MauledAgain

The title of the article, Why tax season is good (and bad) for Americans' health caught my eye. Expecting to read about increases in stress-related illnesses and even death in mid-April or attacks on tax return preparers, I surprised to discover that Diana Farrell focused on the use of income tax refunds to pay for health care. Citing research by the JP Morgan Chase Institute, of which she is CEO, Farrell pointed out that people who file their income tax returns early are more likely to receive larger refunds and to spend a larger portion of the refund on health care. American health care spending increases by 60 percent in the week that the refund is received. Taxpayers getting refunds in February increase health care spending over the next two and half months by 38 percent, whereas the percentage increases are lower for those receiving refunds after February. More than half of the health care spending was for services that should have been sought sooner. The conclusion, that cash flow problems cause Americans to delay their health care, makes sense. That, of course, is not a good outcome.

Farrell notes that if tax refunds are going to be used to finance health care, the timing needs to be adjusted. Farrell explains that taxpayers cannot control when they receive refunds, aside from filing early, where possible. Even filing early doesn’t guarantee that a refund will be received a week sooner than it would have been received had the filing been delayed by a week. Farrell suggests, and I agree, that it is problematic to schedule health care based on when tax refunds arrive.

Farrell proposes a solution. She thinks that “policymakers and employers should consider making changes that would allow consumers to access funds throughout the year. Policymakers might consider offering periodic tax refund payments -- perhaps quarterly payments so that families wouldn't have to defer care until tax season.” She also proposes permitting taxpayers to receive advance refunds on an emergency basis. Another proposal she offers is to permit filing earlier and receiving a refund based on “year-to-date” income.

Though well-intentioned, the first proposed solution presents too many disadvantages. Implementing it would require more forms, more filing, more IRS employees, and more aggravation. Because the amount of the refund is not known until the beginning of the following year, advance refund payments would need to reflect estimation, speculation, and guesses. Worse, if too much is paid during the year, April could bring the shock of owing money. The second proposal poses similar challenges. The third proposal is unworkable. Imagine trying to obtain “year-to-date” Forms 1099, or computing partial-year deductions. Worse, it would mean filing another return for the entire year, thus at least doubling the number of returns being filed and the time invested in filling out those returns. Talk about increasing health risks by doubling the amount of stress to which a person is subjected.

The solution is much easier. Tax refunds exist because more tax is paid or withheld during the year than is owed. Too many taxpayers use tax withholding and estimated tax payments as a way to force themselves to save money, even though they earn no interest on the money. Does it not make sense to reduce the withholding and estimated tax payments, and to simultaneously put the reduction into an account dedicated to health care? Taxpayers subject to withholding could achieve the same, or a better, outcome by asking employers to reduce tax withholding to a more appropriate level and to put the difference into an account, whether or not it is a tax-favored account. This helps those without budgetary discipline experience forced savings without using the IRS as a bank that prohibits withdrawals until tax refund season.

Granted, that solution would be unnecessary if the American health care system were fixed so that premiums were paid evenly throughout the year and care could be obtained when necessary. How can that be done? A variety of solutions have been proposed, but rather than getting into an extensive analysis of the health care system, I will simply point out that what Farrell’s Institute has discovered is yet another instance where a non-tax problem ends up burdening the tax system.

Waiting for Congress to fix things is like waiting on the side of a desert road for an ice cream truck to appear. Better for Americans to turn to self-help, fix their withholding and estimated taxes, put money into accounts – an idea Farrell also suggests – and obtain timely health care that promises long-term health improvements and long-term reductions in health care costs.

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. In Kansas As a Role Model for Tax Policy?, I described how, despite the failures of supply-side economics in Kansas, its then governor, the chief architect of implementing the policy in his state, hailed his failure as a role model for the nation.

One of the problems I noted in Kansas As a Role Model for Tax Policy? was the adverse impact of the supply-side tax policy legislation on the state’s public education system. Because the tax cuts reduced state revenue, the outcome predicted by critics of supply-side economics, proposals to cut funding of public education ended up being litigated. As reported in this article, the Kansas Supreme Court held that the state’s $4 billion funding allowance was insufficient to meet the requirement of the Kansas Constitution that the state provide a suitable education for every child in the state. Faced with the prospect of the court ordering a stop to distribution of state funds so long as the funding was not increased, in effect shutting down all state schools, some of the Republicans in the state Senate, all of the Democrats in the Senate, some Republicans in the House, and a few Democrats in the House voted to increase school funding by $534 million, the bill passing each chamber by very narrow margins.

Republicans who opposed the measure, which was endorsed by the state’s Republican governor and its Attorney General, are worried that they will need to raise taxes to generate the funds. Democrats who opposed the measure are concerned that it does not provide for enough funding to satisfy the Supreme Court’s order.

Some supporters of the funding increase think that tax revenues will increase sufficiently to provide the money. How that will happen has not been explained. Apparently belief in failed supply-side economics dies hard. Some people continue to believe that the planet is flat. Perhaps they went to underfunded schools. What a pity.

The other day, listening to Philadelphia’s news radio station, I heard a commercial for a retailer in Delaware. One of the featured parts of the commercial, repeated and emphasized, was the proposition that people should “come to Delaware” to make the purchase because, in addition to the other advantages of patronizing this retailer, the purchases would be “tax free.” I cannot find a recording or transcript of the commercial.

The proposition that the purchase is tax-free is true for Delaware residents, because there is no sales tax in Delaware. The proposition that the purchase is tax-free for Delaware nonresidents traveling from Pennsylvania, New Jersey, or other states is not true, because those purchasers are subject to a use tax in their home state. That the commercial is directed to potential purchasers beyond people living in Delaware is demonstrated by the use of “come to Delaware” as part of the sales pitch.

As I listened to the commercial, I immediately wondered whether the retailer had an obligation not to mislead purchasers with respect to their use tax obligations. If Pennsylvania, for example, identified a Pennsylvania resident who made a sales-tax-free purchase in Delaware and failed to remit Pennsylvania use tax, could that person sue the retailer for misleading the person into failing to pay the use tax? Or is the retailer absolved by the Pennsylvania resident’s independent obligation to know, and comply with, Pennsylvania use tax law? If the resident, when arriving at the Delaware store, is told that there is a use tax obligation in Pennsylvania, could the purchasers sue the retailer for a misleading commercial? If Pennsylvania revenue officials get wind of the commercial, could they, should they, initiate proceedings to compel the retailer to change or remove the statement about the purchase being tax free?

For the moment, I won’t answer or try to answer the questions. Someone might want to use this a moot court problem or as an examination question. I won’t, because I haven’t been teaching tax courses since 2016.

In theory, the process of administering new tax laws works. Congress amends the Internal Revenue Code, and the Treasury Department, in cooperation with the Office of the Chief Counsel to the Internal Revenue Service, interprets the changes to the extent that the Congress directs the Treasury Department to do so or to the extent the language of the law does not answer the questions that arise when the law is applied to real-life situations. In practice, it has almost worked that way most of the time. Occasionally, there would be a snag. Treasury and the Office of Chief Counsel might disagree on the interpretations. Public comments might delay issuance of guidance. The principal guidance shows up in what are called Treasury Regulations.

But now, the reality of incompetence, greed, power addiction, and egos threatens the implementation of recent tax legislation. In an article with a technically incorrect headline, White House Turf Battle Threatens to Delay Tax Law Rollout New York Times writers Alan Rappeport and Jim Tankersley explain how two Administration officials are making a mess of the tax law implementation system. Technically, the tax law has been enacted. It has been rolled out. What has not been rolled out is the guidance necessary for taxpayers and their advisors to comply with the law in situations not specifically addressed by the legislation.

What’s the problem? The Treasury Department is prepared to function as usual, drafting, proposing, and issuing Treasury Regulations. However, the head of the Office of Management and Budget wants oversight of the process. Though the Treasury Department and the Office of Chief Counsel to the Internal Revenue Service are staffed with tax experts, the Office and Management and Budget doesn’t have the experience and the staff to deal with technical tax issues to the same extent and to the same depth as does the Treasury Department. If it prevails, it will need to hire tax attorneys, a process that will add even more delay to the issuance of guidance.

The Office of Management and Budget wants to impose its cost-benefit analysis rules on the Treasury Department. Until now, the process of tax regulation issuance has not been subject to those rules. Underneath this debate is a political struggle, an attempt to control the scope of the tax breaks enacted in the tax law. Some members of Congress, and it takes one guess to identify them, want interpretations as favorable to taxpayers as possible, and see the Office of Management and Budget as the gateway to such an outcome. The Treasury Department has already issued rules designed to prevent hedge funds and private equity funds from circumventing provisions in the recently enacted tax legislation designed to curtail the carried interest tax break that the wealthy owners of those funds use to pay low capital gains rates on income generated from performing services, a tax break not available to most taxpayers. The reality of Washington politics is that as soon as someone cracks down on abuse, those being restricted look for every angle to wiggle out from the restrictions. Their lobbyists look for the weak spots. It appears they have found one, though these days the nation’s capital is flush with them.

Experts agree that if the Office of Management and Budget gets into the process, the process of interpreting tax laws will slow down even more, and taxpayers and their advisors will be making decisions blindly for even longer periods of time. Extending periods of uncertainty is the last thing the precarious national economy needs. Extending the regulations issuance process also has the effect of bringing more lobbyists into the picture. As one commentator put it, “The swamp is going to be enriched by this one.” Not, of course, that the current Administration has been draining any swamps, as it has been too busy enlarging them.

Is this any way to run a business? A government? A tax regulation process? A tax system? Of course not. How long will it take, if ever, for Americans to figure this out?

For almost fifteen years, I have advocated the enactment of mileage-based road fees to replace the increasingly less effective and less efficient liquid fuels tax. One slice of my reasoning is not unlike the realization, a long time ago, that reliance on taxes imposed on telegraph messages wasn’t going to work once newer technology came along. I have explained how the mileage-based road fee works, and why it is the best solution on the table, in posts such as Tax Meets Technology on the Road, 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?, Between Theory and Reality is the (Tax) Test, 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?, When It Comes to the Mileage-Based Road Fee, Try It, You’ll Like It, Mileage-Based Road Fees: A Positive Trend?, and Understanding the Mileage-Based Road Fee.

Now comes news that Oregon, which has been experimenting with the mileage-based road fee, has decided that its pilot program is now ready for implementation. As part of the next step in the process, Oregon is working out an arrangement with neighboring Washington to coordinate application of the fee to interstate driving. The state of Idaho and the city of Surrey in British Columbia are also involved in discussions to work out ways for each state to receive its share of the fees. Participants have concluded that the technology is ready but express concerns that the public isn’t ready to shift from paying taxes on fuel to paying fees for road use.

The only question is when, not if. As liquid fuel tax revenues decrease and highways continue to deteriorate, at some point enough drivers will demand legislatures do something other than continuing with a failing system. Opposition exists because there are those who see threats and those who see opportunities. Those who see threats fear the loss of their interests vested in the existing system. Those who see opportunities are those falling over themselves trying to privatize the system so that large, faceless, unresponsive, and unaccountable corporations can take over yet another public function.

Three and a half years ago, in Employee or Independent Contractor Issue Stripped Down, I described a judicial decision in which a federal district judge held that strippers are employees for labor law purposes. I described the judge’s reasoning:

According to the decision by a federal district judge in Philadelphia, the strippers are employees, and thus must be paid minimum wage, must be compensated for overtime work, and are entitled to retain all of their tips. The judge based this conclusion on these facts:

-- the club at which the strippers work determines the price paid by customers, and dictates the length of lap dances.
-- the club requires the strippers to share their tips with the club’s DJ, “house mom,” and “podium host.”
-- the club fines the strippers for arriving late, leaving early, using cell phones, chewing gum, entering and leaving the stage other than through the stairs, or not wearing their hair down.
-- the club specifies how the strippers are to make themselves appear physically, providing a salon on the premises for this purpose.
-- the club requires strippers to work at least four shifts a week to avoid paying shift fees.
-- the club keeps each stripper under management review.

The bottom line is that the club controlled the strippers’ work. That is the same principle that underlies the approach taken for tax purposes.

I then pointed out that

Though there are some differences between the tests used for labor law and for tax law purposes when trying to decide if someone is an employee or independent contractor, the analysis in the case is quite similar to that found in tax cases. It is reasonable to assume that when the tax aspects of these arrangements are raised, that the analysis will end up bringing a court to the same outcome.

And I predicted:

That the IRS and state revenue departments will be paying attention to this decision is evident from the amount of money involved. There’s quite a bit of FICA, unemployment compensation tax, worker compensation premiums, and withholding when an employee stripper can earn, according to the club, as much as $1,600 per shift. With a minimum of four shifts per week, the arithmetic suggests a stripper could bring in north of $300,000 in a year.

Although I’ve not seen any reports concerning the status of the club’s federal and state taxes for the years in question, I did notice a few days ago a story about the labor law cost of the misclassification. The strippers, described this time around as erotic dancers, sued the club for the wages they should have received had they been properly classified as employees. A federal district judge agreed, and awarded 353 dancers $4,594,722.73 for wages attributable to their work from 2009 through 2012. It is not unusual for cases to take years, as this one has, before being resolved. Nor is this one over, because it would not be surprising if the club filed an appeal.

No sooner had I posted Why Is Taxation Almost Always the Solution of First Resort?, criticizing use of the tax law to solve problems that are not tax problems, than the General Assembly of Maryland, according to this report passed a bill, which the governor plans to sign, permitting Maryland taxpayer to deduct as much as $7,500 when computing Maryland taxable income if they donate bone marrow, or all or part of a liver, kidney, intestine, pancreas, or lung. There are multiple problems with this approach to encouraging organ donation, which, by the way, I fully support.

For one thing, the legislation ignores other organs and tissues, donation of which is no less important than donation of the listed organs. The legislation encourages donation of organs that can be donated while alive. But what about other organs and tissues, such a hearts, heart valves, veins, corneas, skin, ligaments, tendons, and bones? Why not a tax break for the estate or heirs of a person who agrees to donate organs and tissues that cannot be donated until death? There is no less a need for those organs and tissues. What about a deduction for donating blood, another item often in short supply?

For another, the deduction is more valuable to taxpayers in higher brackets. Does that mean that the organs of higher income taxpayers are somehow more valuable than those of lower income taxpayers? How about taxpayers who don’t need more deductions because their income is so low? Are they not to be encouraged to donate organs and tissues, and not to be rewarded?

The donation of organs and tissue, while alive or at death, is a good thing to do. There are thousands of other things that are good things to do. Ought not each of these good things be the target of a tax break? If not, is the legislature proposing that some good things are better than other good things?

If the Maryland legislature wants to encourage people to donate organs and tissues, or to reward them for doing so, it would be much easier and simpler to announce that the state will send a check (or electronic funds transfer) for a particular number of dollars if and when a resident provides certified proof from the appropriate medical facility that a specific organ or organs, or tissues, have been donated. In the case of organ and tissue donation at death, the check would be issued to the donor’s estate. This simpler approach eliminates what otherwise would be even more complexity in the Maryland income tax, which, though not as absurdly complex as the federal income tax, is no paragon of simplicity. Sending a check also makes the process more transparent, and removes any discrepancy between the value of a donation to a higher income taxpayer and to a lower income taxpayer.

In his commentary about cryptocurrencies, Mark Zandi not only explained why digital currencies, despite some periods of rapid growth in value, are a bubble, but also shared a bit of tax trivia that enlightened me. In describing what would be necessary for bitcoins to be a serious component of national economies, Zandi explained, “A real test of bitcoin would be if any government allowed citizens to pay taxes in cryptocurrency.” He then answered a question I had not previously thought of asking, by explaining, “As far as I can tell, there is only one small Swiss town that does, and payment values cannot exceed a few hundred francs.”

It appears that the small Swiss town is not alone. According to several reports, including this one and another one, California permits the use of cryptocurrency for financial transactions, including tax payments. Even though the number of jurisdictions accepting tax payments in cryptocurrencies is perhaps as low as two, it probably will not stay that way. As reported in several articles, including this one, the Arizona and Georgia legislatures are considering statutes that would permit the payment of taxes with cryptocurrencies. According to another report, similar legislation is pending in Illinois.

One downside to paying taxes with cryptocurrencies is the tax that will be due on the gain recognized from using cryptocurrency acquired for a price less than its value when used to pay the taxes. This effect is particularly disadvantageous to the very many cryptocurrency investors who currently are failing to pay taxes on their gains from selling cryptocurrencies, as revenue authorities struggle to keep pace with the digital money transactions.

Most Americans know very little, if anything, about cryptocurrencies. Will that change? Or are cryptocurrencies a fad and a bubble? Time will tell.

Readers of MauledAgain know that I am not a fan of using taxes as a mechanism to encourage or discourage behavior. Taxes, user fees, tolls, and similar revenue sources should be tied as closely as possible to the benefits, direct or indirect, that they provide to the taxpayer, individually or as a member of society. My position is based not only on a desire to reduce tax law clutter but also on the unsuccessful track record of these sorts of efforts.

Now comes a report that Governor Cuomo of New York wants to impose a tax on prescription medicines that contain opioids and also on some medicines used in treating opioid addiction. His rationale is that the revenue would offset some of the cost of treating opioid addiction. The problem is that the tax, though paid by manufacturers, would be passed through to those who use opioids, including the many who fortunately do not become addicted. Studies also claim that the tax would increase health insurance premiums and health insurance costs in New York.

It is disappointing that when the nation, or a state, encounters a problem, one of the first, if not the first, responses is to cry, “Tax!” Obesity a problem? Tax soda. Gun violence a problem? Tax guns and ammunition. Smoking a problem? Tax cigarettes. Opioid addiction a problem? Tax opioids. Yet, in the long run, these approaches don’t solve the problem, sometimes make the problem worse, and too often generate unwanted, and perhaps unexpected, adverse collateral consequences.

So what’s the answer? The answer is education. The answer is helping people learn why it is foolish to be obese, to smoke cigarettes, to use and handle guns irresponsibly, to listen to bad advice about drugs of any sort. Our education system is in horrible condition. By that, I mean not only the K-12 systems, but also higher education, trade schools, mass media, social media, preaching, speech delivery, and water cooler gossip. For reasons that fly in the face of the logic of natural selection, humans increasingly rely on misinformation and are decreasingly exposed to guidance, advice, knowledge, and comprehension that can reduce, in some instances significantly, many of the problems that are not going to go away simply because a tax is enacted.

There are some basic principles of tax law that every teenage and adult American should know and understand, though it might be expecting too much for that to happen. However, there is no question that lawyers should know and understand these basic tax law principles. One of those principles is the prohibition against deducting the value of income not generated. The reason is simple. The tax law accounts for income not generated by not requiring taxpayers to include in gross income the value of income they have not generated. A related principle is that the tax law does not allow a deduction for the value of labor provided to a charity. The reason is that the tax law does not require the taxpayer to include in gross income the imputed value of the labor that has been provided.

So it was disappointing to discover what happened in Bradley v. Comr., T.C. Summary Op. 2018-13. The taxpayer, an attorney operating as a sole proprietor, provided services as a litigation consultant. He chargedd $250 per hour for his services. During the taxable year in question, he performed 100 hours of pro bono legal research, reviewing evidence, and preparing expert testimony regarding the standard of care owed to plaintiffs for a civil action in the District of Columbia. He did not pay or incur any expenses related to this pro bono activity. On his tax return, the taxpayer deducted $25,000, describing the deduction as “Research on Cases 100 Hrs @ $250 per hr.” The IRS disallowed the deduction.

The Court addressed the deduction by pointing out that “It is well established that section 162 does ‘not permit a business expense deduction based on the value of the taxpayer’s own labor,’ citing several cases. One of the cases also involved an attorney who deducted the value of his time devoted to a pro bono activity, and who failed to convince the Tax Court to overturn the IRS determination that the deduction was prohibited. Similarly, the court rejected the taxpayer’s attempt to claim the value of his pro bono labor as a section 174 research and experimental expenditure deduction, not only because legal research is not within the scope of section 174 but also because the taxpayer did not pay or incur any expenses.

The prohibition against deducting the value of one’s time, whether on account of not having the opportunity to be paid for one’s labor, or on account of providing services to a charity or for a charitable cause, is a topic that gets attention in basic federal income tax courses. It is important not only because it is a principle of widespread application, but also because it illustrates several basic underlying concepts of federal income taxation. So I wonder if the taxpayer did not enroll in the basic tax course, enrolled but somehow didn’t learn this principle, enrolled and learned this principle but forgot it and failed to research the validity of the deduction, or knew very well that the deduction was not permissible but nonetheless claimed it thinking, perhaps, that the IRS would not notice it.

From the scant record in the case, it appears that the taxpayer is not a tax lawyer. I suppose that makes the case a bit less alarming than it otherwise might have been.

Update: Bryan Camp, in his commentary on the case, describes the taxpayer as a "former detective for the Washington D.C. Metropolitan Police Department." The court described the taxpayer as a "litigation consultant" who did "legal research." Often, people trained in a non-legal field, such as engineering, medicine, or criminal justice, obtain law degrees as part of the process of increasing their skills as forensic experts and enhancing their marketing efforts. I have not been able to confirm one way or the other whether the taxpayer attended or did not attend law school, obtained or did not obtain a law degree, or was or was not admitted to the bar.

The headline did not mention tax, but something about it, Jersey Shore ice cream wars. Who gets to sell?, caught my eye and I read the Philadelphia Inquirer article. Perhaps “ice cream” was the catalyst, though “Jersey Shore” might also have sparked my interest.

Whatever the reason I read the article, imagine my delight when taxes came into play. There was no surprise, of course, because taxes are everywhere. If there was a surprise, it was that the tax issue did not involve a tax on ice cream, though I should bite my tongue lest some revenue-generating mind-storming committee get an idea.

For a very long time, the town of Ventnor has sold licenses to veterans and retired firefighters, permitting them to sell ice cream on the town’s beaches. Each seller pays an annual $55 fee. And then someone had an idea. Licenses would no longer be issued to the veterans and retired firefighters. Instead, the right to sell ice cream on the beach would be limited to one vendor. Relying on the experience of neighboring Margate, Ventnor expected to raise $85,000. According to one official, the goal was to offset annually increasing real property taxes. The official explained that there are 10,000 homeowners in the town. So, by my calculation, each homeowner would save $8.50 a year so that a monopoly could take over ice cream sales on the beaches.

Fortunately, this time more than a few people pointed out that the idea being floated was a bad idea. That doesn’t happen often enough in the world. This time, hundreds of people reacted negatively and eventually more than 12,000 people signed a petition against the proposal. And the people organizing the petition gathered those signatures in four days. That’s impressive. That’s how democracy can work, when it hasn’t been monopolized. And it worked. The idea was “tabled,” a nice way to jettison a proposal. An official predicted that the idea “won’t be brought up in the near future.”

The sad news in the story is that the shift from individual vendors, almost always veterans, have been displaced in almost every Jersey shore town but for a handful. The mayor of one of those towns predicts that that the issue will be popping up, because that town has stopped issuing new licenses. Eventually, there will be an insufficient number of vendors on the beaches.

A lesson can be learned from another town, Brigantine, where the same idea of selling a monopoly to the highest bidder was adopted. What happened? The town ended up with no one selling ice cream on the beaches because no one bid. Though that was surprising, as one would think some oligarch somewhere would jump at the opportunity to sell $30 ice cream cones to parched and overheated beachgoers, what was even more surprising was the requirement that anyone selling ice cream on the beach was to be arrested.

Is there a lesson? Yes. Hurting several dozen people so that people who own beach homes can save $8.50 a year is foolish. It’s not what this nation should be about.

The intersection between tax and biotechnological developments, and between tax and technological development generally, has always captured my attention. More then 35 years ago, in Federal Tax Consequence of Surrogate Motherhood, 60 Taxes 656 (1982), I had the opportunity to share my thoughts about the tax consequences of an early form of assisted human reproduction. Since then, advances in medical technology have brought additional opportunities to focus on these issues. Tax issues arising from two newer forms of assisted human reproduction were the subject of at least two of my commentaries, Are In Vitro Fertilization Expenses Deductible?, and The Taxation of Egg Donations. The tax issues in all of these techniques have involved issues of gross income, medical expense deductions, and dependency exemption deductions.

Recent news stories have added another twist to the tax issues that are raised by assisted human reproduction. Within the past two weeks, reports have emerged of possible damage to frozen eggs and frozen embryos at fertility clinics in Cleveland and in San Francisco. Thousands of eggs and embryos were involved in refrigeration failures and nitrogen problems at the clinics.

Assuming, as appears to be the case, that the eggs and embryos in fact have been damaged and thus cannot be used, are the taxpayers who own these eggs and embryos entitled to a casualty loss deduction? The answer isn’t very easy to determine. Casualty loss deductions require, among other things, that the taxpayer’s property be damaged or destroyed. That leads to the question of whether human eggs and human embryos are property. It is likely that human eggs are property. However, theologians, scientists, ethicists, and others have been debating whether human embryos are property. Though there are court decisions, chiefly in divorce situations, concluding that they are property, the specific circumstances of those cases precludes a determinative sweeping definition of human embryos as property. If they are property, the casualty loss deduction should be available, assuming other requirements are satisfied, because the casualty loss deduction is in play when there is damage or destruction of animal embryos. Making the answer even more difficult to find is the possibility that a human embryo could be treated as property for some purposes, including taxation, and not for other purposes. If human embryos are characterized for tax purposes not as property but as humans, a casualty loss would be no more appropriate than it would be if a taxpayer’s child were intentionally or negligently injured or killed.

Already, as reported in in this story, litigation has started. Class action status has been sought in at least one case. It remains to be seen whether the litigation proceeds as a matter of recovering for damage to property or seeking damages for the death of a child. Again, the outcome will not necessarily answer the tax question, because the terms of the contracts between the fertility clinics and their customers will help shape the analysis.

As often happens in other situations, it would not be surprising if the tax question reached the courts before the contract, tort, property, and other issues are resolved in other cases. So there is yet another example of why perceptions of tax law practice being a dance among numbers is so misplaced. Resolving the casualty loss issue has little to do with numbers and a lot to do with an unresolved, perplexing, controversial, and difficult question.

Earlier this week, the Philadelphia Inquirer published a letter to the editor from Nathan A. Benefield, vice president and CEO of Commonwealth Foundation. The letter apparently isn’t on the www.philly.com website, but can be found on the Philadelphia Inquirer replica site. Benefield criticized an earlier claim by columnist Maria Panaritis that maintenance of roads and bridges in Pennsylvania is underfunded. Benefield wrote, “Yet Pennsylvania has the nation’s highest gasoline tax and collects so much for infrastructure that money is redirected to mass transit. Turnpike tolls, vehicle fees, and driver fees all help fund SEPTA, meaning motorists are subsidizing mass transit they don’t use.” There are two problems with this assertion.

First, the first quoted sentence makes it appear that the revenues collected from the gasoline tax is so abundant that after spending whatever needs to be spent on highways and bridges, the rest is gratuitously given to mass transit. That is not the case. By law, a percentage of the tax, and other fees, is transmitted to mass transit agencies whether or not all of the necessary road and bridge maintenance is completed.

Second, the second sentence raises the oft-heard objection that motorists ought not be “subsidizing” mass transit. This objection rests on the unstated assumption that motorists do not benefit from mass transit because they aren’t using mass transit. Even aside from motorists who also use mass transit, motorists who do not use mass transit indeed benefit from mass transit. They benefit because mass transit permits people who otherwise would be using roads and bridges to find other ways to travel, thus reducing congestion. Imagine if mass transit simply disappeared. Mass transit riders would be forced to drive vehicles or to use taxis, Uber, and similar means of transport. Congestion would bring gridlock and more pollution not only to urban areas, but also to some suburbs, and would increase congestion and pollution in suburban and rural areas. People otherwise riding trains from Philadelphia to and from Lancaster, Harrisburg, or Pittsburgh, or two and from those and other cities, would take to the highways, including those traversing rural areas. Moreover, the additional congestion in the cities would delay the shipment of goods to and from rural areas, and increase the costs of those shipments.

Just because a benefit provided by a toll, a user fee, or a tax is not immediately perceived does not mean it does not exist. Sometimes recognizing the full impact of a revenue stream requires much more than simplistic analysis.

In his March 7, 2018, Institute for Policy Innovation commentary, Whose Crumbs?, Tom Giovanetti criticized Democrat Minority Leader Nancy Pelosi for referring to the recent spate of employee bonuses as “crumbs.” Two responses are in order.

First, though I am no fan of Nancy Pelosi, fairness dictates that she not be accused of, nor credited with, originating the use of “crumbs” to describe these mere pittances of bonuses. Giovanetti notes that she used the term on January 11, 2018, and then again on January 25. My guess is that she also used the term at other times after January 11, but Giovanetti did not need to identify every instance to make his point. My point, however, is that credit or condemnation for using the term belongs to me. On December 25, 2017, in Taxmas?, I referred to the impact of the 2017 tax legislation on the average American as “crumbs.” On December 29, in Those Tax-Cut Inspired Bonus Payments? Just Another Ruse, I predicted that “when the smoke clears and the mirrors are removed, corporate cash reserves will grow, some employees at a handful of companies will get a few crumbs, and others, perhaps many others, will lose their jobs.” On January 1, 2018, in Getting Tax Cut Benefits to Those Who Need Economic Relief: A Drop in the Bucket But Never a Flood, I criticized what the recipients of the tax cuts were doing by asking, “Imagine if corporations and businesses were required to use their tax cuts to reduce the prices of their goods and services rather than using them to engage in mergers, buy back stock, increase dividends, or toss bonus crumbs to some employees while axing thousands of jobs.” Weeks before Pelosi shared her description of the meager bonus payments being dished out to a handful of employees, I used a very appropriate word to describe what was about to happen, and has been happening.

Second, Giovanetti’s criticism of Pelosi’s use of the word “crumb” to describe what has happened is seriously flawed. I respond because criticizing her use, or anyone’s use, of the word is no less a criticism of my use of the word. Giovanetti claims that Pelosi is out of touch with the average American family. Maybe she is, maybe she’s not, but I’m not. I’ve spent my entire life in touch with people from average and not-so-average backgrounds, with the wealthy, the poor, and those in-between. So how is the average American family responding to these tax crumbs? The answer can be found in Michael Tackett’s Blue-Collar Trump Voters Are Shrugging at Their Tax Cuts report. One worker described his take-home pay increase caused by the tax cut to be enough for two beers. To quote Tackett, “Other workers described their increase as enough for a week’s worth of gas or a couple of gallons of milk, with an additional $40 in a paycheck every two weeks on the high side to $2 a week on the low.” Another worker concluded that his pay increase would be insufficient “to take his girlfriend to a nice dinner.” Still another worker described the $6 weekly increase as “lunch money,” presumably for one day of the week. One worker appears to be seeing the light of day, though his use of “he” should be “they,” as members of Congress certainly are complicit in the tax cut scam foisted on America; he explained, “He’s pulling out jazz hands and shiny stuff up front and will screw us on the back end.” Indeed.

Surely the reaction to a $250 bonus, which is the equivalent of a $5 weekly pay increase for one year, no different. These tiny amounts, though better than zero, are no different than crumbs. I explained this in several posts, including Oh, Those Bonus Payments! Much Ado About Almost Nothing, describing the average $190 bonus to be received by Walmart employees. In other posts I explained how, at the same time these measly bonus payments were being slated for distribution to some employees, other employees at a number of companies were seeing pink slips.

Giovanetti also claims that Pelosi doesn’t understand economics. Perhaps she doesn’t. Perhaps she does. But the claim by Giovanetti that a company’s taxes are paid by its workers, shareholders, and customers and that these are the people who benefit from the company paying lower taxes flies in the face of economic facts. As I described in More Proof Supply-Side Economic Theory is Bad Tax Policy, a Morgan Stanley study showed that almost half of the tax cut money received by corporations is going to top executives and hedge funds, a fifth is going to mergers and acquisitions enriching investment bankers, and about a tenth ending up in one-time rank-and-file employee bonuses. In other words, prices charged to customers aren’t being reduced, and workers aren’t getting permanent and meaningful wage increases. Of course, as I proposed many times, including How to use the Tax Law to Create Jobs and Raise Wages, Congress could have, and should have, made the tax cuts contingent on worker pay increases and customer price reductions. It hasn’t worked out that way. Instead, increasing amounts of money are flowing into the hands of those who already are drowning in it. Thus, Giovanetti’s claim that the tax cuts “frees up more money for business investment, expansion, hiring and worker training” ignores the reality that these corporations already had huge piles of money available for business investment, expansion, hiring and worker training, weren’t doing very much of that, and still aren’t doing very much of that. Before getting hoodwinked by the increases in jobs, remember that almost all of those jobs are low-paying, minimum wage, and part-time, temporary, arrangements. As the people in Tackett’s report experienced, when factories closed and eventually other employers came to town, the average worker was earning half of what he or she had been bringing home. The poor remain poor, the middle class becomes poorer, and the wealthy, well, they get wealthier.

To Giovanetti’s credit, in the same commentary he criticizes those who defend the tariff increases. He’s right. In his criticism of the tariffs, he flirts with demand-side economic theory, focusing on the impact of the tariffs on consumer spending power. Would that Tom Giovanetti realize that the tariff increases and the tax cuts for the wealthy both emanate from the same approach to economics, and that the approach in question is deeply flawed. I cannot wait until he makes that connection. When he embraces demand-side economic theory, his contribution to the rebuilding of America could be tremendous.

With great delight, Americans for Prosperity issued a press release proudly quoting Paul Ryan’s promise, “We’re not going to raise gas taxes.” He explained, “[T]he last thing we want to do is pass historic tax relief in December and then undo that, so we are not going to raise gas taxes.” Americans with Prosperity endorsed that position, quoting from a letter it sent to the Administration opposing any gas tax increases.

So, with highways, bridges, and tunnels in serious need of repair, and expansion necessary in areas stifled by congestion, what brilliant idea does Paul Ryan and his backers at Americans for Prosperity offer? Let the transportation infrastructure deteriorate while people are injured and killed? Put ownership of public infrastructure into the hands of oligarchs who will impose tolls far higher than any gas tax hike would have been, while they extract more profits for their bulging coffers and scream for more tax relief because they are impoverished?

It amuses me how an organization claiming prosperity as its goal can ignore the vital role that public highways, bridges, and tunnels play in boosting a nation’s prosperity. Does this group not understand the negative impact on the American economy of traffic congestion, delayed delivery of goods, and productivity decreases caused by deficient highways, bridges, and tunnels? It is a well-known principle of economics that one must spend money in order to make money. Has Paul Ryan and Americans for Prosperity figured out yet that investing in infrastructure will increase GDP more quickly and to a greater extent than the tax cuts they worship? And, if dumping money into the economy by putting it into the hands of wealthy individuals and corporations that are using very little of it to spark the economy is supposedly, in their view, so wonderful, is it not even more wonderful to infuse the economy with investments that are visible and guaranteed to provide economic payback that benefits everyone?

The answer surely is the mileage-based road fee. I have discussed that approach in numerous posts, including Tax Meets Technology on the Road, 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?, Between Theory and Reality is the (Tax) Test, 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?, When It Comes to the Mileage-Based Road Fee, Try It, You’ll Like It, Mileage-Based Road Fees: A Positive Trend?, and Understanding the Mileage-Based Road Fee. Yet the anti-tax, pro-oligarchy-enrichment-through-privatization crowd derides the mileage-based road fee with as much vigor as they oppose the gasoline tax and every other tax.

It is not unusual for defenders of a foolish policy, such as cutting off necessary funding that returns many dollars for each invested dollar, to sound more and more ridiculous as they are backed into a corner while the light shining on their policies’ shortcomings becomes brighter and more focused. Every American, including those already injured or dishing out dollars because of injuries and damages caused by infrastructure deficiencies, and those who inevitably will suffer injuries and damages, should be extremely alarmed. Figuring this out while at someone’s funeral, while in the hospital, while dealing with unemployment, or while dealing with delays in the delivery of much-needed medicines will be too late. Way too late.

For almost a decade I have been criticizing the so-called soda tax. It fails to get my support because it is both too narrow and too broad. It applies to items that ought not be subjected to this sort of “health improvement” tax, and yet fails to apply to most of the food and beverage items that contribute to health problems. I have written about the soda tax for almost ten years, 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, The Imperfections of the Philadelphia Soda Tax, When Tax Revenues Continue to Be Less Than Required, How Much of a Victory for Philadelphia is Its Soda Tax Win in Commonwealth Court?, Is the Soda Tax and Ice Tax?, and Putting Funding Burdens on Those Who Pay the Soda Tax.


Now comes news that despite falling short of its revenue goals, Philadelphia officials consider the city’s soda tax to be a success. According to Stu Bykofsky, the city’s budget director declared that the city’s reaction to “coming within 15 percent of that original [revenue] estimate” was something o which “we’re actually pretty proud.” Bykofsky asks, “If you announced a goal and failed to achieve it, would you claim success?” The city’s mayor’s answer, though provided before Bykofsky asked his question, “The beverage industry would like folks to think that somehow $79 million in new revenue is a failure.” The revenue projection was $92 million. The city’s finance director gave an answer by pointing out that “thousands of children are getting access to pre-K and to community schools that they would not have gotten without this tax.” Bykofsky noted that though the goal was to provide space for 6,500 pre-K children, only 5,500 seats will be added because of the revenue shortfall. He asks if the 1,000 children not getting into the program would consider the soda tax to be a success.

My reaction to this debate is that too much focus is being placed on the word “success.” Technically, success means the accomplishment of a goal. Using that definition, the Philadelphia soda tax is not a success. It failed to raise the revenue set as a goal by its proponents. On the other hand, the soda tax revenue has permitted the city to rack up several accomplishments. The question, though, isn’t whether those accomplishments amount to success – they don’t – but whether the method of funding those accomplishments made and makes sense. It doesn’t, for all the reasons I have described in that long litany of previous posts and for the additional reasons other commentators have provided. There are better and more efficient ways to raise revenue.

One of the goals of the soda tax, held out as a justification, is not discussed by Bykofsky in his recent commentary, though that’s because no city official mentioned it. The soda tax was, and still is, touted as a method of improving public health. What remains to be seen are measurements indicating that the health of Philadelphia residents has improved. Has the average blood pressure dropped? Has the average blood glucose level dropped? Has the percentage of Philadelphians who are obese dropped? Statistics exist, as this article demonstrates, but I did not find anything indicating one way or another whether the tax on some beverages, including those not contributing to poor health, has had any noticeable effect on the health of Philadelphians.

To answer the question posed by the title of this post, a tax is successful when the goals established for the tax are met within the period of time set for accomplishment of those goals. At the moment, there is insufficient information to reach a final conclusion on the Philadelphia soda tax, but to date, it has not been a success. Getting partway to the goals, though in and of itself an accomplishment, is not success. The tax is an unwise tax, and it is rare for an unwise tax to be a success.

Readers of this blog know that I am an advocate of demand-side economic policy. Logic and experience have established the failure of tax cuts for the wealthy to improve the economic condition of most Americans. Even some beneficiaries of supply-side tax cutting have disagreed with that approach, as I discussed in Some Wealthy Persons Don’t Want Tax Cuts. Among my many posts pointing out the failures of supply-side trickle-down economic theory are Does Repealing the Corporate Income Tax Equal More Jobs?, in which I explain why demand-side economic theory works and supply-side theory does not, and Kansas As a Role Model for Tax Policy?, in which I describe the utter catastrophe foisted on the people of Kansas by a crazed supply-sider who ignored the advice of experts and alienated even many members of his own political party.

Now comes more proof that the tax cuts enacted at the end of 2017 are not going to do what was claimed by the advocates of tax cuts for the wealthy. In What will S&P 500 firms do with their tax cut billions?, Joseph N. DiStefano explores the outcome of a Morgan Stanley study of what corporations plan to do with their tax cut windfalls. What interested me most was not that overall outcome, which came as no surprise – almost half of the money going to top executives, hedge funds, and similar stockholders, and a fifth going to mergers and acquisitions that generate wealth for investment bankers, and barely a bit more than a tenth ending up in one-time mere pittances of employee bonuses – but what some executives confessed. As DiStefano put it, executives “have admitted they don’t expect tax cuts will fuel new demand for what they sell.” For example, the CEO of Boeing described the effect of tax cuts on aircraft sales by explaining, “No, I don’t see a changing pattern of buying patterns.” When asked if the tax cuts would increase demand for advertising, the CEO of Comcast NBC Universal explained that there wasn’t “necessarily a direct correlation” between the tax cuts and increased advertising designed to increase revenues. Officials at Pulte Corp. explained that lower tax rates do not affect demand for the homes it builds.

These responses do not surprise me. Those who can afford to buy airplanes already have done so and don’t need or want any more, and the tax cuts do nothing to cause more than a handful of individuals and businesses, if at all, to decide they can afford to buy an airplane. The same can be said with respect to the homes built by Pulte. And any company can increase its advertising, but if the consumer class cannot afford what’s being sold, even if it’s wanted, sales will not happen.

How different it would be if the tax cuts had been distributed to the “bottom 90 percent” instead of to those who are not in need of more money, and who clearly are doing very little with their tax cut windfalls that will boost demand in the American economy. But considering that the goal of those advocating these tax cuts was not to improve the economic condition of Americans or to boost the national economy, but to line the pockets of the oligarchy that has seized control of government, it is no surprise that demand-side economic theory will not find a home in national tax policy until the swamp is drained and the make-the-oligarchy-even-wealthier crowd is voted out of power.

Two weeks ago, in One Man Who Made a Difference in the Tax World, I reacted to the passing of Leonard L. Silverstein by describing the positive impact he had on the tax world and on my career. Now comes more sad news. Saturday a week ago, Leon G. Wigrizer died. My career with the Chief Counsel to the Internal Revenue Service was facilitated by his gracious assistance, as he took time to educate me about the responsibilities and opportunities I would encounter and took time to let people in that office know of my availability.

Shortly after I met him, Leon became the first inspector general in the Treasury Department, and eventually served as the first inspector general of Philadelphia. I nodded in agreement as I read comments by the professionals with whom he worked, who used phrases such as “endless dedication to integrity and honesty, “wonderful public servant,” and “inspiration to all.”

One of the many efforts in his campaign to rid government of fraud, corruption, waste, and mismanagement was participation “in an investigation of family members of high-ranking elected officials” in the federal government. The number of government employees arrested through his efforts numbered in the triple digits.

The nation needs more people like Leon Wigrizer. I was blessed for having known him. So, too, was the nation, even though few people realize it. Like Leonard L. Silverstein, Leon made a difference. He will be missed. May he rest in peace.

On Monday, in How To Use Tax Breaks to Properly Stimulate an Economy, I stated that, “The worst way to use the tax law to encourage behavior is to hand out tax breaks without requiring anything in return other than promises.” Already some Americans are beginning to realize that making the wealthy wealthier is doing little, if anything, for the typical middle-class or poor American. In fact, it’s doing almost nothing for anyone not in the top one percent. The evidence is piling up.

Though I detest using the tax law to encourage or discourage behavior, it isn’t enough simply to criticize. So, although I would prefer other avenues, if I were to craft tax law provisions to create jobs and raise wages, I would do something very different. Whether anything needs to be done is problematic, because we’re being told that the labor market is tight, unemployment is down, and wages in a handful of economic sectors are rising because of shortages of skilled workers. Of course, we also are being told that skilled people in their fifties and sixties are finding it difficult to find jobs.

The best way to encourage employers to hire workers is, of course, to put money into the hands of consumers, because the American economy, when at its best, is demand-driven. Supply-side economics is nonsense, and most people are coming to understand that. Many advocates of demand-side economic theory also support tax rate reductions, but aimed at the 99 percent rather than the top one percent. There are flaws, though, in tax rate reductions, because there is no guarantee that the tax cuts will find their way into the economic sectors most in need of revitalization, and because getting money into the hands of those with no tax liabilities requires something more than rate reductions, namely, refundable credits. Refundable credits are problematic.

A somewhat middle position is to provide employers with an additional deduction based on wage and job growth. For example, employers could be allowed to deduct not only compensation paid, but, in addition, a percentage, perhaps 25 or 30 percent, of the excess of the compensation paid during the taxable year and the compensation paid during the previous taxable year, perhaps leaving out of the computation increases in compensation paid to individuals earning more than a specific amount, such as $150,000, $200,000 or some similar figure in that range. This incentive would, or at least should, encourage employers to raise the pay of their low compensation employees rather than CEOs and other highly compensated employees. As for employers that would have no use for these deductions, encouraging failing businesses or successful businesses that use tax shelters to mask taxable income, they ought not be encouraged to continue on those paths. In this way, tax breaks would be tied to performance. People who don’t create jobs ought not get to share in tax breaks held out as job-creation inducements.

The danger in advocating a “somewhat middle position” is that it invites criticism and attacks from all sides. In the current political climate, where compromise is disdained, cooperation avoided, and extremism rampant, the best that can be said about advocating a middle position is that it provides a framework on which to rebuild the nation when, or if, its citizens realize that political climate change is necessary.

There are times when doing something the wrong way is a problem even if the outcome is the desired result. Sometimes, the “no harm, no foul” principle makes sense. Sometimes, even when it make sense, things don’t work out well. In the tax world, though often the IRS and courts look at the substance of a transaction, there are times when form matters more than substance. This notion is illustrated by what happened in Kirkpatrick v. Comr., T.C. Memo 2018-20.

In Kirkpatrick, the taxpayer and his wife divorced. One of the paragraphs in the consent order entered on September 24, 2012, provided, “ORDERED, that the [taxpayer] shall transfer to [his wife] the sum of One Hundred Thousand Dollars ($100,000.00) directly (and in a non-taxable transaction) into an IRA appropriately titled in [his wife’s] name within fourteen (14) days of the entry of this Order and that the funds will not be withdraw [sic] until 2013.” The taxpayer and his wife were separated during the entire year in question, and their divorce became final on June 30, 2014.

The taxpayer did not transfer any money into an IRA titled in his wife’s name at any time after the consent order was entered or before the divorce was finalized. The taxpayer made payments directly to his wife throughout 2013. At that time the taxpayer was over 59-1/2 years of age, and paid the money he was ordered to pay to his wife through a series of checks. To make these payments, he withdrew funds from two of his IRAs held at JPMorgan Chase, and transferred that money to his JPMorgan Chase checking account, from which he wrote checks to his wife.

The taxpayer received two Forms 1099-R from JPMorgan Chase for the 2013 taxable year. One showed gross distributions of $116,489.39 from the first account. The other showed gross distributions of $294,665.64 from the second account. Each had a box checked to indicate that the taxable amount was not determined. Petitioner and his wife filed a joint federal income tax return for 2013, on which they reported total IRA distributions of $411,155, with only $116,489 of that amount claimed to be taxable.

The IRS determined, among other things, that the taxpayer had taxable retirement income of $294,665 from JPMorgan Chase. The taxpayer conceded all of that amount but for $140,000, which had been reported as nontaxable on the joint return.

Generally, distributions from an IRA must be included in gross income. An exception exists for transfers incident to divorce. Section 408(d)(6) provides, “The transfer of an individual’s interest in an [IRA] to his spouse or former spouse under a divorce or separation instrument described in [section 71(b)(2)(A)] is not to be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and such interest at the time of the transfer is to be treated as an [IRA] of such spouse, and not of such individual.”

The taxpayer made three arguments in support of his position that the IRA withdrawals fell within the exception. First, he argued that the consent order is a written instrument incident to a divorce within the meaning of section 71(b)(2)(A). Second, he argued that nothing in section 408 or its regulations offers any specific guidance on the timing of a transfer for it to qualify under the section 408(d)(6) exception, and thus it is logical to assume that any transfer is nontaxable so long as it occurs in a timeframe beginning with the issuance of a written instrument, such as the consent order, and through a judgment of absolute divorce, as happened in this instance. Third, the taxpayer argued that the fact the funds passed through his checking account on the way from him to his spouse’s IRA should have no bearing on the taxability of the exchange because the funds were moved within the allowable time limit for this type of transaction.

The IRS also made three arguments in support of its position that the IRA withdrawals were taxable. First, it argued that the taxpayer did not transfer an interest in his IRAs to his wife, because no IRA was opened in her name, nor were any funds transferred from the taxpayer’s IRAs to an IRA owned by his wife. Second, though conceding that the consent order was a written instrument incident to a divorce, the IRS argued that the taxpayer did not comply with its terms because he did not make the required transfer within 14 days, and thus any transfer that was made was not made pursuant to the order. Third, the IRS argued that any argument by the taxpayer that state divorce law should be determinative as to the IRA distributions’ taxability is erroneous, because state-specific requirements for obtaining a divorce do not preempt or override the Internal Revenue Code.

The taxpayer rebutted the IRS arguments, claiming that there was a transfer of his interest in his IRAs, that they were made under a divorce instrument, and that he complied with all of the conditions in the consent order. He explained that his wife failed to establish an IRA to receive the transferred funds, but that he is not responsible for that failure. He also claimed that state divorce law with respect to taxability from time to time conflict with the IRS position and that to ignore the state court position would put him in contempt of court.

The Tax Court first disposed of $40,000 of the amount in dispute, noting that it had nothing to do with the ordered transfer of an IRA interest. Instead, it related to another paragraph in the consent order requiring the taxpayer to pay attorney fees and litigation costs. The IRA withdrawals made for that purpose would not fall within the exception, and because the taxpayer did not address this amount, the Tax Court considered the taxpayer to have conceded this amount, leaving in dispute the $100,000 IRA transfer.

The Tax Court next disposed of the taxpayer’s argument that the conflict between the state court’s reference to “nontaxable manner” and the IRS position. It pointed out that if a conflict existed, the Supremacy Clause of the U.S. Constitution would resolve the matter in favor of the IRS position. It also pointed out that there was no conflict, because the state court was not holding that any transfer would be nontaxable but that the taxpayer was required to make the transfer in a manner that would cause it to be nontaxable under federal income tax law, something that the taxpayer failed to do.

The Tax Court turned to the applicability of the section 408(d)(6) exception. Relying on prior cases, it explained that there are only two ways to fall within the exception. One is to change the name on the IRA account. The other is to have the trustee of the taxpayer’s IRA transfer funds to the trustee of the wife’s IRA. The taxpayer did not do either of these things. Instead, the taxpayer did what the Tax Court had previously concluded did not fall within the exception, namely, he took a distribution from his IRA and then transferred that cash to his wife.

The Tax court noted that, “Ultimately, [the taxpayer’s] argument rests on the idea that the alleged substance of what occurred should govern and not its strict form.” The court declined to do so, even if the money had been placed by the taxpayer’s wife in an IRA, something that had not been proven, because, as the Court of Appeals to which the case is appealable stated, “’Form’ is ‘substance’ when it comes to law. The words of law (its form) determine content (its substance).” Though that notion has been honored in the breach in some instances, in this case the Tax Court pointed out that section 408(d)(6) refers to an “interest in an individual retirement account” and not “assets from an individual retirement account” or “interest in or assets from an individual retirement account.” The Tax Court summed it up in two words: “Form matters.” And thus the $100,000 must be included in the taxpayer’s gross income.

The taxpayer’s failure to cause his actions to mesh with the required form cost the taxpayer tens of thousands of dollars. It is not difficult to ask the trustee of an IRA to transfer a particular amount of money or other assets into an IRA established in the name of the transferee. In some ways, it would be easier to do that than to ask for the distribution, and then write and deliver one or more checks.

People who insist that proper form be followed often are tagged as picky, demanding, obsessive, or worse. Yet, in so many fields, form matters. Proper form matters in sports, in music, in grammar, in posture, in etiquette, and in many other situations. Form matters.