MauledAgain

A question popped up recently that drew my attention to birthdays and the tax law. Actually, the tax law uses the phrases “attain the age of” and "attain age" far more often that its occasional use of the word “birthday” but few of us talk about “attaining an age” when we are conversing about the anniversaries of our arrival on the planet.

Why does the tax law care about birthdays or age attainment? There are a variety of tax provisions whose application depends on the age of the taxpayer. For example, taking money out of a qualified retirement plan, IRA, or similar investment before the age of 59 ½ generates penalties unless an exception applies. Withdrawals from those accounts must begin, generally, by the time the taxpayer attains age 70 ½.

The question that popped up referred to section 63(f) of the Internal Revenue Code. This provision increases the standard deduction if the taxpayer or the taxpayer’s spouse “has attained age 65 before the close of his taxable year.” Line 39a of the 2015 Form 1040 asks if the taxpayer or the spouse was born before January 2, 1951. Rephrased, the question was whether a person born on January 1, 1951, attains the age of 65 in 2015. The Form suggests that the answer is yes, because that person was born before January 2, 1951. If asked, many people, perhaps most people, would conclude that this person attained the age of 65 on January 1, 2016, when the person celebrates his or her sixty-fifth birthday. Is the Form wrong? Let’s back up to higher tax authority.

The provision in section 63(f) giving an additional standard deduction to persons who have attained the age of 65 replaced a provision in section 151 that gave an additional personal exemption deduction to persons who had attained the age of 65. The reasoning behind the change was to limit the benefit to those persons who used the standard deduction, thus taking it away from higher income taxpayers who are much more likely to itemize. Thus, long before section 63(f) was enacted, the phrase “attained age 65” was in the Code and in need of interpretation. The interpretation is found in Regulations 1.151-1(c)(2). The regulations state, “For the purposes of the old-age exemption, an individual attains the age of 65 on the first moment of the day preceding his sixty-fifth birthday. Accordingly, an individual whose sixty-fifth birthday falls on January 1 in a given year attains the age of 65 on the last day of the calendar year immediately preceding.” Does this make sense?

The idea that a person attains an age on the day before the person’s birthday makes sense. Consider a person born on January 1, 1951. That person attained age one, that is, finished one year of life, on December 31, 1951. The person started their second year of life on January 1, 1952. This is why Treasury took the position in the Regulations that it did.

But this approach created a problem. A person with a January 1 birthday benefits, for tax purposes, from attaining age 65 on December 31 rather than January 1. The person can claim an additional standard deduction if the person is not itemizing deductions. But what happens if the attaining of an age takes away a benefit? Consider section 152(c)(3)(A). To be claimed as a dependent, a person must be a qualifying child or qualifying relative. Under section 152(c)(1), a person is a qualifying child if, among other things, the person meets the age requirement of section 152(c)(3). Section 152(c)(3)(A) provides that a person meets the age requirement if the person “has not attained the age of 19 as of the close of the calendar year in which the taxable year of the taxpayer begins” or “is a student who has not attained the age of 24 as of the close of such calendar year.” A child who is a student and who was born on January 1, 1992, would attain the age of 24 on December 31, 2015 and thus would have attained the age of 24 as of the close of 2015. This would make the child ineligible as a qualifying child (though perhaps the child could qualify as a qualifying relative).

So the IRS decided to change the definition of age attainment, but only for certain purposes. In Revenue Ruling 2003-33, the IRS provided “A child attains an age on his or her birthday for purposes of Code sections 21 (child and dependent care credit), 23 (adoption credit), 24 (child tax credit), 32 (earned income credit), 129 (excludable dependent care benefits), 131 (excludable foster care benefits), 137 (excludable adoption assistance benefits), and 151 (dependency exemptions). “ So, in the example provided, the child born on January 1, 1992, would not attain age 24 until January 1, 2016, and thus would be a qualifying child, assuming the other requirements were satisfied, for taxable year 2015.

The IRS position does not apply to the issue of attaining age 65, or 59 ½, or 70 ½, or any other tax law provision other than the ones specified in the Revenue Ruling. So that means the phrases “attains the age” ends up with two different interpretations. Does it make sense to give a phrase two different meanings when the statute using the phrases does not do so? Of course, this is once again a matter of Congress not thinking through the implications of what it enacts. That’s probably because few members of Congress actually read, let alone think deeply about and think through the consequences of, the legislation on which they vote.

But no matter what the tax law does, each day we are a day older. And as Pink Floyd tells us, “The sun is the same in a relative way, but you're older, shorter of breath and one day closer to death.” Now I must go and instruct my executor what to insert into my obituary as my age if I die on my birthday.

One of the benefits of being on Facebook – aside from genealogy, class reunion arrangements, and keeping current with what friends and relatives are doing – is getting a perspective of the world, and particularly the nation, that is not necessarily otherwise available. I have the opportunity to “converse” with, or in most instances, to “listen” to, people with whom I’d have little or no interaction in my other day-to-day activities. I learn things.

This past week I’ve acquired interesting insights into people’s attitudes and expectations concerning huge lottery prizes. Aside from the expressions of intentions to buy or not buy tickets, there are expectations. Specifically, there are expectations about how much would be available if a person won, and expectations about what would happen if the prizes were structured differently.

The first set of expectations involves how much money a person would have available. Surprisingly, many people think that if they win – assuming they are the only winner of the big prize – they would be walking around with at least $1.4 billion in their pockets, figuratively. What they fail to consider are two realities. One is the time value of money, that is, the nature of the prize and its valuation. The other is taxation.

The announced total of $1.4 billion – an amount which probably will have increased – is not a “cash in hand when you win” amount, but an arithmetic total of what a person receives if the prize is taken in the form of an annuity paid over 30 years. There is an option to take a lump sum, but as explained in a variety of commentaries, including this story, what one would receive today in a lump sum is a “mere” $868 million.

And then there are the taxes. There is a federal income tax. In most states, there is a state income tax. If the winnings are shared with friends and relatives, and they are not co-owners of the winning ticket, the transfers – depending on amount – are subject to a federal gift tax. The total tax bill will be somewhere on the order of 40 percent.

Granted, taking home a lump some of roughly $500 million ought not generate complaints. But I’m confident it will. Wouldn’t it be nice if the birthday gift check had been for $500 instead of $50? A windfall is a windfall.

The second set of expecations involves alternative prize arrangments. For example, though I have reservations about lotteries generally because they tend to impoverish the poor who see them as the only realistic ticket out of poverty, it seems to me that the big prizes deepen the wealth and income inequality that is undermining the market system. Would it not make more sense, for example, to replace the big $1.4 billion prize with 1,000 $1.4 million prizes? Lottery specialists explain that this approach might reduce the number of people purchasing tickets. If that is so, and it very well could be, is it not interesting that people don’t see a 1,000-fold increase in the chances of winning a “lot of money” as worth the price? That, of course, reflects the financial illiteracy that afflicts American and fertilizes all sorts of scams and political con games.

The expectation that widened my eyes is a meme circulating on facebook, and elsewhere, I suppose, that claims splitting the $1.4 billion evenly among all Americans would give each person $4.33 million. Good grief! This is just so wrong. The responses pointing out the error are themselves amusing, with the best one pointing out that it would generate $4.33 per person, enough to buy a calculator. And, of course, there are those who claim that because of taxes and the time value of money, what would be available to split is $500 million, or roughly $1.60 per person. That’s not quite correct, because if the amount were divided by the lottery and not by a winner, the tax impact would be negligible, though the resulting $2.80 or so per person is pretty much just as disappointing. Perhaps $1.4 billion isn’t all that much money nowadays. It takes much more than that to buy a Congress, does it not?

A recent Tax Court decision, Blagaich v. Comr., T. C. Memo 2016-2 should provide some interesting classroom questions for those teaching the basic federal income tax course. It also is providing some interesting insights for myself, and hopefully for readers of MauledAgain.

The taxpayer was involved in a romantic relationship with Lewis E. Burns from late 2009 until early 2011. During 2010, when the taxpayer was 54 and Burns was 72, he transferred to her property worth at least $743, 819, including cash and a Corvette. At the end of November in that year, the taxpayer and Burns entered into a written agreement intended to confirm their commitment to each other and to provide financial accommodation for her. They had no intention to marry and the agreement was, at least in some respects, intended to formalize their "respect, appreciation and affection for each other" in the way a marriage otherwise would do. The agreement provided that the parties "shall respect each other and shall continue to spend time with each other consistent with their past practice", and that both "shall be faithful to each other and shall refrain from engaging in intimate or other romantic relations with any other individual". The agreement also required Burns to make an immediate payment of $400,000 to the taxpayer, which he did. Soon thereafter, the relationship soured, an on March 10, 2011, the taxpayer moved out of Burns’ house, and on the next day he sent her a notice of termination of the agreement. Shortly thereafter, he concluded that she had been involved in a romantic relationship with another man throughout the relationship between himself and the taxpayer.

In late March of 2011, Burns sued the taxpayer in the Circuit Court for the Eighteenth Judicial District, DuPage County, Illinois, seeking nullification of the agreement, return of the Corvette and a diamond ring, and an order directing the taxpayer to return cash “and other accommodations” that Burns had provided to her, totaling more than $700,000. On April 8, 2011, Burns caused there to be filed with the IRS a Form 1099-MISC, reporting a transfer to the taxpayer of $743,819 in 2010. Based on the Form 1099, the IRS asserted a deficiency against the taxpayer, who filed a petition in the Tax Court on March 8, 2013. The IRS learned of the state court action and in May of 2103 requested the taxpayer’s attorney to provide copies of depositions taken in the case, any filings and motions relating to the Form 1099-MISC, and the fraudulent inducement claim asserted by Burns. In October 2013, the taxpayer moved for a continuance, reporting that the IRS did not object, and the Tax Court granted the motion. At some point during this time, Burns died.

In November 2013, after trial, the state court found that the taxpayer had fraudulently induced Burns to enter into the agreement, and entered a judgment ordering her to pay $400,000 to Burns’ Estate. The court held that the Corvette, the ring, and $273,819 in checks were “clearly gifts” to the taxpayer that she was entitled to keep. Subsequently, the executors of the estate caused an amended Form 1099-MISC to be issued, reporting $400,000 of income, and noting that the taxpayer had paid the $400,000 pursuant to the state court order.

The taxpayer then moved in the Tax Court for summary adjudication. The taxpayer relied on two arguments.

First, the taxpayer argued that $343,819 of the amount transferred to her by Burns was excluded from gross income as “clearly gifts.” She also argued that the IRS was estopped by the state court decision from denying that this amount represented gifts. The IRS argued that it was not so estopped because it was not a party nor in privity with any party in the state court action. The Tax Court agreed with the IRS and rejected the taxpayer’s collateral estoppel claim. The court rejected the idea that the IRS was estopped because it took steps to keep itself informed about the state court action. It also rejected the argument that the IRS bound itself to the outcome of the state court case by agreeing to a continuance in the Tax Court proceedings.

Second, the taxpayer also argued that the $400,000 portion of the transfers was not gross income under the doctrine of rescission. In other words, because she returned the money she ought to be treated as having not received it in the first place. The IRS argued that the doctrine of rescission was not applicable because the taxpayer did not return the $400,000 to Burns in 2010. The Tax Court agreed with the IRS, explaining that the doctrine of rescission is a narrow exception to the claim of right doctrine, which requires cash method taxpayers to include gross income in the year received if acquired without consensual recognition, express or implied, of an obligation to repay and without restriction as to disposition. The doctrine of rescission applies if the amount that is received is returned within the same taxable year. The Tax Court rejected the taxpayer’s reliance on cases in which the obligation to return the amounts that had been received had been acknowledged in the year of receipt even though actual repayment was made following that year, because in this instance the taxpayer did not acknowledge, in 2010, any obligation to return the $400,000.

Accordingly, the Tax Court issued an order denying the taxpayer’s motion for summary adjudication. Whether any portion of the $743,819 constitutes gross income to the taxpayer, or can be excluded as a gift, remains to be decided. Though it has been reported that the $400,000 payment for being monogamous was gross income, the taxpayer still has the opportunity to argue that the amounts received were gifts, particularly the amounts received before she and Burns entered into the agreement. Whether she succeeds remains to be seen.

For students in the basic federal income tax class, the question is simple. “Suppose your romantic partner pays you to remain monogamous. Do you have gross income?” When a student objects that “no one does that,” there now is proof that people do. Perhaps not very many people, but sometimes the most interesting tax cases arise from activities in which very few people participate.

Recently, the IRS Taxpayer Advocate issued a ”Most Serious Problems” analysis, reacting to proposals that the IRS increase existing user fees and add new ones. The Taxpayer Advocate recommended that the IRS avoid fees that have significant adverse impacts on its mission, on voluntary compliance, on taxpayer rights, or on taxpayer burdens. The Taxpayer Advocate also recommended careful analysis of fee changes before implementing or increasing a user fee, publication of that analysis, and opportunity for comment from the public.

The reason fee increases were recommended is the refusal of the Congress to fund the IRS adequately so that it can fulfill its mission, provide taxpayer services, and protect the revenue. A reader of this blog, after examining the Taxpayer Advocate’s report, wrote to me: “How to solve the IRS funding problem. Instead of user fees could the IRS charge fees for advertising on their websites, forms, publications , etc. to individuals, corporations, etc. For example, I could see lawyers, accountants , and corporations buying advertising to promote products and services.”

Is monetizing IRS forms, website pages, and publications a sensible way of funding the IRS? Selling advertising space raises money if people are willing to purchase it. My guess is that there would be at least some individuals and entities willing to put their names in front of taxpayers. Logistics could be challenging, because a local or regional tax return preparer, for example, would want the ad directed to potential customers or clients in the preparer’s area. I think that can be accomplished with today’s technology, but it costs money, which would make the ad more expensive. The key would be the cost, because no one is going to pay for ads that are more expensive than alternatives. But what would be the effect of these ads on taxpayers? Website ads clutter the page, making it difficult to get to what the user wants to see; in recent months the websites for most media outlets have taken far too long to load and crash repeatedly because dozens upon dozens of ads and other clutter make it difficult to get to the principal purpose of the page. As for putting ads on tax forms, the result would be longer forms, or smaller fonts, or both, which would adversely affect taxpayers. The idea of longer forms, or forms with additional pages, for the purpose of advertising is nothing more than monetization on super steroids, an idea that would not sit well with most taxpayers. The same would be the case with digital tax forms. Add to this the inevitable disputes that will arise when advertising is purchased by controversial businesses or entities. And how long until politicians and their PACs demanded the right to clutter tax forms and publications with their tax nonsense?

Ads on IRS forms and web pages are not the only changes that taxpayers might see in the future. According to this report, the IRS is planning to automate the tax filing process so that it resembles how people interact with their bank. Online filing will become the norm, and a secure email will be sent as a receipt. Communication through postal mail will be replaced by electronic messages, not only for questions and payments, but also for audits. The IRS Taxpayer Advocate, however, sees this plan as eliminating the ability of taxpayers to interact with a human being, by phone or in person. The Taxpayer Advocate warned that the planned system “threatens to create a ‘pay to play’ system where the only taxpayers who will get personal service are those who can afford to pay for it.” There is a risk that using online accounts to handle taxpayer issues, as the IRS is preparing to do, ultimately will increase taxpayer dissatisfaction and frustration and increase noncompliance. The IRS is pursuing these plans because it is trying to find ways to compensate for significant budget cuts by the Congress. The IRS Commissioner claims that taxpayers want to interact through impersonal digital communications and do not want to “see us at all.” Reconciling that claim with the millions of taxpayers and tax return preparers sitting on hold for near-eternity waiting for an IRS employee to answer the phone is not easy. The Commissioner claims that the online plan will not put an end to phone conversations or in-person meetings.

Unmentioned is the risk of doing business online with an agency that struggles to maintain its computer systems, that uses decades-old technologies, that has suffered cyber-intrusions, and that is plagued by employee turnover, inadequate funding, and revolving door management. Most of those problems, of course, are caused by a Congress dominated by individuals intent on bringing down the IRS and ultimately government in order to make way for private corporations to own and operate the country and its citizens. Until the Congress adequately funds IRS use of technology, and until the IRS demonstrates that its use of technology is secure, effective, and efficient, taxpayers ought not be put at risk.

There is no doubt that the face of the IRS will change. The question is, though, what sort of face will the IRS be presenting to taxpayers? Even though the current system is afflicted with all sorts of problems, changing to a system that presents the same, or even greater, risks is unwise. Rather than trying to imitate the private sector, the IRS should be learning from the mistakes of the private sector’s struggles with technology and developing a plan that is superior in all respects. Doing so requires more money than the IRS has available, which brings the problem back to the cause, namely, the Congress.

As the header on this blog indicates, there are times when I find it interesting and even useful to try connecting law, or legal principles, to genealogy. My expectation has been that these connections would involve issues of privacy, of post-mortem ownership of DNA residing at genealogy DNA testing businesses, post-mortem ownership of genealogical databases, disputes over application of genealogical software, copyright concerns, and similar problems. But the other day I found a law-genealogy connection that I was not expecting.

While watching an episode of Hot Bench, another one of the television court shows I use as a source for classroom hypotheticals, blog posts, and general intellectual growth, I heard a litigant use the term “great cousin.” The plaintiff’s name was Alicia Kafka. As she told her story, one of the judges described her account as “Kafka-esque,” and then proceeded to explain her comment to the courtroom audience. The plaintiff interjected, referring to Franz Kafka, “he’s my great cousin.” When asked to elaborate, she explained that her father was a Kafka and was the subject of some of the famous author’s writings.

Having not previously heard or seen the term “great cousin,” I did some research. Though not an “official” genealogical term, it is used by a handful of people to describe the cousin of a parent, though this usage is the subject of some disagreement. It’s a handy term, but will it catch on? What term would be used for the first cousin of one’s grandparent? What about the second cousin of a parent? I confess that I have tried to find a way to designate an ancestor’s cousin (of any degree). If a second cousin’s child is a second cousin once removed, then would not the second cousin’s parent, who is a first cousin of one’s parent, be a second cousin once back removed? That is, if coming “down” the tree is “removed,” then going back “up” the tree is “back removed.” Trust me, my terminology has not caught on. That could be a good thing.

As for tax, when the judge explained why she thought the case was “Kafka-esque,” she described Kafka’s writings with terms often applied to the tax law. I don’t remember the precise words, but think in terms of convoluted, confusing, and complicated.

A reader asked me three questions. First, “Are the definitions of qualified education expenses for the lifetime learning credit and tuition and fees deduction the same?” Second, “Is the definition of qualified education expenses for the American opportunity credit different than the definitions in question 1, if so how?” “Third, Is the definition of qualified education expenses for purposes of tax-free scholarships and fellowship grants, the same as defined in Question 1 or 2?”

Though one might argue that I was presented with four, or even five, questions, what matters is that these are good questions. They also are important questions. Why? Because the questions themselves present an opportunity to explore the Internal Revenue Code.

Let’s begin with the oldest definition, the one found in section 117(b)(2). It defines qualified tuition and related expenses for purposes of the exclusion: “For purposes of paragraph (1), the term “qualified tuition and related expenses” means — (A) tuition and fees required for the enrollment or attendance of a student at an educational organization described in section 170(b)(1)(A)(ii), and (B) fees, books, supplies, and equipment required for courses of instruction at such an educational organization.”

The lifetime learning credit, enacted in 1997, applies to qualified tuition and related expenses. Section 25(A)(f)(1)(A) defines these as follows: “The term ‘qualified tuition and related expenses’ means tuition and fees required for the enrollment or attendance of — (i) the taxpayer, (ii) the taxpayer’s spouse, or (iii) any dependent of the taxpayer with respect to whom the taxpayer is allowed a deduction under section 151, at an eligible educational institution for courses of instruction of such individual at such institution.” It also includes two exceptions. One provides that qualified tuition and related expenses “does not include expenses with respect to any course or other education involving sports, games, or hobbies, unless such course or other education is part of the individual’s degree program.” The other provides that qualified tuition and related expenses “does not include student activity fees, athletic fees, insurance expenses, or other expenses unrelated to an individual’s academic course of instruction.” For these purposes, an eligible educational institution is “an institution — (A) which is described in section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088), as in effect on the date of the enactment of this section, and (B) which is eligible to participate in a program under title IV of such Act.”

The deduction for qualified tuition and related expenses, added in 2001, apples to qualified tuition and related expenses. Section 222(d)(1) defines these as follows: “The term ‘qualified tuition and related expenses’ has the meaning given such term by section 25A(f).”

Finally, the American Opportunity Credit, added in 2014, also applies to qualified tuition and related expenses. Section 25A(i)(3) defines these as follows: “For purposes of determining the Hope Scholarship Credit, subsection (f)(1)(A) shall be applied by substituting ‘tuition, fees, and course materials’ for ‘tuition and fees.’

So in addition to the differences, small and technical as they are, in the definitions of qualified tuition and related expenses, there also is a difference in what qualifies as an educational institution. Though most would fit within both the section 117 definition and the section 25A definition, there are some that would meet one and not the other.

Someone not an expert in taxation might ask another question, namely, why the differences? It, too, is a good question and an instructive one. When each provision is being considered, revenue loss estimates come into play. Lobbyists push their versions. Drafters offer their own language. Attempts to correlate with other provisions sometimes are made successfully, sometimes are not successful, and sometimes are not made.

I add one final question. Would it not make sense to have one definition and simplify the rules? The answer is easy. Of course it would. But it’s not the sort of thing we’ve come to expect from Congress.

Several days ago, in a New York Times editorial, Max Frankel proposed “a relatively simple new tax – officially called a user fee – “ based on “the grandeur of each lofty view” from the apartments being built in very tall luxury skyscrapers along the southern edge of Central Park. He suggested it could informally be called a “window tax” and he suggested various dollar amounts for windows and doors based on height, the existence or absence of obstructions, and the nature of what can be seen.

Frankel is concerned about the number and size of what he calls cloudscrapers, and by the impact they have on the city skyline. He points out that the wonderful views of Central Park exist because public money was invested in the park and its amenities. Though the new construction triggered his concerns, he proposes that the tax also apply to the buildings that have stood on the edge of the park since the nineteenth century.

Frankel proposes that those subject to the tax “would be paying a royalty for the privilege of consuming the city’s boundless beauty, eyeballing and mentally photographing costly municipal endowments.” He would spend the revenue on park upkeep and improvements as well as maintenance of roads and rivers. In turn, this would permit money currently being spent on those items to be redirected into housing, education and other services.

The proposed tax is not sensible. It poses a huge risk. Logically, what would follow is a tax on persons taking photographs of municipal buildings and attractions financed with tax revenue. One can envision toll booths at each intersection, charging higher tolls for walking or driving down scenic streets and city blocks, with lower fees for taking a route that passes shabby buildings.

The proposed tax is not necessary. Frankel notes that the value of these residences are enhanced by “pk vus, to a degree that has never been properly incorporated into conventional real estate taxes.” Real estate taxes are based on value. The better the view, the higher the value. If the real estate tax is not capturing this enhanced value, it is because the real estate tax is not being properly administered. Rather than directing time and energy into a new tax, or user fee, efforts should be focused on fixing the inefficiencies, incompetence, and administrative failures of the real property tax. Many years ago, recognizing the flaws of the income tax, the Congress, rather than fixing it, added an alternative minimum tax. Hindsight confirmed what some suggested, that it would make things more complicated, fail to solve the underlying problem, and present problems of its own. Much the same would be the case with Frankel’s window tax.

Too many tax breaks are handed out in exchange for promises by the recipients to do something beneficial for the community at large. And, far more often than not, the promised benefits aren’t delivered. The insanity of repeating the same failed strategy over and over again can best be understood by realizing the game that is played between politicians and the lobbyists who demand special treatment for their clients. My objection to these tax breaks rests not only on the undue complexity they add to federal, state, and local tax laws but also on the foolishness of letting privileged people and corporations off the hook by accepting illusory promises. Some of the commentaries in which I have explained my position include Tax Breaks, Politician Takes, Lining Up for Tax Breaks, Job Creation Requires Necessity, Not Tax Breaks, 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, Who Benefits from Tax Breaks for the Private Sector?, Yet More Proof Targeted Tax Breaks Miss the Mark, Where Do the Poor and Middle Class Line Up for This Tax Break Parade?, and The Fallacy of “Job Creating” Tax Breaks, Yet Again.

Now comes news that the jobs promised by a Wisconsin company in exchange for a tax-financed forgivable loan have not materialized by the deadline that was imposed four years ago. In 2011, Wisconsin financed a taxpayer loan to a company that promised to build an aircraft, creating 340 jobs by December 31, 2015, even though the company had no experience building aircraft. In addition to the “loan,” the local government spent 150 thousand taxpayer dollars on infrastructure for the benefit of the company. So the taxpayers of Wisconsin get a New Year’s Day gift not only of money down the tubes, but also of no jobs and no aircraft. I wonder whether the folks who complain about “takers” are thinking of this company when they pat themselves on the back and take credit for being “makers.” Where is the outrage over more than $800,000 funneled into the hands of the private sector in exchange for nothing that can match the anger over a few dollars shelled out to feed hungry babies?

This wasn’t the only “loan” arrangement inflicted on Wisconsin taxpayers. Another company received a $500,000 unsecured loan. Its owner had donated $10,000 – the maximum allowable – to the 2010 campaign of one Scott Walker. Yes, this is the same Scott Walker who criticizes the idea of being “dependent on government.” Unless, of course, one is a Scott Walker supporter.

The aircraft company did not create any jobs. It did manage to keep four employees on its payroll. Those four earned anywhere from $114,400 to $145,600 annually, plus benefits. Whatever they were doing, they weren’t creating additional jobs for Wisconsinites.

No matter what one thinks of helping hungry babies, taxpayer dollars – in the form of tax breaks, grants, “loans,” or other handouts – ought not be used to fund private enterprises. If government regulation of the “free market” is so horrible, as the anti-tax anti-government movement claims, then why is government support for the activities of the privileged elite in the marketplace acceptable?

No, this has nothing to do with the income taxation of profits from raising chickens. Nor does it have anything to do with excise taxes on eggs. It has to do with a story about a man in Oregon who was in some sort of dispute with the state revenue authorities, and who turned seven chickens loose in the lobby of a revenue office. My first thought was, “Why?” Let’s consider the possibilities.

Perhaps the man thought that the following conversation would take place:

Revenue official number one: “There’s a guy here with seven chickens who wants his taxes reduced.”

Revenue official number two: “OH NO! Quickly, reduce his taxes. Make his tax liability zero. Give him money.”

Sorry, chicken man, it isn’t going to happen.

But perhaps the man simply thought that somehow his dispute would get more attention if he pulled a chicken stunt. He’s right. He made the news, and now he’s made MauledAgain. He got attention. For what?

Perhaps he thought that by getting attention he would drum up support for his cause. Perhaps he was thinking that the following conversation would take place:

Person A in an office: “Hey, did you see where some guy released seven chickens in a state revenue office?”

Person B in the office: “Why would he do that?”

Person A: “He was unhappy about his tax situation.”

Person B: “And how was that going to help?”

Person A: “Don’t know but perhaps we should do the same thing to get a tax break.”

Person B: “Think that will work?”

Person A: “Sure.”

Sorry, chicken man, it isn’t going to happen, except for some misguided copycat. Who will end up with the same outcome. A charge of trespass and an order prohibiting him from returning to the revenue office. In other words, his half-baked plan laid an egg.

For decades if not centuries, taxes have been used in attempts to influence behavior. Whether it is encouraging behavior by handing out deductions and credits, or discouraging behavior by imposing some sort of tax, many government policy makers think that using the tax system as a behavioral influence is a wise and effective approach. The empirical evidence is mixed, because some behaviors appear to have been affected by tax provisions, and others have not.

A recent report in the American Journal of Preventive Medicine concludes that a 50 percent increase in Maryland alcohol sale taxes caused gonorrhea rates in the state to decrease by 24 percent. The study suggests that the tax increase reduced alcohol sales and consumption, in turn reducing the number of alcohol-induced sexual encounters. Presumably, the reduction in sexual encounters caused a reduction in gonorrhea rates. But that presents an important question. Why did the rates of other sexually transmitted diseases not decrease?

The report focuses on one other sexually transmitted disease to explain why gonorrhea rates decreased while other rates did not. Focusing on chlamydia, the report explains that gonorrhea cases “are typically more geographically concentrated and restricted to higher-risk populations. Therefore, “a population-based intervention might influence the population rate of gonorrhea quicker than chlamydia.” I suppose what is being said is that the tax increase generated a greater decrease in alcohol purchases among those in the higher-risk populations than in other populations. The report also explained that “the outcome data may be less sensitive to changes in chlamydia than gonorrhea.” In other words, it is more likely that chlamydia is under-represented and under-reported because individuals infected with chlamydia “are less likely to seek testing, . . . and a lack of chlamydia partner-notification services.” If that is true, then the study isn’t analyzing actual cases but only reported cases. That skews the results. Of course, it might mean that the sales tax increase on alcohol generated decreases not only in the gonorrhea rate but also in the chlamydia rate. But there’s no way of knowing. And the report admits this limitation, as well as explaining that there was no “randomly assigned control group.”

There probably is no dispute that alcohol consumption, particularly excessive alcohol consumption, triggers a long list of undesired outcomes, including not only increases in risky sexual behavior, but also traffic deaths and injuries, crime, violence, relationship failures, workplace errors, and a variety of other problems. So if the goal is to reduce alcohol consumption, are taxes the best way, or even an acceptable way, to generate that effect? Increases in alcohol taxation might reduce alcohol consumption, but it also encourages alcohol theft as well as tax avoidance schemes. If increases in alcohol taxation reduce consumption, that reduction occurs disproportionately more among those less able to absorb the increases. It is questionable whether alcohol tax increases reduce consumption among the economically privileged by any significant amount.

Reducing the adverse outcomes of excessive alcohol consumption also can be accomplished through education. Yet education is not one of the nation’s highest priorities. The messages about the dangers of excessive alcohol consumption and the consequences need to be more than slogans. They need to be intense, pervasive, and repeated. They will be, and should be, upsetting. Tax increases, though disturbing to many people, just don’t deliver as powerful a message. Alcohol tax increases, even if they have some effect, are not sufficient to a degree that warrants the adverse impact of trying to regulate behavior through tax policy.

In the telling of the Christmas story, the focus, aside from Jesus, Mary, and Joseph, almost always is on angels, shepherds, magi, a stable, and some animals. What brought the family to Bethlehem is mentioned but rarely does it find attention in popular culture, though scholars have invested time and energy in making sense of the first verse of the second chapter of Luke’s Gospel.

One of the challenges is that there are multiple translations of Luke 2:1. Many are listed at Bible Hub. All agree that the journey to Bethlehem was triggered by an order of the Roman Emperor. But what was the emperor trying to accomplish?

According to the New International Version, the New Living Translation, the Berean Study Bible, the New American Standard Bible, the GOD’S WORD Translation, the New American Standard 1977, and the Darby Bible Translation, he wanted a census taken of the entire Roman Empire or the whole world. According to the English Standard Version, the Berean Literal Bible, the Holman Christian Standard Bible, the International Standard Version, the Aramaic Bible in Plain English, the American Standard Version, the Douay-Rheims Bible, the English Revised Version, the Weymouth New Testament, the World English Bible, and the Young’s Literal Translation, his goal was to have all the world registered or enrolled, which is essentially the equivalent of a census. According to the King James Bible, the NET Bible, the Jubilee Bible 2000, the King James 2000 Bible, the American King James Version, and the Webster’s Bible Translation, the emperor’s goal was that the empire, or all the world, take your choice, should be taxed, or registered for taxation.

It is commonly accepted that in the Roman Empire, the purpose of a census or registration was to create tax lists. The creation of tax lists through census or registration was not a Roman invention and has persisted long after the decline and fall of the empire. So however Luke 2:1 is translated, the meaning is clear. It was time to generate a revised tax list.

When one considers all the reasons that a family would leave one place and go to another, tax registration is low on the list. It might be at the bottom. Families flee because of war, famine, earthquake, and pestilence. They make visits to other family members, just to keep up or perhaps for a wedding, funeral, graduation, or anniversary. They relocate on account of changes in employment, or perhaps to escape higher taxes.

I wonder how many people are thinking today about taxes. I wonder how many realize that taxes were at the root of many of the details in the story being retold today. I wonder how many of the anti-tax crowd are thinking that the family ought to have protested by not making the journey and by refusing to register. But that didn’t happen. And that fact makes a difference. There’s a gift there. What happens when it is opened?

When a person favors both good health and fairness in tax policy, as I do, the soda tax presents a conundrum. If, as its proponents argue, a soda tax reduces the consumption of health-damaging sugar, then health advocates ought to support it. But because soda is far from the only item that contributes to sugar-related health problems, tax policy advocated ought to oppose the soda tax. For me, the fairness concern trumps the health concern, particularly because I do not think the soda tax generates a sufficient reduction in unhealthy eating and drinking habits. I have written about the soda tax in numerous commentaries, beginning with What Sort of Tax?, and continuing in The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, and Taxes, Consumption, Soda, and Obesity.

Now comes a report that a soda tax proposal is being considered for a June 2016 vote in Davis, California. The soda tax is one of three possible taxes being considered to raise money for public works projects. The business community opposes the tax. City council has requested a study to explore the consequences of enacting a soda tax. Some opponents claim that people should not be punished for choosing to spend their disposable income as they see fit. The problem with that position is that when people make choices harmful to their health, the costs of dealing with the ensuing health issues are spread through insurance over society generally. The better argument is that no one has yet proved a soda tax reduces health problems. The Davis city council already has enacted an ordinance requiring restaurants to offer milk and water as the default beverage for children when drinks are included in the meal. It’s too bad parents aren’t already requiring their children to drink milk and water. Some are, but many aren’t.
One member of the council, referring to another California city that recently enacted a soda tax, stated, “Just because Berkeley did it doesn’t mean we need to do it.” That’s true. It would make sense to imitate Berkeley if the Berkeley soda tax improved the health of Berkeley residents. Has it? According to this commentary, it’s too soon to tell. It could take years to acquire sufficient data to answer the question. Perhaps an answer could be found if there were some way to compare how much each person in Berkeley weighed when the tax went into effect, and how much weight, if any, each person lost within the year that followed. That’s not going to happen. Berkeley is trying to gather information about residents’ health, in order to ascertain the impact of the tax, but it will be a while before answers can be offered with confidence.

One huge difference, though, between the Berkeley soda tax and the one being proposed in Davis is that Berkeley is funneling revenues from the tax into health education and health improvement programs. Davis plans to use the revenue for general purposes, which strengthens the arguments of those who see the proposal as a revenue grab.

A reader made me aware of a recent suggestion that every taxpayer who files a timely and honest tax return, along with timely payment, be entered into a lottery. A to-be-determined number of entrants would win a prize, perhaps a refund of their entire income tax liability for the year. Steve Martin and Paul Dolan, who offer the suggestion, think that this carrot approach to encouraging taxpayer compliance would work better than the stick approach currently embedded in the tax law’s system of penalties. They cite a lottery experiment conducted by Kevin Volpp of the University of Pennsylvania, under which patients who took their warfarin medication at the correct time and dose were entered into a lottery giving them a 1 in 5 chance of winning $10 and a 1 in 100 chance of winning $100. Participants in the experiment complied with the medication instructions 88 percent of the time, compared with 65 percent beforehand.

So would a tax return compliance lottery work? Perhaps. Is it worth trying? Of course, unless the top prizes were in the tens of millions of dollars. Would there be implementation issues? Yes. For example, how should the system treat taxpayers who honestly tried to comply but failed to do so because they ran aground on one of the many complex twists and turns of tax law? In that sense, TRYING to comply becomes a lottery of sorts. When is a taxpayer entered into the lottery? After the statute of limitations has expired? If taxpayers are entered into the lottery when the filing season ends, what happens if a subsequent audit determines that the tax return was not compliant and the taxpayer in question won a prize under the lottery? Would individuals not required to file a tax return because they have insufficient income be permitted to file a timely and correct “zero return” to enter the lottery if the prize were a flat dollar amount and not a return of some portion, or all, of one’s income tax liability? Would corporations and trusts be permitted to participate?

The idea of tempting people with lottery participation in exchange for doing something isn’t new. I’m bombarded every day with requests to fill out surveys or consider purchasing something, with a promise that I will be entered into a lottery that pays a trifling gift card or some other token of appreciation. Do I succumb? Only if I would have participated or shopped in any event. So, rest assured I do not fill out surveys asking for my opinion on yarn and needlepoint supplies. Because filing an honest and timely tax return is something I want to do and try to do, and think I have done consistently, I would be entered into the lottery automatically. And I think that would be the case with most taxpayers, because I think most taxpayers at least want to, and try to, file timely and honest tax returns. In fact, because filing a tax return, unlike filling out a survey, is mandatory, opting out of the lottery would require deliberate filing of a late return or a dishonest return. That sort of behavior would be strange, but before the compliant tax return lottery is implemented it might make sense to study the psychological aspects of adopting the proposed lottery.

This might be the sort of experiment in which one or two states could implement, as a smaller-scale experiment. Would it be expensive to implement? Probably not, as it would require some computer programming and the publication of the program. If it worked as Martin and Dolan suggest, the revenue increase would more than offset not only the prize amounts but also the implementation and administration cost. As they point out, lotteries are popular and they make money, not only for the winners, but for the organizations and governments running them. Why not take a chance?

Readers of MauledAgain know that when I have the opportunity I watch television court shows. Actually, I am usually doing something else at the same time, something within the limits of my multitasking skills. But when my ear catches certain words, such as “tax,” I pause whatever else I am doing and focus on the show. From time to time I obtain material for the blog. That was the case with 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?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, and More Tax Fraud, This Time in Judge Judy’s Court. The latest episode to catch my attention broke new ground.

In this case heard by Judge Judy, a man explained that he did income tax return preparation for members of his family, but did not do so professionally. Several years ago, among the family members for whom he did returns was his son and his son’s girlfriend. They were due refunds, and so he requested a check be sent to each of them. In a later year, he decided to have the refunds deposited directly into their respective checking accounts. He had the bank account information for his son and for the girlfriend, and the refunds were deposited without any problem. The following year, the son decided to do his own tax return without his father’s help. The son, according to the father, “had problems.” So in the following year, the son went back to his father and asked him to prepare his return. By then, the son and the girlfriend had broken up. The son was entitled to a refund, and in requesting that it be deposited directly into the son’s account, the father mistakenly used the girlfriend’s bank account information, so the refund ended up in her account.

Not surprisingly, the son sued the former girlfriend for his money. The former girlfriend explained that at first she was unaware the money had been deposited into her account. She then testified that when she became aware of what happened she contacted her bank. She also explained that she figured it was money that her former boyfriend owed her, had promised to her, and had not paid to her, a claim that was unsupported by any credible evidence. At that point, Judge Judy simply said, “Judgment for the plaintiff.”

There are two lessons to be learned. First, be extremely careful when entering bank account information on a tax return for purposes of receiving a refund or, worse, paying an amount due. Imagine if the son had owed money and the father had used the former girlfriend’s bank account information. That would have made for an even more interesting case. Second, when coming into possession of money, or property, to which one is not entitled, take all reasonable steps to make certain it ends up with the person to whom it belongs.

When I was a child, I remember being told by various adults that it was not uncommon for someone, or several people, once they climbed to the top of a hill, to try to prevent anyone else from reaching the summit. As the years passed, I realized how true this is, in many different contexts. For example, it is not unheard of for athletes, once they retire, to be in favor of changing rules that they used to their own benefit, sometimes because their perspective of the rule has evolved but sometimes because a rule change would benefit the team with which they are associated in some post-player status.

And so it is not surprising to see the same game plan play out in the tax arena. The news in this report is almost a year old, but it just recently came to my attention thanks to a long-time reader. It is a wonderful illustration of how things that ought not be part of a game get played to the detriment of taxpayers.

In January, 2002, a Florida newspaper reported that David Koch claimed a Florida historic restoration tax credit for a $12 million remodeling of his 1923 villa in Palm Beach. The credit cost the city’s taxpayers $48,000.

Fast forward to 2015. North Carolina’s historic property renovation tax credit had expired, under the terms of its enactment, at the end of 2014. The state’s Republican governor, among others, advocated renewal. So guess who objects? Americans for Prosperity, which happens to be one of the organizations founded and operated by and on behalf of David Koch and his brother. Does this make sense? An Americans for Prosperity spokesperson explained that it opposed the credit because it complicates the tax code and because renovation of historic properties ought not be financed by taxpayers. It is true that tax credits complicate tax codes. But isn’t it interesting that complication becomes a bad thing only after a tax credit complicating Florida’s tax law was used by someone now objecting to tax credits that complicate tax law? There is much sense in refraining from handing out tax dollars for the renovation of private homes. But isn’t it interesting that an organization claiming to find restoration tax credits objectionable was co-founded by someone who made use of such a tax dollar handout?

The same spokesperson tried to justify this inconsistency with an interesting twist. He tried to differentiate expired credits and existing credits. It is not inconsistent, in other words, to object to the renewal of a credit while taking advantage of a similar credit that is in effect. What’s wrong with this argument? If the credit is a bad idea, then it’s a bad idea whether or not it exists. And someone who takes advantage of the credit ought not be first in line to prevent others from doing likewise.

Translated, it works out to this. “I reduced my taxes from a tax break, but now that I got what I want and you want in, I’m going to stop you. I got to the top but I will prevent you from getting to the top doing what I did to get there.” There’s a word for that approach. Actually, there are several words for that approach. Think about it.

For the past several decades, the Republican Party has been closely tied to tax reduction advocacy and to anti-tax groups. The Grover Norquist “no new taxes” pledge is a creed for most politicians who belong to that party. During the same time period, politicians who are members of the Democratic Party have not hesitated to increase taxes when necessary, and are perceived as proponents of higher taxes. Whether or not this perception is fully accurate, there is an alignment of the parties and tax policy issues.

So what should one expect from a Republican who is elected governor of a state, albeit as an independent? I’m referring to Governor Bill Walker of Alaska. He is an attorney and politician who ran for governor in the Alaska 2010 Republican primary. He lost to the incumbent, Sean Parnell. So Walker decided to run as an independent, and selected the Democratic nominee as his running mate. Walker defeated Parnell in the general election. One might consider this a squabble within the party, not unlike what some expect to happen at the national level if Donald Trump does not win the Republican nomination.

So Walker would appear to be a Republican dressed as an independent. There are more than a few non-politician voters who dress that way. Yet the other day, according to this report, Walker has proposed an income tax for Alaska. There has not been an income tax in Alaska since 1980. Alaska did not need an income tax once revenues began flooding in from its oil production. The problem for Alaska is that oil prices are plummeting, which means its revenues are dropping. When the same thing happened in the late 1980s, a recession gripped the state and, among other things, homes were foreclosed at a rapid pace. Walker seeks to prevent history from repeating itself.

It would not be surprising to hear die-hard anti-tax Republicans brand Walker as “not really a Republican.” Is that the case? Or is he a Republican dressed as an independent who has come to understand the reality of economics and taxes, and the foolishness of opposing taxes on principle no matter the situation? If he is, in fact, considered by Republicans as not really one of them, would that similarly be the situation with voters who are independents dressed as Republicans? Will they feel rejected and turn away from Republican candidates? No matter how the chaos, to use the nicest word that comes to mind, presently infecting the national, state, and local politics plays out, it will affect tax policy decisions in the next few years. The challenging question is, “How?” That remains to be seen. Attempting to predict much of anything at this point is nothing more than guessing.

A reader sent me an email with the contents of this link and a question. Going through the material, I was grateful that he did not pose to me any of the other questions that popped into my brain. I’m confident he realizes I’m no expert in the definition of “live nude entertainment” or what it means to host a sexually oriented business event.

OK, now that I have your attention, let’s turn to the reader’s question. He noted that commentators have been referring to the sexually oriented business fee as a tax, such as Texas Strip-Club Owners Pressured to Pay Nude Entertainment Tax, and EXPO 2015 To Tackle the Resurrection of Sin Taxes. He then asked, “Is it a tax or fee?”

Though a variety of definitions and distinctions have been suggested over the years, I distinguish a fee from a tax by identifying a fee as an amount paid in exchange for a service provided by a government directly to the person making the payment. Thus, for example, the amount charged by a township for trash pick-up is a fee. The amount charged by a state government or agency for the use of a toll highway is a fee. The amount charged by a local government for filing a zoning variation application is a fee. On the other hand, amounts paid to a government that bring indirect benefits, such as an income tax, is not a fee. A portion of what is paid in federal income tax funds national defense, which in turn provides a benefit to citizens, but there is no one-on-one relationship between the amount of tax paid that ends up financing national defense and the value of military protection afforded to a particular individual or business. Sometimes the line is blurred. The township in which I live charges a storm water fee, but it is a flat amount regardless of the size of the lot or the amount of storm water discharged from the property into the storm sewer system. Is it truly a fee? Yes, in the sense that the township provides a system for removing storm water back into the creeks. No, in the sense that a person who diverts most storm water into on-site tanks nonetheless pays the fee, which makes it more difficult to describe the payment as one made for a direct service.

The reader also asked, “Does it matter?” According to some commentators, for example, Lawrence Reed, one can escape a fee but not a tax, because one can refuse the service. There is some sense in that view. One can choose to avoid the toll highway. One can choose not to seek a zoning variance. On the other hand, one cannot refuse to pay the township storm water fee. Does that make it a tax? Before jumping to a conclusion of yes, consider the income tax or the sales tax. One can avoid or reduce an income tax by turning down income, and one can avoid or reduce the sales tax by turning down the opportunity to purchase taxable items.

This is not my first commentary on taxes and fees. I addressed the question in Please, It’s Not a Tax, and So Is It a Tax or a Fee?. Ultimately, whatever it is called, it ought to be measured sensibly, imposed only after appropriate public notice, hearings, and legislative action, and paid if the legal obligation to do so exists.

Sales taxes generally are regressive. That’s because people with relatively little income spend most of their income on items subject to the sales tax, whereas people with substantial income put much of their income into investments, transactions that are not subject to sales tax. So it’s no surprise most people dislike sales taxes. Of course, most people dislike any sort of tax.

One might think that the wealthy, who aren’t reduced to poverty by paying taxes, would be less frustrated by the tax system. That’s in contrast to poor people, who must give up something, perhaps a necessity, to pay taxes.

Yet it’s the wealthy who scream the loudest for tax cuts. Able to afford lobbyists, and with money to pay people to think up sales pitches for why a tax that affects the wealthy ought to be reduced if not repealed, they have succeeded on several occasions on setting the economy back to the detriment of those who are not wealthy. Over the past several decades they have attacked the federal income tax, and have succeeded to the point that not only national infrastructure, public health, and education have been impaired but even national defense has started to weaken. And now, they have attacked the New Jersey sales tax, to the extent it applies to the purchase of yachts. Very few of us have purchased or will purchase yachts. We know who purchases yachts.

So what’s up with the sales tax on yachts in New Jersey? According to this story, the initial proposal would have exempted yacht purchases from the sales tax if they were used in the state for fewer than 90 days. The governor suggested that escaping the tax should be limited to those who use the yacht in New Jersey for fewer than 30 days. The initial proposal and the suggestion went nowhere. Next came a bill that limited to $20,000 the amount of sales tax imposed on yacht purchasers. This meant that those of the middle class or upper middle class who could afford a boat costing $285,000 or less would be hit by the sales tax in full, whereas those springing for the million-dollar and multi-million-dollar ships would pay effective sales tax rates equal to a slight fraction of what applied to everyone else. The governor vetoed that bill. But the advocates of tax relief for yacht buyers didn’t give up. They came back with a proposal to reduce the sales tax rate on yachts to 3.5 percent. That bill passed the legislature and headed to the governor’s office.

The vetoed bill would have reduced state revenue by somewhere between $1 million and $4 million. The latest bill reduces state revenue by somewhere between $8 million and $12 million. This in a state struggling to provide basic services to its citizens, and yet caught up in dishing out tax breaks to wealthy companies and now, yacht purchasers.

Proponents of the tax break claim that it will help people in the marine industry, such as mechanics, manufacturers, and marina operators, whose sales have declined because they have lost sales to other states. For this tax break to generate enough offsetting revenue, it would need to bring hundreds of millions of dollars of yacht sales into the state. That isn’t going to happen. Nor does reducing the sales tax on yachts mean that the purchasers will use the services of New Jersey yacht mechanics or marina operators. The argument is nothing more than a variation on the thoroughly disproven “trickle down” nonsense that was sold to gullible Americans who are now paying the price for buying into that nonsense.

It’s no secret to those familiar with tax practice that the inability or refusal of Congress to stay on top of tax issues and move legislation in a timely manner causes all sorts of headaches not only for tax practitioners but also for their clients and taxpayers generally. The tale of repeated short-term extensions of tax provisions as part of a scheme to jack up campaign contributions is oft-told, though unfortunately not heard by the voters who keep sending these money extractors back to Washington. About two years ago, in Let’s Not Extend The Practice of Tax Extenders, I explained why this money-raising game, even if good for the campaign coffers of politicians, is bad for the nation. In that essay I agreed with the point made in an essay published by the Institute for Policy Innovation, a group with whose positions I don’t always agree, and perhaps more often disagree. And now, again, I find myself agreeing with another essay from that organization.

In 'Tis the Season for PITFA, Tom Giovanetti points out the problems caused by the failure of Congress to act in a timely manner with respect to the Internet Tax Freedom Act. He explains that this provision, which bars federal, state, and local governments from imposing taxes on Internet access, has been allowed to expire and then re-enacted multiple times. Each time, the re-enactment passed by a wide margin, demonstrating there is strong bipartisan support for the policy represented by the act. Now, with expiration due on December 11, Congress would need to move very quickly to prevent chaos.

The chaos will be triggered by laws that have been enacted in some states, providing that the moment the ITFA expires, state taxes on Internet access take effect. These aren’t sales and use taxes on purchases made over the internet. These are taxes that are computed on accessing the internet. They can be flat amounts, they can be a percentage of the fees charged by internet service providers, and they can be based on the number of bytes uploaded and downloaded. No matter how computed, these taxes make internet access more expensive, and yet return nothing to the taxpayer in exchange for what the state or locality is collecting. The pre-digital world analogue is a tax on walking to the mailbox to get postal mail, or walking to the store to make a purchase.

And imagine the confusion if the ITFA expires, these taxes are imposed and collected, and then Congress gets its act together, and re-enacts the ITFA retroactive to December 11. Imagine the administrative aggravation of obtaining refunds of the tax that has been collected by the states with these automatically-triggered taxes in place. It will cost money. Either the taxpayers will need to expend time and resources to file refund claims, or internet service providers will need to do so, passing their costs back to the customer-taxpayers. Either way, it is the sort of adverse consequence that arises when members of Congress put re-election ahead of public service.

In his essay, Tom Giovanetti calls for a Permanent Internet Tax Freedom Act. I support that call. He asks, “Does Congress think there will ever come a time when discriminatory taxes on ecommerce and taxes on Internet access will be a good idea? Is that the option Congress is trying to hold open?” My answer is that the option Congress is holding open is the option to raise more campaign cash by holding ITFA hostage.

Thus, I realize that the likelihood of Congress giving up a money-maker is very low. Congress is no more likely to enact a PITFA than it is to enact permanent extensions of the dozens of income tax provisions showing up year after year in tax extender legislation. It’s a miserable way to run a country, but we’re stuck with it until the voters clean House. And Senate. And the likelihood of that happening also appears to be very low. It’s a miserable way to run a country.

A recent case, Yguico v. Comr., T.C. Memo 2015-230, demonstrates how a tax problem can spiral out of control. By the time the dust settled, the taxpayers had been hit with multiple penalties.

The husband taxpayer was a real estate attorney. In 2009 he became an equity partner in a law firm. As the court stated, they “thereafter began to see large increases in their tax liabilities.” This is an aspect of “making partner” that not every law firm associate understands. It is not unusual for “take-home pay” to decrease when an associate makes partner.

So by 2011 the taxpayers “owed a significant amount of tax-related debt” and thus took $80,685 out of a qualified retirement account. They received Forms 1099-R, but were unable to “testify categorically that they actually supplied” those forms to their tax return preparer. The tax return preparer provided an affidavit stating that he did not remember receiving Forms 1099-R from the taxpayer. The taxpayers stipulated that they were aware that the withdrawals from their qualified retirement accounts “represented taxable income.”

The preparer did not include the $80,685 on the return. Nor did the return include the 10-percent section 72(t) penalty. The preparer filed the taxpayers’ return electronically just before the filing deadline. The taxpayers did not review the 2011 return before it was filed, or at any time thereafter.

The IRS issued a notice of deficiency. The deficiency consisted of the tax liability caused by including the $80,685 in gross income, the $8,069 section 72(t) penalty, and a section 6662(a) accuracy-related penalty. The taxpayers conceded that their 2011 return showed a $29,416 income tax deficiency.

The Tax Court concluded that the IRS met its burden of production with respect to the penalty because $29,416 exceeded both $5,000 and 10 percent of the tax required to be shown on the taxpayers’ 2011 return. Thus, there was a substantial understatement of income tax.

Next, the Court considered whether the taxpayers could show there was reasonable cause for the understatement and that they acted in good faith. The Court concluded that the taxpayers could not rely on the fact that a preparer prepared the return, because they failed to supply the preparer with all necessary information and because they failed to show that the incorrect return was a result of the preparer’s mistake. The Court also pointed out that even if the taxpayers had provided the preparer with all the necessary information, they did not act reasonably because they failed to review the completed return before it was filed. The Court reasoned that had they looked at the return they would have noticed that the $80,685 was not included.

There are two lessons here. First, if using a preparer, be certain to provide the preparer with all necessary information, even if that means providing the preparer with more information than is needed. It is better to over-include than to under-include. Second, review the return. Whether self-prepared, prepared by a preparer, or prepared using software, eyeball the return to make certain there are no glaring errors.