MauledAgain

According to this this story from last week, the state of Michigan and Fiat Chrysler Automobiles have agreed to limit the tax credits available to Fiat in the future. Why? Because the credits are threatening to wreak havoc on the state’s budget.

When the credit was enacted, it was estimated that it would cost the state $1.3 billion in lost revenue. Now it appears it will cost closer to $2 billion. Although Michigan terminated the program four years ago, it did not, and apparently could not, disregard agreements already in place. But it has negotiated amendments to deal with the problem. Limiting the total credit is part of the deal that has been reached.

This situation demonstrates why handing out tax credits to companies that promise all sorts of economic benefits is bad business for states and their citizens. The proponents of these sorts of business credits argue that they generate jobs in the state, and that the jobs generate taxes. The wages that allegedly are created are subject to the income tax. The workers spend their after-tax dollars on items that generate sales taxes. They buy houses and pay real property taxes, or they rent, generating taxable income for landlords, and increasing the value of rental properties, thus generating more real property tax revenue.

That’s all wonderful, in theory. But like most theories, it falls apart when practical reality pops up. If the Michigan tax credit had done what it was promised to do, the increased tax revenues should have more than offset the cost of the credit. But that hasn’t happened, as evidenced by the budget deficits that were spiraling out of control on account of the tax credit giveaway. It’s not just hindsight that suggests the state would be better off without the credits. Careful analysis, free of lobbying dollars and backroom deals, leads to the same conclusion. Fiat claims it has added 15,000 jobs, but those jobs have not produced the tax revenues that would justify handing several billion dollars to Fiat.

Once upon a time, business tax credit giveaways did not exist. The nation prospered. Yet those who clamor for a return to whatever they think constitute the “good old days” don’t seem to advocate returning to the good old days when tax dollars weren’t being handed out to wealthy companies and individuals who don’t need financial assistance from anyone, including governments and ordinary taxpayers.

One of the surface transportation funding bills pending in the Congress contains a provision that would permit the State Department to withhold, revoke, or limit the passport of a person who has a seriously delinquent tax debt in an amount in excess of $50,000. It provides that a tax debt is seriously delinquent if a lien or levy has been put in place with respect to the debt.

One commentator suggests that this approach to collecting tax debts is ineffective. The commentator writes: “I’ve gotta tell you, I had no idea delinquent American taxpayers were willing to have liens imposed upon their property just to avoid paying money they actually have lying around. Maybe it’s all earmarked for a trip to Tuscany? Huh.” The underlying assumption in this comment is that people who owe tax debts don’t have money to pay the debt and thus don’t have money to take vacations. Yet the reality is that more than a few people who owe money, whether to the IRS or another creditor, let the debt sit unpaid while spending money on other items or activities. Legion are the stories of parents who owe child support, don’t pay child support, and yet live lifestyles full of discretionary spending. Some of the cases on television court shows involve defendants who owe money, claim that they cannot pay, and yet are shown to be spending money on a variety of items or activities.

How do they do this? It’s a combination of things. It includes the classic “one step ahead of the bill collector.” It involves moving from one place to another, making it more difficult to be found. It involves stashing cash overseas, beyond the reach of creditors.

Perhaps the legislation will act as leverage. If wealthy Americans are denied passports so that they cannot travel to another country to spend the money they have stashed in that country, and if that other country wants the tourism business, perhaps that other country will have an incentive to participate in shutting down the “stash cash overseas” tax evasion tactic. Or perhaps not. But is there any harm in trying and seeing what happens?

Many years ago, New Jersey enacted a business personal property tax. Among other things, it applies to telephone poles, telephone wires, and switching facilities, including those owned by local municipalities. The tax is paid to those local jurisdictions. One of the companies that pays this tax is Verizon. The tax payable to a particular town applies to Verizon if its market share for phone service in that town is more than 51. According to this report, the amount of this tax being paid by Verizon to some towns has been decreasing, and the number of towns in which the tax payments have been decreasing has been increasing. The reason is simple. People are abandoning traditional landlines and turning to cell phones, internet-based telephone, and similar new technologies. The amount of revenue in question is substantial. Even as recently as 2009, Verizon paid more than $50 million in business personal property taxes to New Jersey towns. At least 143 towns in the state are looking at revenue decreases. One town, for example, that collected almost $16,000 in business personal property taxes two years ago will receive a little more than $3 this year. Some towns have lost revenue measured in six digits.

Towns that have sued Verizon have lost. The issue is how market share is calculated. At best, as newer technologies displace old, it’s only a matter of time. Even if a particular town can demonstrate that Verizon’s market share is, for example, 53 percent, it only will be a matter of one or two years before it slips below 51 percent. From a long-term perspective, litigating the market share issue buys little and might not even be cost effective.

As a consequence of losing business personal property tax, towns are turning to other revenue sources, such as the property tax. This shifts the cost of public services from the business sector to the homeowner sector. Some citizens consider this to be an inappropriate outcome. Perhaps it is. But the solution rests with the state legislature. State legislatures, just like Congress, are notoriously sluggish when it comes to enacting legislation that deals with changes in technology, society, and culture. The problem reaches not only taxation but other areas of law as well. When the subject of a tax fades away, a replacement tax is necessary. If a legislature waits too long to enact the replacement or amend the existing tax, the revenue fix ends up looking like a dreaded “new” tax even though it isn’t new in that regard.

When a government enacts a tax on something that isn’t necessarily long-lived, it runs the risk of losing the tax base. On the other hand, imposing a tax on something that is likely to exist for a long time makes more sense. Pennsylvania, for example, does not tax equipment but instead taxes real property owned by utilities. Thus, it does not matter whether the utility is offering wire or wireless communications. The longer New Jersey waits to fix this problem, the greater the chances that the outcome will be disadvantageous for the towns and for those who pay local property taxes.

It is not uncommon for someone who has been the beneficiary of a gift, a favor, or a helping hand not only to say “Thank you!” but to close out the encounter with “Thanks again!” It never hurts to repeat an expression of gratitude. Nor does it cost anything. Once again we have come to the time of the year when we focus on saying “Thank you” even though that does not mean the rest of the year is, or should be, thankless.

For as long as I’ve been writing this blog, I’ve been sharing a Thanksgiving post to express my gratitude for a variety of people, events, and things. Aside from 2008, when I did not post and I don’t have any recollection of why or how that happened, I’ve dedicated a post on or around Thanksgiving. I started in 2004, with Giving Thanks, and continued in 2005 with A Tax Thanksgiving, in 2006 with Giving Thanks, Again, in 2007 with Actio Gratiarum, in 2009 with Gratias Vectigalibus, in 2010 with Being Thankful for User Fees and Taxes, in 2011 with Two Short Words, Thank You, in 2012 with A Thanksgiving Litany, in 2013 with “Don’t Forget to Say Thank-You”, and in 2014 with Giving Thanks: “No, Thank YOU!” .

As I stated the past two years, “I have presented litanies, bursts of Latin, descriptions of events and experiences for which I have been thankful, names of people and groups for whom I have appreciation, and situations for which I have offered gratitude. Together, these separate lists become a long catalog, and as I have done in previous years, I will do a lawyerly thing and incorporate them by reference. Why? Because I continue to be thankful for past blessings, and because some of those appreciated things continue even to this day.”

The idea of a finite list suggests that there is some sort of limit on what deserves gratitude. That is not the case. The simple reason for a finite list is the absurdity of an infinite list, which, given enough time, I probably could compile. With that caveat, here are some of the things that brightened 2015 for me:

• I am thankful that I have the time to travel to Rhode Island to visit my grandson (and, yes, his parents!).
  
• I am thankful that a bunch of new databases have appeared on genealogy web sites, letting me enlarge the various family histories I have been compiling.
  
• I am thankful that after two years of searching, my congregation identified and elected a new pastor/head of staff.
  
• I am thankful that the chancel choir continues to accommodate my oversight, enduring seating charts and dozens of emails.
  
• I am thankful that I had a chance to visit yet another Grand Canyon, this one much closer to home.
  
• I am thankful that the refrigerator did not need to be replaced and that a higher temperature in the freezer was a normal part of the defrost cycle.
  
• I am thankful for the people who have held doors open for me, and for those who have said thank you when I held doors open for them.
  
• I am thankful for all the people who, one way or another, have done, written, or said things that have inspired posts for this blog.
  
• I am thankful that my immigrant ancestors weren’t required to wear badges..

Nine years ago, in Giving Thanks, Again, I shared my Thanksgiving advice. I liked it so much that I repeated it again, in 2009 in Gratias Vectigalibus, yet again in 2013 in “Don’t Forget to Say Thank-You”, and even again in 2014 in Giving Thanks: “No, Thank YOU!” . For me, it does not lose its impact:

Have a Happy Thanksgiving. Set aside the hustle and bustle of life. Meet up with people who matter to you. Share your stories. Enjoy a good meal. Tell jokes. Sing. Laugh. Watch a parade or a football game, or both, or many. Pitch in. Carve the turkey. Wash some dishes. Help a little kid cut a piece of pie. Go outside and take a deep breath. Stare at the sky for a minute. Listen for the birds. Count the stars. Then go back inside and have seconds or thirds. Record the day in memory, so that you can retrieve it in several months when you need some strength.

I am thankful to have the opportunity to share those words yet again.

Recently on the ABA-TAX listserv, the “how long must I retain past years’ tax returns?” question resurfaced. And again, all sorts of advice was shared. Three years. Seven years. Ten years. Scanning and digitizing old returns also was suggested, though some think the time, effort, and cost isn’t worth it.

I have written about this issue several times. In Why the “Toss Tax Records After Three (or Seven) Years” Advice is Bad, I shared the adverse consequences to a particular taxpayer of failing to keep tax records. In The Importance of Tax Record Keeping and The Aggravation of Tax Paperwork, I have stressed the need to be careful with respect to generating and retaining records for tax purposes. It may be an inconvenience, and it may contribute to paper or digital clutter, but it is essential.

Eleven years ago, in To E-File or Not to E-File: That is The Question, I noted:

Though some people don't hold onto their tax returns for more than say, 3 or 7 years, relying on the statute of limitations, I recommend holding onto all returns, if for no reason other than to maintain records of basis and to guard against the strange day when the IRS claims a return from some years ago was not filed, which would open the statute of limitations, and which can be rebutted quite easily by providing a copy of the return.

Last week, in a webinar, an IRS expert on S corporations explained that tax returns from previous years can help taxpayers figure out their adjusted basis in S corporation stock. Though I would expect this to be common knowledge in the tax practice world, the IRS apparently thought it necessary to drive the point home. Perhaps they had been noticing the listserv discussion and the many websites advocating tossing out tax returns after three or seven years.

And, of course, it’s not just adjusted basis in S corporation stock that requires examination of previous years’ tax returns. And it’s not just tax returns. When a person sells his or her home, and needs to determine adjusted basis, how old are the records proving the cost of improvements made to the property? Often they are more than three or seven years old. The ability to separate value from clutter is important. Yet very few people learn this skill in school, only some learn it from their home environment, and many end up suffering because they aren’t aware of the need to distinguish between the two. Is it time for me to create and teach a new course?

We are told by Katie Pavlich that “Carly Fiorina has proposed a three page tax code” and that ”This is what it looks like.” Curious, I took a look. It’s certainly out of date, or would require a lot of amended returns, because it would be effective for taxable years beginning after December 31, 1994. Other than that, it suffers from the same flaws afflicting every simplistic and unrealistic flat tax plan. In its effort to avoid anything requiring critical thinking, the proposal leaves unanswered all sorts of questions. Policy concerns aside, and there are piles of bad policy decisions implicit in the thing, a taxpayer trying to comply with this sort of statute would be stymied. What happens, for example, if a customer writes a check to a business on December 30, mails it on December 31, and it arrives at the business office on January 2? In what year does the business report it as income? Oh, the flat tax crew would argue, it makes no difference because the rate is the same. Clearly, the absence of any provisions dealing with method of accounting or timing suggests that the concept of time value of money is totally alien to these folks. How would installment sales be reported? How would a taxpayer computed gain? How would debt be treated? Check out the use of the term “dependent” in section 201(a)(2), look at the definition of dependent in section 201(a)(4), and try to synchronize them.

There are rules that prohibit people from performing open heart surgery if they lack the appropriate education, training, and certification. Ought there not be a similar rule that prohibits people lacking the appropriate education, training, and certification from designing tax, or any other sort of, law? Oh, wait, the folks who advocate the “flat tax” are almost coterminous with those who want to rid the world of government regulations. I wonder what they will be thinking when they’re being wheeled into the flat-line operating room. Good luck.

Readers of this blog know that I am not a fan of tax break giveaways to wealthy corporations as rewards for moving jobs from one state to another. Job relocation is not job creation. One of the states that engages in this game of giving to the rich is New Jersey. As I’ve described in When the Poor Need Help, Give Tax Dollars to the Rich, Fighting Over Pie or Baking Pie?, Why Do Those Who Dislike Government Spending Continue to Support Government Spenders?, When Those Who Hate Takers Take Tax Revenue, and Where Do the Poor and Middle Class Line Up for This Tax Break Parade?, New Jersey has handed out tax dollars to companies that are doing well for themselves, claiming that by doing so New Jersey residents would get jobs. Instead, the employees of those companies keep their jobs.

Now comes commentary about the effectiveness of these sorts of tax breaks for the corporate wealthy. Joel Naroff summarizes a report by KPMG and the Tax Foundation comparing companies that receive these tax breaks with the companies that do not qualify for them. The summary matches my previous conclusions: “But when it comes down to it, the tax breaks usually just move firms around a region and, on net, rarely yield much.” Well, they rarely yield much for the taxpayers footing the bill, but they yield quite a bit for the corporate owners who are already drowning in cash and profits. New Jersey has handed tax breaks to such impoverished outfits as the Philadelphia 76ers, Lockheed Martin, and Subaru.

The report also reveals who creates the new jobs, and it’s an eye opener. Of the new jobs created in a state, 80 percent are generated by companies already operating in the state. Another 19 percent are generated by companies started up in the state. A mere one percent comes from companies that relocate into the state or that decide to remain in the state when faced with the option of leaving. In New Jersey, which, according to Naroff, “opens its wallets wide when it comes to new companies,” ends up imposing high taxes on its resident companies while letting businesses that come into the state pay low taxes even though they are not among the 99 percent creating jobs.

And that brings up the next issue. The owners of companies doing business in a state that see tax breaks being handed to out-of-state companies that bring jobs across the border must wonder why they should stick around and contribute to state-funded increases in local competition. A state that hands out tax breaks, and gets next to nothing in terms of new job creation, risks watching its native companies head out for another location. And that produces, not job creation, but job loss for the state.

The CNN Reality Check Team fell down when it fact-checked the latest Republican Presidential Debate. Among the many assertions made by the candidates that came within the scrutiny of the CNN team were two claims about taxation. Carly Fiorina informed the world that the tax code consists of 73,000 pages. Ted Cruz told everyone that there are more words in the “IRS code” than there are in the Bible.

When I read the CNN Reality Check Team’s response to Fiorina’s claim, I was delighted. The team explained that Fiorina probably was “referring to an oft-cited report from CCH” that contains more than 72,000 pages, but that the tax code is only a small part of it. The team correctly noted that most of the almost 73,000 pages consisted of regulations, explanations, and legal analysis. I even deluded myself for a moment that someone on CNN’s Reality Check Team had read one or more of my posts on the question. In a series of posts beginning with Bush Pages Through the Tax Code?, and continuing with Anyone Want to Count the Words in the Internal Revenue Code?, Tax Commercial’s False Facts Perpetuates Falsehood, How Tax Falsehoods Get Fertilized, How Difficult Is It to Count Tax Words, A Slight Improvement in the Code Length Articulation Problem, and Tax Ignorance Gone Viral, Weighing the Size of the Internal Revenue Code, Reader Weighs In on Weighing the Code, Code-Size Ignorance Knows No Boundaries, and Tax Myths: Part XII: The Internal Revenue Code Fills 70,000 Pages, I explained why the Code is nowhere near 70,000 pages, how the misinformation was developed and spread, and why the Code is no more than two thousand pages long. The 70,000-page claim, or one of its variants, is silly, easily debunked, and indicative of America’s tax ignorance, yet it is sustained by those who use it as a vote-grabbing ploy as well as by those who do not want to pay taxes though they enjoy the benefits of government revenue.

But when I read the next assertion analyzed by the CNN Reality Check Team, it became clear that I had deluded myself into thinking that anyone on the team had read any of my commentary on the issue of tax code size. The team relied on a statement by the IRS Taxpayer Advocate describing the code as having “reached nearly 4 million words.” It concluded that Cruz was correct, because the Bible contains about 800,000 words. But as I explained in and Tax Ignorance Gone Viral, the IRS Taxpayer Advocate reached the wrong conclusion because she, or someone on her staff, simply used a word processing program to count the words in an annotated version of the Code, that is, an edition that contained extraneous information that is not part of the Internal Revenue Code. The CNN Reality Check Team actually noted that the count had left in “components such as amendment descriptions and cross-references,” which any intelligent person would realize meant that more than the words in the Code itself had been counted and included in the 4 million total. But another aspect of thinking things through should have caught the attention of the team. The team had concluded there were 2,652 pages in the Code. It also agreed that there are 4 million words in the Code. That works out to 1,508 words per page. Either the font is microscopic or the pages are on the order of three feet by two feet. There are about 400,000 words in the Code, or about half of what is in the King James version of the Bible.

Of course, I sent feedback to CNN, though its web pages make it challenging to do so, and do not provide any way of sending a reaction to the team or the two members of the team whose names are attached to the analyses of the Fiorina and Cruz tax code nonsense. So far, I've had no response and have not seen any published correction. One would think that a news organization would welcome, and find ways to encourage, acquisition of information that enlightens its viewers and readers.

For all of the talk from candidates about jobs, do they not realize that without education the chances of creating or finding a job are significantly reduced, if not eliminated? For all of their talk about international competitiveness, do they not understand the advantage of education and the detriment of ignorance? However understandable, though outrageous, it is for candidates to spew nonsense and misinformation, it is even more threatening to the survival of democracy for journalists to participate in this behavior and to fail to do sufficient research, or even to make it possible for research to be handed to them, free of charge.

I’ve been asked by readers why this issue of Internal Revenue Code size repeatedly gets my attention. It’s not the issue in and of itself. My concern is that twisting such simple facts is but the tip of the iceberg when it comes to the twisting of facts on other, and more serious, issues. Lying for the purpose of advancing an agenda not only is wrong, but also suggests that the agenda is deficient, because if it cannot gain support when the truth is told, it ought not be advanced. As long as Americans buy into the ignorance, the nation will continue sliding on its downward path to the disappearance of democracy and freedom. Count on it.

Several days ago, a Philadelphia Inquirer reader expressed bewilderment at the different inflation adjustment rates used for different federal purposes. Jim Ryan noted that no cost-of-living adjustments would be made to social security recipients in 2016 because there was no inflation in 2015, yet the inflation-indexed rate for U.S. savings bonds was set at 1.54 percent, and the IRS adjusted the 2016 tax brackets by 2 percent because of inflation. Ryan concluded, “Nice to see the different sectors of our government rowing together.”

Each government department or agency that computes an inflation adjustment does so in accordance with a formula provided in a statute. The formula for one adjustment is not necessarily the same as the formula for another. Different indexes of inflation are used. The benchmark year differs. Depending on what is being adjusted for inflation, one or another index is used. Some of those indexes are explained by the Federal Reserve. Does it make sense to use different indexes? Yes. The index used to adjust tax brackets is the Consumer Price Index. The index used to make adjustments to social security payments is the Consumer Price Index for Urban Wage Earners and Clerical Workers, known as CPI-W. Does it make sense to use different benchmark years? Maybe.

But, in any event, the reason that the “different sectors” of government are using different formulas for computing inflation is the difference among the governing statutes. Has the Congress studied these inflation adjustments from an overarching perspective? No. Even the different dollar amounts in the Internal Revenue Code are treated differently; some are indexed, and others are not. The same index is not used for all of the adjustments. The reason? It depends on how much revenue loss can be absorbed in the revenue estimates. In some instances, inflation adjustments are omitted because doing so reduces the revenue loss over the long-term periods used in the budgetary analysis.

Does it make sense to do things this way? Perhaps. Should there be an overarching review of inflation adjustments throughout federal statutes and programs? Yes. Is it going to happen? I doubt it. Who is responsible? Congress. And that’s why I doubt it will happen.

A recent tax case, not unlike many other tax cases, provides a disappointing insight into human nature. Unlike cases involving improper exclusions and unjustified deductions, this case poses the question, “What should I do if someone makes a mistake in my favor and pays me twice?” In Willson v. U.S., No. 14-1109 (D.C. Cir. 6 Nov 2015), the Court of Appeals for the D.C. Circuit provided the answer that most people would give.

The problems for the taxpayer began in 2005. When filing his 2004 federal income tax return, the taxpayer determined that he overpaid his taxes by more than $28,000. He applied the overpayment as a credit on his 2005 return. A year later, that credit was more than enough to cover his 2005 liability, so he applied the remaining $13,193.55 overpayment to his 2006 return. In 2007, when filing his 2006 return, the taxpayer computed a zero liability, qualified for a refundable $30 credit, and ended up with a $13,223.55 overpayment. This time, the taxpayer requested a refund of $10,000 and applied the remaining $3,223.55 as a credit for subsequent returns.

As simple as that is, the IRS made a mess. When it processed the taxpayer’s 2006 return, it did not apply the $3,223.55 as a credit for future years. Instead, it send a check for $13,223.55 rather than the $10,000 that was requested. When the taxpayer filed his 2007 return, the IRS applied $13,223.55 as a credit from the 2006 overpayment. In other words, the IRS somehow managed to take one $13,223.55 overpayment and turn it into a $13,223.55 refund AND a $13,223.55 credit. The IRS increased that credit by a $600 tax relief credit and $85.48 in interest, applied $3,223.55 as a credit for 2008 and thereafter, and made a direct deposit of $10,685.48 to the taxpayer’s bank account.

When the IRS figured out it had done something wrong, it reversed the overpayment credit for the 2006 taxable year, which created a $13,193.55 tax liability for that year. In March 2011, the IRS sent the taxpayer final notice of intent to levy on his property to recover that amount. The taxpayer requested a collection due process (CDP) hearing. As that procedure moved along, the IRS processed the taxpayer’s 2009 return, which reported an overpayment credit, from 2007 and 2008, of $2,206.55. Because the taxpayer, in March 2010, had paid $100 applied to his 2009 liability, the IRS increased the 2009 overpayment to $2,306.55. The IRS did not refund this amount, nor did it apply it as a credit for subsequent years. Instead, it applied it as an offset to the $13,193.55 2006 liability created by the overpayment credit reversal.

It was at this point that the taxpayer realized he had received his expected refund twice. On May 24, 2011, he sent a letter to the IRS acknowledging he had received more than he was due, estimated the overpayment to him was about $10,000, and enclosed a check for $5,000 “not as payment for the 2006 demands which are clearly errors but as an immediately affordable amount to being returning an overpayment made entirely as an IRS error.” He offered to pay another $6,000 over three years.

On July 6, 2012, the IRS Appeals Office issued a final notice of determination sustaining the proposed levy. The $13,193.55 had been reduced by the $5,000 payment from the taxpayer and the $2,306.55 2009 overpayment, to $5,887. The taxpayer appealed the IRS determination to the Tax Court. The IRS conceded it was not permitted to collect the duplicate refund by creating a new assessment for 2006. Its options were to pursued an erroneous refund action, for which the statute of limitations had expired, to accept the taxpayer’s voluntary repayment, or to exercise its common-law right to offset a debt owed to the government with a debt owed to the taxpayer provided it did so within two years of the date of the erroneous refund. Because the assessment for 2006 was improper, the IRS abated the assessment, leaving a zero balance on the taxpayer’s 2006 liability. It determined it was barred by the statute of limitations from applying the 2009 overpayment to the refund, and refunded that amount to the taxpayer.

At that point, because there was no unpaid liability and no pending levy, the IRS moved to dismiss the case as moot. The taxpayer objected. The IRS had not refunded the $100 tax payment made in March 2010, which was within two years of the erroneous refund. The IRS did not return the $5,000 the taxpayer paid voluntarily in May 2011. The taxpayer requested that those amounts be returned and that the Tax Court had the power to order the requested repayment. The Tax Court disagreed, and the taxpayer appealed.

The Court of Appeals affirmed the decision. It held that the Tax Court’s jurisdiction was limited to the tax liability underlying the proposed levy. The underlying tax liability had been abated. The $5,100, according to the court, was not held against an underlying tax liability but was retained to recover an erroneous refund. The debt created by an erroneous refund is not a tax liability. Instead, it is an amount owed to the government by reason of unjust enrichment. The Court dismissed the taxpayer’s other arguments contesting the levy because the proposed levy would not occur due to the abated assessment.

It is unclear why the taxpayer sought the return of the $5,100. What makes it even more puzzling is that the taxpayer acknowledged he had received a double refund, had returned part of it, and proposed paying back the rest. Once the IRS abated the 2006 liability, the taxpayer was no longer at risk of losing property to levy, and thus had the choice of paying back the rest of the erroneous refund, doing nothing, or seeking a return of the $5,100. Rather than paying back the balance, and rather than doing nothing and taking the benefit of a windfall caused by an error, the taxpayer went for a much bigger windfall. In other words, the taxpayer argued for an outcome that amounted to a right to keep a duplicate refund. Whatever the law might provide or require, the decent thing to do is to return the money.

Most people don’t end up with duplicate refunds from the IRS. But many people have experienced store clerks handing them too much change. I have had that experience. What have I done? What I have done has brought gasps of “thank you” from store clerks who would have been held accountable personally for the error. And that just would not have been right. The sad part is that there are people who disagree with me. And they have told me so. The happy part is that they are outnumbered by those who agree with me. So what would you do if you happened to receive duplicate, or, can one imagine, triplicate, refund checks?

Tom Giovanetti, of the Institute for Policy Innovation has released a commentary criticizing the myRA, Treasury’s latest retirement savings opportunity. He makes several good points, including the fact it doesn’t offer anything more than existing Roth IRAs, the fact it invests only in Treasury securities, and that the rate of return is on the low side.

Had he stopped at that point, the commentary would not have inspired me to write anything. But Giovanetti then proceeded to offer this claim:

Workers don't have money to save because of 1) the increasingly anemic Obama economy, 2) skyrocketing health insurance premiums mandated by Obamacare, and 3) the Social Security payroll tax, which comes out of the first dollar of a worker's earnings and funds a Social Security benefit that doesn't even keep up with inflation for most recipients.

He couldn’t be more wrong. Workers don’t have money, to save or spend, because the oligarchs are jacking up corporate CEO salaries while cutting the pay of rank-and-file employees, with more than 95 percent of economic gains over the past seven years benefitting the top one percent. The economy has grown, but only to the benefit of the oligarchs, and to the extent it is anemic, it is because consumers lack money to make purchases, in turn a consequence of stagnant rank-and-file wages, the trimming of worker hours to spare the oligarchs the cost of paying for worker benefits, and the laying off of employees as huge corporations gobble up other businesses and sack the employees of the acquisition. Health insurance premiums are skyrocketing because private companies, which exist to make profits, are doing what profit-seekers will do in the absence of any countervailing pressure, namely increase revenues by increasing prices. And as for the social security tax being a problem, that tax has existed when the economy was robust and rank-and-file shared in the nation’s prosperity, and it has existed when the economy has stagnated or regressed. Thus, if it is to be blamed for stagnation in the economy it also should be credited with economic prosperity.

Isn’t it time for those who have created the economic mess to admit that there is a mess and that what was done has failed? Isn’t it time for those who keep singing the praises of those who messed up the economy to admit that they are fans of losers, and to shift their allegiances and advocacy to what worked in the past and ought to be revived?

Everyone who reads MauledAgain knows that I consider the increasing income and wealth inequality in this country to pose serious short-term and long-term effects on its economy. In the long run, income and wealth inequality makes it quite likely that there won’t be any income or wealth. In other words, income and wealth inequality sows the seeds of income and wealth destruction.

Now comes news that income inequality is “transforming the chocolate business.” According to Hershey Co., the “growing gap between low and high-income households .. . has changed buying patterns.” High-income consumer are shelling out big bucks for premium brands, and low-income consumers are making fewer shopping trips, thus reducing the impulse purchase of chocolate (and other items).

Hershey calls it “consumer bifurcation.” In other words, those who share in the new prosperity exist in a market close to those who have been shut out of the new prosperity. Hershey is not alone, as other companies, such as Campbell Soup, have experienced the same consumer bifurcation.

I doubt that those who consider income and wealth inequality to be a good thing care one whit about its effect on chocolate consumption or, for that matter, the availability of any other sort of consumer product. But eventually they will, as they discover, just as these food companies are discovering, that a healthy economy is demand-driven. Demand drives supply because it creates a market. Supply does not drive demand because demand cannot exist when income and wealth are concentrated in a few. Perhaps now that people are finding chocolate to be more expensive and are consuming less, they might devote some serious time to thinking and learning about economics. Part of me, though, thinks it won’t happen until consumer bifurcation reaches the coffee market. Then we might see some very angry consumers.

According to a recent story from Finland, authorities in that country are cracking down on restaurants that sell pizza for less than six Euros. Their rationale is that in order to sell pizza at that low of a price, the sellers must be evading the taxes that are due. So they are asking customer to report restaurants selling pizza for less than that price. This presents several questions.

First, would people not be tempted to avoid reporting places where they can get good deals on pizza? Knowing why they’re being asked to provide information to law enforcement officials, are they not likely to conclude that doing so would cause closure of their favorite pizza shop?

Second, is it not possible to question the reasoning of the authorities that brought them to the conclusion that cheap pizza equals tax evasion? According to the authorities, roughly one-third of the cost of a pizza covers ingredients, another one-third covers labor, and the rest is split among rent, miscellaneous fees, and taxes. Is it not possible for a pizza seller to find a good deal on rent or ingredients? Of course, perhaps there is some law-breaking underway but it’s not necessarily tax evasion. Are they skimping on wages? Are they obtaining cheap ingredients from an unsafe or unregulated source, or perhaps on a black market? Or perhaps some pizza shops are bringing in other revenue under the table. Are pizzas being sold as a cover for the sale of other items? Or perhaps an effort is underway to take over competitors by pricing them out of the market.

Seems to me that the best way to figure out if taxes are being evaded is to audit the pizza shops. Compare the volume of observed and reported transactions, and the taxes due on them, with the actual taxes being paid. Otherwise folks in Finland will end up being asked or required to report every transaction that they think is a “good deal.”

It’s a familiar story. A private sector business asks for special tax breaks and taxpayer funding for an enterprise that already is extremely profitable and that will continue to be profitable. The justification is that the business generates economic benefits for the public at large. Some of the most egregious instances of this money grab occur in the professional sports industry. I wrote about this eleven years ago in Tax Revenues and D.C. Baseball, and three years ago in Putting Tax Money Where the Tax Mouth Is, Taking Tax Money Without Giving Back: Another Reality, and Public Financing of Private Sports Enterprises: Good for the Private, Bad for the Public.

Now comes a report that the taxpayers of St. Louis are going to be on the hook for financing a good chunk of the cost of building a new football stadium in that city for the St. Louis Rams. The proposed legislation, which the politicians hope “is generous enough” for the impoverished folks of the NFL, would give to the team two-thirds of taxes generated by the stadium. The city and the state would be required to come up with $390 million of the cost of the $1 billion stadium, in addition to giving up two-thirds of the tax revenue. Allegedly an NFL executive considered tax dollars used to finance the city’s share of the construction costs to be “private dollars, not public.”

It is unclear, according to several city officials, how the numbers add up. Under the current arrangement for the existing stadium, the city collects $4 million a year in tax revenue from the team but pays $6 million each year to pay down construction debt. An assistant to the mayor projects that under the proposed deal, the city will continue to pay $6 million annually but receive only $2 million in tax revenue. Supporters of the proposal claim that the city will receive additional revenue from the construction and that the tax revenue might grow more than is expected.

As I asked in Where’s the Promised Trickle-Over?, where is the guarantee that this will work for the taxpayers as promised? Why are those who so intensely claim that the latest giveaway to the wealthy will benefit everyone else so reluctant to ensure that if it doesn’t work out as promised that they will step up and make up the shortfall? The answer is that they know that these deals do not deliver as promised, but they’ve learned the tricks of selling bad deals.

The same people who are quick to complain about spending and tax breaks that help people in need are just as quick to insist on spending and tax breaks that enrich the rich. The claim that it helps those in need has been disproven repeatedly. When people complain that a state or local government fails to support highway maintenance, education, environmental protection, and public health, do they ever consider that the shortage is attributable to giveaways to those who are the first to condemn “takers”? The perspective that taking is good when it benefits the wealthy but is bad when it benefits those in need reflects a deeper outlook. The notion that those in need are in that condition because they are lazy, and that those who have wealth and deserve even more because they are hard-working flies in the face of reality. There are plenty of people who want to work but cannot for a variety of justifiable reasons, and there are too many people who are wealthy simply because of the accident of birth or other incident of sheer luck. It is time for the self-designated “makers” to make something more than increased wealth for themselves.

The NFL and its teams, as well as the other professional sports leagues and franchises, do not need financial assistance from the public. They do not need, and ought not seek, additional funds that require increased taxes for others or reductions in public benefits for everyone else. If a professional sports league or one or more of its teams cannot survive on its own revenue and must go out of business, so be it. People who want these enterprises to succeed can patronize them, and find other ways to support them financially without shifting that burden to others.

From the outset, I have made it a point to work Halloween into MauledAgain, usually looking for the silly or goofy but occasionally taking a more serious approach. The posts began with Taxing "Snack" or "Junk" Food (2004), and have continued through Halloween and Tax: Scared Yet? (2005), Happy Halloween: Chocolate Math and Tax Arithmetic (2006), Tricky Treating: Teaching Tax Trumps Tasty Tidbit Transfers (2007), Halloween Brings Out the Lunacy (2007), and A Truly Frightening Halloween Candy Bar (2008), Unmasking the Deductibility of Halloween Costumes (2009), Happy Halloween: Revenue Department Scares Kids Into Abandoning Pumpkin Sales (2010), The Scary Part of Halloween Costume Sales Taxation (2011), Halloween Takes on a New Meaning and It Isn’t Happy (2012), Some Scary Halloween Thoughts (2013), and The Inequality of Halloween? (2014).

Now we learn that the issue I noted in Halloween and Tax: Scared Yet? (2005), the different sales tax treatment in some states between candies made with flour and those that are not, has caught the eye of the consumer. Flour is used in candies such as licorice, KitKats, and Nestle’s Crunch. In a Napa Valley Register commentary, Jill Cataldo describes the bewilderment faced by her sister when her sister noticed that the sales tax on Twix bars was much lower than the sales tax on Snickers purchased for the same cost. Cataldo did some research and discovered what I had described ten years ago, that in her sister’s state and in many others, the presence of flour in an edible item causes the item to be classified as “not candy” and thus subject either to a lower sales tax or no sales tax. So, as she points out, chocolate covered cherries are candy and thus receive less favorable sales tax treatment. Chocolate covered pretzels are treated as “food” and either escape sales tax or are taxed at a more favorable rate.

Cataldo made the point that consumers looking to save a few pennies on Halloween candy purchases should look for those items that contain flour. I wonder how many people can make a list, without looking it up, of so-called candy that is treated as food under sales tax laws because they contain flour. However many people can do so, I’m confident that the number of people who can explain why this difference exists is far fewer. I can guess, but it really makes no sense to conclude that the inclusion of flour makes the item sufficiently nutritious to deserve more favorable sales tax treatment.

The most important question, though, is how many people are going to hand out Kit Kat bars or Nestle’s Crunch and tell the children, “This really isn’t candy.” My guess, and hope, is zero, because I can’t imagine anyone wants the youngsters running through the neighborhood shouting, “Those people gave us something that they said isn’t candy,” or, worse, “Those people have problems, because they gave us candy and said it wasn’t candy.” I prefer to have a repeat of what the children exclaim when they leave my front door, “He’d giving out Reese’s Peanut Butter Cups.” Indeed. Truly nutritious food. How scary is that notion? Happy Halloween.

There is a tax parade, and apparently the poor and middle class haven’t been invited. For those struggling to get by, if they can get into this parade there are some dollars at the finish line. Lots of dollars.

Where is the parade? The one that has my attention is in New Jersey, but there are similar parades all over the nation. The New Jersey parade gives away tax dollars to prosperous corporations. Why? Because those corporations threaten to leave New Jersey or to refrain from coming to New Jersey even though at least some of them don’t have much of a choice. Here are some of the featured participants:

• The Philadelphia 76ers, as described in In When the Poor Need Help, Give Tax Dollars to the Rich.
  
• Lockheed Martin, as described in Fighting Over Pie or Baking Pie?.
  
• Subaru, as described in Why Do Those Who Dislike Government Spending Continue to Support Government Spenders?.
  
• Berry & Homer, as described in When Those Who Hate Takers Take Tax Revenue

And now comes news that the parade has lengthened. This time, it is Eggo Co., a subsidiary of Kellogg, and Clean Green Textile Service. As was the case with the other handouts, there is nothing to ensure that the promised jobs and other economic benefits will accrue to residents of Camden or others in economic distress. Policy analysts contend that no matter how long these corporations remain in their new locations, the state loses money. Considering that the previous entrants in the parade have not generated jobs or economic benefits anywhere near what was promised, it is understandable that those who look closely at the arrangements can see that the only winners are the corporations getting these tax breaks. In When Those Who Hate Takers Take Tax Revenue, I wrote:

One of the arguments put forth by the anti-government-spending folks is that it is bad morally, socially, and politically to collect taxes from one group and to disburse the receipts to another group. These folks like to brand the first group as “makers” and the second group as “takers.” Yet when the takers are their friends and allies in the movement to feudalize America, not a peep is heard from them.

New Jersey, governed by a member of the political party that is trying to consolidate its power by demonizing “takers,” provides an excellent example of the hypocrisy entrenched in this modern reverse Robin Hood philosophy. * * *

Though this tax revenue giveaway game has been underway for several years, there is no sign that the economic condition of Camden’s residents have improved. The folks in Trenton who rail against government spending cut education spending, job training spending, social welfare assistance, and a variety of other expenditures denounced as enabling “takers” to feed at the public trough. Yet in the meantime, a state that faces deficits in its transportation infrastructure budget continues to funnel taxpayer dollars into the hands of companies with sufficient political connections to snag some funds for themselves. * * *

At what point will enough voters see through the con game and send packing the takers who took over political control by demonizing takers? When will political hypocrisy disappear? At what point will people realize that economic growth consists of creating something of economic value and not simply moving jobs from one place to another?

Previously, in Why Do Those Who Dislike Government Spending Continue to Support Government Spenders? I had written:

There’s something not quite right in the collective psyche of the anti-government-spending crowd. Enraged by high taxes, they manage to put into office, and keep in office, people who dish out tax revenues as though there were no limits on taxation. Of course, the tax breaks go to those who are in least need of economic assistance. Their excuse, that they will use the tax breaks to help those in need, is hilarious, because the best way to help those in need is to direct assistance directly to them so that they can infuse those dollars into the economy. That makes the economy grow. Handing tax dollars to those who don’t need financial assistance is nothing more than helping some people grow their Swiss bank stash.

These words have not reached the eyes of those lining up their corporate friends for parade entry, and in the off chance they are aware of the criticism, from myself and others, they are overwhelmed by the focus on monetized power politics.

So could it be time for “if you can’t beat them, join them”? Not for those of us who lack the resources to sign up for the parade, or perhaps what should be called the corporate gravy train. That is the essence of what is wrong with this nation’s economic condition. Those with more than sufficient money can afford to get more money, and those with insufficient funds are too poor to get more money from the legislative handout machine. Eventually they will have everything and the rest of us will have nothing. By then, it will be too late. The parade will be over, and almost all of us will have been left out.

Section 280E of the Internal Revenue Code prohibits the deduction of “any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.” The Tax Court has held that marijuana is a schedule I controlled substance and that the sale of medical marijuana pursuant to California law constitutes trafficking within the meaning of Section 280E. Olive v. Comr., 139 T.C. 19, aff’d, 792 F.3d 1146 (9th Cir. 2015); Californians Helping to Alleviate Med. Problems, Inc. v. Comr., 128 T.C. 173 (2007). Thus, if the taxpayer is carrying on the trade or business of distributing medical marijuana in California, the otherwise deductible trade or business expenses are not deductible.

In a recent case, Canna Care, Inc. v. Comr., T.C. Memo 2015-206, the Tax Court rejected the taxpayer’s claim that it was not engaged in a trade or business because California law prohibits the distribution of marijuana for profit and the parties stipulated that the taxpayer was not operated for profit. The Tax Court explained that the fact the taxpayer was operated in accordance with California’s restriction on profiting from distributing marijuana did not affect its finding that the taxpayer was engaged in the business of distributing marijuana for purposes of section 280E. The court noted that the salaries paid to the taxpayer’s owners were “well in excess” of those paid to its other employees, an indication that the taxpayer had been formed to generate income.

According to the court’s recitation of the facts, the taxpayer was owned by a married couple who had six children and were facing financial hardship compounded by increased tuition expenses for those children. The husband “turned to his faith for a solution. After much prayer, [he] was convinced that God wanted him to open a medical marijuana dispensary to solve his family’s financial woes.” Because the husband’s prayer was motivated by a desire “to cure his family’s financial difficulties,” the claimed divine inspiration did not absolve the taxpayer of the restriction imposed by section 280E.

When the wealthy, or at least the tax-hating segment of the wealthy, and their advocates push for tax cuts that benefit the wealthy, their justification essentially boils down to a claim that the outcome will be good for all Americans because tax cuts create jobs, stimulate the economy, and advance the cause of freedom. Anyone who reads this blog knows that I think that claim not only is nonsense but is intentionally deceptive.

Now that the tax-haters have control of Congress and most state legislatures, their need to be deceptive has diminished. Because of gerrymandering, even if the majority of Americans voted in favor of undoing the damage, it would have no effect. Controlling the White House or a governor’s house means little when legislatures – such as the Congress and the crew in Harrisburg, Pennsylvania – refuse to act unless the elite who control them get their way.

And it is in that setting billionaire Carl Icahn has threatened the Congress with his money. He has set up a $150 million political action committee, and if the Congress does not enact more corporate tax breaks he will use that money to re-constitute the membership of Congress to a group that does what he wants. Specifically, Icahn wants American corporations that made money but avoided paying taxes by shifting the profits overseas to be permitted to bring that money back to this country without paying the taxes that otherwise would apply. One of the companies that has engaged in this scheme is Apple, in which Icahn is one of the largest investors. Apple has stashed $181 billion overseas, more than any other American corporation.

The president of Every Voice Center, an advocate of campaign finance reform, points out that Icahn’s threat demonstrates “what politics has come to be, which is an argument among billionaires.” In other words, if you’re part of the 99 percent that cannot afford to purchase or threaten Congress, you don’t count. That is, I suppose, what democracy means to the oligarchs. Democracy for them, not for anyone else. So billionaires like Icahn, the Koch brothers, Tom Steyer, and Sheldon Adelson call the shots and use their money to dictate public policy, one pillar of which is to attack the rest of the nation’s citizens by crushing them economically, cutting their benefits, reducing their work hours, curtailing their voting rights, and letting public infrastructure rot away. So now we know what the tax cut beneficiaries have been doing with their tax cuts.

Back in 2004, a similar provision was enacted that permitted corporations to repatriate their overseas profits. It was advertised as a job-creating no-brainer. According to a Senate study seven years later, the provision did not create jobs. Instead, corporations stashed more profits overseas, and, of course, the economy fell apart a few years after the 2004 provision was enacted. But, as has been the case with every other failed economic ploy enacted or proposed by the anti-tax lobby, the failed provision is offered up again and again. Clearly, the ability to learn from one’s mistakes is not a skill possessed by these folks. Icahn’s announcement pretty much underscores his intention to use his wealth to mis-educate the public by saturating the airwaves and internet with more false claims about the job-creating benefits of creating even more tax breaks for the people least in need of tax breaks or any other sort of economic relief.

For whatever flaws there are in government, there is an even bigger flaw in letting oligarchs run the country. There is no voting booth or polling place to which one can go to vote out the oligarchs. The window for fixing the problem is closing quickly.

Recently, a Philadelphia Daily News reader posed a question to the paper’s personal financial columnist. The reader’s mother owns a home on which there is a mortgage loan. The loan balance is $100,000. The reader is a co-signer on the loan but is not on the deed. The mother is selling the home, and buying another one. The reader will not be on the deed to the new home. Apparently the mother needs financial assistance, because the reader has offered to help. The reader listed two alternatives. One is to pay off the mortgage on the existing home and to be repaid when it is sold and the new home acquired. Another is to provide the $100,000 for the new home, thus reducing the mother’s monthly payments on that property.

The reader suggested there might be adverse tax complications. The columnist stated that paying off the mortgage on the existing home would have no tax effect. At first glance, it appears that the reader is doing nothing more than lending money to the mother. Similarly, lending the money to the mother so that the mortgage on the new home is lower would appear to be nothing more than a loan. Generally, the making of a loan does not trigger income tax consequences because the lender is replacing one asset, cash, with another, loan receivable, and thus is not economically wealthier or poorer, and because the borrower is adding an asset while also adding an offsetting liability, and thus also is not economically wealthier or poorer.

However, neither the reader nor the columnist asked about, or mentioned, whether the reader would be charging interest on the loan to the mother. If interest is not charged, or is charged at a rate lower than the applicable rate, section 7872 would come into play. The amount of foregone interest would be treated as a gift from the reader to the mother, with these consequences. The reader would be treated as making a gift for gift tax purposes in the amount of the foregone interest, and would be treated as having interest income in that amount for income tax purposes. The mother would be treated as receiving a gift, excluded from gross income, in the amount of the foregone interest, and would have a potential mortgage interest deduction in that amount. Because the loan in question does not exceed $100,000, the amount of foregone interest for income tax purposes would be limited to the amount of the mother’s net investment income, or zero if the net investment income is $1,000 or less.

It is likely, though not certain, that the mother’s net investment income is zero or very low. But it is possible that the mother has net investment income from assets that cannot be liquidated to provide funds for paying off the existing mortgage or applying to the cost of the new home. Though some might consider this question to be “theoretical,” it isn’t. It isn’t theoretical until and unless all of the necessary facts are known. The fact that it might turn out that the mother’s net investment income is $1,000 or less does not mean that it should be presumed to be so.

The reader’s question would find its way onto a basic federal income tax examination if I were still teaching that course. It provides an opportunity to identify students who understand the tax issues at a basic level, that is, those who earn points for describing the income tax consequences of paying off a loan or making a loan. And it would also provide an opportunity to identify students who would earn even more points for identifying the section 7872 trap that lurks in the background. It is the sort of question that could be asked in terms of “what additional facts do you need to know?” Many students don’t like those types of questions, being accustomed to the “tell me the facts and I will tell you the answer” approach, but in practice, as the reader’s question suggests, the clients usually don’t present all the facts, often do not know what facts they need to be presenting, and need the attorney or accountant to help them identify relevant information.

A recent case, WSK & Sons, Inc. v. Comr., T. C. Memo 2015-204, offers lessons on what not to do on a tax return with beachfront house rentals. The taxpayer was a corporation owned by three related individuals, William S. Karras and his two sons William B. and Robert J. The corporation rented a beachfront house from an unrelated corporation for December 26, 2008, through January 2, 2009, for $22,950, of which $5,000 was a refundable security deposit. The tenants were listed as “William & Shana Karras Family,” the lease covered 10 adults, and the “tenant print name” field on the firm was filled in as “William & Shan Karras/ W.S.K. & Sons, Inc.” William S. Karras provided his personal credit card information to secure the credit card authorization for the agreement. William B. Karras, his fiance, some of her family, and a few of his friends stayed at the house. On January 3, 2009, the day after the rental ended, he and his fiance married.

On its federal income tax return for its taxable year ending February 28, 2009, the taxpayer claimed an advertising deduction that included, among other things, expenses related to the wedding. On its general ledger, under advertising and promotion, the rental amount of $22,950 was listed as “PRUDENTIAL PROP RENTAL.” The IRS disallowed the entire advertising expense deduction.

The taxpayer argued that the $22,950 was deductible because it was for a “corporate retreat” held at the beachfront house, claiming that “the retreat served a legitimate business purpose by enhancing employer-employee relationships for future productivity and preserving and expanding” the taxpayer’s relationship with its primary client. The Tax Court determined that the entry in the general ledger, the lease, and the credit card authorization did not establish that the $22,950 was paid. William B. Karras testified that he was present at the beachfront house, that it was rented to hold the taxpayer’s weeklong company meeting followed by entertainment and that “just the vendors and the subcontractors * * * were invited, along with our employees.” He also testified that his fiance, some of her family, and a few of his friends showed up because “we ended up sponsoring a – hosting a fishing trip shortly after as well.” Though unsure of the number of employees who attended – between 5 and 10 – he testified that more than 30 people were at the meeting. He affirmed that his wedding was the day after the meeting ended. The Tax Court noted that the taxpayer had stipulated that the advertising expense deduction included payments made for the personal expenses of the wedding, but that William B. Karras did not clarify what part of the rent was not related to the wedding expenses.

The Tax Court concluded that the testimony of William B. Karras was vague, uncorroborated, and led by the taxpayer’s attorney. Thus, the expenses were not substantiated and the deduction was disallowed.

Was this simply a case of a taxpayer who neglected to substantiate a deduction by not hanging onto receipts that proved payment? Was this a case of a taxpayer whose shareholder was unable to remember facts that supported the deduction? Why were 20 to 25 people who were not employees at a corporate retreat designed to encourage employer-employee productivity? Why was the retreat during a holiday week? Why was it at a beach? Why was it just before the wedding of one of the shareholders? The Tax Court found a way to resolve the case without getting into these questions. How nice for the taxpayer. But, by the way, the Tax Court upheld section 6662 penalties against the taxpayer. That was not a surprise.