MauledAgain

They’re at it again. The folks who are skilled at making themselves appear financially oppressed even though they are swimming in wealth have persuaded some of their “employees” to introduce the Death Tax Repeal Act of 2015. Designed to repeal the federal estate tax, the legislation reflects the dubious claim that the estate tax is crushing small businesses and farms. Yet, fewer than 30, or perhaps as fewer than 20 owners of farms or small businesses pay a federal estate tax in a given year.

Advocates of repeal offer one good argument. The estate tax is complicated, and doesn’t generate enough revenue to justify the aggravation of compliance. Yes, the estate tax is complicated. Why does it exist? It exists in order to prevent oligarchy-based capitalism from entering into a societal death spiral that impoverishes all but a handful of economic elites.

When I read facebook posts that characterize the estate tax as an illegal “double tax,” I laugh. When I read the proffered reasoning, “we worked for this money, were taxed, and now are going to be taxed again,” I laugh again. For one thing, much of what is being taxed under the federal estate tax is not the product of any sort of work. For another, only a handful of “workers,” at best, squirrel away enough of their after-tax earnings to generate a nest egg big enough to be subject to the estate tax.

But there’s another reason that the “double tax” claim is misleading. A huge chunk of what is subject to the estate tax represents the UNTAXED portion of the value of assets. Specifically, people who must sell items in order to survive and who sell for more than they paid are subject to an income tax on the gain. But those who can escape selling assets in order to live can pass those assets on, to the next generation, with the gains built into those assets forever escaping income taxation. Thus, the idea that the estate tax imposes a double tax is a myth, brewed up by the folks who benefit from income and wealth inequality.

The solution is simple. Couple estate tax repeal with income taxation of assets at death. Yes, that, too, has been opposed on the silly allegation that it is not possible to determine the amount of untaxed gain in an asset. Yet the two items required for that determination – fair market value and adjusted basis – are already being determined, the former for estate and inheritance tax purposes and the latter for those instances when assets are sold during lifetime.

Estate tax repeal, standing alone, is nothing more than another giveaway to the oligarchy. It’s a taking without giving, which apparently is acceptable behavior for the wealthy but not for anyone else. Its cost? More Americans living in poverty, suffering from insufficient healthcare, driving on deteriorating roads, and watching their homes go into foreclosure. It continues to amaze me how a few hundred people have managed to cast enough votes to take over the Congress. A friend asked me the other day why people vote for legislators who enact laws that are bad for the country and bad for the people voting in these legislators. My response? “Why do some women keep going back to the men who beat the living daylights out of them?”

The highway funding situation in Alabama isn’t all that different from what exists in most other states. Roads are falling apart, funding is insufficient because increases in vehicle fuel economy means less gasoline and diesel is sold, and the anti-tax crowd continues to bray the “no tax increases” mantra. The governor has proposed raising taxes to fund, among other things, deficits in the transportation budget. Part of the deficit, as revealed in this story was caused by the shift of $63 million from the highway fund to the general fund.

But, according to this report, Republican state senator Bill Holtzclaw rented a billboard on which he proclaimed, “Governor Bentley wants to raise your taxes. I will not let that happen. Semper Fi - Senator Bill Holtzclaw." In response, the state Department of Transportation suspended funding for highway projects in Holtzclaw’s district. The governor confirmed that the suspension continues.

My suggestion is that the governor acquire billboard space to post this message: “Senator Holtzclaw doesn’t mind those potholes. I want to spare you the expense of fixing your car when you hit them. Governor Bentley.” People need to understand, as I have pointed out time and again, that it makes more sense to pay a small tax increase than to pay ten times that amount in repair bills, and infinitely times that amount to cope with death and injury caused by deteriorating transportation infrastructure. My explanation can be found in previous 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 Back to Taxes and Potholes.

When asked about the suspension tactic, the governor gave a marvelous response. “You know, I don't want to embarrass any of our legislators by bringing tax dollars into their district when they really don't like taxes.” On a national level, that approach would unclog the D.C. logjam rather quickly, considering that “red states,” which provide strong support for the anti-tax movement, pull down more tax dollars from the federal government than they pay in, as reported in numerous studies, including this recent one.

Holtzclaw included the ridiculous “won’t raise taxes” pledge in his campaign. The governor’s advice? "It's OK to change your mind when you see the real issue out there. It's OK. In fact it takes more courage to do that than it does to say no." Indeed. Courage. Something lacking among the politicians who defer to the oligarchs whose self-interest blinds them to the well-being of everyone else.

In a recent commentary, Tom Giovanetti of The Institute for Policy Innovation explains that tax uncertainty causes economic harm. Tax uncertainty exists when taxpayers don’t know what the tax law applicable to a particular year will be because the Congress waits until near the end of the year to extend or not extend provisions that expired as of the end of the previous year. In the commentary, Giovanetti focuses on the ever-changing specifics of the section 179 deduction.

Giovanetti is correct. Tax uncertainty causes economic harm. It also cause other problems, not the least of which is taxpayer anxiety and the opportunity for politicians to grandstand on the issues and to use taxpayer fear as leverage for gathering up campaign contributions.

Of course I agree with Giovanetti. Four years ago, in Tax Rates or Tax Uncertainty, I wrote, “It is my position that the constant tinkering with the tax law, such as the on-again, off-again bonus depreciation deduction, makes it even more challenging, if not impossible, for businesses, particularly small businesses, to do the long-term planning necessary for a viable business plan,” and I explained why tax certainty matters. A year earlier, in Tax Politics and Economic Uncertainty, I had pointed out that “Decisions by businesses to purchase or to refrain from purchasing new equipment have been turned into a gambling game.”

Tax uncertainty exists even though it threatens the short-term and long-term economic health of the nation and even the nation’s viability. Why, then, does it exist? As I explained in Tax Politics and Economic Uncertainty:

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

What needs to be done? I concluded that post with these words: “It ought to be crystal clear to the business leaders of America where the problem lies, and it ought to be crystal clear to them what needs to be done. Will they rise to meet the challenge? Or will they remain mired in the woeful world of tax politics, caught up in a spiral of economic degeneration?” Today I add the simple observation that during the five years since I made that point, the Congress has sunk even deeper into the swamp of politics. Soon the nation will run out of time to clean house.

A recent case, McCarthy v. Comr., T.C. Memo 2015-50, illustrates why it is easy to become confused when retirement plan benefits, social security benefits, and tax law meet up at a three-way intersection.

The taxpayers are a married couple. The wife was a participant in a state retirement plan for teachers. Her employment was not covered employment for social security purposes. Accordingly, her social security benefits were reduced on account of the retirement payments from the state retirement plan. The husband’s employment was covered employment, and he received social security benefits of $19,132.

When the taxpayers filed their joint federal income tax return, they reported as pension income only $9,233.72 of the $27,412.68 retirement payments. The $27,412.68 was the amount shown on the Form 1099-R provided to the wife. They reported total social security income of $37,600.24, with a taxable amount of zero. In other words, what the taxpayers did was to treat a portion of the pension payment as social security benefits.

The Tax Court held that the taxpayers were required to report $27,412.68 of gross income on account of the retirement payments, and $3,868 of the social security benefits because the adjusted gross income increased by one-half of the total social security benefits put the taxpayers’ adjusted gross income at a level that required inclusion of a portion of social security benefits in gross income.

In their answering brief, the taxpayers stated that they sought “judicial redress” of the “financial inequity created by two different Arms of Government (SSA and IRS) defining the same monies (2/3 of the STRS Pension) in two completely opposite ways each to the detriment of the taxpayer.” They suggested that the solution “could be to allow 50% of what the SSA claims is SS included in the STRS Pension (Employer share) to be treated as SS on our Tax Returns.” The Tax Court held that it did not have the authority to do what the taxpayers wanted it to do.

The taxpayers make a good point. By reducing social security benefits on account of the state retirement system benefit payments, the Congress causes the portion of the taxpayer’s overall retirement receipts that is treated as taxable pension payments to increase, which in turn not only increases gross income on its own account but generates gross income from a portion of the social security benefits. This is a creature of Congressional action, and any remedy requires Congressional action. Unfortunately for the taxpayers and others in the same position, Congressional action is not something to be expected in this day and age, particularly Congressional action to deal with a tax glitch that no one in the Congress understands and which Congress has no interest in fixing.

A recent case, Pittman v. Comr., T.C. Memo 2015-44, hammers home the point that a taxpayer is not entitled to claim the credit for purchasing a home for the first time if the taxpayer does not purchase a home. It seems a simple proposition, but sometimes the simplest of things can be confusing when thinking disappears.

On January 22, 2007, the taxpayer rented a residence from a homeowner. On the same date, the taxpayer and the homeowner entered into an option contract, giving the taxpayer the option to purchase the residence. The option expired on January 31, 2008. The taxpayer paid an option fee that would be applied to the purchase price if she purchased the residence. The taxpayer also paid $150 each month to be applied against the purchase price if the option was exercised. The taxpayer did not exercise the option because she could not option financing. No sales contract for the residence was executed. On November 26, 2008, the homeowner filed for bankruptcy. The taxpayer filed an adversary complaint against the homeowner because of his alleged failure to sell the residence to her. Her pleadings in the bankruptcy proceedings indicate she did not purchase the residence and never had title to it. She contended that the homeowner intended to defraud her with the option contract. Her bankruptcy complaint was dismissed. The taxpayer did not produce a settlement statement, a deed, an executed purchase agreement, or any other documentation to prove she purchased the residence.

The first-time homebuyer credit is available to a taxpayer who purchases a principal residence, and who does not own an interest in a principal residence for the three years ending on the date of the purchase. A purchase requires transfer of title or a shift of benefits and burdens of ownership. The Tax Court explained that in Florida, where the residence was located, an option does not shift any interest to the option holder until it is exercised. If the option is in connection with a lease, the parties remain landlord and tenant.

Nothing in the opinion explains why the taxpayer thought she had purchased the residence. Nor does it explain why the taxpayer, if not thinking that she had purchased the residence, would claim that she did. We probably never will have those answers.

Last week, in Moving? Let the IRS Know, I explained why it is important for taxpayers to keep the IRS informed of changes in address. Because the IRS generally is permitted to send deficiency notices to the address on the taxpayer’s most recently filed return, a taxpayer who no longer resides at that address is apt not to receive a deficiency notice. There is an exception for notification by the postal service, which generally requires the taxpayer to initiate a change of address filing with the post office. In other words, the burden of keeping the taxpayer’s address up to date sits with the taxpayer.

One of the not-so-common exceptions was the topic of a recent Chief Counsel Memorandum. The memorandum focused on how the IRS should deal with notices sent to incarcerated taxpayers. The memorandum explained that the fact the taxpayer’s address has been changed to that of a prison on the database maintained by the Bureau of Prisons on its website does not fit within the exception that applies to notification by the postal service. Nor does the Form 13308 prepared by Criminal Investigation when closing and transferring a case to Exam or Collection unless it is signed by the taxpayer and includes a statement that the taxpayer wants to change the address of record.

Though the IRS is required to use a different address if it becomes aware that the taxpayer’s address has changed, courts have held that the address on the most recently filed return can be used as the last known address, even if the IRS knows that the taxpayer has been incarcerated, unless the taxpayer provides clear and concise notification that the place of incarceration should be used as the address. But to this principle there is an exception. If the IRS has specific knowledge of the taxpayer’s incarceration, participated in prosecuting the taxpayer, and knows that there is an infirmity on the address that the IRS would otherwise use, then the IRS must use the place of incarceration as the last known address.

It amazes me that Americans, given the choice between paying $100 in some sort of road use tax and paying $500 for uninsured vehicle repairs necessitated by poorly maintained roads, prefer to pay $500. It’s no wonder that tax cut con artists ply their trade with impunity.

The inability of most Americans to figure out that paying $100 is better than paying $500 has been the topic of more than a few posts in this blog. 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, and When Tax Cuts Matter More Than Pothole Repair, I have tried to explain why it makes sense to pay the taxes that are necessary to avoid paying far more for vehicle repairs.

According to this recent story, focusing on the arrival of pothole season, people are shelling out hundreds of dollars to replace wheels and tires damaged by potholes. It’s at the point where flat tire calls are exceeding dead battery calls to emergency road service outfits. Add in damage to shock absorbers, springs, and other suspension components, and the wages of tax avoidance indeed are steep.

According to the story, the city of Philadelphia alone has filled in 12,000 potholes, and I’m confident its workers have made much of a dent in the damage. Though 2014, as I noted in some of my previous posts, set records in my area of the country for potholes, 2015 is surpassing its predecessor quite easily. From personal experience, I can attest to the fact that finding even a one-quarter mile stretch of highway free of potholes is impossible. In Coatesville, according to the story, every street is damaged. I can believe it.

Here are some numbers to ponder. The state of Pennsylvania has spend close to $33 million on road maintenance this winter, and that includes the cost of snow. Culling out the portion spent on pothole repair and extrapolating it across the country is at best a guess, and though my attempts to find an annual pothole repair cost figure have failed, it seems reasonable to conclude that $1.5 billion gives an idea of the scope of the problem. Though current levels of taxation fund some part of that amount, Pennsylvania, and surely other states, are already over budget. Let’s guess that half of the $1.5 billion needs to be funded by increased road use taxes of some sort. “Horrors!” would be the cry of many taxpayer. “Over our dead bodies” would scream the anti-tax crowd, which could get its wish considering that potholes have caused accidents that have killed motorists. According to the story, quoting industry officials, potholes generate almost $5.4 billion in motor-vehicle damage nationally, each year. In 2014, a bad year for potholes about to be eclipsed by 2015, the AAA claimed that the annual cost was $6.4 billion.

Surely what triggers the choice to resist $100 tax increases in face of $500 repair costs is the “it can’t happen to me” attitude of most taxpayer-motorists. Yet as potholes become no less common than mosquitoes on a summer night, the odds of hitting a pothole are soaring. At what point does opinion shift? When twenty percent of motorists experience the disappearance of $500? Thirty percent? What critical mass is required to stand up to the anti-tax crowd and tell them that enough is enough?

As I noted in When Tax Cuts Matter More Than Pothole Repair, “It is far better to pay taxes and user fees to fix potholes than to be saddled with the much higher cost of lost lives, crippling injuries, and property damage caused by potholes.” So what has happened? Again, quoting from that post, “The vast majority of Americans do not favor potholes. They want them fixed, and quickly. They are willing to pay to have them fixed. Yet a minority of intransigents dead-set on destroying government, society, and people, have managed to co-opt legislatures, through the evils of gerrymandering and bribery, so that the needs of America take a back seat to the desires of the selfish.”

Wouldn’t it be nice if the only vehicles that hit potholes are those driven by the anti-tax folks and that no one else is harmed thereby? One can dream, just as one can dream of the day when democracy returns to the republic.

A recent commentary by Tom Giovanetti of the Institute for Policy Innovation takes the position that it is wrong to blame tax software for tax fraud, which is what some members of Congress have been alleging. The commentary then concludes that tax fraud should be blamed on the IRS and Congress.

As to the first point, that tax software is not the reason for tax fraud, I agree. Giovanetti is correct that software is a tool. To blame Excel for the success of an embezzler makes no sense. Similarly, to blame software for the entries that users insert into the software’s data fields makes no sense.

As to the second point, that tax fraud should be blamed on the IRS and Congress, I disagree. It’s not as though Congress has failed to enact statutory provisions imposing civil and criminal penalties on taxpayers who commit fraud. It’s not as though the IRS and the Department of Justice haven’t pursued and prosecuted fraudulent behavior by taxpayers. Giovanetti claims that “the relevant federal agencies have done little or nothing about” all sorts of fraud, including “obtaining Social Security disability payments under false pretenses, massive, organized Medicare fraud, or making multiple false refund claims for the Earned Income Tax Credit.” That’ simply not true. For the amount of fraud being perpetuated by miscreants, Congressional funding of federal agency anti-fraud efforts is woeful. That’s to be expected from a Congress held hostage by anti-government forces intent on shrinking government into a nullity.

Giovanetti claims that federal programs are so complicated that they cannot be managed. Though there is some truth in that assertion, it does not explain the rising tide of fraud in this nation. There is something to be said about Giovanetti’s complaints that federal officials are slow to deal with reports of fraud, that too many resources are infused into higher salaries at the administrative level, and that agencies are in a rush to issue checks. Giovanetti puts responsibility “squarely at the feet of the IRS” and yet admits that responsibility falls “ultimately to Congress.” Indeed. To blame the IRS for failing to increase resources dedicated to anti-fraud efforts while the Congress continues to cut the IRS budget makes no sense. Yet failure to fund anti-fraud efforts is not the cause of fraud. Similarly, a complicated tax code, though surely responsible for untold innocent mistakes, is not the cause of fraud.

So what causes fraud? Fraud is caused by dishonest persons. In a world of honest taxpayers, fraud would not be undertaken. Certainly mistakes would be made trying to comply with a complex tax law, though that is not an excuse for the unnecessary complexity of tax law. Fraud exists because some people are dishonest. The fact that fraud cuts across all areas of human activity, and all areas of law, demonstrates that the cause transcends any particular area of law. Tax fraud exists for the same reason that Medicare fraud, disability benefits fraud, embezzlement, burglary, robbery, and phone scams exist. Dishonest people who have no allegiance to a higher moral sense are to blame. The Congress and the IRS are not responsible to instill honesty and integrity into the psyche of Americans. Surely Giovanetti would not support throwing tax dollars into a federal program designed to instill honesty in people. Nor would I. The responsibility for stamping out fraud sits elsewhere.

A recent case, Gyorgy v. Comr., No. 13-3363 (7th Cir. 2015), provides a good example of why taxpayers need to let the IRS know their new address when they move.

The taxpayer earned income in 2001 through 2003, but did not file federal income tax returns for those years or for 2004 through at least 2007. During the period in question, he moved frequently, living at eight different addresses in four cities in two states. Using Forms W-2 and 1099, and other information from third parties, the IRS generated substitute returns for the taxpayer and computed tax liabilities for 2001 through 2003.

On or shortly after March 9, 2004, according to the IRS computer system, it sent a notice of deficiency for 2001 to the taxpayer’s apartment on Octavia Street in San Francisco. That address was the one provided on the taxpayer’s 2000 return. Whether the notice actually was sent is unknown, but by that point Gyorgy no longer lived on Octavia Street. In August 2004, the IRS assessed the 2001 tax deficiency.

Gyorgy did not provide any address updates to the IRS. One of the Forms W-2 for 2002 provided an address on Lee Street in Oakland, California. The taxpayer’s Form W-2 and one of his Forms 1099 for 2003 provided an address on Jean Street in Oakland. Other forms provided a business address at Goodby Silverstein in San Francisco. On November 29, 2004, the IRS sent a Form 2797 to the taxpayer, using the Jean Street address, in attempt to confirm that address as being the appropriate address. No response was received.

On December 11, 2006, the IRS sent a notice of deficiency for 2003 to the Octavia Street address. The notice was returned to the IRS by the Postal Service marked “not deliverable as addressed” and “unable to forward,” accompanied by a date stamp of “12/17/06.” There is no indication that the IRS made any other attempts to locate the taxpayer or re-issue the notice. In May of 2007, the IRS assessed the 2003 tax deficiency.

On July 30, 2007, the IRS sent a notice of deficiency for 2002 to the Octavia Street address. The notice was returned by the Postal Service marked “attempted – not known” and “unable to forward,” accompanied by a date stamp of “08/03/07.” The IRS did not try to locate the taxpayer and did not re-issue the notice. In December of 2007, the IRS assessed the 2002 tax deficiency.

The taxpayer did not pay the tax, nor did he petition the Tax Court for a redetermination of the deficiencies. Two years later, the IRS instituted collection efforts. It filed a notice of federal tax lien in the recorder’s office in Cook County, Illinois, in August of 2009. The lien was placed on the taxpayer’s residence at 8900 Forestview Road in Evanston, where he had been living since 2008. It is unclear how or when the IRS figured out that the taxpayer was living at that address in Evanston. The IRS sent a notice of the lien filing to the Forestview Road address. The taxpayer received the notice and requested a collection due process hearing. He contended that the IRS had not followed the necessary procedures and claimed he was not liable for the assessed taxes.

The collection due process review lasted from 2009 until 2011. The taxpayer did not respond to requests for documentation and did not participate in the review. He insisted on a face-to-face meeting, but the appeals officer conditioned doing so on the taxpayer filing returns for 2001 through 2010, as he had not filed returns for those years. Because he refused to do so, the appeals officer performed the review using the information in the administrative file. On July 15, 2011, the Appeals Office issued a notice of determination sustaining the lien notice and concluding that the IRS had followed all legal and procedural requirements. It determined that the Octavia Street address was the most recent address on record and that the taxpayer had not notified the IRS of any address changes.

The taxpayer filed a petition in the Tax Court on August 15, 2011, challenging the Appeals Office determination. The Tax Court granted a de novo review, and held a bench trial on January 28, 2013. The IRS presented the deficiency notices, evidence, and testimony to support its computations. The taxpayer presented no evidence and made no arguments with respect to liability. He testified that he lived on Octavia Street until the spring of 2002, on Lee Street in Oakland until the spring of 2003, on Jean Street in the same city until November of 2004, in Irvine, California until the spring of 2005, on Quail Bush in Irvine until the winter of 2006, on Ridge Street in Evanston until the spring of 2007, on Colfax Street in that city until the spring of 2008, and then on Forestview Road.

The taxpayer claimed that he called the IRS 800 number and submitted a change-of-address form to the post office every time he moved. He claimed to have written letters to the IRS once or twice when he moved but could not remember for which moves. He could not remember the dates or other details of the calls or letters. He provided no documentation. The IRS appeals team manager for the taxpayer’s case testified that the Octavia Street address was his address of record when the notices of deficiency were mailed, and that he did not update his address until 2009.

The Tax Court issued oral findings of fact and an opinion on January 31, 2013. It vacated the lien notice for 2001 because the IRS could not produce a copy of the notice of deficiency or other proof it was mailed. The IRS did not appeal that ruling. The Tax Court sustained the lien notices for 2002 and 2003. It denied the taxpayer’s motion to vacate on July 22, 2013. The taxpayer appealed to the Seventh Circuit on October 21, 2013.

The Court of Appeals for the Seventh Circuit concluded that the IRS mailed the notices of deficiency to the taxpayer’s last known address. It pointed out that in previous cases, it had allowed the IRS to use the address on the return being audited, unless there is clear and concise notification from the taxpayer directing the IRS to use a different address. Other Courts of Appeal have adopted similar principles. A similar formulation has been adopted in Treasury Regulations, though with a reference to the most recently filed tax return rather than the one being audited. The regulations provide that address information from a third party is not a clear and concise notification of a different address unless it comes from the United States Postal Service National Change of Address database.

The court explained that presumptively Gyorgy’s last known address was the Octavia Street address on his 2000 return, as he had not filed any subsequent returns. The taxpayer argued that he had notified the IRS, but the court pointed out that he had failed to prove he had done so. The taxpayer argued that the Forms W-2 and 1099 sent to the IRS with different addresses for him provided the IRS with information, but the court determined these did not constitute clear and concise notification, particularly because they were possible addresses but not known addresses. The taxpayer argued that because the IRS knew he did not live at the Octavia Street address because correspondence sent there was returned, it should have done more to find him through its own investigation, citing two cases from other circuits suggesting that the IRS should do so. The court rejected this argument. It distinguished those cases because they involved taxpayers who proved that they had tried to notify the IRS. In contrast, not only did Gyorgy move around, by failing to file tax returns he made IRS attempts to find him close to futile. Nor did Gyorgy identify the steps that the IRS could or should have taken but failed to take.

The lesson is undeniable. Taxpayers who move need to send a change of address notice to the IRS. It also helps to file returns as required, because doing so increases the odds that the IRS will have the taxpayer’s last known address.

It is rather unfortunate that the amount of time that the taxpayer invested in pursuing this case eclipsed by orders of magnitude the time it would have taken to send notices of address change to the IRS. And had he filed his returns, paying his tax liabilities, the address issue would not have arisen.

A reader directed me to an article reporting the results of a study examining the connection between food consumption and the type of movie being watched by the subjects of the study. According to the study by the Cornell Food and Brand Lab, people watching sad movies ate between 28 and 55 percent more popcorn, both in the lab and in an actual theater. A related study concluded that people watching action and adventure television shows eat more, but only if the food is within arm’s length.

The reader asked, “If a study of college students watching courses online was performed would a college student eat more watching a drama class {liberal arts class} or a tax class {business or legal class}? The class could be taped or live.”

The answer, I suppose, is whether a tax class should be classified as tragedy, comedy, action, or adventure. It surely isn’t romantic. Learning about tax can make a person sad, and so in some respects tax class is like a tragedy. I’m not referring to the students who, at the beginning of the semester, perceive an expected grade that they rate as a tragedy, especially as those students generally end up with decent or even better grades.

But as I told the reader, in my classes, tax or otherwise, so much is happening at such a law-practice-world pace, there is no time to eat. Students are taking notes, flipping through statute books, turning pages in the course book, bringing up materials on their laptops, reading questions posted on the projection screen, and operating their student response pads (“clickers”) that they probably don’t have a free hand often enough to eat. Actually, I do see students bring food into the classroom but almost all of them make a point to finish their meal before class begins.

At the risk of seeming crude, the idea of tax law making someone want to eat strikes me as the opposite of reality. For me, when I read tax law, especially recent amendments, and examine the underlying policies, I want to do the opposite of eating. Yes, the depths into which the federal, and some state, tax law has sunk makes many people nauseated.

On March 4, the IRS released information on the progress of the 2015 income tax filing season. The highlight is the IRS estimate that “three out of five taxpayers have yet to file their tax returns.” Is this a surprise?

One might guess that with more taxpayers expecting refunds than expecting to owe additional payments, a majority of taxpayers would file early. The sooner one files, the sooner the refund arrives. But that’s not what’s happening. Why? Increasing numbers of taxpayers have invested in partnerships, and are waiting for Schedules K-1. Those need not be sent to taxpayers until April 15. Increasing numbers of taxpayers are waiting for Forms 1099. I’m still waiting for one of those. The days of January 31 being the day when Forms 1099 need to be in the hands of taxpayers are long gone.

Most taxpayers receive Forms 1099, because most taxpayers have interest-bearing accounts, or stocks, or other investments, or some combination. Until someone, in this era of rapid information processing, figures out how to get the transactions of one year summed up within a few weeks of that year’s ending, increasing numbers of federal (and state) income tax returns will be filed in late March and April.

The facts in the recent case of Morles v. Comr., T.C. Summ. Op. 2015-13, at least as they related to one of the issues, are simple. During 2010, the taxpayer maintained an IRA, funded by an initial contribution of $1,000 in 2008. The taxpayer did not claim a deduction for that contribution. In 2010, a distribution was made to the taxpayer from the IRA of $950.81, and that amount was shown on a Form 1099-R issued to the taxpayer by the IRA administrator. The taxpayer was younger than age 59.5 years when the distribution was made. The taxpayer did not include any amount on his 2010 federal income tax return on account of the distribution.

Because the distribution was not in the form of an annuity, section 72(e) applies. Under that provision, the taxpayer’s investment in the IRA is taken into account in computing the amount that must be included in gross income. The Tax Court concluded that the taxpayer’s failure to maintain the required records with respect to the contribution for which no deduction was claimed did not prevent treating the non-deducted contribution as the taxpayer’s investment in the IRA.

The taxpayer argued that because the distribution from the IRA was less than the his investment in the IRA, it should be treated as a return of investment. The IRS argued that the entire distribution should be included in the taxpayer’s gross income. The Tax Court concluded that both the taxpayer and the IRS were wrong. The court directed the parties to compute the taxpayer’s gross income by applying section 72(e)(3). Because the opinion does not include any other information, it is not possible to do that computation, but my best guess is that some portion of the $950.81 must be included in the taxpayer’s gross income. That amount reflects the untaxed increase in the value of the IRA attributable to interest and other investment growth between 2008 and 2010. The gross income would be an amount less than what is shown on the Form 1099-R.

A recent case, Villegas v. Comr., T.C. Memo 2015-33, demonstrates a very basic principle applicable to the section 121 exclusion from gross income of gain from the sale of a principal residence. A residence is not a principle residence if the taxpayer never lives in it.

The taxpayers, husband and wife, purchased a four-bedroom home in 1994, paying $200,000. They decided to use the home as a group home for developmentally disabled individuals. The taxpayers used three of the bedrooms to house six clients, two in each room, and used the fourth bedroom as their office. The home also included a kitchen, two bathrooms, a living room, a garage, a patio, and a pool.

Though the wife occasionally slept in the home, the taxpayers resided in another town, La Puente, California, with their three children, a nephew, and the husband’s parents. The La Puente is what appeared on the taxpayers’ checks, bank records, payroll records, tax preparation documents, and their children’s school records. The bookkeeper for the group home business visited the La Puente home to prepare reports in connection with the group home business. There also was evidence that the taxpayers held social gatherings at their La Puente residence.

In 2007, the taxpayers sold the group home for $600,000. According to the Tax Court, the taxpayers filed separate returns, and “each excluded more than $250,000 og fain from the sale,” claiming that the group home was their principal residence. It is unclear how $400,000 of gain realized generates more than $250,000 of gain realized for each of two taxpayers.

Additional evidence presented to the Tax Court shut the door on any section 121 claim. None of the employees of the group home saw the taxpayers live at the group home. Two employees testified that the taxpayers lived at the La Puente residence. None of the school records for the taxpayers’ children listed the group home address, but showed their residence as the La Puente home. The wife’s sister told an IRS agent that the taxpayers lived at the La Puente residence. The Tax Court also discounted the claim that the wife slept at the group home, because the room she claimed to use as a bedroom was the room used as the office.

A taxpayer who has never lived at a residence ought not claim it is or was a principal residence. If a taxpayer does live in a residence, it makes sense to retain evidence of the residency, and if characterizing the home as a principal residence appears to be something that might need to be proven in the future, the taxpayer ought to retain evidence that the residence is the principal residence. Certainly when there are witnesses ready to testify that the taxpayer did not live at the home in question, the idea of claiming it is the principal residence is not a very good one.

As mentioned in this article, Pennsylvania faces a deficit of $2.3 billion in its budget. The deficit is structural, that is, it reflects revenues and spending that persist from year to year. There are only two ways to eliminate structural deficits. One is to change the revenue structure so that more revenue is collected. The other is to reduce spending. Raising taxes triggers all sorts of opposition. Reducing spending sounds appealing, but once people realize it’s not a matter of cutting spending that benefits others but cutting spending that benefits them, opposition to spending cuts grows. The public also suffers from a perception that it is easy to cut spending, but when given a list of spending cut options, they hesitate because they then realize the reality of the spending budget.

On top of this, according to this report, the new governor of Pennsylvania, a Democrat, wants to reduce the corporate income, franchise, and capital stock taxes. That will increase the current and structural deficit. According to the same report, the governor is expected to propose increases in individual income taxes. It will take quite a bit of personal income tax increases to cover a $2.3 billion-dollar deficit plus the revenue loss from cutting corporate taxes.

According to Republican state legislators, the solution is to privatize the state’s alcohol stores. This one-time “fix” supposedly would raise $1 billion, less than half of the deficit, even aside from the proposed corporate tax decreases. But this so-called solution does not address the structural deficit. What happens next year when the deficit re-appears? What, then, does the state sell?

A decision to sell the state store system ought to reflect analysis of the advantages and disadvantages of state-controlled alcohol sales. It ought not be done simply because of a one-time revenue infusion that does not address the underlying cause of the structural budget deficit. It is unknown if sale of the state store system is part of the governor’s overall plan, because only a few pieces of the budget plan has been released. Very soon, the entire budget plan will be disclosed, and that will permit closer analysis. In the meantime, state officials need to fix the causes of the structural deficit, or the state’s fiscal fortunes will continue to spiral downward.

According to a report on a recent NerdWallet survey, “[m]ost American adults get an ‘F’ in understanding income tax basics.” The survey posed 10 questions to 1,015 people. The average score was 51 percent.

Readers of MauledAgain know that I am no fan of tax ignorance. In posts such as Tax Ignorance, Is Tax Ignorance Contagious?, Fighting Tax Ignorance, Why the Nation Needs Tax Education, Tax Ignorance: Legislators and Lobbyists, Tax Education is Not Just For Tax Professionals, The Consequences of Tax Education Deficiency, The Value of Tax Education, More Tax Ignorance, With a Gift, Tax Ignorance of the Historical Kind, and A Peek at the Production of Tax Ignorance, I have lamented how poorly Americans, to say nothing of legislators, fare when dealing with tax issues.

The NerdWallet survey report shares eight of the ten questions that were posed to the people who were surveyed. In all fairness, three of those questions touch topics that are not covered in the basic income tax course that I have taught. The topics – Roth IRAs, section 529 plans, and flexible spending plans – aren’t included because they cannot be understood until the basics are mastered, are complex, and would displace more fundamental topics if squeezed into the course. Yet the performance of those surveyed on those three questions was roughly the same as on the other five that were shared. With the exception of one of the five questions that I would expect a student who completes the basic income tax course to answer correctly, fewer than half of those surveyed chose the correct answer for any of the questions.

It would be fun to require members of Congress and candidates for that office to take this survey, or one like it. I cannot imagine the outcome would be any better than that achieved by the 1,015 survey takers.

According to a recent report, the decision by the Michigan legislature to come up with road repair funds by asking voters to approve an increase in the state sales tax has been criticized by Senator Gary Peters. Peters made the point that “additional road money raised from those who use the roads, not through a sales tax.” He’s right. The sales tax takes a higher percentage of low income individuals’ incomes than it takes from the wealthier individuals, yet vehicle ownership and use is lower for low income individuals than it is for those economically more advantaged.

Trying to get legislatures to adopt a mileage-based road fee is an ongoing effort that will require some years before it is widely adopted. In the meantime, it is totally irresponsible to let the transportation infrastructure fall into deeper disrepair while politicians and privateers try to squeeze dollars for themselves out of the process. I’ve discussed the mileage-based road fee in a long series of posts, beginning with Tax Meets Technology on the Road, and continuing through Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, Liquid Fuels Tax Increases on the Table, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, Mileage-Based Road Fees: Privatization and Privacy, and Is the Mileage-Based Road Fee a Threat to Privacy?.

But if Michigan is unwilling to take on the mileage-based road fee, it ought to enact, or put to a referendum, a funding mechanism that aligns use of roads with revenue for the maintenance of roads. Though the liquid fuels tax has its flaws, it’s a much more appropriate means of funding highways than is the sales tax.

Almost five years ago, in a series of posts including IRS Ought Not Be the Health Care Enforcement Administrator, Health Care: Enlarging the Code and Stressing the IRS. and More Challenges of IRS Health Care Oversight, I criticized the Congress for saddling the IRS with responsibility for administering and enforcing much of the Affordable Care Act. Doing so violated a principle to which I have subscribed for decades, that is, the Internal Revenue Code ought not be used to accomplish goals that ought to be spelled out in other legislation.

Now comes news that the Department of Health and Human Services sent incorrect tax information to as many as 800,000 taxpayers. The information permits taxpayers to determine if they qualify for a subsidy to assist them in paying for health care, a determination that affects income tax returns. The catch is that the information provided by HHS was computed by the IRS, as pointed out in this editorial. The editorial notes:

Last week the U.S. Department of Health and Human Services announced that the IRS had miscalculated subsidies for 800,000 Americans. Figuring out taxes is what the IRS does.

But there’s the catch. The IRS did NOT err in computing taxes. It erred in computing a health care subsidy. It is no more surprising to discover a tax agency making a mistake computing a health insurance subsidy than it is to discover a clerk-typist making a mistake interpreting an MRI. Ought not HHS be computing the subsidy amounts and reporting those to taxpayers rather than simply passing along insurance subsidy information provided by the IRS? Why is the IRS doing what HHS ought to be doing?

If it is outrageous that the IRS has caused problems for almost a million taxpayers, is it not even more outrageous that the IRS was put in this position because the Congress was unwilling to charge HHS with the responsibility for administering the Affordable Care Act? Many members of Congress are quick to criticize the IRS, yet when trying to decide which federal agency ought to administer a program, gleefully turns to the IRS by enlarging the Internal Revenue Code and piling more work on the IRS. Oh, and then it cuts funding for the IRS. It seems to be a reflection of the same mindset that causes some employers, usually the large and impersonal ones, to fire some employees, reduce the pay of others, and to pile more work on those who remain because there’s a shortage of labor resources.

Of course, we don’t know what would have happened had HHS computed the subsidy information and sent out the information to taxpayers. Perhaps there would have been two or three times as many errors. Or perhaps not. But at least Congress ought to give the agency responsible for health issues an opportunity to show what it can do. Then the IRS could focus on its expertise, taxes, and stop focusing on health insurance computations.

The depreciation deduction is not one of my favorites. Too often, it permits taxpayers to report, and pay tax on, a taxable income amount that is much less than the taxpayer’s economic profit. One of the culprits is section 179, originally designed to spare taxpayers the task of computing annual depreciation on relatively small amounts expended for capital items, but expanded to provide half-million dollar write-offs that far exceed the economic cost to the taxpayer of making an investment. The justification is that this provision creates jobs.

Both sides of the aisle are guilty of supporting this unwise provision, as well as its cousin, section 168(k). In Just Because It Didn't Work the First 50 Times Doesn't Mean It Will Work Next Time, I criticized the Congress for renewing the provision. A year later, in If At First It Doesn’t Work, Try, Try, Try Again, I criticized the President for proposing yet another renewal of the expanded section 179 limitations.

In Just Because It Didn't Work the First 50 Times Doesn't Mean It Will Work Next Time, I explained:

Does it make sense to increase deductions for acquisitions of equipment? How does that restore confidence in the economy, which is essential to putting the nation back on track. How does a tax provision that encourages businesses to use their limited funds to buy machinery put people in this country back to work? Nothing in the provision requires that the property be built in the United States, and it's almost certain that such a requirement would violate at least a few trade agreements and treaties. What's the point of enacting tax breaks that create jobs in other nations? Dollar-for-dollar, a tax break for creating jobs directly is worth much more than a tax break for purchasing equipment.

Nothing that has happened during the past six years has changed my opinion on this point.

Now comes news that, again, Congress is planning to renew the provision. At the moment, the renewal proposal has passed the House of Representatives. My guess is that at some point, unless derailed by machinations with respect to unrelated provisions, it will pass the Senate. And it will be signed by the President.

This provision is one of many that is set to expire after a short time, creating incentives for its beneficiaries to fork over campaign contributions to ensure that it is renewed when the time comes. This is no way to run a nation or its tax policy, but it surely is a good way for wealthy political campaign contribution donors to run a Congress.

As I explained in Just Because It Didn't Work the First 50 Times Doesn't Mean It Will Work Next Time, “The depreciation provisions, including bonus depreciation and first-year expensing, have contributed to the current economic mess by allowing taxpayers to compute taxable income as though their economic position declined when in fact it remained the same or improved. Packaged into tax shelters, LILO deals, tax-exempt leasing arrangements, and other devices that contribute to the tax gap, these provisions ought not be considered remedies for the very economic diseases that they have caused and aggravated.”

It’s time to limit depreciation to the economic decline in the value of the property. If it remains acceptable to provide deductions for economic losses that haven’t happened and that may never happen, perhaps it’s time to tax future economic gains that haven’t happened and that may never happen. Imagine the outcry. That alone demonstrates the absurdity of making section 179 anything more than a short-cut for deducting the cost of de minimis expenditures.

Last week, in a CNN Money commentary, Jordan Wathen compared what he described as getting rich the easy way with getting rich the hard way. He pointed out that although people generally think that getting paid millions of dollars a year to do something a person loves to do is getting rich the easy way, it’s actually the opposite. People who get rich, for example, by playing a professional sport have invested tens of thousands of hours learning the game and honing their skills.

Wathen takes the position that there is a much easier way to get rich. He explains that by saving money at a higher rate and patiently holding on to an investment, a person can do quite well. He notes that the average savings rate is between 4 and 5 percent, and that mutual fund investments are held for an average of 3.3 years. In contrast, he suggests, a savings rate of 15 to 20 percent, and a mutual fund holding period of 20 to 40 years, would be outstanding.

Wathen is correct. A person’s savings, or investment, will be higher, and generally much higher, if the person saves 15 or 20 percent of income rather than 4 or 5 percent, even if the person doesn’t hold assets for several decades. Adding long-term holding periods to the mix makes the outcome even better.

The challenge, of course, is finding a way to save more money. Wathen suggests living in smaller home, driving a less expensive vehicle, and “shopping around for the best prices on routine monthly expenses like cable or insurance” will generate funds that can be invested. That might work for someone who is living in a 2,500 square foot home who can move to an 1,800 square foot home, as Wathen suggests. But how many people are living in homes of that size? And how many can move? Additional money might be within reach by trading in a European sports car for a Japanese vehicle, as Wathen suggests. But how many people are driving European sports cars? And of the people living in large homes and driving these sports cars, how many already have more-than-sufficient savings and investments? In other words, how many already are rich? For the wealthy, investing 80 to 90 percent of annual income is easy, because it’s easy to live on 10 percent of a $12,000,000 annual income.

But what about the folks whose income doesn’t cover the costs of sub-standard housing, nutritionally deficient food, second-hand clothes, and emergency-room-only health care? How does someone scraping by on basement wages set aside 4 to 5 percent of income, let alone 15 to 20 percent? How does someone whose annual income just about covers those costs set aside money for the future? By cutting back on a non-existent cable bill? By selling the fancy European sports car?

One of the underlying cause of the current national economic disequilibrium is the lack of long-term savings. That will happen when pensions are discontinued, employee benefits are cut by classifying workers as independent contractors, and wages are cut to the bare minimum. There wouldn’t so many “needy” people if the value of labor were fairly determined.

And, incidentally, when those who are able to do so cut back consumer spending by reducing cable bills and insurance costs, by eating in more than eating out, and by decreasing discretionary spending on entertainment and sports events tickets, what does that do to “consumer demand”? Consumer demand is what makes the economy move.

I’m not against savings. I’m just being practical. A person can’t save what the person doesn’t have. Unless incomes are more than sufficient to cover the costs of living, savings rates will remain too low.

Last week, in Priorities, Priorities: What to Do With Tax Revenues, I explained how Wisconsin’s Governor Scott Walker plans to cut education funding while simultaneously plowing tax revenue into the hands of a privately-owned professional sports franchise owner for a new arena that is far from a necessity.

In at least two other states facing budget shortfalls caused by tax cuts for the wealthy, tax breaks for the wealthy, and expenditures in the form of handouts to the wealthy, Republican governors are seeking to eliminate the deficits by cutting education funding. This is happening in Louisiana, and Kansas.

Why not fix the problem by reversing the cause of the problem? Is there something horrible about eliminating the tax cuts for the wealthy so that the citizens of the state have access to quality, affordable education? Perhaps the reason is a desire to reduce the number of educated people. Why do that? Educated people are less likely to fall for the fear-stoking and lie-infested campaign slogans tossed about by those whose goal is to shift wealth into the hands of a tiny oligarchy.

One would hope that by now enough Americans would realize that the promises offered as enticements to vote for politicians determined to shift wealth to the oligarchy are empty, unfulfilled, and dangerous. The nation is still waiting for the jobs promised more than a decade ago. Those that have developed in the past few years reflect steps taken in spite of the increase in wealth and income inequality. The nation is still waiting for repair and maintenance of the country’s infrastructure, a goal not achieved by the privatization technique that also shifts wealth to a tiny handful of wealthy individuals.

An epidemic of ignorance is about to sweep across the land. If voters let it happen, the outcome will be most unpleasant. Citizens need to ask, “Who benefits from cuts to education funding?” and “Who benefits from handouts to the wealthy?”