MauledAgain

Readers of this blog know that I am not a fan of supply-side trickle-down economic theory and the tax policy based on it. One of my many commentaries on the topic closely analyzed the failure of the theory in Kansas, as described in Kansas Demonstrates Again Why Supply-Side Economics Fails. As I had written in an earlier post, The Tax Fake That Will Not Die, “Supply-side economics is a fake.”

Several days ago, Noah Smith looked at the results of the latest federal supply-side trickle-down exercise. In his Philadelphia Inquirer article, Smith examined the impact of the 2017 tax cuts. He explains that those cuts, particularly the corporate tax cuts, were supposed to generate wage increases. Like its predecessor supply-side tax cuts, this tax cut also failed to do what tax cut advocates expected and advertised. Despite those previous failures, the supply-side acolytes claimed that corporate tax cuts would be more effective because corporate tax rates were relative higher, corporate taxes affect not only the wealthy but also employees and customers, and corporate taxes are more harmful to investment than individual taxes. How did that work out?

At first glance, tax cut proponents shine the spotlight on an apparently booming economy, a small uptick in corporate investment, and unemployment is low. Smith points out that perhaps some, or even much, of the economic growth is doe to “demand-side fiscal stimulus effects.” Yet wages remain stagnant. Higher employment among low-wage job holders doesn’t do much for those who are trying to make ends meet. Smith describes studies showing that “Two common measures of real wages are still below the peaks they hit in the third quarter of 2017.” Another study concluded that a comparison of “the size of the effective tax cuts received by various industries with the change in their wages between the first half of 2017 and the first half of 2018” did not reveal any correlation between the two. The same study concluded that there was “no correlation between tax cuts and employment changes at the industry level.” According to Smith, “That's bad news, since more hiring and tighter labor markets should be the mechanism by which corporate tax cuts raise wages.” Yes, it’s bad news for wage earners, and it ought to be bad news for supply-side theory devotees.

Smith then dismisses those bonus payments praised by the tax-cut folks. Smith concludes that the bonus trend was “exaggerated,” and that an economic study demonstrated that the bonuses did not generate a significant increase in 2018 compensation. Smith notes that the study implies that the bonus claims “were mostly a publicity move.” No kidding. Again, readers of MauledAgain know that I have consistently characterized the bonus payments as what they really are, namely, crumbs, as explained in posts such as Those Tax-Cut Inspired Bonus Payments? Just Another Ruse, That Bonus Payment Ruse Gets Bigger, Oh, Those Bonus Payments! Much Ado About Almost Nothing, Much More Ado About Almost Nothing, You’re Doing What With Those Tax Cuts?, Arguing About Tax Crumbs, and Don’t Want a Crumb? Here’s Dessert But Give Back Your Appetizer and Beverage.
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Smith asks, “So, what's going on? Why isn't the tax cut raising wages?” He gives two answers. First, he suggests, “Perhaps the impact of tax cuts will be felt only over a period of years rather than months. After all, it's important not to read too much into short-term economic data.” Second, he explains, “ But, it also might be the case that the supply-siders are simply wrong. Perhaps those who believed that a substantial amount of the corporate tax cut would go to workers were doing their empirical studies incorrectly, or plugging the wrong numbers into their models. Or maybe U.S. corporations were simply so successful at avoiding taxes before the tax cut that the new lower rate hasn't really done anything other than to allow them to save money on accountants and lawyers.” Or perhaps the belief that people grabbing tax cuts will share what they took from the buffet with the people at the back of the line ignores the practical reality of greed and money addiction among the oligarchs.

Smith closes with a prediction. He writes, “ Either way, if Trump's corporate tax cuts end up having no observable effect on workers' pay, it will be the final blow to the supply-side worldview.” Putting aside the fact that these aren’t Trump’s corporate tax cuts but a tax giveaway to corporations advocated by many Republicans long before Trump arrived on the political scene, the question is, will the next inevitable economic and financial crash dissuade the supply-siders and convert them to the realistic demand-side approach? Two years ago, in Tax Perspectives of the Wealthy: Observing the Writing on the Wall, I wrote, “The death of supply-side, trickle-down economic theory is a slow one, but its final breath draws nearer.” Yet a year later, the title of one of my posts revealed my dismay at the inability of supply-siders to recognize the failure of their dream: The Tax Fake That Will Not Die. I now worry which dies first, stubborn supply-side ignorance or the American economy and the nation and dreams that depend on it.

A few days ago, the Philadelphia Inquirer ran an article that discussed how the two candidates for the state’s governorship were dealing with tax issues. The article began by noting that in response to a recent poll asking voters to identify the most important issue in the race, the most popular answer was “taxes.” I expected to learn that 30, 40, 60 percent of voters considered tax issues to be the most important. I was surprised. Only 12 percent identified taxes as the most important issue. Next on the list, at 10 percent, was education.

The most disliked tax in Pennsylvania is the real property tax. I’ve written about this antipathy toward real property taxes in several posts, including Killing the Geese, Taxes and School Funding, A Perplexing Tax Vote Decision, Which Do You Prefer: Income Tax, Earned Income Tax, Sales Tax, Property Tax?, and Pennsylvania’s “Eliminate the Property Tax” Effort Surfaces Again. The underlying theme is the series of proposals to eliminate that tax, and as I have pointed out repeatedly, the challenge is finding replacement revenue.

According to the Philadelphia Inquirer article, the two candidates, who have slightly different approaches to the issue, apparently have not put the question in the spotlight. The Republican candidate supports eliminating the real property tax to the extent imposed by school districts, but not those imposed by municipalities and counties, but does not reveal the extent to which he would raise other taxes to make up the lost revenue. Four years ago, the incumbent Democratic candidate, while campaigning, advocated reform or repeal of the real property tax, but since his proposal in his first budget to replace the tax with an increase in sales and income taxes was rejected by the legislature, he has been silent.

Commentators explain that solving the real property tax problem is difficult. One problem is that the governor cannot dictate what local governments and school districts do with the tax, in terms of rates. State funding for education can affect what school districts do, but those spending decisions are primarily the bailiwick of the legislature. Even though Pennsylvania voters approved an amendment to the state constitution permitting the legislature to exempt primary residences from the real property tax, the legislature has done nothing in response.

Not surprisingly, though the Democratic incumbent’s budget proposal four years ago, the one that was rejected, increased sales and income taxes, the Republican challenger co-sponsored legislation along the same lines, though he also has claimed that he would reduce government spending to reduce the need to increase other taxes. Oddly, the incumbent governor does not support the legislation co-sponsored by his opponent because he does not want to raise the sales tax rate on certain items nor subject certain tax-exempt items to the sales tax.

What the state needs is a serious conversation about how its citizens want to pay for the services that they demand. The discussion requires evaluating the impact of different types of taxes, identifying which segments of the citizenry are most affected by different permutations of the various taxes, considering the fairness of how tax burdens are distributed, and estimating the revenues generated by different taxes. It is a complex topic, it does not lend itself to sound bites and tweets, and needs to be free of hyperbole, misstatements, propaganda, and the influence of special interest groups and lobbyist money.

In my criticism of the 2017 tax legislation that handed large tax breaks to big corporations and the wealthy at the cost of exploding federal budget deficits and unsustainable increases in public debt, I used the word “crumbs” to describe the tiny net tax breaks handed to the typical taxpayer. I also used the word “crumbs” to describe the puny bonus payments and alleged pay increases that were held up by the tax cut acolytes as “proof” that their failed supply-side trickle-down economic policy works. Some of the commentaries in which I explained the difference between feasting at the table and being a dog to whom crumbs are tossed include Those Tax-Cut Inspired Bonus Payments? Just Another Ruse, That Bonus Payment Ruse Gets Bigger, Oh, Those Bonus Payments! Much Ado About Almost Nothing, Much More Ado About Almost Nothing, You’re Doing What With Those Tax Cuts?, and Arguing About Tax Crumbs. In Arguing About Tax Crumbs. I defended the use of the term, by myself and others, against outcries from those who disliked the characterization even though the relationship between the size of a crumb or two to a full loaf is pretty much in line with the relationship between the size of tax cuts provided to the wealthy and the size of tax cuts and bonus payments available to typical Americans.

Recent news about Amazon’s pay hikes for its workers sheds even more light on the smoke-and-mirrors aspect of the buffet table greed of the oligarchy. As reported in this story, many Amazon workers, overjoyed at the initial disclosure of a new $15 per hour Amazon minimum wage, discovered that Amazon will stop giving its workers stock options and has terminated its monthly bonus payments. Workers who did what I suggest everyone do when dealing with financial decision, that is, “run the numbers,” discovered that after getting a wage increase but losing stock options and bonus payments, their total compensation will go DOWN, not up. I wonder which Amazon employee figured out the public relations stunt that essentially permits the company to cut pay for some employees, leave pay the same for others, but yet proclaim it is raising worker pay. Some workers are not getting raises because their pay already exceeds $15 per hour but they will be losing their bonuses and stock options. Others are getting increases of $1 or $2 per hour, which is insufficient to offset the loss of bonuses and stock options. The pay raises will consume less than one percent of Amazon’s revenue, and will be more than offset by the curtailment of bonus payments and stock options. Some part-time workers will benefit from the changes.

It appears from the reactions of Amazon employees that increasing numbers of people are finding a way to look past the smoke and mirrors and to see the reality hidden by the tweets and sound bites, to discern the truth from inside the maze of misrepresentations, exaggerations, and out-of-context claims. The worship of the bottom line, considered almost divine the closer it gets to infinity, is a manifestation of the calamitous consequences of money addiction. Something is very wrong and hopefully not only is here a quick diagnosis of the disease by enough people but also a fast discovery of a cure.

So now comes the latest report on consumer spending, as discussed in this article. The increase in consumer borrowing in August was much more than predicted, and much more than the July increase. Increases occurred in auto loans, student loans, and credit card balances. Why? If those December 2017 tax cuts, touted as benefitting all Americans, worked as their advocates claim, cash would be trickling down, and the need to borrow would decrease, and surely not increase. What about those bonus payments that the tax cut advocates held up as proof that trickle-down economic theory works? When I and others described them as crumbs, as discussed in Arguing About Tax Crumbs, we were criticized, yet it seems that in order to buy cars, get an education, or purchase anything else, Americans who are not members of the economic elite must resort to ever-increasing amounts of debt. So it turns out that one of the biggest assets in the portfolios of the oligarchy is the debt owed by everyone else (too many of whom continue to adore, support, vote for, and defend the very folks to whom they are indebted).

Almost three-quarters of economic activity is fueled by household spending. Household spending has increased because consumer borrowing is increasing at a rapid rate. In other words, when people rejoice at economic growth reports, they are rejoicing at increases in the amount that poor and middle-class Americans owe to the billionaires. Anyone who studies economic history knows how this story plays out. Good luck.

Reactions to the New York Times story about the Trump family alleged tax fraud and related tax schemes has brought a flood of demands for release of Donald Trump’s tax returns, demands that he be charged with tax fraud, inquiries about the likelihood of IRS audits, and discussions about the implications of the report and the possibility of additional information being uncovered. None of that is surprising, either the information that has been disclosed, the allegations, or the reactions.

What did surprise me was the reaction of John Crudele in his New York Post commentary. The headline for the commentary, “Why I doubt Trump evaded paying taxes” reflects his conclusion that “I don’t know whether Donald Trump was screwing around on his income taxes like The New York Times alleges or not.” That’s the only logical position one can take. Yes, one can guess, suspect, believe, wonder, and perhaps even worry. But to “know” is not yet possible. More information is needed. What surprised me is not the doubt, but the justification for the doubt.

What convinces Crudele to doubt the conclusion reached in the New York Times story? Crudele describes information from “a very good source” that when New York investigated a large group of taxpayers in the 1980s for possible sales tax evasion, Trump came out clean, having paid all of the sales taxes that he owed. Apparently at the time, “a lot of rich folks were having their purchases shipped to states with lower sales taxes.” If I were to guess or speculate, I would hesitate to think that people who were not “rich folks” might also have been engaging in this approach. Perhaps people, rich or not, are still doing this.

But should the fact that a person paid sales taxes weaken the claim that the person did not pay all of the income, estate, gift, or other taxes that the person should have paid? Should the fact that a person pays her electric bill be interpreted as meaning that she pays her lawn care bill? Should the fact that a person does not rob banks carry weight in arguing that the person does not embezzle? Should the fact that a person has never been issued a speeding ticket be a factor in concluding that the person did not fail to stop at a stop sign?

Almost every criminal has obeyed some laws. Almost every law-abiding person has violated some law, ordinance, or regulation, perhaps unknowingly. The fact that someone paid sales tax is irrelevant in determining whether that person did or did not pay an income tax, a gift tax, an estate tax, or even a highway toll.

Several days ago, Carolyn Hax was presented with a question that she answered in her advice question. The question caught my eye because the word “legally” was in the first line. But the question did not reveal the tax aspect. Here is what the person wrote:

Is it tacky or deceitful to legally get married as much as nine months in advance of a wedding ceremony? I'm recently engaged (yay!) to a great guy. We chose a date nearly a year from now because my fiance travels for work all through the spring, and we want to accommodate parents, stepparents, and family traveling from many other states.

However, we're both small-business owners and it looks like it would benefit us financially to marry before 2018 is over. I recently told a friend this idea and she was appalled, that it amounted to us putting on a "show" wedding. For me and my fiance, getting legally married as a business/tax decision doesn't have any of the emotional meaning that standing up in front of our friends and family would.

We're having a "no gifts" wedding, so it doesn't feel like we're even asking friends for anything other than joining us for a celebration of vows. Is my friend right, could it be perceived as dishonest? Should we keep this idea to ourselves?

What mattered more to me than Carolyn’s response was the fact that the tax law was putting two people in what they perceived to be a quandary, causing them, or at least one of them, anguish, and motivating at least one of them to write a letter to an advice columnist. It would not be surprising if the two people invested time in discussing what they ought to do.

Carolyn’s answer made sense. So what if the celebration ceremony takes place at a time after the marriage ceremony. She pointed out that getting married one day and having the celebration at a later date “doesn’t hurt anyone.” She noted that it is not uncommon for memorial services to be held months after a burial. She also explained that no matter what the couple decided, there will be people who are critical of the decision, so why bother “chasing approval.”

Yet it is unfortunate that the tax law put this couple in a bind. Accelerating the marriage in order to reduce taxes probably has happened more than a few times. Usually, if the decision to move up the date is made in time, it doesn’t create the logistical problems facing the couple in question. Or, if all or almost all of the guests live nearby, the logistical challenge might not be so overwhelming. I suspect that this couple was put into this time-crunched decision situation because the changes in the tax law were rushed through the Congress, and put into effect before people and businesses have had a chance to adjust. Note that this couple is not alone in trying to make decisions because of the tax law changes, though for most businesses dealing with this conundrum the problem is lack of guidance to interpret a badly written tax law. Hopefully the couple has had good advice and doesn’t discover a few months or a year later when filing their tax return that they would have been better off not accelerating the wedding.

We need a tax law that does not make the marital status of a taxpayer relevant. That can be done by treating people as individuals and not using the tax law to encourage or discourage marriage. The issues of marriage penalty and marriage bonus have been discussed by tax commentators for decades. Congress, however, continues to be mired in the distant past when it comes to the interaction of tax with present-day relationships. I doubt we will see any repairs in the near future.

When I taught the basic income tax course, one of the questions that popped up early in the semester was, “What is income?” That question must be answered before turning to the question of whether an item of income is included in, or excluded from, gross income. One of the elements in the definition of income is the principle that there needs to be an accession to wealth. It is for that reason when a person borrows money there is no income, and thus no gross income, because the increase in cash is offset by an increase in the obligation to repay, and thus the person is not wealthier. Similarly, withdrawing previously taxed money from a savings account does not generate income because the taxpayer is simply moving money from one pocket to another.

These principles came into play in the recent case of Park v. Comr., T.C. Summ. Op. 2018-46. The taxpayer, a member of the military, purchased a house in 2208 and took out a first and second mortgage with a bank. In 2011, the taxpayer fell behind in making payments on the mortgages but he resumed making payments in May 2012. During 2014, the taxpayer received a $13,508.58 check from the bank, and cashed it. The check was accompanied by a letter that stated, “[b]ased on a recent review of your account, we may not have provided you with the level of service you deserve, and are providing you with this check.” The letter suggested that the taxpayer might wish to consult with someone about any possible tax consequences of receiving the funds, and included a telephone number for him to call if he had any questions. The letter thanked the taxpayer for his military service. The taxpayer called the telephone number several times, but was unable to obtain any additional information. The taxpayer concluded that he had overpaid his mortgages during the time he was deployed overseas, and so he did not report any portion of the $13,508.38 on his 2014 federal income tax return. The bank sent the IRS a Form 1099-MISC, reporting other income of $12,789, and a Form 1099-INT, reporting interest income of $719 from the bank to the taxpayer for 2014. Because the taxpayer did not report those amounts on his return, the IRS issued a notice of deficiency on June 6, 2016, determining that the taxpayer had failed to report income from the bank. Several weeks later, the taxpayer filed a petition with the Tax Court.

The taxpayer explained that it was his understanding that the funds were not taxable income because they represented a return of overpayments on the mortgages. He issued a subpoena to the bank for records related to the check, but the bank replied that it was “unable to locate any accounts or records requested with the information provided.” The IRS argued that the taxpayer failed to provide credible evidence that its determination was incorrect.

The taxpayer argued that the bank’s issuance of the Forms 1099 was a mistake. The Tax Court noted that the letter from the bank indicated that it had made a mistake and was “correcting a wrong it had committed” with respect to the taxpayer’s accounts. The Court concluded that the taxpayer presented credible evidence that $12,789 of the payment was a return of an overpayment, and that the other $719 was interest on the overpayments that was required to be included in gross income. In other words, the taxpayer, by overpaying on the mortgage, moved money from one account to another, and when the bank returned the overpayments, the taxpayer, in effect, moved the money from the second account back to the first.

The taxpayer had to endure this judicial proceeding, investing time and energy, and probably some funds, because the bank made a number of mistakes. The bank failed to explain in its letter how it computed the amount of the check and why it concluded there had been an error. Perhaps the bank was taking money out of the taxpayer’s checking account to apply to the mortgage at the same time that it was receiving checks from the taxpayer. The bank failed to maintain records and thus was unable to reply to the subpoena with any information useful to the taxpayer. Or perhaps the bank had the records but was unable to find them. Or perhaps the bank had the records but did not want to become involved in the case. The bank failed to explain the basis on which it concluded that a Form 1099-MISC had to be issued. In other words, the bank inconvenienced its customer. The issuance of a Form 1099 is a serious matter and ought not be left to computers and software, which is surely what happened in this instance. Just wait until the robots start decided to issue Forms 1099. Can a robot be sued? That is an issue I’ll leave for others to discuss on blogs dealing with torts, contracts, and crimes. Incidentally, imagine what could have happened to this taxpayer had the IRS prepared his return based on the information it had.

Readers of this blog know that I am an advocate of user fees in situations where user fees make more sense and are more efficient than using general tax revenues. Perhaps the most widespread user fee is the highway, bridge, and tunnel toll. It is no surprise that just as people try to find ways to avoid general taxes, they also look for ways to avoid user fees, including tolls. Most income tax evasion methods aren’t material for great movies, and evading user fees on tobacco and liquor often involves smuggling, which has found its way into movies and television shows.

Though evasion of income taxes and tobacco and cigarette duties has inspired all sorts of creativity, toll evasion seems to have taken the art of creativity to a new level. Reader Morris pointed me to a YouTube video in which Florida state troopers stop toll evaders using a variety of tricks in attempts to escape the photographing of their license plates by toll plaza cameras. Take a look, it’s eye opening, and as warned at the end, don’t try any of these “techniques.”

I can attest that the license plate photography system works. Recently I drove to Massachusetts and Rhode Island, and when I drove through the New Jersey Turnpike exit to get on the Garden State Parkway the E-Z Pass sign said “GO TOLL UNPAID.” Huh? I knew I had enough funds in the E-Z Pass account. I encountered the same message at the Garden State Parkway toll booths, but of course there’s no messaging in high-speed E-Z Pass lanes. So on my return I checked with the E-Z Pass folks. It turned out that my transponder was more than 16 years old, and the customer service representative said to me, “You have a transponder from the Stone Age. We’ll swap it out for a new one.” In the meantime, the Pennsylvania Turnpike Authority, the New Jersey Turnpike Authority, the agency that operates the Garden State Parkway, and the New York Thruway Authority (which collects the Tappan Zee Bridge toll) used the photo of my license plate to charge my E-Z Pass account. There were no penalties, and it was obvious I was not evading tolls. The new transponder is smaller and different from the old one. I had not known that transponders can “go bad,” so a tip: if your E-Z Pass transponder is more than five years old, ask for a replacement. It’s free of charge.

A reader pointed me to an article describing something that rarely happens. The author of the article points out that when someone does what happened in this instance, “[p]eople wonder if you’re crazy.” Indeed.

Mat Ishbia, the CEO of United Shore, a wholesale mortgage lender, explained what happened. His company, located in Troy, Michigan, needed more space. It eventually found a suitable location in Pontiac, Michigan. In Michigan, tax breaks are handed out like candy to “almost any company making a major move to or within Michigan.” The tax break industry in Michigan is huge, involving hundreds of politicians and lobbyists.

After deciding on the move, United Shore learned that it qualified for $1.9 million in tax breaks. Thinking that government regulations would require it to invest money in environmental and other features that its officers did not think were necessary, United Shore applied for and received the $1.9 million, intending to use it to finance these features. But as rehabilitation proceeded, United Shore discovered that it didn’t need to install those features. That’s when the allegedly crazy decision was made.

According to Ishbia, once it was determined that the tax break money wasn’t necessary, because the company did what it was planning to do from the outset, the company returned the $1.9 million. Ishbia explained, "We feel it’s better for the city to give that money to schools, children or other causes that need the money more than we do. It was disingenuous to take money that we were going to spend anyway. It wasn't our place to spend it. Once we figured out that we weren't doing anything above and beyond, it was thanks but no thanks." Ishbia rejected suggestions that the money be donated to charity, because, "It's not my place to take their money to donate to charities. We didn't take any handout as a business to get to where we are today and we're not starting today. Let them use it for the right thing. It's not my money. It's the taxpayers' money, and it shouldn't be coming to United Shore."

This nation needs more CEOs like Mat Ishbia, and fewer that resort to what I call the blackmail approach. Too many companies threaten to move out of an area if they don’t get tax incentives. Ishbia explained that United Shore was going to stay in Michigan no matter what.

Supporters of these sorts of tax breaks claim that doing business “still requires a helping hand from the government to overcome rising construction costs and a negative image.” In a free market, if the business produces worthwhile products or offers worthwhile services, it will flourish without needing corporate welfare. If its prices are too high for its consumers, it ought to use that huge lobbying industry to promote demand-side tax cuts and move-up economic policy. The only redeeming factor about Michigan’s tax breaks is that they are “performance-based, meaning the company gets nothing if it doesn't build the expansion and hire all the promised workers.”

To quote Ishbia again, “Hopefully, we kick-start a trend of companies not taking money when it’s not needed. That’s how cities can really grow.” There’s a lesson for the stubborn supply-side trickle-down acolytes who like to keep pretending they have the key to economic prosperity but lack the ability to see the failure of their economic ideology. Failure, at least, for all but the oligarchs who benefit from it.

Most American anti-tax advocates understand and usually admit that they have a choice. Cutting taxes requires increasing budget deficits, cutting spending, or doing some of both. What’s interesting is that most anti-tax advocates also disdain budget deficits, so when they cut taxes they are implicitly signaling that they plan to cut spending. Of course, tipping one’s spending cut proposals would generate overwhelming resistance to the tax cuts, so, as we’ve seen, it was only after the recent tax cuts were enacted that increasing numbers of tax cut advocates own up to their specific spending cut plans. That’s not going to end well.

In the meantime, according to this report, the government of China promised to simultaneously cut taxes, increase spending, and reduce the budget deficit. The only way something this promise could be fulfilled is if the tax rate cuts generated so much more economic activity that tax revenues increased in an amount sufficient not only to offset the revenue losses caused by the rate cuts but also to provide funds for the additional spending, to say nothing of even more revenue to eliminate the budget deficit. Considering that every American attempt to increase taxes by cutting tax rates, justified by reliance on the totally failed and flawed supply-side economic theory and trickle-down nonsense, it is truly mind-boggling that anyone would claim that they could cut taxes while increasing spending and reducing budget deficits.

Sensible economists understand this. According to the report, one top Chinese economist said, “It’s impossible to cut tax, maintain government expenditure growth but not adjust the deficit at the same time." That some people don’t understand this demonstrates the dangers of fiscal ignorance.

Now it’s getting closer to “from famine to feast.” After going quite some time between opportunities to comment on television court show episodes, I was presented with a third Judge Judy case within the span of a week and a half. 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, An Easy Tax Issue for Judge Judy, and Another Easy Tax Issue for Judge Judy.

One layer of facts in the case were simple. Father and mother married, had a daughter, and later divorced. Mother remarried, to stepfather. The stepfather and the mother sued the daughter’s father, claiming that he owed them half of his tax refund for 2017. Why? They argued that the father took the dependency exemption deduction for the daughter even though he had agreed that the mother and stepfather could do so.

The mother claimed that there was an agreement for her to claim the dependency exemption deduction for the daughter so that she could keep the daughter on the mother’s health insurance. It is at this point that the facts get murky, if not downright impossible to figure out. According to the mother, the daughter was on the mother’s health insurance for 2016. The father testified that the daughter was on his insurance for part of 2016. The parties seemed to agree that the daugher lived with the father in 2017, but was covered by the mother’s health insurance for first three months of 2017.

In response to questions from Judge Judy, the mother admitted that she did not pay child support to the father. The mother’s claim that she supported the daughter because she purchased clothes for the daughter was tossed aside by Judge Judy. Judge Judy asked if the father paid child support for the brief periods when the daughter lived with the mother and stepfather, and the answer was yes.

Judge Judy dismissed the mother’s and stepfather’s claim, noting that she thought the stepfather was the moving force behind the litigation. She explained that the father was entitled to the dependency exemption deduction because he supported the daughter, the daughter lived with him, and though she didn’t specifically mention it, there was no written evidence of the alleged agreement.

Then Judge Judy dismissed the father’s counterclaim. The father was claiming that the mother owed him damages because the mother had claimed the daughter on her 2016 return even though the daughter had lived with the father for that year and he had supported her. Judge Judy pointed out that the father had not sued the mother, despite the passage of time, until he was sued by the mother and the stepfather. The father admitted that he would not have sued the mother had he not been sued.

Several lessons pop up from this case. First, when divorced individuals deal with dependency exemption deductions, they need to get professional advice. Though the dependency exemption deduction has been suspended and might even be removed permanently, determining whether someone is a dependent continues to have relevance for other purposes of the tax code, so it continues to make sense to get professional help. Second, every financial agreement between divorced parents should be in writing and also should be reviewed by a professional. Third, it can be unwise to hold a claim in one’s back pocket for use only if facing a lawsuit, for the reason Judge Judy explained. If the claim matters, bring it. If it’s not brought, it’s difficult to show at a later time that it matters.

Reader Morris contacted me last week with a question and a controversial answer. He asked, “Is yoga considered exercise for sales tax purposes?” he included some additional information, which permitted me to learn that six years ago, in a decision that escaped my attention at the time, the New York State Department of Taxation and Finance issued an advisory opinion describing the meaning of “weight control salon, health salon, or gymnasium” for purposes of the New York City sales tax.

New York City imposes its sales tax on receipts from “every sale of services by weight control salons, health salons, gymnasiums, Turkish and sauna bath and similar establishments and every charge for the use of such facilities.” The Department concluded that “A gymnasium is commonly understood to be an indoor facility where sporting and/or exercise activities take place.” It concluded that if facilities provide Pilates classes they are gymnasiums, because Pilates classes constitute exercise activities. However, if a facility provides only yoga instruction, it is not a “weight control salon, health salon, or gymnasium” because “instruction in yoga is not an exercise activity because yoga generally includes within its teachings not simply physical exercise, but activities such as meditation, spiritual chanting, breathing techniques, and relaxation skills.”

Two years later, in a Tax Bulletin, the Department made its position clear. “A facility that provides yoga instruction only is not considered a health and fitness facility. * * * However, if yoga classes are taught in a facility that also provides exercise equipment or Pilates classes and otherwise qualifies as a health and fitness facility, the charges for yoga instruction are subject to New York City’s local sales tax.”

The decision has met contrasting reactions. According to an article that appeared shortly after the advisory opinion was issued, some yoga studio owners were delighted, claiming that paying the sales tax would put them out of business, and that if they raised their prices to cover the tax they would lose customers. One owner claimed that the 4.5 percent tax would require raising the $18 fee to $22. It is unclear why a 4.5 percent tax would require a 22 percent increase in the fee. Some yoga instructors defended the decision by explaining that the physical activity aspect of yoga is a “bonus” because yoga is “a holistic discipline” and that the benefit to health “comes not from physical activity, but the practice of meditation and breathing."

But other yoga instructors were unhappy with the decision. One explained, "To say that yoga isn't fitness is absurd." This person pointed out that Pilates and yoga share the characteristics of not being “a mindless series of exercises as one would follow in a gym or a fitness center.” Both use “practices of breathing and concentration, as well as a focus on the connection between mind, body and spirit.”

So when my physician asks me if I am getting exercise, do I limit my response to the time I am working out at the gym? If I were taking yoga classes, would I not count that time as exercise time? When my physician asks me if I am getting exercise, I relate not only the time at the gym and the time I spend walking in the neighborhood primarily to burn calories and get exercise and secondarily to see what’s going on in the neighborhood, but also the walking I do in connection with other activities for which the primary purpose of moving isn’t to get exercise, but to get someplace, to walk through a store warehouse, to do home repairs, and to accomplish a variety of other tasks that require me to move my body. True, for sales tax purposes, the focus isn’t on “exercise” but on facilities that provide the opportunity to exercise. To conclude that yoga is not exercise simply because it also involves mental and spiritual aspects would require the logical corollary that working out at my gym doesn’t constitute exercise because of the intellectual aspects provided by ongoing conversation and intellectual discussions in which I, and others, engage while we are moving our bodies.

All of this demonstrates the futility of trying to design sales taxes that have exceptions, because every exception opens up debate about its scope, and tempts people to craft transactions in ways that fall within an exception. It also demonstrates yet again that tax law is packed with issues that don’t involve numbers.

Some months ago, Philadelphia’s City Council passed legislation, by a bare 9-8 vote, described in this article, to impose a one percent tax on new construction. The rationale for the tax was the need for revenue caused by revenue shortfalls arising from property tax abatements on new construction. The mayor had until last Thursday to decide whether to approve the legislation or to reject it. Instead, as explained in this report, the mayor and City Council reached a compromise and the pending legislation was withdrawn.

Under the compromise, as the property tax abatement expires on properties, the revenue generated by that expiration will be funneled into the city’s Housing Trust Fund. Revenue from the proposed one percent construction tax would also have been directed into that fund. Additional revenue for the fund will come from voluntary contributions made by developers who want zoning allowances for height, floor area, or density.

This entire drama illustrates the problems with tax breaks. To often, the amount of revenue given up by the break exceeds the actual revenue generated by whatever it is the tax break is encouraging. It’s not enough that the advocates of the tax break make promises. They must deliver. In the case of the Philadelphia tax abatement, the determination that something needs to be done ought not generate an offsetting tax. It ought to generate a reduction or elimination of the tax break. Several Philadelphia officials made that clear throughout the debate. To quote one, "There need to be changes in the 10-year tax abatement." Of course.

Taxing a tax break makes no sense. It’s goofy.

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.