MauledAgain

Several months ago, in Delaying a Questionable Tax, I explained one of my objections to the then pending, and subsequently approved, new Philadelphia cigarette tax designed to raise money to fund the city’s public schools. Expecting cigarette smokers to carry an additional burden for a public good that benefits everyone, including the students, the employers who will hire them, and society that benefits from the contributions made by educated students, creates an imbalance in funding. I compared the tax with the diversion of toll revenue by the Delaware River Port Authority to fund projects having nothing to do with the repair and maintenance of the bridges on which the tolls are collected.

According to a Philadelphia Inquirer story several days ago, it appears that smokers are escaping the new cigarette tax by taking their business to stores outside the city. City merchants report not only that cigarette sales have dropped by as much as 80 percent, but also that the impact on total revenue has been so strong that they have had to let employees go. A wholesaler who supplies corner stores throughout the city described a 50-percent downturn in the amount of tobacco products, candy, and other goods being purchased by those stores for resale.

To combat the practice by city residents of purchasing cigarettes outside the city, the state Department of Revenue plans to hire enforcement agents. Exactly how they will combat city residents purchasing cigarettes while out of town has not been explained. Unlike agents watching license plates on vehicles as they try to enforce a sales tax avoidable by shopping out of state, these agents will need to find some other way of determining the residences of shoppers inside a Wawa or 7-11 outside the city limits.

When I compared using a cigarette tax to fund public education to the use of bridge tolls to fund unrelated projects, I did not mention an important difference. The cigarette tax is easily avoided, as the recent story describes. The bridge toll is not easily avoided if it is essential, for business or other reasons, to cross the Delaware River. There are no practical alternatives, unlike those available to circumvent the cigarette tax. In some respects, this makes the bridge toll revenue diversion more pernicious. Nonetheless, with projections indicating that the cigarette tax will raise much less revenue than predicted, it becomes a “lose-lose” situation, as the schools don’t get the expected funding and neighborhood stores go out of business. The city official who called the tax “win-win” because it will raise money for schools and reduce smoking is banking on theory and not practical reality. The smokers are still smoking, buying their nicotine at stores outside the city, and the school funding will fall short. In the end, all that will change is that some small business owners will close up shop. That’s a rather deplorable long-term result.

A recent Tax Court case, Singhal v. Comr., T.C. Summ. Op. 2014-102, presents an important lesson for taxpayers. The taxpayers were married, and were the only members of a limited liability company which went by the name of Man Machine Interface Technologies (MMIT), and which was treated as a partnership for federal income tax purposes. A third party accountant prepared the partnership tax return for MMIT, and sent Schedules K-1 to the two taxpayers, along with a letter. The letter explained that the Schedule K-1 “reflects the amounts you need to complete your income tax return. The amounts shown are your distributive share of partnership tax items to be reported on your tax return, and may not correspond to actual distributions you have received during the year.” The husband taxpayer prepared the taxpayers’ joint federal income tax return. Instead of including all the distributive share amounts on the Schedules K-1, he reported the distributions received from the partnership. The IRS sent a notice of deficiency indicating that the amount reported was incorrect because the amount reported to the IRS was different from what was on the return.

Although the taxpayers did not contest the change to their return that added what had not been reported, they contested the accuracy-related penalty imposed by the IRS. In rejecting the taxpayers’ argument that the underreporting was because they “made a mistake of law in good faith” that was “reasonable,” the Court noted that the third-party accountant had sent a letter advising them to use the amounts from the Schedule K-1 and warning them that those amounts “may not correspond to actual distributions.” The Court explained that at trial, the petitioner was asked, “what does it mean to you when a letter to you and your wife says, this information reflects the amounts you need to complete your income tax return?” and answered “To be truthful, I never read it.” The Court asked again, “You never read it?” and the taxpayer replied, “Yes.” The Court then reasoned that if the taxpayer had read the letter, it would not have been reasonable to ignore the information provided by the accountant, and if he had not read the letter, it was not reasonable to have done so.

When tax professionals put advice and information in writing, it is because they have determined that advice and information to be important. They usually don’t waste time and resources writing letters or memoranda about unimportant matters. The taxpayer to whom the letter has been sent almost always has paid for the advice and information contained in it. That, too, should be an incentive to read the letter.

True, we are so bombarded with so many types of information that it is difficult to separate the music from the noise. Yet when the letter is from someone to whom payment has been made, is expected, and refers to something as important as tax matters, it should be much easier to pull it out of the pile and examine it. In the case of these taxpayers, the price paid for not reading the letter exceeded $12,000. Ouch.

A recent case, Puentes v. Comr., T.C. Memo 2014-224, illustrates the principle that a taxpayer who is neither legal nor equitable owner of a residence is not permitted to deduct interest paid on the mortgage loan secured by the property. Instead, for tax purposes, the taxpayer who makes those payments is making a gift to the owner, who is deemed to pay the interest. Of course, if the owner does not need the deduction, or stands to acquire less of a tax benefit than would the non-owner, the non-owner has every incentive to try to claim the deduction. Unfortunately, the outcome of the principle is harsh.

The facts of the case are fairly simple. The taxpayer’s brother purchased a residence, made the downpayment, financed the balance of the purchase price with a mortgage loan on his name, and took title to the property in his name. The taxpayer did not contribute to the downpayment, was not obligated on the mortgage loan, and was not on the deed. In 2003, the taxpayer moved into her brother’s house. Their father moved into the house in 2005. The taxpayer’s brother made all mortgage loan payments until 2009, when he became unemployed. During the taxable year in issue, 2010, all three lived in the house, the father paid for repairs and supplies, and the taxpayer paid property taxes, homeowner insurance, and mortgage loan payments. The mortgage company issued a Form 1098 in the name of the taxpayer’s brother. When the taxpayer claimed the interest deduction, the IRS disallowed it. The taxpayer petitioned the Tax Court for a redetermination.

Although the taxpayer conceded she was not a legal owner of the residence, she argued that she was an equitable owner and thus entitled to the deduction despite having made that argument and lost in an earlier Tax Court case involving 2009. She tried to distinguish the facts of the earlier case by pointing out that she also paid the property taxes and the homeowner insurance, and shared in the maintenance expenses. Under California law, the legal owner is the equitable owner unless clear and convincing proof is presented that someone else is an equitable owner. The taxpayer failed to show that any agreement or understanding existed by which her brother held title on her behalf or to present any other evidence supporting her claim of being an equitable owner. The Court noted that the taxpayer had not contributed to the downpayment, was not obligated on the mortgage loan, and did not have her name on the deed.

If the taxpayer wanted the interest deduction, she needed to do something to shift ownership. One possibility would be entering into an agreement by which she became part legal owner of the property, and assumed an obligation to make mortgage loan payments. There probably would be countervailing considerations that could lead to a decision not to shift ownership. The availability of the interest deduction ends up as one of several factors that need to be considered. However, no matter what ultimately is decided, it makes sense in these sorts of situations to obtain advice about the best approach to take.

With mortgage loan modifications rather commonplace, particularly during times of economic downturns, taxpayers need to be careful when re-arranging their loan terms, particularly with home mortgages. There are lessons to be learned from what happened to the taxpayers in a recent Tax Court case, Copeland v. Comr., T.C. Memo 2014-226.

The taxpayers, who use the cash method, applied for and were granted a loan modification by their mortgage lender. Under the modification, the interest rate was reduced, payment terms were changed, and the loan balance was increased. The increase in the loan balance included past due interest that the taxpayers had been unable to pay. The taxpayers claimed a deduction for the unpaid interest that was added to the loan balance. The IRS disallowed that deduction, and the Tax Court sustained the IRS determination.

Interest is deductible by a cash method taxpayer when the interest is paid. The taxpayers in Copeland did not pay the interest, because adding the interest to the loan balance is not payment but simply a promise to make the payment in the future. This principle is well settled in the tax law. To get around this principle, the taxpayers asked the Tax Court to treat the loan modification as if they had borrowed money from another lender and then paid the outstanding principal and past due interest on the existing loan. The court declined to do so, pointing out that what the taxpayers actually did was not the same in economic substance as what they were trying to persuade the court to pretend that they did. The court explained that the taxpayers did not establish that they could have obtained a loan from a third party, and that even if they had been able to do so, the fact that they did not do so confined them to the tax consequences of what they actually did.

If these taxpayers did have the opportunity to borrow from a third party and use the loan proceeds to pay off the existing principal and interest obligations, doing so would have provided them with a tax benefit. Whether non-tax factors would have outweighed the tax advantage is something that cannot be determined from the facts presented by the court’s opinion. But for taxpayers and their tax advisors, it is something worth examining when a taxpayer sets out to restructure a debt obligation.

Last week, on my 10-hour round-trip drive to meet my first grandchild, a thought crossed my mind. It was triggered by the experience of needing to move back and forth between the right lane and the left lane on those inadequate four-lane limited access highways. The need to leave the right lane was triggered by the drivers who dilly-dally, driving at 10 to 20 miles per hour below the speed limit. But getting into the left lane, and staying in it while passing a slowpoke, was a dangerous adventure, because of the drivers who think they are NASCAR heroes and roar down the road at 20, 30, 40 and even more miles per hour than the speed limit. So, it struck me, those who are driving within 5 or 10 miles per hour of the speed limit are squeezed between the two extremes.

And then a second thought hit me. Being squeezed between the laggards and the speedsters is not unlike being squeezed between extremists on the right and extremists on the left. When it comes to tax policy, there are those advocate returning to 90 percent marginal rates, an idea that is absurd, and there are those who advocate eliminating taxes, another idea that is no less absurd. Neither side has the ability to fit their idea into the reality of the overwhelming majority who do not sit on the extreme edge.

What causes this behavior? The answer is simple. Addiction. When passing someone who is lumbering along in the right lane, I will increase my speed in order to minimize the time spent passing, remembering the lesson that the longer two vehicles are running parallel, the greater the chances of a collision. Along comes the speedster who, even though I am now driving 10 miles per hour above the speed limit, hangs on my rear bumper. I’ve experimented. Speeding up does nothing. Though I’ve not tried hitting 80 or 90 miles per hour, it’s never enough for these speed-addicted fools. And the same is true of wealth generation. Most individuals would be happy with salaries in the high six-digit range, and with wealth in the low seven-digit range. But the nation’s multi-millionaires, billionaires, and multi-billionaires aren’t happy. They can double their income and wealth time and time again, and even if they could reach an infinity of dollars, would still be unsatisfied. Something’s missing in their psyche, and like the speedster who does not understand and cannot accept the reality of limits, they, too, cannot stop, for there is no limit on their insatiability.

But what the extremists tend to forget is that if you squeeze too hard, something is going to pop. And the longer it takes for the pressure to build, the stronger the eruption. Some speedsters never learn until that last micro-second before they and their vehicle become on lump of fused human and metal material. I wonder what will be the limit-teaching event for the tax policy extremists.

From the outset, I have made it a point to work Halloween into MauledAgain, usually looking for the silly or goofy but occasionally taking a more serious approach. The posts began with Taxing "Snack" or "Junk" Food (2004), and have continued through Halloween and Tax: Scared Yet? (2005), Happy Halloween: Chocolate Math and Tax Arithmetic (2006), Tricky Treating: Teaching Tax Trumps Tasty Tidbit Transfers (2007), Halloween Brings Out the Lunacy (2007), and A Truly Frightening Halloween Candy Bar (2008), Unmasking the Deductibility of Halloween Costumes (2009), Happy Halloween: Revenue Department Scares Kids Into Abandoning Pumpkin Sales (2010), The Scary Part of Halloween Costume Sales Taxation (2011), Halloween Takes on a New Meaning and It Isn’t Happy, and Some Scary Halloween Thoughts.

This time, I explore how the national dissension over wealth and income inequality has intruded on children’s Halloween activities. An unidentified reader recentlywrote to a Slate.com columnist, asking whether Halloween should be restricted to neighborhoods. The reader lives in what the reader describes as a very wealthy neighborhood, though a few blocks away from the billionaires and celebrities. According to the reader, most of the children knocking on the doors “arrive in overflowing cars from less fortunate areas,” something the reader thinks is “inappropriate.” The reader claims that “Halloween isn’t a social service or a charity . . . for less fortunate children,” and notes that “”we already pay more than enough taxes toward actual social services.”

The columnist’s response deserves a salute. She pointed out that she lived in an urban neighborhood that welcomed families not from the immediate area, and that it was a delight to see the children dressed up in costumes. She explained that her family shelled out an additional $20 to have enough candy to give out. She then described the reader’s letter as a “whine” that caused her to wish that “people from the actual poor side of town come this year not with scary costumes but with real pitchforks.” She advised the reader, “Stop being callous and miserly,” and advised the reader to get some candy to give to children who get one day a year to “marvel at how the 1 percent live.”

Personally, although distributing sugar might be feeding or creating a sugar addiction, I enjoy handing out candy to children on Halloween. When one of them runs down the driveway yelling to friends, “He’s giving out Reese’s Peanut Butter cups,” I get to smile and sometimes laugh. As a child, I canvassed not just my neighborhood but also the adjacent ones, though all of the neighborhoods were of the same socio-economic condition. I paid attention to my older brother and quickly argued for permission to head out with a pillowcase and not a small paper bag. The few people in other neighborhoods who did not know who I was simply asked. The idea that we should stay within our own neighborhood just didn’t exist, at least not by the time we were eleven or twelve. Nowadays, the children who arrive at my door not only come from my neighborhood, but from adjacent ones where the housing prices are meaningfully higher and from the university’s dorms at the northern edge of an adjacent neighborhood. I don’t ask for ID. I suppose that is what the Slate.com reader would be suggesting. I wonder if it would need to be a photo ID.

A recent case, Sanchez v. Comr., T.C. Memo 2014-223, demonstrates how a taxpayer should not file a Tax Court petition. The taxpayer received a notice of deficiency that was mailed on December 2, 2013, making the petition due by March 3, 2014. The taxpayer used an unidentified third party to prepare the petition. That person was “given documents to mail,” printed postage from Stamps.com, added extra postage for making the mailing certified, took the petition to the post office, noticed there were long lines, and dropped the envelope in the outgoing mail slot without getting a postal service employee to stamp certified on, and postmark, the envelope. The petition arrived at the Tax Court on March 10, 2014, bearing a postmark of March 4, 2014.

Not surprisingly, the Tax Court granted the IRS motion to dismiss for failure to file the petition in a timely manner. The court pointed out that the postal service postmark trumped the March 3, 2014, date on the postage generated by Stamps.com, that the postal service postmark could not be trumped by other marks unless it was missing or illegible, and that testimony of delivery to the post office of the petition on a day earlier than the postmark must be disregarded.

There are two major lessons to be learned from this case. First, stand in line and get that hand-stamped postmark. Second, avoid the need to learn the first lesson by treating the petition as due EIGHTY days after it is mailed. That provides a cushion of time, an allowance for unforeseen circumstances, and contingency insurance. The inability of most people to deceive themselves in this manner has its roots in childhood, when too many missed deadlines are tolerated, and lessons in timeliness aren’t taught and when taught, aren’t absorbed. More than a few law students have encountered serious academic difficulties because a variety of circumstances, some unpredicted and some to be expected, caused them to miss deadlines. People complain that law schools should be teaching time management, but, seriously, why are people arriving at law school lacking time management skills? The answer is, for the same reason people not going to law school have the same issues. Better to learn the consequences when what’s at stake is something minor and not a taxpayer’s Tax Court petition.

From this story, I learned that there is a ballot question in Massachusetts asking voters to decide whether the inflation-adjustment indexing of the state gasoline tax, enacted in 2013 and scheduled to go into effect in 2015, should be repealed. The writer of the story introduces it by asking, “Repealing a yet-to-be-implemented gas tax provision passed in 2013 is the top question on the ballot Nov. 4, but what does that really mean for your wallet?” It’s a good question.

The writer points out that it is impossible to predict future gasoline tax increases because the index for inflation adjustment is unpredictable. The writer looks at what would have happened in previous years had the indexing been in effect, but then warns that it is unwise to project the amount of the gasoline tax 20 years from now based on what indexing for the past 20 years would have been. Good point.

The writer explains that the current Massachusetts gasoline tax, raised in 2013 from an even lower level, still remains below the national average and below the regional average. The writer then shares some hypothetical gasoline tax costs using mileage numbers for so-called average drivers.

The flaw in this analysis is that the writer omits other components of the analysis. A repeal of the scheduled indexing will “save” drivers some undetermined amount of additional state gasoline taxes. But it also will cost them in ways that most Americans, including political leaders, writers, and analysts fail to consider. With the failure of gasoline taxes to keep pace with road repair and maintenance costs, a phenomenon mentioned by the writer, the condition of roads, bridges, and tunnels deteriorates. That leads to emergency closings, more accidents, and slower traffic trying to avoid potholes and other deformities. These consequences cause drivers to need more time to make the trips they are trying to make. Time is money. So there’s a cost. And pity the driver who hits a pothole, or whose vehicle is damaged when hit by loose stones kicked up by another vehicle because the road is falling apart. The cost of a front-end alignment alone exceeds what the driver would have paid in increased gasoline taxes. And the damage doesn’t stop at front-end alignment. It can include tire and wheel damage, bent frames, and far more costly damage to vehicle and occupants from accidents caused by drivers swerving around potholes.

In some ways, taxes are like insurance. For example, not everyone will hit a pothole. Not everyone will suffer a house fire. But the purchase of insurance, aside from providing financial peace of mind, spreads the risk so that it can be borne by the individuals who constitute a society. But the anti-tax crowd also is an anti-insurance crowd, for those who subscribe to the “get rid of government” mentality cannot admit, and perhaps don’t even understand, that deep down inside they are adhering to a “get rid of society, let’s just have every person go for himself or herself” philosophy. The failure to understand the individual’s need for society, itself an insurance against the chaos of pure libertarianism, is what lies at the heart of a maladjustment exploited by the manipulative few who see this as an opportunity to be more libertarian than the rest of us.

So, go ahead, vote for a repeal of scheduled increases in the gasoline tax. But please let us know who you are so that when you suffer vehicle damage and start complaining that “the government should have been doing something about” the pothole or whatever caused the accident, we can remind you that you brought it on yourself. It’s a tough way to learn that the long-term needs just as much consideration as the short-term. That is true for many things, including taxes.

It could be anyone’s nightmare. For one woman, it is her reality.

According to this story, the city of Norcross, Georgia, has sold a woman’s condominium unit because she did not pay a $94.85 city tax bill. She did not receive the bill because the address on the bill was wrong and it was returned to the sender. For the same reason, the follow-up notices that the property would be sold did not reach her.

It is troubling that in the so-called information age, a city office cannot get a tax bill and notices to a taxpayer, especially after the items are returned because the address on them is incomplete. How difficult would it be to find the taxpayer’s address? Though the information age brings an abundance of data, it also has generated a culture of relying on machines that are no more capable than the programmers who design them and the software they run. The city’s mayor claims that the city is examining why this error happened. The answer should be easy to find. What happens when a tax bill or notice is returned by the postal service? Does a human see it? What is that person required to do? If they do something, is a record maintained of what was done? If only one mailing had been returned, it would be a bit easier to comprehend the oversight, but multiple items were returned. The answer sits somewhere between badly designed procedures and carelessness or laziness.

The purchaser of the condominium unit has already sold it to another person. There is no way the woman can recover possession of her property. Perhaps the city could offer to purchase it back from the new owner at a premium that entices a sale, but even if that happens, all of the city’s taxpayers would bear the burden of what could turn out to be one person’s mistake.

How does one protect one’s self from this sort of outcome? First, learn what taxes apply to ownership of real property. Examine taxes imposed by the local community, by the county, by the state, and by those multi-jurisdictional agencies and authorities. Second, learn when the tax bill is mailed and when the tax is due. Third, set up some sort of reminder system to keep track of bills as they arrive, and if one doesn’t arrive within three weeks of the due date, contact the appropriate tax office. Yes, it’s more work for someone who doesn’t bear primary responsibility for a task, but that is a marker of current culture, in which too many people bring a lackadaisical attitude to their responsibilities because they figure someone else will bail them out.

On Monday, a reader of the Albuquerque Journal sent an inquiry to a columnist who carefully answered the question. The reader wanted to know why it would be better to make a charitable donation of stock rather than a donation of cash in the same amount as the value of the stock. The reader pointed out that, whichever choice was made, the charitable contribution deduction would be the same. The columnist explained that there was a big difference. By donating the stock, the reader avoids paying the capital gains tax that would be due if the reader sold the stock and donated cash proceeds.

The donation of stock to a charity in lieu of cash clearly is a tax break. It is a complicated tax break because not all stock donations qualify, and in some instances the capital gains tax does apply. It is not unusual for tax breaks to be complicated, because most are designed to benefit a very narrow group of taxpayers, sometimes even one person or company or a handful of family members, but complicated definitions serve to disguise the identity of the tax break beneficiaries.

The tax break for donating stock, though theoretically available to all taxpayers, is, as a practical matter, of value only to those persons who are sufficiently wealthy both to own stock and to be in a position to make a charitable donation of that stock. People who have lost jobs in the interest of boosting shareholder profits, disabled veterans trying to live on meager public benefits, retirees scraping by because a billionaire bought out their former employer and cancelled pension payments, the working poor, a good chunk of the declining middle class, and those afflicted with unplanned medical bills not covered by insurance either don’t own stock or, if they do, can’t afford to give it to charity. In other words, this tax break primarily benefits the rich. It’s a tax break that doesn’t show up in the list of government expenditures criticized by the puppets of the rich, nor is it among the outlays that the same critics label as giveaways to “takers.”

To find out who benefits from this tax break, propose its repeal. Then watch and listen for the response.

Philadelphia City Council has approved legislation giving yet another tax break to employers. According to this story, city officials are using a tax break to do what state law prohibits them from doing directly. They want private sector employers to pay workers at least $12 an hour rather than the current $7.25 minimum hourly wage. The legislation would provide each employer an annual $5,000 tax credit for each new full-time worker hired at a rate of at least $12 an hour.

Some math is in order. An employer who would otherwise pay $7.25 per hour to an employee who works 2,000 hours but who raises the rate to $12 per hour faces an additional compensation outlay of $9,500, aside from other costs associated with the increase. How does a $5,000 tax credit persuade the employer to hire someone, and if hiring someone, to incur a $4,500 out-of-pocket cost? Even with the federal income tax savings from the deduction, the employer’s net cash flow would be negative.

A policy question is in order. Unless the employer otherwise would be hiring, of what use is the tax break? It isn’t triggered by raises handed out to existing employees working for a wage based on less than $12 per hour. Employers hire if they need help delivering goods and services, which requires the existence of a consumer class with money to spend, but we know how that’s been working out under policies set by the “we worship the wealthy and disdain the middle class” crowd.

Perhaps some insight comes from another aspect of the legislation. The tax break technically is the greater of $5,000 or 2 percent of the new employee’s salary. So if an employer brings in a new employee who would have been hired anyway, at a salary of $500,000, the tax credit is $10,000. Justifying the tax break on the theory that it is designed to increase wages paid to low-income workers is impossible when the tax break is of more value to employers when hiring high-end employees.

Advocates of this approach to dealing with the low-wage problem point to an existing tax break. They claim that 1,057 new jobs were created. Employers hiring those new employees claimed $1.8 million in tax breaks. What’s unproven is the connection between the tax break and the hiring. How do we know that the hiring would not have otherwise happened even without the tax break? Again, employers hire when they have a need that justifies the salary outlay, and a tax break that does not pay for the worker’s salary isn’t going to generate hiring in and of itself.

It is understandable why the city council took this path. Blocked by state law preventing it from raising the minimum wage paid in the city, and unlikely to get that law changed by a legislature dominated by friends of the wealthy, it wanted to try something, anything. But making a tax break available for the hiring of employees whose salaries are nowhere near minimum wage makes no sense. Nor does the tax break do anything for current employees. And unless the tax break picks up the entire cost of hiring someone, whether that cost is $9,500 or somewhat less on account of income tax deductions, it is insufficient incentive for employers to increase salaries. Worse, the tax break might tempt some employers who already pay $12 per hour or more to have their employees quit, only to be hired by an affiliated company and claimed as new employees, though hopefully the legislation would be written in a way to prevent that sort of game.

All of this brings me back to one of the core principles of how I would design a tax system. Never do indirectly through taxes what can and should be done directly. Put the brakes on tax breaks.

Four months ago, in When the Poor Need Help, Give Tax Dollars to the Rich, I criticized the decision by New Jersey’s Governor Christie to dish out tax credits to the Philadelphia 76ers in return for the team moving its practice facility to Camden. The state claimed that by giving away $82 million over 10 years it would get back $77 million over 35 years. That doesn’t add up, except for the private sector corporations and wealthy individuals who pocket the difference, which surely is much more than it appears to be. Why? Although these sorts of giveaways to the wealthy are defended by claims of job creation, the fact of the matter is that they simply move jobs from one state to another. In some cases, such as the 76ers, employees simply go to a new work location. In other cases, for every unemployed person who ends up with a job, someone, somewhere, finds himself or herself on the unemployment line.

Now comes news that New Jersey is getting ready to hand out more than $100 million in tax breaks to Lockheed Martin, in an effort to persuade it to move some jobs from wherever they are to Camden. This comes on top of a $260 tax break giveaway to Holtec International, which in turn added to the almost $4 billion in tax credits handed out by the state during the past ten years.

From a national standpoint, from the perspective of what is good for the nation, this is nothing more than a zero sum game. States fight over pieces of the private sector by using tax dollars to increase the size of the economic pie that they can grab, while the small business entrepreneurs who actually bake pie struggle because they cannot afford to put huge campaign contributions in the pockets of the politicians using tax dollars to enhance their power. If state governors and legislators continue down this path, eventually there won’t be any pie for them to fight over. Not that I advocate using tax breaks to encourage the private sector to do what it should be doing on its own, but if public money is going to be handed out, it ought to be limited to helping those who create jobs and not those who move jobs around in a tax break shell game.

I like puns, and word games. The other day I came across one that meshed with taxation. It’s bad, so it’s appropriate for hump day.

We know that taxes are used both to discourage activities on which society allegedly frowns, as well as to generate revenue to pay for the social cost of those activities. Thus there are taxes on tobacco, on gambling, on alcohol, and on inappropriate activities by private foundations, to name a few. So would it not make sense to develop a tax for another practice on which at least some part of society frowns.

And thus, it has been proposed that when people make grammatical errors, they should be subjected to a syn tax. Perhaps the suggestion is a joke. But in a country in which taxes are levied on just about every item and every behavior, it might end up as something not quite a joke.

A recent Tax Court case, Kalapodis v. Comr., T.C. Memo 2014-205, presents an opportunity to explore how the tax law affects the manner in which people decide to implement a plan. The taxpayers, a married couple, had a son who died. They received $75,000 of life insurance proceeds on his life. They decided they wanted to use the money to establish scholarships for deserving students. So they put the money into a trust, gave it a name, and directed the trust to pay $2,000 in scholarships to each of three high school students. The money came from investment income on accounts owned by the trust, and was paid with checks written on the trust’s account to the recipients. The trust did not apply for tax-exempt status.

The taxpayers claimed a charitable contribution deduction for the $6,000 paid to the three students. The IRS disallowed the deductions, and the Tax Court upheld that decision. The court gave several reasons. First, the $6,000 was paid by the trust, not the taxpayers, and there was no justification for treating the trust a grantor trust. Second, the payments were made to individual students, who do not qualify as charitable donees for purposes of the charitable contribution deduction. Third, the taxpayers did not provide evidence of a contemporaneous written acknowledgement of the payments.

Nothing in the opinion indicates whether the taxpayers sought professional advice on how to set up the scholarship program. Presumably, if they had done so, it would have been included in the facts provided by the court, but there’s no guarantee of that. If they did what they did based on professional advice, it would be troubling. Would it not have made more sense to set up a charitable entity, such as a trust or non-profit concern, that obtained tax-exempt status? Would that not make the contributions to the trust deductible, and leave the trust tax-exempt on its investment income? There’s no indication of whether the taxpayers deducted the $75,000 that they transferred into the trust. Granted, setting up a tax-exempt scholarship foundation isn’t something just anyone can do, as there are details that must be taken into account, record-keeping that is required, and safeguards that must be implemented. Would it have cost a few thousand dollars? Probably. But in the long run, the tax savings would have made the investment in professional advice worthwhile.

So is that what you would have advised? Or am I wrong and did the taxpayers set up the scholarships in a sensible way? Are there alternatives that would make more sense? I am confident that the taxpayers are not the last folks to decide to set up a fund for a charitable purpose, whether scholarships or some other good purpose. Hopefully, the next group of people to take this route follow the right path.

Many Pennsylvania towns impose a local services tax, which is limited to $52. Most localities have opted to impose the maximum amount. The tax is imposed on all individuals who are employed or self-employed within a jurisdiction. Employers are required to withhold and remit the tax for their employers. See, for example, the regulations for Radnor Township.

What happens if the employer fails to withhold and pay the tax? According to this story, that’s what happened to employees of the United States Postal Service in Scranton, Pa. Actually, it happened to some of the employees but not all of them. For eight years, going back to 2006, the tax was not withheld and paid on behalf of at least 50 employees. Eventually Scranton’s tax office figured out that the tax has not been paid, and has sent bills to the employees. One employee received a bill for $669, including interest.

Now a dispute has arisen as to who is responsible. The employee in question stated that if he knew the tax had not been paid, he would have paid it, but no one told him. The Postal Service claims that it’s the employee’s responsibility to point out errors in withholding. The employees’ union disagrees, and has filed a grievance seeking to have the employees reimbursed.

Here is how I would resolve the dispute. The employees owed the tax, and to the extent it was not withheld and paid, they took more money home. They had the use of that money for the period during which the tax was not paid. Thus, as for the tax amounts, the employees should pay. As for the interest, the employees had use of the money, but the interest rate charged by Scranton probably is more than the interest rate that the employees could have earned on the money. The difference should be picked up by the employer, who has the obligation under the tax ordinance to withhold and remit the tax payments.

Of course, one of the underlying problems with this situation is that the tax is a nuisance tax. It’s a small amount. In Radnor, a sole proprietor who is not an employee is required to make four $13 payments and is not permitted to pay in one $52 lump sum, increasing the chances that a payment will be missed. It’s also a silly tax, because it is levied for services, and yet is not imposed on people receiving services who are not employed or resident in the locality. It also imposes an administrative cost on the locality, and the fact that it took Scranton eight years to discover that some of the employees of one the locality’s larger employers demonstrates the challenges facing tax collectors. It also is a regressive tax. I commented on this tax back in 2005, in Stealth Tax, Type Two, and Spotlights Now Turn to That Penna. Stealth Tax. Nothing in this recent story from Scranton suggests that my criticisms of the tax are misplaced.

My last comment concerning the Philadelphia cigarette tax was two months ago, in Delaying a Questionable Tax. Aside from my criticism of a legislature that delayed its decision on a question that needed immediate attention, I shared my concern that the cost of educating tomorrow’s voters ought not fall on a very narrow group of individuals. The legislature eventually approved the tax, which is projected to generate $83 million for a cash-strapped school system.

The tax went into effect on October 1, several weeks after the school year opened. How did the School Reform Commission, the group that oversees the operation of the Philadelphia school district, react? It cancelled its contract with the school’s teachers, in order to compel the teachers to increase contributions to their health plans, thus cutting the district’s compensation costs by almost $44 million. The Commission justifies its actions by pointing out Philadelphia teachers belong to one of only two school districts whose teachers do not contribute to the cost of their health plans. The Commission did not mention the relative pre-contribution salaries of school teachers in the various districts. Working with the data at OpenPAgov.com, it is easy to see that Philadelphia teachers do not earn as much as their suburban counterparts. So, in effect, the move by the Commission is the equivalent of a pay cut.

Had the Commission announced it was intending to cut pay, would all of the legislators who voted for the cigarette tax have nonetheless voted for it? Or would enough of them have balked in light of the Commission’s overall plan? The burden of education tomorrow’s voters is being placed on narrow slices of the population rather than on everyone. Until and unless the funding of public education is fixed, the performance of American students in a competitive global marketplace will continue to suffer.

A reader pointed me in the direction of an article about an Indiana woman who has been living rent-free for eight years in a house that she does not own, and that no one claims to own. Property taxes have not been paid, and yet the taxing jurisdictions apparently have made no effort to collect the taxes by filing a lien on the property. No bank or other possible owner has asked for rent. The article does not explain whether anyone has done a title search to determine the identity of the last recorded owner, or to learn what happened to that person.

The reader’s question, though, was no one of real estate law but one of income tax law. He asked, “Is this gross income?” He also asked if she was required to pay income taxes, but I cannot even begin to address that question because I don’t know enough about her other income tax attributes to determine her taxable income, her tax liability before credits, and her credits. But the first question is a good one, the sort I would ask in the basic federal income tax course if I were still teaching it.

There do not seem to be any cases or rulings directly addressing the income tax consequences of squatting. At first, that is surprising, because squatting is not a recent phenomenon, and during the past decade it has increased in frequency. On the other hand, there is no easy way for the IRS to know that a person is squatting, and it is unlikely that a squatter would seek advice from the IRS or anyone else. There is no one to issue a Form 1099. In other words, the activity is under the tax radar. Even when a squatter is detected by local authorities or a bank, and is ejected, no attention is given to the squatter’s income tax consequences.

So is there gross income? One would think so. Although the squatter does not come into ownership of the property aside from the rare situations in which they are there long enough to take title by adverse possession, the squatter is acquiring something of value, namely, the use of the property. First-time tax students, and many others, sometimes struggle with the notion that the use of property has a value and that income is not limited to actual ownership of property itself. What the squatter has is the equivalent of what the finder of property has, namely, windfall gross income. Some might argue that the squatter is not wealthier and thus has not had an accession to wealth, but it is well settled that reduction of an outlay is the equivalent of an accession to wealth. A person who escapes the payment of rent is better off than she would have been had she paid the rent.

Do any of the exclusions from gross income apply? If the facts indicated that the person was living rent-free in the house because the owner, a relative, permitted them to do so, it is possible to fit the transaction within the gift exclusion. That does not appear to be the case in the situation described in the article, nor in pretty much every other squatting event. None of the compensation exclusions, such as fringe benefits, apply, nor is the rent-free use a prize, award, scholarship, or damages for personal injuries.

The analysis would be different if the squatter is the owner, who has stopped making mortgage payments. That analysis would involve the tax consequences of debt forgiveness, and involve the owner’s adjusted basis in the property and the amount of the debt. The situation described in the article involves a different sort of squatter, a person with no connection to unoccupied property and who moves in and makes herself at home.

I would be interested if anyone knows of a case or ruling involving a squatter of this sort, or if anyone has dealt with the situation under circumstances not generating a case or ruling. I know at least one reader shares my interest.

Thanks to a reader alerting me to this story, I now know what someone 1500 years ago did with an old tax receipt. Perhaps this discovery will generate a new fad.

A research fellow at the John Rylands Research institute at the University of Manchester was going through papyri stored in the library’s vault when he spotted what may be one of the oldest Christian amulets. On one side are verses from a Psalm and the Gospel of Matthew. On the other side is a receipt for payment of a grain tax an Egyptian village. The research fellow explained that papyrus was a tax receipt, the reverse side of which was used to create a charm probably kept within a locket or pendant. I suppose there was a papyrus shortage, or perhaps the person creating the amulet was not unlike those of the present day who preserve old papers to use the reverse side as scrap.

Surely all sorts of tax receipts have been used in modern times as scrap paper. It’s easy to guess the sorts of things that might be written on the reverse side, but it is almost impossible to know what are the more prevalent uses. Shopping lists? Phone numbers? Email addresses? Directions? Doodling? To-do lists? Reminders? And how many will survive to be discovered 1500 years from now?

One of the arguments advanced by the anti-tax, anti-government crowd is the supposed inappropriateness of using taxpayer dollars to help people in need. Using terms such as lazy, shiftless, and taker to describe these recipients of taxpayer assistance, these advocates of eliminating taxes and government fail to recognize that most people rescued by government safety nets are in need because of matters beyond their control. Veterans neglected by the government, victims of diseases many of which are caused by corporate pollution and chemical mis-use, people out of work thanks to short-sighted short-term focus on profits, and children who did not ask to be born into poverty present a challenge that gives people the opportunity to show the temperature of their hearts.

So one might think that if governments are being pressured to cut back on assistance to the needy, they would not be dishing out tax dollars to help those who are not in need. Yet that is what is happening, with the most recent absurdity of this sort, according to this report, taking place in New York. The governor’s office has explained that the state will shell out $750 million to build facilities and buy equipment for the solar cell manufacturer SolarCity. The state also will provide tax incentives of unknown magnitude. Solar City will be required to pay utility costs plus $1 per year in rent for the facilities. SolarCity will be required to pay $410 million over 10 years if it does not generate the promised jobs.

SolarCity is owned in part by Elon Musk, a billionaire. Surely he and his fellow shareholders can afford to pay for the cost of constructing buildings to run a business, to pay rent, and to pay taxes. If SolarCity cannot make this work using its own dollars, it ought not try. The average person starting a business is on his or her own. Why a different set of rules for SolarCity? Even if required to pay $410 million as a penalty for not creating jobs, Elon Musk and the other owners of SolarCity will have made out like bandits, with taxpayer money. Can someone explain how it is inappropriate to provide a few dollars to help those genuinely in need, often because of societal breakdowns, but a wonderful idea to dish out money to the rich?

How does this sort of nonsense happen? It’s easy to understand the answer. The rich have the money to pay lobbyists and other operatives to push these sorts of Great Treasury Raids through legislatures and agencies. The poor can’t afford to hire people to advocate for them, especially when they are being condemned for causing government spending that comes out per-person in amounts far less than what is being served up to the wealthy.

The tougher question is this: why do people who complain about taxes and government spending keep voting for politicians who insist on spending tax dollars to help the very folks who are causing the tax and spending problem? Is it that difficult to figure out the foolishness of voting for those who do not have the voter’s best interests at heart? This nation had best straighten out its priorities, and quickly, or it will spiral even more quickly into a medieval arrangement of heartless nobility and impoverished peasants.

Many years ago, while discussing entry-level law practice jobs, I suggested that it would make more sense for law firms to hire two law school graduates at half the salary they were dishing out to one new employee. I saw, and continue to see, many advantages. This approach would increase the number of jobs, it would increase diversity in terms of finding good lawyers just as having more draft picks helps a professional sports team increase the chances of finding an athlete with a sustainable career, it would reduce the stress associated with the 80-hour work weeks connected to those salaries, and it would provide more scheduling flexibility. A variety of defenses of the status quo were offered, and I’m not going to bother rebutting them because they’re all variations of the theme that it’s better to have one highly paid individual and one person out of work than it is to have two moderately paid individuals.

Now comes news, in this Philadelphia Inquirer article, that the Philadelphia City Controller is suggesting that city agencies hire more employees rather than paying overtime to existing employees. Calculations by Alan Butkovitz show that the city could have saved more than $700,000 in one year alone had it hired more employees. In one instance, an existing employee received $220,000 in overtime salary and benefits for taking on additional work that could have been done by a new employee costing $58,000.

I wonder if reforming this approach to getting government work done is on the “cut spending” list of the anti-government forces. I doubt it.