MauledAgain

My eyebrows were raised by a recent post from the online magazine of the National Society of Accountants. What I read distressed me.

The title of the post, IRS Revenue Code Section 280: A Tax Potpourri, was yet another example of the idiocy of referring to the Internal Revenue Code as the IRS Revenue Code. Think about it. Is there Really an Internal Revenue Service Revenue Code? Please. This is not the first time I have tried to help people understand the difference between the IRS and the Internal Revenue Code. That difference matters, as I have explained in posts such as Is Tax Ignorance Contagious?, Code-Size Ignorance Knows No Boundaries, and Intentional Misleading Tax References.

But it quickly became far worse than nomenclature sloppiness. The blog post in question was a complaint that “the government decided to dump into one place,” namely, the now correctly designated “Internal Revenue Code section 280,” what the writer called “a conglomeration, a potpourri, and a mass of all kinds of stuff.” Curious, I continued to read. The writer explained, “We’re dealing with a lot of subsections in 280. I’m going to be going through A, B, C, D, E, F, G, and H.” Immediately, I realized that the writer did not understand how the Internal Revenue Code was structured. The writer does not understand the difference between a Code section and a Code subsection, nor does the writer understand how Code sections are numbered.

The numbering system of the Internal Revenue Code follows a pattern. This pattern was adopted when the Internal Revenue Code of 1954 was enacted, replacing the Internal Revenue Code of 1939. The pattern in the Internal Revenue Code of 1954 was followed when the Internal Revenue Code of 1986, the current version, was enacted. Essentially, the drafters identified the topics addressed by the Code. They grouped these topics and then grouped the groupings. Because the Internal Revenue Code is title 26 of the United States Code, the highest level of groupings were designated subtitles. Subtitle A deals with income taxes, subtitle B deals with estate and gift taxes, subtitle C deals with employment taxes, and so on. In turn, subtitles are divided into chapters. For example, chapter 1 of subtitle A deals with normal taxes and surtaxes, whereas chapter 2 deals with tax on self-employment income, and so on. Chapters are divided into subchapters. For example, subchapter A of chapter 1 of subtitle A deals with determination of tax liability, subchapter B deals with computation of taxable income, and the somewhat well-known subchapter S deals with what everyone knows as “subchapter S corporations,” or simply, “S corporations.” In turn, subchapters are divided into parts, and some, but not all, parts are divided into subparts.

The assignment of numbers to Code sections was designed to “leave room” for future legislation. Thus, for example, part I of subchapter A of chapter 1 of subtitle A starts with section 1. It ends with section 5. Part II of that subchapter starts with section 11. There is no section 6, nor 7, 8, 9, or 10. Turning to subchapter B of chapter 1 of subtitle A, which deals with the computation of taxable income, part I, dealing with the definition of gross income, adjusted gross income, taxable income, etc., begins with section 61 and ends with section 68, part II, items specifically included in gross income, begins with section 71. Part IX of subchapter A of chapter 1 of subtitle A deals with “Items Not Deductible.” It begins with section 261. Part X, which deals with Terminal Railroad Corporations and Their Shareholders, starts at section 281. Presumably, when this assignment was made, the drafters of the 1954 Code figured that leaving sections 261 through 280 for nondeductible items would be sufficient. They were wrong.

By 1976, Congress reached section 280, which limited deductions for expenditures attributable to the production of films, sound recordings, books and similar properties. In the same year, Congress wanted to add limitations on deductions attributable to personal residences, specifically, home offices, in-home child care facilities, and vacation homes. It could not use section 281, because that was already in use, and renumbering Code sections and moving them around was considered to be even more confusing. So Congress resorted to a technique it had used on previous occasions when it had “run out of numbers,” and concluded that the next number would be section 280A. Not subsection 280A, but section 280A. It did NOT insert the personal residence deduction limitations into section 280. In 1976, Congress also enacted limitations on deductions attributable to the demolition of structures, and put those into section 280B. Over the years, Congress continued to add deduction limitations, in response to maneuvers in which taxpayers engaged, and eventually added section 280C, section 280D, section 280E, section 280F, section 280G, and section 280H. These are each separate sections. They are not part of section 280. The language in each of these sections is not part of section 280, and thus cannot be considered to have been “dumped into section 280.”

Most of these sections have subsections. Thus, for example, section 280A has subsections (a) through (g). Notice that subsections are designated by lower-case western alphabet letters in parentheses. In contrast, when letters are part of section numbers, they are in upper-case and there is no intervening parenthesis or other punctuation. Granted, it is strange that Code numbers contain letters, but that is a quirk with which tax professionals need to be familiar. A similar set of constructs deal with the lettering and numbering of paragraphs, subparagraphs, clauses, subclauses, and more, which I explained in, for example, Internal Revenue Code: Small Change, New Feature, New Look.

Thus, to call section 280A a subsection would generate absurd challenges and ridiculous outcomes when trying to describe 280A(a). Would it be “subsection 280A subsection a”? Would it be “subsection a of subsection 280A”? Please.

When I teach the basic federal income tax course, I give the students materials to assist them in understanding how the Internal Revenue Code is structured and how its elements are arranged and designated. I do the same with Treasury Regulations, which have their own arrangement and terminology. I do this because understanding cross-references, citations in judicial opinions, and tax law analysis requires an appreciation of how the Code and the regulations are arranged and designated. It’s a foundation element of tax law practice.

Thus, it is distressing to read “They just buried all kinds of things in there [section 280].” Aside from the fact that the “things” that are described are NOT in section 280, it is disappointing that the writer did not comprehend that what sections 280A through 280H address are non-deductible expenditures, not ‘all kinds of things.” It is also distressing to read “So, in section 280, we’ve got automobiles.” No, we do NOT. There is nothing in section 280 about automobiles. Limitations on deduction of automobile expenditures is in section 280F. Then, when reading, “There are probably 15 different code sections here, but they dumped them all into one,” I realized that the writer of the commentary surely did not understand much, if anything, about the Internal Revenue Code. So who is this writer? I don’t know the person’s name. It’s not mentioned. The writer describes himself or herself as “an expert in the Internal Revenue Manual,” as someone who “worked there [the IRS] for 30 years,” and who has “been teaching for another 20 years.” My guess is that the writer is not a lawyer, has not studied tax from the “Code first” approach that tax lawyers and most other tax professionals use, and uses the “begin with the Internal Revenue Manual or someone’s paraphrased analysis” approach that some of my students – specifically, some of the undergraduate accounting majors – unsuccessfully insist that I use in my courses.

In all fairness, most of the writer’s commentary is a description of tax rules and cases dealing with issues to which sections 280A through 280H are applicable. Though presented in a somewhat stream-of-consciousness pattern, there is useful information in the commentary. It is unfortunate that those reading the commentary, and those attending the presentations of which the commentary appears to be a transcript, are totally misled with respect to how the Internal Revenue Code is arranged, and are left with the impression that the material in sections 280A through 280H are part of section 280. It is unfortunate that they are left with the impression that there is no coherent and logical structure behind the arrangement and designation of Code sections and that sections 280A through 280H are not a dumping ground but a series of deduction limitation provisions. It is unfortunate that they are left with the wrong impression of what sections and subsections are.

Sometimes I think that trying to stem the storm surge of ignorance is as futile as holding one’s finger in a dike while the waves crash over it. But I will continue my efforts to educate the world. At the very least, it’s therapeutic. Perhaps somewhere, someone will read something I write and think, “Aha.” That is the blessing of teaching that generates a beneficial result.

The supply of television court shows seems endless. So, too, is the stream of television court shows that touch on tax issues. There’s no question that these shows have supplied inspiration for a long line of my commentaries, starting with Judge Judy and Tax Law, and continuing with 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?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other.

The most recent Judge Judy that I viewed, but for which I cannot find a link, was difficult to follow, because the parties disagreed with respect to the facts, and at certain points provided different answers to the a question when it was repeated. The plaintiff’s daughter-in-law had formerly been married to the defendant. The daughter-in-law and the defendant had two children before their relationship ended. The daughter-in-law and the plaintiff’s son married, and had one child.

Until some point in 2016, or perhaps 2015, the defendant’s two children lived with him. At first he claimed that he had custody and they lived with him until June of 2016, but then he admitted that his two children lived with their mother, the plaintiff’s daughter-in-law. He then stated that he had custody in 2014 and 2015, but the plaintiff agreed only that the defendant had custody during 2014 and the first half of 2015.

At some point, the defendant became homeless and surrendered custody of his two children to their mother. He also commented that he and the children lived with his aunt, but it was unclear for how long, because the parties also cross-talked in arguing that point.

So at some point in 2016, or perhaps in 2015, the plaintiff’s daughter-in-law and her husband, the plaintiff’s son, ended up with custody of all three of the daughter-in-law’s children. The daughter-in-law and her husband somehow became caught up in illegal drugs, and Child Protective Services threatened to take all three children. At that point, in the fall of 2016, the plaintiff took custody of all three children. However, the oldest child of the defendant had issues, so eventually that child ended up in a group therapeutic foster home. The defendant asserted that he visited the other child several times while that child was in the plaintiff’s custody.

When filing his income tax return for 2016, the defendant claimed dependence exemption deductions for his two children. When asked, he explained that he had also claimed two exemptions for the children in 2014 and previous years. The plaintiff sued the defendant because she wanted to claim the children as dependents.

Judge Judy remarked that the parties needed to take the custody issue back to family court. She concluded that the two children had spent most of their lives with their father. She dismissed the plaintiff’s claim.

Judge Judy did not decide, nor did she need to decide, who was entitled to dependency exemption deductions for the two children. Answering that question, even if it was within the scope of the case, would require additional facts. Because the children were step-children of the plaintiff’s son, and thus step-grandchildren, the only relationship test that they possibly could meet is that of someone residing in the plaintiff’s home for the entire year. Even if that had been so, and it wasn’t, there were other requirements that would have been met. Whether the defendant or the children’s mother was entitled to the exemption is a different question, and it did not need to be resolved in order to conclude that the plaintiff had no claim.

This case provides an excellent example of one of the several reasons tax law is complicated. It is simple to state that a person is entitled to claim a dependency exemption deduction for a child, but that simple rule is impossible to apply when the facts become complicated. Who is a child? What about step-children? Adopted children? Foster children? Children of separated or divorced parents? Children who are shuttled from home to home? Children who are in and out of the foster care system? Children in the custody of the state? Each one of these situations requires a rule. Suddenly the simple, conceptual rule is joined by a parade of additional rules. The applicable law becomes complicated. Worse, each of the terms used in the additional rules requires definitions and imposes conditions.

Though it’s true that a good chunk of tax law complexity arises from provisions enacted to benefit the privileged few, or to satisfy special interests, another chunk of tax law is complicated because life is complicated. People live complicated lives and engage in complicated transactions. Business owners, business entities, trusts, and estates also engage in complicated transactions. And so long as that is how life progresses, it is highly unlikely that tax laws will become simple.

According to this report, the chair of the Presidential Advisory Commission on Election Integrity suggested that “when burdens like poll taxes and literacy tests were imposed on citizens and registering often required a trip to the local courthouse, voter turnout was far higher than it is now.” Surely any correlation is a coincidence and not a matter of causation.

Using this logic, doubling the price of a product should increase sales. Charging admission for events that had been free should boost attendance. This is the same sort of reverse tax logic that claims lowering tax rates to near zero will generate huge increases in tax revenue.

I’m being nice using the word reverse. A much better phrase to use is twisted tax logic.

For almost two decades, Americans have been told, time and again, that they oppose tax and fee increases. Enormous sums of money have been plowed into efforts to persuade Americans that taxes are a bad thing and to persuade legislators to refrain from enacting or increasing taxes and to reduce or repeal those that exist. Some people have made careers out of, and have profited from, anti-tax campaigning.

According to a new survey from HNTB Corporation, 70 percent of Americans are willing to pay higher taxes and tolls to build, repair, and maintain roads, tunnels, and bridges. Some prefer higher taxes, some prefer tolls and fees, and some prefer a combination. If those taxes and tolls were guaranteed to be used only for transportation projects, the approval percentage increases from 70 to 84. According to the survey, 80 percent support tolls on existing highways, including interstate highways, if the revenue was used for specific purpose. Of those polled, 41 percent support tolls to reduce congestion, 40 percent support tolls to improve safety, 34 percent support tolls to add capacity, and 21 percent support tolls to add or improve adjacent public transportation to relieve congestion. The other 20 percent are opposed to tolls under all circumstances. Apparently they were not asked how they would fund highway repairs.

So how is it that we are told that Americans, or at least a majority of them, oppose taxes, fees, and tolls, and yet surveys – the HTNB poll being but one – indicate that most Americans support taxes, fees, and tolls for transportation infrastructure? Have Americans changed their minds? Or has there been a misrepresentation of American opinion, making the desires of an elite few appear to be the clamor of the general populace? Perhaps it is a mixture of both.

It is not unlikely that Americans, having seen the real-world impact of the theoretical tax-cuts-for-the-few-benefit-the-many nonsense, are beginning to understand the connection between government revenue and life convenience. For several decades, resistance to increases in fees and taxes, such as the liquid fuels tax, has gifted Americans with more potholes and the attendant costs, both human and monetary, of inadequate funding. How many Americans realize that during the past four years, 26 states have increased liquid fuels taxes?

The key, I think, is making certain that Americans receive services in exchange for the taxes that they pay. There appear to be people who think that they should go through life enjoying public benefits, such as roads, without paying taxes. Though some might take that position through selfishness, there surely are those whose attitude arises from ignorance. It is essential that public officials explain to constituents where their tax, fee, and toll dollars go. Eventually, the anti-tax crowd, aside from the anti-government anarchists, will realize that Americans do not oppose taxes or even tax increases, but oppose irrational taxes, inexcusable tax systems, and oligarchic tax policies.

Taxpayers complain about the complexity of tax laws and tax forms, to say nothing of the inconvenience of keeping records and digging up information in order to comply with tax laws. But taxpayers also complain when they perceive tax laws to be unfair, and those complaints are a seemingly never-ending stream. But is there not a conflict between simplicity and fairness?

Critics of the income tax, who see it as too complicated, often point to the sales tax as an example of a simple tax. Yet the sales tax is not simple, as anyone who has dug through the list of items subject to, and exempt from, the tax can attest. Worse, there isn’t one sales tax, but dozens, even hundreds, because sales taxes apply at state and local levels. Accompanying the sales tax is the use tax, designed to fill in the gap caused by taxpayers subject to a sales tax making purchases outside the jurisdiction. During the past decade, the rise in online purchases has generated sales and use tax revenue declines.
For years, enforcement has relied on voluntary reporting. Not surprisingly, compliance has been terrible. With the onset of online transactions, jurisdictions turned increasingly to the vendors, trying to compel or persuade them to collect the use tax on behalf of the jurisdiction. Success has been spotty. I have written about this challenge in more than a dozen commentaries, starting with Taxing the Internet, and continuing through Taxing the Internet: Reprise, Back to the Internet Taxation Future, A Lesson in Use Tax Collection, Collecting the Use Tax: An Ever-Present Issue, A Peek at the Production of Tax Ignorance, Tax Collection Obligation is Not a Taxing Power Issue, Collecting An Existing Tax is Not a Tax Increase, How Difficult Is It to Understand Use Taxes?, Apparently, It’s Rather Difficult to Understand Use Taxes, and Counting Tax Chickens Before They Hatch, A Tax Fray Between the Bricks and Mortar Stores and the Online Merchant Community, and Using the Free Market to Collect The Use Tax.

The Vermont Tax Department, according to this story, is trying to boost voluntary compliance. It is inviting Vermont residents to pay past due use taxes, with an incentive in the form of interest and penalty waivers. Vermont offers two methods of computing the tax. One is to maintain a list of all purchases subject to the use tax, to add up the prices, and to multiply by the tax rate. The other is to pay an amount based on the taxpayer’s adjusted gross income.

The choice presented to Vermont taxpayers illustrates the tension between complexity and fairness. Keeping track of all out-of-state and online purchases is inconvenient, perhaps annoying, and usually difficult. At the time of each purchase, or thereafter, the taxpayer must determine if the item is subject to, or exempt from, the use tax, and must also determine whether the item was brought back to, or shipped into, Vermont. Calculating a tax based on adjusted gross income is much simpler, but it generates unfair results because two people with the same adjusted gross income ought not pay the same use tax if one has made many taxable purchases and the other has made far fewer taxable purchases. The latter situation arises if the person saves a substantial portion of income, or makes large payments for nontaxable expenses, such as tuition.

The choice presented to Vermont taxpayers is not unlike the choice given to taxpayers who are, or were, eligible to deduct state and local sales and use taxes on their federal income tax returns. Taxpayers can keep track of what they paid, or use a table based on income, state of residence, and number of exemptions. The table is very popular, but in this instance the perception of unfairness is dampened by the fact it is generating a tax benefit and not a tax liability even though economically one can demonstrate differences in tax liability when using the table in comparison to using itemized receipts.

It has been known for as long as taxation has existed that every attempt to make a tax fairer requires adding complexity. Every exception, exemption, reduction, alternative, or adjustment requires additional language and lines on tax forms. Every one of those tweaks opens up additional possibilities for disagreement and generates additional hours of research, preparation, compliance, disagreement, and litigation. Even though many people clamor for a simple tax system, there is no doubt that implementation of a simple system, or even a simpler system than now exists, will generate as many, or more, cries for fairness that erodes the simplicity. This is a tax fact of which no taxpayer should be ignorant.

Unquestionably, I am a fan of mileage-based road fees. Those fees are a sensible and efficient method of funding highway repairs and maintenance, a worthy replacement for the increasingly antiquated liquid fuels tax, and a much more equitable way of matching costs with users. I have written about these fees for almost 13 years, 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, What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?, And Now It’s California Facing the Road Funding Tax Issues, If Users Don’t Pay, Who Should?, Taking Responsibility for Funding Highways, Should Tax Increases Reflect Populist Sentiment?, and When It Comes to the Mileage-Based Road Fee, Try It, You’ll Like It.

When something new is proposed, it is not uncommon for many people, even if they are not natural skeptics, to hesitate and to doubt. A fine way to overcome doubts before committing to a permanent change is to sample the idea, to test the concept, to try a temporary test, or to engage in a pilot program. That is what states have been doing with the mileage-based road fee proposal. According to the Mileage-Based User Fee Alliance, at least 9 states, one city, and one multistate interstate group have engaged in, or are engaging in, pilot projects. Now comes news that Utah is preparing to set up a pilot project.

As more states, and localities, experiment with mileage-based road fees, and as the pilot projects continue to return mostly positive outcomes, general acceptance of the idea will grow. Better yet, as the pilot projects are undertaken, snags in the implementation can be identified and worked out, improvements can be made, and more can be learned about the best way to explain how mileage-based road fees work. Like the often-mentioned snowball rolling down the hill, this trend suggests that mileage-based road fees have a better chance of being universally adopted long before self-driving vehicles totally displace vehicles with human drivers.

Readers know that I watch television court shows in search of good tax stories. They know this because they’ve seen a long parade of commentaries on those shows, starting with Judge Judy and Tax Law, and continuing with 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?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, and Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?.

Readers also know that I haven’t had the time or opportunity to watch all of them. So when they come upon a show they think I haven’t seen, because there’s no commentary on this blog about the show, they send me a link. Not long ago, a reader directed me to this Judge Judy episode. For many people, tax professionals and others alike, it provides insight into how a particular tax scam works.

The plaintiff and the defendant had been a couple, but were not married. The defendant had a child from an earlier relationship. The plaintiff explained that he had been led to believe he was the father of a child whose mother was a woman who lived in the Bronx. When it came time for the plaintiff to file his 2009 federal income tax return, the defendant, knowing that the child’s mother needed help and wanting to help her, mentioned this to the defendant. The defendant, or her sister, a tax return preparer, allegedly told the plaintiff that the best way to help the mother was to claim the child as a dependent and apparently to give her the tax refund generated by the dependency exemption deduction and child tax credits. According to the plaintiff, the defendant’s sister prepared the return, and asked him how he wanted to receive the refund. Because he had no bank account, he told her to have it mailed to him. Then, according to the plaintiff, the defendant’s sister called and told him the refund would arrive more quickly if it were sent to a bank account, so she persuaded him to let it be deposited in the defendant’s bank account, and then the defendant would give the money to the plaintiff. The refund went into the account, but the defendant did not pay it to the plaintiff. The plaintiff sued. The defendant justified keeping the money because of the plaintiff’s bad temper and some things he had allegedly damaged. The defendant claimed that the plaintiff had agreed she could keep the money, but the judge did not believe her.

Judge Judy began by interrogating the plaintiff. He explained that he claimed two exemptions on the return, himself and the child. The child lived with the child’s mother. In response to whether he supported the child, the plaintiff stated that he watched him, took care of him, and gave him some things that the child needed. The plaintiff did not live with the child or the child’s mother. There was no child support order in place, and the child’s support came from welfare payments. Judge Judy then asked, “So your son is on welfare and you claim him as a dependent?” The plaintiff explained that the child’s mother had told him it was his child, but then in March of 2010 he discovered it was not his child.

Judge Judy explained to the plaintiff that by claiming the child as a dependent, the size of the refund was enlarged. But because the child is not a dependent, the plaintiff is not entitled to the portion of the refund attributable to claiming the child, the IRS wants the money back. So the judge said to the plaintiff, if the defendant were ordered to pay the money to you, I assume you will return it to the IRS. She then pointed out, “We can do that for you.”

Judge Judy asked the plaintiff the age of the child. The plaintiff said, “Four.” The judge asked if he had claimed the child as a dependent on tax returns for earlier years. The plaintiff replied, “No.” The judge asked, if you thought the child was yours, why did you not claim the child in the earlier years? The plaintiff did not provide an explanation. Asked who prepared his tax returns in earlier years, he replied, “H&R Block.”

The judge then asked the plaintiff, “So why did you claim child in 2010?” That is, why did you claim him on your 2009 income tax return when it was being prepared in 2010? The plaintiff said that the defendant’s sister, the tax return preparer suggested it. But then plaintiff said that it was the child’s mother who said he could claim the child.

Judge Judy asked to see the return. It was filed in March 2010. On further inquiry, the plaintiff claimed that it was after the return was filed that he discovered that the child was not his.

Judge Judy told plaintiff that he needed to file an amended return, removing the child as a dependent. She dismissed the plaintiff’s case based on the doctrine of clean hands, because she did not think he had done things properly with respect to the return.

Turning to the defendant, the judge asked “What do you have to do with this man’s tax returns?” The defendant explained that the plaintiff did not claim the child in question as a dependent, but claimed the defendant’s grandchildren as dependents. When asked to explain the relationship, the defendant said that the children in question were the children of a woman she had raised. That woman is the mother of two children, one of whom was the child the plaintiff claimed. When asked, the defendant admitted she had not adopted the woman in question. Thus, concluded Judge Judy, the alleged grandchildren were not the defendant’s grandchildren.

Judge Judy, not surprisingly, concluded that the entire set of transactions constituted a scam. She concluded that the defendant was complicit in the scam. She announced her intention to notify the IRS that the defendant has the money fraudulently received from the IRS as a result of the scam.

That there was a scam was obvious from two perspectives. First, the facts did not fit. The plaintiff supposedly thought a child was his, yet did not claim the child until the child was four years of age. The identity of the child was in dispute. The depositing of the refund into the bank account of someone other than the taxpayer is a red flag. The child’s mother was not someone in need of a dependency exemption. Second, the demeanor of the parties, along with the changes in parts of the story as the trial developed, suggested that they had broken one of the rules of conspiratorial scamming, that is, agree on one story and stick with it.

It’s unclear who the parties wanted to be the ultimate recipient of the money. Either the defendant or the mother of the children, or both of them, thought they would receive or split the refund. Perhaps the plaintiff was going to get a cut of the refund, but because he received nothing, it is possible that he was indeed duped by the defendant and her sister. It’s possible that the child’s mother was unaware of the scam, and perhaps was not going to receive anything. As I listened to the defendant’s voice beginning to shake, I got the sense that she didn’t anticipate encountering a judge who would break through what the defendant thought was going to be some sort of contract dispute to unearth the tax fraud. I wonder if the plaintiff filed an amended return, though hopefully someone would explain how that would be even a better outcome in terms of dealing with the defendant than suing. I wonder how things turned out between the IRS and the defendant.

It has been almost 13 years since I first wrote about the mileage-based road fee. At the time, it was an idea, one that addressed the ever-growing problem of declining liquid fuel tax revenue attributable to increases in fuel efficiency and the use of vehicles not using liquid fuels. It was attacked, and continues to be attacked, on a variety of grounds, none of which stand up under careful scrutiny. Over the years, I have returned time and again to this issue, sometimes in response to renewed objections, sometimes to describe yet another mileage-based road fee pilot program, and sometimes to focus on the connection between usage and financing. The list of my commentaries continues to grow, starting 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, What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?, And Now It’s California Facing the Road Funding Tax Issues, If Users Don’t Pay, Who Should?, Taking Responsibility for Funding Highways, and Should Tax Increases Reflect Populist Sentiment?.

Now comes news that the state of Washington has enlisted 2,000 volunteers to participate in a pilot program, at least the seventh state to do so. The participants won’t be paying the fee, but simply measuring what they would be paying if the fee were real, and comparing it to what they pay in liquid fuel taxes. Washington is initiating the pilot program for the same reasons other states have done so or are considering doing so. Washington is watching road construction and repair costs growing by 2.6 to 3.1 percent a year due to inflation, while fuel tax revenue increases by 0.7 to 0.9 percent.

Even though the pilot program is voluntary and costs the participants nothing, while perhaps satisfying the curiosity of some or all of them, in this survey of Washington residents, 58 percent opposed the idea. Yet in California, which conducted a pilot program with 5,000 participants, post-program surveys revealed that 85 percent of the participants were satisfied with the program, and 73 percent concluded that the mileage-based road fee is more fair than a liquid fuels tax. What’s the lesson? Sometimes it makes sense to explore something, try something, study something, and examine something before reaching a conclusion. When it comes to the mileage-based road fee, many of the people who oppose it will discover that they like it.

When a child wins money in a beauty pageant, should the gross income be reported by the child or the child’s parents? When expenses are paid in connection with a child’s beauty pageant activities, should those expenses, if deductible, be deductible by the child or the child’s parents? Those questions might appear to be invented for a test or exam in a basic federal income tax course, but they arise from a recent case.

In Pedrgon v. Comr., T.C. Memo 2017-171, one the taxpayers’ children participated in various beauty pageants. In 2011, the taxpayers paid $21,732 for travel, outfits, and other costs, and in 2012 they paid $15,445 for these items. In 2011, the child won $1,325 and in 2012, $1,850. On the advice of their tax return preparer, the taxpayers included the winnings in gross income on their 2011 and 2012 federal income tax returns, and they deducted the expenses, reporting the income and expenses on Schedules C. The preparer based his advice on his understanding of the child labor laws of the state in which the taxpayers lived. The IRS disallowed the deductions, explaining that the income and deductions of the child must be reported by the child on the child’s own income tax return.

The Tax Court agreed with the IRS. Under section 73(a), amounts received in respect of the services of a child are treated as the child’s gross income and not the gross income of the parent. Before the predecessor of section 73 was enacted in 1944, income received in respect of the services of a child was reported by parents who held rights to those services under local law. Because local laws varied from state to state, Congress enacted what is now section 73 in order to create uniformity. Similarly, under section 73(b), all expenditures attributable to amounts included in the child’s gross income solely by reason of section 73(a) are treated as paid or incurred by the child, even if the parent makes the expenditure. Thus, the gross income from, and any deductions attributable to, the child’s beauty pageant activities ought not to have been reported on the taxpayers’ tax returns. Though the taxpayers perhaps considered this outcome to be ugly, the court got it right.

The good news for the taxpayers was the Court’s determination that they relied in good faith on their tax preparer. Thus, they escaped liability for the accuracy-related penalties that the IRS had asserted.

Even if section 73 did not exist, the taxpayers’ attempt to deduct expenses that were 8 and 15 times the income that was generated would raise section 183 questions. Did the child, or the taxpayers, engage in the beauty pageant activities with the intent to make a profit? Though it is a fact question, it would not be surprising to discover, had the issue been reached, that a court would conclude that it was not a for-profit activity.

As I mentioned a bit more than a year ago, in Taxation of Androids and Robots, and Similar Pressing Issues, I often use “tax consequences of time travel” as an example to law students in my attempt to warn them about drifting from the practical into the theoretical when doing so is inappropriate. Would it make sense for a government, whether federal, state, or local, to consider enacting a tax on time travel? One’s reaction surely would be, “No!” but a recent development causes me to think it could happen.

According to this report, the City Council of Broadview Heights, Ohio, is considering a proposal to raise its hotel tax from 7 percent to 10 percent. The catch? There are no hotels in Broadview Heights. The last hotel in the city closed about six years ago. The city council president who made the suggestion to raise the rate noted, “Now is the time to do it, when we don’t have a hotel. At least they [referring to hotels] will know what they’re getting into.” Or perhaps there are no hotels in town to lobby against the increase, which would bring the rate to double or triple the rate charged in the several other cities and towns that have hotel taxes.

A thought that passed through my brain was the possibility that the goal of the tax increase is to deter hotels from operating in the city, considering that it would generate a tax two to three times those applicable in other towns. But that idea was evicted from my mind as I continued to read the report. The city council president added, “The higher tax would bring a better hotel than what we’ve had in the past.” Really? So on the one hand there are state and local governments that hand out tax breaks to lure businesses into staying in, or relocating to, the jurisdiction, and yet here, on the other hand, is a proposal that increasing taxes will attract business. Perhaps the idea is that a higher tax generates higher prices, which would encourage the building of a hotel that caters to more economically blessed patrons. Is it an attempt to keep out budget-conscious folks who struggle economically?

To the extent that certain types of taxation is seen as a tool to discourage particular activities and behaviors, such as tobacco and gambling taxes, will governments consider enacting taxes on time travel even though time travel does not (yet) exist in an attempt to discourage research into time travel? Imagine the threat that time travel poses to governments and politicians.

From time to time, when teaching the basic federal income tax course, a student would approach and explain that he or she was confused because something in the assigned regulations was inconsistent with what was in the statute. The best example is the personal and dependency exemption deduction amount. Though changed from time to time when Congress amended the statute and when adjusted for inflation, the regulations continued to refer to a now outdated $600 amount. I explained to the student, and the class, that with a long list of regulations projects, editing an amount in a regulation was given low priority because it was something people could, and should, figure out for themselves.

Confusion over the relationship between Internal Revenue Code and Treasury Regulations apparently is not limited to students in basic federal income tax courses. It popped up in a recent Tax Court case, Mitsubishi Cement Corp. v. Comr., T.C. Memo 2017-160. The taxpayer produced finished cement. One of the ingredients in its product is calcium carbonate which the taxpayer mines at one of its locations. The taxpayer computed depletion with respect to the calcium carbonate by deducting 15 percent of gross income from mining. The IRS argued that the taxpayer was limited to 14 percent of gross income from mining. The taxpayer relied on Treasury Regulation section 1.613-2(a)(3), which provides that 15 percent is the applicable percentage depletion rate for “minerals listed in this subparagraph,” which includes calcium carbonates. The taxpayer argued that the regulation is “an agency pronouncement that should be deemed a concession or stipulation” by the IRS. The taxpayer also cited Rev. Rul. 66-24 as evidence that the IRS has “valid[ated]” the rate provided in regulations section 1.613-2(a)(3), although that ruling concerned the application of the regulation to refractory and fire clay, and not to calcium carbonates. The taxpayer also offered an argument based on the legislative nature of regulations adopted under section 611.

The court, however, pointed out that the taxpayer ignored “the timing of the regulations in relation to the change in the controlling statute.” The court explained that the language in the regulations was adopted in 1960, when the statute provided a percentage rate of 15 percent for calcium carbonates. The Tax Reform Act of 1969 amended the statute, lowering the percentage to 14 percent. Thus, the percentage in the statute superseded and made obsolete the percentage in the regulations. The court also reminded the taxpayer that an agency regulation cannot supersede the language in the statute.

This is another instance in which amendment of a regulation provision has been assigned a low priority. The pace at which Congress amends the Internal Revenue Code outstrips the pace at which the limited number of attorneys in Treasury and in the Chief Counsel’s Office can update or draft regulations. Changing the number “15” to “14” is something that, like the personal and dependency exemption deduction amount, people can, and should, figure out for themselves.

This is another example of why, when conducting tax research, a person must begin with an identification of the applicable Code provision. There are many ways of doing that identification. But once accomplished, the next step is to read that Code provision. Reading something else, whether a treatise, a commentary on the web, a pamphlet, or some other material, is dangerous because it might be outdated. In this manner, when next turning to an explicatory aid, the researcher should recognize inconsistencies between what is being examined and what was read in the Code provision, thus alerting the researcher to a possible conflict. That conflict must be resolved in favor of the Code provision.

Though advocates of soda taxes view them as pots of revenue gold offering funding for a long list of programs, those advocates justify the tax by describing it as a disincentive for consumption of certain allegedly unhealthy beverages. If it functions as a disincentive, then would not the pot of revenue gold come up increasingly closer to empty as consumption of those beverages diminish? So it ought not to have been a surprise when Philadelphia discovered its soda tax revenues being less than anticipated, as I discussed in When Tax Revenues Continue to Be Less Than Required.

Now, according to this report, Boulder, Colorado, which enacted a sugary-drink tax and earmarked its revenue for 16 programs, has had to revise its projected revenue from the tax. It cut the estimate in half. Two explanations were given. One was an error in computing the amount of tax expected from sales on the campus of the University of Colorado. First computed as $1,000,000, it was recomputed as $200,000. The other was failure to take into account exemptions for cocktail mixers. Liquor stores succeeded in their request for an exemption, arguing that “most people aren’t getting fatter or harming their own health outcomes by downing daiquiri or margarita mix.” If it’s a liquid that contains sugar, why is it any different from any other liquid that contains sugar? Is it simply a matter of the liquor industry having more clout than the soda industry? Based on the liquor stores’ argument, perhaps there ought to be exemptions for purchasers who can prove that they are in excellent health and have consumed sugary beverages for most of their lives. As silly as that proposition might be, it’s no sillier than the notion that drinking sweet cocktail mixers has a different health effect than drinking soda. This sort of inconsistency ought not be surprising, considering that sugary foods, such as donuts, pies, cakes, and cookies, contribute just as much, if not more, to obesity and health problems.

Readers of this blog know that I do not support targeted tax breaks. These are special tax law enactments that benefit a particular recipient, or a handful of similarly situated recipients, almost always in exchange for promises from the recipients that they will do something wonderful for society. Sometimes they promise job creation, almost always they promise an increase in overall economic health of a geographical area, and too often they promise nothing more than to refrain from doing economic damage by cutting jobs or moving business locations.

So why do I not support targeted tax breaks? I oppose them because in almost every instance, in the long run, the promised benefits either never appear or turn out to be far less than the tax cost paid by other taxpayers. Those other taxpayers pay by facing increased taxes, losing out on their own tax reductions or, too often, seeing services such as highway repair and education reduced or eliminated. It’s the same reasoning that causes me to conclude that the “cut taxes for the wealthy and it will help everyone else” nonsense ought not be supported, though it too often is supported by the very people it hurts.

So I was delighted to learn, from this story that a government that gave a special tax break to a business is seeking to undo the tax break and recover the lost revenue because the business did not follow through on its promise. According to the story, in January 2016, the Erie County Industrial Development Agency approved a tax break for Gordon Restaurant Market in North Buffalo. The break was conditioned on Gordon’s assurance that it would be a wholesale business. The tax break in question was available only for wholesale businesses.

When Gordon opened its store, it opened to the general public and did not restrict its customers to those who owned and operated restaurants. In other words, it operated as a retail business. It did not restrict itself to wholesale business. According to the Agency, Gordon operates as a 100 percent retail store. As a retail business, it does not qualify for the tax break.

So the Industrial Development Agency wants Gordon to return the $182,000 in tax savings that it received when its tax break was approved. The Agency explained that it granted the tax break because Gordon’s application stated that less than the cost of the store would fund retail business. The Agency also wants Gordon to return sales tax incentives it also received because of its status as a business approved for the Agency’s tax break. It is unclear whether the Agency also wants Gordon to pay interest on the $182,000, or if any penalties attach to the repayment claim. Gordon admits to changing its business model and ascribes the cause to a miscalculation in the Buffalo economic environment. It claims that it applied for the tax break in good faith, and that less than a third of its sales are retail sales. The Agency replied that the determination is based not on sales but on the use of all of the approved project’s funds on building the retail facility. Gordon also pointed out it is reviewing its options and will respond in due course. The Agency has promised to sue Gordon if the tax savings is not repaid by the end of the month.

By requiring tax break recipients to fill out applications, the Agency sensibly compels recipients to memorialize their promises. That makes it much easier to demonstrate that the promises were not kept. A provision that the tax savings must be returned if the promises are broken should reduce the number of taxpayers, especially prosperous ones, from seeking tax breaks and should increase the amount of money returned to the public from which it is too often taken without public benefit.

Imagine if every tax break incorporated into federal, state, and local tax law required the recipient to memorialize its promises and document its compliance. Those requirements exist for some tax breaks, such as the requirement for substantiation of charitable contributions and real estate taxes. When taxes for the wealthy are reduced based on a claim of job increases, why not require wealthy taxpayers whose taxes are reduced to enter into a contract specifying the number of employees they promise to hire, requiring them to document the employment contracts, and requiring them to return the tax breaks, with interest, to the extent they fail to follow through on those promises? I expect this suggestion would meet with stiff resistance, for the simple reason that it exposes the silliness of the “tax break for me means money for you” scheme that has afflicted this nation for far too long.

It was not until I was well into adulthood that I encountered adults who did not know how old they were. I’m not referring to people with amnesia, dementia, brain injuries, or congenital memory problems. I’m referring to people who apparently were never told when they were born. Aside from these folks, there are people who, when asked to give their age, provide different answers to different people.

As I dig into family history and map out collateral lines, I use a variety of resources to identify individuals and enter them, and their information, into the databases. It wasn’t long before I began encountering discrepancies in a person’s birth date, often a matter of two different years being provided, and usually those two years being one year apart. Many of these instances occurred on World War One draft registration forms, probably because people wanted to make themselves appear one year younger and thus not yet eligible for the draft. Another batch of these instances occurred on Social Security Applications and Claims, surely because people wanted to appear older than they actually were in order to begin receiving benefits sooner. These discrepancies were much more common decades ago than they are now, but they continue. Yet another cause of confusion arises for people who were born in Europe, where a person’s first birthday is, logically, they day the person is born. When asked their age, Europeans often refer to their last birthday, which is a number higher by one than what an American would respond.

As confusing as these situations can be, there are times when a person does not know his or her age. There are instances of individuals who are listed at a certain age in a decennial census and who have aged 8 years or 12 years or 7 years or 11 years in the next decennial census. Though occasionally this happens because the person’s birthday occurred after, say, the 1910 census taker knocked on the door but before the 1920 census taker knocked on the door, or vice versa. It is not uncommon, when digging through civil records of Italian towns and villages, to find a person’s age given in his or her marriage entry, death entry, and entries for the births of his or her children that leave the researcher with five or six or even more possible years of birth. Sometimes the birth record solves the problem, but if it doesn’t exist or cannot be found, it’s just a matter of guessing.

There are people who, for whatever reason, are reluctant to disclose their age, relying on the oft-heard and oft-read quip that “age is just a number.” That’s not quite true. Ask a 15-year-old or a 20-year-old if the next birthday is “just a number.” Age matters for purposes of collecting social security. And it definitely matters in the world of taxation, for a variety of purposes, including requirements with respect to qualified retirement plans and similar arrangements.

That brings us to Omoloh v. Comr., T.C. Summ. Op. 2017-64, in which determination of the taxpayer’s age resolved the question of whether the section 72(t) additional tax for early withdrawal from an IRA applied. The taxpayer, born in Kenya, obtained a birth certificate issued more than 55 years after the October 1, 1950 birth date on the certificate. If October 1, 1950 was the taxpayer’s birth date, the additional tax would not apply. However, the taxpayer’s date of birth was shown as October 1, 1952 on the taxpayer’s Texas driver’s license, his certificate of naturalization, issued on April 8, 1997, a Form IAP-66A, Certificate of Eligibility for Exchange Visitor (J-1) Status, certified by the taxpayer’s sponsor on November 16, 1981, a Form IAP-66A, certified by his sponsor on October 12, 1982, a Form IAP-66A, certified by his sponsor on June 22, 1984, a Form IAP-66A, certified by his sponsor on December 10, 1984, a Form IAP-66A, certified by his sponsor on December 5, 1985, a Form I-687, Application for Status as a Temporary Resident, dated May 4, 1988, a Form I-688, Temporary Resident Card, issued on May 5, 1988, a resident alien card, a Transcript of Academic Record from the University of Georgia, printed on June 15, 1988, an FBI fingerprint card, dated October 27, 1988, a Form I-698, Application to Adjust Status From Temporary to Permanent Resident, dated July 21, 1990, a Form I-697A, Change of Address Card for Legalization, dated May 21, 1991, a Form N- 400, Application for Naturalization, dated February 28, 1996, and a petition for name change filed with the U.S. District Courtand granted on April 8, 1997. Some of these documents showed the taxpayer’s birth date as January 10, 1952, but the court treated those as a juxtaposition of the day and month. If October 1, 1952 was the taxpayer’s birth date, the additional tax would apply.

The Tax Court noted that all of the documents, aside from the birth certificate, suggested that the taxpayer was not older than 59-1/2 years of age when the distributions from the IRA were made. The IRS agreed that the birth certificate was authentic but questioned its accuracy. The court raised the same concern, noting that the information on the birth certificate was provided by the taxpayer to the Kenyan authorities while his tax court case was underway. The court concluded that it was “reluctant to make any finding regarding” the taxpayer’s birth date. Accordingly, the taxpayer was held to have failed in his burden of showing that the imposition of the section 72(t) additional tax by the IRS was erroneous.

How do I deal with these sorts of situations when making genealogical database entries? I select the most probable date for entry into the appropriate date field, and in the notes field, where I record sources and other information, I indicate that a particular source, or sources, specify different dates for birth, death, or marriage. The challenge also arises with respect to places of birth, death, and marriage, first names, family names, names of spousal parents, and just about everything else that is relevant. Generally, the further back in time one goes, the more likely it is that discrepancies will be found, but as this Tax Court case demonstrates, the ancients have no monopoly on factual confusion.

Once again, a television court show has come through with a tax angle to the case. The list gets longer. It started with Judge Judy and Tax Law, and continued with 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?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, and When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree.

This time the episode is from Hot Bench. Yes, I do watch more than a few television court show episodes, if I happen to be home, near the television, and working on something that doesn’t require full-focus concentration. I can only imagine what I would find if I set out to watch every episode of every television court show. I probably would not have time to write blog posts!

The plaintiff needed to have her car fixed, so she took it to the defendant. The defendant had been in the auto repair business, and operated an auto repair shop. He had closed that business, but continued doing repair work at his home. The plaintiff paid the defendant $800 to fix her car. The defendant did the repairs, the plaintiff picked up her car, and she testified that she was satisfied with the repair work. So what was the problem?

The plaintiff alleged that she asked for a receipt at the time the repairs were completed and that the defendant refused to give her one. The defendant said that the plaintiff did not ask until two weeks later, and that she refused the receipt he offered her. He showed court the receipt he offered, and it was the receipt for the parts he purchased to use in making the repairs. The defendant had no adequate response when one of the judges asked the defendant why he did not include his labor and hourly rate in the receipt even though he had testified that he worked about six or seven hours on the car. The defendant suggested that the plaintiff was asking for a receipt in order to commit insurance fraud.

The plaintiff claimed that the lack of a receipt prevented her from getting reimbursement from the insurance company for the cost of the repairs, and for that reason she was suing for $800 in damages. However, she did not have proof that the lack of the receipt prevented her from getting reimbursement. The plaintiff did provide proof that she had paid for an insurance policy, but her evidence did not include sufficient details with respect to coverage and deductibles under the policy.

One of the judges noted that either the two parties were involved in some sort of insurance fraud or that the defendant was refusing to give a receipt for his labor because he did not want to report the income on his tax return. The judge noted that the latter was more likely the situation.

At that point, another judge asked the defendant if he was willing to sign a receipt for $800 and provide it to the plaintiff. The defendant responded in the affirmative. So the court ordered the defendant to provide the receipt to the plaintiff, noting that whether the insurance company would reimburse the plaintiff was not a matter before the court. The court denied the $800 monetary relief, but granted specific performance in the form of the receipt that the plaintiff originally requested.

The judge’s observation about the reluctance to provide a receipt for the value of services rendered to another person is an interesting one. I’m not convinced that tax fraud is the only reason that a service provider would refuse to provide a receipt. But I do think that in most instances, failure to provide a receipt in a cash transaction has a tax fraud twist. On the other hand, failure or refusal to provide a receipt is not the only indication that tax fraud is underway. The “pay cash, pay less” arrangement, the use of a fictitious name, the maintenance of separate sets of books, and the rapid disappearance from the geographic locale also trigger suspicion that something isn’t quite right, and tax fraud is at the top of the list.

Several days ago, in Taxing a Tax, I discussed litigation commenced in Cook County, Illinois, by an individual who alleged that McDonald’s calculated sales tax on his purchase by applying the sales tax rate to the sum of the cost of his purchases plus the Cook County beverage tax. I provided an example to demonstrate how the sequence of computation meant the difference between imposing the sales tax on the beverage tax and not doing so. I provided an example, and did not use the actual numbers, in part because I did not see, nor could I find, the actual receipt.

Not surprisingly, I was looking forward to seeing what the court did with the lawsuit, and learning whether my prediction as to the outcome was correct. Much to my surprise, the case was dismissed. According to various reports, including this one, the court convinced the plaintiff that McDonald’s had not, in fact, imposed the sales tax on the beverage tax. The court, and apparently the defendant’s attorneys, conducted a “walk-through of the receipt . . . to demonstrate double taxation hadn’t occurred.”

A reader asked me, “Does the dismissal of this case answer the question stated [in Taxing a Tax]?” The answer is, “No.” Why? The question was whether imposing a sales tax on the beverage tax violated Illinois or Cook County law. Once the plaintiff was persuaded that a sales tax was not imposed on the beverage tax, there was no need to answer the question. Why did the court not add something along the lines of, “If the sales tax HAD been imposed on the beverage tax, . . .” Would not that sort of guidance been helpful? Yes, it would be, but courts do not decide issues that are not before the court. Occasionally, a court will present dicta, but doing so is intended to help people understand the reasoning behind the issue being decided. A dictum does not establish law, and in some instances a dictum creates more confusion than it provides useful guidance.

If, in fact, retailers in Cook County are not imposing the sales tax on the beverage tax, the question of whether doing so is a violation of law will never be presented. Despite my curiosity with respect to what the outcome would be, society is better served if there never is a need to answer the question.

The email arrived a few days ago from a reader with the simple subject line, “you were right.” For a moment, before opening the email, I scanned my memory banks for any reminder of having engaged in a debate, dispute, discussion, or disagreement with the sender of the email. There was nothing. When I opened the email and read it, I realized that this reader was telling me that my prediction with respect to the outcome of a tax-or-fee lawsuit in Oklahoma had turned out to be correct. In all honesty, it turned out to be a good guess.

I described the issue in question in Tax versus Fee: The Difference Can Matter. The Oklahoma legislature enacted a new $1.50 per-pack “fee” on cigarettes. It did so after four previously failed efforts to increase the per-pack cigarette tax by $1.50. Repeating what I had written in Tax versus Fee: The Difference Can Matter:

In this era of tax hatred, it has become commonplace for legislators, lobbyists, and other advocates to use the label that sells. Thus, in Please, It’s Not a Tax, I criticized the use of the term “tax” by opponents of a fee, who clearly were trying to ride the anti-tax wave to prevent enactment. And in So Is It a Tax or a Fee?, I criticized the use of the term “fee” by proponents of a fee that they had earlier labeled a “tax,” because calling something a fee doesn’t get the attention of the anti-tax crowd to the extent a tax does.

In Tax versus Fee: Barely a Difference?, I concluded by suggesting, “Ultimately, whatever it is called, it ought to be measured sensibly, imposed only after appropriate public notice, hearings, and legislative action, and paid if the legal obligation to do so exists.”

Not surprisingly, the enactment of the “fee” in Oklahoma generated a challenge. I explained the challenge:

Opponents have sued, asking the Oklahoma Supreme Court to invalidate the legislation. They argue that the fee originated in the state Senate, thus violating the requirement in the state Constitution that revenue-raising legislation originate in the state House. The opponents also argue that enactment of the legislation during the last week of the legislative session violated the state Constitution’s requirement that revenue-raising legislation not be enacted during the last five days of a legislative session. The opponents also argue that proponents of the $1.50 charge were trying to characterize the legislation as not revenue-raising by labeling it a fee. The opponents explain that the fee “simply reincarnated the earlier cigarette tax bills under a new name.”

Then I stepped into the world of predicting the outcome of litigation, an exercise often punctuated by error, surprise, disappointment, and embarrassment. Of course I tried to dampen expectations by opening with an admission of my limitations:

Though I’m no expert in Oklahoma constitutional law, it seems to me that the fee raises revenue, and thus has been enacted in revenue-raising legislation. Accordingly, the process by which it was enacted appears to have violated the Oklahoma Constitution. If, for some reason, the Oklahoma Supreme Court determines that the provisions in the constitution applies to taxes but not fees, then deciding whether the $1.50 charge is a tax or fee would be determinative. The label alone should not resolve the question. The state is not selling cigarettes to people, nor is it selling licenses to use tobacco, and thus it is difficult to characterize the charge as a fee. It would not be surprising if the Oklahoma Supreme Court, if it were to limit the requirements in the state Constitution to taxes, decided that this particular charge was a tax. It will be interesting to see what the court decides, probably sometime later this year.

Recently, the Oklahoma Supreme Court indeed addressed the issue. It concluded that the legislation in question was a revenue-raising measure, and, as such, was subject to the requirements that it originate in the state House and not be enacted during the last five days of a legislative session. Reviewing the history of the legislation, the court determined that revenue raising was the purpose of the legislation, particularly because the legislation replaced revenue-raising proposals that had not been enacted and because the legislation did not focus on any purpose other than revenue raising. The court made it clear that using the word “fee” to describe a tax does not transform a tax into a fee.

In all fairness, it was a fairly easy issue on which I guessed. In other words, it was not entirely a guess because there was enough information with which to engage in analysis. It was an educated guess. Was I right? This time, yes. But not always. I live with constant reminders of that fact.

Cook County, Illinois, enacted a one-cent-per-ounce tax on sugary drinks. The county also imposes a sales tax, which together with the state sales tax, amounts to 9 percent. According to this report, among others, Yvan Wojtecki has started class-action litigation against McDonald’s Corp. because it included the beverage tax in computing the sales tax. An example helps understand the issue. Assume a person purchases a 25-ounce soda for $2.00. The beverage tax is 25 cents. Should the sales tax be 9 percent of $2.00, or 18 cents, or should it be 9 percent of $2.25, or 20 cents? Though the two-cent difference might seem miniscule, a person who makes that purchase every day is looking at an extra $7.30, and though that, too, might appear trivial, for a family of six people, it becomes $43.80, or almost $4 a month. What makes the issue huge, and thus fodder for a class-action lawsuit, is the impact when applied to all consumers. More than 5 million people live in Cook County. Not all of them purchase sugary drinks. But Cook County also hosts tourists, business visitors, and commuters who live outside the county. If 3 million people purchase 25 ounces of soda every other day, and that is probably a very low estimate, the state and county are hauling in an additional $10,950,000 in revenue each year. On the higher end, if 5 million people, which offsets visitors, tourists, and commuters who purchase soda against residents who don’t, purchase 50 ounces of soda every day, the state and county fill their treasuries with an additional $73,000,000 each year. Perhaps the amount in issue is in the middle, and whatever it is, it isn’t a one-year-only deal.

What is the correct answer? I’m not an expert in Illinois and Cook Country sales taxes. It seems to me that the tax applies to the retail cost of taxable items, that tax is not a taxable item, and that the retail cost of an item does not include tax. I welcome reactions from Cook County tax practitioners who can enlighten me, and readers of MauledAgain, on the technical application of the state and county sales tax.

Along with other problems cited in the foregoing and other reports, this is yet another example of the administrative challenges posed by taxes that might appear, theoretically, to have some merit, but which, when thrown into the cauldron of practical reality, generate a variety of problems.

I’ve been using computers, in one way or another, since 1972. I have owned a personal computer of one sort or another since 1983. I have been “on the internet” since the early 1990s. I started browsing with Mosaic and Cello. It ought not be a surprise, considering the parallels between the thought processes of tax analysis and the thought processes of programming and coding, activities in which I have engaged over the years. So of course I’ve been familiar with cybersecurity and passwords for a long time. Like every computer and internet user, I’ve been prompted to change my password on a regular basis by some websites and organizations, and I have changed them on my own initiative from time to time for a variety of reasons.

When I noticed a recent story describing how Bill Burr changed his position on password security, particularly his previously recommended frequent changing and use of upper case letters, lower case letters, numbers and special symbols, I was delighted. Without going into all of the reasons I think frequent password changes create their own risks, and why inserting numbers and special symbols into passwords can be counter-productive, I wondered how long it would take before the “it’s time to change your password” messages would stop arriving.

One of the interesting bits of information from the story came from a researcher at Microsoft, which no longer follows Bill Burr’s guidelines. Cormac Herley revealed that “Collectively, humans spend the equivalent of more than 1,300 years each day typing passwords.” It’s unclear if that includes the time invested in trying to remember a password. It does not appear to include the time invested in creating a password, particularly because the advice of not using the same password for multiple purposes makes very good sense for a variety of reasons.

The idea that significant time is invested – and arguably wasted – dealing with passwords caused me to think about complaints that time invested – and sometimes wasted – dealing with taxes is burdensome and detrimental to economic progress as well as individual well-being. So I decided to make a comparison.

According to the Taxpayer Advocate’s 2012 annual report, taxpayers invest roughly 6.1 billion hours each year handling their taxes, though it conceded that this number “is difficult to measure with precision.” So, too, I am confident, is the measurement of hours invested in typing passwords.

If people invest 1300 years each day typing passwords, that means they invest 474,500 years each year typing passwords (1300 x 365). There are 8,760 hours in a non-leap year, so those 474,500 years are the equivalent of 4,156,620,000 hours (474,500 x 8,760). That’s about two-thirds of the time invested in handling taxes. Yet I do not hear as many complaints about password typing as I hear about handling taxes, and perhaps that’s because people don’t have the same, usually negative, attitude about taxes as they have about passwords. As the old saying goes, time flies when you’re having fun, and though typing passwords might not qualify as “fun” – though they may be at the entrance to something that is fun – doing taxes is, for all but a few people, not fun.

I wonder how many of these hours are overlap? How many hours do people invest in typing passwords in order to access and file tax returns? I have no intention of trying to answer that question.

Most adults have probably seen or heard the phrase “tax sale,” and some probably have an idea of what that means. Others surely know what it means. Simply put, when a taxpayer has failed to pay real property taxes assessed on a parcel of real estate, the taxing jurisdiction puts either the property up for sale or sells a lien on the property. Under either approach, the purchaser ends up as owner of the property unless, in some instances, the delinquent taxpayer redeems the property by paying the taxes within a specified period of time.

When people who understand tax sales think about them, they contemplate the sale of residences, commercial buildings, parking lots, and similar parcels. But tax sales can reach another type of property. It happened recently in San Francisco, according to this report and others, as the story has gone viral.

In San Francisco, decades ago a developer built homes and a street for people living in those homes to access the nearest public road. Ownership of the street, along with other common areas, was placed in a homeowners’ association. At some point, the association retained a property management firm, which handled care of the street and common areas, providing services such as pothole repair and snow removal. One of the firm’s responsibilities is to pay the real estate taxes assessed on the street. For many years the tax bill, in the grand total of $14, was sent to an address at some other place in San Francisco. It is an address with no apparent connection to the property management firm, the homeowners’ association, or any of the home owners. Not surprisingly, the bill went unpaid. Finally, the city put the street up for sale in a tax sale. But the city did not post any notice on the street, nor did it deliver a notice to the property management firm, the homeowners’ association, or any of the home owners. In 2015, at an auction, the street was sold for $90,000. The accumulated unpaid tax bills had reached $944, which appears to have included interest and costs as well as the unpaid taxes. The purchasers admit that they “got lucky” and had purchased the street without seeing it. The property management firm, the homeowners’ association, and the home owners did not learn of the sale until very recently, roughly two years after the sale.

A lawyer for the homeowners’ association claims that the sale was illegal. The city disagrees, claiming that it followed all proper procedures. What happens next? Though litigation might be on the horizon, in the meantime, the owners of the street have the legal right to charge the home owners for driving or parking on the street and for using the common areas. There also is the possibility that the new owners of the street and common areas will try to sell the property back to the homeowners’ association for an amount that generates a profit. The purchasers suggested they might build themselves a home on the street if that can be done in compliance with land use regulations. Apparently, the new owners recently attempted to persuade the homeowners’ association to buy back the street and common areas.

The development is one of the city’s most expensive neighborhoods. Homes have been listed for amounts in the single and double-digit millions. The neighborhood has its own private security guard force. Apparently, no one thought of checking city records to make certain that the tax office had the correct address to which to send the bills.

I wonder if this story will encourage people to scan tax sale notices looking for private roads on which taxes have not been paid. Imagine being charged a fee by some stranger for driving and parking on the road in front of your house. Perhaps it is best to avoid purchasing property for which access is limited to private roads. Perhaps there are some lessons in this story for those who advocate privatization as the cure-all for the nation’s economic challenges. But perhaps the biggest lesson is this: if you own real property, and you or your representative or agent has not received a tax bill during the past year or more, check with the tax office lest the property be sold out from under you.