MauledAgain

Names matter. We encounter names everywhere. Though occasionally a name strikes us as unusual, or noteworthy, usually we take names for granted. Everyone has a name.

But sometimes, even though names matter, a person doesn’t have a name. I encountered this phenomenon in two different contexts during the same day last week. In one instance, someone posted an inquiry to a genealogy web site, asking why someone’s name on a birth certificate would simply be “baby.” Others replied that sometimes parents had not yet agreed on a name, and that the birth certificate would be updated at a later time. In the other instance, I noticed a story about the Georgia Department of Health refusing to issue a birth certificate for a newborn because the Department did not approve of the name chosen for the child. Without getting into the question of whether the Department’s action is justified, a point made by the story’s author caught my eye. The author correctly noted that by not having a name, and thus no birth certificate, the child cannot obtain a social security number. If the child does not have a social security number, the child’s parents will face huge, and perhaps insurmountable hurdles, getting the child insured, getting the child enrolled in school, and getting the child a passport.

What the story’s author did not mention was something that naturally popped into my head, which still has tax things wandering around in it. If the child does not have a social security number, the parents cannot claim the child as a dependent on their federal income tax return, nor on their Georgia income tax return. Eventually, if the dispute with the Department of Health is resolved quickly enough, the parents will need to file amended returns for those taxable years for which their unnamed child did not have a social security number.

Names matter. Even for tax purposes.

It’s the time of the year when states examine highways and bridges, evaluate the damage caused by winter weather, usage, and deterioration caused by aging, and realize that, yes, repairs are necessary. Though the extent of repairs can vary from state to state, in part because of differences in the harshness of winter weather, determining that none of a state’s highways and bridges need repairs just doesn’t happen.

California, according to several reports, including this one, needs $52 billion to fix its roads. The governor and some legislators are rallying behind a proposal to raise gasoline taxes for the first time in more than twenty years, increase car registration fees, and impose a fee on emission-free vehicles. The plan is meeting with resistance, particularly because in the past, transportation revenues have been diverted to other uses. That happens in many states, and it’s not just transportation revenues that are diverted from their intended purpose. The advocates of this most recent proposal in California have also proposed an amendment to the state Constitution to prevent this sort of fund diversion.

If anyone in California has suggested the mileage-based road fee as a source of funding, it hasn’t become public. Eventually, as transportation technology evolves, that fee is the most likely replacement for taxes that will cease to work because, for example, the decline in gasoline sales will eviscerate the gasoline tax base. I have written about the mileage-based road fee many times, beginning with Tax Meets Technology on the Road, and continuing through Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, Liquid Fuels Tax Increases on the Table, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, Mileage-Based Road Fees: Privatization and Privacy, Is the Mileage-Based Road Fee a Threat to Privacy?, So Who Should Pay for Roads?, Mileage-Based Road Fee Inching Ahead, Rebutting Arguments Against Mileage-Based Road Fees, On the Mileage-Based Road Fee Highway: Young at (Tax) Heart?, To Test The Mileage-Based Road Fee, There Needs to Be a Test, and What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?

The California proposal represents a shift in the direction of highway funding for several reasons. The fee on emission-free vehicles, which are not subject to the gasoline tax because they don’t use gasoline, acknowledges that emission-free vehicles contribute to the wear-and-tear on public highways. The scaling of the registration fees based on a vehicle’s value is a step in the direction of scaling the fee based on weight. Generally, heavier vehicles have a higher value, though the correlation isn’t very strong.

California’s governor made a point that I’ve been making for years. He explained that, under the plan, most drivers would pay less than an addition $10 each month, and that they would benefit from reduced vehicle repair expenses. It continues to puzzle me that so many citizens object to small tax or fee increases that will reduce or eliminate huge repair bills caused by highways in disrepair. In some respects, paying for highway repairs is good insurance against paying even higher amounts for vehicle repairs, but in recent months it has become painfully obvious that many Americans do not understand what insurance is, how it works, and why it makes sense.

One drawback to the proposal is that it does not appear to raise enough funding. California needs $59 billion to fix existing problems on state highways, and its local governments collectively need $78 billion to fix local roads. It doesn’t seem that $52 billion will make enough of a dent in that backlog, especially while the list of required repairs continues to grow each month.

It is unclear whether the proposal will pass. Even if it does, it will take years before the risk of vehicle damage, accidents, injuries, and deaths attributable to damaged highways begins to recede. For some, it will be too late.

There is no question that supply-side-based tax policy, and its related “trickle down” theory, do not work. They cause far more problems than the difficulties they allegedly were designed to fix.

One of the best examples of how trickle-down supply-side tax policy is a total failure is the Kansas experience. I have written about the terrible outcome in that state on several occasions. In A Tax Policy Turn-Around?, I explained how the Kansas income tax cuts for the wealthy backfired, causing the rich to get richer, the economy to stagnate, public services to falter, and the majority of Kansans to end up worse than they had been. In A New Play in the Make-the-Rich-Richer Game Plan, I described how Kansas politicians have been struggling to find a way to undo the damage caused by those ill-advised tax cuts for the wealthy. In When a Tax Theory Fails: Own Up or Make Excuses?, I pointed out that the Kansas experienced removed all doubt that the theory is shameful. In Do Tax Cuts for the Wealthy Create Jobs?, I described recent data showing that the rate of job creation in Kansas was one-fifth the rate in Missouri, a state that did not subscribe to the outlandish tax cuts for the wealthy that Kansas legislators had embraced. In Kansas Trickle-Down Failures Continue to Flood the State and The Kansas Trickle-Down Tax Theory Failure Has Consequences, I described how large decreases in tax revenue, the opposite of what is promised by the supply-side theorists, triggered cuts in public education, and in turn stoked the fires of voter frustration. The voter reaction, however, did not push out of office enough supply-side supporters. In Who Pays the Price for Trickle-Down Tax Policy Failures?, I described how the governor of Kansas, who claimed that tax cuts for the wealthy would generate increased revenues, proposed to deal with the resulting revenue shortfall by cutting spending for essential services.

Yet, despite the unquestionable failure of his state’s foray into the world of trickle-down supply-side tax policy, the governor of Kansas actually recommended that what he did in Kansas be used as the template for federal tax reform, as reported in this article. Does it make sense to take reading lessons from illiterate people?

Now comes a report that the Kansas policy of cutting taxes for the wealthy with the unwarranted promise of resulting revenue increases and economic prosperity is on the verge of total collapse. Brownback, a Republican, has watched a Republican-controlled Kansas legislature come close to dumping his economic and tax policies. Many expect that the next state budget will put those policies to rest. The state, facing a huge budget deficit, has exhausted short-term tweaks and borrowing capacity, and must choose between undoing the tax cuts or pretty much terminating education funding. The latter approach would face court challenges likely to succeed. Not unlike the situation in the nation’s capital, centrist Republicans find themselves in disagreement with the extreme conservative Republicans who support Brownback. One Republican state senator has described Brownback’s tax and economic legacy as “going down in flames.” Yet Brownback thinks his failure is a role model for the nation.

Brownback, not surprisingly, places the blame elsewhere. He attributes the state’s economic mess to oil price declines and reductions in crop prices. Though claiming that his policy of cutting taxes for the wealthy created new businesses and jobs, job growth in Kansas last year was worse than all but five states. The practice of assigning blame to others rather than admitting a mistake seems to be a popular approach among certain segments of the political world. Interestingly, the Republican-controlled Kansas House voted to restore teacher tenure and expand Medicaid, and if that bill passes it would undo two other Brownback policies the results of which have not fared well with the people who voted Brownback and his legislative allies into office some years ago.

Kansas indeed is a role model for national tax policy, but it’s not the lesson Brownback wants to teach. What the Congress needs to understand from the Kansas fiasco is that supply-side trickle-down tax and economic policies do not work. If Congress wants to learn what works, it can examine states where demand-side policies have been enacted and have worked. Otherwise, as a Republican legislator warned, economic failure makes voters angry, and when voters get angry, they “go to the polls and get rid of you.” That, too, is a lesson.

A recent United States Tax Court case, Gaines v. Comr., T.C. Summ. Op. 2017-15, provides some insight into claiming a charitable contribution deduction for donating clothing to a charity. The taxpayers were a married couple, but the issues involved the transactions of the wife. She worked as a independent contractor in the foster care industry, and also worked in the women’s clothing department of Saks Fifth Avenue and Neiman Marcus. The taxpayers’ income tax return included a Schedule A, Itemized Deductions, and a Form 8283, Noncash Charitable Contributions. On the Schedule A, the taxpayers claimed an $18,000 charitable contribution deduction for gifts other than cash on the Schedule A. The Form 8283 indicated that the deduction was attributable to clothing donations made to “Goodwill”. At trial the wife testified that the
deduction related to donations of clothing that were made to a church that might or might not be still in existence. The IRS disallowed the deduction.

The Tax Court agreed with the IRS. The court pointed out that the taxpayers had not complied with any of the requirements applicable to deductions of $5,000 or more for property other than cash. The taxpayers did not explain the discrepancy between the donee identified on Form 8283, “Goodwill,” and the wife’s testimony that the donee was a church. The taxpayers did not provided details as to the number of specific items donated or the value of any specific item. They did not present any written substantiation for the deduction, nor could the wife recall how the value of the items was calculated.

What especially struck me, though the court did not elaborate on the point, was the amount of the deduction. Used clothing, unless it is something once owned by a celebrity, is like a used car. Its value diminishes from the moment it is purchased, and continues to do so as it is worn. Though the court did not disclose the taxpayers’ total income, the facts permit a guess that it wasn’t particularly huge. It seems plausible that the cost of $18,000 of used clothing would be in the range of $50,000 to $100,000. That’s a lot of clothing. I wonder if the clothing was purchased by the wife as an employee of Saks Fifth Avenue and Neiman Marcus at a deeply discounted price, and that she computed the donation by using the retail price of the clothing. The retail price surely exceeded the employee price, and surely exceed the value of the clothing after it was taken home and used.

If the amount of clothing donated to a charity is so massive that it has a five-digit value, or the clothing includes items remarkable for having been owned by a celebrity or a similar reason and thus has a five-digit value or more, it certainly makes sense to spring for an appraisal. The cost of the appraisal is but a fraction of the tax savings generated by the charitable contribution deduction.

The Philadelphia soda tax remains controversial, and hasn’t started off very well. The controversy has accompanied it since its proposal, as I’ve described in posts such as 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, When Tax Revenues Are Better Than Expected But Less Than Required, and The Imperfections of the Philadelphia Soda Tax.

The tax, in place now for two months after years of disagreement, has fallen short of what it needs to generate in revenue. In When Tax Revenues Are Better Than Expected But Less Than Required, I discussed the significance of the city’s report on the tax for January. The city has committed to spending $91 million annually from soda tax revenues. That requires an average of $7.58 million per month in tax collections. In January, the city collected only $5.7 million. A bit of arithmetic reveals that to reach $91 million for the year, the average monthly collection for the remaining 11 months needs to be $7.75 million per month. A few days ago, according to this report, the city announced that it collected $6.4 million. Though more than what was collected in January, it is still below the required average monthly collection. A bit more of arithmetic reveals that to reach $91 million for the year, the average monthly collection for the remaining 10 months needs to be $7.89 million per month. Each month that the revenues fall short, the target for the remaining months of the year increases.

According to the report, the city needs to increase its monthly totals to $7.7 million beginning in April. I don’t see how that would bring the total to $91 million unless somehow the city brought in $9.6 million in March or succeeds in bringing in $7 million of unpaid taxes. It’s unclear whether the unpaid taxes are amounts collected by distributors and not remitted, or amounts that the city thinks should have been collected and that might not actually be due. The city also suggests that holidays and weather affect collections, so perhaps the city is banking on a beverage buying spree come summertime. Unfortunately for the city, stories and anecdotes suggest that the buying spree might take place outside of the city limits.

My conclusion in When Tax Revenues Are Better Than Expected But Less Than Required is no less a concern:

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.

It is going to be interesting tracking these monthly reports as 2017 progresses.

Hawaii has a problem. According to this report, its State Highway Fund is $100 million short of what is needed to keep its highways in functional condition. Of course, Hawaii is not alone when it comes to highway funding. Almost every state is facing the same problem, with the amount of the shortfall varying from state to state.

So the Hawaii legislature is considering ideas to fix the problem. Its Senate Transportation Committee has opted for an increase in the fuel tax. Another proposal is to replace the current weight tax with a tax based on the value of the vehicle. The weight tax rests on the principle that heavier vehicles cause more damage to highways and bridges than do lighter vehicles, and thus the heavier vehicles should pay a higher tax. Proponents of a shift to a value-based tax simply explain that it would generate more revenue. Clearly, some higher-value vehicles do more damage to roads, but there isn’t that strong of a correlation between a vehicle’s value and its weight, or between its value and the wear and tear it puts on roads.

There is another option. Readers of this blog know what it is. The legislators in Hawaii, working with the state’s Department of Transportation, should consider the mileage-based road fee. I have written about this approach many times, beginning with Tax Meets Technology on the Road, and continuing through Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, Liquid Fuels Tax Increases on the Table, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, Mileage-Based Road Fees: Privatization and Privacy, Is the Mileage-Based Road Fee a Threat to Privacy?, So Who Should Pay for Roads?, Mileage-Based Road Fee Inching Ahead, Rebutting Arguments Against Mileage-Based Road Fees, On the Mileage-Based Road Fee Highway: Young at (Tax) Heart?, and To Test The Mileage-Based Road Fee, There Needs to Be a Test. Surely a state caught between higher fuel taxes and arguments about vehicle weight and value would find merit in an idea that takes the best of the weight-based tax and blends it with another measure of wear and tear, vehicle mileage. But I’m not holding my breath.

Though from time to time I find material for this blog when I watch television court shows, there are far more shows and episodes than I’ve had an opportunity to view. A reader sent me a link to an episode of Judge Faith, a show that I have not seen, which involved a dispute between two former friends. One friend had prepared the other friend’s tax return, but the second friend refused to pay the bill.

The judge concluded that the second friend owed the first one the return preparation fee. There was a contract between the two friends, which required the second friend to pay by a certain date or when her tax refund was received. The refund check did not show up, and it turned out that it had been stolen and cashed in another city. The IRS opened an investigation that was still underway at the time of the case in question. The second friend argued that she did not owe the tax return preparation fee because she had not received the refund. The judge explained that under the contract, receipt of the refund was one of two payment requirements. Because the specified date had passed, the fee was due.

But the best part of the case was the revelation at the outset by the first friend. The plaintiff opened her case by saying, “I’m a tax preparer and I’m an adult entertainer. So I dance full time and I do taxes seasonally.” The judge replied, “You have no problem counting those dollar bills is what you’re telling me.” The plaintiff rejoined, “Oh, I count money very well.”

Many people are seasonal tax return preparers. Some are retired. Most have other jobs. Many of those with other jobs are accountants, and some are lawyers. I wonder how many seasonal tax return preparers who have other jobs, when asked to describe their other job, would reply, “adult entertainer.” It surely is an interesting combination. I suggest not asking your tax return preparer what he or she does in the off-season.

One of the key ingredients of tax law practice is the ability to parse statutes. As I tell my students, sometimes the answer is in the statute, and if it isn’t, the statute should guide the analytical path to an answer, if there is one.

One aspect of interpreting a statute, tax or otherwise, is punctuation. One type of punctuation that matters is the comma. For years, writers, grammarians, lawyers, and others have debated the use of the so-called “Oxford comma.” The Oxford comma is used to separate the next-to-list item in a list. For example, one could write, “I gave the instructions to Bob, Mary, Rachel and Tony.” Proponents of the Oxford comma argue that the sentence should be, “I gave instructions to Bob, Mary, Rachel, and Tony.” In this instance, with or without the Oxford comma, a reader can easily determine that the instructions were given to four people. But sometimes the absence of the Oxford comma can make a difference in meaning.

Recently, in O’Connor et al v. Oakhurst Dairy et al, the United States Court of Appeals decided that the absence of an Oxford comma in a statute was the critical element of its decision. The case involved a dispute between a diary company and its drivers over the drivers’ rights to overtime pay. Under Maine law, which governed the employment relationship, overtime pay generally is required if the employee works more than 40 hours in a week. Among the exceptions to this requirement is Exemption F, which states that overtime pay protection does not apply to “The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment or distribution of: (1) Agricultural produce; (2) Meat and fish products; and (3) Perishable foods.

The drivers argued that these words refer to the single activity of “packing,” whether the “packing” is for “shipment” or for “distribution.” The drivers explained that though they handle perishable foods, they do not engage in “packing” them. Thus, the drivers contended that they were not within the Exemption F exception.

The dairy argued that the statute refers to two distinct exempt activities, one being “packing for shipment” and the other being “distribution.” Under this interpretation the drivers are within the Exemption F exception because they unquestionably distribute perishable foods.

When the case was filed in the district court, it was referred to a Magistrate Judge, who decided that the dairy’s argument was the better one, and recommended granting the dairy’s motion for partial summary judgment. The district court agreed, and granted summary judgment for the dairy on the ground that “distribution” was a stand-alone exempt activity. The drivers appealed.

The Court of Appeals began by setting aside an unpublished opinion of the Maine Superior Court cited by the dairy. The Maine Superior Court had ruled that Exemption F provides an exemption “for the distribution of the three categories of foods.” The federal Court of Appeals pointed out that it is not bound by a Maine Superior Court decision because a Maine Superior Court decision does not bind the Maine Law Court. The Court of Appeals also noted that the cited case had been appealed to the Maine Law Court, which did not follow the Superior Court’s approach but decided the case on other grounds.

The Court of Appeals concluded that Exemption F was ambiguous, even after taking account of interpretive aids, the law’s purpose, and the law’s legislative history. The dairy argued that the words “distribution” and “shipment” are synonyms, that accordingly “distribution” is not a type of “packing,” and that “shipment” describes the exempt activity of “packing” whereas “distribution” is a separate exempt activity. The dairy also relied on the linguistic convention of using a conjunction to mark the last item on a list, and thus argued the lack of a conjunction before “packing” made “distribution” a separate item. The dairy conceded that if a comma had been placed after the word “shipment,” its interpretation would be unquestionable, but tried to block the conclusion that the lack of the comma required the opposite outcome by pointing out a rule in the Maine Legislative Drafting Manual that stated, “when drafting Maine law or rules, don’t use a comma between the penultimate and the last item in a series.”

The drivers argued that “shipment” and “distribution” are separate activities. They explained that “shipment” refers to outsourcing delivery to third-party carriers, and “distribution” refers to a seller’s in-house transportation of products to recipients, relying on dictionary definitions. The Court of Appeals noted that if the dairy was correct in treating “shipment” and “distribution” as synonyms, it would be odd for the legislature to use both terms. Additionally, the court noted that in other statutes, the Maine legislature treated “shipment” and “distribution” as different activities. Thus, using both terms was consistent with an exemption for “packing for shipment” and “packing for distribution.” The drivers also argued that because each exempt activity was described by using a gerund – a word ending in “ing” – the use of “shipment” and “distribution” should be treated as having the same grammatical role under the parallel usage convention. Thus, the drivers concluded, those two words are objects of the preposition “for” that follows the gerund “packing.” The drivers responded to the dairy’s reliance on the Maine drafting manual by highlighting a caution in the manual that drafters should “be careful if an item in the series is modified.”

After explaining why the arguments based on grammar did not resolve the matter, the Court of Appeals proceeded to explain why the arguments based on legislative history did not provide an answer. The court turned to the principle of interpreting a statute in favor of those whom the statute is intended to protect. In this instance, it was intended to protect employees. Accordingly, the Court of Appeals held that the drivers were not within the overtime requirement exception, and reversed the district court.

The lesson is simple. Had a comma been placed after the word “shipment,” the dairy would have prevailed. Though the dispute between advocates of the Oxford comma and those who do not subscribe to it will continue, it is clear that using the comma can provide clarification that its absence cannot offer. Those who draft statutes, regulations, rulings, contracts, or any other document need to pay very careful attention to each word and each punctuation mark, including the comma. The cost of a missing Oxford comma can be steep.

A few days ago, a new survey from WalletHub was released, revealing some interesting responses from Americans with respect to taxes and a few other topics. Because I mention only a few of the questions, I recommend visiting WalletHub’s web page and browsing through the survey results.

The folks at WalletHub asked people what they would be willing to do to achieve a future in which they did not pay taxes. The most prevalent response was “other,” which included everything except the eight specific choices presented to those surveyed, though respondents were permitted to select more than one answer. Of the eight specific choices, the winner was surprising. Of the respondents, 20 percent would get an “IRS” tattoo as a price to pay for avoiding future taxes. Not me. Another choice that I just simply could not accept was selected by 10 percent of the respondents. They would agree to stop talking for six months. Wow. That’s just not me. Check out the survey at the link above to see some of the other choices. Naming your first-born child “Taxes?” Really?

Another question brought unsurprising responses. When asked whom they liked more than the IRS, respondents paraded out a litany of individuals, including Barack Obama, the Pope, several members of the Trump family, Vladimir Putin, and OJ Simpson. Again, take a look at the full list. Yet 88 percent of respondents thought the IRS was necessary, though most of those respondents thought significant improvement was needed.

Several other questions addressed taxes. Almost two-thirds of respondents did not think Donald Trump’s proposed tax reforms would save them money. The list of things people would rather be doing than preparing tax returns is long, and includes things like changing diapers, spending the night in jail, and breaking an arm. Wow.

Not surprisingly, people fear identity theft more than they fear getting audited. In fact, they fear getting audited less than they fear making a mistake on their return or not having sufficient money to pay taxes that are due.

There are some other questions dealing with taxes, and a handful addressing related political issues. My favorite non-tax question was “Whom We’d Most Like to Punch.” Curious? Take a look at the survey.

Most of us believe taxes are not fun. Perhaps. But surely asking questions about taxes and reading the responses definitely is fun.

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?