MauledAgain

In a recent case, Gartlan v. Comr., T.C. Summ. Op. 2018-42, the taxpayer asked the Tax Court to create an exception to the statute based on policy but the Tax Court declined to do so. Unfortunately, the case demonstrates yet again the deteriorating state of legislative drafting skills in the Congress.

In 2015 the taxpayer was enrolled in a health insurance plan offered through an insurance exchange created under the Affordable Care Act. He paid monthly health insurance premiums of $383.45, totaling $4,601.40 for the year. In January 2016 the Department of Health and Human Services issued to the taxpayer a Form 1095-A, Health Insurance Marketplace Statement, reporting that in 2015 no advance premium assistance payments had been made on his behalf. On October 16, 2016, the taxpayer timely filed a Form 1040
for 2015, reporting business income of $1,163, deductions of $82 and $1,880 for self-employment tax and student loan interest, respectively, and adjusted gross income of $799. The taxpayer attached to his tax return a Form 8962, Premium Tax Credit, and claimed a premium tax credit of $3,156. The taxpayer reported a household size of one person and modified AGI of $799.

The IRS determined that the taxpayer was ineligible for the premium tax credit because he is not an “applicable taxpayer” within the meaning of section 36B(c)(1). The taxpayer asserted that he was entitled to the credit under a special rule for taxpayers with household income below 100 percent of the Federal poverty line and should be treated as an applicable taxpayer consistent with the policy objectives underlying section 36B.

Under section 36B, a refundable premium tax credit is available to applicable taxpayers. An applicable taxpayer is a taxpayer whose household income for a taxable year equals or exceeds 100 percent, but does not exceed 400 percent, of the Federal poverty line for the taxpayer’s household size. For this purpose, household income is the taxpayer’s modified AGI plus modified AGI of family members for whom the taxpayer properly claims personal exemption deductions and who were required to file a Federal income tax return. Modified AGI is adjusted gross income increased by certain items of income normally excluded from gross income.

Section 1.36B-2(b)(6)(i) of the regulations provides an exception to the general definition of an applicable taxpayer. It provides that a taxpayer whose household income for a taxable year is less than 100 percent of the Federal poverty line for the taxpayer’s
family size is treated as an applicable taxpayer for the taxable year if four conditions are satisfied. First, the taxpayer or a family member must enroll in a qualified health plan through an exchange for one or more months during the taxable year. Second, an exchange estimates at the time of enrollment that the taxpayer’s household income will be at least 100 percent but not more
than 400 percent of the Federal poverty line for the taxable year. Third, advance credit payments are authorized and paid for one or
more months during the taxable year. Fourth, the taxpayer would be an applicable taxpayer if the taxpayer’s household income for the taxable year was at least 100 but not more than 400 percent of the Federal poverty line for the taxpayer’s family size.

The taxpayer and the IRS agreed that the taxpayer’s household size was limited to one person and that his modified AGI for 2015 was $799. Because his modified AGI was below $11,670 (100 percent of the Federal poverty line for 2015), he does not qualify as an applicable taxpayer under the general rule. The court concluded that the taxpayer did not qualify for the regulatory exception because the second and third conditions were not satisfied.

The taxpayer claimed that he should be treated as an applicable taxpayer who eligible for the credit because he falls within the class of persons that the statute was intended to assist, even if, because of circumstances beyond his control, he did not satisfy the regulatory exception. The taxpayer argued that the policy behind the credit is to provide advance premium assistance payments to taxpayers, like him, who cannot afford to pay some or all of the cost of health insurance. He explained that advance premium assistance payments should have been made on his behalf, but were not so made because there was no relationship between the State of Delaware, the exchange, and his insurance carrier that could facilitate the contribution and receipt of advance payments.

The Tax Court explained that although it was not unsympathetic to the taxpayer’s situation, it is bound by the statute as written and by the accompanying regulations consistent with the statute. Thus, because the taxpayer’s modified AGI was below eligible levels and he did not satisfy the conditions for the regulatory exception, no other outcome was possible. The court then suggested that the taxpayer’s recourse was to eek a legislative remedy. The chances of the taxpayer succeeding in that effort are pretty much the same as the taxpayer’s chances of prevailing in his Tax Court litigation. It is unfortunate that increasingly Congress enacts legislation drafted by uncoordinated lobbying groups and pushed through at a pace that prohibits careful examination that would reveal the sort of flaw that tripped up the taxpayer in this case. But until Congress puts the nation over political party, this style of legislation is unlikely to be replaced with an approach beneficial to all Americans.

Several weeks ago, according to this report, the corporation that owns the New York Islanders National Hockey League franchise has been given a tax break. The Nassau County Industrial Development Agency approved a reduction of almost half a million dollars in sales taxes that are due on items it is purchasing for renovation of the arena in which the team plays. The tax break comes on top of a $6 million grant from the state of New York. The corporation that owns the team plans to shell out the other $3.9 million of the project cost.

The chair of the agency granting the sales tax break justified the action by expressing a desire to have the team play in the arena, and claimed that the sales tax break was “moderate enough that it won’t have any major impact on the county taxpayer.” If the agency can handle a half-million dollar revenue decrease, why not reduce the taxes being paid by ordinary taxpayers who aren’t rolling in seven-digit-incomes and who don’t own professional sports franchises?

So it’s not enough that taxpayers are shelling out more than 60 percent of the cost of a private corporation’s project. The corporation obtained an additional handout, raising the taxpayers’ share of the project to roughly 65 percent. Perhaps the corporation and its owners want the taxpayers to foot 100 percent of the bill.

If the owner of a sports franchise wants to build, renovate, or expand facilities, it has three acceptable choices. It can use its own money, it can borrow money, or it can increase ticket and concession prices. If it uses its own money, it will earn it back if the project is viable. If it borrows the money, it will be able to repay the loan, with interest, if the project is viable. If it increases ticket and concession prices, it will generate additional revenue if the public demonstrates that the project is viable by willingly stepping up and paying for those tickets and other items. Resorting to the use of taxpayer dollars suggest that the owner either has little or no faith in the ability of the project to generate sufficient revenue or is simply looking for a quick and easy handout to satisfy avarice.

As long as taxpayers put up with these sorts of giveaways to corporations and wealthy individuals, they should get no sympathy for their complaints about tax rates and tax increases. If they truly want tax reform, they need to step up and vote out of office the politicians who engage in these transactions.

It’s not unlike “from famine to feast.” After going quite some time between opportunities to comment on television court show episodes, I was presented with a second Judge Judy case within the span of a week. An indication of how often these opportunities pop up is evident from the parade of commentaries I have written, 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, One of the Reasons Tax Law Is Complicated, and An Easy Tax Issue for Judge Judy.

This time around, in episode 260 of season 22 (second half of the linked programs), Judge Judy again faced an issued involving dependency exemption deduction. The plaintiffs were a boyfriend and girlfriend suing the girlfriend’s mother on a number of issues. The boyfriend and girlfriend had lived with the girlfriend’s mother. Both of them worked, but the girlfriend’s mother did not. The boyfriend contributed $300 each month for household expenses, including room, utilities, and food. The boyfriend and his girlfriend’s mother reached an agreement by which the boyfriend claimed the mother’s two other, younger, children as dependents on his tax return. They did this because the mother, having no income, had no need for the dependency exemption deductions. Claiming the deductions generated a $1,700 refund for the boyfriend who, pursuant to his agreement with the girlfriend’s mother, delivered $1,000 of the refund to the mother. Not surprisingly, the boyfriend was audited, the IRS denied the deductions, and the boyfriend was required to repay the IRS. In addition to other unrelated claims, the boyfriend sued his girlfriend’s mother for return of the $1,000.

Judge Judy correctly described the agreement between the boyfriend and his girlfriend’s mother as a scam, and told the boyfriend that what he did was something that he “should not have done in the first place.” She explained that the boyfriend had no right to claim the deductions because he did not support his girlfriend’s mother’s two younger children. She dismissed the claim.

In the post-trial interview, the boyfriend asserted that his girlfriend’s mother had approached him with the idea of having him claim the dependency exemptions. He said he “didn’t know any better,” and that he thought it would be ok because he was the only one in the house filing a tax return, the only one working, and was therefore considered to be the head of the household.

So the boyfriend is out $1,000 and his girlfriend’s mother has the $1,000. Unfortunately, there is no recourse for him under the law, and it is no surprise, considering how the other issues played out, that the mother had and has no intention of repaying her daughter’s boyfriend. How much better off the boyfriend would have been had he done some research or consulted someone with adequate knowledge with respect to dependency exemption deductions. Ignorance is dangerous, and it can be costly.

Is it simply greed? Is it money addiction? Is it a deep insecurity that no matter how much money one has, even when it is more than enough multiple times over, the risk of ending up in the poorhouse appears to be way too high? It might seem that after receiving monstrous tax breaks at the expense of the average American, large corporations and wealthy individuals would not need to come begging for even more. This time, it’s the owners of a major league soccer franchise who are grabbing public land from Nashville. In other words, an asset that is worth more than $20 million, that belongs, in effect, to the citizens of Nashville, is being handed over to these owners already rolling in money.

What is it about these professional sports franchise owners? What makes them so intent on having others pay for their desires? I have written about wealthy sports franchise owners going after taxpayer funds in posts such as Tax Revenues and D.C. Baseball, Public Financing of Private Sports Enterprises: Good for the Private, Bad for the Public, So Who Are the Takers of Taxpayer Dollars?, Taking and Giving Back, If You Want a Professional Sports Team, Pay For It Yourselves; Don’t Grab Tax Dollars, St. Louis Voters Say “No” to Proposed Tax Increase to Fund Private-Sector Proposal, Is Tax and Spend Acceptable When It’s “Tax the Poor and Spend on the Wealthy”?, and When “Cut Spending” Doesn’t Mean “Cut Spending”.

According to this recent article from Reason’s Hit and Run Blog, which reader Morris brought to my attention, the city of Nashville has agreed not only to hand over 10 acres of public land to a private sports franchise, but also to toss in another 10 acres of public land in order to persuade the owners of that franchise to accept the initial handout. What? “Here’s $10 to persuade you to accept a $10 tax cut.” Something is way out of whack in American politics. But we knew that.

The justification is that the land in question isn’t “ideal,” namely, it isn’t in downtown Nashville. I suppose if the city had 10 acres of contiguous public land in the downtown area, it would hand that over to the apparently impoverished franchise owners. Of course, those 10 acres would be worth at least what the 20 acres are worth.

What will the owners of the sports franchise do with the extra 10 acres? Supposedly they will build apartments, offices, bars, restaurants, and a hotel. Whether Nashville needs those buildings in a “less than ideal” area remains to be seen. Would it be surprising if, when and if they are built, those structures end up with high vacancy rates?

If, indeed, it is good to have that development constructed on those 10 acres, why not sell the land to a private developer? If the answer is that the developer can’t turn a profit if the developer must pay for the land, then it is clear that there is no need for the development, for if there were such a need, sufficient revenue would be generated. If the answer is that the developer CAN turn a profit if the developer must pay for the land, then what’s the justification for not charging the developer for the land?

What makes this situation even worse is that Nashville is facing a budget crunch. One of the reasons is that the city is obligated to shell out $300 million for improvements to the stadium used by the city’s NFL team. Why not use that stadium for professional soccer? The soccer league insists that its teams have their own dedicated-to-soccer stadiums, yet two of its teams in other cities play in NFL stadiums, and a third team plays in, of all places, a baseball stadium. Professional soccer matches have been played in Nashville’s NFL stadium by teams from the world’s best soccer league. So why is that stadium insufficient for a low level soccer team such as the one that has been playing in downtown Nashville?

That budget crunch has Nashville officials contemplating holding back on raises due to teachers. Heaven forbid that Nashville insist on being paid for the land it is handing over, for free, to rich sports franchise owners, and investing the proceeds as an endowment to support teacher pay. Perhaps they think that playing soccer and watching soccer for a slightly lower ticket price is far more important than the education of Nashville children. Perhaps they fear that educated Nashville children will grow up to see through the charades that are being played by the seedy relationship between politicians and the oligarchy.

Eventually Nashville will need a tax hike to fix its financial problems. Of course, the anti-tax crowd will show up, barking its usual silly claims about the dangers of taxation. Their rants against government spending will make no mention of the handing over of public assets to private enterprises surely in no need of even more handouts.

Two of the individuals planning to take over the team if the stadium deal goes through are billionaires. One of them already managed to get Minneapolis to shell out $500 million to build an arena for that city’s NFL team. That robbery of public funds was one of many that I discussed in So Who Are the Takers of Taxpayer Dollars?. Why can’t these guys use their very large federal tax cut funds to pay their own way?

There is enough opposition to this awful scheme that the outcome is not yet inevitable. Opponents have showed up in meaningful numbers at the hearings already heard, and initial votes suggest that getting enough members of the city’s council to vote in favor of the handout might not be possible. As one member of the council put it, "It's taking from one group to give to an in-favor group. It's pretty ruthless." No kidding. And the oligarchy continues to complain about, mistreat, and rip off the people they castigate as “takers” while it members, loaded with wealth, bloated with tax cuts, and scheming for even more tax cuts and “gifts” of taxpayer-owned property, go on a taking rampage. At what point will Americans wake up and realize what is happening? Or will they figure it out the day they realize they’re just serfs laboring on the fields of the nobility? It’s sad what greed and money addiction can do.

It has been a while since I commented on a television court show episode. It’s a combination of not seeing very many new episodes, and the absence of any tax issue popping up in the episodes that I did see for the first time. It’s not as though there has been an overall shortage of episodes providing material, as can be seen in the long list of posts I have written about television court 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, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other, and One of the Reasons Tax Law Is Complicated.

In this particular episode, for which I do not have a web link, an unmarried couple appeared before Judge Judy. They had two children, one of whom lived with the mother and one of whom lived with the father. The mother had no income other than welfare. The father had a job. The father paid support for both children, and claimed both children as dependents on his tax return. The mother sued the father, raising a variety of claims. Among her claims was that she should be entitled to one of the dependency exemptions because allegedly she and the father so agreed. She apparently wanted damages based on one-half of the tax reduction that the father obtained by claiming the dependency exemption deductions.

Judge Judy said to the mother, “Why do you need the deduction? You have no income. You have no use for the deduction.” The facts demonstrated that Judge Judy nailed it. The deduction in question was of no use to the mother. No mention was made of any credits arising from the status of the children as dependents, almost certainly because there were none applicable. Certainly the mother was not eligible for an earned income credit. It is unclear why the mother made the claim, but considering all the claims she had compiled against the father, she either received bad advice or thought that the more claims she added the better her chances of recovering on at least some of them. Her approach didn’t work, and it didn’t get past Judge Judy.

Reader Morris alerted me to a report of a Chester Co., Pa., Orphans Court decision. My attempts to find an online publication of the court’s opinion have been unsuccessful. So I am relying on the report’s description of the decision.

The facts are simple. Lesley G. King’s will established a trust for her many animals, including horses, dogs, cats, and chickens, for the duration of their lives. All of her property was transferred to the trust. Trust income and principal is to be used for the care of the animals. When the last of the animals dies, any remaining funds would be distributed to King’s brothers and sisters and their children.

Pennsylvania imposes an inheritance tax on the value of assets transferred to any person who is an heir or beneficiary. The rate varies; it is zero percent, for transfers to surviving spouses and to parents from children 21 or younger, 4.5 percent for transfers to descendants, 12 percent for transfers to brothers and sisters, and 15 percent on transfers to others. The tax does not apply to transfers to charities and other tax-exempt organization.

The Pennsylvania Department of Revenue assessed a 15 percent inheritance tax on the entire estate. The Department’s position is that because the trust in question is not a tax-exempt entity, the inheritance tax applies to the transfer from the estate to the trust. It applied the 15 percent rate because the trust is not a surviving spouse, a parent of a child 21 or younger, a descendant, a brother, or a sister.

The executors of King’s estate argued that transfers for the benefit of animals are not subject to the tax because animals are not persons. They relied on an earlier case from Westmoreland County, in which the court held that a trust for the benefit of horses was not subject to the tax because there was no “person” to whom the property was transferred. The Chester County Orphans Court, however, concluded that although the animals are not persons, transfers to the trust for their benefit are taxable because there is no statutory provision exempting the transfer from the tax.

Though I agree with the conclusion, I disagree with the reasoning. Logically, the question of whether an exemption applies is not relevant unless there is a transfer to a person. The animals are not persons, and thus the tax does not apply, and thus the applicability of an exemption does not matter. The flaw, however, is the conclusion that the transfer was made to the animals. The transfer was made to a trust, the beneficiaries of which included not only animals but also the brothers, sisters, nephews, and nieces of the decedent. Those individuals are persons. Another approach is to treat the trust as a person, though doing so would simply move the analysis back a step, because determining the applicable rate would require identifying the beneficiaries of the trust. In this instance, the trust has human beneficiaries.

It probably is distressing to some to learn that under the law animals are not persons. Outside of the legal world, there are many instances in which people consider animals to be persons, whether pets who are considered to be children or chimpanzees and dolphins who can reason and communicate using human language. The debate about the status of animals, both inside and beyond the legal world, has been intense and ongoing. It is not one I address today.

What matters is how, if at all, a different outcome could have been reached with different planning. As the author of the report points out, the decedent could have avoided this outcome by setting up a similar irrevocable trust more than a year before death, because the tax does not apply to lifetime transfers not within one year of death. Another consideration would have been to determine more carefully the amount of money that would be needed for those animals, and to transfer that amount, rather than the entire estate, into that trust. King’s estate exceeded $400,000, and unless that amount, plus income on that amount, is required for the care of two horses, two dogs, two cats, and some chickens, putting all of that money into the trust exposed too much to the highest rate of inheritance tax.

So, technically, the answer to the question is, no, animals do not pay taxes but trusts set up for their benefit do end up paying taxes. The next question is whether robots pay taxes. I discussed that issue in Taxation of Androids and Robots, and Similar Pressing Issues. It’s only a matter of time before someone sets up a trust for a sentient robot. Who said tax is boring?

It is not unusual for students about to embark on a semester’s journey in a basic tax course to worry that their perceived inability to “do math” will get in the way of successfully completing the course. Much to their surprise, a substantial portion of what they encounter in the course does not involve math, and when math does show up it’s pretty much simple arithmetic.

Two months ago, the Pennsylvania Commonwealth Court delivered its opinion in a tax case. Neither math nor arithmetic were part of the analysis.

The core question faced by the court in East Coast Vapor, LLC, v. Penna. Dept. of Revenue, was whether e-cigarettes that do not deliver tobacco, and e-liquids that do not contain nicotine or contain nicotine from non-tobacco sources, are “tobacco products” under the Tobacco Products Tax Act. Specifically, the court was asked to decide if the legislature, by including these items within the definition of “tobacco products,” violated the due process clauses of the United States and Pennsylvania Constitutions. After disposing of procedural issues, the court turned to the basic question facing it.

The taxpayer argued that items not used to deliver tobacco nor manufactured from tobacco “are both logically and scientifically not a tobacco product.” I have told my students that by studying tax, one can learn quite a bit about many other things, and this case provides another example. I had not known that nicotine can be extracted not only from tobacco, but also from eggplants, potatoes, and tomatoes.

The Department of Revenue argued that there is a rational basis for treating e-cigarettes and e-liquids as tobacco products because they contain nicotine, nicotine is addictive, and the use of e-cigarettes opens the door to smoking tobacco cigarettes. The tax paid on e-cigarettes and e-liquids, according to the Department, helps bear the costs of harm caused by tobacco products, including e-cigarettes.

The Court concluded that there is a rational basis for including an “electronic oral device,” or e-cigarette, in the definition of “tobacco product” because, even as the taxpayer admitted, it can be used to vape e-liquid that contains nicotine derived from tobacco. The court also concluded that there were “legitimate state objectives” for including in the definition of “tobacco product” any e-liquid containing nicotine not derived from tobacco. The court explained that because the plaintiff did not argue that the nicotine derived from products other than tobacco is any different from nicotine derived from tobacco, it is not “unreasonable, unduly oppressive or patently beyond the necessities of the case” to tax something that is similar to tobacco, contains nicotine, and is addictive, as a tobacco product. The court noted that the tax is designed to increase the cost of e-liquid in an effort to discourage consumption of e-liquid.

The court also concluded that the Department of Revenue’s attempt to tax separately packaged component parts of e-cigarettes went beyond the statute. The court explained that the Department’s concern about sellers disassembling e-cigarettes and selling the components separately for consumer reassembly raised a problem that only the legislature could solve.

Because the case can be appealed, it is likely that the Commonwealth Court’s decision is not the end of the story. How will the Supreme Court of Pennsylvania react to the conclusion that something not containing nor derived from tobacco is a “tobacco product” simply because it resembles tobacco? Is a goose a duck because geese resemble ducks? Why isn’t the definitional problem also one for the legislature, which, I think, could impose a nicotine tax rather than, or in addition to, a tobacco tax? Candy cigarettes resemble real cigarettes and can encourage children to shift from sugar-based to tobacco-based cigarettes, so does that justify including candy cigarettes within the definition of “tobacco products”?

There are two related analyses required to deal with this situation. One is the policy analysis, namely, what should or should not the legislature encourage or discourage people from doing. The other is whether the legislature, after making that determination, has properly drafted the language of a statute to implement what it has decided to do.

Reader Morris directed my attention to a web site that contained the following statement:

Taxable income is the amount of money you owe the government in taxes, calculated on an annual basis.

Also known as gross income or adjusted gross income (minus tax deductions and exemptions) taxable income is any income, including workplace income, investment earnings and any income earned on the side (for things like part-time jobs, hobbies and gambling), and for income the IRS deems as "unearned."

Of course, anyone who understands even the most basic of federal tax principles knows that taxable income is NOT the amount of money owed in taxes. The distinction between taxable income and tax liability is one of the core principles of tax law, and I tell students that if they learn these core principles they will not fail the basic tax course even if they are unable to work their way through the taxation of social security benefits or the niceties of section 280A.

When I returned to the web site, the language in question had been removed, though it remains on other web sites that have re-published all or the first portion of the original posting. See, e.g., News Like This, Gtubo.

When I visited the web site, there still remained this language:

Taxable income is your federal tax liability. Fortunately, there are good ways to lower that number.

By the time this blog post is published, perhaps that language also will disappear or be amended.

This episode reinforces my request that basic tax principles be taught to every student at some point in the K-12 educational experience, as I discussed in posts such as Getting It Right: Questions and a Proposal, Promising Progress on the K-12 Tax Education Front , and Another Reason We Need Better Tax Education.

When the Congress, in its 2017 tax legislation, chose to limit state and local income tax deductions, states with relatively higher state and local income taxes decided to find ways to circumvent the limitation. One plan involves letting state and local taxpayers make charitable contributions to funds established by the state in exchange for state income tax credits that, in effect, offset the tax increase imposed on these taxpayers by the 2017 federal tax legislation.

After looking at the plans, I concluded, in Will My Reaction to Their Tax Plan Break Their Hearts? that these plans would not work. I explained as follows:

The plan won’t work. Here’s why.

To be deductible as a charitable contribution, a payment must satisfy several requirements. One of those requirements is that the payment be voluntary. Another is that the payment not be a quid pro quo.

If New Jersey enacts legislation that reduces some portion of state and local taxes and replaces that payment obligation with a requirement that taxpayers make payments to a charitable fund, then there is no charitable contribution deduction because the payment is not voluntary. If the payment is made voluntary, state and local revenues will decrease because surely there will be many taxpayers who choose not to make a voluntary payment.

If New Jersey enacts legislation that reduces some portion of state and local taxes and replaces that payment obligation with a requirement that taxpayers make payments to a charitable fund, then there is no charitable contribution deduction because the payment is a quid pro quo. First, the payment can be viewed as a transfer of money in exchange for lower tax bills. Second, the payment can be viewed as a transfer of money in exchange for state and local government services.

Three months later, when the IRS issued Notice 2018-54, I provided my prediction, in How Not to React to a Bad Tax Law, with these words: “Reading between the lines, I am convinced that Treasury and the IRS will characterize the payments to the state-controlled charities that are made in lieu of state or local taxes as failing to qualify for the charitable contribution deduction.” Last week, the Treasury issued proposed regulations that deny the federal charitable contribution deduction for contributions made in exchange for state tax credits. The Treasury concluded that receipt of the state tax credit or other tax benefit constitutes a quid pro quo that precludes a charitable contribution deduction. The federal charitable contribution deduction, assuming the other requirements of the deduction are satisfied, equals the amount of the contribution reduced by the value of the state tax credit or other benefit. The Treasury also proposes to permit taxpayers to ignore the subtraction of the state tax credit if the credit does not exceed 15 percent of the contribution to the charitable fund.

Officials in at least one state have promised to bring a lawsuit to challenge the proposed regulations. Technically, until the regulations are adopted, litigation is premature. But even after the regulations are adopted, it is difficult to identify any arguments that would prevail.

Surely there are people who are unhappy with these proposed regulations, and surely even more will be unhappy when they finally realize what the 2017 tax legislation has done to their finances. Unfortunately, for too many people, it won’t be until next tax filing season when they are enlightened. Tax filing season does not begin until several months after November. I repeat what I wrote in How Not t React to a Bad Tax Law:

I wonder how many taxpayers adversely affected by this “cut deductions for the middle class to finance tax cuts for corporations and the wealthy” had been supporting those who promised tax “reform” thinking that those promises would be helpful to them. Surely the wealthy don’t care, because their tax cuts more than make up for the lost deductions, but for those getting little or nothing in the way of tax cuts face tax increases. Trying to falsely claim mandatory taxes are voluntary charitable contributions isn’t an effective, or morally upstanding, way to deal with the problem. People who understand what is happening in Congress, and how income and wealth inequality are incremented by this deduction limitation, should know what needs to be done in the voting booth to fix the problem. Are there enough of those people? Will they act? Or will they throw their hands up in surrender and pave the way for even more wealth and income shifting in the wrong direction?

Those questions are still on the table.

Reader Morris directed my attention to an article describing a proposal by Hu Jiye, a finance professor at China University of Political Science and Law. Reacting to reports of falling birth rates in China, Jiye explained that the solution is a “no child tax” on two-income couples who have no children. The revenue would be placed in a “fertility fund” proposed by two other academics, which would be used to pay families with one child to have a second child. The two academics who proposed the “fertility fund” went further than did Jiye, suggesting that all citizens, not just two-income couples with no children, under the age of 40 pay a percentage of salary into the fund. Not surprisingly, the proposal has met with negative public reaction.

Jiye’s rationale is that couples with no children “have no offspring to take care of them once they grow old and therefore will consume social resources.” Does it not seem to him, as it does to me, that two-income couples with no children are in a much better position to save for retirement because they do not face the expenses of raising children. Why the assumption that they will be as needy, if not more needy, in old age than the couple who expended all their resources on raising children and did not save for retirement?

It wasn’t that long ago when China ordered families to limit their offspring to one child. Now that the practical implications of that foolish policy have become clear, China now faces what it considers to be a demographic crisis. It’s one thing for government to educate citizens with respect to the advantages and disadvantages of having families of different sizes, the wisdom or foolishness of having children when younger than 18, and the need for good family and financial planning. It’s totally another to dictate the number of children a couple has, whether directly or through taxation.

Though I have not been able to find details of the proposals in English, I wonder whether exceptions are made for couples who are physically unable to have children. I wonder if couples who have a child who dies would be required to have another child in order to avoid the proposed tax. Would a couple avoid the tax by adopting a child whose parents die? What happens if a couple has a child, divorce, and remarry to others? What happens if the divorcing couple has two children, and one of the former spouses marries someone who has no children? Must that spouse with two children have children with the new spouse in order to avoid being part of a childless couple?

Some of the public’s kinder reactions to these proposals used the words “unreasonable” and “absurd.” As one commentator declared, “Taxation is not the answer to everything.” Yet some provinces in China already have put in place policies that encourage having children, including subsidies, tax breaks, free school tuition for second children, housing benefits, and extended maternity leaves.

China’s concern is that as its population ages and dies the decline in births will translate to fewer taxpayers to support the aged, fewer workers, and a reduced pool for the military. There are other nations with the same concern. Yet at the same time there are nations with exploding populations, job shortages, and very high proportions of youngsters. Surely there is some way to remediate these global population imbalances without pushing the world’s population to even more unsustainable levels.

What makes this academic theory even more questionable in light of practical reality is its assumption that the existence of a “fertility fund” will boost births. What happens if childless couples choose to pay the tax rather than having children? Is the next theory to emerge from the academy a proposal to mandate having children? If so, will the couples ordered to have children be selected on the basis of more than simply their childlessness?

Considering that the reluctance of many Chinese couples to have children, or to have more than one child, is the high cost of raising children, and the recognition of those offering the proposals that financial challenges are a significant part of the problem, would not the solution be a realignment of the economy so that the average person is in a better financial position, one that makes it easier to have children? Could it be that income and wealth inequality – which is very severe in China -- presents even more threats to civilization than previously understood? If so, if the solution is to be found in the form of a tax, might it not be a tax on economic inequality?

Reader Morris alerted me to a story that is showing up in multiple reports, including this one from Fortune At least three large corporations, Apple, Genentech, and Walgreens, are disputing local property tax assessments. It’s not the dispute in and of itself that is alarming. After all, it’s not unusual for a tax assessor to overvalue a property. Nor is it necessarily alarming for a company as large and widespread as Apple to have appealed assessments 489 times during the past 14 years.

What is alarming is the position that Apple has taken with respect to at least two properties. In one instance, a property owned by Apple was assessed at $384 million. In another instance, a cluster of buildings around its headquarters was assessed at $1 billion. In its appeal for each of those assessments, Apple has asserted that each property is worth $200. That’s two hundred dollars, not two hundred thousand or two hundred million. Two hundred.

Why would Apple take such an extreme position? Perhaps it is playing the “meet you halfway game,” a game that many people think that courts and other decision makers play when resolving financial or other numerical disputes between parties. Yet, not surprisingly to those who understand how valuation, unreasonable compensation, and similar arbitration and judicial decisions are made, the “meet you halfway” outcome occurs fairly infrequently.

The explanation, it seems, rests on the greed underlying the drive to push shareholder returns to infinity. No matter how much of a tax cut or tax break is handed to large corporations and wealthy individuals, they come back for more. To claim that its properties are worth $200 is beyond absurd. It is a symptom of the extent to which greed has poisoned this nation, its economy, its tax policy, and its democratic principles.

It’s no secret that the tax legislation rushed through the Congress late last year is infected with errors. These are not simple mistakes that can be easily resolved. For example, if the word taxpayer appears as txpaer, almost everyone can figure out what is intended, and it’s not a big deal. But the mistakes in question are far more serious. They are so serious that the Republican members of the Senate Finance Committee have written a letter to the Secretary of the Treasury, and to the Assistant Secretary of the Treasury for Tax Policy who is also Acting Commissioner of the IRS, describing three of the errors and asking for help. Errors include failure to include items within definitions, cross-reference errors, the use of the word “ending” when the word “beginning” was intended, and badly drafted deduction limitations. These are but a few of the mistakes.

These Senators present their plea as an attempt to “clarify the congressional intent,” which they point out is “reflected in the conference report, revenue estimates, and other legislative history.” They admit that they are continuing to examine the legislation to “identify other instances in which the language as enacted may require regulatory guidance or technical corrections to reflect the intent of the Congress.” They explain that they intend to introduce technical corrections legislation.

If the Senators intend to fix these mistakes through legislation, why did they write to the Treasury and the IRS? Their letter provides the answer. “We send this letter to provide sufficient clarification so that any guidance that is issued related to [the described errors] and the Internal Revenue Service’s enforcement of them reflects the Congress’ intent.” In other words, these Senators want the IRS to ignore certain language in the statute and to act as though the language in the statute is the language that the Congress intended to, but failed to, insert. In recent years, the Treasury and the IRS have come under increasing criticism and attack for “legislating” beyond the scope of the statute, a charge also brought against other federal agencies. Suddenly Senators who subscribe to the “textualism” approach to statutory interpretation are trying to bring about legislative change by influencing an executive branch administrative agency. All of this could be avoided if the Congress had acted carefully last year, or if it enacted technical corrections legislation quickly. It has been, unfortunately, unable to do either. It rushed through the legislative process last fall, cobbling together bits of language that had been sitting on the shelf, waiting for a change in Administration, mixing in text drafted by lobbyists who have a narrow perspective of just those Code sections in which they are interested and lack an overall view of the Code, and making last-minute changes to satisfy one or another of their handlers. The result is a mess, even aside from the policy disasters reflected in the legislation. And because they are caught up in their own troubles, despite controlling both houses of the Congress, they are unable to get a technical corrections bill enacted with any degree of alacrity.

It is not the job of the executive branch to fix the errors of the Congress. The claim that “laws should be enforced as written,” so often hailed by adherents to the philosophy that has conquered the political party to which these Senators subscribe, should be followed in this instance. Of course that will hurt some taxpayers. Perhaps that hurt, like the hurt suffered by so many others who are getting the opposite of what they voted to receive, will inspire people to sit back, think about the dysfunction, and move forward in a way that cleans up the mess that has made the tax law, and other laws, such morass of absurdity during the past several decades.

The bottom line is simple. Caught up in partisanship, putting party and donors over country, putting spite ahead of graciousness, and handing too much of the job to the lobbyists, the Congress has failed. It has failed in its duties, it has failed the voters, and it has failed the nation. Though technical corrections legislation has been with us for a long time, the need for fixes has continued to increase, and now has reached the point where the original legislation is such a mess that it ought to be recalled. If they can’t get it right, they ought to step aside and make room for those who can. And that’s not an invitation for the legislative branch to defer to the executive branch. It’s an invitation to repopulate the Congress, on both sides of the aisle.

It amuses me when someone who disagrees with a point that I make tries to classify me as an adherent of one or the other of the two competing ideologies that dominate American politics. Yet, as I pointed out in Tax Code Overuse, “When it comes to politics, I dine at the buffet. My focus is on the nation, principles, and policies, rather than on policies, caucuses, or individuals. It is not unusual for me both to praise and criticize the same organization or person.” I then provided an example, and today I provide another example of how I adhere to the principle that conclusions should be reached based on analysis and not on adherence to a particular person, party, or organization. On more than a dozen occasions I have shared a reaction to commentaries published by The Institute for Policy Innovation, and today I offer another. How will I react? The futility of trying to classify me is demonstrated by how I have reacted in the past. On three occasions (Let’s Not Extend The Practice of Tax Extenders, Yes, Tax Uncertainty Hurts, When Congress Dilly-Dallies on Tax Issues) I have agreed, on six occasions I have disagreed (When Double Taxation Doesn’t Exist, How Best to Describe the Use Tax Collection Issue? , The New Five-Year Plan? , So Why Are Workers Struggling? , Does Repealing the Corporate Income Tax Equal More Jobs? , Arguing About Tax Crumbs), and on six occasions I agreed in part and disagreed in part (Tax Code Overuse, Tax Collection Obligation is Not a Taxing Power Issue, It’s Not Just Taxes, Collecting An Existing Tax is Not a Tax Increase, Who’s to Blame for Tax Fraud? , Deducting Taxes: It’s Not the Subsidy). In some instances the disagreement was more a matter of articulation or finding the appropriate remedy to an agreed-upon problem than a rejection of the underlying concern.

A few days ago, in Who Pays Tariffs?, Tom Giovanetti offers an important analysis of how tariffs work and what the recently imposed tariffs will do to Americans and the American economy. Giovanetti points out that in the past, tariffs were a major source of federal tax revenue, that tariffs have been in place for decades, and that until recently, U.S. tariffs were significantly lower than those of the nations with which the U.S. trades. He points out that tariffs on goods imported from a particular country are not paid by citizens or residents of that country but by the Americans who purchase those goods, because the importer passes the tariff along as part of the price charged to consumers. On all of these points, he is correct.

Giovanetti argues that the tariffs imposed by the current Administration aren’t designed to raise revenue, but to increase the cost of imported products so that American consumers will shift their purchasing decisions from those items to their equivalents manufactured in the United States. He notes that this shift also has the effect of raising the prices charged by domestic manufacturers. Tariffs, he concludes, hurt American businesses and American consumers. On all of these points, he is correct. He doesn’t mention that in some limited instances the tariffs might be helpful to a particular American company or its workers to the extent the shift in purchasing decisions increases that company’s sales and profits, though those increases might be offset by the increased costs the company faces when it purchases components and supplies and that its workers face when making their consumer purchases. In sum, this omission isn’t a flaw in his explanation, but a detail that probably has no meaningful impact on the analysis.

Giovanetti describes the “national security” justification presented by the current Administration for its tariff decisions as “an embarrassing fiction.” Of course it is. And when he argues that “any discussion about tariffs should at least be informed by an accurate understanding of who actually pays,” he is spot on.

Giovanetti characterizes the tariff as a tax, specifically, a border tax. It is. In some ways, the word “tariff” is less offensive to some than the word “tax.” It is not unlike a sales tax or a value added tax. And it falls on the person purchasing the item subject to the tariff, just as a sales tax or value added tax falls on the consumer.

Tariffs are not the path to improving the American economy. There is a place for tariffs, but those instances are limited and often should be of short duration. Giovanetti is correct. The current flood of new and increased tariffs is helping no one who needs help.

Almost two weeks ago, in The Realities of Income Tax Withholding, I discussed the extent to which the revised withholding tables will cause taxpayers to owe tax, or receive smaller refunds, in early 2019. I explained:

My guess is that the number of taxpayers who need to pay more in April will be more than 21 percent. There have been claims that the Administration and certain members of Congress want ordinary taxpayers to think that the 2017 tax legislation significantly benefits them, even though more than 80 percent of the tax breaks in the legislation accrue to large corporations and wealthy individuals. What better way to do this than to increase take-home pay through reductions in tax withholding? Happy wage earners will react in November, and then, in March and April, discover that some, perhaps all, of that extra take-home pay was nothing but a temporary boost in cash while they scramble to come up with money to pay the tax due on their returns. When this claim was raised in December, the Secretary of the Treasury called it ”another ridiculous charge." Tell that to the people who will be writing checks in March and April. But tell them now, or in September, or in October, when this information will be more valuable to them. Learning this in early 2019 will be too late.

I suggested. “Check your withholding and your estimated tax payments. Or have a tax professional do that for you. Figure out what will happen next March and April if you do nothing. Then make adjustments to minimize the pain of early 2019.”

A week after my commentary and suggestion appeared, the IRS offered its opinion. In a news release issued on August 13, the IRS offered this advice:

The IRS urges taxpayers to complete their “paycheck checkup” now so that if a withholding amount adjustment is necessary, there’s more time for withholding to take place evenly throughout the year. Waiting means there are fewer pay periods to withhold the necessary federal tax – so more tax will have to be withheld from each remaining paycheck.

Adjusting withholding can prevent taxpayers from having too little tax or too much withheld. Too little withheld could result in an unexpected tax bill or penalty at tax time in 2019.

In another news release, issued the next day, the IRS elaborated, pointing out that taxpayers with income primarily from sources other than wages, taxpayers with complex returns, and taxpayers with higher incomes also should check their withholding.

The IRS urged taxpayers to run the computations “soon,” advice which makes good sense. The longer taxpayers wait to adjust withholding, the fewer paychecks remain to absorb the changes. To this I will repeat my recommendation that the computation be done before November so that taxpayers can get a much better understanding of what tax “reform” and tax “reduction” is doing for them. In too many instances, it will be much less than expected. In some instances it won't even be a reduction, but an increase.

It’s no secret that I support education. Education is the antidote to ignorance, and ignorance is the fertilizer of undesired and unpleasant consequences. Education comes in many forms, ranging from the informal activity of watching and learning as someone works on a project to attendance at lectures in large auditoriums. If a person studiously focuses on the educational process, the person learns at least something and often learns quite a lot.

There is a risk, of course, in supporting education. Without a qualifier, the word education also includes learning how to do things that ought not be done. It’s no secret that one of the flaws of the prison system is that first-time offenders learn from experienced criminals how to polish and perfect their lawbreaking skills. The internet abounds with instructions for creating evil devices and pursuing wicked activities.

So even though it ought not have come as a surprise to me when I read what was revealed in this news story, I indeed did stop and shake my head when I came to one particular aspect of the report.

Put briefly, a woman in North Carolina entered a guilty plea to a charge that, along with others, she prepared 519 false tax returns, generating $1.3 million in unjustified tax refunds. The woman was a co-owner of a tax return preparation business. She also was affiliated with another tax return preparation business. She and the other individuals created false information for their clients about a variety of items affecting tax liability computation, running the gamut from income and deductions to credits. They told their clients to write false information on tax forms and other documents to generate fake records that were used in preparing the returns.

Now comes the kicker. The woman held training sessions for employees of the tax return preparation businesses to teach them how to, according to court documents, “manipulate the information on clients’ tax returns to maximize the clients’ tax returns.” It’s one thing for education to be flawed because the instructor is inadequately trained, or doesn’t understand the material sufficiently, or lacks communication skills, or demonstrates a lack of interest in one or more of the topics. That’s lamentable, but it’s not intentionally evil. The only good news is that she was caught, and will go to jail. The bad news is that she may end up teaching the other inmates how to file false tax returns. That is why it is so important to maximize the number of Americans provided with quality tax education.

A week and a half ago, in Tax Hogs at The Tax Trough, I criticized the proposal that Treasury, independent of Congressional action, index adjusted basis for purposes of computing taxable gains. Of course, I was not alone in lambasting the proposal. Similar, and additional, reasons to reject the proposal were raised by the Tax Policy Center, other law professors, the New York Times, New York Magazine, and numerous other commentators who understand the realities of tax policy.

Of course, it wasn’t long before the defenders of increased wealth and income inequality stepped up to defend the indefensible. Consider the arguments made by Ryan Ellis of the Center for a Free Economy. He argues that because one-fourth of capital gains reflects inflation, that increasing adjusted basis to reflect inflation is justified. Of course it would be, but for the fact that special low tax rates on capital gains reflect intent to offset the inflation element of the gains. When income, in the form of capital gains, is taxed at zero, 15, or 20 percent, and ordinary income is taxed at rates as high as 37 percent, it is obvious that those special low capital gains tax rates offset inflation by much more than inflation. Ellis, unhappy with the portrayal of this proposal as a handout to the wealthy, which, of course, it is, tries to demonstrate that the proposal would assist “normal, middle-class Americans.” His examples include sales of long-held residences by married couples that generate more than half a million dollars in gains, farmers who sell land held for decades, retired individuals selling stocks, and collectors of various memorabilia. As I pointed out in my earlier commentator, I’m all for indexing adjusted basis, provided that, in turn, the special low capital gains tax rates are abolished. When someone argues that because inflation exists they ought to get both special low rates and basis indexation, I return to the vision of tax hogs at the tax trough. And, of course, for every dollar of capital gains that a middle-class taxpayer would escape with indexation of basis, the wealthy escape hundreds, if not thousands, of dollars of gains. Once again, advocates of making the wealthy wealthier think that throwing crumbs to the peasants justifies serving rich pastries to the engorged.

Ellis asks, “If a child buys a toy in 1980 for $5 and can sell it today for $100, why can’t they use the $5 number in today’s inflation-adjusted terms ($16) instead when figuring gain on the sale?” The answer is simple. The $95 of gain is taxed, if at all, at no more than 20 percent, rather than at 37 percent. A fair tax system would required the toy seller to compute gain of $84, using indexed basis, and then pay tax at regular rates on the $84. It’s obvious why the special low capital gains rate structure, rather than basis indexation, was selected by investors when the tax policy debate was framed decades ago. But now, having made their choice, they’re back to grab both. Oink, oink.

And consider the thoughts expressed in the anonymous Washington Examiner editorial. The writer argues, “It’s a bit of a stretch to describe indexing of capital gains to inflation as a tax cut.” There is no question, at least among those who understand taxation, that indexing basis will reduce the tax liabilities of those who sell assets with indexed adjusted basis. A reduction in tax liabilities is a tax cut. Tax cuts exist not only when tax rates are reduced, but when exclusions, deductions, or credits are increased, and when gains, or other inclusions, are reduced. The anonymous writer tries to defend the absurd claim that a tax reduction is not a tax cut with this gem: “True, people will owe less in capital gains taxes as a result, but that's because the federal government will no longer use fake gains to take real money away from them.” I’m all for removing fake gain from the tax base provided the advocates of inflation-indexed basis agree to remove fake tax rates from the Code. Why do I call those special low capital gains rates fake? Because once fake gains are removed from the definition of income, then income is income from whatever source derived, and ought to be taxed at the same rate whether it arises from the sweat of labor or the winnings from playing the lottery or the stock market. The anonymous writer gives a silly example, writing, “ If you buy a stock at $20 and it grows to $30, but $8 of that gain is because of inflation, 80 percent of your gain is notional, not real. Why should you be taxed on $10 when you only made $2?” The answer is simple. First, rarely, if ever, would 80 percent of the increase in stock growing by 50 percent be on account of inflation. Second, under present law, the practical effect of the special low capital gains rate is to tax only a small portion of the $10 overall gain. Of course, using realistic numbers would demonstrate that special low capital gains rates removes the inflation portion of gain from taxation. The anonymous writer claims that “Envy never looks good once it's stripped of its camouflage of concern for fairness.” Somehow this writer wants people to think that grabbing both special low rates and indexed basis is fair. I wonder if this writer thinks it is fair when someone takes a second helping from the buffet table before others even get their first go at the buffet.

These supporters of double dipping by the wealthy are either ignorant of the history of how gains are taxed or are deliberately failing to provide a complete explanation in the hope that keeping people ignorant of reality will increase support for a foolish, dangerous, and unjustifiable idea. The fact that this idea is getting traction among the acolytes of the wealthy proves, once again, that education is valuable because education dispels ignorance. Too few people have been educated with respect to tax policy. It’s time for that to change.

My criticism of the 2017 tax legislation as a sloppily-drafted, terrible-for-most-Americans giveaway to the oligarchs is no secret. I have written about the flaws of that legislation in posts such as Taxmas?, Those Tax-Cut Inspired Bonus Payments? Just Another Ruse, Getting Tax Cut Benefits to Those Who Need Economic Relief: A Drop in the Bucket But Never a Flood, Oh, Those Bonus Payments! Much Ado About Almost Nothing, More Proof Supply-Side Economic Theory is Bad Tax Policy, Arguing About Tax Crumbs, Another Reason the 2017 Tax Cut Legislation Isn’t Good for Most Americans, Yet Another Reason the 2017 Tax Cut Legislation Isn’t Good for Most Americans , Is Holding On To Tax Cut Failures Admirable Perseverance or Foolish Stubbornness?, and What’s Not Good Tax-Wise for Most Americans Is Just as Not Good for Small Businesses.

Now there is more evidence that the tax breaks created by the 2017 tax legislation are doing much more for the oligarchy than they do for the vast majority of Americans. According to this newly released Bloomberg report, banks which received an average of almost $400 million in tax cuts for the first half of 2018 eliminated 3,200 jobs. The tax legislation was sold on the promise that tax cuts for big corporations would create jobs, and presumably good jobs. So what was done by the 23 banks classified by the Federal Reserve as “most important” do? They didn’t create jobs. They didn’t leave their workforces intact. They eliminated 3,200 jobs. Several of the banks defend their actions by pointing out that employees fortunate enough to retain their jobs received pay increases, though for most of the banks the portion of revenue going to employee compensation declined from the previous year.

Perhaps these banks increased the loans they make to individuals and small businesses so that consumer demand would increase and small business hiring would increase. Both of those things would stimulate the economy and contribute to genuine job growth. Though they increased loans, by 0.9 percent, they did so at one-half the rate of lending growth a year earlier, before the 2017 tax legislation was enacted. Put another way, those tax breaks handed out by the 2017 tax legislation to these banks caused lending growth to decline. Banks are offering the excuse that their customers don’t need to borrow because they have received their own tax cuts. Tell that to the people who continue to struggle with debt, who continue to delay home purchasing, or who cannot afford the basic necessities of life, but who are either turned down when they apply for a loan from these banks.

What did these banks do with their tax breaks? They have indicated they will increase dividends and payouts by more than $28 billion between now and the middle of next year. I wonder how many of those 3,200 individuals who lost their jobs are looking forward to getting some part of those dividend payout increases.

Oddly, a significant minority of Americans continue to praise the 2017 tax legislation. Though a tiny percent are happy because the are reaping most of the benefits, the vast majority of those worshipping the 2017 tax legislation are unaware of what looms ahead for them when the bubble breaks. By the time they realize they’ve been conned, by the time they realize even more wealth and income has shifted away from them, by the time they realize that blame for their economic and other woes has been misdirected, it will be too late. Even if, by then, their eyes are opened and their minds change, it will be too late.

I have been writing about the collection of use taxes on internet transactions for more than fourteen years. I started with Taxing the Internet, and continued with 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, Using the Free Market to Collect The Use Tax, and A Better Understanding of Sales and Use Taxes Can Enrich the Discussion.

My last post on the topic brought a response from a reader who shared his experience

:The small companies I have audited would prefer if the sales taxes were charged on the items they get from out of state. It would save them time and wages, from not having to go through the invoices to pay the use tax owed.

After considering this observation, two thoughts found space in my brain. The first made me wonder whether two different sales/use tax systems would be better, one for small companies that make online purchases and one for individuals. It is much more difficult for small companies to avoid use taxes than it is for individuals. So, yes, in terms of having the vendor figure out the use tax liability and collect it does spare the small company the cost of compliance. On the other hand, most individuals find it easier to escape paying their use tax obligations, because states lack the resources to go after individuals other than those making out-of-state purchases of registered items such as vehicles and boats and because putting a use tax line on state income tax returns isn’t very effective. Given the choice, most individuals would prefer that the vendors not collect the use tax, because that translates into escaping the use tax. The second thought made me think that support by small companies for having out of state vendors do the computation, collection, and payment work that spares the small companies from the effort and resources they would need to expend in order to file use tax returns strengthens the argument I continue to make that states ought to be compensating out of state vendors for doing that work. Some states do compensate in-state vendors for collecting sales taxes, though I doubt that the amount of compensation covers the cost of computing, collecting, and remitting the sales tax.

It’s unfortunate that states and non-resident vendors did not deal with this issue through negotiations as I have suggested but let the issue end up in the Supreme Court. Vendors have lost much of the position of strength that they would have had in negotiating the issue. All is not lost, however. Considering how desperate some states have been to bring business into their domain through tax breaks and other incentives, might it not make sense for some vendors to write off low population states, or states where their products and services are in low demand, by refusing to sell to consumers whose zip codes are within those boundaries? Put another way, should vendors tell states, “If you want your residents to have the opportunity to purchase what we sell, pay us to do your use tax collection work.” Those who disagree might theorize that competitors would jump in to fill the void, but the overhead of installing use tax collection processes which deters the existing vendor is an even steeper obstacle for the newcomer. As much as small companies making purchases from out-of-state vendors might be happy paying the use tax to the vendors, those vendors might not be very happy, and individuals with neglected use tax obligations will continue to ignore use tax filing unless and until the vendors from whom they purchase collect the use tax. Smart governors and state legislators know that it makes more sense to work out deals with out-of-state vendors than to try to club them over the head with a Wayfair hammer. What better way to induce out-of-state vendors to do the state’s use tax collection work rather than refraining from selling to residents of that state than to pay the vendors for doing the work?

For decades, taxpayers whose income comes from wages have paid their income taxes not by waiting until filing their returns but through withholding by their employers. How does an employer know how much to withhold? The employee tells the employer his or her expected filing status and how many withholding allowances the employee is claiming. Those allowances were based on the number of personal and dependency exemptions the employee expected to claim and the amount of itemized deductions the employee expected to claim. The employer then used tables, more recently incorporated into software, provided by the Department of the Treasury.

That changed in December when the 2017 Tax Cuts and Jobs Act was enacted. One of its changes was to set the personal and dependency deduction amount to zero. Because the withholding tables provided by Treasury used the personal and dependency deduction amount, which was adjusted each year for inflation, the existing withholding tables would not work for 2018 withholding. So the legislation gave the Treasury discretion to compute a withholding allowance based on other factors. There was concern that changes in withholding based on new allowance amounts would not generate the proper amount of withholding. Several members of Congress requested the Government Accountability Office to examine what Treasury did with respect to withholding. The GAO did so and issued a report.

In its report, the GAO explained that Treasury officials described Treasury’s goal in adjusting the withholding allowance amount as increasing the accuracy of withholding. Treasury set the withholding allowance at $4,150, which is what it would have been had the 2017 legislation not been enacted. Treasury claimed that no other amount that it tested was better at reaching Treasury’s goal of increasing the accuracy of withholding. Though Treasury officials described the process of determining the amount, they did not provide to the GAO any documentation of the process, claiming that it was “routine and straightforward,” even though federal internal control standards require agencies to document their processes. The GAO reported that the Treasury’s description of simulations that it performed included a conclusion that the new withholding tables would increase to 21 percent the percentage of taxpayers with insufficient withholding. In other words, taxpayers who will discover, during the 2019 tax filing season, that they owe more taxes. How many taxpayers are included in the 21 percent? Thirty million.

My guess is that the number of taxpayers who need to pay more in April will be more than 21 percent. There have been claims that the Administration and certain members of Congress want ordinary taxpayers to think that the 2017 tax legislation significantly benefits them, even though more than 80 percent of the tax breaks in the legislation accrue to large corporations and wealthy individuals. What better way to do this than to increase take-home pay through reductions in tax withholding? Happy wage earners will react in November, and then, in March and April, discover that some, perhaps all, of that extra take-home pay was nothing but a temporary boost in cash while they scramble to come up with money to pay the tax due on their returns. When this claim was raised in December, the Secretary of the Treasury called it ”another ridiculous charge." Tell that to the people who will be writing checks in March and April. But tell them now, or in September, or in October, when this information will be more valuable to them. Learning this in early 2019 will be too late.

Yes, there always have been taxpayers whose withholding is insufficient. The point is, there now will be more. There also are taxpayers who will discover that although they do not owe more taxes, their expected refunds will be less than what they were hoping or planning to receive. Of course, taxpayers can do pro forma 2018 tax returns now, figure out their tax liability, divide it by the number of pay periods, and then reverse engineer the withholding tables to figure out how many withholding allowances to claim, as I described ten years ago in It’s Time to Adjust Withholding, But Can You Do the Calculations?, and Getting More Specific with That Withholding Question. Most people are unwilling or unable to do that. Nor should people be required or expected to put themselves through that laborious process. Of course, I have, year after year. But I’m not most people.

But, people, be forewarned. Check your withholding and your estimated tax payments. Or have a tax professional do that for you. Figure out what will happen next March and April if you do nothing. Then make adjustments to minimize the pain of early 2019. But remember, in November, where you would have been and who put you there.

Americans have been warned. Are they listening? Will they pay the price?

When people try to avoid or evade taxes, they often become creative. Tax creativity is good if it works, and is a nightmare when it fails. A recent case, Grainger v. Comr., T.C. Memo 2018-117, demonstrates how not to design a tax shelter. The taxpayer, a retired grandmother fond of shopping, developed what she called her “personal tax shelter.” When she learned that taxpayers generally may claim a charitable contribution deduction equal to the fair market value of donated property, she concluded that the fair market value of a retail item is the price at which the retailer first offers it for sale. So the taxpayer decided to purchase items that were “heavily discounted” from the original price on the sales tag and to donate those items. Her reasoning caused her to conclude that if a $100 item went on sale for $10, she could pay $10, donate the item, claim a $100 deduction, and save more than $10 in taxes.

The taxpayer started using her self-designed tax shelter in 2010. She reported non-cash charitable contributions of $18,288. In 2011, she claimed $32,672, and in 2012, the year in issue, she claimed $34,401. In the two following years, which were not in issue, her claimed deductions rose to $40,351 and $46,978. That’s a lot of shopping.

The items that she donated in 2012, for which she claimed a non-cash charitable contribution deduction of $34,401, cost her $6,047, consisting of $2,520 in cash, and $3,527 in store “loyalty points.” The items were described by her on Forms 8283 as dresses, jackets, and other clothing.

The IRS denied all but $2,520 of the claimed deduction, concluding that the taxpayer’s method of determining fair market value was not a qualified method. On appeal, the IRS increased the deduction to $6,117, mostly by including the loyalty points. It’s unclear why the $6,117 exceeded the $6,047 outlay. Thereafter, the IRS issued a notice of deficiency and the taxpayer filed a petition with the Tax Court. The IRS moved to reduce the allowed deduction by $3,527, arguing that it had erred when it included the loyalty points in the allowed deduction, but the court denied the motion because it was untimely and would prejudice the taxpayer.

The Tax Court denied the taxpayer’s claimed deductions in excess of what the IRS had allowed. It did so because the taxpayer had failed to obtain a qualified appraisal, required because the clothing items, when grouped together as required, exceeded $5,000 in claimed value. The Forms 8283 that the taxpayer had attached to her return were not executed by an official of the donee organizations. In addition, the court held that the taxpayer had not obtained the contemporaneous written acknowledgments. The court then explained that even if the taxpayer had provided the required substantiation, her claimed deduction would be disallowed because she did not use a qualified method for determining fair market value. The court pointed out that fair market value of an item is not the price at which a retailer initially offers the item for sale. The fair market value is the price for which the item was transferred from the retailer to the purchaser, which was the amount the taxpayer had paid. And, the court added, even if the taxpayer could establish that the fair market value of the items exceeded what she paid for them, because she donated them shortly after purchasing them, she would be required to reduce the deduction by the amount of gain that would not be long-term capital gain had the taxpayer sold the items for the claimed fair market value.

One of the many symptoms of the current tax law’s sickness is the ease with which the wealthy can enter into tax shelter arrangements that are unavailable to taxpayers of much lesser means. Tax shelter promoters, whether hawking legitimate or not-so-legitimate deals, turn their attention to the wealthy, in part because it doesn’t pay to offer $10 tax shelters, in part because investment regulations block people of modest means from most private offerings, and in part because the wealthy are in a better position to cause the enactment of legitimate tax shelters in the tax law that are feasible only for those with sufficient funds. It is not surprising that a retired grandmother, whose income from the facts appears to have been quite modest, would engage in a creative but misguided scheme to reduce her tax liability.