MauledAgain

A few days ago, someone posted a question to the Reddit Tax Forum.It’s the sort of question that can find its way onto an income tax exam but it’s also a question that surely has been faced by more than a few taxpayers. To quote the question, “Is an indirect donation (such as paying an expense on behalf of a charity) tax deductible to the donor and/or recognizable as revenue by the charity?” In other words, what are the tax consequences when a person pays a charity’s invoice due to an unrelated third party?

In substance, the person is paying the charity so that the charity can pay its bill. The practical problem is that if and when the IRS audits the person and asks for proof, the person will have a check made out to a business or other payee that is not the charity and likely is not itself a charity. Then the person must prove that it was paying on behalf of the charity. Does the person have a copy of the invoice sent to the charity by the third party? Does the person have an acknowledgement from the charity that the charity’s invoice was marked “paid in full” by the third party because of the person’s payment to the third party on behalf of the charity? Without the appropriate evidence, the person can end up without any deduction, as happened in Bell v. Comr., T.C. Summ. Op. 2013-20, though denial of the taxpayer’s deduction in that case also involved additional factors.

In the long run, it’s much easier simply to write a check payable to the charity, submit it to the charity, and obtain a receipt. The charity then has the funds to pay its invoices. As technology changes, perhaps the person, instead of writing the check, can make an electronic funds transfer. But it should be made to the charity. Why make things more complicated than they need to be?

Law students, not unlike people generally, think that tax “is all about numbers,” or, worse, “involves lots of math.” As I try to explain to anyone with those concerns, a substantial portion of tax law does not involve numbers or arithmetic. Whether someone is engaged in tax compliance, such as filing a return, or tax planning, that person’s brain will focus less on numbers than it will on words. A recent case illustrates this point.

On November 15, the United States Court of Appeals handed down its opinion in Moneygram International, Inc. v. Comr., No. 15-60527, on appeal from the United States Tax Court. The issue is one that can be stated simply: Is Moneygram International a bank?

Why does it matter if MoneyGram is a bank? The answer is simple. Banks are subject to special federal income tax rules, most of them beneficial to the bank. For example, although generally corporate taxpayers are permitted to deduct capital losses only to the extent of capital gains, banks are permitted to offset ordinary income with capital losses. The taxation of banks is not an area of tax law in which I have any particular expertise, and I have not taught the special rules in any of my courses, though I alert students that a set of special rules exist for banks, and insurance companies. Federal income taxation of banks is a narrow sub-specialty of tax law practice, and there are a handful of tax practitioners who are experts in that area. I’m not one of them.

Section 581 defines a bank as “a bank or trust company incorporated and doing business under the laws of the United States (including laws relating to the District of Columbia) or of any State, a substantial part of the business of which consists of receiving deposits and making loans and discounts, . . . and which is subject by law to supervision and examination by State, Territorial, or Federal authority having supervision over banking institutions.” The Tax Court held that MoneyGram was not a bank for two reasons. First, it did not meet the common meaning of the term “bank,” which the Tax Court defined to include “(1) the receipt of deposits from the general public, repayable to the depositors on demand or at a fixed time, (2) the use of deposit funds for secured loans, and (3) the relationship of debtor and creditor between the bank and the depositor.” Second, the Tax Court held that MoneyGram did not satisfy section 581 because “receiving deposits and making loans do not constitute any meaningful part of MoneyGram’s business, much less ‘a substantial part.’”

Section 581 does not define “deposits” or “loans.” The Tax Court defined “deposits,” in the context of § 581, as “funds that customers place in a bank for the purpose of safekeeping,” that are “repayable to the depositor on demand or at a fixed time,” and which are held “for extended periods of time.” The Tax Court held that money received by MoneyGram as part of its money order and financial services segments did not meet this definition because MoneyGram does not hold these funds for safekeeping or for an extended period of time. The Tax Court defined “loans” as an agreement, “memorialized by a loan instrument” that “is repayable with interest,” and that “generally has a fixed (and often lengthy) repayment period.” The Tax Court held that the Master Trust Agreements entered into between MoneyGram and its agents do not meet this definition and are therefore not loans, particularly because the agreement is facially a trust agreement and not a loan agreement, and does not charge interest.

On appeal, MoneyGram challenged both the Tax Court’s interpretation of section 581 as imposing the requirement that an entity be a bank within the common meaning of that term and its articulation of that common meaning. MoneyGram argued that the Tax Court’s interpretation impermissibly imposes an “ill-defined extra-statutory requirement that is inconsistent with the language and purpose of Section 581.” Rather, MoneyGram argued that the beginning of section 581 only requires that the entity be “incorporated and operating legally.”

The Fifth Circuit noted that section 581 “is not a model of statutory clarity,” pointing out that its construction and circular use of the term “bank” are inherently ambiguous. Yet it concluded that “the most consistent and harmonious reading of” section 581 “supports the Tax Court’s conclusion that being a ‘bank’ within the commonly understood meaning of that term is an independent requirement.

Moneygram, relying on the canon of interpretation against surplusage, which supports interpreting a statute “so that no part will be inoperative or superfluous, void or insignificant,” argued that the Tax Court’s interpretation rendered superfluous the requirement in section 581 that a substantial part of the taxpayer’s business consist of “receiving deposits and making loans and discounts” because the Tax Court’s definition of the common meaning of bank also includes the receipt of deposits and the making of loans. The IRS, also relying on the canon of interpretation against surplusage, argued that MoneyGram’s interpretation read “bank or trust company” out of section 581.

The Fifth Circult explained that MoneyGram’s interpretation, essentially translated the statute so that it read: “For purposes of sections 582 and 584, the term ‘bank’ means a . . . company incorporated and doing business under the laws of the United States (including laws relating to the District of Columbia) or of any State.” It rejected Moneygram’s interpretation. It also rejected MoneyGram’s argument that incorporating the common meaning of bank into the statute would render other portions of section 581superfluous. It concluded that although the Tax Court’s definition of the common meaning of bank overlapped with the deposit, loan, and discount requirements of section 581, the definition was not completely duplicative. The Fifth Circuit gave as an example an entity that is a bank under the common meaning of the term but that does not engage in receiving deposits and making loans as a substantial part of its business.

Though the Fifth Circuit agreed with the Tax Court that the term “bank” in section 581 is an independent component that must be given its common meaning, it disagreed with its definition of “deposits” and “loans.” The Tax Court defined “deposits” as “funds that customers place in a bank for the purpose of safekeeping” that are “repayable to the depositor on demand or at a fixed time” and which are held “for extended periods of time.” The Fifth Circuit, though accepting the first two aspects, disagreed with the third, because the only case on which the Tax Court relied involved valuation of a bank’s depositor relationships and not the definition of a deposit. The Tax Court defined “loan” as a memorialized instrument that is repayable with interest, and that “generally has a fixed (and often lengthy) repayment period.” The Fifth Circuit disagreed, looking to previous cases in which the term was defined, in the section 581 context, as “an agreement, either expressed or implied, whereby one person advances money to the other and the other agrees to repay it upon such terms as to time and rate of interest, or without interest, as the parties may agree.” Finally, the Fifth Circuit concluded that the Tax Court did not address, nor did the parties argue, the meaning of the term “discounts,” which the Fifth Circuit held was a separate and required element of the definition.

For these reasons, the Fifth Circuit vacated the Tax Court order and remanded the case for reconsideration consistent with the Fifth Circuit’s analysis. Unless the parties settle, there will be, at some point, another Tax Court decision in this case.

The question of whether an entity is a bank is but just one example of the numerous instances in which a tax practitioner must analyze facts without being immersed in arithmetic. Sometimes numbers do enter into a definitional requirement, such as the support test that must be considered when determining if someone fits the definition of dependent. On the other hand, whether transfers are alimony or separate maintenance payments, whether an LLC is a partnership, whether a scholarship recipient is in fact receiving payment for compensation, whether a transfer is a gift, and whether work clothing is suitable for everyday use are questions that do not require numerical gymnastics to resolve.

Because the courses I have taught did not require students to explore the taxation of banks, I have never posed to them the question, “What is a bank?” I have made the “tax is not all about numbers and in fact is not all that much about numbers” point by asking, early in the basic income tax course, “What is a gift?” It’s a short question, most people, including law students, think they know the answer, and then the fun begins. Is it an eye-opener? Indeed. You can bank on that.

In Four Post-Election Tax Moves To Make Today, Phil DeMuth offers three unsurprising suggestions, though the deferral of income and acceleration of deductions makes sense in most cases. The exception is an expectation of future year tax increases more than sufficient to offset the impact of the time value of money.

It is DeMuth’s fourth suggestion that gave me pause. He wrote:

I heard some disgruntled Hillary supporters saying, “Kill me now!” in the wake of the election. This is not smart. Trump has promised to eliminate the death tax. If your expiration date is getting near, your heirs will thank you if you can possibly hold off until Jan. 1, 2017.

One might expect that in most instances, deferring death is not an option available to the decedent. Yet some studies, such as several described in this report, suggest that deaths are deferred when there are tax advantages to doing so. As one study put it, “The results show a significant ‘death elasticity,’ meaning that the reported date of death responds significantly to changes in the estate tax.” Aside from deferred suicides and the implementation of extraordinary measures to keep alive a person who is on his or her deathbed, how can death be postponed? The authors of one of the studies admit that “We cannot rule out that what we have uncovered is not a real death elasticity, but instead ex post doctoring of the reported date of death to save on taxes.” If that is happening, I would not be surprised. On more than a few occasions, while gathering information for various genealogical databases, I have discovered all sorts of instances in which birth dates are misreported, particularly among those making themselves younger for purposes of the World War One Draft Registration and those making themselves older when applying for Social Security benefits. Understand, though, that in both of these situations, these sorts of events occurred decades ago. Changing a birth date nowadays would be much more challenging than it was when people simply were taken for their word when providing information.

Does the opposite happen? Would the prospect of an estate tax increase encourage people to accelerate death, which is much easier to accomplish than death deferral? In Fixing Everything: Government Spending, Taxes, Entitlements, Healthcare, Pensions, Immigration, Tort Reform, Crime...(2010), Nedland P. Williams, in discussing the transition from 2010, for which the federal estate tax did not apply, to 2011, when it would, asks, “Should the person in failing health or their relatives be forced into a decision to accelerate death before the January 1, 2011 deadline?” That question addressed an option facing far more people than does the possibility of deferring death.

Congress and state legislatures too often use tax law to encourage or discourage behavior. Though economic incentives can be powerful, and in some instances more influential than simple mandates for, or prohibitions on, specific behavior, using the tax law as to control behavior creates far more problems than it solves. But certainly messing around with the timing of death because of future tax law changes is unfortunate. In this instance, when the future changes are, unlike the revival of the estate tax already enacted and ready for implementation in 2011, mere guesses as to what a final package of tax changes might constitute, trying to cheat the Angel of Death for a few days or a few weeks could backfire. Is it worth paying hundreds of thousands of dollars in medical bills to keep someone artificially alive in order to save a few hundred thousand dollars of taxes?

Last week, a reader directed me to this report explaining that voters in Missouri approved an amendment to the state constitution prohibiting the imposition of the state’s sales tax on services. Sales taxes originally were applied to the sale of goods, but in recent years a handful of states have expanded the scope of sales taxes to include particular services.

The article’s lead under the headline states: “As states increasingly try to tax services like Netflix and yoga, Missouri voters have decided to keep that from ever happening.” I think that’s a bit misleading. It certainly is possible that in some future year, circumstances and voter preference triggers a repeal of the constitutional amendment that was just approved. I wonder if anyone thought that the amendment to the United States Constitution making Prohibition the law of the land meant that the amendment would keep widespread sales of alcoholic beverage “from ever happening.” Granted, it is more difficult to change a constitution than to change a statute, but it’s not impossible.

Seven years ago, in Tax Credit for Chocolate?, I facetiously suggested that the “growth, manufacture, sale, purchase, and consumption of chocolate be included as something within the scope of the education credits” because studies had been released at the time demonstrating that chocolate helps the learning process. It also increases heart attack survival rates, reduces cavities, and reduces blood pressure.

Three years later, in Chocolate? Yes!, I noted that more proof had been discovered that “chocolate is medicinal” because it contains the flavonoid epicatechin, a substance that has beneficial health effects. Current law does not permit taxpayers to claim a medical expense deduction for their chocolate purchases. Nor should it.

Now comes yet another report that weekly chocolate consumption enhances brain function. The headline suggests “Eating More Chocolate Might Make You Smarter.” Might? Does it? Let’s find out. Let’s have a “Chocolate Consumption” month. No tax breaks. No sales tax exemptions. It doesn’t take much to encourage people to consume chocolate. It’s wonderful. Imagine if the path to having a better-functioning brain was an increase in the consumption of brussel sprouts, or whatever food is on your “please, no thank you” list.

The new study gathered information over a several decades from almost 1,000 people. For six of those years, those conducting the study collected dietary information from the participants. The one substance found to “significantly improve mental function” was chocolate. As the report notes, other healthful activities, such as exercise, eating properly, reducing stress, though helpful, don’t have the impact that chocolate provides.

The study determined that weekly chocolate consumption improved “visual-spatial memory and [organization], working memory, scanning and tracking, abstract reasoning, and the mini-mental state examination.” The precise connection has yet to be identified, but researchers are guessing that cocoa flavanols are the cause. They also point to methylxanthines, found not only in chocolate but also in coffee and tea.

So, with the start of tax return preparation season only a few months away, perhaps it is time to begin prepping our brains to confront the mental challenges of taxation. Surely clients will appreciate the jar of chocolate goodies sitting in the reception area, helping them sharpen their minds for their meeting with the tax return preparer.

The world always hungers for good news. Well, this discovery qualifies. My only disappointment is that these advances in scientific research did not happen decades ago. Why? It would have made it easier, at least theoretically, to persuade my parents to raise the limits on my chocolate candy consumption.

New Jersey raised its gasoline tax and some people are quite unhappy. An article published last week reported that a Pennsylvania resident who commutes from Conshohocken to her job in Hamilton, N.J., roughly 50 miles away, claimed her cost of driving to and from work would increase by at least $50 a week. Shortly thereafter, Douglas K. Smithman submitted a letter to the editor contesting the $50 claim and providing computations showing that the increase would be $6.25 per week. Subsequently, the original article was amended to change the $50 to $5.

The article and Smithman’s letter encouraged me to think about the issues triggered by the New Jersey gasoline tax increase. What other considerations are relevant?

I wondered if the Conshohocken resident, who clearly was filling her tank in New Jersey, would be better off doing so in Pennsylvania. The answer, at least this week, is no. The tax increase in New Jersey brings the total cost of a gallon within pennies of the cost of a gallon of gasoline in the Conshohocken area. A similar outcome appears to be the case with fuel prices on either side of several bridges connection Pennsylvania and New Jersey.

The original article also reported the reaction of a man who paid $41 to fuel his Kia Optima. He travels 66 miles a day to work and back. He claimed that the increase was “a lot more” out of his gasoline budget. Curious, I checked the fuel mileage for a Kia Optima. It is rated at 28 city, 39 highway. Because those numbers are usually optimistic (sorry), I used 30 miles per gallon, which means that he uses roughly 2.2 gallons a day. The 23-cent-per-gallon increase generates a price increase of 50.6 cents per day. That’s $2.53 per week, or, allowing for two weeks vacation, $126.50 per year. Hold that thought.

The original article also quoted an AAA representative who pointed out that, on average, motorists pay $600 a year for repairs required by potholes and other road hazards. Some sources suggest the cost could be as high as $1,200 per year. New tires, new wheels, and front-end alignments are expensive, and cost more than the fuel tax increases required to eliminate road hazards, as I have pointed out in previous posts such as Potholes: Poster Children for Why Tax Increases Save Money, When Tax Cuts Matter More Than Pothole Repair, Funding Pothole Repairs With Spending Cuts? Really?, Battle Over Highway Infrastructure Taxation Heats Up in Alabama, and When Tax and User Fee Increases Cost Less Than Tax Cuts and Tax Freezes. Add to that the cost of burning fuel sitting in traffic jams caused by inadequate road capacity. To return to the Kia owner, isn’t $126.50 a year a much better price to pay than the $600, $1,200, or more, that becomes increasingly likely as roads deteriorate and traffic increases? To return to the Conshohocken resident, is $5 per week a good insurance price to pay to reduce significantly the chance of a $600, $1,200, or worse, repair bill?

Making the calculus worse are the reports, also shared in the original article, of motorists taking their anger out on fuel station owners and operators. Those proprietors are not pocketing the increase. They are just as unhappy, because they are likely to lose their Pennsylvania customers and thus suffer from reduced sales volume. Informed individuals know this.

Smithman concluded his letter with a plea:

I make this point as an example of a larger problem. In our busy lives, we often re-Tweet and repeat what someone has said and allow it to become fact through repetition. It is important to think objectively about what we hear and apply common sense to those statements, particularly before we put them out there in such a manner that they might be quoted and an erroneous statement becomes fact.

It is uplifting to know that Smithman has the same concern that I have (and I’m also impressed with his math skills). Quality education is not just a matter of acquiring information, but also a matter of learning how to acquire information, learning how to acquire sufficient information, and learning how to dissect and analyze the information that is acquired. Figuring out the impact of the New Jersey gasoline tax increase, and deciding whether it is economically beneficial or detrimental, is important. It is not difficult to do. It requires looking a bigger picture than the numbers on a gasoline pump.

Apparently there is a problem in Seattle. Eighty percent of dog owners fail to register their pets. The situation probably isn’t much different with respect to other animals that must be licensed. Because of the noncompliance, the animal control budget is inadequate to deal with the safety and protection of people.

In a Letter to the Editor of the Seattle Times, Ellen Taft suggests that it would be more effective to repeal the pet license law and replace it with a sales tax surcharge on pet food. The revenue would be dedicated to animal control enforcement. It would also be used to provide free spay and neuter clinics, and thus in the long run save money and reduce the rate of pet euthanasia. Taft does not mention any impact on the number of animals in shelters.

Would this work? In terms of revenue, perhaps. Perhaps pet owners in Seattle would purchase pet food outside the city. Perhaps they would order pet food online from vendors not subject to use tax collection requirements.

But the practical problem presented by the proposal is the loss of pet identification. Pet licenses permit animal control employees, police officers, and people trying to find the owners of lost pets to identify the pet and thus the owner. In the case of an animal bite, the identification is crucial in deciding whether the victim needs rabies treatment. Microchips are a solution, but relying on voluntary microchip implantation isn’t going to reach anywhere near all of the animals.

This is an instance in which a special tax doesn’t solve the problem. What is required is effective enforcement of the licensing laws, in order to protect people. The revenue from issuing pet licenses can be supplemented by the imposition of fines and penalties on pet owners who fail to comply.

A recent United States Tax Court case, Urgent Care Nurses Registry, Inc. v. Comr., T.C. Memo 2016-198, takes the tax world into a twilight zone of entities that don’t exist existing for purposes of being told that they don’t exist. Surely there are lessons in this case, as strange as it is.

The taxpayer was incorporated in California on July 21, 2005, and was assigned a taxpayer identification number by the California Franchise Tax Board. On August 1, 2008, the Board suspended the taxpayer’s corporate charter under section 23301 of the Suspension and Revivor article of the California Revenue and Taxation Code. On July 26, 2016, the California secretary of state certified as follows: “The records of this office indicate that the . . . [Board] suspended . . . [taxpayer’s] powers, rights and privileges on August 1, 2008 . . . and that . . . [petitioner’s] powers, rights and privileges remain suspended.”

The taxpayer filed income and employment tax returns for 2009 through 2013 but enclosed no payments. It did not file other returns, and so the IRS prepared substitutes for returns that met the requirements of section 6020(b). The IRS assessed all of the taxes in question plus a penalty under section 6721 for failing to file Forms W-2. In January 2015, the IRS sent the taxpayer a Final Notice of Intent to Levy and Notice of Your Right to a Hearing. The taxpayer timely requested a collection due process hearing, and a settlement officer was assigned to the case. In June 2015 the settlement officer informed the taxpayer’s representative that the case history indicated that the taxpayer was no longer in business, that the revenue officer had been told the business was being operated as a sole proprietorship, and that the settlement officer was requesting copies of documents confirming the dissolution of the taxpayer. The taxpayer’s representative provided a copy of Form 966, Corporate Dissolution or Liquidation, and a certificate of dissolution of the taxpayer.

On June 26, 2015, a telephone collection due process hearing was held, and the settlement officer requested additional documents by August 3, 2015. On August 18, 2015, having received none of the requested documents, the settlement officer closed the case. On August 28, 2015, the IRS issued to the taxpayer a notice of determination sustaining the proposed levy. On September 28, 2015, the taxpayer timely sought review in the Tax Court. On July 28, 2016, the IRS moved to dismiss the petition for lack of jurisdiction, contending that the petition was not filed by a party with capacity to sue under Rule 60(c). On August 4, 2016, the court ordered the taxpayer to respond to the motion on or before September 2, 2016. No response was filed.

Under Rule 60(c) of the Tax Court, the capacity of a corporation to litigate in the court “shall be determined by the law under which it was organized.” Under applicable California law, the Board may suspend the powers, rights, and privileges of a California corporation for failure to pay tax, penalty, or interest. Once a corporation’s powers are suspended, it may not prosecute nor defend an action. The taxpayer’s powers were suspended in August 2008, and the taxpayer provided no proof that its powers had been revived or that it was current on its California tax liabilities. In fact, the California secretary of state confirmed that as of July 2016 the taxpayer’s powers continued to be suspended. Documents provided to the settlement officer by the taxpayer’s representative indicated that the taxpayer had been formally dissolved, and that its business was being conducted by a sole proprietorship. Accordingly, the Tax Court held that the taxpayer lacked the capacity to litigate when it filed the petition, and thus the IRS motion to dismiss was granted.

As logical as that appears to be, several questions arise. If the taxpayer does not exist for purposes of litigating in the Tax Court, does it exist for purposes of being the recipient of a notice of deficiency? Apparently it does. Does it matter that the IRS, which considers the taxpayer to exist for purposes of the notice of deficiency, is the party that moves for dismissal because the taxpayer no longer exists? Not really, because the dismissal in the Tax Court is under a rule of the court, not an overriding provision that denies the taxpayer’s existence for all purposes.

So what is the taxpayer to do? The classic answer when access to the Tax Court is blocked for any reason when the taxpayer receives a notice of deficiency is to “pay the tax and file a claim for a refund, and then commence a refund suit in district court if the refund claim is, as expected, denied.” But if the taxpayer does not exist, how does it pay the tax? It can’t. Is there transferee liability on the former shareholder who is apparently running the taxpayer’s former business? What happens if no one is operating the business after the taxpayer is dissolved? With the dismissal of the petition, where does the IRS turn to collect the taxes that are due? There are insufficient facts provided in the opinion to answer these questions. The outcome will be revealed, if at all, in a follow-up proceeding.

Philadelphia revenue officials are in the process of generating rules and regulations specifying in detail how the city’s new soda tax will be implemented, including not only procedural and filing issues but also the scope of the tax. The tax, of course, is flawed. It is mis-named, because it applies to more than soda. It reaches products that do not contain sugar. Though touted as a way to reduce sugar consumption, there are hundreds of sugar-containing items that escape the tax. I have explained these flaws in What Sort of Tax?, 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?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, What Gets Taxed If the Goal Is Health Improvement?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, and How Unsweet a Tax.

Despite all the attention I have paid to the soda tax issues, I discovered a few days ago that it is even worse than I had realized. In a Letter to the Editor of the Philadelphia Inquirer, Michelle Pauls alerted readers to a startling development. Apparently the “soda” tax will be imposed on sales of almond milk, rice milk, and cashew milk. These “milks,” though not from a cow, goat, or other mammal, are derived from plants and are consumed not only by people who prefer them, but also by individuals who cannot digest, or who are otherwise adversely affecting from drinking, cow or other mammal milk. Pauls notes that the “Physicians Committee for Responsible Medicine cite research that ‘approximately 70 percent of African Americans, 90 percent of Asian Americans, 53 percent of Mexican Americans, and 74 percent of Native Americans were lactose intolerant.’” Lactose intolerance also affects substantial numbers of people with Italian, Greek, Jewish, and other ancestry from Mediterranean areas.

So what would be the justification for taxing plant-based milk but not mammal-based milk? It’s not the sugar content, because all these milks contain sugar. It’s not for health promotion purposes, despite the alleged justification for the soda tax, because all these milks are healthy. It’s not that they are beverages, because there are beverages not subject to the tax. So what is it? Could it be ignorance of what these milks are? Could it simply be revenue maximization? If it’s the former, it’s not all that difficult to become informed. If revenue maximization is the concern, then why not tax all sugar-containing products? Why let donuts, cookies, pies, and cakes off the hook?

It remains to be seen what will happen. I hope that wisdom and common sense prevail.

One of the many areas of tax law in which facts matter as much as, if not more than, the statute and regulations is the determination of whether a transfer of money or property is a gift excluded from gross income or compensation included in gross income. The black letter law is simple. Section 102 provides that gifts are excluded from gross income. But what is a gift?

A recent case, Jackson v. Comr., T.C. Summ. Op. 2016-69, provides a helpful illustration of why facts matter. In 2012, the taxpayer was the pastor, a director, and the registered agent for a church. His wife also was a church director. The church had approximately 25 to 30 active members and as many as seven ministers, and offered services three days each week. The taxpayer had informed the church’s board of directors that he did not want to be paid a salary for his pastoral services but that he would not be opposed to receiving “love offerings,” gifts, or loans from the church. The taxpayer and his wife managed the church’s checking account, and apparently they jointly signed all of the church’s checks. During 2012, they signed numerous checks payable to the taxpayer, with handwritten notations such as “Love Offering” or “Love Gift” on the memo line.

From 1993 until 2015, one person served as the church’s bookkeeper. In 2012, the bookkeeper prepared and sent to the taxpayer a Form 1099-MISC, Miscellaneous Income, reporting nonemployee compensation of $4,815 from the church. When this bookkeeper left the church in late 2015, the taxpayer’s daughter became the church’s bookkeeper. When the taxpayer and his wife filed a joint federal income tax return for 2012, they did not include the $4,815 in gross income. The IRS issued a notice of deficiency based on the Form 1099, and the taxpayer and his wife filed a petition with the Tax Court.

The taxpayer did not deny receiving the $4,815. Instead, he claimed that it was improperly reported as nonemployee compensation. The taxpayer testified that he contacted the bookkeeper and asked her to retract the Form 1099 or issue a corrected one, but that did not happen. The bookkeeper was not called as a witness. The taxpayer claimed that the $4,815 represented nontaxable “love offerings,” gifts, or loans. Though the taxpayer’s daughter testified that some of that amount constituted a loan that the taxpayer could repay at his discretion, the taxpayer did not provide any documentation or records to support the assertion that the church made loans to the taxpayer.

The Tax Court explained that under existing case law, the key to identifying a gift is the intention of the transferor. This requires an examination of objective facts and circumstances rather than the recipient’s subjective characterization of the transfers. According to the court, the transfers were made to compensate the taxpayer for his services as pastor. The taxpayer had told the board of directors that he would accept “love offerings” and gifts a substitutes for a salary. The bookkeeper at the time considered the payments to be compensation, and reported them on the Form 1099. The frequency of the transfers and the fact they were made on behalf of the congregation strengthen the conclusion that they constituted compensation. The taxpayer failed to provide testimony by the board of directors or other evidence that would support a conclusion that the intent of the board of directors was to make gifts to the taxpayer.

So what is the answer to the question, “Do ‘Love Offerings’ and ‘Love Gifts’ Constitute Gross Income?” The answer is, “It depends.” It depends on the facts and circumstances. There certainly can be instances where a pastor, especially if receiving a full and adequate salary, is the recipient of transfers that are gifts from or on behalf of the congregation. Thus, it is inappropriate to conclude, from this case, that “love offerings do not constitute gifts excluded from gross income.” The desire for short sentences, 140-character tweets, and sound bites misleads people into thinking that simple rules provide all the answers all of the time. Occasionally they do, but often they do not.

What can be learned from this case is the need to document transactions before or as they occur. Documentation matters. Even when memories are keen, testimony too often is self-serving and twisted. Writing “love offering” on a check does not, in and of itself, make the transfer a gift. Nor does omission of that phrase, or any other words or phrases, prevent a conclusion that the transfer is a gift. Yes, it depends. It depends on facts and circumstances, and the best way to make certain the full set of facts and circumstances is considered is to maintain appropriate records.

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), 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), The Inequality of Halloween? (2014), and When Candy Isn’t Candy (2015).

This year, I’ve noticed people that among the costume suggestions being floated about are several that are tax related. At first I was amused, but then I figured that in light of present-day tax issues, someone answering the door and seeing one of these costumes might be frightened into total bewilderment.

Someone came up with a costume that consists of a t-shirt, sweatshirt, or hoodie, on which is emblazoned, “THIS IS MY SCARY TAX ACCOUNTANT COSTUME.” Here is a photo of the t-shirt version.

Someone at Hallowwen Costumes suggests dressing up as an IRS agent. Instructions are provided for “a drab outfit of the Internal Revenue Service reminded to put on a staff. Hit the resale shop for a pair of polyester pants and a short-sleeved shirt; add some horn-rimmed glasses, an oversized calculator and a great support purse with play money overcrowded.” It’s been quite a while, I fear, since that sort of outfit set someone apart as an IRS employee.

Someone at Quartz has a different idea. The suggestion is to put on a “tax inversion” costume. The instructions? “Dress in over-the-top American garb (maybe even a full Uncle Sam outfit) but insist that you are actually Irish and speak in a thick Dublin brogue.” I fear very few people, if any, would figure that one out.

You won’t find me wearing any of these costumes. If I had to create a tax-related costume, I’d get a sweatshirt and put the language of Internal Revenue Code section 509(a)(4) on it. While people were reading it and reeling in horror, I could shovel candy into my sack. No, seriously, I’d never do that. Take the candy, that is. I make no promises about the section 509(a)(4) costume. For those who don’t know what it says, dig in: “For purposes of paragraph (3), an organization described in paragraph (2) shall be deemed to include an organization described in section 501(c)(4), (5), or (6) which would be described in paragraph (2) if it were an organization described in section 501(c)(3).”

Most people know that being convicted of a crime brings all sorts of bad news. Convictions generate consequences ranging from prison terms and steep fines to probation and supervised release. In most instances, the conviction remains on a person’s record. Depending on the crime, the person can end up losing voting rights, having his or her name put on one of several “beware of this person” registries, and facing dismal employment prospects.

To the list of bad outcomes can be added a disadvantageous tax consequence. A case in point is demonstrated by the United States Tax Courtorder in Swartz v. Comr., Docket No. 3583-10. Swartz, a CPA who left his accounting firm to become an assistant comptroller for Tyco International Ltd., eventually was promoted to Chief Financial Officer. Swartz participated in a loan program, and in 1999 a journal entry reduced his outstanding loan balance by $12.5 million even though Swartz had not made any payments on this loan during 1999. Swartz did not include the $12.5 million on the tax return he filed with his wife, nor was it included on the Form W-2 that Tyco provided to Swartz.

Two years later, Swartz became a member of Tyco’s board of directors. Shortly thereafter, the board learned the vice president to whom Swartz reported was the target of a criminal investigation for state sales tax violations. That vice president was indicted and resigned, and his successor initiated an audit by an outside law firm to examine Tyco’s business, including compensation paid to, and transactions with, its officers and directors. This process opened up a discussion about the $12.5 million loan reduction entry made in 1999, and that led to Swartz repaying the $12.5 million with interest. Two months later, Swartz, along with the former vice president, was indicted for multiple counts of grand larceny, falsifying business records, conspiracy, and other violations. Though the first trial ended up with a hung jury, the second jury convicted Swartz on all but one count. One of the counts on which he was convicted alleged that “in or about August 1999 and thereafter, [Swartz] stole property, to wit, money, having a value in excess of $1 million, to wit, $12,500,000 from Tyco International Ltd.” Another count on which he was convicted alleged that Swartz, during 1999, “with intent that conduct constituting the felonies of Grand Larceny in the First Degree, Grand Larceny in the Second Degree, Criminal Possession of Stolen Property in the First Degree and Criminal Possession of Stolen Property in the Second Degree be performed, agreed with each other and with others known and unknown to the Grand Jury to engage in and cause the performance of such conduct . . . .” Swartz argued that he thought the $12.5 million loan reduction was part of his bonus, but the jury found that it was not authorized by Tyco and that Swartz knew that. Swartz was sentenced to serve between 8 1/3 years and 25 years in prison and ordered to pay a fine of $35 million plus restitution. His appeals were rejected and the conviction is final.

The IRS issued a notice of deficiency, concluding that the $12.5 million loan reduction in 1999 constituted gross income to Swartz. After Swartz filed a petition with the Tax Court, the IRS moved for partial summary judgment, arguing that the criminal conviction estops Swartz from denying that the $12.5 million constituted gross income.

The Tax Court grants summary judgment if there is no genuine dispute of any material fact and the party moving for summary judgment is entitled to judgment as a matter of law. The other party must present specific facts showing that there is a genuine issue for trial. The party moving for summary judgment continues to bear the burden of proving there is no genuine dispute of material fact. In analyzing the arguments, the Tax Court reads factual inferences in a manner most favorable to the nonmoving party.

Swartz claimed that the issues in the Tax Court were different from those arising during the criminal trial because in 2002 Tyco adjusted its records to show a $12.5 million repayment obligation on Swartz, and because Swartz repaid the $12.5 million. He also claimed that the adjustment shows that the 1999 journal entry reduction the loan amount was null and void from the outset, and that he did not raise this issue during the criminal trial. He argued that erasing and then restoring the record of a debt in corporate books has no tax consequences because, in effect, the two actions offset each other.

The collateral estoppel sought by the IRS applies when an issue of law or fact in the second case is the same as one in the first case, there has been a final judgment in the first case, the party to be precluded is the same or in privity with a party in the first case, the issue that is precluded was actually litigated in the first case, and the controlling facts and legal principles are unchanged. If the parties in the second case are not identical, federal law requires the court to examine state law to determine if nonmutual collateral estoppel exists. The Tax Court determined that under New York law, nonmutual collateral estoppel does exist, and concluded, “that's good enough for us.”

Though conceding that the IRS showed several of the requirements for collateral estoppel existed, he argued that issue identity and actual litigation had not been shown because he never presented his "null and void" theory in the criminal case. The Tax Court explained that one problem with this argument is that a party's failure to make an argument about an issue in the first case doesn't mean that he is entitled to try again in the second, quoting the Restatement (Second) of Judgments, sec. 27 comment c, which elaborates, “if the party against whom preclusion is sought did in fact litigate an issue of ultimate fact and suffered an adverse determination, new evidentiary facts may not be brought forward to obtain a different determination of that ultimate fact. . . . And similarly if the issue was one of law, new arguments may not be presented to obtain a different determination of that issue.”

The Tax Court suggested that perhaps Swartz was arguing a subtler point, that, although his distinction between a void theft and a voidable one might not have mattered as a matter of New York criminal law, it should matter under federal income tax law. This distinction, though, according to the court, fails as a matter of law because gross income arises regardless of whether the thief does not obtain title or obtains voidable title. In other words, gross income includes ill-gotten income, whether obtained through embezzlement, larceny, false pretenses, extortion, or any other type of theft. Though the court has “entertained” an exception to this principle if the thief makes repayment in the same year in which the theft occurs, that did not happen in this instance.

Thus, the conviction estopped Swartz from denying that he embezzled $12.5 million in 1999. Nor, therefore, could he argue that the $12.5 million did not constitute gross income. Though the order does not disclose the impact of the inclusion on Swartz’s tax liability, presumably the inclusion causes it to increase by somewhere on the order of $4 million. The court specifically noted that the tax consequences of the 2002 repayment was not before it. Even if it causes a reduction in Swartz’s 2002 federal income tax liability, the time value of money and possible rate differences makes it very likely that a 2002 tax liability reduction does not fully make up for the 1999 increase, and it is also quite possible that the statute of limitations for 2002 has expired.

During the many years I taught basic federal income tax, some students would explain why they did not take the course or were reluctant to do so. Their arguments followed a general pattern. “I’m not going to be a tax lawyer, and although I understand that lawyers who focus on areas like corporate law, domestic relations law, and wills and trusts, I’m going to be a criminal defense lawyer (or prosecutor), and I’ll pay someone to do my tax returns. So studying basic tax law doesn’t matter to me.” My reply usually began, “Oh, yes, it does.” Indeed it does. Crime simply doesn’t pay.

When I taught the basic federal income tax course, I tried to help students understand that the practice of tax law is not simply a matter of rules and numbers. The toughest part often is figuring out the facts. Sometimes figuring out the facts requires classifying information by finding the appropriate place to draw a line. For example, is an insect infestation that destroys trees a casualty? In this instance, the tax practitioner must become more than casually acquainted with insects, infestations, biology, and botany.

In Germany, the VAT is imposed at different rates depending on the transaction. The basic rate of 19 percent is reduced to 7 percent if the transaction is the purchase of a ticket to an event of high culture. That is why people attending a classical concert pay the reduced VAT on the ticket price. But what about tickets to attend events at a nightclub? Does the ticket to the nightclub qualify for the reduced rate?

According to this story, a German court concluded that tickets to the Berghain nightclub qualified for the reduced rate. The court focused on the events most often hosted at the club, specifically, “marathon techno sets.” It didn’t matter much that the club also made space available for book readings, photograph exhibitions, and fashion shows. The club’s attorney made his case by comparing techno sets with classical music concerts. Both the club and concert halls have stages. The music in both venues has a recognizable beginning and end. In both instances, people in attendance have the opportunity to applaud between pieces. The attorney also noted that both club goers and concert attendees could achieve a “trance-like ‘intoxication’ ” by listening to “a Mahler symphony or a Planetary Assault Systems DJ set.”

I’m confident that, given the choice between doing research on insects and trees, and research on music, I’d choose the latter. The challenge, though, for tax practitioners, is that they rarely get a choice. They must deal with what the client brings to them.

Somewhere, some people are shaking their heads in disbelief, wondering how anyone could consider a nightclub to be a bastion of “high culture.” All jokes aside – yes, I know what you’re thinking, and so am I – no one has a monopoly on defining culture, high or otherwise.

As I also told my students, the practice of tax law is fun. It’s far from boring, no matter what one thinks of rules and numbers.

Last week I started a project that has been on the to-do list for longer than it should have been. The tile floor in the laundry room, at least 45 years old, was breaking up. The plan was to replace the floor. After moving everything but the washer and dryer out of the room, I realized that it would make sense to paint the room. That hasn’t been done for a long time. Then I realized that before painting the walls, they needed to be cleaned, and in a few places, patched. On Wednesday I discovered that the laundry tub trap was leaking, perhaps as a consequence of my banging into the tub legs while taking up the floor.

The point of this anecdote is that too often, when we set out to accomplish a project, the task grows to include far more than we had planned to do. There is a parallel phenomenon when it comes to tax, or any other, legislation. Proposed bills grow, making the successful enactment of the original proposal much more difficult.

Earlier this month, in Getting a Tax Statute Right the First Time is Much Easier Than the Alternative, I discussed a decision by the Supreme Court of Pennsylvania to strike down the state’s slots tax because it, in effect, subjected casinos to varying rates of taxation in violation of the uniformity clause of the state’s constitution. The court gave the legislature 120 days to fix the statute, by staying its order for that length of time. One reaction, from almost every direction, was a prediction that fixing the statute would be difficult, because, among other things, the legislature would be tempted to do more than simply redraft the slots tax provisions. For example, the emergence of video-gaming terminals and online gambling during the years since the statute was originally enacted most likely will entice legislators to offer provisions dealing with those activities.

Now comes news that competing interests will cause the legislature to “be pulled in multiple directions as it tries to fix” the slots tax. Aside from video-gaming terminals and online gambling, the distribution of the revenue raised by the tax is now getting attention. Many legislators on the House Gaming Oversight Committee want to change the formula used to distribute the tax proceeds. Under existing law, the revenue is shared by the state and the localities in which the casinos are located. They point to instances in which casinos in one county or municipality is very close to, but not in, another county or municipality, and thus receive services from police, fire fighters, and others who are funded by the locality in which the casino is not located. These legislators hint that getting votes for fixing the rate issue will require agreement on changing the distribution rules.

Although the Supreme Court stayed its decision for 120 days, the localities in which the casinos are located have less time to put together their budgets for next year. Without assurances of what will happen with the tax, people subject to taxation by these localities, especially those who pay real property taxes, face the prospect of significant tax increases to offset the anticipated loss or delay of slots revenues. In one locality, the tax provides 40 percent of its budget.

Even if the legislature could accomplish its task within 120 days, localities face serious financial planning problems. Yet the odds are high that the legislature, encumbered by additional items placed on the to-do list, will not produce a revised statute within 120 days. My bet is that I will finish the laundry room project before the Pennsylvania legislature fixes the slots revenue statute.

The state of Kansas continues to provide excellent insights into the failings of trickle-down economic theory. The theory, long discredited but revived by Donald Trump in an even more severe form, insists that tax cuts create jobs. The experience in Kansas says otherwise. And the Kansas story now has another chapter.

In A Tax Policy Turn-Around?, I explained how the Kansas income tax cuts for the wealthy backfired, causing the rich to get richer, the economy to stagnate, public services to falter, and the majority of Kansans to end up worse than they had been. In A New Play in the Make-the-Rich-Richer Game Plan, I described how Kansas politicians have been struggling to find a way to undo the damage caused by those ill-advised tax cuts for the wealthy. In When a Tax Theory Fails: Own Up or Make Excuses?, I pointed out that the Kansas experienced removed all doubt that the theory is shameful. In Do Tax Cuts for the Wealthy Create Jobs?, I described recent data showing that the rate of job creation in Kansas was one-fifth the rate in Missouri, a state that did not subscribe to the outlandish tax cuts for the wealthy that Kansas legislators had embraced. In Kansas Trickle-Down Failures Continue to Flood the State, I highlighted some of the additional disadvantages faced by ordinary Kansas citizens as a consequence of the trickle-down tax cuts for the economic elites of Kansas. Several days later, in The Kansas Trickle-Down Tax Theory Failure Has Consequences, I shared the political fallout from the failed trickle-down policies, as Kansas voters woke up and voted out many of the legislators who had supported the tax cuts.

Now comes news that Kansas governor Sam Brownback, architect of the Kansas trickle-down tax cuts, facing another budget crisis compounded by those tax cuts, refused to take a definite stand against tax increases. He prefers not to raise taxes, arguing that taxpayers in the agricultural and energy sectors are struggling with what he calls a “rural recession.” Brownback is term limited, so there’s not much that Grover Norquist and the anti-tax crowd can do to retaliate if Brownback ends up supporting a tax increase.

Yet Brownback has a way out, one that does not inflict tax increases on Kansas taxpayers whose incomes have dropped because of the difficulties faced by the agricultural and energy industries. Brownback can simply explain that the tax cuts were predicated on the promise of a robust economy with high job creation, that the promise was not fulfilled, and that the only suitable, and fair, remedy is to undo those tax cuts. In other words, the tax increase should be placed on the shoulders of the folks who walked away with the tax cut windfall in 2012 and 2013. Perhaps next time a governor or president proposes, and a legislature decides, to cut taxes on the wealthy because doing so will generate advantageous economic outcomes, the legislation should be in the form of a contract, with tax increase penalties for breach by those making the promises.

It comes from every direction. Tax ignorance, that is. Readers of this blog know that dislike ignorance of any kind, and tax ignorance is particularly bothersome to me. I’ve written about it time and again, in posts such as Tax Ignorance, Is Tax Ignorance Contagious?, Fighting Tax Ignorance, Why the Nation Needs Tax Education, Tax Ignorance: Legislators and Lobbyists, Tax Education is Not Just For Tax Professionals, The Consequences of Tax Education Deficiency, The Value of Tax Education, More Tax Ignorance, With a Gift, Tax Ignorance of the Historical Kind, A Peek at the Production of Tax Ignorance, When Tax Ignorance Meets Political Ignorance, Tax Ignorance and Its Siblings, Looking Again at Tax and Political Ignorance, Tax Ignorance As Persistent as Death and Taxes, and Is All Tax Ignorance Avoidable?

I find tax ignorance in articles, in comments, in arguments, on television shows, and even public service announcements. And now, thanks to a reader, it shows up in a comic strip. Granted, this is more than a year old, and somehow I missed it when it first appeared. In this particular comic, the dialogue goes as follows:

Woman in a restaurant booth: “Hey, we’re getting a tax refund.”
Man sitting with her: “Woo-hoo! Free money!”
Man sitting in the adjacent booth: “Sigh. Sounds like a job for . . . OBVIOUSMAN”
He continues: “You didn’t win a prize there . . . Your refund only means you gave the government an interest-free loan! Now it’s taxable income for this year!”
Man: “Wait. . . . What?”
Woman: “You mean we would’ve been better off NOT getting a refund?”
Obviousman: “Right. . . . My work is done here!”
Woman: “Thanks for keeping our moment of joy so brief, Obviousman.”
Obviousman: “You’re welco. . . oh . . . sarcasm, right?”
Woman: “Ah, nothing gets past you, sir. . . .”

The refund is not taxable income. It might be gross income, if it is a state or local income tax refund, and it was deducted in the year it was paid, and that deduction generated a tax benefit. And even if it is gross income, it might not generate taxable income, depending on what other deductions are available. If it is a federal income tax refund, it’s not gross income, period.

If the point that the comic author was trying to make was the disadvantages of overpaying income taxes and getting a refund in a subsequent year, because of the lack of interest on the amount in question, then that point could have been made without getting into the question of whether a refund causes an increase in gross or taxable income. If the author was also trying to make the point that all income tax refunds generate taxable income, it’s way off the mark.

So I wonder how many people will think that because they saw this comic, in the newspapers or on the internet, that the claims made by its Obviousman character are correct. Surely those who understand some basic tax law principles would know it’s not so. But only a small proportion of the population has experienced education on that issue. Sad, isn’t it?

Several months ago, in A Not So Hidden Tax Increase?, I commented on the decision by New Jersey’s Governor Chris Christie to explore the termination of the income tax reciprocity agreement between New Jersey and Pennsylvania. I explained how the repeal of the agreement would increase income tax burdens on higher-salaried Pennsylvanians working in New Jersey and lower-salaried New Jersey residents working in Pennsylvania. Shortly thereafter, New Jersey’s governor terminated the agreement. Why? New Jersey needs revenue

In the meantime, New Jersey has been dishing out tax breaks to companies that it has enticed to move to New Jersey. Though the claim that handing out tax reductions ultimately raises tax revenue is offered as justification for these deals, the reality is that these sorts of tax breaks are as effective as trickle-down tax cuts, that is, they’re not. I have written about these giveaways many times, most recently in The Tax Break Parade Continues and We’re Not Invited, and previously 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?.

So perhaps it was a surprise to read, in this news story, that executives from at least three of the companies who were the beneficiaries of those relocation tax breaks are “furious” with the governor’s decision. One described his reactions as feeling “blindsided” and “very disappointed.” In fact, he explains that the company is “reevaluating” its move, and that, “Had we known about this, before our construction of headquarters and our national training center, we may have reached a different conclusion. It would have factored into whether we moved.” Of course it would. It’s this sort of political decision making that leaves businesses grappling with uncertainty, because today’s promise becomes tomorrow’s breach.

Having no access to the negotiations that preceded the individual tax break handouts, I do not know if these companies even tried to negotiate promises that the overall tax and economic landscape would not be altered. I doubt that they tried, and I am confident that even if they did, no such promises were forthcoming. Otherwise they would be preparing to sue the state for breach of contract.

The entire situation demonstrates the dangers of trying to work out private deals to obtain tax and economic benefits superior to those available to the average citizen. When Americans who are angry about the tax and economic condition of the nation take the time to examine who is responsible, and to look beyond the headline-grabbing federal tax system to the state and local tax scene, they might discover who really is responsible for the mess, and vote accordingly. This story, and the larger drama in which it plays out, is far from over.

Jokes abound about those who cannot make up their minds. “I used to be indecisive. Now, I’m not sure.” So, too, do complaints. More than a few people have heard, “Make up your mind or else . . .”

Now it appears that those who cannot decide whether they favor or disfavor a proposed tax increase can vote for both. According to this report, the choices on a Broward County ballot question includes a yes/no choice. The question is whether the sales tax should be increased by one-half of one percent to fund transportation improvements. The intent was to provide two choices, yes and no. The intent also was to provide the choices in three languages, English, Spanish, and Creole. The intent was to have the first choice read “YES/SI/WI” and “NO/NO/NON.” What appears on the ballot question? “YES/SI/NO” and “NO/NO/NON.”

It seems funny, but it’s not. What happens when someone wanting to vote “no” sees the “NO” in the first choice and selects that choice because it appears to be what should be selected for a NO vote? What happens is that the vote is counted as a YES.

Because ballots have already been mailed and people have already voted, officials claim there is no way to fix the problem. The practical solution would be to reprint the ballots on a different colored form, and start over. My guess is that there is some sort of deadline set by law that makes this impossible absent a legislative change. Ballots that have not yet been mailed will include an insert explaining the error.

One official expressed hope that voters would not be confused. Because one line begins with yes and the other with no, voters presumably would figure out what each line means. But that presumes voters would be looking at, and understanding, the first word in each line. Most probably do, but there’s no guarantee.

How did the error occur? No one knows. Multiple proofreaders review the ballot. The proofreaders include individuals who speak one or more of the three languages. It’s easy for this sort of mistake to happen when only one person looks at the document. The chances of an error should go down as more people examine the language. Yet, sometimes, ever once in a while, a mistake gets through even though multiple pairs of eyes have looked at the language.

The ballot was not intended to include “unsure” as a third choice. But now, for those who are undecided, apparently it does.

According to this story, officials in several dozen California cities are thinking of imposing a tax on video streaming platforms such as Netflix and Hulu. And it would be a good guess that officials in other places are also thinking about the same thing. In California, the proposal is to subject video streaming to a tax already in place that applies to cable television. Pennsylvania and the city of Chicago have enacted taxes on video streaming. What encourages these actions is the loss of tax revenue from individuals who are unsubscribing to cable television and getting their movies and television shows through the internet.

As described in this report, the Chicago tax has been challenged. Though one of the grounds is procedural, focusing on which Chicago officials have the power to impose the tax, the challengers also claim that the video streaming tax violates the Internet Tax Freedom Act, which prohibits states and cities from enacting taxes that apply only to the internet. The Chicago tax rate on video streaming is higher than the rate imposed on DVD sales and on live entertainment.

Opponents of the California proposals claim that taxing video streaming would be double taxation. Their reasoning is that the user pays local taxes for internet access provided by internet service providers and for smart phone connections.

Is there double taxation? Travel back in time to the days when movies were rented from brick-and-mortar retail stores. In most states, the sales and use tax applied to the rental charge. Was that the only tax? Any person using a vehicle to obtain access to the retail store also paid tax on the fuel used to power the vehicle. If the person used a bicycle, the person had paid a sales and use tax on the bicycle. In other words, is taxing access the same as taxing the item being procured through the access? If the tax on the amount paid on the service provided to access the internet is comparable to the tax paid on the fuel used to access the retail store, and the tax on the rental of the movie is comparable to the tax paid on the downloaded video stream, then knocking down the video streaming tax on the double taxation claim will be difficult.

But that does not end the analysis. To the extent that the tax is imposed on video downloaded through the internet and not on video obtained through other channels, then the attempt to overturn the tax has a higher chance of success. The same is true if the rate of tax on streamed video is higher than the rate imposed on other types of video and, in the case of amusement taxes, on other types of amusement.

A recent Tax Court decision, Costello v. Comr., T.C. Memo 2016-184, provides helpful instructions about what to do and not to do when combining an LLC with a corporation. Though it’s too late for the taxpayer in that case, there are lessons that should prove helpful to others facing the issue in the future.

The case involved collection actions for employment tax liabilities. The resolution required identifying the tax status of the employer. Though the amount of the tax liabilities was undisputed, the issue required identification of the responsible taxpayer.

In 1989, the taxpayer’s father incorporated Heber E. Costello, Inc. (HECI). The taxpayer’s father was the sole shareholder of HECI. HECI filed Form 1120 for each of its taxable years. At some point before 2004, the taxpayer’s father died and the taxpayer became the sole owner of HECI.

On December 31, 2003, the taxpayer formed an LLC. He was the sole member. The LLC never filed Form 8832, Entity Classification Election. On December 31, 2003, HECI and LLC merged – though the better word would be “combined” – and HECI ceased to exist. After the combination, the LLC filed Forms 1120 using HECI’s employer identification number. The taxpayer filed Forms 940 and 941 on behalf of the LLC but did not make sufficient tax deposits or pay the tax due for its employment tax liabilities for the first three quarters of tax years 2007 and 2008 or pay the tax due for its employment tax liabilities for the periods ending December 31, 2006 and 2008. The IRS issued a notice of intent to levy (NOIL) on June 1, 2011, for all of those periods and a notice of Federal tax lien (NFTL) filing on December 13, 2011, for all those periods other than 2006. The taxpayer timely submitted Forms 12153, Request for a Collection Due Process or Equivalent Hearing (CDP hearing), on June 26, 2011, and January 6, 2012, in response to the NOIL and the NFTL filing, respectively. The taxpayer indicated he could not pay the liabilities and wanted either an installment agreement or an offer-in-compromise (OIC). Though it was unclear if an OIC was submitted, it appears that any OIC would have been based on his argument that he was not individually liable for the LLC’s employment tax liabilities, which is the same argument he made before the Court. The taxpayer’s CDP hearing requests indicated he wanted Appeals to consider the abatement of taxes. Though asked to do so, the taxpayer did not submit a Form 433-A or any collection alternatives before the hearing. When an Appeals official met with the taxpayer’s representative, the taxpayer did not submit an OIC or any other collection alternatives to Appeals, nor did he present any argument with respect to the abatement of taxes. Instead, the taxpayer argued that the LLC, and not the taxpayer personally, is liable for the LLC’s employment taxes. The IRS issued the notices of determination upholding the proposed lien and levy actions on November 28 and December 3, 2012, respectively. Petitioner timely filed a petition for review of the determination.

After dealing with procedural issues, the Tax Court turned to the substantive question of whether the LLC or the taxpayer was liable for the employment taxes. The court explained that a single-member LLC is disregarded as a separate entity for federal tax purposes unless it elects to be treated as a corporation. The LLC did not file the election. Therefore, it was a disregarded entity.

The taxpayer, however, advanced three arguments in support of his position that the LLC should be treated as a corporation. The Tax Court rejected all three.

First, the taxpayer argued that the combination of HECI and the LLC was a valid F reorganization, and that the resulting entity was a corporation. The court concluded that regardless of whether the combination qualified as a F reorganization, the failure of the LLC to file Form 8832 electing to be a corporation kept it from being a corporation. Though the court did not directly answer the question, is it possible for a disregarded entity to enter into an F reorganization? Logically, the conclusion would appear to be no, because an F reorganization requires a mere change in identity, form, or place of incorporation, and in this case HECI disappeared, and the LLC did not change its identity or form, nor did it have a place of incorporation to change.

Second, the taxpayer argued that by filing Form 1120 for the first taxable year after the combining of HECI and the LLC was a valid election by the LLC to be treated as a corporation. The Tax Court concluded that the election to be treated as a corporation must be made on Form 8832 and is not made simply by filing a Form 1120.

Third, the taxpayer argued that the doctrine of equitable estoppel prevented the IRS from arguing that the LLC is not a corporation because of its “tacit acquiescence” to the filings of Forms 1120 for the year of the combination and subsequent years. The Tax Court concluded that equitable estoppel did not apply, because it requires proof that the IRS made a false representation or wrongful misleading silence, proof that the error was in a statement of fact and not in an opinion or a statement of law, proof that the taxpayer was ignorant of the true facts, and proof that the taxpayer was adversely affected by the
acts or statements of the person against whom estoppel is claimed. The court explained that the IRS made no false statements to the taxpayer, and its failure to reject the LLC’s Forms 1120 was not a wrongful misleading silence. The court also explained that the taxpayer knew that the LLC had never filed a Form 8832 to be treated as a corporation.

For wages paid in the years in question, the activities of a disregarded entity are treated in the same manner as those of a sole proprietorship, branch, or division of the owner. Thus, the sole member of an LLC and the LLC itself are a single taxpayer or person personally liable for purposes of employment tax reporting and wages paid before January 1, 2009. That left the taxpayer liable for the LLC’s unpaid employment tax liabilities.

The lesson is clear. If the member or members of an LLC want the LLC to be treated as a corporation, file Form 8832. There is no alternative. As complicated as tax law is, the filing of Form 8832 is one of the easier tasks to undertake. Though deciding whether to treat the LLC as a corporation requires somewhat more sophisticated judgments, projections, and planning, once the decision is made, the filing of the form is not difficult.