MauledAgain

A recent Tax Court decision, Rodrigues v. Comr., T. C. Memo 2015-178, should serve as a warning of how badly things can go when someone is convicted of a crime. Gary Wayne Rodrigues was convicted of mail fraud, health care fraud, money laundering, conspiracy to commit money laundering, embezzlement, and accepting kickbacks to influence operation of a union hospitalization trust fund. He was sentenced to 64 months in prison, ordered to pay a $50,000 fine, and ordered to pay $378,103.63 in restitution to the union. Because Rodrigues had no liquid assets from which to pay the fine and restitution, the government proposed garnishing his pension plan balance. Because of concerns over the tax consequences, Rodrigues established an IRA into which his pension benefits were rolled over, to give him time to arrange another way to pay the fine and restitution. On appeal, his conviction was affirmed, and the trial court ordered the funds in the IRA to be distributed to satisfy the fine and restitution. In the meantime, the union sued Rodrigues, obtained an $850,000 judgment against him, and succeeded in its motion to garnish the gains and interest in Rodrigues’ IRA. Accordingly, the IRA custodian issued a check to the trial court to cover the fine and restitution, and a check to the union for $89,343.98 in partial satisfaction of its judgment. Thereafter, the custodian issues a Form 1099-R to petitioner reporting taxable distributions from the IRA equal to the $517,447.61 that it had paid on behalf of Rodrigues.

Rodrigues reported the $517,447.61 on his tax return, computed a tax of $113,116, but did not pay the full amount of the tax. The IRS assessed the tax shown on the return, filed an NFTL, and then sent a Notice of Tax Lien Filing. In response, Rodrigues submitted a Request for Collection Due Process or Equivalent Hearing, claiming he was not liable for the tax, questioning the legality and validity of the garnishment order, requesting a hearing from prison, and asking the IRS to restore his IRA with interest. The IRS response was returned as undeliverable because Rodrigues did not include an inmate register number in his request. After a long series of communication and attempted communication between the IRS and Rodrigues, the matter ended up in the Tax Court.

The parties agreed that the transfer of the pension benefits into the IRA was not a taxable distribution. However, they disagreed on the tax consequences of the distributions to the trial court and the union. The Tax Court reject Rodrigues’ argument that the distributions were not included in gross income because he did not personally receive them. The court explained that the distributions were constructively received by Rodrigues because they were made in satisfaction of his obligations. The Tax Court also rejected Rodrigues’ argument that he was not taxable on the distributions because he relied on the trial court, the government, and the IRA custodian to comply with the law and they failed to do so in setting up the IRA and distributing funds from it. The court explained that Rodrigues was the one who decided to set up the IRA, and did so to find alternative sources of paying the fine and restitution. The Tax Court did not accept Rodrigues’ argument that the reasoning of the state court judge permitting the union to garnish the gains and interest in the IRA proved that the distributions were not taxable to him. The Tax Court refused to consider Rodrigues’ argument that the garnishment violated the Consumer Credit Protection Act and the Mandatory Victims Restitution Act because it does not have jurisdictions over those types of claims.

The effect of the tax law is to compound the financial cost of the crimes for which Rodrigues was convicted. In addition to being hit with a fine, restitution, and civil judgment, he was additionally hit with a federal income tax liability because those amounts were paid with tax-deferred retirement benefits rolled into an IRA and then distributed from the IRA. There will be some who consider this outcome to be excessive, and those who respond by noting that crime does not pay and the tax outcome is just part of the price that is paid. Though that may be true, I doubt that tax consequences arising from potential fines, restitution obligations, and civil judgments are on the mind of those who engage in this sort of behavior.

Yes, you read that correctly. According to this report, the Alabama House Ways and Means Committee, trying to deal with a budget shortfall, has approved legislation imposing a 40 percent excise tax on, well, it depends on whose explanation is accepted. Some are calling it a tax on porn. The legislator who proposed the tax describes it as applying to “any entertainment product that’s adult in nature, that you have to be over 18 to purchase.” The language of the bill imposes the tax on “gross receipts resulting from the sale or rental of sexually-oriented material the sale or rental of which is prohibited to a minor as defined herein.” The bill provides extensive definitions of “sexually-oriented material.” Exceptions are carved out for movies carrying an R or NC-17 rating, contraceptive devices and medication, and prescription medications “intended to enhance sexual performance or sexual enjoyment.” The definition of sexually-oriented material includes “[a]ny book, magazine, newspaper, printed or written matter, writing, description, picture, drawing, animation, photograph, motion picture, film, video tape, pictorial presentation, depiction, image, electrical or electronic reproduction, broadcast, transmission, video download, telephone communication, sound recording, article, device, equipment, matter, oral communication, depicting breast or genital nudity or sexual conduct as defined herein.”

So assuming this bill is enacted and withstands First Amendment challenges, which is highly unlikely, people in Alabama are going to find themselves paying an excise tax not only on what generally is considered “porn,” but also subscriptions to a variety of mainstream magazines that happen to depict topless people. Keep in mind that the word “breast” in the proposes statute is not modified by the adjective “female.” And what of magazines that contain photographs of paintings of unclothed individuals? Tax lawyers will be wrestling with definitional issues unlike those to which they are accustomed. Courts have struggled in other contexts with the definitions of obscenity and pornography, so tax lawyers will find themselves studying cases and rulings from areas of law beyond the familiar though complex arena of taxation. Sometimes tax lawyers do need to immerse themselves in constitutional law, but this Alabama endeavor will revamp the landscape.

This is not the first time genius legislators have singled out “pornography” for increased taxation. Kansas dabbled in it back in 2005. In the same year, eight senators tried the same thing in the federal Senate. In 2008, legislation was introduced in California, as nicely discussed by Kay Bell. Why did these, and similar efforts elsewhere, fail to get traction? Because the First Amendment prohibits, in the words of constitutional law expert Eugene Volokh, “tying a tax strictly to a product's content. . . . you can't tax Playboy, for instance, unless you also hit Newsweek and National Geographic.”

The only silver lining in this unwise idea is that it will solve one small challenge facing the tax profession. Many people, including most law students, consider tax law to be “boring,” a word I have heard thousands of time in conversations about tax. I’m sure, once I convince my dean and associate dean that there should be a new course called “Porn Tax,” the word “boring” will not enter into commentary. Just like the title of today’s post probably will up the page view count.

Readers of this blog know that I find interesting tax topics when I watch television court shows. Today I add another to the parade that began with Judge Judy and Tax Law, and continued 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, Tax Fraud in the People’s Court, and More Tax Fraud in the People’s Court. This latest episode is the first time I saw a television court show in which a tax return preparer was sued by a client. My guess is that most tax return preparers would not want to appear on television if sued by a client, and what happened in this instance should make them happy with their decision to stay out of the spotlight.

The client had retired from the New York Police Department after 21 years, and received a pension along with a lump-sum payout of deferred compensation. She went to the preparer because her father had used his services for many years. What happened next was disputed. The client claimed that she did not have any discussions with the preparer about the numbers reported on the return. She explained that he did the returns, she signed them, had to pay federal income tax and received a refund from the state. Two years later, she received a bill from the state for $8,000 in unpaid taxes plus $1,600 in interest. She paid all of it, and then called the preparer, who told her that she had asked him not to report the lump-sum payment on the state income tax return and that he had put a note in the file recording this request. Not being satisfied, the client sued the preparer for the interest, alleging that had he done the state return properly she would not have incurred the interest charges.

The preparer claimed that he did not put the lump-sum deferred compensation payment on the state return because the client insisted that he not report it. When asked about the note written to the file, he denied it existed and denied ever having told the client that it existed. He stated that he explained to the client that the state would pick up on its omission and pursue the taxes due on it. He also claimed to have told the client that it was not criminal to omit the income from the state return because it was reported on the client’s federal return. The client denied that this conversation had taken place. The judge asked the preparer why he would fill out a tax return without reporting what he admitted was income. He stated, “I knew it wasn’t criminal” to omit the income, and repeated that defense several times.

The judge told the parties she found it difficult to believe that there had been no discussion about the issue. She mentioned that apparently the plaintiff had offered to meet with the defendant half-way on the interest payment, but the plaintiff disagreed, claiming that the defendant offered to pay one-fourth of the interest. To cap off this dispute, the defendant denied offering to pay anything.

So the judge went Solomon on the parties. She split the amount in question, ordering the preparer to pay one-half of the interest that the client had been charged.

During the post-trial interviews with the show host, the preparer said that next time he would get the conversation in writing if the taxpayer wanted to “push the envelope” and that he had worked with the client because her father had been a client for a long time. The plaintiff, in her post-trial interview, simply stated it was not her fault.

There are so many lessons to be learned from this episode. First, yes, get it in writing and put it in writing. Though writings do not eliminate disputes, they eliminate a good chunk of the you-said-I-said debates. Second, a preparer ought not accommodate a client who wants a return that does not comply with the law. It’s that simple. Third, if the preparer has written a note to the file, keep it, and if necessary, provide a copy to the client. Fourth, if told that a document exists, ask for a copy. Fifth, if claiming that a document exists, bring it to court. Sixth, don’t hang on to a client simply because the person’s relative or friend is a client. If it is time to say good-bye, wave farewell and move on.

Last week, as I browsed my Facebook news feed, I noticed that someone had shared a post called “History Lesson on Your Social Security Card.” As I read it, I recoiled in horror. Lie after lie compounded the utter worthlessness of the content. Curious, I did a search, and found the same content on a variety of sites, including The Financial Physician. Perhaps I am doing society a disservice by sharing a link, because there is a real risk that people will go to that page, read this propaganda, and believe it.

But as I thought about writing a post taking this “lesson” apart, something in the back of my brain woke up and said, “This is familiar. Surely you have written about this.” And so I did another search. I discovered that EIGHT YEARS AGO I did debunk this nonsense, in Social Security Email: Nonsense Breeds Nonsense. Though finding the 2007 post confirmed that my memory still worked, as does my ability to recognize financial garbage when I see it, the discovery disenchanted me. One would think that after eight years, this evil would have been extinguished, especially as other debunkers of outrageous lies, such as the folks at FactCheck and Snopes, had also educated Americans to demonstrate the fallaciousness of what some have called fraud.

As an educator, it is both frustrating and puzzling when members of a species proudly calling itself sapiens sapiens cannot get it right even when given the opportunity to learn. The failure isn’t a failure of the substance. It’s not a failure of the law, nor is it a failure of the tax law or the social security law. It’s a failure resting on some deep flaw in certain humans. Finding the solution is a challenge, but it is a necessity. It might be clever to wonder what would happen if some clown decided to spread claims that the sun rises in the South and just as many people who fell for the “history lesson” succumbed to this “geography tutorial.” At worst, some people would get lost, and others would miss a photogenic sunrise. But what happens when the issue in question is far more serious than sunrise locations or the history of social security? What happens when the lies and the propaganda deal with health care, children’s nutrition, gunfire, cybersecurity breaches, and nuclear weapons? What happens when life or death hangs in the balance while the merchants of fraud do their thing?

I am a firm believer in free speech. Say what you want, and say it out loud and in public so that I, and others, know what is in your brain. But understand that others will point out the flaws in your assertions when the issue is a matter of fact and not one simply of opinion. Tell me that you don’t like chocolate, and I’ll smile and let it go, but tell me that chocolate is made from brussel sprouts and I’ll exercise my free speech rights to explain that you have no clue and thus ought not to be trusted on matters of food origins. But I will do so in ways that help determine whether the nonsense emanating from your mouth, your pen, or your keyboard reflect intellectual deficiency or moral depravity. If it’s the former, I will do all that I can do to help you get through having been duped. But if it is the latter, I will do all that I can do to let the world know that the Great Liar is circulating among us.

It might help to repeat some of what wrote in Social Security Email: Nonsense Breeds Nonsense:

For all of my law school teaching career, I have emphasized to my students that what they think is the "fun" part of lawyering, namely analysis and theoretical policy discussion, cannot begin until the facts are known. Good lawyers know what facts need to be ascertained, and good lawyers know how to find facts, how to interview clients, how to do empirical research, how to find information. There's more to research than finding the law. In many respects, it is easier to find the law than it is to determine the facts.

Many people, including lawyers, are woefully remiss when it comes to checking facts. Baseless rumors are started by the evil, the manipulative, the power-obsessed, the revenge seekers, and the deranged, and they acquire lives of their own. Politicians and their operatives pepper the airwaves and the internet with what must be called by its true name, propaganda. People too lazy, too uneducated, too busy, too disinterested to check the authenticity of what's being said don't simply ignore it, but believe it, and then replicate it, contributing to the spread of nonsense throughout the world.

It is not that difficult nor time-consuming, when encountering claims and assertions, to do a bit of research and fact-checking. Not only does it help snuff out propaganda in its early states, it’s also good exercise for one’s brain. Yes, that brain. The brain that is the justification for appropriating the name sapiens sapiens. It’s time to start living up to that title.

No, I am not the one asking the question. And if I did ask the question, it would not be delivered in a manner suggesting that the answer is no one. And surely there are at least a few people who know taxes better than me.

The person who asked the question was none other than Donald Trump. He made the comment on a radio show in Birmingham, Alabama in late August.

So for Donald Trump, I have some questions to see if you measure up to at least one person who definitely knows taxes very well. Let’s see if Trump has done any of these things:

Mr. Trump, have you read the Internal Revenue Code cover to cover at least twice?

Mr. Trump, have you read the U.S. Master Tax Guide cover to cover for several years in a row?

Mr. Trump, have you read a considerable portion of the Treasury Regulations dealing with taxes?

Mr. Trump, have you read any state taxation statutes?

Mr. Trump, have you read any local tax ordinances?

Mr. Trump, have you done any tax planning?

Mr. Trump, have you drafted any documents intended to implement a tax plan?

Mr. Trump, have you prepared hundreds of tax returns?

Mr. Trump, have you prepared your own tax returns?

Mr. Trump, do you want people to take you statements that the “fair tax is okay” and the “flat tax is okay” as proof you know taxes better than anyone? Because, if you do, for me and many others, those statements demonstrate you know very little about taxation that matters. Certainly not enough to set yourself up as an omniscient tax expert.

But don’t worry, Mr. Trump, you might know more than the other candidates who think themselves qualified to be president of this country. Perhaps the best thing about your claim is that it will trigger all sorts of boasting from other candidates about their tax expertise. If that happens, thank you for triggering more material for this blog.

Controversy is swirling about the posting of a sign by a Shippensburg, Pennsylvania, property owner that stated a $10 parking fee charged for parking on the property would “help support our local school district.” According to this story, the property is an empty lot which the owner makes available for parking during a corn festival and during a community fair. Curious individuals asked school district officials if contributions had been received by the district and they explained they were unaware of any. One official suggested asking the school’s athletic booster club, but it, too, had not received anything. Finally, the property owner explained that the money collected for parking was used by him to defray a portion of his school real property tax on the property. The property owner noted that the tax is more than the property generates in annual income, apparently because it is characterized and valued as commercial property.

Some people think that the sign implied that the parking fees would be transferred to the school district as a charitable contribution or similar donation. The owner of an adjacent property called the sign “a little misleading.” The property owner who posted the sign asserted that it is honest. According to the property owner, people paying the parking fee asked what he was doing with the money, and that prompted the posting of the sign.

Technically and literally, the sign is correct. The parking fee receipts were used to pay taxes, and taxes support the operations of the school district. Yet when people read the sign, many, perhaps most, think that they are contributing to a donation that is over and above the school district’s tax receipts. An even more precise sign would state, “I use the parking fees to defray school taxes on this property.” I have no idea whether this would generate additional complaints about the fee or cause people to park elsewhere, though apparently all lot owners in the area turn their vacant ground into parking lots during these events.

This might start a trend. Every business could post a sign that states, “A portion of our sales receipts helps support our local schools,” or “A portion of our client billings helps support our local police and fire departments.” Technically, this would be true, except, of course, for those who are not paying their taxes. Perhaps employees and unions could bargain with employers by promising that “a portion of our wages helps support the military, national parks, and the environment.”

Or perhaps the next fad will be a button one could wear on one’s jacket or shirt or other article of attire: “I pay taxes. Do you?” Perhaps I’ve given someone an idea. Perhaps that person should pay me a commission for the inspiration. It would be income. I would pay taxes on it. Think of all the things I’d be supporting.

The politicians outdid themselves this time. According to this story, a gerrymandering stunt has backfired, leaving the outcome of a vote on a local sales tax increase in the hands of one person.

When the promoters of the Business Loop 70 Community Improvement District in Columbia, Missouri, decided to finance their projects with a sales tax increase, they were required to comply with a state law that subjects the increase to approval of those who reside in the district. So the promoters gerrymandered the borders of the district so that it would not include any voters. In other words, they redrew the boundary lines to exclude residential properties. It might have worked – as it is unclear how something can be approved if there is no one qualified to vote – but those doing the gerrymandering stunt messed up. They overlooked a residence. And thus, 23-year-old Jen Henderson, a college student, has the only vote. She has suggested she will vote no, because the sales tax increase, as are all sales taxes, is regressive, hurting lower income individuals more than it affects higher-income people. She also noted that the director of the proposed district would benefit from the arrangement.

I dislike gerrymandering. It’s nothing more than manipulation. In this instance, it reflects an attempt to disenfranchise the voters who, under state law, have a right to approve or disapprove a tax that will fall upon them. The promoters want to impose a tax without giving those who are affected a say in the matter. Of course, disenfranchising voters has become a primary weapon in the attempt to take over more than a sales tax issue in one small town in the Midwest. It has become a staple of the oligarchy and its puppets. This time around, the effort backfired. I’m not so confident that next time, with a bigger playing field and more at stake, it will similarly falter. It could, if people would get educated about what is happening behind the scenes. After all, they don’t teach this stuff in our public schools. They don’t want people to know what actually transpires when political maps are redrawn. The best thing about this story is not the oversight by the promoters. It’s the opportunity it presents for Americans to learn that those who claim to be on their side aren’t. That’s the sort of lesson that, if learned too late, brings tears and no recourse.

The anti-tax crowd, along with those who are willing to tolerate minimal taxation but want to cut significantly government spending, must not be very happy with a photo and story making the rounds. I first saw the photo on facebook, where it has popped up multiple times, and so I looked for more information. According to this story, which also includes the photo, Brad Craig of Okanogan, Washington, thanked firefighters for saving his home from one of the many huge fires that are sweeping across Washington and Oregon. Someone thanking public servants for saving their lives or their homes is not particularly startling, and actually is nice to see.

But there’s a twist in this story. In the photo, Brad Craig is seen wearing a t-shirt that says “Lower Taxes + Less Government = More Freedom.” It is a shirt sold by a Tea Party organization, one that opposes funding for federal disaster relief. Federal funds contributed significantly to the cost of fighting the fire that threatened Brad Craig’s house.

So what we have is someone who is opposed to government and taxes but who is quite happy to benefit from taxes and government when in need. There is something woefully inconsistent at work. Someone who truly wants freedom to be free ought to say, “No thank you, I do not accept government benefits, and that means I do not accept your help in saving my home. I will do it myself.”

This situation is but one example of a widespread cultural phenomenon that helps put the “makers and takers” mantra into proper perspective. For example, people who oppose highway taxes don’t refrain from using public roads, and are among the first and loudest to complain when they incur hundreds of dollars in expenses because of potholes. It is human nature to want to take without paying. Rather than pointing the finger at those who allegedly take without making, mostly the poor, disabled, and unfortunate, there needs to be more use of mirrors.

Let’s see how many of the anti-tax, anti-government crowd are willing to give up all public benefits in exchange for not paying taxes. Let’s see how long it takes for those who go that route to cry uncle and surrender. Sometimes things are easier to learn through the experience of practical reality than through theoretical philosophies.

Over at debate.org, TheUnapologeticTruth asked, “Should traffic tickets be scaled to personal income like taxes?” No matter one’s conclusion, it is helpful that this sort of question is asked every now and then to see if circumstances have changed in a manner warranting a change in how traffic tickets are priced.

Those favoring a “yes” answer to the question point out that a fixed traffic fine is but petty cash to a wealthy person but for a poor person it might mean no groceries for a week or two. If the fine is to be a deterrent, argued another, it needs to be set at an amount that has the same impact on rule-breaking driver, something that does not happen if the fine is a fixed amount.

Of those favoring a “no” answer to the question, one person argued that adjusting a fine to reflect income could generate a higher fine for a wealthy person who drives without a seatbelt than for a poor person who is speeding. Another explained that basing a fine on income would be the equivalent of imposing criminal sentences set as a percentage of remaining life expectancy, causing younger convicts to face longer prison terms than older ones. Still another pointed out that the income of the driver does not change the degree of risk to others created by the traffic violation. Yet another noted that under such a scheme, police would prefer to stop the expensive vehicle going 5 mph over the speed limit rather than the inexpensive vehicle going 15 mph over the limit. The final commentator asked if it would make sense to charge a higher-income person a higher fee for trash collection or for water usage.

It is no surprise to me that at the time I examined the web site, the replies were split 50-50. The question is one for which good arguments can be made in support of either response. Yet no one raised the concern that tipped my response to “No.” Basing a traffic ticket fine on income would require each traffic enforcement district, or agency, or court to engage in a determination of an offender’s income. What is income? Is it federal gross income? Federal adjusted gross income? State gross income? Taxable income? Does it include tax-exempt income? And who makes the determination, and how do they do so? Do they “plug into” the IRS or a state revenue department? Do they trust the offender to produce authentic copies of tax returns? Do they provide their own “income determination” form? What happens if, a year or two later, the offender is audited and the final determination is a significant increase, or decrease, in the offender’s federal or state income of whatever sort? Would an additional fine be due? How would the relevant traffic enforcement entity know of the audit?

So my bottom line is, yes, conceptually it is an interesting idea with some valid arguments in support, and with some valid arguments in opposition. But when I turn to practical reality, a benchmark too often overlooked, the answer for me is clearly, “No, it’s not worth it.”

A reader alerted me to an unusual book, Tax the Rude, Not Me!. The examples provided in the preview tend to confirm the depiction of the book as humor. For example, they propose an “outer limits tax” on “infuriating supermarket shoppers who insist on going through the supermarket "express" checkout ahead of you knowing full well they exceed the posted maximum limit” and a “petrie dish tax” on “restaurant customers who use the rest rooms, don't wash their hands, and then dig around in the candy dish at the cash register for their favorite after-dinner mint.” These impositions, even if they somehow were to be enacted, would be fines, or penalties, or perhaps in some instances user fees. In fact, there already exist penalties for littering, which would cover the behavior of smokers “who toss their butts everywhere,” which the authors would subject to a “butthead tax.”

But though it makes no sense to use taxation or even government intervention to teach rude people how to be polite, there is at least one example of an attempt by the private sector to deal with rude people economically. According to this story, the owners of a café in southern France created a variable-price menu in an attempt to reduce customer rudeness. According to the menu, those who requested “a coffee” would be charged five times the amount to be paid by those who said, “Hello, a coffee, please.” Omitting the “Hello” would trigger a price in between those two amounts.

The owner of the café has not actually charged the higher prices. Perhaps it is because customers quickly caught on. The owner explained that his customers’ behavior changed, and in fact many decided to exaggerate their politeness.

Here is what I fear. Modern American tax policy, which is in tatters, is of such a wrecked nature that it is only a matter of time before someone proposes a refundable politeness credit. The form would be fun, would it not? “How many times during 2017 did you hold a door open for another person?” Even better, the audits and the Tax Court litigation.

Seriously, learning politeness begins with those responsible for the education of a child. Tragically, teaching politeness requires an understanding of what politeness entails. It seems to be on a trajectory to oblivion. That’s what happens when greed predominates.

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.