MauledAgain

A recent case, Jackson v. Comr., T.C. Summ. Op. 2017-11, provides an example of when persistence is not worth the effort. Deciding when to be persistent and when to relent isn’t always easy, but sometimes it is.

The taxpayer lived with his girlfriend in a home that she had purchased in 2005. She financed the purchase with a mortgage on which she alone was liable. Because of credit problems, the taxpayer was not included on the deed or joined in the mortgage. His girlfriend paid all of the interest on the mortgage, all of the property taxes, and all of the homeowner’s insurance. The mortgage company issued Forms 1098 to the taxpayer’s girlfriend but did not issue any to the taxpayer. In 2015, the taxpayer’s girlfriend sent a letter to IRS counsel stating that the taxpayer “has paid the amount of $1,000 per month on the Mortgage payment * * * for the past 10 years.”

The taxpayer claimed an interest deduction for taxable years 2011 and 2012. The IRS issued a notice of deficiency disallowing the deduction. The taxpayer filed a petition with the Tax Court, which held, on July 5, 2016, in Jackson v. Comr., T.C. Summ. Op. 2016-33, that the taxpayer was not entitled to the deduction. The court concluded that the taxpayer had no legal obligation to make mortgage payments, and held no legal, beneficial, or equitable ownership in the residence.

The taxpayer also claimed an interest deduction for taxable year 2013. Again, the IRS issued a notice of deficiency disallowing the deduction. Again, the taxpayer filed a petition with the Tax Court. The taxpayer appeared at the calendar call on October 3, 2016, but did not appear at the trial two days later. He did not testify, nor did he call any witnesses. When the Tax Court received a stipulation of facts filed by both parties on November 16, 2016, it ordered the taxpayer to confirm that he wanted to submit the case fully stipulated. The Tax Court did not receive a response. On January 5, 2017, the court closed the record and ordered the case submitted as a fully stipulated case.

Again, the taxpayer did not provide any objective evidence that he paid the interest or that he had a legal, beneficial, or equitable interest in the property. The court gave no weight to the girlfriend’s letter because it did not state that he had any interest in the property. The court also noted that there were no bank records or Forms 1098 supporting the taxpayer’s position. During the calendar call, the taxpayer had requested the court to follow the decision in Bronstein v. Commissioner, 138 T.C. 382 (2012). But that case involved the amount of the debt on which an interest deduction could be claimed, and did not include any disagreement that the taxpayer had paid the interest. Once again, the Tax Court upheld the deficiency.

Though the taxpayer filed his 2013 federal income tax return three years before learning that the claimed interest deductions for 2011 and 2012 was not allowable, by the time the case was ready for disposition in October of 2016, the taxpayer already knew that the same deduction, under the same circumstances, had been disallowed. The prudent course of action would have been to concede the case before or at the October calendar call. I suppose the taxpayer figured that he had nothing to lose by raising a case that was not on point, but then he failed to show up for trial and failed to respond the court’s request for confirmation of the stipulation.

When I was a child and trying to accomplish something unsuccessfully, I was told, “If at first you don’t succeed, try, try, try again.” I have a dim memory of this being told to me at least several times, perhaps when I was trying to learn to ride a bicycle. What I remember more clearly is my early attempt at playing lawyer. I had asked for something, probably cookies, and was told no. I asked again, and again, until I was told to stop, and cautioned that it was pointless to keep pestering my mother. Of course I replied, “But I was told if at first you don’t succeed. . . “ I don’t think I finished the sentence before I was commanded to leave the kitchen. Never again did I pull that stunt. Sometimes persistence pays dividends. Sometimes it does not. Somewhere, somehow, we try to learn to distinguish the two situations.

The word glitch has become an everyday word in twenty-first century America. Essentially, it means a defect or malfunction in a machine or a plan. Its use masks the underlying problem, which is the defect or malfunction almost always can be traced back to a person or persons.

Recently, according to this story, a glitch of unidentified origin played havoc with the bank accounts of Massachusetts taxpayers. Thousands of them filed tax returns on which they specified that their refunds be deposited into their bank accounts. The deposits occurred, and far more than a few of the taxpayers wrote checks and made withdrawals after seeing their bank balances increase by the amount of the refund. But, unbeknownst to them, shortly after generating the refund deposits, the software used by the Department of Revenue reversed the deposits and pulled the refund amounts back out of the taxpayers’ accounts. For some people, this meant that their checks and withdrawals triggered overdraft fees.

The governor explained the cause as “a tech glitch.” The question that was not answered is, “What caused the glitch?” Was it poorly written software? Did someone run the software twice, after clicking on the wrong selection before the second run? Was there a hack? Was it a hacking test designed to determine if the malware could make the refunds appear to be going to one bank account even though the funds were placed in the hackers’ accounts and masked by a reversal that would not be caught until several days later?

Does this mean that taxpayers who have refunds deposited into their bank accounts should wait a week before spending the money? Should they wait two weeks? Three weeks? Longer? Your guess is as good as mine.

Yet again, while in the shower and listening to the local Philadelphia news station, I heard another story that caught my attention. Though I could not find the story on the station’s web site, I did find the story elsewhere. The part that made me pause for a moment is encapsulated in this sentence: “The maker of Lindor chocolate balls continued a clean-up of Russell Stover’s portfolio of more than 2,000 products last year, while the American chocolate market declined for the first time in years.” Or, as more succinctly reported by Bloomberg Gadfly, “But the American chocolate market declined in 2016, Lindt & Sprungli AG said Tuesday.”

How can that be? Are people confused? Is the pressure to reduce soda consumption somehow being interpreted as a message to give up on chocolate? Probably not. It’s more likely that the increases in chocolate prices during 2016 had an impact, though prices began to fall later in the year. Though some commentators predict even higher prices, including a dire prediction of prices doubling by 2020, there are those who disagree. According to this report, the price of chocolate is “set to fall as the world cocoa market shifts from a deficit to the largest surplus in six years.”

But because chocolate candy also includes other ingredients, such as sugar, milk, and dairy fat, increases in the prices of those items can cause the price of chocolate candy to increase even though the cost of chocolate itself is dropping. Though prices of those items soared in 2016, it appears as though they are stabilizing.

So what’s a chocolate connoisseur, or even someone using chocolate for medicinal purposes, to do? Stock up? Invest in a chocolate hedge fund? The answer depends on what a person thinks will happen, their aversion to risk, and their willingness to reduce chocolate consumption.

The good news, I suppose, is that the decrease in chocolate consumption during 2016 was not the result of decreased desire for chocolate but simple economics. Fear not. I am not going to advocate for a chocolate consumption tax credit. If chocolate really matters, cut the consumption of something else, like brussel sprouts.

Earlier this week, while showering, I heard a radio advertisement for a tax debt relief business. The advertisement noted that there are ways to reduce or eliminate tax debts owed to the federal government, and urged listeners to act quickly because the IRS was in the process of sending hordes of personnel out to collect back taxes. I didn't get a chance to write down the specifics, because I don't keep pen and paper in the shower.

Also earlier this week, unsurprising news appeared that because of budget cuts, the IRS was auditing an even lower percentage of individuals and businesses. The IRS has lost almost 7,000 enforcement agents.

So whom should we believe? The advertisement that portrays a rapid increase in IRS tax debt enforcement? Or the news that the IRS is reducing its enforcement efforts because of budget cuts? An even more important question is why are two very different portrayals of federal tax enforcement being advanced?

So, should taxpayers be rejoicing at the improved audit lottery odds and perhaps even taking liberties with their returns? Or should they be in panic mode while expecting IRS employees to come knocking on their doors?

In a matter of decades, what was once two people looking at a Corvette and reporting that they each saw a Corvette has morphed into a postmodern cultural phenomenon of two people looking at a Corvette and one reporting that it’s a Corvette and the other reporting that it’s a Mustang. What’s next? Two people looking at a Corvette and one reporting that it’s a Mustang and the other reporting that it’s a Ferrari. The world beyond postmodern appears to be existentially catastrophic.

No tax is perfect. By definition, a tax takes money or property from people, theoretically, at least, in return for goods or services. Because it is impossible to measure the precise value of goods and services provided to each taxpayer, the amount of tax collected from someone is unlikely to match exactly what the person has received. User fees also suffer from the same imprecision, though some, such as a sewer fee based on water use, can come very close.

But some taxes are so far from perfect that they need to be classified as counterproductive. This characterization surely describes the Philadelphia soda tax, which I have criticized consistently since it was first proposed. Touted as a mechanism to reduce sugar consumption, it fails to reach most sources of sugar consumption and yet applies to healthy items. Those interested in my explanation of the serious flaws in the Philadelphia soda tax can take a look at 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, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, Updating Two Tax Cases, and When Tax Revenues Are Better Than Expected But Less Than Required.

Now comes news that Pepsi plans to lay off as many as 100 employees at three distribution plants that provide beverages to Philadelphia wholesalers and retailers. Pepsi revealed that its sales in the city have dropped by 40 percent. The city administration criticized the announcement, drawing attention to the pre-kindergarten program funded in part by the tax, which it claims created 251 new jobs. Of course, that’s no solace to Pepsi workers who lose their jobs, as they probably aren’t qualified to teach youngsters. A city spokeswoman claimed that Pepsi profits are sufficient to avoid the layoffs, and that the layoffs probably aren’t a consequence of the tax. What the city has overlooked is that the distribution plants are independent businesses which measure profit and loss separately from Pepsi itself.

Pepsi is not the only company slashing jobs. Canada Dry Delaware Valley announced it would lay off three dozen employees. An owner of six ShopRite stores has cut employee hours and may end up cutting 300 jobs. In a this commentary, Dom Giordano explains that some of the jobs being cut are held by individuals who are in second-chance programs after serving sentences for committing crimes.

One aspect of this news is puzzling. If reports are true that Philadelphians are making their beverage purchases in the suburbs, would not the suburban retailers need more inventory? Do the regional distributors have the ability to deliver to the suburban retailers the soda they no longer sell in Philadelphia? Or is it a matter of having the suburban truck and driver deliver more soda while mothballing the city truck and laying off the city driver? It would be most helpful if the beverage wholesalers provided additional information.

Another question comes to mind. How would things have turned out if the tax were an “unhealthy food” tax coupled with a “healthy food rebate”? Dom Giordano mentions that he ran out of orange juice and did without until he made his suburban shopping trip. Why is orange juice being taxed as though it were soda? Orange juice is a good source of vitamin C, and is a far better complement to breakfast than donuts, Danish pastry and, yes, this will generate howls of protest, bacon.

Of course, a tax on unhealthy foods isn’t perfect, even if very precisely designed. It would make sense for its revenues to be used in part to subsidize, through rebates or some other system, the cost of healthy food. It would make sense for its revenues to be used in part to pay for the increased costs of healthcare caused by the ingestion of unhealthy food and beverages. It would make sense for its revenues to fund courses throughout the K-12 system and in adult night schools that give people the opportunity to learn about unhealthy eating and drinking, to learn about the connection between unhealthy diets and healthcare costs, and to learn how to change their habits.

It’s unwise to continue on the path of taxes that aren’t sufficiently connected to the use of their revenues. It makes sense to use fuel taxes to fund highway repairs. It does not make sense to impose a tax on hair and nail salons to fund playgrounds and swimming pools. Just because a funding goal is worthy, such as expanded pre-kindergarten education, is no reason to justify a tax on an unrelated transaction or status.

An unidentified author at Wesplain has proposed an “equality tax” designed to “level the economic playing field.” According to the author, minorities suffer economically because of “racist employers, a disproportionate targeting of minorities by law enforcement, racial wage gaps, poor inner city schools.”

The proposal is that “the privileged should pay more.” The author concedes, “I don’t know how much more, but it must be more.” The author then suggests, “Let’s start at 5% . . . Certainly, the privileged can stand to spare 5% with all of their economic advantages.” Five percent of what? The computation used by the author to calculate the revenue reflects 5% of the federal income taxes paid by “white Americans.” The revenue would be distributed to those with “non-Caucasian race status.” The author also proposes that the 5% rate would apply only to “single heterosexual Caucasian males,” whereas a 4.5% rate would be applied to “single heterosexual Caucasian females,” a 4% tax to “married heterosexual Caucasian family,” and a 3% tax to “non-cisgender Caucasian.”

This proposal is a magnificent example of what happens when emotional reactions to a problem trump the use of reasoning. Let’s look at the proposal more closely.

First, there is no question that “racist employers, a disproportionate targeting of minorities by law enforcement, racial wage gaps, poor inner city schools” cause economic woes, and that those woes are borne almost entirely by minorities. But that does not mean that all minorities are afflicted by economic woes. There are minorities of every background who are economically successful, and some are economically privileged. Does it make sense to permit the economically privilege to share in tax revenue designed to shift wealth from the economically privileged? Of course not.

Second, if “the privileged should pay more,” and perhaps they should, identification of “the privileged” ought to be based on something that measures privilege. Income and wealth, demonstrated by asset holdings, income statements, and lifestyle, measure privilege. So, too, does being left alone by authorities when committing a crime, receiving weak sentences when convicted of crimes, and having doors opened because of family wealth. Those benefits of being privileged mesh with wealth and income.

Third, there are people in this country who are not privileged, who suffer from poor schools and poor health, who are unemployed, and who struggle economically, and yet who are not minorities. The array of mostly white, rural, and economically distressed individuals who shifted their traditional voting allegiances are proof enough that income and wealth inequality don’t afflict only those who are not white. Does it make sense to shift money from economically unprivileged non-minorities to privileged minorities?

Fourth, aside from the absurdity of equating “privilege” with “white” and “non-privilege” with “minorities,” how does one define a minority? The unidentified author of the article uses the word “Caucasian.” What does that mean? Who is Caucasian? Is Barack Obama Caucasian because his mother is “white” or a minority because his father is “black”? If, as many people conclude, he is black and not white because he allegedly “identifies as black,” does that mean he is not privileged? Would he be eligible to receive a slice of the revenue stream proposed by the unidentified author? He is far from alone, in terms of being bi-racial or tri-racial, and though some individuals with multiple racial ancestry are in dire economic straits, others are not.

Fifth, why the assumption that women necessarily are less privileged than men? There are women who are far more economically privileged than many men. Should Betsy DeVos pay a lower rate because she is a woman even though she is drowning in money?

Sixth, why the assumption that non-cisgender individuals should pay an even lower rate? Again, there are individuals who are non-cisgender who are economically privileged, and there are those who are not. Should Caitlyn Jenner pay a lower rate because she is non-cisgender even though she is not economically distressed and certainly is afforded privilege unavailable to most Americans?

Seventh, the unidentified author claims that the economic success of the privileged “was only made possible by the blood and sweat of minorities.” Does that mean “minorities” include the Irish who worked for almost nothing on canals and railroads to enrich the robber barons of the late nineteenth century? Does that mean “minorities” include the Italians who labored for peanuts in mills and on construction sites to enrich the manufacturing real estate barons of the early twentieth century? Does that mean “minorities” include the Poles who worked for scraps in the stockyards of Chicago? Those are just three of many examples of how minorities as described by the unidentified author, namely, non-Caucasians, do not have a monopoly on being oppressed and marginalized.

Whoever at Wesplain fits within the word “We” explains that they contacted the author of the article to answer a question. The author responded “that if you were born white, but identify as a different race or otherkin, you would not void from paying” the tax, though proof of “this transformation” would need to be “genuine.” How does someone generate genuine proof that they have transformed into a dragon or butterfly? Presumably, the same “self declaration” would apply to sexual orientation. Who would audit these claims? How would their validity be determined? Would the revenue officials investigate the sexual behavior of individuals to determine if their self-declared sexual orientation was genuine?

The underlying flaw in the author’s proposal is a reasoning defect that has led to the very inequities of which the author complains. To conclude that all Caucasians are privileged, that all women are not privileged as much as men who are privileged, and that all non-straight non-Caucasian individuals are not privileged is to exhibit the same sort of gross overgeneralization and specificity deficiency that appears in statements claiming that all people of a particular race or ethnicity are thugs, rapists, or criminals, or that all persons of a particular sexual orientation are diseased, perverted, or dangerous.

There is no doubt that the inequities described by the unidentified author exist. Those inequities are not caused or exacerbated by race, ethnicity, gender, or sexual orientation. They are caused by two major socio-economic conditions. One is income and wealth inequality. The other is ignorance. The solution is two-fold. First, educate people so that they learn to stop over-generalizing based on singular events and anecdotes. Second, reduce income and wealth inequality.

The unidentified author laments that “With the republicans in power and the rise of the alt-right, this new tax initiative is sure to enrage the privileged.” Actually, the proposal will not enrage the privilege. They simply will laugh because they know it will go nowhere. But it will enrage those who enabled and continue to enable the privileged and the alt-right, because it is the very sort of poorly developed analysis that generates fear among those who, rightly or wrongly, feel unappreciated and marginalized.

Ignorance and analytical deficiency are sad things. They produce nothing of value.

Readers of this blog know by now that I watch television court shows for several reasons, including the opportunity to see how the judge and the parties deal with tax issues when they happen to be in play during the case. Over the years, these shows have provided the materials for posts such as Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, and A Court Case in Which All of Them Miss The Tax Point. Last week another opportunity came my way on one of Judge Judy’s episodes.

The plaintiff had worked for the defendant, who fired the plaintiff because the plaintiff came to work high and made a scene. The plaintiff had left some property and equipment at the defendant’s premises, and the defendant eventually disposed of the plaintiff’s things. So the plaintiff sued for recovery of the property or its value.

Judge Judy asked the defendant if he had paid the plaintiff for his work. The defendant answered in the affirmative. Judge Judy then asked if the defendant if he had deducted the payments on his tax returns. He replied, “Yes.” She asked if he had withheld taxes. He said. “No.” She asked the defendant if he had sent the plaintiff a Form W-2 or a Form 1099. He said, “No.” Judge Judy commented, “Now I know what sort of person I’m dealing with.” She then turned to the plaintiff and asked, “If I were to see your tax returns for the three years you worked for the defendant would I see the income on it?” The plaintiff replied, “No.” Judge Judy then commented, “Now I know what sort of people I’m dealing with.”

Judge Judy pointed out to the parties that courts “don’t really like to help two people who are scammers.” She asked rhetorically, “Who should win? The one who makes money and doesn’t pay taxes on it? Or the one who takes a tax deduction for the payments but doesn’t issue a Form 1099?”

The defendant had brought a witness, who was the operations director for the defendant’s business. Judge Judy asked the witness if she received her income by check or by cash. The witness replied, “By commission.” Judge Judy, somewhat annoyed, exclaimed, “By commission? Does that mean wampum? Did you get a cash or check?” The witness explained that she was paid by the clients of the business and sent Forms 1099 to herself.” Judge Judy laughed and quipped, “We could eliminate the national debt if we keep this going.”

Judge Judy then concluded that the plaintiff’s property was “junk.” She dismissed the plaintiff’s case.

I wonder if anyone from the IRS watched the show. Will notices of deficiency be forthcoming? Unfortunately, because a majority of the Congress underfunds the IRS and at least one member of the executive branch wants to eliminate government, it is highly unlikely that the IRS will deal with the two parties and the witness even if an IRS employee saw the Judge Judy episode in question. It’s no wonder more and more people toss aside their civic obligation to pay taxes. It will be interesting to hear their stories after governments collapse and the feudal system returns.

The so-called Philadelphia “soda tax,” which taxes more than soda but not everything containing sugar, continues to pose problems. For almost ten years I have commented on this well-intended but awfully-designed attempt to improve public health, starting with What Sort of Tax?, and continuing with 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, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, and Updating Two Tax Cases. Now comes news that for its first month, the revenues from the tax exceeded what was expected but fell short of the amount needed to fund the programs that the revenue from the tax is intended to support.

According to the story, Philadelphia had expected to collect $2.3 million in January, based on the assumption that businesses would delay registering with the city and the assumption that businesses had increased inventory during the last months of 2016. Instead, the city announced it had collected $5.7 million. Though it might appear wonderful, from the perspective of revenue officials, that a tax brought in more than twice as much revenue as expected, there is a problem. The city has already committed to spending $91 million per year from soda tax revenues. A monthly collection of $5.7 million won’t generate $91 million in a year. Though some think that January collections getting off to a good start bodes well for the rest of the year, I wonder whether the increasing publicity about Philadelphia residents doing more grocery and beverage shopping outside the city limits will encourage more city residents to do likewise. Another factor to consider is that the city based its revenue estimate on an assumption that sales of items subject to the tax would decrease by 27 percent. Yet since the beginning of the year, some sellers are reporting larger decreases in sales, and layoffs are expected. Layoffs, of course, will reduce other city tax revenue, as will decreasing profits for the businesses losing sales of items subject to the tax. At least one individual has suggested that the city’s $2.3 million estimate for January was low based on what distributors had been reporting they had paid to the city. I wonder if the low guess was designed to produce precisely the “tax revenues exceed expectations” headline that appeared, in an effort to make the tax seem wildly successful.

All of this, of course, is tentative, because the challenge to the tax is on appeal in Commonwealth Court. What happens if it is struck down? Spending money that the city might be required to refund is unwise, as I discussed in Gambling With Tax Revenue. And even if the city prevails, it still appears to be a huge gamble, considering the likelihood of revenues falling short of $91 million.

A recent survey by the Public Policy Institute of California reveals how the spread of misinformation through social media has contributed to the inability of Americans to distinguish fact from fiction. The survey asked people in California to identify the largest areas of state spending. Thirty-nine percent of the respondents identified prisons and corrections as the biggest expenditure. Less than ten percent of the California budghet is spent on the prisons and corrections system. Only 16 percent of the respondents correctly identified K-12 public education, which consumes almost 43 percent of the state budget, as the largest expenditure. It’s not as though the information is classified or difficult to find. So few people know the answer in part because so few people care about learning this sort of information, and in part because it’s so easy to accept as true whatever information gets pumped out of someone’s favorite source of “news.” I wonder what would happen if the survey respondents were asked the question, and then given the opportunity to research the answer. How many could take themselves to an official California state budget web site to discover the answers?

Why does it matter? Who cares? It matters because decisions are made based on the facts people think exist. For example, in California, voters are given the opportunity to approve or reject propositions that directly affect taxation and spending. Advocates of more spending for a particular area of the budget strive to convince voters that the particular area in question is underfunded. Those seeking to cut spending on particular areas try to convince voters that those areas are overfunded.

Six years ago, in The Grand Delusion: Balancing the Federal Budget Without Tax Increases, I pointed out:

A month and a half ago, the Kaiser Family Foundation released poll results revealing that 40 percent of Americans “think that foreign aid is one of the two biggest areas of spending in the federal budget.” This, of course, is totally incorrect.

Yet this piece of tax misinformation persists. How can good decisions be made when reality is different from perception? Imagine what happens if surgeons, electricians, auto mechanics, and engineers made decisions based on misinformation rather than on actual facts. Just imagine.

Is it possible for the child of a taxpayer’s girlfriend, or boyfriend, to be the taxpayer’s dependent? Though one’s first reaction might be to say no, the answer is yes. How can that be? One answer can be found in a recent case, Walker v. Comr., T.C. Summ. Op. 2017-8.

Walker resided fulltime with his girlfriend, Tiffany Clark, and her son, S, in a two-bedroom apartment on Maine Street in Vallejo, California. Walker paid part of the rent and a government subsidy paid the rest of it. Walker is not the father of S, nor did he adopt S. Walker provided financial support for S, which allowed Clark to stay at home to take care of S. Walker provided more than one-half of S’s support for 2013 and 2014. During those years, S was enrolled at a local elementary school. The school’s records show S’s home address as the apartment rented by Walker on Maine Street, and show Walker as one of S’s guardians.

On his 2013 and 2014 federal income tax returns, Walker filed as head of household and claimed, among other things, a dependency exemption deduction for S. He also claimed a child tax credits with respect to S. The IRS disallowed the deduction and the credits. It also denied Walker head of household filing status.

The Tax Court explained that although S was not a dependent of Walker on account of being a qualifying child, because S did not meet any of the relationship tests, S was a dependent of Walker on account of being a qualifying relative. For the years in issue, S had the same principal place of abode as did Walker and was a member of Walker’s household, Walker provided more than one-half of S’s support, S’s gross income was less than the exemption amount, and S was not the qualifying child of Walker o any other taxpayer. The court noted that testimony given at the trial, along with the records at the elementary school attended by S, supported the conclusion that S resided full time with Walker at the apartment.

However, because S was not Walker’s qualifying child, Walker was not entitled to child tax credits with respect to S. The court then concluded that because S was a dependent of Walker for 2013 and 2014, Walker was permitted to file using head of household status. However, because S was a dependent under section 152(d)(2)(H), S does not qualify as a dependent for purposes of section 2(b)(A)(ii). My guess is that no one noticed the provision that is at the end of section 2(b).

The key to Walker’s success with respect to the dependency exemption deduction for S rests on the evidence that Walker presented. The school records, as insignificant as they might otherwise seem, corroborated the testimony with respect to S’s residence in the apartment. Fortunately, Walker was able to obtain copies of those records. Had the school disposed of them before Walker realized he needed them for his Tax Court litigation, the outcome might have been different. At the risk of enabling those who accumulate clutter, I suggest that taxpayers consider keeping copies of documents held by others but affecting the taxpayer if there is any serious chance of those documents not being available a year or two later. Sometimes it’s all about the documentation.

As explained in this article and others, the governor of Pennsylvania has proposed that Pennsylvania towns relying on the state police for all policing in the town pay a $25 per-person tax for those services. Not surprisingly, the proposal has triggered controversy. Small towns, including some that had their own police forces but disbanded them to save money, argue that they cannot afford to pay for the state police services. Residents of towns with their own police forces, who pay not only local taxes to finance their police departments but also state taxes that finance the state police, explain that they ought not be financing, in effect, police forces for both their own towns and for other towns whose residents are not paying for police services. Among readers of the article, sentiment in favor of the proposed tax runs roughly two-to-one, though the sample size is fairly small.

About half of the state’s municipalities, a number that continues to grow, are given full-time police coverage by the state police. Thus, in effect, the burden of local policing for the entire state falls on roughly half of the state. Advocates of the proposed tax claim that this situation is unfair. They point out that the state police budget has grown by almost 50 percent during the past ten years. Five years ago, the state police determined that it spent more than half of its budget providing local police services to towns without police departments. To accommodate the state police need for funds, money has been taken from the road and highway safety fund to finance to help finance the agency.

The $25 per-person tax is pretty much a token amount. Municipalities with their own police departments calculate that the cost of police protection ranges from $300 in Lancaster and $320 in Pittsburgh to $403 in Philadelphia. Though the proposed tax would be computed based on the number of residents, it would be imposed on the municipality, which presumably would recover it through existing taxes or a new tax, or through reductions in spending.

Some legislators, including Republicans opposed to raising taxes, noted that residents of local towns, preferring to avoid local tax increases, have eliminated police departments as a means of shifting police protection costs to the state, that is, residents of the other municipalities in the state. One of them called the proposal one “whose time has come,” and explained, “We are coming into the reality zone now.”

Legislators also argue that even if the proposed tax is enacted, state police ought not be doing local police work. They should be doing “the things the local municipal police department cannot do.” A township supervisor in a large municipality that has no police department argued that state police help local police departments, with assistance in crime lab work, backup, and SWAT team deployment. What was not mentioned is the fact that residents of municipalities with local police departments pay state taxes that help fund the state police.

Local officials in towns without police departments suggest that “everyone pays for what they use.” That sounds like a user fee. How would it be implemented? Would crime victims be charged for police assistance while those fortunate enough to escape being mugged don’t pay? To what extent is police patrolling of a neighborhood like insurance, and thus, how would a “police patrolling user fee” be computed? Who pays for use of the state crime lab, the victim or the criminal? Or is this another instance of where the benefit of policing accrues to everyone, and thus should the entire policing system in the state, local and state-wide, be financed with a flat per-person user fee?

A recent United States Tax Court decision, Smyth v. Comr., T.C. Memo 2017-29, provides an opportunity to explore the extent to which a tax law, applied to a specific set of facts, can generate an “unjust” result. The facts were undisputed.

During 2012, the taxpayer maintained a household in which her adult son, his wife, and their two children resided. The taxpayer provided all the financial support for the home and those living in it. Her son did not work and dealt drugs, and her daughter-in-law was a stay-at-home mother. When she filed her 2012 federal income tax return, she claimed the two grandchildren as dependents. As filed, her return would generate a refund of the taxes withheld from her pay, plus refundable credits arising from claiming the grandchildren as dependents. The taxpayer claimed the two grandchildren as dependents after her son told her that he and his wife were not going to file an income tax return for 2012. He suggested that she should claim the two grandchildren so that she could “get back some of the money she had spent supporting his family.” The IRS rejected her refund claims because it determined that she was not permitted to claim the grandchildren as dependents. It reached this conclusion because the taxpayer’s unemployed son had already filed a federal income tax return for 2012, on which he claimed his two children as dependents, received a refund check based on refundable credits, and cashed it to spend on drugs. The IRS described this outcome as required by the law, though it did not purport to defend it as a just result.

The IRS determined that the two grandchildren were not the taxpayer’s qualifying children for purposes of the dependency exemption deduction. When the taxpayer received the notice from the IRS, she thought she was an identity theft victim but then realized that someone else had claimed the grandchildren as dependents. Eventually her son admitted that he and his wife had done so. Her son then offered to provide an affidavit in support of her claim and prepared an amended 2012 return that omitted his claim that the children were his dependents, but he did not file the return. A copy of this amended return was given to IRS counsel two weeks before trial.

The basic definition of a qualifying child made the two children qualifying children of both the taxpayer and her son. Why? To be a qualifying child, the child must be a child or grandchild of the taxpayer, share a home with the taxpayer for more than half the year, be less than 19 years old, not provide more than half of his or her own support, and not file a joint return. There was no dispute that the two children were grandchildren of the taxpayer and children of her son, shared a home with the taxpayer and with her son, were less than 19 years old, did not provide more than half of their own support, and did not file joint returns. When, as in this instance, two or more taxpayers “tie” when it comes to an individual being a qualifying child, special tie-breaking rules apply. Section 152(c)(4)(A) provides that if the tie is between the child’s parent and someone not a parent, the parent “wins the tie” and treats the child as a qualifying child, and the others do not, unless the parent does not claim the child as a dependent. In that case, another taxpayer with respect to whom the child is a qualifying child can claim the child as a dependent if that other person has an adjusted gross income higher than that of either of the child’s parents, which was indeed the situation in this case.

The IRS argued that because the son claimed the children as dependents, it did not matter than the taxpayer’s adjusted gross income was higher than that of her son. The taxpayer argued that her son didn’t file an original 2012 return and that, even if he did, he filed an amended return in which he and his wife relinquished any dependency claim with respect to her grandchildren. The court concluded that the taxpayer’s son had filed a 2012 return, that the taxpayer did not prove otherwise, and that her son did not file an amended return. The court explained that hand delivering a return to IRS counsel does not constitute filing a return or amended return because the law requires that it be delivered to “any person assigned the responsibility to receive hand-carried returns in the local Internal Revenue Service office.” IRS counsel is not the service center nor a person assigned by the IRS to receive returns for the local IRS office. The court also noted that even if the son had filed the amended return, it was unclear if this would be sufficient to constitute a relinquishment of the claimed dependency exemption deductions on the original return. Accordingly, the taxpayer was not only barred from a dependency exemption deduction for her grandchildren, she also did not qualify for the earned income credit because her adjusted gross income was too high for someone who had no dependents, she did not qualify for the child credit, and she did not qualify for head of household filing status.

The court admitted that it was “sympathetic to [the taxpayer’s] position.” It explained, “She provided all of the financial support for [the children], had been told by her son that she should claim the children as her dependents, and is now stuck with a hefty tax bill. It is difficult for us to explain to a hardworking taxpayer like [the taxpayer] why this should be so, except to say that we are bound by the law.” The court also noted, “And it is impossible for us to convince ourselves that the result we reach today--that the IRS was right to send money meant to help those who care for small children to someone who spent it on drugs instead--is in any way just.”

Most people would agree that the outcome is unfair. Most people would point to the taxpayer’s son and his behavior as the cause of the taxpayer’s plight. Yet it is the Congress that enacted the dependency exemption rules, the definition of qualifying child, and the tie-breaking rules. What recourse is there for the taxpayer? Even if there were deemed to be a contract between her and her son, it is unlikely that she could recover any damages. So how can taxpayers prevent themselves from falling into the mess that this taxpayer encountered? What sort of safeguards could be applied? Amending the tax law would only make it more complicated, and more than likely would not eliminate most of these unfortunate outcomes. Years ago I proposed replacing the current personal and dependency exemption arrangement with one in which each individual be granted an “exemption amount” to be used on that person’s return, or granted to one or more other taxpayers, or some combination thereof, under an assignment. A child’s exemption amount would be assigned by the child’s parent, custodial parent, or legal guardian. In this case, under this arrangement, the taxpayer’s son and his wife would be required to assign the children’s exemption amounts to someone, or they would be lost. If they assigned them to the grandmother, then that assignment would prevail against any subsequent assignment. If they assigned it to themselves, then they could not assign it to the grandmother. If they attempted to do so, the validity of the assignment could be verified by cross-checking it against an assignment database. Yes, this would be a bit complicated but surely not as complicated as the current law, and it would reduce the number of unfair or unjust outcomes. I doubt the Congress will take this approach, for a variety of reasons, including the fact it is different.

A recent United States Tax Court case, Quintal v. Comr., T.C. Summ Op. 2017-3, is a lesson in how not to draft marital separation agreements when seeking maximum tax benefits from paying alimony. The taxpayer married his wife in 1992, they had three children, and they separated and divorced in 2010. On October 29, 2009, the taxpayer and his then wife executed a separation agreement which included exhibits A through M. Those exhibits were incorporated in the separation agreement by reference. The separation agreement stated that the taxpayer’s wife would be awarded physical custody of the three children and that the parties intended that the separation agreement resolve all matters between them, including past, present, and future alimony and support and maintenance. The separation agreement further stated that the children “are still principally dependent upon the parties for support and entitled to support” under state law. Before the agreement was executed, the taxpayer and his wife engaged in last-minute negotiations, and several of the exhibits were substantially revised. In some instances, entire paragraphs of an exhibit were lined through and replaced with handwritten statements.

Exhibit A stated in relevant part that the taxpayer would maintain his current health insurance coverage or its equivalent for the benefit of his children as long as each child was “unemancipated as that term is defined herein,” but Exhibit A did not include a definition of the term “unemancipated”. Exhibit B, originally titled “ALIMONY”, was revised to read “Unallocated Support,” stated in part that the taxpayer would “pay to * * * [his future former wife] the sum of $900.00 per week commencing forthwith by implemented wage assignment. (See Exhibit J),” and stated in part that “[a]ny alimony payments shall terminate” upon the earlier of the death of the taxpayer or his former wife or the former wife’s remarriage. Exhibit B further stated that the parties “acknowledge that husband anticipates that the above payment is deductible to him and includable to wife”.

Exhibit J was titled “CUSTODY, SUPPORT, VISITATION”. Although exhibit J originally referred to the taxpayer’s obligation to make child support payments, that statement was lined through and was replaced with the phrase “See Exhibit B implemented wage assignment forthwith.” Exhibit J included a statement acknowledging that, as a result of disabilities, two of the couple’s children might never become self-sufficient or emancipated and defined the term “emancipation” of the minor children generally as occurring on the child’s death, marriage, entering into military service, or graduation from high school or a four-year college program. Exhibit J further stated, “Support as to the child as termed in this agreement shall end upon emancipation. In accordance with Section 71(b)(1)(B) of the Code, the Husband and Wife expressly agree to designate and hereby do designate all payments required in this Exhibit as excludable and non-deductible payments for purposes of Sections 71 and 215 of the Code, respectively. It is expressly agreed and understood that the payments made by the Husband to the Wife for support under this Article shall terminate upon his death and shall not constitute a charge upon his estate in that there are to be life insurance trusts established to provide for the needs of the children.” The remainder of exhibit J established the terms for custody of and visitation with the children.

The state family court entered a Judgment of Divorce Nisi which incorporated the separation agreement and terminated the couple’s marriage effective January 28, 2010. On October 22, 2014, the family court filed a stipulation for judgment in response to the former wife’s complaint for modification and the taxpayer’s counterclaim. The stipulation for judgment, which was incorporated into the final judgment, stated in relevant part, “That the Father pay to the Mother $900 per week as child support for the parties’ three children.”

The taxpayer filed federal income tax returns for the taxable years 2011, 2012, and 2013, and on each return he claimed a deduction of $46,800 for alimony paid to his former wife. She, however, did not report the payments as income on her tax returns.

The IRS argued that although the payments satisfied subparagraphs (A), (C), and (D) of section 71(b)(1), that is, they were made under a divorce or separation instrument, that parties were not members of the same household, that the obligation to make the payments ended at the former wife’s death, and there was no obligation to make payments as a substitute for the payments after the former wife’s death, the payments ran afoul of the requirement that the divorce or separation instrument not designate the payment as non-deductible and non-includable. The IRS pointed to the language in Exhibit J that stated, “In accordance with Section 71(b)(1)(B) of the Code, the Husband and Wife expressly agree to designate and hereby do designate all payments required in this Exhibit as excludable and non-deductible payments for purposes of Sections 71 and 215 of the Code, respectively.” Alternatively, the IRS argued that, because the unallocated support payments are subject to contingencies involving the taxpayer’s children, they are considered payments made for the support of his children in accordance with section 71(c)(2), and thus cannot qualify as deductible alimony.

The taxpayer argued that Exhibit B, expressly provided for “unallocated support” payments rather than alimony or child support. Noting that Exhibit J did not expressly require any form of payment, the taxpayer argued that the statement in Exhibit J on which the IRS relied was not relevant to the question of whether the payments constituted alimony. The taxpayer also argued that the parties’ last-minute negotiations and revisions to the agreement were intended to ensure that the payments would be treated as alimony for purposes of sections 71 and 215.

First, the court rejected the taxpayer’s reliance on the intent of the parties. The court explained that when section 71 was revised, Congress eliminated any consideration of intent in determining whether a payment was deductible. Instead, the objective tests in section 71 are determinative.

Second, the court acknowledged that Exhibit J did not expressly require any payment or otherwise fix an amount to be paid as alimony or child support. The court then noted that the taxpayer’s narrow focus on this aspect of exhibit J gave no effect to the cross-references in Exhibits B and J. The court reasoned that a proper consideration of the
agreement required a construction of the document as a whole, including the Exhibits and the cross-references within the Exhibits. When reading the agreement as a whole, the court concluded that Exhibits B and J must be read in tandem and that the unallocated support payments prescribed in Exhibit B were subject to the provisions of both that Exhibit and Exhibit J. The court observed that “the handwritten revisions to the settlement agreement were poorly conceived.” It added, “Specifically, although Exhibit B was revised to state that the parties ‘acknowledge that husband anticipates that the above [unallocated support] payment is deductible to him and includable to wife’ * * * Exhibit J states more definitively: ‘In accordance with Section 71(b)(1)(B) of the Code, the Husband and Wife expressly agree to designate and hereby do designate all payments required in this Exhibit as excludable and non-deductible payments for purposes of Sections 71 and 215 of the Code, respectively,” and decided that the latter, more definitive statement controlled. Accordingly, the payments did not satisfy the definition of deductible alimony.

One of the challenges in making revisions to a document is the need to reconsider how each provision interacts with every other provision in the document. Though this can be a tedious process, it is absolutely necessary. The challenge increases as the number of changes increase. The need to be careful is exceedingly high when the changes are being made at the last minute, under time pressure, with two or more people providing input at the same time. As I tell my students, “Before writing, think, and help the clients decide, what it is that they want to do. Then write. And be certain to write what was decided, and avoid trying to write language that is murky in an attempt to make each party think that they are getting what the wanted even though what they wanted is different from what the other party wanted.” The advice given to youngsters to “avoid talking out of both sides of your mouth” applies no less forcefully to writing. Aside from enduring the cost and aggravation of an audit and litigation, the taxpayer may have ended up with an outcome he did not think was the outcome he was going to get.

It is unclear whether the parties had assistance from attorneys when drafting the agreement or when making last minute changes to the document. The references in the agreement to specific Internal Revenue Code provisions and state law statutes suggests that attorneys were involved at the outset. It would not be surprising to learn that the last minute changes were made without the help of lawyers. But it also would not be surprising the learn that lawyers were responsible for those changes. Either way, it’s no way to draft a document. And it’s certainly no way to generate the best tax outcomes.

A reader alerted me to this story about a tax that once existed, that I think no longer exists, and that I did not know existed. It was a tax imposed by Montana on bachelors. Curious, I did a bit of research.

A fellow named William Atzinger, age 35, refused to pay the $3 tax that Montana imposed on bachelors. In his protest communicated to the county assessor, he claimed, “Spinsters are responsible for my not being married in their refusals of my wooing in the past.” He then expressed a willingness to pay the tax if the state also imposed it on spinsters. He refused to get married simply to avoid jail and he refused to pay the tax to avoid jail. Soon thereafter, the Supreme Court of Montana held that the tax was unconstitutional. At the same time it also invalidated a poll tax imposed only on men.

Two years ago, in The Single-People Tax Is Not Working, Allison Schrager, writing for Bloomberg, points out the threat posed to economic growth and the ability to pay for social services and pensions when the fertility rate falls below the population replacement rate, as has happened in parts of Europe and recently in the United States. She points out that, throughout history, nations have had a vested interest in “family-making” for the same reason. She notes that the ancient Romans imposed a tax on bachelors, and in the twentieth century, towns in Germany and Italy did the same.

Discussing failed attempts to enact a bachelor tax in Michigan in the early twentieth century, Le Roy Barnett, in The Attempts to Tax Bachelors in Michigan, explains that not only the ancient Romans, but also the ancient Greeks, taxed unmarried men. And in the late seventeenth century, countries in Europe, needing to replace the people killed in the continent’s constant warfare. In addition to population replacement, the tax provided funds for the treasuries of nations and local governments. Another goal was to find husbands for war widows, who otherwise would require public subsidies. The tax on unmarried men also popped up in South Africa and Argentina. Did you know that in 1913 a bill was introduced in Congress to tax unmarried men in order to fund pensions for widows and children? I didn’t, probably because it failed to pass and thus did not make it into the history books or into tax courses. Nor was Montana the only state to tax bachelors. Georgia, Maryland, and Wyoming got in on the action. Michigan tried to enact a bachelor tax, but the proposal never made it past legislative discussion.

Reaction to the tax, at least during the past century or so, was unsurprising. People argued that unmarried women also should be taxed. Others suggested that a tax be imposed on any woman who turned down a marriage proposal. Yet, in Michigan, on several occasions some citizens petitioned the legislature to tax bachelors in order to support poor women, widows, and orphans. As late as the 1910s, pressure persisted in Michigan for a bachelor tax. One police chief claimed that “90 percent of the criminals” in his town were bachelors. One proposal would have exempted widowers and men who had obtained divorces. One version even provided a bonus to be paid to men who married. The effort in Michigan fizzled out in the 1930s, chiefly because of the economic impact of the Great Depression.

Barnett explains that exemptions existed in many of the bachelor taxes in Europe. Men with physical disabilities, men suffering from mental illness, and men in prison were not taxed on account of being unmarried. Exceptions also existed in some laws for men who could prove that their marriage proposal to a woman had been rejected.

Using taxes to encourage or discourage behavior is an inefficient approach to solving problems. The bachelor tax is yet another example. For one thing, it is unadministrable, particularly when there are exceptions. Barnett explains that the exception for rejected suitors created a job for women who were called “professional lady rejectors,” who, for a fee or other compensation, agreed to testify that they had rejected a marriage proposal from a man trying to fit within the exception.

If the principal goal of a bachelor tax is to increase a nation’s or state’s birthrate, would it not be better to find a way to encourage people to have children? Rather than paying people to do so, or charging them a tax for failure to do so, why not create a society and culture in which people want to have children? In the current climate, it is understandable that some people are reluctant to bring new lives into the world. Consider the reasons provided in this article for why people choose not to have children. Whatever the solution to maintaining a population replacement rate might be, it surely isn’t a tax. That’s been tried. It didn’t work.

We live in a post-modern world where facts become optional, reasoning is mocked, intellectual and cerebral efforts are downplayed, and ignorance infects too many brains. I most recently wrote about the danger of ignorance in Ignorance, Tax or Otherwise, Is Dangerous, noting my earlier commentary on the problem 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, Is All Tax Ignorance Avoidable?, and Tax Ignorance in the Comics.

One particular bit of ignorance illustrates how misinformation can go viral in an instant. For more times than I care to remember, I have tried to hold back the ridiculously erroneous claim that there are 74,000 pages in the Internal Revenue Code. I have explained why this claim is wrong in posts such as Bush Pages Through the Tax Code?, and continuing with Anyone Want to Count the Words in the Internal Revenue Code?, Tax Commercial’s False Facts Perpetuates Falsehood, How Tax Falsehoods Get Fertilized, How Difficult Is It to Count Tax Words, A Slight Improvement in the Code Length Articulation Problem, and Tax Ignorance Gone Viral, Weighing the Size of the Internal Revenue Code, Reader Weighs In on Weighing the Code, Code-Size Ignorance Knows No Boundaries, Tax Myths: Part XII: The Internal Revenue Code Fills 70,000 Pages, and Not a Surprise: Tax Ignorance Afflicts Presidential Candidates and CNN. Despite my efforts, this false claim is repeated over and over, and accepted as true by millions of people, few if any of whom bother to pick up a copy of the Internal Revenue Code and discover for themselves that it is far from 74,000 pages. So to some extent, the spread of ignorance is in part attributable to laziness, just as it is in part attributable to the malicious motives of those who invent false stories, fake reports, and foolish lies.

During the Super Bowl, H&R Block aired a commercial touting its partnership with IBM’s Watson, and saying to the world, “Imagine being able to understand all 74,000 pages of the U.S. tax code.” Aside from erroneously calling the Internal Revenue Code the U.S. tax code, the writers of the commercial decided to hype their product by exaggerating the size of the Internal Revenue Code. Why is this not only wrong but dangerous? First, it strengthens a falsehood. Second, it makes it easier for people to become comfortable with falsehoods. Third, it changes the attitudes of those who understand the need to reform the tax law, because it misleads people into thinking that the problem is different from, and on a scale much larger than, actual reality. Once people lose their grip on actual reality, they slide into delusion. When people are delusional, they do dangerous, stupid, and often fatal things.

As I wrote in Ignorance, Tax or Otherwise, Is Dangerous, when people are ignorant, they “do things that harm themselves because they are unaware that what they are doing is harmful. That is the price paid for ignorance. It’s only a matter of time, given the current cultural climate, for collective ignorance about something existential to exact an ultimate price.” When attacking a culture of ignorance, every instance of ignorance must be rebutted, because every instance of ignorance, no matter how small, is not unlike every cancer cell, no matter how small. Instances of ignorance, if not stamped out, will grow, and metastasize, destroying everything in its path, including those who created, nurtured, enabled, and tolerated ignorance and its consequences. Unfortunately, too many people are ignorant of this reality.

In a recent Tax Court case, Cheves v. Comr., T.C. Memo 2017-22, the taxpayers made early withdrawals from their retirement accounts, and did not report all of the withdrawals as gross income as required. To the IRS contention that they owed income tax and the section 72(t) penalty on the withdrawals, the petitioners replied that they honestly believed the reported amount to be correct and that taxes had been withheld on all of the withdrawals. They agreed that they had withdrawn the funds from their retirement accounts and that they withdrew more than they reported on their federal income tax return. However, they requested “that their tax liability be forgiven in consideration of their many years of proper reporting.” The Tax Court explained that, “While we applaud petitioners’ satisfaction of their obligation to report their income in the past, we are obligated to follow the statute as written and do not have the authority to waive
reporting requirements mandated by law.”

So, in other words, a taxpayer who files correctly year after year does not earn a pass when misreporting one or more items in a subsequent year. A student who has perfect attendance from grades one through eight does not escape the consequences of having unexcused absences in grade nine. Even if Congress decided to reward, in some way, taxpayers who filed correct tax returns for a stretch of some particular number of years, administering this sort of system would be a nightmare. It would require an audit of each of the years in question. It would require some sort of mechanism to prevent the excused error from costing too much revenue. And it would invite the begging of taxpayers who claimed to have been “off” by only a few dollars.

Perhaps a better way to think about the request for relief is to consider traffic rules. Should a driver who has stopped at every red light for thirty years be permitted to run one or more red lights without bearing the responsibility for the consequences of doing so?

Throughout this century, fear has been growing, feeding on itself and on basic human limbic reactions. Fear causes people to do dangerous things, or to do nothing at all, or to demand that others do something, anything, to remove the fear. Fear, though, cannot be removed. It’s as ubiquitous as every other emotion. What can be removed is the source of the fear, which can be an externality, or which can be a flawed limbic process that assigns fear where there is no danger. Worse, in some instances fear does not exist when there should be fear, causing a person to do dangerous things.

The word fear, as well as its companion word afraid, often pops up in the context of taxes. Some students entering the basic tax course claim that they are afraid of the course. Many people claim to be afraid of taxes. Most people fear being the subject of a tax audit. There are people who are afraid of doing tax returns, though doing a tax return is more a matter of tedium and frustration, conditions that generally don’t trigger fear though they can trigger other emotions. Perhaps what people fear is the ultimate bottom line of the amount of tax still owing.

One antidote to fear is to prevent situations that can trigger fear. People who are afraid of heights tend to avoid standing on the edge of a cliff. People who are afraid of loud noises and darkness turn down opportunities to see an action movie in a theater.

Yet something about tax that has made some people fearful and that should frighten everyone is the new twist in the tax theft game. For some time, scam artists used a person’s name, address, and social security number to file tax returns on which, by using fake income amounts, these wrongdoers would generate refunds for themselves based on false earned income tax credit claims. Eventually the IRS engineered ways to identify at least some of these false returns, by comparing information to the previous years’ returns and looking for inconsistencies. For example, if the person whose social security number was being used improperly had been filing returns showing income in the $100,000 range and claiming five children as dependents and suddenly files a return showing a much lower income and only one child, the odds were very high that the latest return wasn’t really from that person.

So the scam artists stepped up to a more sophisticated approach. To circumvent the IRS safeguards, they needed to make their fake returns look like they came from the person whose social security number they were inappropriately using. To do that, they needed to know the person’s income. What better way to do that than to get their hands on the person’s W-2? So the scammers started sending fake emails to corporate employees, pretending to be a high level executive, asking for the W-2 forms for all employees. They also have targeted businesses that prepare income tax returns, both through hacking and phishing.

In an important security report from Brian Krebs, this W-2 information, which could include YOUR W-2 information, is now showing up on what he calls cybercriminal shops. These are web sites where people can purchase stolen credit card data, usernames and passwords for accounts at financial web sites, and similar data. When once it was the case that a scammer had to find a way to get the information using hacking or phishing, the less energetic but no less greedy scammers can now purchase the information they need. Why? For one thing, a hacker who gets a hold of 10,000 W-2 forms doesn’t need that many, so they sell most of them. This dark market is going to increase exponentially the number of fraudulent tax returns sent to the IRS, and it’s anyone’s guess as to how many are blocked.

In his report, Krebs explains the economics of this dark market, explains where some of the stolen W-2 forms were obtained, and how they were obtained. Every American ought to read this report. The principal reason is to understand how to block scammers from getting information. Smaller businesses are more at risk, because they are less likely to have a sufficiently sized IT department to guard the store, so to speak. Krebs also provides guidance on what to do after one’s information has been used to file a tax return using the person’s name, something that is discovered when the person tries to file their actual, genuine return. He also provides tips on how to reduce the chances of a scammer filing a fake tax return using another person’s name. Most involve common sense practices that have been the subject of advice for the past two decades. Sadly, some people end up afraid because they neglected to let themselves learn. And, by the way, that’s not a problem just in the tax world.

On Monday, in Taxpayer Wins Tax Case But Attorney is Criticized, I discussed a case involving an attorney who had filed a Tax Court petition at the deadline, using self-printed postage. I included the court’s unflattering comments about waiting to file “until the last possible day.” I included comments I had made more than two years earlier, in How Not to File a Tax Court Petition, in which I discussed a similar instance of last minute filing using self-printed postage. I suggested that the best way to avoid deadline errors is to pretend that the deadline is sooner than it actually is.

Later that day, a reader contacted me, providing a link to a deadline calculator website, and asking, “Would this website help the lawyers in your article today?” My answer is, “Generally, no.” It would help lawyers and anyone else dealing with a deadline compute a deadline when it is a particular number of days after a specific date. That, however, is rarely the problem. The problem is that people know that something must be done by a specific date, and for a variety of reasons, wait until the last minute to deal with the matter. Sometimes it is a matter of being too busy. Sometimes it is a matter of priorities. Sometimes it is oversight. And often, it is simply a pattern, reaching back into childhood, of letting things go as long as possible. A calculator that tells someone when something is due is of no help to someone who already knows when something is due.

Last week, in Tax Advice That Tax Professionals Probably Don’t Want to Share, after describing a web site brought to my attention by a reader in which advice on the disposition of a tax refund is based on astrological interpretations, I asked, “Are there people who make financial decisions based on astrological guidance?” And I added, “If so, what’s their track record compared to those whose decisions reflect other approaches?” I explained that a few minutes of research did not provide me with an answer.

A different reader contacted me to share his experience with this question. Here is what he wrote:

“Are there people who make financial decisions based on astrological guidance?”

Answer: Yes.

They aren't common, but I've had at least three of them as clients. One in a litigation case, one in a probate matter, and one in an estate planning case.

In the litigation case, every setting of a hearing, trial date or deadline demanded intense client involvement as it was evaluated astrologically. It was a real pain and the ultimate outcome of the case was nothing special.

In the estate planning matter, the client would draw elaborate drawings that looked like magical runic circles full of symbols out of some witch's spell book, or the Masonic symbolism on a dollar bill, which he consulted during office conferences as we presented choices to him for estate planning document options. He basically wanted to us to translate these diagrams into Wills and Trusts as sincerely as possible, and we made a half-hearted attempt to do so. The resulting choices, filtered through our experience as estate planners, were a bit quirky and unconventional, but not horribly bad ones.

The clients in the probate matter talked a lot of about their views in small talk, but it didn't have much apparent influence on their decision making in a short lived case that resulted in a swift total victory via settlement in a few days, in a case that could have turned into a long, protracted, uncertain and expensive litigation. (Honestly, it was one of the most successful negotiations of my career.)

While I don't have direct evidence of the outcome of their methods on their financial success, all three clients (like most of my clients) were comfortably upper middle class, and at least a couple had risen from merely middle middle class means.

One virtue of any method other than the predominant strategies in the marketplace is that if you buy and sell at arbitrary times, rather than falling into the group think that drives a majority of the players in the market. When your timing is either due to necessity like a major unexpected expense that requires you to sell a market position when you hadn't planned on doing so, or due to astrology, your timing is effectively random. This avoids the bad but common instinct to sell low and buy high, or to read more into market trends than they deserve. It may not be optimal or a good way to beat the market, but like index funds, it prevents you from doing worse than average by overthinking the problem in a way that adds negative value. So, while it is a nutty way to make decisions, it may be better than some of the seemingly more rational approaches. This may partially explain why their reliance on astrology, at a minimum, did not leave them worse off.

I learned several things. First, there are people who seriously consider astrological, or similar, guidance to be valuable, and use it. Second, nothing in law school prepares lawyers for how to interact with clients who bring this sort of advice into their discussions, though it seems to me that the reader sharing these experiences handled them deftly. Third, there may be, at least in the investment world, advantages to approaching decisions from a different and not-so-common perspective. Fourth, every client is different and we learn something new from each one.

Sometimes the simplest things get complicated, and often unnecessarily so. An example is found in the story provided by the opinion in Tilden v. Comr., No. 15-3838 (7th Cir. 1/13/2017). The IRS issued a notice of deficiency to the taxpayer. The due date for filing a petition with the Tax Court was April 21, 2015. When the petition arrived at the Tax Court on April 29, 2015, the Tax Court dismissed it as untimely. The taxpayer explained that on April 21, 2015, his attorney’s staff put the petition in an envelope, purchased first class and certified delivery postage from Stamps.com, printed the postage, affixed it to the envelope, and delivered the envelope to the post office on that same date. The post office did not put a postmark on the envelope. The taxpayer argued that because timely mailing is treated as timely filing, the Tax Court should not have dismissed the petition. Initially, though conceding that the envelope had been delivered to the post office on April 21, the IRS argued that under section 301.7502-1(c)(1)(iii)(B)(2) of the regulations, applicable because the postmark was not made by the postal service, the petition was not timely filed because it arrived at the Tax Court after a period of time longer than the period of time an envelope postmarked by the postal service would have arrived. The Tax Court, however, applied section 301.7502-1(c)(1)(iii)(B)(3) of the regulations, which provides that if the envelope has both a postal service postmark and a postmark not made by the postal service, the latter is disregarded, and the determination of whether the mailing was timely is made under section 301.7502-1(c)(1)(iiii)(A) of the regulations. Recognizing that the postal service had not placed a postmark on the envelope, the Tax Court noted that the postal service had entered the envelope into its tracking system on April 23, and treated that action as equivalent to a postmark. Accordingly, it treated April 23 as the date of filing, which made the petition late, and so the Tax Court dismissed the taxpayer’s petition.

The taxpayer sought reconsideration, arguing that the parties had not raised the issue of whether tracking data is equivalent to a postmark made by the postal service. The IRS agreed, abandoned its argument based on section 301.7502-1(c)(1)(B)(2) of the regulations, requested that the Tax Court apply section 301.7502-1(c)(1)(B)(1) of the regulations, and conclude that it had been satisfied. The Tax Court denied the motion, explaining that the 90-day limitation for filing petitions is jurisdictional, and thus cannot be altered by agreement between the parties.

The taxpayer appealed to the Seventh Circuit. At oral argument, the court and counsel for the parties focused on whether sections 6213 and 7502 of the Internal Revenue Code and section 301.7502-1 of the regulations create a rule that is jurisdictional. The Seventh Circuit requested supplemental memoranda on the issue. The Seventh Circuit then concluded that the provisions are jurisdictional. However, it concluded that although litigants cannot stipulate to jurisdiction, they can agree on the facts that determine jurisdiction. The court provided as an example the requirements under federal diversity jurisdiction, which require that the litigants be domiciled in different states. Though the parties cannot simply stipulate that diversity exists, they can stipulate that one party is domiciled in one state and the other party in another, and that agreement is binding unless the parties are colluding. Because the Tax Court did not suspect the taxpayer and the IRS of colluding, because the IRS conceded that the envelope was delivered to the postal service on April 21, and because there is nothing to establish that the postal service treats entry of an item into its tracking system as a postmark, the Seventh Circuit concluded that the petition was timely filed, and reversed the Tax Court.

The Seventh Circuit then shared its thoughts on what had happened:

Although the taxpayer thus prevails on this appeal, we have to express astonishment that a law firm (Stoel Rives, LLP, of Salt Lake City) would wait until the last possible day and then mail an envelope without an official postmark. A petition for review is not a complicated document; it could have been mailed with time to spare. And if the last day turned out to be the only possible day (perhaps the firm was not engaged by the client until the time had almost run), why use a private postmark when an official one would have prevented any controversy? A member of the firm’s staff could have walked the envelope to a post office and asked for hand cancellation. The regulation gives taxpayers another foolproof option by providing that the time stamp of a private delivery service, such as FedEx or UPS, is conclusive. 26 C.F.R. §301.7502–1(c)(3). Stoel Rives was taking an unnecessary risk with Tilden’s money (and its own, in the malpractice claim sure to follow if we had agreed with the Tax Court) by waiting until the last day and then not getting an official postmark or using a delivery service.

That paragraph should be included in whatever materials are used in tax procedure courses in every tax law program in the country. It also should find its way into every professional responsibility course in the nation’s law schools. Does it surprise me? Not at all. In How Not to File a Tax Court Petition, I commented on a case involving a taxpayer who, after receiving a notice of deficiency, relied on a third party to mail the petition which was due by March 3, 2014. The third party printed postage from Stamps.com, added extra postage for making the mailing certified, took the petition to the post office, noticed there were long lines, and dropped the envelope in the outgoing mail slot without getting a postal service employee to stamp certified on, and postmark, the envelope. Because the petition arrived at the Tax Court on March 10, 2014, bearing a postmark of March 4, 2014, the Tax Court granted the IRS motion to dismiss for failure to file the petition in a timely manner. The postal service postmark superseded the Stamps.com postmark. Foreshadowing what the Seventh Circuit would write, I reacted with these words:

There are two major lessons to be learned from this case. First, stand in line and get that hand-stamped postmark. Second, avoid the need to learn the first lesson by treating the petition as due EIGHTY days after it is mailed. That provides a cushion of time, an allowance for unforeseen circumstances, and contingency insurance. The inability of most people to deceive themselves in this manner has its roots in childhood, when too many missed deadlines are tolerated, and lessons in timeliness aren’t taught and when taught, aren’t absorbed. More than a few law students have encountered serious academic difficulties because a variety of circumstances, some unpredicted and some to be expected, caused them to miss deadlines. People complain that law schools should be teaching time management, but, seriously, why are people arriving at law school lacking time management skills? The answer is, for the same reason people not going to law school have the same issues. Better to learn the consequences when what’s at stake is something minor and not a taxpayer’s Tax Court petition.

To that commentary, I must add another lesson. “Third, at some point missing deadlines or handling a deadline in a fashion that requires one or more courts to sift through evidence and consumes the time and resources of litigants and lawyers will cause much embarrassment and consternation when an amazed, or annoyed, court takes time to use an opinion to reprimand those mishandling deadlines.”