MauledAgain

It is a basic tax law principle that economic windfalls are taxed. That principle applies to a variety of transactions, and as a recent tax court case, Debough v. Comr., 142 T.C. No. 17 (2014), demonstrates, comes into play when property sold by the taxpayer is reacquired by the taxpayer. In this case, the property in question was the taxpayer’s principal residence and the taxpayer was unable to shelter any of the gain under section 121.

The taxpayer sold his principle residence in 2006 under an installment sale agreement. The taxpayer sold the residence for $1,400,000. Under the sales agreement, the buyers paid $250,000 at the time they entered into the contract, and promised to pay $250,000 on July 12, 2007, along with $25,000 semi-annually until July 11, 2014, when the balance was due.

The taxpayer had purchased the residence for $25,000, and recomputed his adjusted basis after his wife died. Using an adjusted basis of $742,204, he computed gain of $657,796. Before trial, the IRS and taxpayer stipulated that the basis was $779,704.

In 2006, the taxpayer reported gain of $28,178. He did so by excluding $500,000 of gain under section 121, because his wife had died within the past two years, permitting the taxpayer to use the $500,000 limitation rather than the $250,000 limitation. Thus, the taxpayer computed taxable gain of $157,796 ($657,796 minus $500,000), and divided it by $1,400,000 to generate a gross profit ratio of 11.27 percent. Multiplying the $250,000 payment received in 2006 by 11.27 percent generated taxable gain of $28,178. In 2007, the taxpayer received the second $250,000 payment, and again reported $28,178 in taxable gain. In 2008, the taxpayer received only $5,000, and using the 11.27 percent gross profit ratio, reported taxable gain of $564. Thus, the taxpayer reported total taxable gain of $56,920.

The buyers failed to comply with the terms of the contract. The taxpayer reacquired the property in July of 2009, incurring costs of $3,723. The taxpayer treated the reacquisition as full satisfaction of the indebtedness, reporting gain of $97,153. Subsequently, the taxpayer amended the 2009 return and removed the $97,153 gain. Before trial, the IRS and the taxpayer agreed that the taxpayer was obligated to report at least $97,153 of gain. The IRS, however, took the position that the taxpayer ought to have recognized $443,644 of gain. The IRS computed this gain by subtracting the $56,920 reported by the taxpayer from 2006 through 2008 from the $505,000 of cash received by the taxpayer.

Under section 1038(b), a taxpayer who reacquires real property in satisfaction of debt secured by that property is taxed on any money and other property received before the repossession, except to the extent previously reported as income. Section 1038(e) provides that if the taxpayer reacquires property with respect to the sale of which gain was not recognized under section 121, and within one year of the reacquisition the taxpayer resells the property, then section 1038(b) does not apply, and for purposes of section 121, the resale is treated as part of the original sale of the property. The taxpayer and the IRS agreed that section 1038(e) did not apply because the taxpayer did not resell the property within a year.

The taxpayer argued that section 1038(e) does not preclude applying section 121 to the original sale, because “if Congress had intended to completely nullify the section 121 exclusion upon reacquisition of a taxpayer’s principal residence, it would have drafted a provision explicitly so stating.” The IRS argued that the existence of section 1038(e) “confirms that Congress was aware of the interplay between sections 1038 and 121 and drafted section 1038(e) as a limited response thereto; the absence of a ‘more generous provision’ regarding the overlap of sections 1038 and 121 confirms that Congress intended for taxpayers in petitioner’s situation to be treated under the general rules of section 1038.”

The court agreed with the IRS. It held that section 1038 applied to the reacquisition, and that section 121 does not apply to a transaction subject to section 1038 unless it is within section 1038(e). Accordingly, because section 1038(e) did not apply, the taxpayer was subject to section 1038(b) and section 121 did not apply.

The court pointed out that economically, the taxpayer began with property and ended up with property and $505,000. The court cited the Glenshaw Glass decision in support of its conclusion. That case stands for the proposition that windfalls are gross income. The $505,000 was a windfall, as the taxpayer ended up retaining the property. It was not “unfair,” according to the court, to tax the $505,000. Because $56,920 had already been reported as gain, the other $443,644 of gain was taxable in 2009. Presumably, though the court did not mention it, the $3,723 cost of reacquisition is added to the taxpayer’s adjusted basis in the property to be taken into account when the property is resold.

Had the taxpayer resold the property within a year, the taxpayer would have escaped taxation, though how the “unused” portion of the exclusion would have been recovered is unclear. But the taxpayer did not do so, presumably because of adverse market conditions. Perhaps one year is too short of a window in which to resell principal residences under these circumstances. But that one-year period is a creature of the Congress, and cannot be changed by the IRS or by the courts. I don’t expect Congress to change that time period, not only because it isn’t accomplishing much of anything these days in terms of tax law, but also because it isn’t focusing on section 1038 and its interplay with section 121.

It is a long-established principle of federal income tax law that a taxpayer is not permitted to deduct an otherwise deductible expense to the extent that the taxpayer is entitled to reimbursement from the taxpayer’s employer. As I tell my students, it’s usually not the legal principle that stumps the taxpayer. It’s the application of the principle to the facts. This notion is illustrated by the taxpayer’s tale in Richards v. Comr., T.C. Memo 2014-88.

The taxpayer was a loan officer employed by Prospect Mortgage, LLC. Under the employment agreement, she was entitled to an expense reimbursement allowance equal to .0005 of the 1st Point of Revenue for each non-brokered loan. If the expenses exceeded that reimbursement, an employee was permitted to submit itemized receipts and other documentation and would be reimbursed for “any legitimate expense that were necessarily incurred in the performance of Employee’s duties that exceed the reimbursement allowance.”

The taxpayer traveled to New Orleans to attend a marketing event. She alleged she spent approximately $2,100. Prospect reimbursed her immediate manager for the cost of his trip but denied her oral request for reimbursement. She concluded that the denial was on account of her being a “probationary” employee who had not yet made any sales. After this denial, the taxpayer made no additional requests for reimbursement.

The taxpayer testified she paid expenses as a real estate loan officer, including the cost of a home office, equipment, supplies, subscriptions, and advertising. She was not reimbursed for these expenses by Prospect. She claimed these expenses as deductions on her income tax return. The IRS audited the return and denied the deductions.

The Tax Court explained that with respect to the New Orleans trip, the taxpayer did not qualify for reimbursement. However, the court concluded that she was not entitled to deduct the expenses because she failed to substantiate them. As for the other expenses, the court held that the taxpayer failed to establish that she did not have the right to reimbursement, failing, for example, to provide evidence of loan revenues that she generated. The court noted that the taxpayer admitted that she did not seek reimbursement for any expenses other than those for the New Orleans trip. Accordingly, the deduction of the employee business expenses was denied.

Demonstrating whether a taxpayer is or is not entitled to reimbursement requires presentation of all the facts permitting the IRS or a court to compute the extent to which the taxpayer was or would have been reimbursed. Not only should a copy of the employer’s reimbursement policy be provided, and not only should the taxpayer keep receipts and other documentation for the expenses, the taxpayer also needs to produce the other information that permits application of the employer’s reimbursement policy to the specific circumstances of the taxpayer’s outlays. In this case, the taxpayer failed to introduce evidence of her loan revenues, and she failed to supply receipts and other evidence for her expenses.

When the question “is the employee entitled to reimbursement?” is asked, providing the answer is much more a matter of evidentiary detective work than it is knowing a principle of tax law. The principle is about as easily expressed as any tax law rule. It’s the facts and circumstances part of the equation that poses the practical challenges. As I tell my students, being a lawyer is much more than knowing the law or being skilled in writing or oral advocacy. Being a lawyer, or a tax practitioner, requires the skills of a detective.

The Treasury Inspector General for Tax Administration has released report, Significant Discrepancies Exist Between Alimony Deductions Claimed by Payers and Income Reported by Recipients. I haven’t decided which reaction bothered me the most. Is it the fact so much misreporting can arise from violating one straight-forward tax principle? Or is it the fact that the IRS has no system in place to detect comprehensively the misreporting?

The tax law principle in question is studied in pretty much every basic federal income tax course. The deduction of an alimony payment by the payor must match the gross income reported by the recipient. Unless the parties agree to treat the payment as neither gross income nor deduction, alimony must be included in the gross income of the recipient and is deductible by the payor.

According to the report, in 2008, alimony deductions were claimed on 577,003 federal income tax returns, amounting to $9.9 billion. The following year, the number of returns decreased to 573,904 but the total alimony deductions increased to $10.4 billion. In 2010, the number of returns on which alimony was deducted declined again, to 567,887, and the total deductions fell to $10 billion. Of the 567,887 tax returns filed in 2010 on which alimony deductions were claimed, 266,190, or 47 percent, were not fully matched by gross income inclusions on corresponding returns. In some instances, the recipient filed returns with no alimony gross income, in other instances, the recipient filed returns with alimony gross income less than the claimed deduction, and in still other instances, the recipient did not file a return even though the amount of the alimony in question would have required a return. The unreported gross income, or overstated deductions, however one wants to characterize the imbalance, exceeded $2.3 billion in 2010 alone.

The report concluded, “Apart from examining a small number of tax returns, the IRS has no processes or procedures to address the alimony reporting compliance gap.” Contributing to the problem not only are inadequate examination selection filters, but also “limited examination resources.” In theory, it ought to be easy to bring the claimed deductions into equivalence with reported gross income. Because the taxpayer identification number of the recipient must be reported by the payor, it should be simple to pull up the recipient’s return, determine whether the amount of the deduction is reported as gross income, and if it isn’t, pull both returns for audit. But it costs money to write the software, and it costs money to pull the returns, and it costs money to conduct the audit. Where does the IRS obtain that money? I suppose some people would argue that it ought to stop auditing corporations, and others would add a proposal to stop auditing tax returns filed by the wealthy.

People are increasingly aware that the IRS has limited resources to track down tax cheats. People are increasingly aware that the chances of getting away with tax fraud are getting better each day. Not that all of the mismatching is due to fraud, as surely some small fraction is attributable to negligence or simple innocent mistake, but the erosion of the tax pillars on which civilization is built promises to swell from a few falling stones to a landslide. After all, if this sort of noncompliance is taking place with respect to one simple tax principle, imagine what is transpiring with respect to all of the other tax rules, including the very many that are so complicated it’s not so easy to detect the noncompliance. It’s only a matter of time before the landslide buries the system.

The IRS Oversight Board has released a report, FY 2015 IRS Budget Recommendation Special Report, that examines the seemingly eternal problem of deficient IRS funding. This is not a new issue. I have criticized Congress on numerous occasions during the four decades I have lived in the tax world, including posts such as Another Way to Cut Taxes: Hamstring the IRS and So Cutting IRS Funding Won’t Decrease Revenues? Yeah, OK.

The Oversight Board makes the same points that I, and others who understand the seriousness of the problem, have been making over the years. IRS funding has been cut, even though its responsibilities have increased. IRS funding has been cut even while other agencies have received increases to reverse the impact of the sequestration stunt. IRS funding is unpredictable, making it difficult or impossible for the IRS to establish and maintain programs to counter tax evasion and identity theft. IRS funding has been cut, preventing it from updating its technology and curtailing its ability to train employees and help them keep up with repeated changes in the tax law. IRS funding has been cut, causing reductions in taxpayer service, longer wait times on the IRS telephone assistance lines, increases in waiting times, decreases in Taxpayer Assistance Center activities, and delays in taxpayer correspondence. IRS funding has been cut, causing reductions in the number and scope of taxpayer audits, making it easier for taxpayers to evade taxes.

What person or entity, presented with a guarantee that investing a dollar would generate ten dollars, would reject that offer? There is no question that every dollar invested in the IRS generates ten dollars of revenue, revenue that would be collected without IRS intervention if all citizens were honest, but we don’t live in that sort of world. So why does Congress cut the IRS budget when it ought to be increasing it? The answer is simple. The people who control the Congress want to kill the IRS, eliminate federal tax revenues, eliminate federal spending, and eliminate the federal government. Some want to do this so that states can return to the days when they violated laws and human rights with impunity, daring anyone to put an end to their mistreatment of people other than the controlling elite. Others want to do this so that private corporations, under the control of the elite and free from voter control, can own and run everything for the benefit of the elite at the expense of everyone else.

Why do they succeed in this effort? Because it is easy to paint the IRS as the enemy of the people, and because the IRS has contributed to its bad reputation through mismanagement, though one wonders how much of that mismanagement is the consequence of insufficient funding. Every chance that anti-tax, anti-government advocates get to trash the IRS, even if it means twisting the facts, hiding some facts, or exaggerating facts, they pounce on the opportunity to rip apart the system that holds American civilization in place.

How many members of Congress will read the Oversight Board’s report? Few, if any. How many American citizens and residents will read the report? A handful, most of whom already know what’s in the report and understand the problem. How many people will act, write, speak, vote, or argue differently because of what’s in the report? A few, at most. Does this mean that writing the report was a waste of time? No. When all else fails, and the perpetrators of American decline are finally exposed, their claim that they did not know can be rebutted, easily.

My use of potholes as the poster child for what is wrong with the public fiscal policy perspectives advanced by the anti-government, anti-tax crowd caught the attention of a long-time reader, who shared with me three reports. Two expanded my understanding of pothole effects, and the most recent highlighted the relationship between potholes and another of my concerns about anti-government, anti-tax policies, the privatization ploy.

The first report explained that potholes cause far more damage than things I had previously mentioned. I had focused on damaged front-end alignments, wrecked tires, and pothole-triggered accidents causing death, injuries, and property damage. The first report adds to the list things such as back injuries caused by hitting potholes, swerving to get around potholes, and slamming on the brakes to avoid potholes. The list of complications reads like a medical school text, but it is unimaginable that anyone would be pleased if they suffered prolapsed inter-vertebral disc, whiplash, or vertebral compression fractures after encountering a pothole. Although some people are more at risk, no one is safe. The second report is the story of how a pothole “saves a man’s life.” An ambulance transporting a man with a life-threatening rapid heartbeat hit a pothole, and the impact knocked the fellow’s heart rate back to normal. Despite the silver lining in the pothole cloud, potholes remain a serious threat to life, limb, and property, notwithstanding the good fortunes of one man. As I explained in Liquid Fuels Tax Increases on the Table, You Get What You Vote For, Zap the Tax Zappers, Potholes: Poster Children for Why Tax Increases Save Money, When Tax and User Fee Increases are Cheaper, and Yet Another Reason Taxes and User Fee Increases Are Cheaper, it is far better to pay taxes and user fees than to be saddled with the much higher cost of lost lives, crippling injuries, and property damage.

The third report corroborated the foolishness of putting pothole repair or any other public service into the hands of those who seek nothing but profits, particularly at others’ expense. In Are Private Tolls More Efficient Than Public Tolls?, When Privatization Fails: Yet Another Example, How Privatization Works: It Fails the Taxpayers and Benefits the Private Sector, and Privatization is Not the Answer to Toll Bridge Problems, I have explained why privatization benefits a select few at the expense of the many.

According to the third report, the town of North Bergen, New Jersey, using municipal employees and equipment, repaired 700 potholes at a cost $50,000 less than what it would have cost using private contractors. The cost to taxpayers of keeping the work in-house was approximately $1,000 per day. Private contractors would have charged the town $3,000 per day. That $2,000 daily difference represents the profits sought by the private sector, a factor that does not exist when public tasks are done publicly. As for the claims by privatization advocates that the private sector is more efficient, there is nothing to indicate that the private contractors would have generated at least a three-fold increase in the number of potholes repaired each day.

From every angle, potholes teach us why taxation is not evil and why privatization of public responsibilities isn’t the panacea its advocates claim that it is. Fortunately, there seems to be a slowly growing understanding among Americans that the smooth ride promised for several decades by the anti-tax, anti-government lobby is, in fact, quite a bumpy and dangerous journey. It’s time to hit the brakes on that failed philosophy before even more damage is done.

Most of us do not enjoy sitting at red lights. Most of us do not enjoy shelling out money for something because we would prefer to get it for free. How can we convince other people to join with us in making the world bow down to us? The answer, it seems, is to tag what we don’t like with a name, a name that will rile up others and bring them to join our ranks. The answer, it seems, is to call it a tax.

This is not the first time that I have objected to the twisting of language, specifically the misuse of the word “tax,” to attain a goal better met through genuine intellectual argument and analysis rather than sound-bite name-calling. In The “Rain Tax”?, I explained that a storm management fee imposed by the state of Maryland was not a tax, but a fee to defray the costs of permitting runoff from one’s property. In A Tax or a Ban: Which is Better?, focusing on attempts to improve public health, I noted that “Some health insurance companies provide premium discounts for insureds who regularly exercise. However one wants to characterize the higher premiums paid by those who don't exercise enough, it is not a tax. It isn't imposed by a government.” In Please, It's Not a Tax, I rejected the use of the term “curb tax” to characterize parking fines.

On Monday, in a letter to the editor of the Philadelphia Inquirer, Ken Greiff argued that “Ad pollution on Philadelphia’s municipal architecture is a tax.” He explains that “It’s a tax on our peace of mind and a tax on our consumer autonomy.” It’s not a tax. Greiff makes several good points. Plastering advertisements on public property is, as he puts it, “a defilement,” something similar to “graffiti, litter, blight, or unmaintained schools.” It ruins our “clear vistas.” It is caused by corporations getting more out of the advertising than they are paying the municipality. Many of the ads are for products that, in the long run, aren’t beneficial. It is, as he puts it, “a sign that no one cares, that you have been sold out.”

What is a tax? As I explained in A New Insult: Don't Like It? Call It Taxation:

A tax is a financial imposition levied by a government or government entity, or a non-governmental organization acting on behalf of or under specific revenue-collecting authority of a government or government entity. To be more specific, this definition from Lectric Law Library's Lexicon will help a lot of people doing crossword puzzles: “This term in its most extended sense includes all contributions imposed by the government upon individuals for the service of the state, by whatever name they are called or known, whether by the name of tribute, tithe, talliage, impost, duty, gabel, custom, subsidy, aid, supply, excise, or other name."

So why does Greiff use the word “tax”? I answered that question when I explained my objection to the use of the word “tax” by Michael Silverstein to describe parking fines, in Please, It's Not a Tax:

Why does Silverstein use the tax label for something that is not a tax? The answer is simple. The anti-tax crowd does a knee-jerk reaction to the word, so that announcing that a "curb tax" has been increased will bring out the anti-tax zealots in far greater numbers and with far more intensity than the more mundane, but more truthful, announcement that parking meter charges and parking ticket fines have been increased. I wonder what the anti-tax crowd would do if someone started referring to the cash register total in a grocery store as a grocery tax, the invoice from People Magazine as a reader tax, and so on. Putting the label of tax on a fee or charge that one doesn't like is a very misleading way of making a point.

In the long run, Greiff would do better to call the corporate advertising invasion what he understandably thinks it is, a defilement, a blight, an eyesore, a menace, a threat to health, a sign of greed run amok. In the long run, this focuses the debate on the substance of the issue, rather than tossing the outcome to the consequences of using a word as an intended insult. Calling it a tax lets the advocates of this unattractive phenomenon reply, “It’s not a tax.” Calling it an eyesore focuses the discussion on the essence of the matter.

One of my many disagreements with anti-tax arguments is that they are so focused on the short-term that they miss the present value of the long-term. My favorite illustration of this point is the infamous pothole. In Liquid Fuels Tax Increases on the Table, I wrote, “Leaving gasoline taxes at their current levels guarantees more bridge collapses, and pothole-caused front-end alignment repair costs that will take more out of motorists’ pockets than the proposed tax increases.” I made the same point in You Get What You Vote For, when I predicted that “front-end alignment spending will skyrocket past the small amounts that would have been paid if the [highway repair tax funding] proposal had been enacted.” In Zap the Tax Zappers, I explained why tax evaders need to face the consequences with these words, “Lest this be thought too rough, think of the person who dies when their vehicle hits a pothole and goes out of control, a pothole not repaired because of revenue shortfalls and spending cuts triggered by the actions of a group of people who refuse to pitch in and fulfill the obligations of citizenship.” In Potholes: Poster Children for Why Tax Increases Save Money, I shared news from the United Kingdom that the cost of damage caused by potholes exceeds the tax or user fee necessary to fix the pothole, and news from Los Angeles that potholes cause $750 of damage annually for each vehicle. Finally, in When Tax and User Fee Increases are Cheaper, I tried to drive the point home with these words: “There are times when it makes sense to increase taxes or user fees in order to prevent even higher costs. Given the choice between paying an additional $150 in highway user fees or $750 in pothole repair costs, rational people would choose the former.”

Now comes even more evidence of how fiscal short-sightedness can have long-term disadvantageous consequences, both for public financial health and for individual safety. According to this report, a woman who was severely injured when the tourist bus she was riding hit a pothole, throwing her out of her seat, has settled her claim against the company for $450,000. The pothole responsible for the damage apparently had been unrepaired for a long time. For all I know, it might still be unrepaired. It’s clear that the reason it is unrepaired is that the city of Philadelphia lacks the funds to repair the pothole. Whenever it discusses raising taxes, or increasing transportation-related fees, or whenever someone suggests a reform of motoring fees by the state so that resources can be made available for repairing potholes and doing other maintenance, a howl of protest arises. These protests often are described as advocacy for business enterprise, and far too often, they succeed.

So how did this work out for the company? Whether or not it spoke up for or against tax increases to repair highways, it ended up not paying increased taxes. Instead, it now must shell out almost half a million dollars, surely far more by orders of magnitude than what it would have paid under any of the transportation tax reforms that have been proposed. My guess is that the company will be reimbursed for much, if not all, of the payment by its insurance carrier. But I’m also going to guess that its premiums will go up, and it’s not unlikely that the premium increase also will exceed the additional taxes the company would have paid under the proposed reforms.

So are those anti-tax folks who pretend to be advocating on behalf of business doing much good for businesses? Hardly. And it appears that at least smaller business owners are beginning to realize that what’s good for the huge enterprises is bad for Main Street, which generates most of the new jobs created in this country. So the true job creators are being hurt by those who pretend to be job creators but who are nothing more than greedy people who think they are entitled to own everything.

The anti-tax resistance to appropriate funding of public enterprise is turning out to be one of the biggest Ponzi schemes in history, in which increasing amounts of American wealth fall into the hands of the elite few at the top of the pyramid. It’s going to come crashing down, one way or another. The choice for America is whether it is dismantled safely, brick by brick, or collapses on top of everyone, crushing them into oblivion.

The federal budget deficit exists because expenditures exceed revenue. Revenue increases reduce the deficit. Spending cuts reduce the deficit. Revenue decreases increase the deficit. Spending increases increase the deficit.

So one would expect that those opposed to enlarging the federal budget deficit would favor reducing spending, increasing revenue, or both. One would expect that those who passionately fight for spending cuts are determined to reduce the budget deficit, especially when they advance cutting the federal budget deficit as the primary reason for the spending cuts.

So imagine how confusing it must be to Americans to learn that advocates of federal budget reduction through spending cuts have voted, according to this report, to INCREASE the federal budget deficit by approving revenue decreases. Does it seem a bit hypocritical? Of course it does. Does it make sense? Yes, it does, if one understands that reducing the federal budget deficit is not a serious concern of at least some of those who use deficit reduction as an excuse to cut spending. How does it make sense? Reducing the budget deficit is “important” to the extent it justifies cutting spending that benefits those not favored, but has no meaning when it comes to reducing revenue by dishing out tax breaks to the favored.

Who is favored? Who is not favored? That one is easy. Spending that benefits the economically disadvantaged is cut while tax breaks the help the wealthy are approved. It’s just another piece of the plan to shift wealth to the favored elite and subject the masses to, at best, peasant treatment. At what point will the 99 percent wake up?

As readers of this blog know, the Delaware River Port Authority (DRPA) has had more than its share of troubles, almost all of them self-inflicted. From diverting toll revenue to expenditures having nothing to do with the facilities it oversees, to other problems beyond the scope of MauledAgain, the agency has managed to invent new ways of falling short. I have discussed some of its troubles in posts such as Soccer Franchise Socks it to Bridge Users, Bridge Motorists Easy Mark for Inflated User Fees, Don’t They Ever Learn? They’re At It Again, A Failed Case for Bridge Toll Diversions, and DRPA Reform Bandwagon: Finally Gathering Momentum.

In response to recent news stories about cronyism and other practices afflicting the DRPA, Andrew Terhune of Philadelphia, in a letter to the editor of the Philadelphia Inquirer suggests that DRPA’s problems are caused by politics and cronyism and that the only way to eliminate those behaviors is to privatize the agency. Although he does not specifically say so, Terhune proposes that each bridge would be operated by a different private operator, because he portrays a situation in which the operators of each bridge “had to compete against each other for our business.” Although I agree with Terhune that cronyism and politics are a problem, the solution is to clean up politics. When a house is a mess, simply moving to another residence while leaving behind the garbage doesn’t make the neighborhood any less smelly.

There are several reasons why privatization will not solve the problems. Again, readers of this blog know that I do not support privatization for activities properly within the ambit of government. In posts such as Are Private Tolls More Efficient Than Public Tolls?, When Privatization Fails: Yet Another Example, and How Privatization Works: It Fails the Taxpayers and Benefits the Private Sector, I have explained why privatization benefits a select few at the expense of the many.

The first problem with Terhune’s proposal is that motorists are not going to drive miles out of their way in order to pay $3.90 rather than $4.00 to cross a river. A person who lives in southern Delaware County who wants to go to Mullica Hill would be foolish to burn fuel, sit in I-95 and I-295 traffic, and waste time by crossing on the Walt Whitman Bridge rather than the Commodore Barry Bridge. Similarly, someone in Trenton isn’t going to use the Benjamin Franklin Bridge to get to Bristol. Though there are some instances where the choice of bridge is “six of one and a half dozen of the other,” there aren’t enough motorists in that position to make competition realistic.

The second problem with Terhune’s proposal is that at some point all of the crossings will end up being owned, directly or indirectly, by one private company. What guarantee exists that this company will operate the bridges in the best interests of the public, in contrast to the best interests of its shareholders? No such guarantee exists. It hasn’t existed for previous privatization profit grabs, and it would not exist in this case. Motorists would not have the realistic option of refusing to purchase the company’s services, as there is no other way to cross the river. Nor can motorists vote out the company’s directors, or shift operation and ownership of the bridges to another enterprise.

The problem with the DRPA is that its members are appointed rather than elected. Motorists cannot affect the board other than through the indirect process of voting for the governors of Pennsylvania and New Jersey, but gubernatorial races are cluttered with all sorts of issues that put the DRPA concerns near the end of the list. With direct election, DRPA board members would be far more attentive to the motorists who pay their salaries and have fewer opportunities to engage in the sort of behavior that has created the problems. Coupled with direct voting should be even stronger transparency regulations, so that the board operates in full public view. The third element of reform would be enactment and tough enforcement of criminal laws putting board members at risk of conviction if they engage in behavior that violates the public trust. Putting DRPA operations into the hands of private companies would generate problems that make the current difficulties appear to be minor glitches.

Ten years ago, in Killing the Geese, I shared my reaction to a proposal that would replace Pennsylvania’s local school district real property taxes with local income taxes, local earned income taxes, increased county and township real property taxes, and business receipts taxes. Seven years ago, in Taxes and School Funding, I analyzed the impact of the electoral defeat of the local school district income tax proposal discussed in A Perplexing Tax Vote Decision. Two years ago, in Which Do You Prefer: Income Tax, Earned Income Tax, Sales Tax, Property Tax?, I shared my reaction to the proposed Pennsylvania Property Tax Independence Act. None of these proposals made much progress in the legislature.

The attempt to eliminate real property taxes has resurfaced. According to this report, a member of the legislature, with bipartisan support, want to repeal the property tax. It is unclear how the lost revenue would be replaced, though the identity and background of the proponent makes it difficult to rule out the possibility that there is no intention to replace the revenue. Supporters of the repeal claim that the tax is unpopular. It is, but considering that all taxes are unpopular, that argument proves nothing. They also claim that the property tax increases at a rate faster than do incomes, and that the tax accordingly disfavors homeowners on the lower end of the income scale. That’s very true. Opponents of the repeal claim that property taxes are easier to collect than income or sales taxes, don’t generate reduced revenue when the economy slips, and are more difficult to evade. These points also are true, though one can argue that with more efficient revenue administration, the evasion of income and sales taxes can be curtailed.

The previous proposal, the Pennsylvania Property Tax Independence Act, would permit school districts in effect to piggy-back on the state income tax, an idea that I had advocated in my earlier posts on real property tax replacement. But that proposal also suggested the enactment and expansion of earned income taxes, a tax that I consider reprehensible because it shifts the burden of funding government from the wealthy to the working person.

A proposal to repeal a tax makes no sense unless the revenue is replaced, because cutting services any more than they have been cut in Pennsylvania would usher in a new Stone Age. The determinative question is what sort of replacement tax the proponents of this latest proposal have up their sleeves. Pennsylvania taxpayers need to pay close attention.

The Obama Administration’s budget, according to this report proposes repeal of a federal law that prohibits imposing tolls on interstate highways other than the roads that were toll roads before they became part of the interstate system. It is understandable why the Administration is making this proposal. States are running out of money to maintain and repair interstate highways, because the inefficient liquid fuels tax is generating less revenue at a time when highway infrastructure presents increasing repair needs. The Highway Trust Fund is projected to run out of money by August. An alternative proposal – putting $150 billion into the fund by enacting some one-time corporate tax reforms – is getting little support from Congress. Of course, the Congress is responsible for the mess, but continues to promote failing highways as part of its attempt to cater to the anti-tax crowd rather than showing leadership by explaining to America that taxes pay for things Americans need, like safe highways.

The Administration’s proposal, though well-intentioned as a solution to a problem created by the Congress, is far from ideal and poses challenges. My thoughts on using highway tolls are summarized in Toll Increases Ought Not Finance Free Rides, a post that cites and quotes dozens of my earlier commentaries on the subject. Do I object to tolls? No. As I explained in User Fees and Costs, using tolls to cover the cost of “building, expanding, improving, repairing, maintaining, policing, and monitoring the road” makes sense. But it also requires consideration of the impact that tolling a highway has on nearby roads. As I explained in that post:

The analysis I support is one that looks at the impact of the toll road and its use on surrounding residents, neighborhoods, and infrastructure. Traffic volume surrounding a toll road interchange is higher than it otherwise would be, and that generates additional costs for the local government. It makes sense to include in the toll an amount that offsets the cost of widening adjacent highways, installing traffic signals, increasing the size of the local police force, adding resources to local emergency service units, and similar expenses of having a toll road in one's backyard. I understand the argument that because the locality benefits economically from the existence of the toll road and its interchange that it ought not be subsidized by the toll road. It is unclear, though, whether the toll road is a net benefit or disadvantage. If it were such a wonderful thing, why are new roads so vehemently opposed by so many towns and civic organizations.

So what’s the answer? It’s something I’ve been advocating for a long time, something that ties paying for road maintenance with road use. It’s the mileage-based road fee, which 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, Mileage-Based Road Fees: Privatization and Privacy, and Is the Mileage-Based Road Fee a Threat to Privacy?.

Listen carefully, members of Congress. Listen carefully, President Obama. Listen carefully, special interest groups and lobbyists. Listen carefully, America. It is time to implement twenty-first century funding approaches to a twenty-first century problem encountered by people living in the twenty-first century. It is time to put away the road financing methods of the seventeenth, eighteenth, nineteenth, and twentieth centuries. Failure to do so will take transportation, and thus the economy, back to the Stone Age.

This recent story about tax evasion is a candidate for the tax-believe-it-or-not hall of fame. More details appeared in another version of the story.

A man in India showed up at a hospital complaining of abdominal pain. Physicians determined there was some sort of blockage, cut into the fellow, and discovered 12 33-gram gold bars in his stomach. The first story was tagged, “An India man's apparent attempt to evade taxes by swallowing gold did not have a glittering end” and commented that the man is now “under investigation for tax evasion.” The second story explained that he apparently smuggled the bars into the country to evade import duty. I suppose import duty can be considered a tax, at least for purposes of describing the swallowing of gold bars as a foolish way to evade taxes. What’s even worse is that it didn’t work, and the medical bills probably exceed the taxes the fellow was trying to circumvent.

That the guy doesn’t qualify for a rocket scientist award is further demonstrated by what he told the doctors. He claimed to have swallowed the cap from a plastic bottle. What did he think was going to happen? That the surgeons would operate and remove a plastic bottle cap?

And the gold bars? They’re now in the hands of the customs agency.

I think I know what the fellow was expecting to happen. Unfortunately, that didn’t come to pass.

I last discussed the saga of Philadelphia’s Board of Revision of Taxes in Philadelphia’s BRT Encounters a Provision That Bars Solving the Problem that the Provision Created. It’s a story I’ve been addressing from time to time for almost seven years, 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, Is a Tax Appeal Delayed a Tax Appeal Denied?, Sometimes, They Cannot Win, and momentarily ending with Philadelphia’s BRT Encounters a Provision That Bars Solving the Problem that the Provision Created.

The latest chapter of the story involves the attempt to adjust the pay of those serving on the BRT. Some thought that the huge backlog in appeals filed with the Board was a result of pay discrepancies among the members. An attempt to lower the board members’ pay was precluded with respect to several members because of a state constitution provision prohibiting the reduction of a sitting member’s pay. That meant that some board members were making $70,000 per year, and others were being paid at a rate equivalent to roughly $38,000 per year. Some board members weren’t putting in forty hours a week, perhaps because they figured that if they were being paid roughly half what other members were earning, they should do half the work. So City Council voted to pay each board member $70,000 per year. Then came an observation that the increase violates the same provision because it would increase the pay of sitting members. While the matter is being bounced about, apparently the paychecks have been equalized, because now comes news that with the bill having been passed by City Council, the rate of appeals being resolved by the BRT has ramped up. Previously the Board had been deciding about 150 cases each week, and now it’s resolving roughly 600 cases each week. With a backlog of almost 24,000 appeals, it still will take some time before the docket is emptied. And if the City Council legislation is overturned by a court, it seems that the wheels of tax justice in Philadelphia will slow considerably.

I wonder how effective this approach to increasing one's pay would work in the private sector. Perhaps politicians should be paid the minimum wage. That might solve all sorts of problems.

It seems appropriate to repeat what I noted in my last post on the subject, Philadelphia’s BRT Encounters a Provision That Bars Solving the Problem that the Provision Created: ”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.”

Eight years ago, in A New Book on Taxation of Residence Sales: Don't Leave Home Without It I reviewed Julian Block’s book, “THE HOME SELLER’S GUIDE TO TAX SAVINGS: Simple Ways For Any Seller To Lower Taxes To The Legal Minimum." Now he has a new edition, with a different subtitle, “The Home Seller’s Guide to Tax Savings: A Tax Guide for Buyers, Sellers, Foreclosures, Short Sales and More.” As he has done with his many other tax books, Julian has put together a plain-English description of the tax law as it applies to typical taxpayers engaging in typical residence transactions.

Julian begins with a summary overview of section 121, which permits taxpayers to exclude from gross income up to $250,000, or $500,000 for married couples filing joint returns, of the gain from selling the principal residence. Although seasoned tax practitioners understand what gain means, Julian assists the non-expert taxpayer in understanding that the gross sales price is not the gain. He is careful to explain the dual-prong ownership and use tests that must be satisfied, and the once-every-two-years-use-of-exclusion limitation. He also explains how a partial exclusion is available if the taxpayer does not meet those tests or falls within that limitation. He also explains the recent change that prevents the exclusion from applying to gain attributable to periods of nonqualified use. He provides guidance on what to do and what not to do when trying to meet the ownership and use tests. Julian discusses recent rulings that address whether a situation satisfies the unforeseen circumstances exception that permits qualification for a reduced exclusion even though the ownership and use tests have not been met. In connection with these tests, he provides an extensive discussion of what constitutes a principal residence.

The book contains helpful sections that address particular situations. Julian describes the issues facing widows and widowers, divorced individuals, and unmarried couples who cohabit. He also explains the impact on computing the exclusion of using a portion of the residence as a qualified home office. He describes the treatment of life estates in the residence, the complications caused when vacant land adjacent to the principal residence is sold, the disappointing consequences of selling rent control rights in a rent-controlled dwelling (spoiler: the exclusion doesn’t apply), and the much better consequences of selling condominium units and cooperative apartments. Julian also explains the consequences of short sales, foreclosures, insolvency, and debt forgiveness, all of which have become far more common than they were ten or twenty years ago.

When the gain from selling a residence must be taxed, because the exclusion is insufficient to cover the entire gain, the taxpayer faces a possible need to make estimated tax payments, the complexity of computing the tax on capital gains, and the application of the Medicare surtax on investment income. Julian takes the reader through an explanation of what these issues involve and how to deal with them.

The computation of gain depends in part on the selling price and in part on the taxpayer’s adjusted basis in the property. In most instances, the computation of basis begins with cost, though for gifts it begins with the donor’s basis, and for inherited property it begins with fair market value. Adjusted basis is then computed by taking into account closing costs, and improvements. Julian explains how these rules work and gives tips on how to maximize adjusted basis, including the need to keep records, and points out how condominium and cooperative apartment owners need to pay attention to the information provided by the condominium or cooperative association. In connection with the determination of basis, Julian provides an explanation of the new regulations issued by the Treasury to distinguish repairs from improvements. Although improvements usually are not deductible, they can be if they qualify as medical expenses, and Julian devotes a few pages to explaining how this works.

Though generally losses on the sale of a principal residence are not deductible, there are exceptions, and Julian digs into these. He describes the tax consequences of selling a former principal residence that has been converted into a rental property. He explains the casualty loss deduction, and though he discusses some cases and rulings involving thefts not related to home ownership, the stories generating the tax issues in these situations are well worth the cost of the book (small spoiler: thieving roommates, fortune tellers, adultery cover-ups, disgruntled dance studio customers, the crushing of cars parked in no-parking zones, friends wrecking cars before insurance was purchased, and children abducted by former spouses).

Julian also explains deductions connected with residences, including mortgage interest, mortgage loan points, and real estate taxes. He also discusses the deductions arising from the use of a portion of a residence as a qualified home office.

The book closes with several questions, presumably from readers of earlier editions, and Julian’s answers. It is interesting to see the variety of situations people encounter, although unfortunately too many of them involve casualties to the home.

As has been the case with his other books I’ve had a chance to review, I recommend this one. It is something that anyone owning a home, renting out a home, thinking about buying a home, or selling a home will find very useful.

A recent Tax Court case, Henson v. Comr., T.C. Summ. Op. 2014-36, demonstrates how unwise it is to say one thing and then to say something inconsistent at a later point in time. The taxpayer in question, during a Tax Court trial involving other issues, decided to assert that the alimony income she reported on the tax return at issue was not gross income. The Tax Court would have none of it.

When the taxpayer divorced, she and her husband entered into an agreement that he would pay her property settlement payments totaling $200,000, plus maintenance payments of $5,000 per month for 60 months followed by $2,500 per month for 48 months. The maintenance payments would terminate if the taxpayer died, cohabited, or remarried. The agreement made no mention of tax consequences of the payments. After making ten maintenance payments, the taxpayer’s husband failed to pay the amounts due for the remaining two months of the year, causing the taxpayer to bring an action in state court against her former husband. The taxpayer reported the $50,000 as alimony gross income.

During the Tax Court trial, the taxpayer argued that the $50,000 was not gross income, claiming that “her divorce decree ‘even states that it’s not alimony, it’s just separating marital property, and * * * [my husband’s and my] money.’ ” The Tax Court explained that the ten payments totaling $50,000 were alimony gross income under section 71(b) of the Internal Revenue Code because they were in cash, were received by the taxpayer under a separation instrument, were not the subject of a provision characterizing them as not alimony, were not made between spouses occupying the same household, were not due for any period after the death of the taxpayer, and were not replaced by payments required to be made after her death. The Tax Court noted that the taxpayer reported these payments as alimony on her income tax return. It also pointed out that she brought a state court action against her former husband for the two unpaid payments, making it possible to infer that he made the other ten maintenance payments, consistent with what the taxpayer reported on her return.

Though the taxpayer was subjected to a section 6662 accuracy-related penalty, that penalty did not apply with respect to the alimony because she had correctly reported the alimony. The taxpayer was fortunate. No penalty was asserted against her for trying to back out of a correct return position by arguing that what clearly constituted gross income was not gross income. A taxpayer does not earn points with a court by taking this sort of stance, which is quite different from bringing up a deduction accidentally omitted from a return under audit or claiming and demonstrating that a gross income item was mistakenly computed. Reading the opinion gave me the sense that the taxpayer, anticipating losing on most or all of the other issues, brought up the “it’s not alimony” claim in the hope that removing it from the return would offset the increased taxable income generated by the adjustments being made by the IRS with respect to the other issues. The taxpayer represented herself in Tax Court, so she was bereft of the advice that competent counsel would have provided, namely, “Nothing can be gained from making that argument.”

A recent Reuters report discloses that, according to tax return preparers, at least some wealthy clients “have been surprised” to learn that their taxes have increased. One tax professional claimed that “people are caught off guard.” There are stories of taxpayers who have underpaid their estimated taxes, and who have not adjusted their withholding, and now are having to write significant checks to pay the amount by which they have failed to maintain tax payments.

The changes, effective for 2013, were enacted more than a year ago. They were enacted amid a flurry of objections, arguments, lobbying, negotiations, press coverage, social media complaints, and an assortment of other discourse. It is a good guess that most, if not all or nearly all, of the taxpayers facing these issues have tax advisors. What sort of advice were they getting? Were they not listening? Were they not listening to their advisors? Were they not reading the news? Were they not paying attention?

The report describes the situation as one in which these taxpayers “have been surprised to learn the Internal Revenue Service was taking a larger bite.” Nonsense. It’s the CONGRESS of the United States that decided to amend the tax laws. The Congress. I suppose paying attention in civics courses, where they still exist, also has not been on the agenda.

A recent Tax Court decision, Johnson v. Comr., T.C. Memo 2014-67, indicates why it’s important to screen one’s tax return preparer. Although the taxpayer came out on the losing side in terms of the substantive tax issue, by relying on a tax return preparer, the taxpayer avoided the section 6662 accuracy-related penalty.

The taxpayer divorced his wife in 2006. The divorce decree required him to pay spousal maintenance of $6,068 each month. In addition, he was required to pay her 40 percent of his gross bonus. Both the monthly payments and the bonus percentage payments terminated on the earliest of any of three events. They terminated when the youngest child graduated from high school. They terminated when the taxpayer’s ex-wife remarried. They terminated when the taxpayer or his ex-wife died. The decree stated that the payments were deductible by the taxpayer and includible in the ex-wife’s gross income. The decree also required the taxpayer to pay $500 per month, adjusted for inflation, in child support until they graduated from high school or certain other events occurred. In 2008 the state court reduced the fixed amounts to $4,000 and $200 per month, respectively.

On his 2008 federal income tax return, the taxpayer deducted $54,788 as alimony. A certified public accountant prepared the return. The IRS disallowed the deduction and issued a notice of deficiency, including an accuracy-related penalty. After the taxpayer filed a petition in the Tax Court, the CPA amended the return, increasing the deduction to $70,848, to reflect the bonus percentage payments not claimed as a deduction on the original return.

The Tax Court held that the payments were not deductible as alimony because they were subject to a contingency involving a child, specifically, graduation. The provision in the divorce decree for child support payments did not prevent classifying the other payments as child support payments because of the contingency.

The Tax Court also held that the taxpayer was not subject to the accuracy-related penalty because he had reasonable cause and acted in good faith. The taxpayer gave his preparer complete and accurate information, the preparer was at fault in preparing an erroneous return, and the taxpayer believed in good faith that he was relying on a competent return preparer. The court noted that the record did not indicate whether the CPA was incompetent or inexperienced, and that the taxpayer was not required to second-guess the preparer’s advice.

The opinion does not discuss whether the preparer reimbursed or planned to reimburse the taxpayer for the costs of going to Tax Court to resolve the issues, or for the interest that accrued on the tax deficiency. Even if reimbursement is made, the aggravation and inconvenience of dealing with the audit and the judicial proceedings is something most taxpayers would prefer to avoid. One way of increasing the chances of avoiding these sorts of problems is to check out one’s tax return preparer before engaging the preparer to prepare returns. Until and unless there is some central clearing house that rates and reports on tax return preparers, taxpayers must rely on recommendations from reliable friends and relatives to identify competent and experienced tax return preparers.

Six years ago, in What’s in a Tax Label?, I noted that calling a tax increase a “loophole closer” doesn’t change the reality that a tax increase is in the works. The following year, in Please, It’s Not a Tax, I argued that calling a parking fine a “curb tax” was nothing more than an attempt to use anti-tax sentiments to fight proposed increases in parking fines. Last year, in The “Rain Tax”?, I made the same point with respect to a storm water management fee. It seems that rather than sticking to a standard definition of tax, people who oppose something call it a tax because it’s easier to find allies to oppose it, and people who are trying to raise revenue find names other than tax in order to avoid scaring off people who don’t like taxes.

Now comes a story about “tax policy adjustments” in Governor Chris Christie’s proposed budget for New Jersey. His administration claims that the adjustments are not new taxes or tax increases. The nomenclature mess is taking a back seat to the claim that Christie previously accused political opponents of doing what he now proposes to do.

Christie wants out-of-state sellers to collect use tax on online sales to New Jersey residents. In fairness to Christie, the use tax already exists but, as is the case in many states, enforcement is lax. The sellers who would be required to collect the tax would not be paying it, because their customers would be charged for the tax. The customers would be paying a tax that they owe under current law.

Christie also wants to extend the tax on tobacco products to e-cigarettes. No matter what policy arguments can be made to support the proposal, a tax on e-cigarettes would be a new tax, because e-cigarettes are not tobacco products.

Another idea from Christie is to repeal the sales tax exemption for Urban Enterprise Zone businesses for certain purchases. The repeal of a tax exemption is a tax increase. Calling it a “tax policy adjustment” is a ploy designed to preserve a claim of not having raised taxes.

Grover Norquist thinks all of the proposals are new taxes or tax increases. I agree with him on two of the three. Taking steps to collect a tax that already exists is not the enactment of a new tax and it’s not a tax increase. Calling it a tax increase is deceptive, and it’s worse because it’s done for political purposes.

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?