MauledAgain

It is not unusual to see stories about tax return preparers who are convicted of tax fraud, or of ripping off their clients. It happens too often. But a recent story about a convicted tax return preparer caught my eye because the actions of the preparer were especially egregious.

First, the preparer, who pleaded guilty to conspiracy, filing false tax returns, fraud, and aggravated identity theft, used the names of foster children and disabled children as dependents on his clients’ tax returns, even though those children were not dependents of the clients. The sentencing judge explained that “there was a moral ‘distaste’ for what [the preparer] did.” No kidding. But it gets worse.

Second, the preparer, after pleading guilty and while awaiting sentencing, then proceeded to prepare returns at another location using someone else’s name as preparer. When questioned about it under oath, he denied having done so. But after consulting with his attorney, the preparer, at the sentencing hearing, admitted in court that he had used another person’s name.

So what was the punishment? A prison term of 7 years and 10 months, followed by three years of supervised release, and restitution of $39,895.

The preparer is a citizen of Sierra Leone. Two questions come pop up. Should a non-citizen be permitted to do business as a tax return preparer? Should a non-citizen who commits tax fraud be deported?

About a month ago, in Be Careful With Divorce Tax Planning, I noted the lessons learned from two Tax Court cases in which the taxpayers ended up with federal income tax consequences worse than those that they would have experienced with careful tax planning when arranging their divorces. And now, as so many things seem to happen in threes, comes another Tax Court case with yet another divorce tax planning lesson. As I pointed out last month, the “the rules are fairly straight-forward, as tax rules go, [but] it is easy to get into trouble.

In Crabtree v. Comr., T.C. Memo 2015-163, a married couple divorced, entering into an agreement which the state family court entered as an order of the court. The state court order stated that it was issued “[w]ithout a hearing, without passing upon the substance, form, and/or fairness of the agreement,
and without knowledge by the Court of the facts and circumstances concerning the negotiations of the parties.” The sixth paragraph of the agreement provided that the former husband would pay “unallocated alimony/child support in the monthly sum of $5,232.00 for a continued 8 year period with the provision as long as [the former wife] should not remarry or cohabitate.” Nothing in the agreement addressed what would happen to the payment obligation if the former husband or former wife died during the 8-year period. The agreement also provided that the former husband would pay current tuition for both daughters of the marriage, then in elementary or high school, and for their undergraduate college tuition if they started college after graduating high school. Other provisions in the agreement disposed of the marital property and liabilities.

During 2010, the former husband paid $62,784 to the former wife. She did not report these payments as gross income. The IRS issued a notice of deficiency, determining that the $62,784 constituted gross income. The former wife disagreed, and filed a petition with the Tax Court, arguing that the payments did not constitute alimony for federal income tax purposes.

The Tax Court agreed with the former wife, reasoning that because the payments were not scheduled to stop if either former spouse died they did not meet the requirement of section 71(b)(1)(D) that there be no liability to make the payment for any period after the death of the payee spouse. The court explained that the sixth paragraph of the agreement, though not explicitly stating whether the payment obligation ended at the former wife’s death, created an inference that the obligation would not so terminate. The language referred to “a continued 8 year period,” with no indication that the period would be shortened. The same paragraph did contain two conditions terminating the obligation, namely, marriage or cohabitation by the former wife. The absence of any reference to her death suggested that the parties did not contemplate termination of the payment obligation for that reason.

The former wife argued that under state law, the payment obligation automatically terminated on her death, citing section 1512(g) of chapter 13 of the Delaware Code. However, the Tax Court explained that this provision only applies to alimony determined by the state court, in contrast to amounts voluntarily by the divorcing parties in a divorce agreement or similar contract. Even though the state court stamped the parties’ agreement as an order of the state court, that court expressly provided that there was no hearing, no evaluation of the substance, form, or fairness of the agreement. That took the analysis back to an interpretation of what was provided in the parties’ agreement, which the Tax Court determined did not cut off the payment obligation if the former wife died.

The opinion does not reveal whether the former husband deducted the alimony payments. If he did, the outcome in the former wife’s case would be inconsistent with a deduction by the former husband. It is possible that the former husband and IRS agreed to wait for the decision in the former wife’s case and proceed accordingly.

Though the taxpayer prevailed, the taxpayer was required to invest time and money, and probably some psychic energy, in a case that ought not have occurred. A simple sentence in the agreement, which the parties drafted without assistance of counsel, would have specified whether or not the payment obligation terminated if the former wife died during the 8-year period. There is no way of knowing if they considered the question. There is no way of knowing, if they considered the question, what they wanted the answer to be. There is no way of knowing if they thought that the answer did not require a provision in the agreement. What can be known is that it is risky to draft a divorce agreement without understanding the tax implications.

Roughly a month ago, in Tax Fraud in the People’s Court, I described a case on one of the television court shows in which both parties engaged in tax fraud and when their arrangement fell apart, unsuccessfully sought relief from the judicial system. This post was the latest in a series of commentaries on the television court show episodes that I happen to see, often long after the original broadcast. Among those commentaries are Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, and Learning About Tax from the Judge. Judy, That Is.

And as the title to this post suggests, there’s yet another episode involving disappointing behavior. The plaintiff sold a boat to the defendant, with delivery to occur when the full price was paid. The buyer paid part of the price. The plaintiff sued for the balance of the sales price, alleging that the agreed price was $3,500. However, the bill of sale showed a sales price of $500. The reason? An attempt to minimize the state sales tax on the transaction.

Worse, the check that was written by the purchaser for the amount that had been paid included the word “generator” in the memo section of the check. The judge figured that out quickly. It was an attempt to change a non-deductible cost of a boat into a business deduction. I’m guessing that the goal was to get one of the first-year expensing deductions.

The seller prevailed. Why? The buyer admitted that even though he had not paid the full price, he had gone, in the very early morning, to where the boat was stored and took it without having paid the balance of the purchase price.

This is more than a tax issue. Even if there were no applicable taxes, why does someone think that he or she is permitted to take possession of an item without having paid the full price when the contract provided that the transfer of the item would take place when the full price was paid? Perhaps the answer is greed, a disease that has become an infection on the order of a pandemic. I don’t think eliminating taxes or getting rid of government solves the problem.

No sooner had I noted, in Mileage-Based Road Fee Inching Ahead, that the Editorial Board of the New York Times had published remarks favoring the mileage-based road fee than a reader sent along links to two articles in which commentators expressed serious dissatisfaction with the idea. As readers of MauledAgain know, I am a strong advocate of shifting to this twenty-first century means of financing road infrastructure. It began with Tax Meets Technology on the Road, and has continued 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, Is the Mileage-Based Road Fee a Threat to Privacy?, So Who Should Pay for Roads?, and Mileage-Based Road Fee Inching Ahead.

Both commentators dislike what they perceive as an intrusion on privacy required by a mileage-based road fee system. In Oregon Tax Is a Drag on the Open Road, Stephen L. Carter argues that the system denies drivers the anonymity that can be obtained even if a person is acting in a public venue. He notes that if no one recognizes a person, that person remains anonymous. He concedes that “there are traffic cameras everywhere,” and that E-ZPass and its equivalents permit tracking. In Don't Track Me, Bro! The Perils of Tax by GPS, Glenn Harlan Reynolds laments that a mileage-based road fee will mean the demise of the freedom of driving a car that permits a person to “go anywhere without buying tickets, checking in, or otherwise operating under someone else’s nose.” He worries that the system could alert authorities if a driver is speeding. He concedes that cell phone tracking already exists, that license-plate cameras are tracking vehicles, and that the communication systems in vehicles can be accessed remotely. He argues that it is better to increase the gasoline tax, because a mileage-based road fee would be designed to generate as much additional revenue, making the increase in gasoline tax less of an intrusion. He doesn’t mention that the use of credit and debit cards to purchase the gasoline also permit tracking of motorists.

These concerns were addressed by me in previous posts. In Mileage-Based Road Fees: Privatization and Privacy, I explained:

And, yes, there is a risk that a mileage-based road fee system can be used to determine where a vehicle has been. Vehicles, of course, do not have privacy rights. But because people assume that an owner of a vehicle is wherever the vehicle happens to be, it is understandable that knowing where a vehicle has been might reveal where the owner has been. Of course, a mileage-based road system need not track location, though those being considered and those in place do so, provided that the fee did not change based on the road being used. Connecting to the odometer would suffice. It also is important to remember that for many decades, the location of vehicles has not been a private matter hidden behind the sacrosanct walls of a person’s home. For a long time, law enforcement officials, investigative journalists, and even nosy neighbors have been able to determine where a vehicle has been, aided by the existence of license plates, bumper stickers, and other identifying characteristics. There’s nothing private about being in public.

And in Is the Mileage-Based Road Fee a Threat to Privacy?, I argued:

Existing technology, such as roadside cameras, credit card receipts for fuel purchases, electronic toll systems such as EZPass, and observations by law enforcement authorities, already provide substantial information concerning the location of a vehicle. Similarly, the location of an individual when in public areas is not a secret. The mileage-based road fee does not generate a significant increase in the revelation of vehicle location information, and does nothing to increase the disclosure of individual location information.

Those who are holding on to a right of privacy that exceeds what presently exists are holding on to a dream. That dream is long gone.

Carter raises another objection to the mileage-based road fee. He claims that the gasoline tax is designed to encourage people to purchase fuel-efficient vehicles, that it has succeeded in doing so, and that once motorists’ vehicle purchase habits have been changed, the gasoline tax has served its purpose and should not be replaced with a tax that affects motorists who have purchased fuel-efficient vehicles. He compares the gasoline tax to the tax on tobacco, noting that if the tobacco tax succeeds in encouraging everyone to give up use of tobacco, the tax will disappear. The first flaw in Carter’s argument is the claim that the gasoline tax is designed to encourage people to purchase fuel-efficient vehicles. The gasoline tax was enacted to fund the construction and maintenance of highway infrastructure, and was enacted decades before anyone was thinking about fuel efficiency. Thus, until the need for road maintenance disappears, funding cannot stop. The attempt to analogize the tobacco tax is misplaced. The second flaw is Carter’s claim that the gasoline tax has “nudged people toward purchasing more fuel-efficient vehicles.” The gasoline tax has not been increased for a very long time, which is, of course, a chief cause of the problem. What affects consumer vehicle choices is the cost of gasoline and diesel fuel, which, though fluctuating, has increased over those decades.

Carter also argues that the impact of the mileage-based road fee, using computations from the Oregon experiment, would penalize purchasers of vehicles such as the Prius. Viewing the impact as a penalty is caused by too narrow a view of the situation. The increase is nothing more than an adjustment to account for the fact that electric vehicles use the roads, and cause them to wear down, and have been escaping contributions to their upkeep. The fact that a Prius causes less damage because it weighs less than Carter’s example of a Ford pickup truck is not a concern because weight can be built into the mileage-based road fee computation. The mileage-based road fee functions as a user fee, whereas the gasoline tax does not.

As for Carter’s claim that 40 percent of the mileage-based road fee collected by Oregon will end up in the hands of private vendors, it would be helpful to see a source other than the several news outlet sites that appear to be repeating someone’s talking point. If it is true, and the absence of anything in the enabling statute or the report of the Oregon Road User Fee Task Force mentioning a 40 percent fee, or any other percentage, suggests that it might not be, then there is an issue. It could be, however, that there is some fixed fee which is a higher percentage at the outset and will decline as increasing numbers of motorists sign into the system. Until someone provides a citation to an official record, it makes no sense to pursue the question any further.

The question of whether it is permissible to pay one’s taxes with pennies is one that does not seem to go away. In many instances, the issue isn’t simply whether one can use pennies. Often there is another angle. For example, in the situation this story, the taxpayer dumped the pennies all over the place in the tax office, and was arrested. In another situation, reported here, the taxpayer and public officials got into a spat about the taxpayer’s right to record the payment encounter.

Recently, as this story explains, a Pennsylvania taxpayer, who describes himself as a tax protester, decided to pay his real estate property tax bill with pennies. He encountered difficulties finding 83,160 pennies after visiting 15 banks over a three-day period. After getting his hands on roughly 50,000 pennies, he made up the difference with higher denomination coins and some dollar bills. He ended up paying the bill at a bank designated by the township, because the township accepts only checks and money orders.

What caught my eye about this story wasn’t the use of pennies and coins, an event which happens often enough to be almost boring. Instead, I was amazed at the reason given by the taxpayer. He considers the real property tax to be “financial slavery.” Why is it financial slavery? He claims that the taxes are used to finance the public school system, which for some reason he does not support. He also stated that he was paying in pennies because he was “being forced to pay for something against my own will.”

School taxes constitute only part of the tax bill paid by the taxpayer. The real property tax also pays for a variety of public services, including, for example, police protection and maintenance of local roads. The taxpayer apparently thinks that he is entitled to use those roads but cannot be compelled to contribute to the cost of maintaining them. That, to me, speaks volumes. So, too, did his revelation that he waited until the last minute to pay the taxes because he had other bills to pay.

Other than a few minutes of fame and attention, the taxpayer’s sense-less gesture did nothing to change tax policy or the township’s budget. What a waste of three days, to say nothing of the cost of the wheelbarrow that he somehow had the resources to purchase at Home Depot to transport the pennies.

Four years ago, in United States v. Home Concrete & Supply, LLC, et al, the Supreme Court held that a taxpayer’s overstatement of adjusted basis, causing a reduction in the amount of gain recognized reported as gross income on its tax return, did not constitute an omission from gross income, thus precluding the IRS from applying the six-year statute of limitations that supersedes the usual three-year statute. The Court decided not to overrule its previous decision in Colony, Inc. v. Comr., in which it had reached the same conclusion with respect to essentially identical language in the Internal Revenue Code of 1939. The Court again concluded that overstating basis is not the same as omitting gross income, even though a consequence of overstating basis is omission of gross income.

Section 2005 of the Surface Transportation and Veterans Health Care Choice Improvement Act Of 2015, H.R., 3236, amends section 6501(e)(1)(B) of the Internal Revenue Code to provide that “An understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income.” The change applies to tax returns filed after July 31, 2015, and to returns filed before August 1, 2015 for which the statute of limitations, determined without regard to the newly enacted provision, has not expired.

What’s shocking is not that the Supreme Court’s decisions in Colony, Inc., and Home Concrete have been overturned. Those decisions, though relying on a very precise and technical reading of the statute, generated the absurd result that a poorly drafted statute can create. What is shocking is that the current Congress passed legislation that changes the tax law. Though often attacked as a “do nothing” Congress, this development proves that the Congress can do something when it wants to do so. The implications of that realization reach far beyond the tax law.

Taxpayers who are partners in partnerships, and tax practitioners preparing returns for partners, have far too often encountered the delays generated by the fact that for many years the due date for partnerships and for individuals has been the 15th day of the fourth month following the close of the taxpayer’s taxable year. For calendar year taxpayers, that rule produces the familiar April 15 due date. Because the partnership is not required to file its return and send schedules K-1 to its partners until April 15, the calendar-year partner cannot file a return by April 15 because the information has not been received. The situation gets more complicated if the partnership is a partner in another partnership, and so on. The practical solution is for the partner to make use of extensions of time to file, but those do not absolve the taxpayer of the duty to pay taxes by April 15. Failure to do so triggers interest and penalties. But how is the taxpayer to estimate a tax liability? My personal experience for clients has been that partnership tax return preparers willing to provide guesstimates often discover they were way off the mark.

What’s the answer? One possibility has just been enacted by section 2006(a)(2)(A) of the Surface Transportation and Veterans Health Care Choice Improvement Act Of 2015, H.R., 3236. It amends section 6072(b) of the Internal Revenue Code to provide that the due date for partnership income tax returns is changed from April 15 to March 15 for calendar year partnerships and, for fiscal year partnerships, from the 15th day of the fourth month following the close of the year to the 15th day of the third month.

Will this solve the problem? Yes and no. Certainly for partnerships that are not partners in other partnerships, the information should reach the partner in time to file without relying on extensions, unless, of course, the partnership takes advantage of an extension. But if the partnership is a partner in a partnership, which in turn is a partner in another partnership, and so on, there is no guarantee that the movement of information along the chain will finish in 31 days. It has become increasingly common to find chains of partnerships, designed for one or another of various reasons.

Though this particular partnership taxation challenge is far from the most complicated, considering that issues such as allocations and basis adjustments are far more likely to cause partnership tax practitioners to get headaches, it is on the list of reasons that subchapter K is too unwieldy, too impractical, and too vulnerable to tax planning abuse. My solution? Subject partnerships to the income tax, and permit the tax paid by the partnership to be claimed as credits by the partners, allocated in proportion to the partners’ profit-sharing ratios in effect for the taxable year for which the tax is paid. The credit would be available for the taxable year for which the tax was paid if the information return is provided to the partner by the fifteenth day of the fourth month following the taxable year, and otherwise it would be available the following year. This would generate an incentive for partnerships in partnership chains to get their tax returns completed earlier in the tax filing season.

This morning, in So Who Is It That Gets Hit With This Special Tax Rule?, I asked why C corporations with a June 30 taxable year were not within the scope of the amendment that shifts C corporation return filing due dates from the fifteenth day of the third month following the close of the taxable year to the fifteenth day of the fourth month. A reader passed along a suggested reason. Under current law, the due date for a C corporation with a June 30 taxable year is September 15. Under the amendment, but for the special exception, it would be October 15. What I had neglected to consider is that the federal budget year ends on September 30. It appears that the Congress did not want to delay filing and, more important, tax collection from one federal budget year to the next because of the adverse impact it would have on the computation of receipts and expenditures, and thus the deficit. This explanation makes sense.

Note: the reader has since sent along a link to the blog post by James R. Beaudoin, who provided the suggestion. He calls the special rule "a budgetary gimmick." He's quite right.

Section 2006(a)(2)(A) of the Surface Transportation and Veterans Health Care Choice Improvement Act Of 2015, H.R., 3236, amends section 6072(b) of the Internal Revenue Code to provide that the due date for C corporation income tax returns is changed from March 15 to April 15 for calendar year corporations and, for fiscal year corporations, from the 15th day of the third month following the close of the year to the 15th day of the fourth month. The amendment achieves this result by removing corporations from section 6072(b), leaving them within the general rule of section 6072(a).

Under section 2006(a)(3)(A) of the Act, the change applies to tax returns for taxable years beginning after December 31, 2015. Thus, for calendar year corporations, the due date remains March 15 for 2015 returns. It will not be until the 2017 tax filing season, for 2016 returns, that the change will go into effect for calendar year corporations.

However, section 2006(a)(3)(B) of the Act postpones this one-month due date shift for “any C corporation with a taxable year ending on June 30.” It postpones the change until the filing of tax returns for taxable years beginning after December 31, 2025. That’s a ten-year delay. Why? And who is deprived of the due date shift?

If there is a committee report explaining the Act, I cannot find it. It appears from a search of the Library of Congress legislation site for H.R. 3236 that the bill was introduced in the house, passed by the house, passed by the Senate, and sent to the President for signature. It would be interesting to know why this exception was included. Someone knows. I don’t.

For at least eleven years, 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, Is the Mileage-Based Road Fee a Threat to Privacy?, and So Who Should Pay for Roads?, I have advocated the replacement of liquid fuel taxes with a mileage-based road fee. I have never been alone in this effort. Progress has been made. Experiments are underway.

Now comes what I consider to be wonderful news. The Editorial Board of the New York Times has come out in support of moving beyond gasoline taxes as the source of transportation infrastructure funding. The focus of the editorial is on mileage-based road fees. Though the editorial is not, and is not intended to be, a technical analysis of the advantages of shifting gears on highway funding, it addresses the major issues, such as mileage measurement and privacy. These and other issues have been the subject of my commentary in one or more of the posts listed in the preceding paragraph. The editorial also notes that anti-tax groups surely will try to derail any changes, though it does not mention the true reason, which is a desire to put public assets within the control of an oligarchy beyond the reach of the voting booth.

The best news is that the editorial has been published by a newspaper that is widely read. Among the readers are people in a position to make decisions. The conversation now will move from the world of blogs, academic publications, and the legislative halls of a handful of states, to the national stage. Unfortunately, it probably will take another infrastructure disaster or two to kick start the process of shifting into the twenty-first century while putting the needs of the people above the desires of the greedy.

As mentioned in several reports, including this one, the state of Massachusetts has set up another sales tax holiday. Under the terms of the provision, for a two-day period, sales taxes will not be imposed on sales of items costing $2,500 or less. The goal of the provision is to generate economic activity. But do sales tax holidays increase spending? I think not.

The only way that a sales tax holiday generates increased economic activity is if it causes people to make purchases that they otherwise would not make. Does this happen? Perhaps here and there, but certainly not on any grand scale. Why? Making the cost of a $100 item $100 rather than the $106.25 it would cost after imposing the Massachusetts sales tax is not going to motivate someone who does not have the $100 to make the purchase. Nor is it going to cause someone who does not need or want the item to purchase it. The only person who would make the purchase on account of the sales tax holiday is the person who has $100 but does not have $106.25 and who needs or wants the item.

So what does a sales tax holiday do? Pretty much, it does two things. First, it causes people to accelerate their purchases. Knowing that something with a price tag of $106.25 two months from now can be obtained for $100 today will encourage people who have the $100 to make the purchase now. But, of course, two months from now, sales, and thus economic activity, will be $106.25 less than they otherwise would be. Second, the prospect of a sales tax holiday – which has been enacted repeatedly in Massachusetts for the past decade but for one year – causes people to wait, if the purchase is not urgent, in hopes of avoiding the sales tax. So, in both instances, the provision does nothing but move sales around in the calendar. If it increases sales, it’s a drop in the bucket.

So why do legislators enact these provisions? They do so because they can acquire votes by relying on people who think that some wonderful gift has been bestowed on them. Deep thinking, that is, thinking through the entire situation, would illuminate the minds of those who think that they’re getting some sort of long-term economic benefit.

As a member of the Massachusetts legislature noted, “It’s a gimmick.” And that legislator is a member of the political party that is addicted to tax cuts. Even he realizes the smoke-and-mirrors game of a sales tax holiday.

Readers of MauledAgain know that I object to using the tax law to accomplish what can and should be accomplished, if at all, through other means. It ought not be the task of the IRS or a state revenue department to administer the health law, supervise the automobile industry, or determine whether appliances satisfy energy-saving requirements. One state tax credit that I find particularly unacceptable is the tax giveaway to “persuade” film companies to do their filming in the state granting the credit. Some of my thoughts on this issue can be found in Are Tax Incentives Worth It?. It was no surprise to me that a study demonstrated the return to a state for each dollar of tax giveaway was less than a dollar, and in some cases way less than the dollar.

Now comes a report that film writers are trying to get in on New York’s film and television production credit giveaway. New York enacted a tax credit to “encourage” California film and television production companies to film in New York. In computing the credit, amounts paid for the services of writers are not taken into account. Apparently the production companies continue to use writers who are based in Los Angeles. New York writers are annoyed that the California production companies aren’t doing business with New York writers. So they want a new tax credit that would use taxpayer dollars to pay California companies to hire New York writers. Some complain that after going to school in New York, writers need to move to California to make a living. The industry explains that producers prefer writers to be nearby, and thus because the producers pretty much congregate in Los Angeles, the writers also base themselves there.

Once tax credits are handed out, everyone wants in on the gravy train. Some of the staunchest opponents of social welfare expenditures become very quiet when tax credit expenditures are being dished out. Even the argument that tax credits are necessary to encourage an activity fall apart when applied to the film and television production industry, because production companies will churn out movies and shows even if the credits don’t exist, and we know that because they were doing business profitably long before these tax credits were foisted on an unsuspecting public as a way of directing even more taxpayer dollars into the hands of those who already had dollars.

The solution is not enactment of another film and television industry credit. The solution is repeal of the existing credit. If a writer needs to go to California to get a job, so be it. People in all sorts of industries are required to relocate in order to find buyers for their skills. That’s the way free markets work. If particular individuals in New York want production companies to do work in New York, then those individuals need to do what needs to be done, without taxpayer funding of their personal film-making preferences, to make New York attractive to production companies. Arguing that taxpayers should pay because taxpayers will benefit is a theory that has been disproven by the practical reality of the facts, as explained in Are Tax Incentives Worth It?.

A reader pointed me in the direction of a three-year-old paper published in the Proceedings of the National Academy of Sciences of the United States of America in the category of Psychological and Cognitive Sciences, and also available here. Normally I don’t comment on old stories, but this paper, which somehow flew under the radar or at least under my radar, deserves more attention. The proposition advanced by the paper is that documents offering the opportunity to commit fraud should be signed at the beginning rather than at the end. The authors give as examples tax returns and insurance policy forms.

Though the authors base their suggestion on theoretical analysis, they back up their musings with practical testing generating empirical results. The authors explain that when people sign a form after intentionally filling it out erroneously, they are more likely to “engage in various mental justifications, reinterpretations, and other ‘tricks’ such as suppressing thoughts about their moral standards that allow them to maintain a positive self-image despite having lied.” In contrast, signing the form before filling it out “makes morality accessible right before it is most needed, which will consequently promote honest reporting.”

When I read this explanation, my first thought was that in other circumstances people are required to affirm the truth before providing information. The example that popped into my head was the treatment of witnesses in litigation. They are sworn in before they testify. Aside from the theoretical impact, there is a practical advantage, especially for the attorney engaged in cross-examination, arising from the ability to remind the witness that he or she is under oath.

So why not do this for a tax return? As a practical matter, would people refrain from signing until after they fill it out? Possibly, if the return is in paper format. But as the tax system shifts to what will be an entirely digital process, it would be rather easy to compel a taxpayer to sign and affirm to truth before permitting tax items and other information to be entered into the relevant fields.

Even in less formal situations, people often stress the need for honesty before getting into the facts. Consider a parent who is attempting to determine what happened while he or she was out of the room. It is not unusual for the parent to preface questions with a reminder that truth-telling is important.

The change would not be difficult to make. It’s a matter of rearranging the paper form, and modifying a few lines of code in tax return preparation software. Finding a way to tell people, on tax or other forms, that “telling the truth is important” make sense. In a era when truth-telling finds less favor among some segments of society, there is no good reason to refrain from reminding people that without truth all else, not just revenue, is lost.

Every now and then an episode from a television court show touches on taxation. Sometimes it is tangential and sometimes it is direct. At various times during the past four years, I have commented on these cases, beginning 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, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, and Learning About Tax from the Judge. Judy, That Is.

Because of my schedule and commitments, I don’t see many of these shows, and when I do, it’s often as a re-run. Thanks to a reader, my attention was directed to People’s Court case from about a month ago. It’s a humdinger.

The plaintiff, whose tax situation for some not-well-explained reason caused her to have no use for a credit connected with one of her children, agreed with the defendant, her cousin, to refrain from claiming her child as a dependent so that the defendant could claim the child and obtain a refund based on the credit. They agreed to split the money, though the testimony was confusing as to how much of a refund was expected or was received and how it would be split. The plaintiff first stated that it was $3,234, of which the defendant would keep $1,000, but then stated that it was $5,000, of which the defendant would keep $1,000. The defendant explained that it was $3,200, and that she would keep $1,600. The defendant ended up keeping most of the money, and according to the plaintiff she kept all or almost all. The defendant testified that she gave the money to the plaintiff’s sister, but the plaintiff testified she did not get along with her sister and had not had contact with her. Defendant then testified that she was going to give the money to plaintiff’s mother but the plaintiff’s sister said it was ok to give it to her, the sister. Plaintiff testified that she contacted the sister after learning of the defendant’s claim, and learned that the sister said that the defendant did not give any money to the sister.

The defendant admitted that the child did not live with her. The defendant admitted that she did not support the child. The child lived with, and was supported by, the plaintiff.

Judge Milian pointed out to the parties that they had engaged in tax fraud. She asked the plaintiff if she had done this in the past and the plaintiff, after a bit of hemming and hawing, admitted that she had pulled the same stunt with someone else in a previous year.

After judge dismissed the case because the law does not enforce fraudulent contracts, the plaintiff asked, “What about pain and suffering?” The judge: “Are you out of your mind.”

The parties in the case are poster children for what is wrong with American education, civic responsibility, and common sense. The defendant, who testified that she is a court reporter, surely knows that the arrangement was improper. The plaintiff, and her boyfriend, in post-trial interviews, continued to argue that there was nothing wrong with what they did, and expressed bewilderment that the defendant was not compelled to turn over some amount of money.

Worse, these two individuals have admitted, on a nationally syndicated television show, that they have committed several crimes. It would not be surprising that at some future date they are contacted and informed that they have been indicted. It would be disappointing if that does not happen.

In my post earlier this week, Who Benefits from Tax Breaks for the Private Sector?, I shared this thought about tax breaks for specifically targeted individuals and companies:

How do they manage to get these tax breaks? They use a dual tactic. One is that they can afford to “own” legislators because they finance legislative campaigns. The other is that they can afford to hire PR experts who excel at convincing the public, and the few remaining independent legislators, that the tax break for a specific individual, entity, or industry is in fact an economic benefit for the public.

Now there is yet another example of why Americans should compel their legislators to stop falling for these deals.

According to this report, Intel, seeking to reduce costs by $300 million, is laying off hundreds, perhaps thousands, of employees because revenues are less than expected. That part of the story is far from uncommon, although it is another example of how the economic distress of the middle class is not a good thing for business. What caught my eye was the fact that last year Washington County, Oregon, had entered into an agreement with Intel. Under the agreement, Intel would invest up to $100 billion in Oregon, and in return receive a $2 billion tax break. According to the mayor of Hillsboro, Oregon, the agreement would permit Intel to increase its investment in Hillsboro, and would ensure economic security for workers.

So how has this worked out for the workers who are losing their jobs? How has it worked out for the Oregon taxpayers who are paying more taxes, or obtaining less tax relief, in order for the Intel tax break to be implemented? Has it occurred to anyone that the number of Oregonians who can't afford to purchase computers has increased, and that this consequence would cause further reductions in Intel’s revenue?

It’s time to put an end to targeted tax breaks.

If a sports team that lost two games after winning the first five games of its season claimed to be undefeated because the losses came after wins, the reactions of most people would range from “idiocy” to “bull manure.” If a person who drove in a westerly direction for 10 miles turned around and headed east for three miles, most people would react in a similar fashion if that person claimed not to have traveled in an easterly direction because the easterly movement had followed a western trek. If a person who spoke for ten minutes after being silent for an hour claimed to have been mute because the speaking followed a period of silence, the person’s friends would have reason to worry.

People aren’t that foolish, are they? Few are. But politicians? That’s a totally different story.

According to this report, the governor of Kansas, whose foolish tax reductions for the wealthy three years ago caused economic detriment and social chaos, as explained in Success for the Anti-Tax Crowd: Closing Down Education, and who was compelled to raise taxes, though mostly on those not wealthy, as explained in So What’s Trickling Down?, to repair the damage, claims that the increases in sales and other taxes are not a tax increase because there were tax cuts three years earlier. There are only three explanations for this sort of claim. A person who offers this sort of nonsense, which unfortunately some people might believe, is ignorant, dishonest, or manipulative. Those are not pillars on which society and government ought to be built.

That the governor of Kansas lives in an oligarchic fantasy world is not news to those who pay attention to the “canary in the coal mine” role that Kansas has played for the past few years. As I commented in A Tax Policy Turn-Around?, things don’t work out well when they’re directed by politicians “running around the country spewing forth idiotic economic theories and bizarre social concepts.” Because admitting that the tax increases are tax increases would be, in effect, an admission that the tax cuts of three years favoring the wealthy ago were a bad idea, the governor of Kansas must resort to deflection in the hopes that the sinking ship of trickle-down isn’t really sinking. Denial is a terrible thing, isn’t it?

How twisted is the thinking process of people who claim that a 5-2 team is undefeated because the losses followed a greater number of wins? The governor of Kansas blames the Democrats in the Kansas legislature for the mess in Kansas. He complains that they “put forward no proposals to solve this issue. None.” Duh. Hey, governor, why should those not responsible for the mess clean up the slop? Republicans hold more than 75 percent of the seats in the Kansas legislature. They created the crisis. They’re not infants whose messes need to be cleaned up by their parents. They need to fix their own mistakes. If they want the Democrats to fix their errors, fine. Resign en masse, and let the Democrats take over the state house.

The insanity in Kansas is simply the opening round in a cascading collapse of the economy generated by the disciples of disproven trickle-down voodoo economics. The chicanery eventually is revealed, and the price must be paid. The longer people wait to throw out the ignorance, dishonesty, and manipulation, the higher will be the price.

Many people, I suppose, would respond to the question, “Who benefits from tax breaks for the private sector?” with the answer, “The private sector.” And they would be correct. The better question, though, is “Who benefits from a tax break designed for a specific individual, entity, or industry?” The answer, most people would suggest, is “The specific individual, entity, or industry for whom it was designed.”

The follow-up question, “Should this tax break have been enacted?” surely would bring the answer, “No.” And that is because the overwhelming majority of Americans do not get as many tax breaks as do the specific individuals, entities, and industries that in recent years have procured all sorts of tax relief. How do they manage to get these tax breaks? They use a dual tactic. One is that they can afford to “own” legislators because they finance legislative campaigns. The other is that they can afford to hire PR experts who excel at convincing the public, and the few remaining independent legislators, that the tax break for a specific individual, entity, or industry is in fact an economic benefit for the public.

Readers of this blog know that I’m no fan of these targeted tax breaks. Interference in the so-called free market that causes the market to be less free, which is what these tax breaks do, is far worse than interference in the market necessitated by abuses of the market committed by those sufficiently powerful to twist the market. Of course, those who oppose regulatory control of market bullies are diehard supporters of market interference that benefits them.

A recent example caught my eye because of the stark contrast between promise and performance. According to this report, the city of New York’s Independent Budget Office examined the economic consequences of a real property tax break. The city gave the developer of One57, a luxury Manhattan condominium project, $65.6 million in real property tax reductions. In exchange, the developer promised to build affordable housing. It turns out that the developer spent $5.9 million to build 66 affordable apartment units in the Bronx. The Budget Office calculated that the city could have built almost 370 affordable housing units had it simply spent the $65.6 million directly to construct those units.

So where does the remaining $59.7 million go? The folks who can afford to purchase these condominium units enjoy a reduction in the annual cost of owning them, because they pay reduced real property taxes. These buyers are not people in need of affordable housing. In other words, a slice of the economic elite gets wealthier while those who should be benefitting from the tax break are short-changed.

The tax break in question was not limited to the one development. It cost the city roughly $1.1 billion annually. Why not just let the market for upscale residential housing sort itself out without paying wealthy people to do what they would be doing anyway?

Two recent Tax Court cases, published on the same day, illustrate the need for taxpayers to be careful when planning how to work out the economic effects of a divorce. Though the rules are fairly straight-forward, as tax rules go, it is easy to get into trouble, especially when alterations are made without thinking through all of the consequences.

In one case, Mehriary v. Comr., T.C. Memo 2015-126, the taxpayer and her eventual former husband agreed that he would have exclusive use, ownership, and possession of one of their residences, on Morton Road in New Bern, North Carolina, and that she would take their residence on Sweet Briar Road in the same town. He quitclaimed his interest in the Sweet Briar property to the taxpayer. They also agreed that the taxpayer would pay alimony to her former husband, in the amount of $4,000 each month for 60 months. These payments would be made to the bank holding the mortgage on the Morton property, and if the mortgage loan was paid in full, remaining payments would be made to the former husband. The agreement “advised the parties to seek the opinion and advice of a tax professional as to the tax ramifications of the agreement.” Subsequently, the taxpayer proposed a modification, under which the taxpayer would quitclaim the Sweet Briar property to her former husband in lieu of $80,000 of the alimony obligation, and he agreed. The taxpayer quitclaimed the property in February 2011, and in September 2011 requested the local court to modify the divorce decree to reflect the modification. The taxpayer deducted an $80,000 loss on her 2011 federal income tax return for the transfer of the Sweet Briar property, explaining at trial that she did so because her insurance company had characterized that property as an investment property.

The Tax Court held that the transfer of the Sweet Briar property was a transfer of property between former spouses incident to a divorce, and thus under section 1041 no gain or loss was permitted to be recognized by the taxpayer. The Tax Court also held that the taxpayer’s attempt to characterize the transfer as a deductible alimony payment failed because the transfer was not in cash, as required by section 71. Finally, the Tax Court upheld the imposition of a section 6662 accuracy-related penalty, pointing out, among other things, that the taxpayer had been advised to seek a tax professional’s opinion but that she did not introduce any evidence that she relied on professional tax advice.

In the other case, Muniz v. Comr., T.C. Memo 2015-125, the taxpayer and his eventual former wife agreed that he would pay alimony to her, along with $409 per month to cover health insurance for her and her son, followed by the lesser of $500 or the cost of health insurance for nine months. The former wife waived all rights to any other alimony payments. The parties then agreed to an order requiring the taxpayer to pay her $6,000 in satisfaction of the alimony obligation under the first agreement, and the taxpayer did so. The court reserved ruling on her request for attorney fees and costs. Subsequently, the court ordered the taxpayer to pay $45,000 to his former wife, which she characterized at trial as a settlement for attorney fees and division of marital assets. The taxpayer paid the $45,000, and deducted the payment. His former wife did not include it in gross income. The taxpayer is a licensed attorney, and also holds a CPA license which at some point he put on inactive status.

The Tax Court held that the $45,000 payment was not deductible alimony. It pointed out that the alimony covered by the first agreement did not add up to $45,000. It pointed out that the former wife waived rights to any other alimony aside from the $6,000 payment. The Tax Court also noted that the $45,000 appeared to be a property settlement. The court explained that under applicable state law, the obligation to pay the $45,000 survived the death of the former spouse, and thus failed to qualify as deductible alimony for federal income tax purposes. The court rejected the taxpayer’s argument that because making the $45,000 payment extinguished any additional obligation on his part to make payments to his former wife the payment was alimony, noting that there is no such test in the Internal Revenue Code or in applicable state law. Finally, the court upheld the imposition of a section 6662 accuracy-related penalty, pointing out, among other things, that the taxpayer did not explain what sources he used to determine his tax liability, that he did not consult a tax professional for advice, and that the fact he is a licensed attorney who at one time held a CPA license “should have alerted him to the fact that alimony is not deductible under section 215(a) unless it satisfies the requirements of section 71(b).

What makes these cases stand out is that in one of them the taxpayer was an attorney-CPA, though it isn’t clear he was a tax professional, and in the other, the taxpayer was advised to obtain advice from a tax professional. I wonder how many state judges ask parties in divorce cases if they have consulted a tax professional. I wonder how many attorneys representing parties in divorce cases advise their clients to do so or ask if they have done so. Not that doing this will eliminate these avoidable outcomes, but perhaps it will reduce the number of these unfortunate outcomes. The fact that both of these cases were handed down on the same day simply magnifies the prevalence of these sorts of situations.

As Pennsylvania moves deeper into budget crisis, rhetoric over the governor’s attempts to replace the shale impact fee with an extraction tax has escalated. The industry, ever protective of its already exalted status in Pennsylvania, has produced a variety of arguments attempting to justify what continues to be a farce. Pennsylvania remains the only state not to impose an extraction tax on the production of natural gas from shale. How that came about is, of course, another example of what the ultra-wealthy do with some of their dollars, namely, purchase legislatures willing to do their bidding.

One of the assertions made by the industry is laughable. According to this story, the president of the Marcellus Shale coalition claimed that replacing the impact fee with an extraction tax would increase the industry’s cost of doing business in Pennsylvania to the point that it would “divert investments to more hospitable states.” How? For one thing, all of the other states in which there is shale gas to extract have extraction taxes, so where are the “more hospitable” states? For another, so long as there is shale gas in Pennsylvania to extract and sell at a profit, the industry isn’t going to walk away and leave those profits in the ground.

However one wants to characterize this not-so-veiled threat, it is difficult to avoid calling it a bluff. The fact that even some members of the shale industry, including executives of some of the companies doing business in Pennsylvania, “recognize the need for a severance tax” demonstrates the thinness of the Coalition’s threat.

Those same executives “were amazed” that Pennsylvania, unlike all of the other states, has no severance tax. Reportedly, “they thought Pennsylvania was being a chump for not having one.” Of course. Chump. It’s what happens when those with a fiduciary duty to the people sell out to a handful of the oligarchy.

When all is said and done, the shale extraction industry is not leaving Pennsylvania. I doubt the governor takes the threat seriously. The question is whether the legislative chumps will wise up

There’s a difference between a tax and a fee. I explained it in Please, It’s Not a Tax. So why do some people use the word “tax” to describe a fee? As I explained in that post from six years ago, because it riles up the anti-tax crowd and generates opposition that would not otherwise show up. For most people, paying a fee for something in return is more palatable than paying a tax.

This nomenclature silliness has recently moved back to center stage. According to numerous reports, including this one, Republicans are using the word “fee” to describe an increase in the penalty imposed on businesses for failure to file a required Form 1099-MISC that is included in legislation currently being considered. So what’s wrong with that? Nothing, in and of itself, because payment of a penalty is tantamount to payment of a fee, because the person paying it does so because the person chose to do or not do something that triggers the penalty.

The problem is that when the same increase was included in legislation several years ago, the same Republicans – individuals, not just the party – raised a ruckus, calling the increase a tax. But now that it is part of legislation favored by Republicans, the name is changed. For example, Ryan Ellis of Americans for Tax Reform – Grover Norquist’s operation – wrote of the current legislation, “This is a fine for failing to comply with tax law, not a tax increase.” Yet several years ago, writing with respect to the same statutory language, Ellis described the increase in the penalty as a tax increase. Another official of Americans for Tax Reform did the same thing, claiming that the provision currently under consideration is not a tax increase, while describing the very same language in the earlier legislation as a tax increase. Requests for clarification of the inconsistency did not bring any sort of comprehensible explanation, other than to tag an opponent of the current legislation, who is a conservative activist as a “liberal Democrat.”

In the meantime, John Boehner is pushing Republicans to support the legislation and the penalty increase in it. This is the same John Boehner who several years called the exact same provision “one of Washington’s dumbest ideas.” The switch would make more sense if Boehner would announce that he changed his mind because he has shifted to a different political philosophy. But he has not. It’s also worth noting that the current legislation is being crafted in the same manner that brought Republican criticism of how the earlier legislation was enacted. This would make more sense if Boehner would step up and announce that he now approves of the very sort of tactic that he thought was horrible when it was employed by the other side of the aisle. Again, requests for clarification did not bring any sort of comprehensible explanation.

So what is it? A tax or a fee? Apparently, it’s whatever the politicians want to call it as part of the process of putting spin on what they are advocating. Of course, it would make much more sense to be transparent and honest. The problem with transparency and honesty is that it gets in the way of political power play, and exposes covert political deals for what they really are. And apparently the same sort of labeling is applied to people to fit the accusations that some people want to make. Expediency trumps integrity in post-modern America.

All of this leaves a bunch of Republicans who pledged to vote against tax increases finding themselves voting for tax increases, and thus violating the pledge that they took to an unelected self-appointed individual. Do they really think calling it something other than a tax increase excuses the vote? Apparently the answer is yes, because the person to whom the pledge was made has redefined the definition of what the pledge opposes.

And people wonder why this nation is in a mess. Rather than screaming, “Take back our country,” – and I wonder, from whom? – perhaps they need to vote, “Bring back integrity.” Or at least what little of it once existed in the political process.