MauledAgain

As the April 15 deadline approaches, it seems appropriate to take a look at one of the more “interesting” attempts at a tax deduction to have come to my attention. In a series of 13 Crazy Tax Deductions, one described the attempt of an 85-year-old taxpayer to claim dependency exemption deductions for her parents. According to the tax return preparer, who declined to include the parents on the tax return as dependents, the taxpayer showed him a copy of “the instructions,” and claimed that all the tests had been met, namely, the parents had no income, were related to her, did not file a tax return, and were not claimed as dependents by anyone else.

The story does not disclose when this happened. But although the definition of dependent has changed, under both the old and the current definitions, one of the requirements is that the taxpayer provide over half of the person’s support. That’s found in section 152(a) before the amendment, and in section 152(d)(1)(C) of the current statute. Support for a person who is dead is zero. The amount of support provided to the dead person is zero. Zero is not more than one-half of zero.

This is not to say that a person who is dead cannot be a dependent. If a dependent dies during the taxable year, the exemption is available for that year because the dependent was alive during part of the year.

The position taken by the taxpayer was at best, clever and creative, but like most clever and creative things, it went nowhere. The tax return preparer’s decision to refuse to claim the deceased parents as dependents is consistent with a ruling that no dependency exemption is available for a stillborn child, and a case holding that no exemption is allowed for a child not born by the end of the year. In contrast, the IRS has ruled that a child who lives momentarily after birth qualifies as a dependent if the other requirements are satisfied.

On Wednesday, in The Colors of Making and Taking, I noted the correlation between states that pay in fewer federal tax dollars than they take out in federal expenditures and the tax policy philosophy of those states as indicated by their political color, and the correlation between states that pay in more federal tax dollars than they take out in federal expenditures and the tax policy philosophy of those states as indicated by their political color. Those who are anti-tax seem quite happy to be among the takers even though their mantra in being anti-tax rests principally on a distaste for takers among whom, of course, they don’t count themselves.

The other day, Gallup releases a poll measuring the extent to which people “gripe” about their state tax burden. With only a few exceptions, taxpayers who thought that their state taxes were too high lived in the states that pay in more federal tax dollars than they take out in federal expenditures, and taxpayers who were the “least negative” about their state taxes lived in the states that pay in fewer federal tax dollars than they take out in federal expenditures. That makes sense. To the extent that taxpayers in one group of states are financing those in another group of states, taxpayers in the first group need to pay more state taxes in order to make up the shortfall caused by the shifting of federal tax dollars from the first group to the second group. And of course the taxpayers who are footing the bill for the expenditures of states that refuse to carry their own financial weight are going to gripe. Unfortunately, unlike the wealthy who can buy votes throughout the country no matter where they live, the taxpayers who live in the maker states are unable to cast votes in the taker states to put an end to this travesty.

It’s easy for politicians in taker states to lower state taxes and assume the role of an anti-tax hero their state is being financed by the taxpayers of another state. How much more evidence needs to be put forth before Americans recognize that no matter what state they live in, they are being taken for a ride?

A column several days ago in the Philadelphia Inquirer, Where’s the money go? Often, to other states, caused me to think a bit about the great divide that many of those on the right claim exists in this country. To them, the divide isn’t between the one percent and the 99 percent, but between “makers” and “takers.” They view this divide as unjustified, with “takers” riding on the backs of the “makers.”

The column in question pointed out several realities that deserved attention. All are interrelated.

First, though the government collects revenue, it also puts money back into the economy. In other words, it’s not a matter of tax revenue falling into a black hole and exiting the economic arena.

Second, funds flowing into the government don’t flow back in a balanced manner. For some states, the amount of federal expenditures that inure to the state’s benefit is less, sometimes much less, than the revenues going to the federal government. For the other states, tax payments turn out to be a good investment, with the state taking back as much as three, four, five, and six times as much as it pays in to the federal government. How does this happen? Though the column doesn’t go into the details, it surely is attributable, at least in part, to federal politics, with Senators and representatives from the “taker” states having serious clout in Washington, often because of seniority rules. Those seniority rules are rather detrimental, and are another reflection of why some sort of term limit is worth serious consideration.

Third, the portion of state budgets that are funded with federal expenditures also varies considerably. In some states, federal funding constitutes about a quarter of the state budget. In the “taker” states, almost half of state expenditures are funded with federal dollars.

Fourth, it is unlikely that the “taker” states would be pleased with proposals to equalize federal funding inflows and outflows. It is quite likely that they would resist any attempt to reduce their dependency on the federal government, especially as that would require them to raise state taxes, and thus incur the wrath of state taxpayers.

Fifth, according to a WalletHub study, the states that fall into the “maker” category are pretty much so-called “blue states,” and the states that fall into the “taker” category are pretty much “red states.” It’s rather ironic, that if federal expenditures were cut as desired by the anti-tax, anti-government crowd, red states would experience economic turmoil far more severe than what would hit the blue states. Letting the emotion of anti-tax, anti-government feelings trump the logic of rational analysis is foolish, and yet that is what succeeds so well in pulling people into the irrationality of the anti-tax, anti-government movement.

A few days ago, I heard a story on the local news radio about tax evasion charges being brought against the owners of a pizza shop. I didn’t think much of it, because, for me, tax evasion indictments are an unfortunate yet not uncommon event. But some time later, I saw a posting by a cousin on facebook, referencing instance of the story, accompanied by a comment of “what’s the world coming to?”

By reading the story I learned that those who had been charged own a chain of pizza shops, that they are “landmark” stores, and that three are in Ocean City, New Jersey. The indictment alleges that the owners concealed almost $1,000,000 of the $4,500,000 in sales that they generated mostly during the three months of summer. The owners, a married couple are charged with conspiring to evade income taxes, making false statements to the IRS, and tax evasion. The husband also is charged with 23 counts of structuring financial transactions to avoid reporting as required.

I think that my cousin’s reaction was not one of shock at the idea of someone being charged with tax evasion. My guess is that it’s WHO has been charged. Incidents like this chip away at people’s faith in society, that is, their faith in each other. And when that societal bond deteriorates, anarchy is not all that far down the road. When the glue that holds society together, that is, a mutual trust and fidelity that comprehends the importance of adhering to norms and pitching in, is eroded, society crumbles. And so the answer to the question, “what’s the world coming to?,” is not a pleasant response to consider.

The other day, I noticed a headline in a PhillyClout blog post that required me to stop and read it several times. Superficially, it made no sense. The headline? “Dems bash Corbett for new taxes and fees supported by Dems”

After reading the blog post, it made more sense. The chairman of the Pennsylvania Democratic Party criticized Republican Governor Corbett for signing legislation that funded transportation infrastructure repairs and improvements by, among other things, increasing fuel taxes and vehicle-related fees. The long and twisted path that this legislation took on its way to enactment was discussed by me in If They Use It, Should They Pay?, The See-Saw World of Legislating Infrastructure Funding and Noticing a Tax. Many Democrats supported the proposal, and thus it is puzzling that the chairman of the party would criticize the governor for signing it.

The criticism directed at the governor took the form of pointing out that he had violated the infamous “I won’t raise taxes” pledge pushed by Americans for Tax Reform. This pledge has been the subject of several of my posts, including Tax Pledges: Never Say Never and Never Say Never. Corbett signed the pledge when he ran for governor in 2010. He has been criticized by Democrats, and others, for having done so. The chairman of the Democratic party stated, "This is a man who campaigned on and most likely won on that pledge, and then he turned around and broke it." When he signed the bill, Corbett pointed out that it was the result of a bipartisan effort.

Not only has the Democratic party chair lashed out at Corbett, Americans for Tax Reform characterized his signing of the bill as a violation of the pledge, and conservative Republicans have been so upset that one has decided to challenge Corbett in the Republican primary for the governor’s race. A Corbett spokesman apparently labeled the criticism from the Democrats as an April fool’s joke.

So what’s up? Is the chair of the Democratic party being silly? I don’t think so. I think the underlying message is a simple one, namely, making the point that Corbett ought not be trusted because he changed his mind, violated a pledge, and broke a campaign promise. But seriously, if someone should be denied public office because of broken campaign promises, most, if not all, public offices would be vacant.

There are all sorts of bases on which to criticize Governor Corbett. But to find fault with his seeing the light on taxation simply deters others who have made the wrong choice from recognizing the error of their ways and reforming themselves. As I wrote in Tax Pledges: Never Say Never, “It takes a good deal of courage to confess to having signed a foolish pledge. It takes a good deal of wisdom to understand that the pledge is foolish. It takes a good deal of honesty to explain to America why the foolish pledge is causing so much harm.”

In November of 2012, the Tax Court, in Packard v. Comr., held that a married couple qualified for the first-time homebuyer credit because the husband satisfied section 36(c)(1) and the wife satisfied section 36(c)(6), even though the husband did not satisfy section 36(c)(6) and the wife did not satisfy section 36(c)(1). Last week, the Eleventh Circuit disagreed, reversing and remanding the case after concluding that because the husband and wife failed to satisfy either section 36(c)(1) or section 36(c)(6) as a unit, they did not qualify for the credit.

The husband and wife purchased a principal residence on December 1, 2009. The wife owned and resided in a principal residence from April 1, 2004, until November 17, 2009. The husband rented a residence during the three years preceding December 1, 2009, and did not own a principal residence during that time.

Section 36(a) allows “an individual who is a first-time homebuyer of a principal residence in the United States” a tax credit for the taxable year in which the residence is purchased. Section 36(c)(1) provides that a first-time homebuyer is “any individual if such individual (and if married, such individual’s spouse) had no present ownership
interest in a principal residence during the 3-year period ending on the date of the purchase of the principal residence to which this section applies.” In 2009, Congress added section 36(c)(6), which provides: “Exception for long-time residents of same principal residence.--In the case of an individual (and, if married, such individual’s spouse) who has owned and used the same residence as such individual’s principal residence for any 5-consecutive-year period during the 8-year period ending on the date of the purchase of a subsequent principal residence, such individual shall be treated as a first-time homebuyer for purposes of this section with respect to the purchase of such subsequent residence.”

The IRS argued that in order to satisfy section 36(c)(6) both the husband and the wife must own and reside together in the same residence for the required five-consecutive-year period. The IRS conceded that the wife would have satisfied section 36(c)(6) but for the fact that the husband did not co-own and live in the residence with her. The IRS also conceded that the husband would have satisfied section 36(c)(1) but for the fact that the wife owned a residence during the three-year period preceding the purchase of the new residence.

The Tax Court reasoned that section 36(c)(6) expanded the scope of the credit by widening the definition of first-time homebuyer. The court explained that the language should be given its plain and ordinary meaning unless doing so generated an absurd or futile result. The court concluded that “it is clear that Congress wanted to restrict the first-time homebuyer credit to only those married couples where both spouses qualify as first-time homebuyers. When Congress amended section 36(c) to add an
exception to the definition of first-time homebuyer that would include longtime residents of the same principal residence, it presumably also sought to restrict the
first-time homebuyer credit to only those married couples where both spouses qualify as first-time homebuyers, and it therefore borrowed the same parenthetical
phrase from section 36(c)(1). However, we cannot believe that Congress intended to restrict the first-time homebuyer credit to only those married couples where both
spouses qualify under the same paragraph of section 36(c).

The IRS appealed, and the Eleventh Circuit reversed and remanded the case. The court reasoned that originally, before section 36(c)(6) was enacted, both a husband and a wife were required to satisfy section 36(c)(1) in order to qualify as a first-time homebuyer. The court also reasoned that when Congress added section 36(c)(6) it used the same parenthetical language to require that in order to fall within the exception, both the husband and the wife were required to satisfy section 36(c)(6). The court pointed out that “The ‘preeminent canon of statutory interpretation’ requires the court to ‘presume that the legislature says in a statute what it means and means in a statute what it says there.’” The court concluded that the language of both section 36(c)(1) and section 36(c)(6) is unambiguous, and that a married couple can qualify as a first-time homebuyer only if both the husband and wife satisfy section 36(c)(1) or if the husband and wife satisfy section 36(c)(6). The court rejected the Tax Court’s reliance on the absurdity exception, noting that it “only comes into play where the absurdity is ‘so gross as to shock the general moral or common sense.’”

In other words, according to the Eleventh Circuit, a married couple is treated as a single unit and must satisfy either section 36(c)(1) or section 36(c)(6) in order to qualify as a first-time homebuyer. According to the Tax Court, the husband and wife can qualify even though one satisfies section 36(c)(1) and the other, section 36(c)(6), or vice versa.

The language of the statute is not as crystal clear as it could be. What would Congress select if asked to choose from the following two provisions?

1. “A married couple does not qualify as a first-time homebuyer unless the husband and the wife both satisfy paragraph (1) or unless the husband and wife both satisfy paragraph (6).”

2. “A married couple qualifies as a first time-homebuyer if the husband satisfies either paragraph (1) or (6) and the wife satisfies either paragraph (1) or (6), without regard to which paragraph is satisfied by the other spouse.”

Because it is highly unlikely that the Congress considered the question, it is foolishness to try to predict which of the two provisions it would select. Could Congress have done a better job when it amended section 36 and added section 36(c)(6)? Of course. That ought not come as a surprise to anyone who pays attention to the last decade and a half of Congressional tax writing.

The cultural debate over makers and takers has focused on arguments by one side trying to prove that welfare recipients are mooching off the rich and arguments on the other side trying to prove that the rich take welfare in the form of tax breaks not classified as government expenditures and thus wrongfully being excluded from government spending allegedly responsible for the federal budget deficit. But as often is the case when two sides try to pain their positions with a one-size-fits-all approach, some important indicators of reality can be overlooked.

The concern about welfare takes on a new twist, according to this report. Though the accusations are, at the moment, just that, there’s good reason to believe that they are true and nothing at this point to conclude they are false. A prosecutor in Minnesota filed charges against a married couple who collected food stamps and welfare provided by the state of Minnesota. According to the complaint, the husband was the CEO of a satellite television and broadband services company and the wife operated a championship dog breeding business. They managed to deposit several million dollars into bank accounts. They resided in luxury homes and drove expensive vehicles. They purchased and lived on a $1.2-million yacht in Florida at about the same time they applied for, and collected, food stamps and welfare, omitting their million-dollar bank accounts from the application, and claiming that they were living in Minnesota. Until officials discovered what had been happening and cut off the payments, the couple managed to pull in more than $165,000 in benefits designed to assist the poor.

Perhaps the movement favoring income inequality has reached new heights, or more accurately, depths. It’s not enough to make it difficult for poor people to put food on the table and care for their children, it’s time to pretend to be poor in order to grab some of what little food is being provided. Is there any better indication that so much of income inequality is the consequence of addiction and greed? I wonder if the prosecutors plan to investigate how the millions that the couple accumulated before pretending to be poor were generated. Perhaps from successful business operations. Perhaps not.

According to this report at least one candidate for the Democratic nomination for governor is in favor of making changes to the Pennsylvania personal income tax that would have the effect of taxing higher income individuals at higher rates than middle-income individuals and taxing the latter at higher rates than low-income individuals, who would for the most part end up with a zero tax liability. Regardless of where one stands in terms of whether this sort of progressivity in the income tax is wise, a question exists as to how and if this plan can be sustained considering that the Pennsylvania Supreme Court held, decades ago, that the Pennsylvania Constitution prohibits a graduated income tax.

Some argue that so long as only one tax rate is applied, a graduated income tax does not exist. Others point out that under the plan, which would provide an exemption or deduction, when taxpayers divide tax liability by their total income, they would find themselves being taxed at different rates. Some in fact would pay no tax.

What makes this complicated is that under current law, the Pennsylvania personal income tax provides “tax forgiveness” for lower-income individuals in the form of a tax credit. This credit also has the effect of creating, in effect, a graduated income tax. Does it make a difference if the effect of a graduated income tax is accomplished through a credit rather than an exemption? If the answer is yes, then how difficult would it be to switch from the proposed exemption to a larger credit available to more individuals? That is, in fact, what another of the candidates for the nomination has proposed.

It will be an interesting campaign season in Pennsylvania. And depending on who is elected in the fall, it should be an interesting tax legislation season as 2015 opens. Stay tuned.

Almost three years ago, in Americans Still Don’t Grasp Federal Budget Realities, following up on The Grand Delusion: Balancing the Federal Budget Without Tax Increases, I pointed out how pitiful it is that most Americans do not know how their federal income tax dollars are spent. The earlier post considered the results of a Kaiser Family Foundation poll and the follow-up post considered a CNN poll.

Last week, I received an email directing me to the results of a GoBankingRates poll reaching the same conclusion. The poll results are, of course, distressing, because they indicate that Americans have not become any wiser, educated, or informed about the uses to which federal income taxes are put. What was also at best confusing, and at worst troubling, was the inclusion of Medicare among the expenditures funded by the federal income tax. Medicare, as this explanation informs us, is funded by the Medicare portion of the federal payroll tax and by premiums charged to Medicare participants. Interestingly, social security payments were excluded from the list, but yet even though Medicare is also administered through a trust fund, it was not similarly excluded.

One of many disadvantages of a tax system as complicated as the one that lobbyists have created is that it’s too easy to be confused, to reach erroneous conclusions, and to spread intentionally misleading or incorrect information. The GoBankingRates error surely is not intentional, but it suggests how even those more familiar with the tax laws can be caught by tax law complexity. Productive debate and progress with respect to tax policy cannot be accomplished until citizens know how the tax law works and how tax revenues are used. And at the moment, that does not appear to be happening for enough people.

Last Monday, in Sometimes, They Cannot Win, I commented on the strange outcome of the proposal to increase the salaries of some members of the Board of Revision of Taxes in Philadelphia. Though one might think that increasing someone’s compensation would make the person better off economically, in the case of at least one board member the outcome would be a decrease in total income because a pension would be forfeited. The saga of the tribulations of the Board of Revision of Taxes is a long one, with my commentary beginning with An Unconstitutional Tax Assessment System, and continuing with Property Tax Assessments: Really That Difficult?, Real Property Tax Assessment System: Broken and Begging for Repair, Philadelphia Real Property Taxes: Pay Up or Lose It, How to Fix a Broken Tax System: Speed It Up? , Revising the Board of Revision of Taxes, How Can Asking Questions Improve Tax and Spending Policies?, This Just Taxes My Brain, Tax Bureaucrats Lose Work, Keep Pay, Testing Tax Bureaucrats Just Part of the Solution, A Citizen Vote on Taxes, Freezing Real Property Tax Reassessments: A Nice Idea, The Tax Price of a Flawed Tax System, Can Bad Tax Administration Doom the Tax?, Taxes and Priorities, R.I.P., BRT, A Tax Agency Rises from the Dead, Tax Law as Subterfuge: Best Use Valuation v. Current Market Valuation, How to Kill a Bad Tax System That Will Not Die?, The Bad Tax System That Will Not Die Might Get Another Lease on Life , Robbing Peter to Pay Paul, Tax Style, Don’t Rob Peter to Pay Paul: Collect Unpaid Taxes, The Philadelphia Real Property Tax: Eternal Circles , A Tax Problem, A Solution, So Why No Repair?, Can the Philadelphia Real Property Tax System Be Saved?, Alarm Bells Ringing for Philadelphia Property Tax Reform, A New Chapter in the Philadelphia Property Tax Story, and Sometimes, They Cannot Win. In that last post, a week ago, I noted that “this story will continue.” And indeed it does.

Now comes an observation that the provision generating the mess that the proposal is designed to fix also prevents the proposed remedy. According to this story, Article 3, section 27 of the Pennsylvania Constitution provides that “No law shall extend the term of any public officers, or increase or diminish his salary or emoluments, after his election or appointment." So when the compensation of the board members was reduced, the incumbents were protected. That created the compensation differential that some think accounts for the board’s sluggish response to the roughly 24,000 property tax appeals that have been filed with it. But solving the problem by raising the compensation of those earning less also appears to be prohibited.

There are two solutions. One is to clean house and appoint an entirely new board. Politics surely gets in the way of that solution. The other is to abolish the board, which is what the city tried to do, but the courts blocked that move. Finding a solution is going to require putting the well-being of the city and its residents over the interests of politics and politicians. The chances of that happening are low enough that I can again predict with confidence that the story will continue.

A recent story about an architect taking selfies to prove that he is not in New York for more than 182 days. He is doing this, according to the story, to “avoid a run-in with the IRS.” The tag line on the video in which the story is reported (after a 25-second advertisement) declares, “Man Takes Selfies to Avoid Extra Tax from IRS.” Here’s the problem. Staying in New York for 183 or more days might generate federal tax issues in terms of deductions for travel away from home, but probably would work to the taxpayer’s benefit. What staying in New York for 183 or more days will do is trigger taxation as a resident by New York State and New York City. The tax collectors that the taxpayer should be worrying about are the revenue departments of the state and city of New York, not the IRS.

The confusion is indicative of how much Americans don’t know and understand about taxes. This issue isn’t a matter of complex rules and computations. It’s simply a matter of knowing that taxes are imposed not only by the federal government, but also by state and local governments. This outcome of insufficient education also manifests itself when people complain about “the government,” as though there is one monolithic government. My response to these sorts of complaints is a simple, “Which government?” It often brings a silent stare. Is it any wonder that the misinformation merchants thrive in this country?

Last week, I received an email from Queendom, which is a outfit that provides tests and surveys for a variety of purposes and users. According to the press release contained in the email, its survey indicated that when it comes to the impact of money on whether a person is more egoistic or more altrustic, there “isn’t a great deal of difference between classes.”

The survey asked respondents to answer a series of questions, such as whether they “regularly do favors for others without being asked,” “will only do something nice for others for personal gain,” and “feel bad when they see someone less fortunate.” The outcomes, sorted into three categories of low socio-economic status, middle status, and high socio-economic status, pretty much came out the same way for all three groups, but for the question about giving to charities on a regular basis.

Whatever anyone wants to make of the survey results, it is important to understand that on these sorts of surveys, people lie. As explained in this advice to survey designers, people are dishonest on surveys if they fear their answer is contrary to what is socially acceptable, if they want to appear sophisticated, tolerant, or up-to-date, if they want to be mischievous, or if they dislike the survey or surveyor. Some things measured by surveys, such as the one in question, are often better resolved by observation. For example, a survey asking people if they have ever run a red light almost certainly generates results inconsistent with information gathered by observers stationed at intersections.

How people really feel reveals itself in actions. There’s a reason that the old saying, “Actions speak more loudly than words,” has hung around for so long. Unlike some survey responses, it’s true.

On Wednesday, in Is a Tax Appeal Delayed a Tax Appeal Denied?, I discussed how an attempt to reduce city expenditures by reducing the pay of members of the city’s Board of Revision of Taxes is considered to be at least part of the reason almost 24,000 property tax valuation appeals have not yet been decided and are projected to be in the queue for quite some time. As a consequence of a court decision holding that the pay of incumbent members could not be reduced, the Board ended up with two members earning $70,000 salaries and the others being paid on an hourly basis. Wednesday’s post was the latest in a long series of commentaries on the saga of the BRT, beginning with An Unconstitutional Tax Assessment System, and continuing with Property Tax Assessments: Really That Difficult?, Real Property Tax Assessment System: Broken and Begging for Repair, Philadelphia Real Property Taxes: Pay Up or Lose It, How to Fix a Broken Tax System: Speed It Up? , Revising the Board of Revision of Taxes, How Can Asking Questions Improve Tax and Spending Policies?, This Just Taxes My Brain, Tax Bureaucrats Lose Work, Keep Pay, Testing Tax Bureaucrats Just Part of the Solution, A Citizen Vote on Taxes, Freezing Real Property Tax Reassessments: A Nice Idea, The Tax Price of a Flawed Tax System, Can Bad Tax Administration Doom the Tax?, Taxes and Priorities, R.I.P., BRT, A Tax Agency Rises from the Dead, Tax Law as Subterfuge: Best Use Valuation v. Current Market Valuation, How to Kill a Bad Tax System That Will Not Die?, The Bad Tax System That Will Not Die Might Get Another Lease on Life , Robbing Peter to Pay Paul, Tax Style, Don’t Rob Peter to Pay Paul: Collect Unpaid Taxes, The Philadelphia Real Property Tax: Eternal Circles , A Tax Problem, A Solution, So Why No Repair?, Can the Philadelphia Real Property Tax System Be Saved?, Alarm Bells Ringing for Philadelphia Property Tax Reform, and A New Chapter in the Philadelphia Property Tax Story.

Now comes news that City Council has voted to boost pay for all members of the Board so that all of them receive a $70,000 salary. The hope, or perhaps expectation, is that the raises will encourage the board members to work longer hours. Interestingly, the Board continues to exist even though the city tried to abolish it, because another court decision requires that the board be maintained as the venue for appeals of property tax valuations.

The change would increase one member’s pay from $50,000 to $70,000, which he would collect in addition to his $88,800 annual state pension. Another member, currently being paid $150 per hour, would earn $70,000, along with his $95,000 annual state pension. But for another member, who receives a $64,000 annual city pension, a switch from $150 per hour to a $70,000 salary would mean surrender of the pension. So, in a bizarre twist, the attempt to create a financial incentive for this member backfires, as he would earn more if he remained a $150 hourly employee.

It’s unclear whether a member can refuse the switch to a salary and remain as an hourly employee. It’s also unclear whether a “raise” leaving a member in worse financial shape would cause that member to resign from the board. Sometimes things aren’t as they appear to be, and often things aren’t simple. In this case the simple concept of a raise creates the appearance of something that it isn’t.

The measure needs the mayor’s approval. There are rumblings that it is being criticized in his office. So this story will continue.

I don’t smoke, so there are limits to what I understand about cigarettes and e-cigarettes. I do know that cigarettes are subject to special taxes, as are some other items and activities, such as alcohol and gambling. These special taxes are justified in part as providing revenue to offset the long-term societal costs of the items and activities, and in part as providing incentive for people to refrain from certain behavior. Yet at the same time, these activities are not prohibited, and some states even participate in activities such as gambling. Sometimes it is tempting to think that the legislative attitude simply is one of “they’re going to do this no matter what, so let’s tax it and get some revenue.”

According to this story, the governor of New Jersey proposes a new tax on e-cigarettes. Though e-cigarettes are not illegal in New Jersey, using them in public has been prohibited. It is unclear whether the proposed tax is designed to discourage the use of e-cigarettes or to provide funding for the long-term societal cost of their use. It’s unclear, as explained in this story, whether e-cigarettes help people stop smoking tobacco or encourage people who wouldn’t otherwise smoke tobacco to transition from non-smoking through e-cigarettes into tobacco use. Another study, according to this story, concluded that e-cigarettes causes an increase in the number of tobacco smokers.

It has been suggested that New Jersey’s proposed tax would push e-cigarette stores out of business because the tax would at least triple the cost of the liquid used in e-cigarettes, and encourage some users of e-cigarettes to turn to tobacco products. Others think that taxing e-cigarettes at rates less than those applicable to tobacco products would signal that the legislature thinks e-cigarettes are safer than tobacco.

Public hearings are scheduled to consider the proposal. They should be interesting.

A tax appeal delayed is not a tax appeal denied if the taxpayer making the appeal is not required to pay the disputed tax until the disagreements are resolved, especially if interest and penalties do not accrue while the appeal is pending. This issue has popped up as the latest installment in the long-running story about Philadelphia and its difficulties with its real property tax. That story has been the subject of numerous posts, beginning with An Unconstitutional Tax Assessment System, and continuing with Property Tax Assessments: Really That Difficult?, Real Property Tax Assessment System: Broken and Begging for Repair, Philadelphia Real Property Taxes: Pay Up or Lose It, How to Fix a Broken Tax System: Speed It Up? , Revising the Board of Revision of Taxes, How Can Asking Questions Improve Tax and Spending Policies?, This Just Taxes My Brain, Tax Bureaucrats Lose Work, Keep Pay, Testing Tax Bureaucrats Just Part of the Solution, A Citizen Vote on Taxes, Freezing Real Property Tax Reassessments: A Nice Idea, The Tax Price of a Flawed Tax System, Can Bad Tax Administration Doom the Tax?, Taxes and Priorities, R.I.P., BRT, A Tax Agency Rises from the Dead, Tax Law as Subterfuge: Best Use Valuation v. Current Market Valuation, How to Kill a Bad Tax System That Will Not Die?, The Bad Tax System That Will Not Die Might Get Another Lease on Life , Robbing Peter to Pay Paul, Tax Style, Don’t Rob Peter to Pay Paul: Collect Unpaid Taxes, The Philadelphia Real Property Tax: Eternal Circles , A Tax Problem, A Solution, So Why No Repair?, Can the Philadelphia Real Property Tax System Be Saved?, Alarm Bells Ringing for Philadelphia Property Tax Reform, and A New Chapter in the Philadelphia Property Tax Story.

In the latest installment in this saga, it seems that it will take years for the Board of Revision of Taxes to work through the approximately 24,000 appeals that have been filed. More than $48 million in tax revenue has not been collected while the appeals are resolved. According to this report, one of the reasons that the process is taking so long, aside from the huge volume of appeals, is the decision of some board members to hold out for a pay increase. It is expected that by the end of this month, about 10 percent of the appeals will be resolved. At that rate it will take years to work through the appeals, and certainly more will be added to the backlog when another real property tax year rolls around.

Currently, though two members of the board are paid $70,000 a year for their work, others are paid as little as $150 per day, which works out to roughly $38,000 a year. City Council claims that it has made money available to the board to hire staff, but apparently that money was used to comply with a court order requiring back pay for several board members. The board spends two days a week listening to arguments on behalf of taxpayers, and three days a week dealing with appeals for which taxpayers have not requested the opportunity to make presentations. On those days, the board meets for about an hour, sometimes less. It seems that for $150 a day, board members aren’t inclined to put in 40-hour weeks. So now attempts are underway to increase the pay of all the board members to $70,000. The situation is muddied by the fact that the city had tried to reduce the pay for all the board members from $70,000 to $50,000 for the chair, $45,000 for the secretary, and $150 per meeting for the other members. But the courts held that pay could not be cut for members already holding office, which generated back pay for them, and left only the new members being paid $150 a day. Legislation is working its way through City Council that would restore the $70,000 salary for all board members, in an attempt to “make the BRT members feel encouraged to finish the hearings by the end of the year.” The Mayor and his spokesperson are questioning why this plan wasn’t brought forward months ago.

Getting through these appeals requires all the board members to put in full-time weeks. It makes no sense to pay two of them $70,000 a year and the others $150 a day. This is what happens when someone thinks that saving a few hundred thousand dollars by cutting government spending is a good idea, when in fact the cost of the delay triggered by the outcome delays collection of almost $50 million in tax revenue. It’s not unlike the foolishness of cutting the IRS budget and then wondering why there is a federal budget deficit, knowing that the annual $300 billion shortfall over several decades accounts for quite a chunk of the national debt. Short-term thinking, one of the banes of modern culture, is bad for long-term progress. Surely there will be more chapters in the Philadelphia property tax story.

The topic of the email caught my eye. It simply stated, “Money is the last social taboo for the rich, reveals deVere study.” Curious, I looked more closely at the press release. Though I could not find the actual survey results, the press release noted that:

In the global survey conducted by deVere Group, one of the world's largest independent financial advisory organisations, 61 per cent of those polled ranked personal finance as the most difficult subject to discuss with family, friends and colleagues.

It came ahead of politics (14 per cent), sex (11 per cent), religion (8 per cent), and health issues (6 per cent) in the study of 1,125 clients who have investable assets of more than £1m. The respondents came from, the U.K, the U.S., the United Arab Emirates, Hong Kong and South Africa.

My first reaction was not one of surprise, but one of curiosity. Did these results differ from how people not considered high-net-worth individuals would reply. Digging around, I discovered that Wells Fargo had done a similar survey of individuals aged 25 to 75, without regard to financial status. According to the news release, the results were a different:

A new survey from Wells Fargo (NYSE: WFC) revealed that Americans find discussing personal finances as difficult as talking about other thorny discussion topics like religion and politics. Nearly half of Americans say the most challenging topic to discuss with others is personal finances (44%), whereas death (38%), politics (35%), religion (32%), taxes (21%), and personal health (20%) rank as less difficult.

It seems that a somewhat higher percentage of the high-net-worth individuals found finance discussions difficult. What is interesting is that despite that difference, for most people, conversations about money present the toughest challenge. That’s not a surprising result. So however the differences might be with respect to the other topics – the survey results are presented in a way that prevents comparison – it seems that rich, poor, or in between, talking about money continues to be a social taboo.

Few people delight in paying taxes, though some people pay them with the same sort of acceptance that people project when stopping for a red light. There are people, however, who cannot abide compliance with societal norms. Some, equipped with sufficient resources, find ways to buy their way out of paying taxes. Others, frustrated that they lack those resources and resulting influence, rebel by taking matters into their own hands, refusing to pay taxes, and justifying their actions with voluminous quantities of nonsensical arguments. It is not difficult to understand the anger that motivates the tax protest movement, many of whose members would abandon it if they were able to obtain the special tax breaks that have been acquired by others.

The unfortunate thing about the tax protest movement is that most of the people in it are vulnerable folks who fall for the siren song of the ringleaders, just as those who support special tax breaks, even without benefitting from them, have fallen for the siren songs of those who procure special tax breaks for themselves and their clients. Just as most of those arguing for the wonderfulness of economic inequality take their words from a few propagandists, so, too, most people in the tax protest movement blindly follow the words and instructions of the movement’s ringleaders.

This is what happened to Steven T. Waltner. Following the advice given by Peter Hendrickson in “Cracking the Code: The Fascinating Truth About Taxation in America,” Waltner and his wife submitted returns showing zero wages, two deductions, and a zero tax liability. Listing their occupation as “private-sector workers,” they attached Forms 4852, Substitute for Form W-2, reporting zero wages, including boiler-plate statements that they did not receive wages. Waltner also attached a “correcting” Form 1099-B, on which he replaced the gross proceeds amount with a zero, and at the bottom of which he included more boiler-plate language.

Of course, the IRS issued notices of deficiency to the Waltners. The ensuing litigation generated enormous activity, ranging from multi-hundred-page discovery requests, dozens of orders by the Tax Court, and eventually the Waltners paid the taxes that were due. But the case didn’t end at that point. The IRS had asserted section 6673 sanctions against the Waltners, and the Waltners in turn asserted similar sanctions against the IRS. In Waltner v. Comr., T.C. Memo 2014-35, the Tax Court upheld a $2,500 penalty against Waltner, even though it was authorized to impose a penalty of as much as $25,000.

Rather than simply pointing out that the Waltners had filed frivolous returns and imposing the penalty, the Court took the time, and many pages, to rip apart Hendrickson’s book. The Court’s effort is intended to prevent others from wandering down the deceptive path on which Hendrickson has been leading people looking for a quick way to live life without contributing to what society provides them. Anyone who thinks Hendrickson is sharing any sort of valuable tax information needs to read the case to learn why he simply is regurgitating the same, long-disproven, nonsensical arguments that analytical examination readily identifies as silly and dangerous. The best part of the opinion, for me, having read numerous rebuttals of the tax protest creed, is the description of Hendrickson’s tax protest activities. The court notes that nowhere in his book does Hendrickson provide his credentials, confining himself to a claim that he is a “researcher, analyst and scholar.” The court continues, “Add to that felon and serial tax evader.” Hendrickson not only has been indicted for tax-related crimes, but also placing and using explosives in the mail, and he ultimately pled guilty to some of the charges. Subsequently, he was again indicted on 20 counts of federal tax crimes, and eventually convicted. At his trial, Hendrickson defended himself by making the same arguments he made in his book, and those arguments were soundly rejected by the court.

Even though Hendrickson’s ideas, broadcast in his book, have been rejected, some people seem intent to treat it as worthy of being followed. It doesn’t seem to matter to them that Hendrickson went to prison for following his own advice. Do they think they’re headed anywhere else if they persist in going along the same path? It doesn’t seem to matter to them that Hendrickson proclaims Irwin Schiff, another convicted ringleader of the tax protest movement, to be his mentor. They’re so angry about paying taxes that they would follow these Pied Pipers right over the cliff as they play their pipes.

Yes, the tax system is a mess. But the path to its reform is to clean up the Congress that is responsible for the mess. To do that, control of the Congress needs to be taken away from the moneyed interests that have corrupted it to their purposes. Going down the tax protest path does nothing but to strengthen the power of the moneyed elite over the Congress. If those in the tax protest movement took their energy, their anger, and their frustration, and directed those feelings into reforming the Congress, they’d be pleasantly surprised by the outcome.

Last Wednesday, in Making Taxes Fun, I reacted to a quip by Harry Gross in which he asked and answered a question, “Fairest [tax] of all? A self-assessed tax on men based on virility, and on women based on beauty.” I pointed out that, as a practical matter, it would be too easy for people to claim that they were “horrifically unattractive.”

An enterprising reader, far more steeped in popular culture than I am, sent me an email and pointed me in the direction of this number from Boardwalk Empire: Don’t Put a Tax on the Beautiful Girls. Just imagine an exemption for beautiful girls. It’s not difficult imagining the lobbying that would take place in favor of such an exemption. Nor is it difficult to imagine that every female would claim to qualify. But what about the handsome men? What would they do? One can only imagine. The entire concept is not only hilarious but ridiculous.

If anything, all of this simply proves that individuals are intent on seeking an edge over everyone else. Whether it’s going straight out of the left-turn lane, sneaking into a movie theater without paying, or getting a tax break based on some supposedly unique or limited feature or characteristic. Too often, the feature or characteristic has nothing to do with sensible measure of a tax base, but is hyped as having some rational connection with how revenue is raised. The point of the suggestion made by Harry Gross is that the best tax is one that requires declarations against one’s own interest. That, however, is not easy to construct.

So I’ll toss out another idea. Perhaps people should be taxed on income equal to the amount they claim as income when they apply for a loan or try to impress a date, and perhaps property taxes ought to be paid on the value of the homes, boats, cars, airplanes, and other items that people claim to own when they are trying to get an edge in some arena other than taxation.

Yes, sometimes tax policy can generate hilarity. And ridiculousness.

Every now and then we read of someone finding something valuable. This time, it’s a California couple who found a stash of gold coins on their property. According to this story, the couple found eight cans containing 1,400 coins, valued at approximately $10 million.

The joy of the moment is tempered, of course, by the existence of income taxes, both federal and state. Must the couple pay tax? Yes. The value of the coins is included in the couple’s gross income. It is ordinary income. The law is settled. See, for example, Treasury Regulation section 1.61-14(a), Cesarini v. U.S., 296 F. Supp. 3 (N. D. Ohio 1969), aff’d, 428 F.2d 812 (6th Cir. 1970); Rev. Rul. 53-61, 1953-1 C.B. 17.

If the couple treat the coins as an investment does that turn the income into capital gain? No. Holding the coins as an investment generates capital gain or loss when the coins are sold by the couple. Capital gain or loss treatment requires a sale or exchange. Acquisition of something by finding it and reducing it to possession is not a sale or exchange. Assume that the coins in fact are worth $10 million. The couple reports $10 million of ordinary gross income, and obtains a basis of $10 million in the coins. If the couple hold the coins as an investment and sell them for, say, $11 million, there will be capital gain of $1 million. Whether the capital gain is long-term or short-term depends on when they sell the coins.

But if the couple treat the coins as inventory, any gain on subsequent sale of the coins would be ordinary income. According to the story, the couple plan to sell the coins individually or in small bundles using on-line sites. That approach raises the possibility that they will be treated as dealers.

It has been suggested that because the couple found the coins on land that they owned, that they purchased the coins when they purchased the land, that part of what they paid for the land should be treated as having been paid for the coins, that they thus invested in the coins, so that selling the coins generates capital gain. This argument simply prevents the couple from having gross income when they purchased the land equal to the difference between what they paid for it and its value as computed with $10 million of gold coins buried in it. In other words, the acquisition transaction by which they were enriched did not take place when they purchased the land, but when they extracted the excess value by discovering the coins. If instead of discovering coins they had discovered natural gas, oil, or minerals naturally in place and extracted those items, they would have gross income, not when they purchased the land but when they sold the natural gas or oil. At best, the argument supports a delay in the timing of the income but does not convert it into capital gain any more than a landowner who discovers and sells oil from the land has capital gain.

If the couple reports capital gain, the IRS surely will adjust their return. If they choose to contest that decision, they will end up in court, and the world will know who they are. To date, they have carefully protected their identity and the location of the land, understandably, and have chosen to remain anonymous. It is unlikely that they would surrender that anonymity for the sake of saving some tax dollars net of the cost of contesting the IRS assessment.

Thanks to the reader who raised the question about the tax treatment of this event.

According to this story, a study sponsored by the Pew Charitable Trusts has determined that the percentage of people in Philadelphia who belong to the middle class has fallen from 59 percent in 1970 to 42 percent in 2010. The study did not determine whether those who left the city’s middle class fell into the lower-income class, moved out of the city, or died. What is clear is that they did not join the ranks of the city’s upper class, because the percentage of the city’s population in that group went from 11 percent in 1970 to 10 percent in 2010. The percentage of the city’s population in the lower class increased from 30 percent to 48 percent during the same period.

The thought that these statistics reflect mere geographical movement is negated by another bit of information from the study. During a comparable forty-year period, 1971 through 2011, the percentage of the nation’s population that belonged to the middle class fell from 61 percent. This news is exacerbated by a realization that the economic condition of the middle class also has fallen, because middle class income has stagnated.

The decline of the middle class is not because those in it lack education. The study revealed that in 1970, only 56 percent of the city’s middle class had at least a high school education, and only 18 percent had any college education. By 2010, 92 percent of the middle class had finished high school, and 50 percent had at least some college education.

According to the study, the biggest drop in the city’s middle class, from 55 percent to 48 percent of the population, took place during the 1980s. The biggest increase in lower-class membership, from 36 percent to 45 percent, took place during the same decade. That decade, hailed by many as a time of American prosperity, surely didn’t do wonders for Philadelphia’s middle class.