MauledAgain

Sometimes a principle of tax law is uncomplicated, easy to understand, and easy to apply. This can be the case even if taxpayers don’t like the result or don’t understand the reason for the principle. An example of this concept popped up in a recent Tax Court case, Stebbins v. Comr., T.C. Summary Op. 2015-10. The taxpayer incurred a net operating loss in 2007. In 2008, the taxpayer generated self-employment earnings, on which the self-employment tax was due. The taxpayer took the position that the self-employment earnings in 2008 could be offset from the NOL carried forward from 2007. The IRS disagreed. The Tax Court agreed with the IRS, citing section 1402(a)(4). That provision clearly states that in computing self-employment earnings, the NOL deduction is disallowed.

Whether the provision makes sense can be debated. Should an NOL be permitted to offset self-employment earnings? Perhaps, but at the moment that’s not how the tax law works. Unless it is changed, taxpayers cannot do what the taxpayer in Stebbins tried to do.

The anti-tax crowd claims to dislike taxes because, among other reasons, they enable government spending. To these folks, government spending is a bad thing. Or at least that’s what they say.

So, when the governor of Wisconsin, Scott Walker, as reported in various sources, including this one and this one, proposed a state budget cutting $300 million in funding for the University of Wisconsin, the anti-tax crowd must have rejoiced. Finally, a reduction in the expenditure of public funds to improve the education of citizens, to reduce and eliminate ignorance, to foster knowledge, and to preserve civilization.

But wait!

That same anti-tax, anti-government-spending governor’s proposed budget also includes a payment of $220 million to assist the Milwaukee Bucks, a privately-owned professional sports team, build a new arena. The Bucks don’t need a new arena. But what’s to stop a wealthy sports team owner from grabbing some free money when it’s there to be grabbed? That it is coming from a governor who objects to people thinking they are entitled to government food and medical assistance makes no difference to those who preach one thing and practice another.

This is not the first time that I have objected to wealthy owners of professional sports teams grabbing taxpayer dollars, often with the assistance of people who claim to detest taxes because government spending is such a bad thing. Eleven years ago, in Tax Revenues and D.C. Baseball, I objected to the grabbing of tax dollars by those not in need, and revisited the issue in Putting Tax Money Where the Tax Mouth Is, Building It With Publicly-Funded Tax Breaks , Public Financing of Private Sports Enterprises: Good for the Private, Bad for the Public, When Tax Revenues Fall Short, Who Gets Paid?, and So Who Are the Takers of Taxpayer Dollars?.

But this time, it is inescapably obvious that the governor of Wisconsin has no qualms about taking money from education in order to fatten the wallets of his wealthy “sponsors.” He, of course, is not alone. He is joined by the other politicians who beckon to the siren song of rich donors’ money. Though campaigning on themes designed to get votes from unknowing and easily misled voters who struggle to pay taxes, these experts in transferring wealth from the poor and middle classes to the wealthy are now so emboldened by the success of their electoral strategies that they don’t care if the world sees them for what they are or notices what they are doing. These are people who think giving the wealthy even more money so that they can build basketball arenas for the simple purpose of keeping up with their wealthy friends’ new arenas is far more important than educating the nation’s citizens.

Today, Wisconsin. Tomorrow, considering Walker’s desire to be president, the nation? Is this really what the people of Wisconsin want? Is this what the people of this nation want?

The facts are easy. Tom Brady, by being named MVP of the Super Bowl, becomes the winner of a truck given by Chevrolet as a prize to the player named MVP. Brady, however, decided that Malcolm Butler, whose interception of Russell Wilson’s pass sealed the New England Patriots’ win, should get the truck, and announced he would transfer the truck to Butler. That’s a nice gesture, but it also raised tax questions. What would be the tax consequences?

The answer to the first “What would be the tax consequences” question is easy. Under statutory and judicial precedent, Brady would be required to include in gross income the fair market value of the truck. Depending on information not available, he might be subject to a gift tax on making a taxable gift to Butler, though the best guess is that Brady would simply use a small portion of his unified credit to offset any gift tax liability. Barring further changes in the law or in Brady’s financial situation, that decision would cause his estate tax in some distant future year to be a wee bit higher. For all practical purposes, the amount and the time lag make that tax burden minimal.

That answer, however, caused someone to ask Chevrolet to transfer the truck directly to Butler. And Chevrolet, according to this story, decided to do just that.

So again one must ask a question. What would be the tax consequences?

The answer to the second “What would be the tax consequences” question also is easy. What makes it worth discussing is that the wrong answer has been offered. In that same story, one Robert Raiola, a CPA, is reported to have said that “Now instead of Brady paying income taxes, Butler will have to.”

Because Brady won the prize, he must include the value of the prize in gross income. Not only did he win the prize, he took delivery of the vehicle when the keys were handed to him. In order to have avoided being taxed on the prize, he would have needed to reject the keys, and to have disclaimed the prize before he became entitled to it, in other words, at some point before he was named MVP. He could have done so by somehow declining to be named as MVP, though I don’t know if that is possible, or by rejecting any claim to the prize associated with being named MVP. He did neither. And even if he had not been handed the keys, he would have had constructive ownership of the truck by virtue of being named the MVP.

Many years ago, in Rev. Rul. 58-127, 1958-1 C.B. 42, the IRS concluded that a taxpayer who won a prize by submitting the winning entry in a contest was required to include the prize in gross income despite having directed the payor to deliver the prize to someone else. Did it matter that title to the prize did not pass through the taxpayer’s hands? No. The IRS explained, “It is not material whether the taxpayer actually acquired title to the prize.” In other words, Chevrolet, in transferring title directly to Butler, is acting as Brady’s agent, and the substance of the transaction remains the winning of a taxable prize by Brady and the making of a gift by Brady. This conclusion is strengthened by the fact that Brady didn’t reject the prize, but exercised dominion and control by dictating who would receive the prize, namely, Butler. That’s because Brady became economic owner of the truck when he was named MVP, and Chevrolet had no choice other than to deliver title to Brady or someone designated by Brady. Had Chevrolet, as suggested by some, awarded the truck to the Seattle offensive coordinator or head coach, Brady would have a contract claim for Chevrolet’s breach of the MVP prize agreement.

The last time Brady won a prize, he gave it to a charity. So the issue washed out, with the charitable contribution deduction offsetting the gross income. In contrast, Malcolm Butler is not a charity. There’s no deduction for Tom Brady to use to offset his gross income.

Unfortunately, this incorrect advice is popping up all over the internet, for example, not only in the ESPN story, but also on the website of ABC 7 in California, CBS Sports, and dozens of other sites. Raiola, who is described as an expert in sports management, is going to find it difficult to retract the bad tax advice.

It’s time to ponder the tax issues in another Judge Judy episode. Readers of MauledAgain know that television court shows are among the various sources producing material for this blog. Surely I have missed many episodes that generated other tax issues, as I don’t get to see very many of the shows. In the past, I have commented on six, starting with Judge Judy and Tax Law, and continuing through Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, and Foolish Tax Filing Decisions Disclosed to Judge Judy.

In this most recently viewed episode, the plaintiff sued his former employer for unpaid wages. The defendant allegedly employed the plaintiff as a day laborer. There was no dispute that the plaintiff worked for the defendant. During the process of trying to determine how much was owed, Judge Judy asked a sensible question. Surely tax records would provide information. When asked if he had filed tax returns, the plaintiff answered no. When asked if he had filed business tax returns reporting the plaintiff as an employee, the defendant replied no.

Perhaps the parties keep up with the news and realize that the IRS lacks the resources to audit more than a handful of taxpayers. Perhaps they realize that Congress has made additional cuts to the IRS budget. Perhaps they will be joined by everyone else. Once we end up with no one paying taxes, it will be amusing, and tragic, to observe the outcome.

When I first read the claim by Senator Rand Paul that the earned income tax credit is afflicted by a 25 percent fraud rate and deprives the Treasury of between twenty and thirty billion dollars, I thought, “That cannot be so.” According to several reports, including this one, the senator’s claim is wrong.

The Government Accountability Office issued a report that concluded the earned income tax credit had a 24 percent improper payment error rate. But not all improper payment errors are fraud. Some are math mistakes. Some are the consequence of not understanding a complex slice of the income tax law. Some are made by taxpayers. Some are made b the IRS. Though the percentage that constitutes fraud wasn’t specified, it is far more likely it is on the order of 5 or 10 percent than it is to be 25 percent. Actually, it cannot be 25 percent, because that would require treating 104 percent of the errors as due to fraud.

The same GAO report concluded that as a consequence of all the errors, including those that are not due to fraud, the Treasury failed to collect roughly $14.5 billion. That’s a far cry from twenty to thirty billion dollars.

So why would a senator say what Rand Paul said? There are several possibilities.

One is that he was misinformed by a staff member or campaign consultant. That doesn’t create much confidence in the senator, does it?

Another is that he glanced at the report, but didn’t read it carefully. Would he do the same with the details of a proposed federal budget?

Yet another is that he looked at the report, but didn’t understand it. Though that might happen to most Americans considering the complexity of tax law, ought not those who aspire to direct tax policy have the requisite ability to do so?

Still another is that he very well knew the facts, but set them forth in a manner designed to exaggerate something so that he could cast in a bad light a program he does not like. Though modern politics has become a swamp of this sort of behavior, is this the sort of example the nation wants being set by its leaders?

Mistakes happen. But the higher one tries to climb on the ladder of responsibility, the more dangerous the consequences of mistakes, the more vociferous the criticism, and the more urgent the need to surround one’s self with those who can assist in preventing mistakes.

The candidate I admire is one who would simply say, “There are problems with the earned income tax credit. It is too complex. It would not be necessary if employers paid living wages.” Getting to the root of the problem makes it easier to solve the problem.

After the Katrina disaster, Congress enacted section 1400N(d), a provision permitting taxpayers to claim more generous depreciation deductions for certain property used in the Gulf Opportunity Zone, used in the active conduct of a trade or business by the taxpayer in that zone, and purchased by the taxpayer after August 27, 2005, provided original use of the property in the zone begins with the taxpayer after August 27, 2005, and provided the property is placed in service before January 1, 2008, or January 1, 2009, if it is nonresidential real property or residential rental property. A recent case in the United States District Court for the Western District of Louisiana, Stine, LLC v. United States, No. 2:13-cv-03224 (27 Jan 2015), addresses the question of when a building was placed in service for purposes of this provision.

The taxpayer sells home building material and supplies. After Katrina, the taxpayer constructed two retail store buildings within the Zone. The taxpayer claimed the more generous depreciation deduction, generating a loss that it carried back to earlier years, which in turn generated refunds for those years. After receiving the refunds, the taxpayer then received a notice of deficiency because the IRS rejected the deduction. The taxpayer paid the deficiency and sued for a refund of that payment.

The government and the taxpayer agreed that all of the requirements for the more generous depreciation deduction had been satisfied except for one. The government contended that the buildings had not been placed in service before January 1, 2009, because they were not open for business by that date. The taxpayer argued that the buildings had been placed in service because they were substantially complete, were ready and available for their intended use, were staffed by employees to install the shelving and load the merchandise to be sold, and had been the subject of certificates of completion and occupancy issued by the appropriate local authorities.

The court rejected the government argument that the deduction should be disallowed because it violated the “matching principle.” According to the government, that principle would be violated because the deduction would not be claimed for a year in which revenue from use of the buildings would be received by the taxpayer. It is unclear where the government found that principle, because nothing in the depreciation deduction provisions include a revenue requirement, which probably is at least one reason the court characterized the arguent as “totally without merit.”

Under Treasury Regulation section 1.167(a)-10(b), property is placed in service “when first placed in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business, in the production of income, in a tax-exempt activity, or in a personal activity. . . In the case of a building which is intended to house machinery and equipment and which is constructed, reconstructed, or erected by or for the taxpayer and for the taxpayer's use, the building will ordinarily be placed in service on the date such construction, reconstruction or erection is substantially complete and the building is in a condition or state of readiness and availability. Thus, for example, in the case of a factory building, such readiness and availability shall be determined without regard to whether the machinery or equipment which the building houses, or is intended to house, has been placed in service. However, in an appropriate case, as for example where the building is essentially an item of machinery or equipment, or the use of the building is so closely related to the use of the machinery or equipment that it clearly can be expected to be replaced or retired when the property it initially houses is replaced or retired, the determination of readiness or availability of the building shall be made by taking into account the readiness and availability of such machinery or equipment.”

The government argued that a building used in a retail operation must be open for business in order to be considered placed in service. The court examined the three cases advanced by the government in support of its argument, and distinguished all three. One case involved an airplane, and not a building, and a taxpayer whose evidence was discounted and whose testimony was not credible. The second involved a facility containing interconnected components, unlike a building housing separate items of shelving and merchandise. The third case involved the placement in service of equipment housed in a building and not the building itself. The court noted that the taxpayer in the third case relied on yet another case, in which the Tax Court determined that a building was placed in service years before the equipment in question was installed and made operational.

The taxpayer cited proposed Treasury Regulation section 1.168-2(e)(3), which provides “For purposes of this section, a building shall be considered placed in service (and, therefore, recovery will begin) only when a significant portion is made available for use in a finished condition (e.g., when a certificate of occupancy is issued with respect to such portion).” The taxpayer also cited the IRS Audit Technique Guide for Rehabilitation Tax Credits, which indicates that for purposes of the rehabilitation credit placement in service requirement, “[A] ‘Certificate of Occupancy’ is one means of verifying the ‘Placed in Service’ date for the entire building (or part thereof).”

Accordingly, the court dismissed the government claim that a building must be open for business in order to be placed in service. The court explained that during oral argument, the government conceded that there is no authority for its proposition. Because the taxpayer presented undisputed evidence that certificates of occupancy had been issued, that the buildings were substantially complete, and that the buildings were fully functionally to house the shelving and merchandise, they had been placed in service within the required time period. Thus, the taxpayer was entitled to the deduction.

The IRS Commissioner has disclosed that because “It takes longer to process paper returns and in light of IRS budget cuts resulting in a smaller staff, it will likely take an additional week or more to process paper returns meaning that those refunds are expected to be issued in seven weeks or more.” Keeping in mind that 80 percent of taxpayers get refunds, there will be more than a handful of people fretting over the impact of waiting at least another week to get money they need to pay bills or deal with other financial demands.

Why the longer delay? It’s simple. The Republican-controlled Congress has yet again cut the IRS budget. The foolishness of cutting the IRS budget should be apparent to all those other than the handful who are plotting the destruction of government through the elimination of taxation, as I described in The Continued Assault on the Tax Foundations of American Civilization.

Unquestionably, some of the people who will complain about delays in receiving refunds will be people who voted for the legislators who have caused the delays. It is mind boggling that people will vote for what they don’t want. Though in some instances people are tricked into voting for what they don’t want when politicians use deception to hide their true intentions, the politicians who are working to destroy the tax foundations of civilization have been very clear that they are on a tax-elimination campaign that includes the destruction of the IRS. Folks, if you think it’s bad now, imagine what it will be like when the system falls apart. And it will, if people continue to vote for what they don’t want.

Almost two years ago, in Getting Smart About Tax Questions, I expressed agreement with the advice given to an individual who donated eggs to a fertility clinic, that the compensation received for doing so was includible in gross income. I referred readers to my previous posts concerning donation of kidneys, The Taxation of Kidney Swaps and Tax Consequences of Kidney Sales.

Now, in a case of first impression, the Tax Court has agreed. In Perez v. Comr., the Tax Court held that even though the amounts received by the egg donor were designated as compensation for pain and suffering in the contract with the fertility clinic, the payments constituted gross income, and not damages within the scope of the section 104(a)(2) exclusion.

When it came time to prepare her federal income tax return, the taxpayer “concluded that the money was not taxable because it compensated her only for pain and suffering.” She reached this conclusion [a]fter consulting other egg donors online.” She did not report the compensation on the return, and the IRS issued a notice of deficiency. Once again, we are given an example of why relying on advice from those not expert in a matter can be counter-productive.

The Court’s conclusion makes sense, and not simply because it reaches the conclusion I advocated for reasons I suggested relying on cases on which I relied. It makes sense because there is a long history of requiring employees and independent contractors to include in gross income the amounts they are paid for performing services, even if the services cause discomfort, pain, bruising, or other “damages” to the person. Though the Court did not cite me, it did cite an article which in turn cited the article in which I alerted the tax practice world to the tax issues in these types of transactions, Federal Tax Consequence of Surrogate Motherhood, 60 Taxes 656 (1982).

The outcome strengthens the likelihood that my position with respect to the tax consequences of kidney swaps, similarly will be the result when a court eventually deals with that issue. It further demonstrates the foolishness of describing my positions with respect to these sorts of transactions as “ivory tower academics,” a charge I refuted in Taxation of Kidney Swaps: Dispelling the “Ivory Tower” Myth. Indeed, the donation of eggs or the swapping of kidneys, even if properly categorized as “innocent events,” are taxable events.

The only downside to the decision is that it deprives tax law professors of a “question with no authoritative answer” examination or discussion question. That’s not a problem, though, because our supply of these sorts of questions is abundant.

A recent Tax Court case, Milbourn v. Comr., T. C. Memo 2015-13, teaches an important lesson to spouses working their way through divorce proceedings. Payments intended to be alimony that are made when there is no divorce or separation agreement in place requiring those payments are not deductible as alimony, nor are they includible in the recipient’s gross income.

In Milbourn, the divorce decree did not contain any provisions with respect to alimony. The decree subsequently was amended, but in a year later than the one in which the payments in question were made. Nor was a written separation agreement in place because, even though one had been drafted, the parties had not signed it.

Sometimes, it’s that simple. Or, from the perspective of trying to get the parties to agree, quite complicated. Tax issues constantly hover over the divorce proceedings. Everyone involved needs to be aware of that, and needs to be aware of what the tax law requires.

Social media is all aflutter, or should I say, atwitter, reacting to news that by 2016 the top one percent will own nearly half the world’s wealth. Interestingly, several months ago, this news circulated but did not seem to get as much attention.

Perhaps as the news tricked down, it surprised people, who began the process of sharing it with friends and social media acquaintances. But it’s not a surprise to anyone who has been paying attention. The portion of the world’s wealth owned by the one percent has been climbing steadily. It was 44 percent five years ago, and 48 percent last year.

Does anyone expect the trend to stop? If it reaches 50 percent by 2016, it will reach 60 percent by 2025, or sooner. Eventually it will reach 100 percent. Unfortunately, some people will not accept the fallacy of the “trickle down” nonsense, that by giving more and more to the one percent everyone else becomes wealthier, until the one percent owns 100 percent. Guaranteed, 99.99999 percent of the people believing in trickle-down, supporting tax breaks for the wealthy, and acting as cheerleaders for the oligarchy will find themselves owning nothing, or perhaps, at best, near-nothing. Already, a mere 80 people own as much as the poorest 50 percent of the planet’s population. Two containers of wealth, one shared by 80, the other by more than 3.5 billion.

How difficult is it to understand that the one percent consists of people whose goal is to own as much as they can. Once they clean out the middle class and enlarge the ranks of the poor, they’ll start fighting among themselves. And who will do their fighting? Poor people, starving and homeless, will provide the troops.

So while some people wake up and view this realization of reality with alarm, a small handful is toasting halftime. “We’re halfway there.”

When I finished reading this recent story, my first thought was, “Well, what REALLY happened?”

According to the story a person identified as “Dan from Marlton” called the governor of New Jersey on a radio show and reported that a car wash in Marlton Township was not charging its customers sales taxes. He claimed that the car wash had a sign telling customers they could avoid the sales tax if they paid in cash. The governor said, “I’m very interested. I’d love to have our consumer affairs people, if you’re listening out there, Attorney General Hoffman, it would be interesting to go to that car wash in Marlton.” Christie promised that the attorney general and the state treasurer would check into the matter.

Well, it turns out there are TWO car washes in Marlton Township. Each received a visit from a state tax investigator. The investigator was driving a black Jaguar. Car wash owners and employees tend to be pretty good at identifying vehicles.

The owner of one car wash provided cash register and other information, and explained that he charges the sales tax and that he is an “open book” with “nothing to hide.” The owner of the other car wash explained that he charges a fixed price that includes the sales tax.

Somehow, news of the visits reached a reporter. The reporter contacted the tax investigator, who had left a business card with both car washes. Asked about the visits, the investigator replied that “he did not know what a reporter was talking about” and that he could not “disclose anything.” Spokespersons for the treasury department, the attorney general, and the governor’s office declined to comment, using different articulations of the concept. The treasury department spokesperson declined to answer a question about department vehicles.

The questions are many. Which car wash, if any, was the subject of the phone call? Who is Dan from Marlton? Does he have any connection with either of the car washes? Does he have any evidence of the sign he described? Why did he call into the radio show? Do all tax investigators in New Jersey drive Jaguars? Is the Jaguar a government vehicle or a personal vehicle? Why did the spokespersons refuse to provide any information, especially state policy concerning departmental vehicles?

There’s not much else to say about this series of events until and unless more facts are ascertained. Opinions are fine but there needs to be something about which to express an opinion. But there's a little to say. If it turns out, though, that there is no sales tax avoidance at Marlton car washes, the governor ought to let the citizens of New Jersey know that, and also should track down “Dan from Marlton” to explain to him and everyone else that it’s not acceptable to make unfounded tax avoidance allegations about other people. If there is sales tax avoidance, then he ought to track down “Dan from Marlton” to thank him. Only the facts will tell.

Almost four years ago, in Why Teaching Isn’t Just a Matter of What One Knows or Understands, I commented on the conviction of a then Hamline University School of Law tax professor, Robin Kimberly Magee, for failure to file state income tax returns for at least 17 years. I speculated that, considering her personal statement in her no-longer-online biography, she was protesting against government, refusing to file because being required to file state income tax returns is tyranny, or acting on a belief she was not subject to the law.

In the meantime, after she was convicted, Hamline University terminated Magee, who had been granted tenure in 1994 after having been hired in 1990. Magee then sued the dean of the law school, the university’s trustees, and a St. Paul, Minnesota, police officer, alleging that they had “worked in concert” to terminate her position at the law school. She claimed that her constitutional rights had been violated, that there had been intentional interference with her employment contract, and that her contract had been breached. The district court dismissed her section 1983 claim with prejudice, and her state law claims on jurisdictional grounds. Magee appealed, and the dismissal was affirmed.

Roughly a year later, Magee sued the university and the dean, alleging that her dismissal was the result of racial discrimination. The action was dismissed based on the doctrine of res judicata, because the claim in the first lawsuit arose out of the same transaction as the new claim. Again, Magee appealed. Last month, the United States Court of Appeals for the Eighth Circuit affirmed the dismissal. The court explained that both lawsuits rested on “Magee’s termination from employment as well as the series of events precipitating that termination.”

In Why Teaching Isn’t Just a Matter of What One Knows or Understands, I wondered if Magee would “enlighten us by explaining why she hadn’t been filing state income tax returns.” Though there are indications that she disagreed with how the police handled a case on which she had worked in 2007, that doesn’t explain her failure to file reaching back to 1990. Nor, even if it is assumed something happened before 1990, would it explain why refusing to file state income tax returns is an appropriate or effective approach to dealing with an issue. So we still don’t have an answer. I doubt we will get one. The entire story remains puzzling, sad, and worrisome.

It’s a simple tax question with a complicated response. The facts that raise the question aren’t difficult to understand, though they do raise some people’s eyebrows. Harold Hamm, a billionaire, was ordered by a state court to pay $995.5 million to his former wife as part of the divorce proceedings. Both parties appealed the lower court decision. Yet Hamm send his ex-wife a check for $975 million. Why? Sue Ann Arnall, his former wife, rejected the check. Why? It seems that cashing the check would have a detrimental effect on her appeal. A that point, a wonderful tax issue popped up.

The tax issues are simple to spot. Is Hamm entitled to deduct the $975 million? First, does the amount constitute deductible alimony? Second, is the sending of a check that is rejected considered payment sufficient to support the deduction?

As for the first issue, it is difficult to determine from the facts if none, some, or all of the $995.5 constitutes deductible alimony. The payment was to be spread out over nine years. But that fact alone is not determinative. But in order to address the second issue, assume that at least some portion of the payment constitutes deductible alimony.

As for the second issue, it is generally understood that payment, for a cash-basis taxpayer, occurs when a check is mailed, even if it does not reach the other party until the following year. Does the other party’s refusal to accept the check mean that payment has not been made? Though there are cases dealing with the other side of the question, namely, whether the recipient has income if the check is rejected, I could not find much of anything on point considering the impact on the person delivering the check. So it becomes helpful to engage in a bit of reasoning.

For the recipient, rejection of the check does not prevent the receipt of income for tax purposes if the recipient is entitled to the payment. That is why, in the classic example, turning away from a paycheck in December in an attempt to move the income into the following year isn’t effective. On the other hand, if the employee arranges with the employer before the services are performed to prohibit the employer from making the payment until the following year, the income can be deferred. This suggests that the treatment of the person sending the check should reflect whether the person to whom the check is being sent is entitled to it. In the Hamm case, it appears that Arnall’s right to the check was dependent on how things turned out on appeal. It is possible that on appeal Hamm’s obligation could have been reduced or eliminated.

Another analogy can be found in the treatment of gifts for gift tax purposes. A gift tax is due on certain gifts. Suppose a person writes a check, notes “gift” on it, and mails it to someone who doesn’t want it. Surprising as it might be, accepting the gift could generate adverse tax or other consequences that the intended donee wants to avoid. The check is returned to the donor with a note of “thanks, but no thanks.” Is the donor obligated to pay a gift tax? No, because no gift has been made.

In many respects, the placing of the check in front of Arnall isn’t very different from making an offer during a negotiation. Surely, if Hamm had said, “How about if I pay you $975 million?” no deduction would be allowed. Making the offer more enticing by waving a check in front of her wouldn’t change that outcome. And putting it on the table in front of her, or in her mailbox, or in her purse does not change the outcome if she hands it back or rips it up.

Thus, if I were presented with this fact situation and asked to decide, I would conclude that no transfer had taken place, that accordingly no payment had been made and no alimony deduction would be allowed. On the other hand, Robert Wood, in this commentary suggests that Hamm’s “deduction sails through just fine.” That’s possible, but it doesn’t answer the question of whether it *should* sail through. Due to budget restrictions imposed by the Congress, all sorts of things sail through on tax returns, whether or not they should.

But, fortunately or unfortunately depending on one’s point of view, this fact situation no longer exists as a possible case. According to this report, Arnall changed her mind and cashed the check. That simply leaves the not very uncommon question of whether any part of the payment constitutes alimony. To the extent that it does, there is a deduction.

A few weeks ago, in A Tax Policy Turn-Around?, I wrote about how the income tax cuts for the wealthy backfired, causing the rich to get richer, the economy to stagnate, public services to falter, and the majority of Kansans to end up worse than they had been. I suggested that perhaps Republicans were beginning to realize that there are limits to tax cuts, and that tax cuts for consumers are more valuable than tax cuts for money stashers. But perhaps there’s another play in the Kansas Republican tax game plan.

Now comes a report that Kansas politicians are examining ways of “undoing” the tax cuts that caused so much damage. Of course, the easiest thing would be to return to tax law status as of the day before the cuts. In other words, undo the income tax cuts. But instead, proposals have been floated to eliminate sales tax and income tax exemptions, to increase alcohol and tobacco taxes, to raise sales taxes, to delay additional income tax cuts, and to make the trigger for even more income tax cuts more difficult to reach.

These proposals need to be split into two groups. One group, consisting of the last two proposals, simply addresses the need to prevent further damage. The other group, consisting of the first three proposals, addresses the need to undo the damage caused by the tax cuts that already went into effect.

The proposals in the first group make sense. If the first set of tax cuts for the wealthy created damage, there’s no point in piling on even more catastrophic economic outcomes. Of course, delaying additional cuts and increasing the trigger for even more cuts is the second-best approach. The best approach would be to remove from the statute any sort of risk that more tax cuts would be thrown into the economic mess.

The proposals in the second group are wicked. The burden of undoing foolish tax cuts for the wealthy would be imposed on the non-wealthy. It is common knowledge among those who study taxes that sales taxes and taxes on alcohol and tobacco are regressive, that is, they consume a higher percentage of income the lower the income. The sales and income tax exemptions under consideration appear to be those that benefit the middle class and lower-income class more than they benefit the wealthy.

In some respects, it’s a matter of timing. If a legislature announced that it was simultaneously reducing income taxes on the wealthy and increasing taxes that burden everyone else, more than enough people presumably would object. Instead, the tax cuts for the wealthy are accompanied by nominal tax cuts for everyone else, and then a few years later taxes that burden the non-wealthy are jacked up. Clever, but wicked. Is it a matter of time before we see the same stunt being pulled at the federal level?

In his latest column for the Philadelphia Inquirer, Joseph DiStefano reports that Mark Vitner, of Wells Fargo Securities L.L.C., tries to explain why there are fewer jobs in Pennsylvania in 2014 than there were in 2007. After describing the lost jobs, Vitner points out that, contrary to popular belief, all those Marcellus Shale don’t create all that many jobs, and that manufacturing employment has plummeted. What does Vitner propose? Tax breaks for “capital spending, improvement, research and development, and infrastructure spending.”

Would tax breaks work? Probably not. Like the economic benefits of shale gas, a good chunk of the economic benefits from these sorts of tax breaks would flow to investors outside the state. That’s if anyone went for the deal. Would tax breaks be enough to persuade businesses to locate in, and workers to seek jobs in, a state with a horrific transportation infrastructure? Businesses need good roads and bridges, and so do workers. Would tax breaks be enough to pay sufficient wages to workers so that they could avoid the crumbling school districts in the state? Would tax breaks be enough to bring the sort of weather, climate, and environmental quality that businesses and workers prefer? Probably not.

The state is in an economic mess because its imitation version of the federal cut-taxes-for-the-wealthy-and-cut-spending-for-the-common-good experiment similarly has failed. Unless the root causes of that failure are addressed, short-term tax breaks not only are unlikely to fix things, they are likely to make things worse.

According to a recent report, several Republican senators are considering an increase in the federal gas tax. Tempted by reductions in the price of gasoline, which would make the increase less noticeable and more palatable, they are paying attention to the fact that the highway transportation fund is underfunded by $100 billion, and the fact that the nation’s transportation infrastructure is falling apart, earning a D+ from the American Society of Civil Engineers.

Though I prefer implementation of a per-mile user fee, I am sufficiently aware of political realities and logistic issues to support a gasoline tax increase as the next best option. The anti-tax crowd may be shocked by the support of Republicans for a tax increase, but it isn’t rocket science to understand that there are costs to maintaining a highway system and those costs must be paid.

The surprise is that President Obama does not support an increase in the gasoline tax, though apparently he is “open to compromise.” He would pay for transportation infrastructure funding with the elimination of “unfair tax loopholes.” I disagree. If somehow the Congress could be persuaded to eliminate unfair tax loopholes, and I have my doubts it could or would do so, the revenue gains ought not be diverted to solving problems with a different tax system. The gasoline tax is, for all practical purposes, a user fee. Those who use the highway system ought to be the ones who pay for it.

Shocking as it may be to those readers who tell me that my positions are biased, this time around I support the Republican proposal to increase the gasoline tax. Of course, those few Republicans don’t speak for the large number of Republican members of Congress who will go down to the last bridge collapse obstructing any sort of tax increase no matter the circumstances. It would not shock me to see these Republican senators targeted by the extremist right-wing zealots during the next election cycle.

More than seven years ago, in Deconstructing Tax Myths, I shared a list of different types of taxes. In addition to the usual income taxes, sales taxes, property taxes, and cigarette taxes, there were inventory taxes, accounts receivable taxes, food license taxes, and an assortment of telephone taxes, to name but a few. But missing from that list was a tax that came to my attention only within the past few days, and only because I came across some news articles explaining that it was expiring sooner than expected.

Ten years ago, after Hurricane Charley saddled insurance companies with billions of dollars in damage claims that caused some companies to go under, the state of Florida enacted a 1.3 percent assessment on insurance policy premiums to fund the state’s catastrophe fund. Technically the Florida Catastrophe Fund Emergency Assessment, the imposition quickly became known as the hurricane tax. According to several reports, including this one and this one, the tax is being terminated a year sooner than planned, because the fund now is solvent.

All things considered, Floridians did well. A Pennsylvania tax on wine and liquor sales, enacted to provide revenue needed after the Johnstown Flood, remains in place, despite efforts to repeal it and despite the fact that full recovery from the effects of the flood was made decades ago.

According to some experts, another serious hurricane in Florida might require restoration of the hurricane tax. In the meantime, it should get added to the list. That list is one that will continue to grow.

Back in March, I reacted to a proposal by then gubernatorial candidate Tom Wolf to change the Pennsylvania income tax so that high-income individuals would pay at rates higher than those paid by middle-income individuals, who in turn would pay at rates higher than those imposed on low-income individuals. In Pennsylvania’s Ban on Graduated Income Taxes: Credits and Exemptions, I explained that the core question is how such a proposal could be implemented given that the Pennsylvania Constitution prohibits a graduated income tax. That same Constitution allows for an exemption applicable to poverty-level-income individuals, which has the effect of subjecting them to lower tax rates than apply to the other individual taxpayers. In that post, I asked, “Does it make a difference if the effect of a graduated income tax is accomplished through a credit rather than an exemption? If the answer is yes, then how difficult would it be to switch from the proposed exemption to a larger credit available to more individuals?” I concluded with these words: “And depending on who is elected in the fall, it should be an interesting tax legislation season as 2015 opens. Stay tuned.”

Candidate Tom Wolf is now governor-elect Tom Wolf, soon to be Governor Tom Wolf. So his proposal has not faded away as do most proposals by candidates who lose elections. His proposal is now front and center. Several days ago, Professor Anthony C. Infanti picked up on the issue, in a Philadelphia Inquirer opinion commentary entitled “Reform Pa.’s flat tax rate.” Prof. Infanti points out the same obstacle that I noted, namely, that the proposal runs up against the provision in the Pennsylvania Constitution prohibiting graduated income taxes and limiting the exemption to poverty-level-incomes. He suggests it is time to amend the state’s constitution to permit graduated income tax rates. I agree. Every other state with an income tax manages quite well with graduated rates, free of what Prof. Infanti calls the “excessively rigid uniformity requirement” of the Pennsylvania Constitution. The alternative, retaining one rate but amending the state’s constitution to permit a variety of scaled exemptions, which does get pretty much to the same result, is cumbersome and much more difficult to finely tune.

Of course, there will be opposition to the proposal. In order for the very small percentage of individual taxpayers who would incur higher taxes to persuade the majority of taxpayers who would benefit from the proposal to campaign against the proposal, they will need to deceive the majority with misleading claims. They will allege that the proposal would raise taxes on the middle class. They will allege that the only fair tax is a flat tax. They will allege that a flat tax is a simpler tax. Those are some of the tactics used at the federal level, with varying degrees of success, so I would expect to see the same tactics unveiled in Pennsylvania when the governor presents a tax reform plan to the legislature. If explained properly, Pennsylvania voters might get the chance to figure out who their friends in the legislature are and are not.

Readers of MauledAgain know that I prefer paying now for necessary transportation infrastructure repairs rather than paying later. Though it is easy to find people who advise postponing paying bills for as long as possible, there are two considerations that make that advice dangerous. First, there is the cost of accidents, injuries, death, and property damage caused by defective transportation infrastructure during the period between when the repairs should be made and when, if at all, they are made. Second, the cost of the repairs continues to increase while the work is delayed. I’ve made this point, that it is foolish to choose short-term tax benefits that will bring overwhelming long-term costs, in posts such as 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, Yet Another Reason Taxes and User Fee Increases Are Cheaper, When Potholes Meet Privatization, When Tax Cuts Matter More Than Pothole Repair, and An Unanswered Tax Question for the Letter Writer.

Earlier this week, in A Tax Policy Turn-Around, I commented on the trend, in states controlled by the anti-tax crowd, of slowing down or halting tax cuts. I pointed out that it will take time for attitudes to shift. But there now is more evidence that people, or at least some people, are figuring out that the anti-tax crowd consists of a parade of Pied Pipers. They are beginning to figure out that although government and taxes might not be a good deal for the wealthy, it’s better for the 99 percent than is the unelected corporate governance machine that the wealthy are trying to substitute for democracy.

Yesterday, as described in this report, the wholesale gasoline tax in Pennsylvania increased by 9.8 cents; a comparable increase affected other liquid fuels. The money will be used to repair more than 80 bridges and more than 1,600 miles of roads. A spokesperson for the Department of Transportation pointed out the obvious: “[M]ost drivers . . . want their pavements smooth and their bridges in a state of good repair.” Though it is unclear how much of the increase will show up at the pump, if the entire increase is passed on to drivers, a person who drives 12,000 miles a year in a vehicle getting 24 miles per gallon will pay an additional $49. That’s quite a good deal, considering that the alternative is hundreds, perhaps even more than a thousand, dollars in repairs from hitting potholes or other road hazards. And compared to the cost of being on a bridge when it collapses, it’s a grand bargain.

What can a state legislature do when it needs money to fix its transportation infrastructure? There are all sorts of taxation choices, but Virginia’s legislature, as described in this report, decided that it would require out-of-state retailers to collect use taxes owed by Virginia residents under the existing use tax statutes. As I have explained in previous posts, such as How Difficult Is It to Understand Use Taxes?, and Apparently, It’s Rather Difficult to Understand Use Taxes, states ought not be compelling out-of-state retailers having no connection with the state to do their tax collection work. And absent authorization from the Congress, states are not permitted to do that. The Virginia legislature, however, confident that the Congress would enact pending legislation permitting states to force out-of-state retailers to do their collection work, decided to fund its transportation infrastructure repairs with the revenues it expected to collect once Congress permitted forcing out-of-state retailers to do the collection work.

But, as these stories go, Congress did not pass the pending legislation. The Virginia legislature, though, had included in its legislation an alternative revenue source in the event that the federal legislation was not enacted. There’s no indication how many legislators voted for this “backup tax plan” thinking that it was unlikely to happen. Under the backup plan, the tax on wholesale gasoline sales increase by 5 cents per gallon. Surely this will be passed on at the retail level.

Interestingly, one of the opponents in Congress to enactment of the federal legislation is from Virginia. He had told state officials that the federal legislation was controversial and had been batted around for years. He told them “it was foolish . . . to count on revenues from a bill that” had not become law, and that they “should not assume legislation would be enacted within their time frame.”

With gasoline prices dropping, motorists might not notice the 5-cent per gallon increase. On the other hand, there’s a good argument that motorists face a higher fuels tax because their fellow citizens are not paying use taxes that they ought to be paying. If Virginia needs revenue, why not enforce the existing use tax law? To the extent that it costs too much money to collect the use tax, the legislature ought to re-think the wisdom of relying on a tax structure, namely the sales and use tax system, that is difficult to administer, inefficient, and regressive. There are better alternatives. Imposing involuntary tax collection servitude on out-of-state retailers with no say in whether the tax exists, its rates, or the scope of items to which it applies is wrong. And relying on the hope that Congress will let states do that indeed is foolish. Counting chickens before they hatch is risky, whether on the farm, in the derivatives market, or during a tax policy session.