MauledAgain

For some reason, the fact that professional athletes must pay income tax to a state in which they play a game seems to disturb some people. Though I understand the disagreements over how an athlete’s income should be apportioned to a state in which an athlete plays one or more games, I don’t understand why the idea of paying income tax to a state in which a person does work or sells items in order to generate income is disturbing. Tens of millions of Americans, who aren’t headliners or stars, work in states other than the ones in which they live, either through cross-border daily commutes or through extensive or occasional out-of-state business travel, and yet little attention is paid to their state income tax situations compared to the angst demonstrated over what athletes face.

A few days ago, John Breech of CBS Sports published an article, “The Panthers have stayed the week in California during their West Coast trip, and that gets pricey, in which he points out that the team’s decision to remain in the state between their two regular-season games, along with its presence in the state for the Super Bowl, will cost Cam Newton $220,000 in California income taxes. Though the prospect of paying that sort of tax bill might overwhelm most Americans, it’s petty cash to a person earning, as Newton does, $20,000,000 in 2016, and $103.8 million over five years.

But what caught my eye and left me shaking my head was the first sentence of the article: “Panthers quarterback Cam Newton doesn't live in California, but he's going to be playing a lot of taxes there when Uncle Sam comes calling in April.” Uncle Sam is short-hand for the federal government. The federal government, through the Treasury Department, and more specifically, the Internal Revenue Service, collects federal income taxes. California state income taxes are collected by the California Franchise Tax Board. I’m unaware of any nickname for the California FTB, but perhaps a reader in that state can enlighten us. It is important to distinguish the federal government from state governments, and to distinguish the IRS from the FTB.

The advocates of tax cuts claim that cutting taxes puts more money in taxpayers’ pockets. Not only do tax cuts not benefit the economy if they are not appropriately distributed, as we saw fifteen years ago and are going to see again, tax cuts that require spending cuts shift the burden of those expenditures to other governmental units, requiring those governments to raise taxes. Until and unless legislators measure the true cost of what taxpayers want and then spread that cost in a manner that benefits the economy, the downward economic spiral will continue no matter what false promises or well-intended futilities are tossed about.

An example of this whack-a-mole tax shift was described in a recent report about the inability of the Pennsylvania legislature to enact a budget on time. One of the snags that caused the nine-month delay in setting out the state’s finances is the insistence by some legislators that taxes not be increased under any circumstances whatsoever. One of the effects of this approach to governance was the need for the state’s counties to raise taxes in order to make up the shortfall in revenue and the cutbacks in services provided to the citizens. Because the state relies on a variety of taxes, but counties and school boards rely primarily on real property taxes, the effect of this tax shift is to move overall revenue collection in the state in the direction of a less equitable and less efficient revenue-generating system.

The situation will worsen. The anti-tax crowd that will have unfettered freedom in the nation’s capital to curtail spending on things other than their pet projects while cutting taxes for the wealthy is proposing to shift responsibility for citizen services to the states. And states, in turn, either will raise taxes, or, where anti-tax crowds are in control, require localities to raise taxes. All that will trickle down from Washington through the states and into counties and localities are tax cuts for the wealthy and tax increases for everyone else. The nation went down this path fifteen years ago, and about seven years into the journey it all came crashing down. When that happens again, about seven years from now, the damage will be even worse, because what will be enacted dwarfs what was done in 2001.

One of the emails that bring me daily tax updates included, among its more than a dozen headlines, this one: Trump Has a Family Foundation. Why Don’t You? Though I didn’t think the question was aimed at me personally, I did stop for a moment and think about it. It would be nice, I suppose, to have a family foundation, if for nothing more than to preserve the genealogical and family history materials, books, pamphlets, maps, photographs, charts, and other data, in both physical and digital form, that I have accumulated. Surely it would be a benefit to the several hundred thousand individuals who have or will have a direct interest in the collection. But before I began seriously considering whether such a foundation would or could qualify for tax-exempt status, I answered the question. The answer is simple. I don’t have the financial resources.

According to the full article, as of 2014 there were about 40,000 tax-exempt family foundations making grants. That’s a lot, until it is contrasted with the number of people in the country, which is in the hundreds of millions. In other words, almost everyone does NOT have a family foundation. But perhaps that is because most of us aren’t anyone, as the article starts off, “Everyone who is anyone, it seems, has a family foundation.” Apparently there aren’t very many anyones in this country. But then the article notes that, “The vast majority of family foundations are headed by people you’ve never heard of.” But those people are still someones, because they have the clout that money brings, even if they are content to work in the shadows and don’t seek the publicity of tweets and political campaigns.

According to the article’s lead, most of these foundations have less than a million dollars in assets. What does that mean? Specifically, the median asset amount in 2014 was $735,000, and the average was $9.6 million. Three out of five family foundations held less than a million dollars in assets. Years ago, the benchmark for setting up a family foundation was a $5 million investment. In recent years, it has become possible to set up a foundation with $250,000. The reality is that most Americans, who struggle to make ends meet, who are in debt, and who find it difficult if not impossible to set aside savings, aren’t in a position to put $250,000 into a family foundation.

Operating a family foundation is complicated. There are a variety of restrictions, and anyone who pays attention to the news knows that the president-elect’s foundation recently confessed that it had engaged in self-dealing, which is a prohibited activity. The reason for these restrictions is to prevent someone from using tax-exempt status to avoid income and other taxes. To ensure compliance, it is necessary to retain experts who can assist the foundation and its trustees in avoiding missteps. That costs money. Foundations with millions of dollars in assets generate enough income to afford the cost of the experts. It’s a different story with a foundation holding $250,000 in assets.

So that’s why don’t I have a family foundation. Do I fret about this? No. But there’s the answer, in case the question had been aimed at me.

In a series of posts, I have criticized the New Jersey tax policy of dishing out tax breaks to companies that it entices to move to New Jersey, or to move to Camden from within 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?

A recent article about a company denied a giveaway revealed, at least to me, another flaw in the tax break giveaway. It’s bad enough that taxpayer dollars are handed out to companies that are far from struggling economically, but now it turns out that if your company is too small, it’s barred from the tax buffet table.

After meeting with the Economic Development Authority, which guards the door to the tax breaks, the owners of the company were left with the impression that all was going well with the application. By merging, they had created a company with 42 employees, which was more than enough to meet the “number of employees” requirement for obtaining the tax break. But then the owners were told that their application was rejected. Why?

The Economic Development Authority rejected the application because it did not want to set a precedent that would encourage small companies to merge “for the sole purpose of securing tax incentives.” The company explained that it understood the decision because they guessed that the Authority was concerned that the merging firms would operate as four individual companies. Though one of the companies ended up dropping out of the merger, the others continued and moved into Camden despite the lack of the tax giveaway.

So the tax break is designed for large companies that already exist as large companies. Small fry need not apply. That makes no sense. First, it is an inappropriate and senseless distinction. If the goal is the creation of jobs, who cares whether a company with 15 employees creates 2 jobs for a $100 tax break or a company with 5,000 employees creates 20 jobs for a $1,000 tax break? Well, it doesn’t quite work that way, as the tax break isn’t measured by the number of jobs created, particularly considering few jobs have been created and even fewer for residents of economically distressed Camden. Second, most job creation is generated by small businesses. So if there is going to be selectivity, it ought to be in favor of the small business.

It would not surprise me that in the end, this newly created small business creates more jobs, at least proportionately, than the big companies have generated. The firm denied access to what the big companies get has already announced plans to engage in a variety of activities designed to help the neighborhood and city in which they are locating. If this is what happens without the tax breaks, why have the tax breaks?

As soda taxes gained voter approval in four cities earlier this month, Philadelphia continues to encounter challenges in its attempt to implement its version of the tax. Unlike those four cities, Philadelphia faces questions of state constitutional authority that have yet to be resolved because they are the subject of pending litigation.

The soda tax is deeply flawed. As I have pointed out 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, How Unsweet a Tax, and When Tax Is Bizarre: Milk Becomes Soda, the tax is both too narrow and too broad. Though touted as a health improvement incentive, despite being attractive to politicians because of its revenue possibilities, it reaches items that are healthy and fails to reach all sorts of items that contribute to poor health. Taxing almond milk but not doughnuts belies the claim that the soda tax is designed to, and will improve, health.

Now comes news that despite the pending court challenges claiming that Philadelphia lacks the authority to enact the tax, the city is spending the revenue that it anticipates collecting. Reports are that Philadelphia has spent almost $12 million on a pre-K program, and $1.5 million on expansion of a community schools plan. The pre-K program is planned to begin on January 1, the same day that the tax goes into effect. The judge hearing the case has promised a decision by January 1. What happens if the judge rules that the city exceeded its authority? What happens if the judge holds in favor of the city but appeals are taken? What happens if eventually there is no soda tax revenue? Which existing programs are cut by $13.5 million to make up for the money that has been spent despite the uncertainties surrounding collection of the tax? The $13.5 million probably grow to a larger amount, because there is no reason to think that spending on the program will stop during December. And what happens to the children who have been enrolled in the program, and their families? Will they have time to make alternate plans?

To these questions, the answers are not forthcoming from Philadelphia officials, who refuse to comment on their contingency plans, assuming they have any, to deal with an adverse judicial decision. The only comment is that “As of today, the city has no existing streams of revenue to replace the anticipated funding.” No kidding.

The city signed a contract with an academy that operates pre-K programs, and the contract includes a clause making additional funding contingent on the soda tax revenue. The academy is renovating one of its classrooms and has hired four teachers to handle the expected enrollment increase. What happens if the revenue doesn’t materialize? The academy’s CEO explains, “If some sort of repeal was to occur, I think it would be devastating.” No kidding.

It is one thing to enact a tax and spend anticipated revenues before the tax goes into effect. It’s another thing to enact a tax that everyone knows will be challenged and that is, in fact, challenged and to spend anticipated revenues before the authority for enacting the tax has been confirmed. It’s reckless. If the tax is struck down, someone is going to pay. As usual, it won’t be the officials who made the gamble. It will be the people whose jobs are terminated, whose programs are cut, whose services are diminished, whose lives are disrupted.

It would have made more sense to delay the pre-K program until the beginning of the next academic year, in September. By then, the status of the tax would be known, and if it were upheld, eight months of revenue would have been collected and available for starting up the program. But it’s so easy to gamble with other people’s money.

Five 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.

A little more than a month ago, in Tax Reciprocity Meets Tax Break Giveaways, I described the strong negative reaction to Christie’s decision articulated by executives of at least three of the companies that are beneficiaries of the tax breaks New Jersey hands out in attempts to generate economic development in the state. At least one corporate official explained that had the company known that the income tax reciprocity agreement was going to be terminated, it probably would not have agreed to the relocation required by the tax breaks.

Several days ago, New Jersey’s governor changed his mind. According to this report, he decided not to terminate the agreement, mere months after announcing that he would. At least he isn’t reneging on a campaign promise, because he said nothing about the agreement when he ran for the governor’s office. But, still, he created a good deal of angst among New Jersey residents who work in Pennsylvania and Pennsylvania residents who work in New Jersey. I wonder how many of those folks started job searches or took other steps to put in motion a relocation of their employment to their state of residence. Definitely corporate tax administrators in Pennsylvania have invested resources redesigning their systems to comply with the changes that termination of the agreement would require. Perhaps they should be reimbursed by New Jersey for being put in this disadvantageous position?

Christie’s explanation is that the revenue he projected would be raised for New Jersey by terminating the agreement no longer is required. He claims that recently enacted legislation would reduce health care costs for public employees, and thus eliminate a predicted state budget deficit that would have been offset by the projected revenue from the termination of the agreement.

I wonder if Christie changed his mind because he no longer saw a use for the revenue. I wonder if, perhaps, his decision was heavily influenced by the reaction of those corporate executives who considered themselves blindsided by the governor’s announcement of his intention to terminate the agreement. As I pointed out in Tax Reciprocity Meets Tax Break Giveaways, I have no access to the negotiations that preceded the individual tax break handouts to those executives’ corporations. I wrote, “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.” But perhaps they did negotiate for those things, and perhaps they were preparing to sue, and perhaps that triggered the abrupt U-turn by the governor. In the murky world of back-room politics and bargaining hidden from the public’s view, a practice that promises to go viral two months from now, it is difficult to know precisely who is getting what from whom. As I also wrote, “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.” For the moment, what is clear is that the 250,000 taxpayers caught in the confusion had no say in what happened. I doubt they have enjoyed being jerked around.

Several days ago I received an email containing a press release from a publicity specialist on behalf of DeVere Group, which describes itself as “one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients.” The press release, which also can be found online, including at this site, is headlined “Trump must ‘show backbone’ and repeal Obama’s imperialistic global tax law.”

According to the press release, “Nigel Green, founder and CEO of deVere Group, is demanding that the president-elect addresses the issue of abandoning the Foreign Account Tax Compliance Act (FATCA), which adversely affects FFIs and millions of Americans around the world as ‘a priority.’” Green relies on the president-elect’s promise to “revoke some of Obama’s executive orders” and proposes, “I would urge him to make repealing FATCA one of those he revokes.”

No matter what one thinks of FATCA – its goals are laudable but its implementation is a morass of complexities and unintended consequences – no President can revoke it. FATCA is a law enacted by the Congress. Specifically, it is Public Law 111-147, introduced as H.R. 2847 and signed into law on March 18, 2010. Only Congress can repeal or change FATCA. FATCA is not an executive order. It cannot be revoked by executive order.

In Nigel Green’s defense, he presumably is a citizen of the United Kingdom and received his schooling there, though, like Bloomberg, I have been unable to ascertain any specifics. So it is highly unlikely that a United Kingdom individual, in the normal course of schooling, would learn much of anything about the legislative, executive, and judicial processes in the United States.

But Nigel Green focuses on international clients and international transactions. It is not too much to expect someone who is involved in global finance to hire or retain experts who are familiar with the laws applicable to those clients and transactions. There are plenty of professionals throughout the world, from dozens of countries, who understand how FATCA came into existence and who has the power to repeal it.

Surely a multi-billion-dollar entity can find someone who would have advised Nigel Green so that he would have said something along the lines of “I urge the president-elect to work with the United States Congress to repeal FATCA” or, because he agrees that, “Tackling tax evasion is a noble and worthwhile objective,” “I urge the president-elect to work with the United States Congress to modify FATCA so that it achieves its goals without subjecting people to undue complexity and unintended consequences.”

It is difficult for me to pay heed to pronouncements that are wrapped in error, and bereft of fact checking. It is particularly difficult when the pronouncements come from multi-billion-dollar entities and extremely wealthy individuals who can afford to pay someone to spare them from ignorance and its effects.

It has been said that love is something that can be shared without diminishing what remains to be shared again. The same can be said about expressions of gratitude. Saying “Thank you!” to someone doesn’t reduce the number of people to which that response can subsequently be presented. And so, as we celebrate Thanksgiving, the stream of “Thanks!” continues on MauledAgain.

For as long as I’ve been writing this blog, I’ve been sharing a Thanksgiving post to express my gratitude for a variety of people, events, and things. Aside from 2008, when I did not post and I don’t have any recollection of why or how that happened, I’ve dedicated a post on or around Thanksgiving. I started in 2004, with Giving Thanks, and continued in 2005 with A Tax Thanksgiving, in 2006 with Giving Thanks, Again, in 2007 with Actio Gratiarum, in 2009 with Gratias Vectigalibus, in 2010 with Being Thankful for User Fees and Taxes, in 2011 with Two Short Words, Thank You, in 2012 with A Thanksgiving Litany, in 2013 with “Don’t Forget to Say Thank-You”, in 2014 with Giving Thanks: “No, Thank YOU!” , and in 2015 with Thanks Again!.

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

So when I look back on the past year, here are a handful of people, events, and things added to the list, even though some of these can be tagged as repetitive in some ways:

• I am thankful for my grandson, who continues to grow, to learn, and to amuse me in ways no one else does.
  
• I am thankful for my children and my daughter-in-law, and the ways they enrich my life.
  
• I am thankful for my congregation’s inspirational new pastor/head of staff, who also happens to appreciate attention to detail.
  
• I am thankful for the chancel choir, which permits me to be its president without requiring re-election campaigns.
  
• I am thankful that I figured out the refrigerator needed replacement without losing most of the food in it.
  
• I am thankful that my law faculty colleagues recommended that I be appointed Professor of Law Emeritus.
  
• I am thankful that I have the opportunity to continue teaching law courses.
  
• I am thankful for the chance to continue compiling genealogical databases, and for the people who have helped that to happen.
  
• I am thankful that my immigrant ancestors weren’t required to sign registries and wear badges.

Ten years ago, in Giving Thanks, Again, I shared my Thanksgiving advice. I liked it so much that I repeated it again, in 2009 in Gratias Vectigalibus, yet again in 2013 in “Don’t Forget to Say Thank-You”, still again in 2014 in Giving Thanks: “No, Thank YOU!” , and even yet again in 2015 in Thanks Again!. For me, it does not lose its impact:

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

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

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.