were made pursuant to a divorce or separation instrument, that the taxpayer and his former wife were not members of the same household, and that the taxpayer’s obligation to make the payments will not survive the death of the former spouse. The parties disagreed on whether the divorce or separation instrument designated the payments as not includible in gross income for the payee and not allowable as a deduction for the payor.

The taxpayer argued that even though the divorce decree characterized the payments as nondeductible by the payor, the statutory requirement is not satisfied unless the spouses intend for that designation to be made. The taxpayer pointed to Q&A-8 of Temp. Regs. Section 1.71-1T(b), which provides that the “spouses may designate that payments otherwise qualifying as alimony or separate maintenance payments shall be nondeductible by the payor and excludible from gross income by the payee by so providing in a divorce or separation instrument.” The taxpayer argued that the phrase “spouses may designate” demonstrated that the state trial court lacked the authority to include the non-deductibility language in the decree without the consent of both spouses. The taxpayer also argued that despite the “for income tax purposes” language in the decree, the state trial court had not contemplated an income tax designation for the health insurance premium payments.

The Tax Court rejected the taxpayer’s arguments. It noted that the language in Q&A-8 provides that the parties may agree to designate payments as non-deductible, but in doing so the regulations allow the spouses to so agree but do not provide the spouses with complete authority to define the payments. The Tax Court explained that the regulations do not contemplate or regulate a state court’s ability, in its discretion, to make the designation. In other words, the designation may be made by the spouses but there is no requirement that it must be made by the spouses. The Tax Court further explained that to accept the taxpayer’s arguments would require federal courts, in resolving the issue, to return to the practice of examining the intent of the spouses, an approach that the Congress eliminated when it amended section 71 in 1984.

Is it possible to write the regulation differently, in a way that would make it easier for taxpayers to avoid getting caught up in this sort of case? Yes. Consider this language: “If a divorce or separation instrument designates a payment as nondeductible for the payor and non-includable for the payee, the payment does not qualify as an alimony or separate maintenance payment, and thus is not deductible by the payor nor includable in the gross income of the payee. It does not matter whether the language appears in the instrument because the spouses agreed to the language and requested the state court to include it in the instrument, because one of the spouses requested the inclusion of the language, or because the state court on its own initiative and through exercise of its discretion included the language in the instrument.”

A recent Tax Court case, Jibril v. Comr., demonstrates that identifying a taxpayer’s dependents isn’t as obvious as one might expect. The taxpayer arrived in the United States in 2007, moving to Washington in May of 2008. In April of 2009, the taxpayer’s aunt and her two children, cousins to the taxpayer, arrived in the United States and settled in Arizona. In June 2009, the taxpayer moved into an apartment in Kent, Washington. In December 2009, the taxpayer paid for airline tickets to bring his aunt and cousins from Arizona to Washington. They moved into the taxpayer’s apartment. In January 2010, the taxpayer’s aunt and cousins moved out of the taxpayer’s apartment and into their own apartment. The taxpayer assisted his aunt and cousins with their rent payments and with other financial support. The taxpayer’s lease on his apartment ended in June of 2010, at which time he moved into the unit occupied by his aunt and cousins. In September of 2010, the taxpayer moved to Seatac, Washington. On his 2010 federal income tax return, the taxpayer claimed dependency exemption deductions for his cousins, filed as head of household, and claimed an earned income credit. The IRS disallowed the deductions, the filing status, and the credit. The Tax Court agreed with the IRS.

The Tax Court explained that in order for the taxpayer to claim his cousins as dependents, they must be qualifying children or qualifying relatives of the taxpayer, in addition to other requirements. The cousins were not qualifying children because the only persons who can be qualifying children are those listed in section 152(c)(2), namely children, brothers, sisters, stepbrothers, stepsisters, and descendants of children, brothers, sisters, stepbrothers, and stepsisters. Cousins are not within the list. The cousins were not qualifying relatives because they did not fall within the list of relatives in section 152(d)(2), nor did they satisfy the section 152(d)(2)(H) test of being an individual, other than a spouse, who, for the taxable year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer’s household. An individual is not a member of the taxpayer’s household unless both the individual and the taxpayer occupy the household for the entire taxable year. During 2010, the taxpayer and his cousins shared one apartment unit for roughly a month, and shared another apartment unit for as many as four months. They did not occupy a household together for the entire taxable year.

Because the taxpayer was not eligible to claim the cousins as dependents and because they were not his qualifying children, the taxpayer was not entitled to claim head of household filing status. Similarly, because the cousins were not qualifying children of the taxpayer, the taxpayer was not entitled to an earned income credit because his earned income exceed the phaseout amount for a taxpayer with no qualifying children.

The court noted that it was “sympathetic” to the taxpayer’s position, and that it realized statutory requirements can cause harsh results for taxpayers who provide significant financial support to family members. The court, however, also explained that it is constrained by the statute as written. The responsibility for the outcome, therefore, rests with the Congress. Perhaps it is time to permit each taxpayer to use, transfer, or sell his or her personal exemption and to eliminate the tangled tapestry of definitional requirements that pervades the personal and dependency exemption deduction. If tax credits can be bought and sold, so, too, can personal and dependency exemptions be transferable. Not only would this approach contribute to simplification of the tax law, it also would ameliorate the harshness of the outcome in cases such as Jibril.

Though I don’t remember the first time one of my parents said to me, “Don’t forget to say thank-you,” I do remember that during my childhood, I heard that advice enough times for it to sink in. The identity of the person to whom thanks were expressed did not matter, nor did the particulars of whatever it was that they said or did. What mattered was that a gift, an act of kindness, a good gesture, or a word of encouragement deserved acknowledgement and appreciation.

What I do remember is that, with the exception of 2008, a Thanksgiving post has appeared in this blog each year as Thanksgiving showed up yet again on the calendar. I do not remember what happened in 2008. Nor have I tried to figure out what happened.

Beginning in 2004, with Giving Thanks, and continuing in 2005 with A Tax Thanksgiving, in 2006 with Giving Thanks, Again, in 2007 with Actio Gratiarum, in 2009 with Gratias Vectigalibus, in 2010 with Being Thankful for User Fees and Taxes, in 2011 with Two Short Words, Thank You, and in 2012 with A Thanksgiving Litany, I have presented litanies, bursts of Latin, descriptions of events and experiences for which I have been thankful, names of people and groups for whom I have appreciation, and situations for which I have offered gratitude. Together, these separate lists become a long catalog, and as I did in 2011 and 2012, I will do a lawyerly thing and incorporate them by reference. Why? Because I continue to be thankful for past blessings, and because some of those appreciated things continue even to this day.

This year, there is more for which I express thanks. And, yes, it is a list:

• I am thankful for the lives of those whose time in this place ended during the past year.
  
  
• I am thankful for those who put me in touch with second and third cousins I did not know I had.
  
  
• I am thankful for the opportunity to arrange a meeting between my mother and her newly-discovered second cousin.
  
  
• I am thankful for the time to travel, to see new places, to visit again familiar places and long-time friends, and to walk in the streets of several ancestral towns and villages.
  
  
• I am thankful for the experience of singing with a choir formed to sing with England’s National Symphony Orchestra, under the direction of Anthony Inglis, aboard the Queen Mary 2.
  
  
• I am thankful for Villanova University adopting the staged retirement plan I proposed, for Dean John Gotanda in helping me draft it, and for the agreement into which the University and I entered.
  
  
• I am thankful for GPS and those who invented it, because it has rescued me more than a few times, spared me from asking for directions, and saved me time and inconvenience.
  
  
• I am thankful for caller ID and those who invented it, because it has saved me much time and aggravation.
  
  
• I am thankful for being able to live one mile from the School of Law, because after hearing commuting horror stories from friends, I realize how many hundreds of hours are available to me each year for other endeavors.
  
  
• I am thankful for all the things and people for which and for whom I ought to be thankful but have let slip my memory.

I share again what I wrote in 2006 in Giving Thanks, Again, and again in 2009 in Gratias Vectigalibus:

Have a Happy Thanksgiving. Set aside the hustle and bustle of life. Meet up with people who matter to you. Share your stories. Enjoy a good meal. Tell jokes. Sing. Laugh. Watch a parade or a football game, or both, or many. Pitch in. Carve the turkey. Wash some dishes. Help a little kid cut a piece of pie. Go outside and take a deep breath. Stare at the sky for a minute. Listen for the birds. Count the stars. Then go back inside and have seconds or thirds. Record the day in memory, so that you can retrieve it in several months when you need some strength.

Some things are worth repeating, and I am thankful I could do that.

In last Friday’s post, I described the see-saw history of the Pennsylvania legislation that will provide funding for transportation infrastructure repairs and improvements, with much of the money coming from the elimination of the cap on the wholesale gasoline tax. One of the legislation’s opponents, according to this report, offered an interesting perspective on the infrastructure maintenance. Representative John Lawrence admitted that “structurally deficient bridges are a real issue and we have to focus on that.” He then asserted that the price tag should be lower. How can the price be reduced? Use cheaper materials, risking additional structural failures or, at best, shortening the lifespan of the bridge and thus accelerating the day when more funding is required for repairs? Use cheaper labor? Perhaps the skilled workers responsible for repairing and building bridges and highways that need to be safe should be paid minimum wage, or less? The reality is that safe, adequate, and functional bridges and highways cost money. If the state were to try to “do it on the cheap,” it would end up with cheap bridges and cheap highways. That’s no way to fulfill one’s fiduciary responsibility for the health and safety of the citizens of Pennsylvania.

Earlier this week, in If They Use It, Should They Pay? I described the controversy over proposed legislation in Pennsylvania that would generate funding for the state’s crumbling transportation infrastructure. One of the principal sources of revenue for funding the projects is a repeal of the limit on the tax imposed on the wholesale price of gasoline. I criticized legislators who objected to the legislation because it would increase the cost to motorists of using the highways. I pointed out that the motorists were the people whose vehicles, over time, put wear and tear on the highways, bridges, and tunnels, and that it made sense for the users of the infrastructure to pay for its use. I noted that in the absence of repairs to the infrastructure, motorists would face even higher outlays for wheel alignment, tire damage, accidents, injuries, and death.

On Monday, the Pennsylvania House, according to this report, voted down the legislation by a vote of 103-98. Those voting against the bill included not only legislators opposed to increasing the amount paid by motorists to use the highways, but also legislators objecting to an amendment that had been tacked onto the legislation. Under the amendment, highway projects costing between $25,000 and $100,000 would be added to the list of projects for which prevailing union-level wages would not be required, an exemption that currently applies only to projects costing less than $25,000. Reaction was predictable, with expressions of outrage, shock, and disappointment coming from those who understand the seriousness of the problem being addressed.

The next day, when the legislation was again brought up for a vote, it passed, 104-95, according to this story. What happened that caused six more yes votes and eight fewer no votes? The Secretary of Transportation explained that he and other administration officials had invested time trying to persuade legislators who had voted no to change their mind, and succeeded with some of them. He denied making promises to use some of the funding for projects in those legislators’ districts. Considering the fact that highways in every district are in need of repair, it’s not difficult to believe that there was no need to promise funding for any district because funds would be headed to each district in any event. But, perhaps there was some discussion of additional funding.

Objections to increases in the cost of gasoline were met not only with the argument I have been making, that motorists need to pay for the cost of transportation infrastructure, but also with an explanation of why the change in the prevailing wage limitation was an insignificant concern. The Secretary of Transportation revealed that during the past year only 17 state highway projects were under the $100,000 limit and that the change in the limit would affect only a handful of the thousands of projects on the needs-to-be-done list. Another piece of information shared with legislators was a statement from the president of the Pennsylvania Chapter of Business and Industry, which supports the legislation, to the effect that it is not a certainty that eliminating the cap on the wholesale gasoline tax would bring about a penny-for-penny corresponding increase at the gasoline pumps. Also swaying some legislators are the 50,000 jobs that will be created once the projects are underway.

Yet, in the not unusual complex manner in which legislation is enacted, the bill must go through several more steps before becoming law. On Wednesday, as described in this report, the Pennsylvania Senate, which had passed a similar funding bill by a wide margin in June, approved the measure, even though the bill it approved in June did not have the change to the prevailing-wage cap that is in the House-passed legislation. The legislation returned to the House for what is called a concurrence vote, was approved by the House, as reported in this story. It now goes to the governor to be signed.

In all of this jockeying and maneuvering, one observation stands out. The Secretary of Transportation noted, when describing efforts to persuade legislators to vote for the funding bill, “Some members thought they didn’t have to vote for it and today realized they did.” Really? After several years of discussion and commentary from every corner of the state focusing on the dire condition of the state’s highway infrastructure, it took this long for some members to realize that the legislation is necessary? That’s no less disappointing than the initial failure of the bill to gain approval on Monday.

In a Washington Times editorial, Adam Brandon objects to raising funds for the nation’s crumbling highway infrastructure through the use of the mileage-based road fee because doing so would require the installation of a “little black box on your car’s dashboard that would transmit your vehicle-use data to a government tax collector.” This, he argues, would be an unwarranted invasion of privacy, or, at least, a threat to become an unwarranted invasion of privacy. I have addressed the mileage-based road fee in a long series of posts, 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, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, and Mileage-Based Road Fees: Privatization and Privacy.

Brandon actually tags the mileage-based road fee as “an improvement over the gas tax” because it “is both economically efficient and lacks the redistributive component of most taxes.” Yet Brandon seems nervous about the prospect of the possibility that “the government will know where you are at all times.” But the mileage-based road fee device will not provide that capability. Why? Because it can track only the location of the vehicle. Thus, even if a government wanted to know, and figured out, that a person’s vehicle was in a shopping mall parking lot, there would be no way of knowing from that information which stores the person visited, what the person purchased, or how much the person paid for those purchases. Nor would it provide any information about the identities of individuals with whom the person met or the content of their conversation. As I explained in my last post on the topic, Mileage-Based Road Fees: Privatization and Privacy:

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.

Thus, Brandon’s concern that “tax collectors can access our physical location at the touch of a button” is overstated, because at best, the only location that could be accessed is the location of the vehicle. And considering that the system could be outfitted with a delay such as that used with EZPass and similar systems, because information about the use of the road need not be real-time for a fee to be imposed, by the time the button is pushed the vehicle very well could be at another location, its driver could be out of the vehicle, or another person could be driving the vehicle.

Brandon also poses an interesting concern. He predicts that some people, in an attempt to avoid paying the fee, would tamper with the device. Or at least would try. He’s correct, because it is unquestionable that people exist who want something for nothing and want road use for free. The answer is not to ditch the proposal, for the same reason people don’t stop buying houses because burglars exist. The response is to create a device that is as tamper-proof as possible, and to provide for serious penalties for those caught trying to tamper with the device. But when Brandon tries to explain why the possibility of tampering demonstrates what he sees as the inadvisability of the proposal, he makes an awkward assertion. Brandon claims, “Do we really own our own cars if we are not allowed to modify them?” The answer is yes. Under current law, it is illegal to tamper with odometers, certain safety features, catalytic converters, and some other items. Adding the mileage-based road fee device to the list does not make the owner of the vehicle any less an owner.

Existing technology, such as roadside cameras, credit card receipts for fuel purchases, electronic toll systems such as EZPass, and observations by law enforcement authorities, already provide substantial information concerning the location of a vehicle. Similarly, the location of an individual when in public areas is not a secret. The mileage-based road fee does not generate a significant increase in the revelation of vehicle location information, and does nothing to increase the disclosure of individual location information.

Pennsylvania, not unlike other states, faces a transportation infrastructure crisis, though some reports indicate the situation is worse in Pennsylvania than in any other state, when measured, for example, by the number of deficient highway bridges. Legislators in Harrisburg have been hammering out a bill that would provide $2.5 billion for repairs to crumbling highways, bridges, and tunnels in Pennsylvania. According to this Philadelphia Inquirer report, there is a significant chance that the legislative effort will die.

One of the features of the proposed legislation is a provision that removes the limit on the tax imposed on the wholesale price of gasoline. Some Republican legislators object to the legislation because they “believe uncapping the tax on the wholesale price of gas will be passed on to motorists.” Of course it will. And it should. Motorists are the people who use the highways and bridges. Motorists are the ones whose vehicles, over time, wear down the road surface and stress bridges. Motorists are the ones who benefit from the existence of highway infrastructure. The price of repairing and maintaining that infrastructure has increased over the decades, and highway tax revenue has not kept pace.

Those who argue that motorists ought not bear the cost of maintaining the roads, because the roads benefit non-motorists who, for example, buy goods shipped over the highways are missing an important market factor. The motorists, specifically, trucking companies, who deliver goods will, as they ought, pass the increased costs on to the consumers. Those costs are part of the price of the item in question.

The highway infrastructure is crumbling. The cost of accidents, pothole damage to vehicles, and the deaths and injuries caused by infrastructure deficiencies is rising, and will continue to rise until and unless the roads and bridges are fixed. In the long run, the cost of increased road taxes is less than the cost of not doing anything about the roads. Roads are not free. Someone needs to pay. And who ought that be other than those who use the roads?

Advocates of cutting taxes claim, among other questionable assertions, that taxes can be cut because too many tax dollars are shifted from taxpayers to “takers,” with “takers” generally being defined as the poor and unemployed who are in need of assistance because they’re lazy, accustomed to entitlements, or unwilling to look for work. Supporters and members of the anti-tax crowd claim that taxes are too high. One of the questions they ask is, “Where do the tax dollars go?” One of the items on the list that constitutes the answer is something that ought not be on the list, yet stopping the flow of tax dollars in that direction is proving to be difficult if not impossible. Why? Because the recipients of these taxpayer dollars are the ultrawealthy.

The takers in this instance are the owners of professional sports franchises. I first raised objections to siphoning tax revenues into the wallets of wealthy sports team owners in Tax Revenues and D.C. Baseball. I explained:

Major league baseball wants D.C. to fund the stadium. D.C., an area that has had, and continues to have, serious financial problems, which depends on the Congress for appropriations to assist it in balancing its budget, and which can barely provide services to its residents, is being asked to come up with money to pay for a stadium to be used by a bunch of multi-millionaire team owners and their almost-as-wealthy employees. In addition to charging the team rent for use of the stadium, a tax on concessions, D.C. proposes to impose a tax on other businesses, and has set out to try to "sell" this plan to them.

Once upon a time, if a business chose to move one of its facilities, it found a location, negotiated a price, worked out any zoning problems, and carried on in true free market tradition. That's not how it happens anymore. Businesses that choose to move approach two or more governments and bargain for public financing and/or tax breaks. Sports teams are among the most notorious for seeking public financing of their private enterprises.

The argument that is used by the sports teams and by other businesses is that they are bringing "economic growth" to an area. Therefore, so the argument goes, because they are improving the economic condition of the community, the community ought to pay. Through the government. So governments trip over each other trying to entice the business to their neighborhoods.

There are three huge flaws in the argument.

First, there is no guarantee that the newly arrived sports team or business will bring economic growth. Yet any attempt to obtain a pay back of the governmental financial assistance if the promises of the sports team or business aren't met is rejected. Why can't the team or the business put its money where its mouth is? Simple. They want the risk to be shifted to the taxpayer.

Second, the community gets its chance to pay without the need for tax revenues to be funneled to the team or business. If the team or business is selling something that people want, they will come. They will buy tickets or pay for the goods or services being sold. They will patronize the subsidiary businesses that sprout up around the principal team or business location. They will watch the team on television, pushing up ratings, and increasing the amount of money that networks and advertisers are willing to pay to the team. A tax, in contrast, is a forced extraction of money that lacks the voluntariness of the free market.

Third, the idea that governments need to cave because the team or business otherwise would not locate in the area is tempered by the fact that the team or business needs to locate somewhere. There are only so many cities that can support a professional sports team. Most businesses need to be near a port, or an airport, or a good highway system, or the source of raw materials. No one city can "grab" all the teams or all the businesses, and when a city gets too big in that respect, businesses begin to avoid the city because its success in attracting businesses breeds its rewards of congestion, higher infrastructure needs, crime, and other disadvantages. In the long run, it balances out.

It is interesting that D.C., which could use revenue to fund schools, playgrounds, and other beneficial social services, is expected to come up with revenue for a baseball stadium when it hasn't been able to find the revenue to meet more important needs.

I returned to this issue more than a year ago, in Putting Tax Money Where the Tax Mouth Is, when I addressed plans in Chester, Pa., to enact new taxes to deal with the failure of a taxpayer-financed professional soccer stadium to generate the economic development that its supporters claimed would be generated by using taxpayer dollars to fund the stadium. I wrote,

Private enterprise, which for the most part rejects taxation and government regulation, is quick to find ways to tap into public funding that is financed by the very tax systems that private entrepreneurs detest. Though the argument that a particular private enterprise is good for the public gets transformed into a plea for public funding, what’s missing is evidence that the public funding is necessary. And, if the public funding is necessary because the private enterprise otherwise is not economically viable, ought not the private sector not pursue an uneconomical proposal? Ought not the question be whether the private enterprise is necessary for the health and welfare of the public? It’s one thing to seek public financing for a private enterprise that puts out fires, prevents river flooding, and improves public safety. It’s a totally different animal to seek public funding for the construction of a stadium that is important to the small fraction of the public that cares about the sport in question.

The absurdity of private enterprise feeding at the public trough is illustrated by the almost-completed deal to finance the construction of a stadium for the Minnesota Vikings. The team, a member of a league that hauls in billions of dollars of revenue every decade, managed to cajole state and local legislatures to approve public funding for its private activity. According to this Alexandria, Minn., Echo Press story, Minnesota would fork over $348 million and Minneapolis would dish up $150 million for the construction of a stadium owned by taxpayers who supposedly were going to use their increased after-tax-cut dollars to fund job-creating enterprises. So apparently the get-richer-quick deal is to buy some votes, get a tax cut, use a fraction of the tax cut to hire lobbyists, and have those lobbyists extract tax dollars from the government.

A little more than a year ago, in Building It With Publicly-Funded Tax Breaks , I pointed out that private sector claims that it was superior to government when it came to getting things done, and its slogan, “we built it,” was hypocritical considering the enormous volume of taxpayer dollars pumped into the private sector even when taxpayers objected.

About a year ago, in Public Financing of Private Sports Enterprises: Good for the Private, Bad for the Public, it was the taxpayer financing of parking garages for Yankee Stadium that generated my criticism of wealthy stadium owners grabbing taxpayer dollars, particularly when those garages ended up not as the economic blessing the multi-millionaires and billionaires promised but as an economic failure requiring more tax revenues to be diverted. A month later, in When Tax Revenues Fall Short, Who Gets Paid?, I pointed out how funneling tax dollars to wealthy sports team owners had required cities like Oakland and Jacksonville to cut services for ordinary citizens and how Indiana raised taxes to fund its contributions to the stadium used by the Indianapolis Colts. I noted that:

The anti-tax crowd, oblivious to the harm that tax cuts do to ordinary citizens, backs tax increases when the revenue is funneled into private enterprise. . . Reversing foolish tax cuts to provide revenue to care for the needy is some sort of outrageous sin in the minds of the anti-tax crowd, but jacking up taxes to pump money into the hands of the wealthy seems to be some sort of virtue to these folks.

It is outrageous that the anti-tax crowd casts into a “47 percent net” the people it considers to be “takers.” These folks do this without regard to whether the “taker” is a disabled military veteran, a person disabled by disease caused by private enterprise pollution of air and water, a person unable to work because of the consequences of being the victim of a crime that could not be prevented because a city had to let police officers go, a person disabled when doing a good deed to save the lives of innocent people, or a firefighter injured on the job. Yet when the rich show up, hat in one hand, bully-club in the other, these same opponents of “taking” start handing out taxpayer dollars to wealthy individuals and corporations, justifying their hypocritical decision with every possible baseless excuse available.

Now comes news that the Atlanta Braves, whose owners are swimming in wealth and who stand in line for billions of dollars of television and other broadcast revenue, have somehow persuaded Cobb County, Georgia, to fork over at least $450 million of its tax revenues to finance a new stadium for the club, while the team provides only $200 million. The taxpayers of Cobb County must be thrilled, facing some combination of tax increases or service cuts. The Braves and the politicians teamed up with the club argue, of course, that this deal will trigger at least $450 million in new revenues for Cobb County, but it hasn’t worked out that way in Chester, Pa., or for New York City, or Oakland, or Jacksonville, or any of the other places where the ultrawealthy padded their wallets.

As I explained in Putting Tax Money Where the Tax Mouth Is, there are two solutions:

The first is easy. When a private enterprise seeks government funding, just say no. If it’s an economically viable project, it will survive in the free market on its own. The second solution is an alternative, to permit flexibility in cooperation between the public sector and the private sector. When the private sector entrepreneurs offer promises that their project will increase government revenues, hold them to that promise. Compel them to offer a number. Compel them to guarantee that if the revenues do not materialize, they will make up the difference. If they truly believe their project will do what they promise it will do, they ought not hesitate to agree, because the guarantee rarely if ever will need to be met. I doubt, though, that the private sector handout seekers will agree to such a guarantee, because they know the reality of these sorts of deals. The promised tax revenue benefits rarely, if ever, show up.

Why am I so adamantly opposed to letting rich takers feed at the public trough while the needy and deserving are reduced to poverty? I answered that question in When Tax Revenues Fall Short, Who Gets Paid?, when I asserted, “The typical justification [for steering more wealth into the hands of the already wealthy] that it is good for everyone to cut the taxes of the wealthy, or that it is good for everyone to collect taxes from everyone and funnel the proceeds into the hands of private corporations and rich individuals, has been disproven repeatedly. These actions have not generated jobs. They have reduced public safety. They have failed America.”

There are two lessons to be learned from the Tax Court’s decision in Herring v. Comr., T. C. Summary Op. 2013-84. Both may be obvious to tax practitioners but probably are not so apparent to those not steeped in tax law.

The taxpayer inherited an interest in his family’s home when his mother died. Several years later, he moved into that house and treated it as his primary residence until 2007. For each of the years from 2005 through 2007, he filed with the local government for real property tax relief, claiming a homestead exemption because the house was his primary residence.

In 2001, the taxpayer began to build a house on another piece of property that he had owned for several decades. The development stopped in compliance with an injunction issued when the taxpayer and his then spouse began divorce proceedings, but resumed when the divorce was final in the fall of 2007. On June 8, 2008, the taxpayer moved into the new home.

On March 30, 2009, the taxpayer filed his 2008 federal income tax return, claiming the first-time homebuyer credit on account of the home he had constructed and into which he moved on June 8, 2008. When the taxpayer filed his 2010 and 2011 federal income tax returns, he reported a $500 additional federal income tax liability on account of the first-time homebuyer credit claimed on the 2008 return.

The Tax Court held that the taxpayer was not entitled to the first-time homebuyer credit because he failed to meet the requirement that he not have a present ownership interest in a principal residence during the three-year period ending on the date of the purchase of the residence or, when the residence is constructed by the taxpayer, the date the taxpayer occupies the residence. In this instance, the taxpayer owned a principal residence during most of the three years preceding June 8, 2008. By treating the inherited residence as a principal residence and by filing the homestead exemption claim on which the taxpayer asserted that the property was a principal residence, the taxpayer unquestionably failed to qualify for the credit. The lesson is a simple one, known to tax practitioners, but apparently not understood by many others. To be a first-time homebuyer, one must not already own a principal residence during that three-year period ending on the date of purchase or occupancy.

In what ought to be considered dictum, because it was not essential to the conclusion reached by the Court, the Tax Court rejected the taxpayer’s claim that by claiming the credit, he had entered into an enforceable contract with the IRS, by which the IRS loaned $7,500 (the amount of the credit) at zero percent interest, repayable through annual $500 increases in tax liability over a 15-year period. The taxpayer argued that the acceptance of his 2010 and 2011 tax returns by the IRS ratified the contract. The Court explained that putting something, such as a claim for a credit, on a return is at most a declaration by the taxpayer of the taxpayer’s position with respect to that item.

The Court also addressed the taxpayer’s argument that it was unfair for the IRS to issue a notice of deficiency for $7,500 without taking into account the $500 annual “repayments” made in later years. The Court explained that the definition of a deficiency does not take into account increases in tax liability for subsequent years required by section 36(f)(1). The Court advised the taxpayer that the appropriate avenue for relief would be the filing of a claim for refund for those subsequent years. However, if the taxpayer does not act with rapidity, the statute of limitations will preclude success. When the notice of deficiency is received, it might be wise to consider filing a protective claim for refund before the statute of limitations expires. Of course, the better plan would be to refrain from claiming in the first place a credit for which the taxpayer’s lack of qualification is undeniable.

According to this Philadelphia Inquirer story, the City of Philadelphia, strapped for cash because of tax revenue declines, and home to a School District on the verge of breakdown triggered by tax revenue shortages, is about to bless a team of private developers with a tax break in the tens of millions of dollars. The deal sought by the developers would provide them with a $33 million loan which they would repay through tax forgiveness over 20 years. In other words, the so-called loan is a special tax break, one amounting to $76 million over the 20-year period. The loan would be used to help finance the construction of two hotels in center city Philadelphia.

So why would the City of Philadelphia, specifically City Council and the Mayor, permit a cash-strapped city to relieve these developers of some or all of their tax obligations, while not extending similar breaks to the ordinary rank-and-file worker who lives in the city and pays taxes? For those who advocate free market approaches to government regulation and tax policy, this situation is an interesting lesson.

When it comes to deciding to build a hotel, a developer faces two possibilities. Either it is an economically feasible project, or it is not. By economically feasible, I mean a project that over a period of time will generate sufficient net revenue to pay for its construction and return a profit to the developers and owners. If the project is economically feasible, then the developers ought not be begging at the doorway of government offices for tax breaks. Build the hotel, provided zoning and other requirements are satisfied. On the other hand, if the project is not economically feasible, don’t move forward. If the project is not economically feasible, the reasons should encourage putting the project on the shelf or abandoning it entirely. For example, if the project cannot generate sufficient revenue, it’s almost certainly because there is no need for the two hotels. As another example, if the costs of building and operating the hotels are high, then charge higher prices for the hotel rooms, and if the market cannot sustain those prices because there isn’t a shortage of hotel rooms to drive up room prices, don’t build the hotels. When asked by City Council to provide their project profit margin, the developers declined to do so.

According to the story, the developers insist “they can’t build there without tax increment financing.” The response from the city ought to be, “Then don’t build there, because the market is telling you it makes no sense to build there.” Existing hotel owners explain their opposition by pointing to the lack of demand for the hotel rooms the developers are proposing to build. Supporters of the project insist that demand is or will be increasing, and that existing hotels are not able to set aside blocks of hotel rooms for people attending conventions at the city’s convention center. From a lawyer’s perspective, this aspect of the debate comes down to a matter of determining the facts. Opponents of the project note that although convention center space has grown by more than one-third, the number of attendees has remained the same during the past dozen years. If the hotels are built and demand does not increase, it is possible that these newer hotels would siphon customers from existing hotels, which could go out of business.

Interestingly, some of the existing hotel owners who oppose the project aren’t opposed to tax subsidies for private developers. Of course not. Isn’t it fun when private developers fight with each other over tax breaks not available to others?

The developers also have obtained funding for the project by persuading the governor of Pennsylvania to kick in $25 million of state taxpayer dollars. This is the same state that is incapable of coming up with funds for financially distressed school districts or for fixing transportation infrastructure.

Advocates of the project argue that, when built, the project will generate tax revenues even after taking into account the tax breaks. If this is true, then perhaps the city ought to build the project and collect the profits, which would generate far more revenue for the city than simply giving $76 million in tax breaks to private sector developers.

This is not the first time I’ve criticized public funding of private sector projects. I doubt it will be the last time. The private sector individuals and corporations who help themselves to public money surely are among the wealthy who complain that tax rates are too high, and yet even after tax rates for the wealthy are chopped, they continue to find ways to reduce their tax burdens through these sorts of private arrangements. Most of these projects fail, leaving taxpayers in a lose-lose situation. When are taxpayers who don’t get these multi-million dollar tax breaks going to wake up and stand up to this continued erosion of the well-being of the commonwealth?

Earlier this week, numerous reports, such as this one, revealed that an investigation for suspected tax evasion turned up more than unpaid taxes. Customs police in Germany conducted a raid in 2011, searching the apartment of a person suspected of tax evasion. During the search, the police discovered a cache of 1,500 works of art, worth at least one billion dollars. The art, which included masterpieces, had been stolen by the Nazi Party. How it ended up in the possession of the taxpayer has not yet been disclosed. Government authorities in Germany have not confirmed these reports, and have declined to comment on any of the issues involved in the investigation. Nor has there been any comments on the tax implications of the discovery, and it is unclear whether questions about tax issues have been posed to the authorities.

So to the list of reasons taxes are a good thing is added another, unexpected benefit. I doubt that any of the people who eventually recover the art stolen from them or their families will be shedding tears over the fact that a tax investigation search was the cause of the discovery.

From time to time, and rather often during the past few months, people ask me to describe the chances for tax reform. My response is always the same. “Don’t hold your breath.” I explain that for genuine reform to occur, special tax breaks need to be repealed. I describe what happens when a tax break is put on the table for repeal. “Those who benefit from the tax break show up, or send lobbyists on their behalf, to argue that repeal of the tax break will destroy the American economy, bring on a depression that dwarfs all prior economic downturns, and quietly threaten legislators with losses in the next election. I don’t doubt that those campaigns are financed in part with the tax savings generated by the tax breaks in question. It doesn’t matter whether the tax break is good or bad for the economy, creates or destroys jobs in this country, enhances or weakens national security, or is good or bad for the American people. The folks with the money use some of it to purchase more tax breaks.”

And now another reason to doubt that we will see tax reform in the near future has come to light. As revealed in this calendar, the House of Representatives had scheduled 126 working days for the First Session of the 113th Congress, which meets during 2013. For 2014, according to the recently published legislative calendar, the House plans 113 working days. In comparison, the typical American fortunate enough to have full-time employment works, assuming a two-week vacation, 250 days each year. Or more. Tax reform requires a heavy investment of time. It is a major project. It’s not something that can be done, even in a slipshod manner, by a legislature that is absent most of the year.

If there ever was a need for proof that members of the Congress is more concerned with getting themselves re-elected than with buckling down to do what needs to be done for the common welfare of the American people, the legislative calendar is Exhibit A-One. There’s no denying that the Congress has become the servant of the moneyed interests, and in its present configuration and mentality, will bring nothing of value in terms of tax reform. If something is enacted with fancy words of promise in the name of the Act, it almost surely will not be genuine reform and most likely will be a cover for more tax breaks benefiting the people who can afford to purchase them.

An important decision by the Supreme Court of Virginia, Elizabeth River Crossings v. Meeks, Docket No. 130954 (Va. 2013), addresses the imposition of tolls by a private entity empowered to do so by a state transportation agency to which the legislature delegated toll-setting powers. Though the decision rests on the language of the Virginia Constitution and the specific statutes enacted by the Virginia legislature, the holding and analysis should prove helpful when similar questions arise in other states.

The litigation was brought by a citizen who objected to the fact that he would be required to pay a toll for using a tunnel that previously had been untolled. The plaintiff claimed that the toll was a tax, that the setting of the amount of the toll had been delegated to a private entity in violation of the Virginia Constitution, and that the arrangement abridged Virginia’s police power. Though prevailing in the lower court, the plaintiff’s claims were rejected by the Supreme Court of Virginia.

To deal with traffic congestion in the Portsmouth and Norfolk areas, specifically, the crossing of the Elizabeth River, the Virginia legislature authorized the Department of Transportation to enter into a contract with a private entity, selected by the department, under which the private entity would build a new tunnel and, at the option of the parties, make improvements to existing tunnels and feeder highways. The legislation provided that if those improvements were made, tolls could be imposed on the use of the improved facilities.

The plaintiff’s arguments rested on the contention that the tolls are taxes, and that the setting of the tolls by the private entity was an unlawful delegation of legislative power. The Supreme Court of Virginia disagreed.

The plaintiff argued that the tolls “are a tax because their primary purpose is to raise revenue.” The court explained why it held that the tolls are user fees. To be a tax, the amounts in question must be “levied for the support of government, and their amount . . . regulated by its necessities.” On the other hand, “tolls are user fees when they are ‘nothing more than an authorized charge for the use of a special facility.’ ” Specifically, the court treated the tolls in question as user fees for three reasons. First, “the toll road users pay the tolls in exchange for a particularized benefit not shared by the general public.” Second, “drivers are not compelled by government to pay the tolls or accept the benefits of the Project facilities.” Third, “the tolls are collected solely to fund the Project, not to raise general revenues.”

The plaintiff also argued that the tolls are taxes, that delegating the setting of the tolls was an impermissible delegation of legislative power, and that the Department of Transportation was not permitted to transfer the toll-setting role to the private entity. The court responded by pointing out that the tolls are not taxes, acknowledging that if they were taxes the setting of the rates was not a task that could be delegated. In addition, the court pointed out that the setting of the tolls was not done by the private entity acting alone, but only in concert with, and subject to the supervision and approval of, the Department of Transportation. The court explained that by permitting the private entity to be involved in the determination of toll rates, the legislature did not delegate toll-setting powers to the private entity, but simply empowered it to participate in the process. The court emphasized that the dichotomy between delegation and empowerment is a critical component of its analysis.

The plaintiff argued that the contract between the Department of Transportation and the private entity abridged Virginia’s police power because its terms prevented “the Commonwealth from responding to changing circumstances throughout the duration of” the contract. The court held that by entering into the contract, the police power had not been abridged, because any interpretation of the contract is subject to the impact of the police power, and that the possibility of money damages being awarded against the Commonwealth for breach does not abridge the police power because the legislature must consent to those damages and appropriate funds to pay them.

As these sorts of arrangements for improvements to the nation’s transportation infrastructure continue to get attention, the decision of the Supreme Court of Virginia in this case will be studied, cited, and given consideration. As the court pointed out, the policy question of whether states ought to be putting transportation functions in the hands of private entities is a different issue, one not within the scope of the court’s jurisdiction, but left to the world of public politics and legislative lobbying.