MauledAgain

There is a discussion underway in the state of Washington that involves the classification of taxes. According to this report written by Jason Mercier, advocates of enacting a capital gains tax are up against Washington Supreme Court decisions holding that, for purposes of the Washington Constitution, income taxes are property taxes and thus are subject to the restrictions on property taxes contained in the Washington Constitution. One legislator who supports the capital gains tax proposal stated, “Republicans and Jason Mercier and company have been agitating for years that a capital gains tax is an income tax, and expressing horror and disbelief that anyone could claim that it’s not an income tax. That’s not actually the question. We don’t care whether a capital gains tax is an income tax because an income tax is not something that shows up in our constitution.”

Confusing? Yes. What appears to be happening is that proponents of a capital gains tax hope that the inevitable challenge to it would reach the Washington Supreme Court, providing an opportunity to argue that the Court’s treatment of income taxes as property taxes is wrong and that it should overturn its previous decisions. It appears that one argument might be that the treatment of income taxes as property taxes subject to restriction in the Washington Constitution does not apply to capital gains taxes because capital gains taxes are not income taxes. The argument that capital gains taxes are not income taxes is baseless. There is no question whatsoever that capital gains constitute income and that a tax on capital gains, even if not imposed on any other sort of income, is an income tax.

On the other hand, it is not a given that income taxes are property taxes. This question has been around since income taxes were first proposed. When the question has reached state courts, some have held that income taxes are property taxes and some have held that they are not. Of course, applicable language in a state constitution, if it exists, can differ from language in another state constitution, to the point where the language necessitates one conclusion or the other. This means there is no universal “income taxes are property taxes” or “income taxes are not property taxes.” It depends. A good, though very dated, explanation can be found in Rottschaefer, “A State Income Tax and the Minnesota Constitution, 12 Minn. L. Rev. 683 (1928). At the time, income taxes were held to be property taxes in Alabama, Delaware, and Massachusetts, and were held not to be property taxes in Arkansas, Georgia, Mississippi, Missouri, and Wisconsin, though Henry Rottschaefer made the same point I have made, which is that the language in the state constitutions differ and can constrain the reasoning and result. The two lists are short because at the time many states did not have income taxes, or the question had not reached the courts. For example, it wasn’t until six years after the article was published that the Washington Supreme Court addressed the issue and answered in the affirmative. Twenty-six years later, in Lockyer, “The Legal Nature of the State Income Tax,” 43 Ky. L. J. 215 (1954), Charles Lockyer, in analyzing whether state income taxes are property taxes, added California, Illinois, Pennsylvania, and Washington to the list of states whose courts treated income taxes as property taxes. I have not found a current comprehensive listing, though I have not invested the many hours of research that would be required to determine which states’ courts have addressed the issue, the results those courts reached, and the extent to which the reasoning in each case dovetails with other cases.

The point is that slapping a label on a tax does not necessarily dictate or preclude a particular result in a particular situation. The analysis is more complex. Adding to that complexity is the existence of other taxes, such as wage taxes, occupation taxes, unearned income taxes, and the like, and other possible classifications, such as excise tax. Getting hung up on labels, or on simple equations that a certain type of tax falls within a particular category, is rarely helpful in the tough cases. And when there is a simple equation, such as the conclusion that a capital gains tax is an income tax, though it makes it easy to decide easy cases, it offers little to help resolve difficult cases.

This can be illustrated by what would happen in Washington if the issue comes before the court. An argument that a capital gains tax is not an income tax would be dismissed quickly. An argument that if a capital gains tax is an income tax it nonetheless is not a property tax would require some discussion though ultimately it, too, would be dismissed. But the arguments and the court’s opinion would not be simple sentences of a few words, but multiple paragraphs of complex sentences. Continued efforts to push legal arguments into tweets and social media posts is no less damaging than trying to squeeze complex scientific studies, engineering designs, psychological analyses, or software code into tweets and sound bites. For those who prefer something like a tweet, here’s one. Classifying taxes is not a simple matter.

In a way, it’s sad. In a way, it’s puzzling. In a way, it’s foolish. In a way, it’s infuriating. What am I describing?

According to this Wisconsin State Journal article, a Wisconsin couple, owners of a bowling alley, has been sentenced to federal prison, each serving six months at different times, after having pleaded guilty to tax fraud and filing false returns. What exactly did they do?

According to the Assistant U.S. Attorney handling the case, Dan Graber, Dudley Hellenbrand worked out an arrangement with Thomas Laugen, the owner of a vending machine company, to set up a cash skim on a video gambling machine that Laugen had installed at the bowling alley in 2010. Dudley’s wife Cherie wife claimed that she did not find out about the arrangement until 2017. At that point they terminated the bowling alley’s business connections with Laugen and allegedly entered into a contract with another vending machine company and tried to enter into a similar arrangement. The arrangement was discovered when the couple tried to sell the bowling alley, met with an undercover IRS agent posing as a potential buyer, and touted the gambling machine skim as a selling point.

Though the judge agreed that Cherie did not know about the scheme until 2017, he wondered why she hadn’t noticed the additional money being brought into the household. He emphasized that when she discovered what was happening, rather than persuading Dudley to stop and pay back taxes, she participated in continuing the arrangement and in trying to create another one.

Laugen was sentenced to a year in prison for tax evasion. The Hellenbrands asked for probation, but the judge concluded that what they had done was “serious enough, calculating enough and intentional enough” to justify prison terms, and decided to impose “a sentence proportional to their responsibility compared to Laugen’s.” The couple also was ordered to pay the back taxes, and they already have repaid the more then $350,000 they had managed to evade.

The judge described the couple as “decent people” who tried to compartmentalize their lives by using a different set of rules for how they operated their business from the set of rules they used in the other aspects of their lives. Dudly Hellenbrand helped and mentored youth through sports organizations and Cherie Hellenbrand was a high school business education teacher. The judge remarked, “It greatly concerns me that the people in Mrs. Hellenbrand’s business classes who would have seen her teach the idea that you should run a business with integrity, when in fact what she did was cheat the government once she found out that they had underreported their income.” The judge also pointed out that they “undermined what I think is a lifetime of service.” Both Dudley and Cherie Hellenbrand have apologized. Cherie Hellenbrand noted that “she hopes other bar owners will learn from her mistake, ‘how not respecting and following the law can ruin your life and hurt the ones you love.’”

It’s sad because two people who otherwise did good for the community and served as role models for youth let it all fall apart because of the lure of money. Based on how much back taxes they repaid, the amount skimmed must have been a significant sum.

It’s puzzling because two people who knew better and understood how a business should be run broke rules and surely knew that at some point the IRS would come knocking on the door. If at the time the arrangement was set up, the question had been posed, “Why are you doing this considering the risks?” I wonder what the answer would have been.

It’s foolish because it makes no sense to try to use a tax evasion scheme as a selling point when trying to find a buyer for the business. A potential buyer could be anyone. The person with whom negotiations are undertaken not only could be an undercover IRS agent or some other official, but a person sufficiently concerned about what has been revealed that he or she becomes a whistle-blower.

It’s infuriating because it tempts others to do the same thing, as a challenge to prove that they can pull it off without getting caught. It contributes to the anti-tax disease that is ripping apart the civilized facets of society. It sends a message, and makes cynics out of the very youngsters they were trying to influence in a good way. The damage caused when a person learns that the person telling them to do or not do something is, in fact, acting to the contrary. It destroys trust and fuels resentment, anger, protest, and rebellion.

Graber disclosed that the IRS is also investigating other taverns and restaurants that are not paying their taxes in full, with an emphasis, it appears, on video gambling machines. So will others who are doing what the Hellenbrands did stop and come clean or will they continue to gamble, hoping they are not caught? It depends, I suppose, on how clever they think they are.

As readers of MauledAgain know, I am not a fan of tax breaks. Of course, the fact that I do not think they should be enacted doesn’t mean they won’t be enacted. But if they are being enacted, they ought to be drafted in ways that return something to the taxpaying community. A tax break, after all, is nothing more than a jurisdiction handing money to a taxpayer. Think of the taxpayer paying the tax that would have been paid absent the tax break and then having some or all of that tax handed back. It’s worse, of course, because some tax breaks are nothing more than handouts that exceed what the taxpayer would have paid absent the tax break.

A good example of bad tax break statutory drafting is illustrated by a recent decision of the Pennsylvania Commonwealth Court, Dechert LLP v. Pennsylvania Department of Community and Economic Development. The tax break in question involves Keystone Opportunity Zones (KOZs), Keystone Opportunity Expansion Zones (KOEZs) and Keystone Opportunity Improvement Zones (KOIZs), all of which can be called Keystone Zones (KZs). Properties in a KOZ are exempt from property taxes and qualified businesses within a KZ are “entitled to all tax exemptions, deductions, abatements or credits set forth in [the statute] for a period not to exceed 15 years.” The administration of the tax breaks, including participation in designation of KZs and related matters, is in the hands of the Pennsylvania Department of Community and Economic Development (DCED).

Dechert LLP, a qualified business, leases space from Brandywine Realty Trust in the Cira Center. The Cira Center is within a KOIZ whose designation has expired. From 2004 through 2018, Dechert received almost 15 years of tax breaks. Dechert plans to terminate its lease and enter into a new lease in a new office complex being built by the landlord in a different KZ. Dechert requested a letter ruling from DCED regarding the availability of tax breaks if it should relocate from its current location to the new office complex. Dechert claimed that moving from an expired zone to a different, but active zone, should not limit the tax breaks it would receive by locating its office within the new KZ. The DCED responded by explaining that it interpreted the statute to preclude a taxpayer who received tax breaks in a now-expired KZ from obtaining a new set of tax breaks by moving into a new active KZ. The DCED explained that the KOZ program “is designed to encourage businesses to
locate in economically distressed communities; to become economic anchors of the communities; and to re-enter the state and local tax rolls at the end of the KOZ term.” Accordingly, the DCED denied Dechert’s request. Dechert filed a petition challenging the DCED’s conclusion and seeking a declaration that it would not lose tax breaks by relocating into a new KZ.

The statute, however, does not address the treatment of a business that relocates from one zone to another. The DCED argued that failure to prevent taxpayers from “zone hopping” in order to extend KZ benefits infinitely conflicts with the legislative intent that the benefits of KZs are intended to be temporary tax relief. That failure would encourage “mass exodus from one zone to another in an attempt to retain tax exemptions, and thus frustrate the purpose of the statute.”

The statute provides for the treatment of businesses that move from outside a KZ into a KZ, requiring them to meet certain conditions in order to obtain the tax breaks. These conditions involve increases in employment, investments in property, and entry into leases in the KZ. The Court concluded that because the statute did not address movement from one KZ to another, that nothing in the statute prohibits Dechert from obtaining the tax breaks available by moving into the new active zone. The Court explained that Dechert would be moving into a KZ from outside that KZ, even though it already was in a different KZ. The Court noted that there is no prohibition on zone hopping in the statute. It granted summary relief to Dechert and entered the declaratory judgment sought by Dechert.

As the Court pointed out, fixing what the DCED considers to be a problem requires a legislative remedy. Put another way, the problem exists because the legislature failed to consider and address the question one way or the other. Apparently no one asked, “What happens if a taxpayer or business stays in a zone until it expires and then moves to another zone that is active? Should the taxpayer or business get another batch of tax breaks?” Answering the question would then cause the legislators and their staffs to realize another provision in the statute was necessary.

The case illustrates the problem with tax breaks. Once the taxpayer experiences the tax break, the taxpayer wants more, and more. Unless the KZ tax breaks are repealed, sometime in the late 2030s Dechert will be moving again. And it’s not just Dechert. Dechert’s attorney noted that he has “additional clients seeking the same relief.”

It is possible that the DCED will appeal the decision to the Pennsylvania Supreme Court. However, given the way the statute is drafted, it is difficult to envision the Supreme Court reversing the decision. As the Commonwealth Court pointed out, it’s the responsibility of the legislature to fix the problem. Of course, my preference is a provision that limits a taxpayer to 15 years of tax breaks, not 30 or 45 or eternity. Actually, my preference is total repeal but that’s not going to happen. Too many people are deeply invested in this tax break.

There are many reasons that an otherwise qualified individual declines to run for public office. Political campaigns are filthy. Lies abound. Ignorance flourishes. A variety of dirty tricks, altered images, fake videos, and false accusations are used by those so desperate to win and so insecure in their chances if they run a clean campaign deter those who would bring much-needed ideas and accomplishments to the public arena.

A recent news report now adds to the list of improprieties that can afflict candidates. According to the report, the tax collector for Seminole County, Florida, stalked and impersonated a political opponent and impersonated a student in order to make false allegations about the opponent. He now faces federal charges. The tax collector posed as a student at the school where his opponent worked, and used that status as a fake student to file a false complaint that the opponent was engaging in sexual misconduct with an unidentified other student. He also created a facebook account pretending to be a teacher at that school, repeating the false complaint. He also set up a Twitter account pretending to be his opponent, and used that account to issue tweets making his opponent appear to be “a segregationist and in favor of white supremacy.”

Gone are the days when politicians, candidates, and office holders engaged in rational, intelligent, honest, and sensible discussions and arguments about issues. Instead, a mentality of win-at-any-price, devoid of critical thinking and cogent analysis, and reflecting any sense of quality values, has infected the political process. It is not unlike the money-at-any-cost approach that has ruined businesses, nourished income and wealth inequality, damaged the health care system, and weakened the nation’s economy and national security.

Is it any wonder that many good, decent people stay out of politics? When I hear or read someone asking, “Why can’t there be better candidates?” I tell them that the system is broken and that one of the symptoms is the inability of the system to flush away the misguided, misdirected, money-addicted, selfish, unempathetic, power-hungry authoritarians that have been taking over the political process. But who wants to enter the political arena and face being impersonated, subjected to false claims, insulted, misrepresented, stalked, and otherwise abused? Yes, there are some good politicians and office holders out there, but they are far and few between, and are a dying breed. It’s no wonder the good ones are disappearing.

Last week, according to this news release from the Kansas Attorney General, a Topeka resident pleaded no contest to a charge of failing to remit sales tax on vehicles that he sold. He pleaded guilty to one felony count of making false information and one misdemeanor count of failure to remit sales tax.

According to the news release, the defendant was identified after an investigation by the Kansas Department of Revenue Office of Special Investigations. The investigation revealed that the defendant “was illegally selling cars by knowingly representing incorrect sales prices on KDOR sales tax forms and shortchanging the state $454.16 in sales tax.”

The dollar amount is rather low, compared to most tax fraud cases. The sales tax rate in Kansas on automobiles varies by location. Assuming the sales took place in Topeka, the sales tax rate is 9.15 percent. A bit of arithmetic determines that $454.16 is the sales tax on $4,963.50 of automobile sales.

My guess is that there is more to the story. There are several possibilities. Perhaps the defendant shaved a few dollars off the reported sales price of many car sales, for example, selling 100 cars and reporting each sale at roughly $50 less than the actual sales price. That’s an attempt to avoid $5 of sales tax on each sale. It makes no sense. Another possibility is that the defendant sold many cars, and reduced the reported sales price by roughly $5,000 per sale, but in the plea agreement only one such sale was the subject of the sale. In other words, perhaps one count was alleged for each sale, resulting in multiple counts, but the plea agreement focused on one count. I was unable to find any background information, such as an indictment or similar document.

The amount involved in the plea is a rather small amount. It is less than the cutoff in many states for treating a theft as a felony. Sentences for felony convictions usually are substantial, so it would make no sense to plead no contest to a charge of tax fraud involving $454.16 in sales tax unless the amount evaded was much more. Not that understating the sales price of items is a wise move, but it seems unlikely that a department of revenue would pursue felony charges when the amount involved is just shy of $500. There surely is much more to the story. Risking jail and heavy fines for $454 makes no sense.

First, some background will help. When taxpayers are unable to pay their federal income taxes they can enter into installment agreements with the IRS to replace immediate payment with a schedule of periodic payments over a period of time. Usually, these arrangements are made after taxpayers are audited and are found deficient in tax payments but are unable to pay back taxes because they have spent all or most of their money, including the amounts that should have been paid in taxes. From time to time, these arrangements are made when taxpayers are filing a return, determine they owe additional tax, know that they lack the resources because of intervening financial problems such as job loss or illness, and file the return with a request for an installment agreement rather than including payment. This is, by the way, the reason people who owe tax but are unable to pay are advised to file the return to avoid additional penalties for failure to file.

A recent Tax Court case, Strashny v. Comr., T.C. Memo 2020-82, is a useful example of why installment agreements are designed to help taxpayers who are in difficult financial situations. The taxpayers, a married couple, filed their 2017 federal income tax return but did not pay the additional tax that was due. The IRS thus assessed that amount on June 4, 2018. The taxpayers proposed an installment agreement that would permit them to pay the amount due in installments over a six-year period. Their proposal on Form 9465, accompanied by Form 433-A, was delivered to the IRS on Friday, July 27, 2018, and recorded by the IRS as pending on Monday, July 30, 2018.

The amount owed by the taxpayers, including interest, exceeded $1.1 million. In an attempt to collect this amount, the IRS issued a Notice CP90, Intent to Seize Your Assets and Notice of Your Right to a Hearing. The taxpayers timely requested a collection due process (CDP) hearing, expressing interest in an installment agreement and attaching a copy of their previously submitted Forms 433-A and 9465. They did not check the box indicating that they could not pay the balance, and they did not dispute their underlying liability for 2017.

The case was assigned to a settlement officer in the IRS Appeals Office in Baltimore, Maryland. After reviewing the taxpayers’ administrative file the settlement officer confirmed that the 2017 liability had been properly assessed and that all other requirements of applicable law and administrative procedure had been met. On April 17, 2019, she sent the taxpayers a letter scheduling a conference for May 29, 2019. The settlement officer reviewed the Form 433-A, which showed that the taxpayers owned substantial investment assets, consisting chiefly of cryptocurrency. She also received from the taxpayers’ representative a copy of their 2018 tax return, which reported wages exceeding $200,000, and investment statements showing cryptocurrency assets valued over $7 million. During the conference with the taxpayers the settlement officer noted that the taxpayers were currently withdrawing $19,000 per month from the cryptocurrency account. She asked the taxpayers’ representative why they could not liquidate or borrow against those assets in order to pay the tax liability in full. The representative replied that he would discuss that point with the taxpayers and contact the settlement officer. The settlement officer emphasized that the taxpayers could not qualify for an installment agreement if they had the current ability to pay their tax liability in full and simply chose not to do so.

The taxpayers’ representative argued that the IRS should not have issued the notice of intent to levy while the taxpayers’ installment agreement request was pending. The settlement officer explained that the IRS would not levy on the taxpayers’ assets until the installment agreement request had been resolved. If and when that request was denied, levy would occur 30 days thereafter. In a follow-up communication, the taxpayers’ representative did not provide any evidence that the taxpayers were unable to draw on their cryptocurrency account to pay their tax liability. The representative insisted that the taxpayers could still qualify for an installment agreement by agreeing to pay their liability in full over a six-year period. The settlement officer explained that the six-year rule applies only if a taxpayer lacks the ability to pay the entire liability currently. The representative then spoke with the settlement officer’s manager, who confirmed the officer’s analysis.

On June 25, 2019, the IRS issued a notice of determination sustaining the proposed levy, and rejected the taxpayers’ request for an installment agreements. The notice stated that “[l]evy action is permitted 30 days after the rejection.” The taxpayers filed a timely petition with the Tax Court for review. On February 13, 2020, the parties filed cross-motions for summary judgment.

The Tax Court reviewed the settlement officer’s determinations and concluded that she had discharged all responsibilities. She properly verified that the requirements of applicable law or administrative procedure had been met, considered any relevant issues raised by the taxpayers, and considered “whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayers that any collection action would be no more intrusive than necessary.”

The Tax Court concluded that the settlement officer did not abuse her discretion in concluding that the taxpayers were not entitled to an installment agreement. The court declined to substitute its judgment for the settlement officer’s conclusion, nor would it recalculate the taxpayers’ ability to pay or independently determine what would be an acceptable offer. By following guidelines in the Internal Revenue Manual, the settlement officer did not abuse her discretion. The guidelines in that manual provide that absent special circumstances such as old age, ill health, or economic hardship, a taxpayer must liquidate assets in order to qualify for an installment agreement. The settlement officer concluded that the taxpayers were ineligible for an installment agreement after determining that they could fully satisfy their tax liability by liquidating a portion of, or borrowing against, their cryptocurrency assets. The taxpayers did not demonstrate economic hardship or other special circumstances, and in fact reported annual wages exceeding $200,000 and monthly withdrawals from the cryptocurrency account of $19,000. They supplied no evidence that they were unable to withdraw from that account sufficient additional sums to pay their tax liability in full.

The taxpayers argued that the IRS erred in issuing the notice of intent to levy while their Form 9465 request for an installment agreement was pending. They relied on on section 6331(k)(2), which provides that no levy shall be made while a taxpayer’s request for an installment agreement “is pending with the Secretary” or, if the request is rejected, “during the 30 days thereafter.” The Tax Court explained that though section 6331(k)(2) “bars the IRS * * * from making a levy” during this period, it does not bar the IRS from issuing notices of intent to levy. Thus, it was permissible for the IRS to issue the Notice CP90.

The taxpayers also argued that the IRS failed to comply with an Internal Revenue Manual provision stating that a taxpayer’s request for an installment agreement should be recorded within 24 hours of receipt. The Tax Court treated the recording of the request on Monday, July 30, after receipt on Friday, July 27, as harmless error. The delay because of the weekend did not cause a levy that violated section 6331(k)(2), and the taxpayers were give full consideration of their installment agreement proposal during the collection due process hearing. The court concluded that granting the taxpayers’ request for a supplemental hearing would serve no useful purpose.

The Court granted summary judgment for the IRS and denied the taxpayers’ motion for summary judgment. Presumably, the IRS will levy on the taxpayers’ cryptocurrency account unless the taxpayers quickly borrow against it or sell a portion of it and pay their tax liability.

What struck me about this case was the audacity of taxpayers worth at least $7 million, with at least that much in liquid assets, trying to make use of a provision intended to assist taxpayers in difficult financial straits. It’s not as though paying the tax would have wiped out the taxpayers’ assets. The amount owed was roughly 15 percent of what their assets, and would have been a smaller percentage had they paid the tax before interest and penalties accrued.

It is too common to encounter people who are able to pay but who feign inability to pay or otherwise find ways to avoid paying a legitimate obligation. It is not unlike refusing to pay contractors for work done in building a hotel or casino. Fortunately, in this case, the misuse of the installment agreement process was stopped by the Tax Court.

Tax return preparers are entrusted with helping people file tax returns that comply with the tax laws. Most tax return preparers fulfill this obligation. Unlike attorneys and CPAs who prepare tax returns, tax return preparers are not subject to professional licensure and discipline. Though tax return preparers who prepare federal tax returns must obtain a Preparer Tax Identification Number (PTIN), they are not required to hold professional credentials. Some, for example attorneys and CPAs do have those credentials, most do not.

It is for this reason that the Treasury Inspector General for Tax Administration (TIGTA) undertook an examination of tax compliance by tax return preparers. In a report issued last week, TIGTA revealed some startling statistics. The title of the TIGTA report, almost says it all: “Tax Return Preparers With Delinquent Tax Returns, Tax Liabilities, and Preparer Penalties Should Be More Effectively Prioritized”

TIGTA examined the Return Preparer Database as of November 2018. It identified 10,495 tax return prepares who, though preparing more than 2,000,000 tax returns for 2016, did not file their own tax returns. TIGTA identified “the top 100 nonfiler” tax return preparers from the 10,495, and determined that they prepared from approximately 1,000 to 6,000 tax returns for clients for 2016. These 100 preparers collected from more than $189,000 to more than $1,000,000 in client fees. TIGTA calculated that if the IRS pursued 6,903 tax return preparer nonfiler cases, it could collect roughly $45.6 million in tax revenue. The IRS informed TIGTA, after reviewing a draft of the report, that it had added 449 of these nonfiler preparers to its Fiscal Year 2020 Examination Plan. What about the other 6,454 preparers? TIGTA determined that they either had been classified as currently not collectible or were waiting to be assigned to the collection process. TIGTA determined that “there were high-priority preparer penalty modules in [currently not collectible] shelved status, preparers in [currently not collectible] hardship status likely earning significant income, and high-dollar [cases]” waiting to be assigned to the collection process.

Worse, TIGTA determined that “the IRS’s new nonfiler strategy does not include specific items to address preparers who have failed to file their own tax returns that are due, and the current preparer misconduct strategy does not provide specific direction on how the IRS might address preparers who are nonfilers or have balances due for their own tax accounts.”

The answer is simple. Identify non-compliant tax return preparers. Notify these preparers that their PTINs are being suspended. Notify each taxpayer whose last three filed returns contain that PTIN that the preparer’s PTIN has been suspended, that the IRS will not accept a return prepared by that preparer, and that the taxpayer’s next return must be prepared either by the taxpayer or a preparer whose PTIN has not been suspended. Ask the Congress to enact legislation that gives taxpayers a cause of action against preparers who prepare a return even though their PTIN has been suspended. This approach is in addition to the administrative changes suggested by TIGTA, some of which the IRS adopted and some of which it rejected. Those changes, however, don’t pack the punch that PTIN suspension and notification would provide.

It appears that another unwise tax proposal has been put on the table. According to numerous reports, including this one, the idea is to provide a tax credit, perhaps as much as $4,000, for “vacation expenses.”

It is unclear what is meant by “vacation expenses.” Surely it would include hotel fees, admission fees for resorts and amusement parks, and airfare. It probably would include rental car and restaurant costs if incurred more than a sufficient number of miles from home to be considered a vacation. It would be limited to amounts spent within the United States.

The justification for the proposal, according to its supporters, is to revive a segment of the economy hard hit by the pandemic. However, the proposal is focused on one segment and not on a related ones. For example, the pandemic has also hit the dining and rental car industries. If the travel and tourism industry is to get a boost, why not other hard-hit segments of the economy? I suppose those industries can fend for themselves and do their own lobbying. This “us and let them worry about themselves” approach to tax policy reeks of the same “me and mine first” tribalism, an offshoot of the “me generation” attitude, that is ripping the country apart. So what happens if Congress decides, after handing out credits to one industry, that there are budget concerns requiring shutoff of the credit tap? Is it first come first served? While industries with the means to hire lobbyists quickly grab food at the tax buffet, other industries that aren’t so well off will find, by the time they raise enough money to hire lobbyists, that the buffet is closed. Congress should work for all the people and all industries, not just those with the most money, the stronger lobbyists, and the faster run to the buffet table.

The rationale for the proposal, according to its supporters, is to encourage Americans to go on domestic vacations. There are two reasons that the tourism industry faces a potential slow recovery, a concern that has sparked the proposal. First, Americans as a group have been hit economically and have had to cut spending. The first expenditures to go are discretionary items, and vacations are high on that list. If tax credits are going to be used to help Americans cope with budget woes, ought they not be used to help with necessary expenditures such as housing, food, and health care? The only people who could afford to go on vacation are those with sufficient resources to cover their necessary expenses, and that cuts a lot of people out of the vacation tax credit buffet. And certainly a tax credit, if nonrefundable, is of little value to taxpayers with little or no tax liability because they have been unemployed or underemployed. Second, many though not all Americans are hesitating to go on vacation because they are leery of the CoVid-19 virus, have concerns about its resurgence, are aware of spikes currently beginning to show up in health department reports, and have good memories of what happened to vacationers in February and March when the virus ran wild. Considering that a significant portion of vacationers in “normal” times are older Americans, the fact that they are presumably more at risk of serious health consequences from contracting the virus causes one to wonder if a tax credit will entice them to leave the house. If the tourism industry wants to encourage Americans to travel, it needs to invest in, and support, the things that need to be done to minimize the risks. The focus should not only be on sanitizing facilities, implementing distancing, requiring masks, and the like, but also on pushing for legislation mandating national contact tracing, adequate supplies of PPE, accurate reporting, punishment of officials who hide information in order to enhance their own political agendas, restoration of national pandemic teams, and other steps to make certain that progress with tourism facilities isn’t negated by problems in other areas of human activity.

There are reports that the Administration is looking at the proposal favorably. Is it any wonder? At least one member of the Administration owns a variety of tourism facilities, particularly hotels and golf courses.

Nowhere is there mention of income limitations on the credit. It makes no sense for the wealthy who are not suffering economically from the pandemic, or even doing better because of it, to get another $4,000 put in their pocket because they took their usual summer vacation to their usual posh resort. Haven’t they already grabbed enough from the buffet when tax breaks and loans intended to help small business have been diverted to recipients whose names are being kept secret?

As readers of this blog know, I do not support using the tax code to do what can be done through other means. But if there are to be tax credits, ought they not first, for example, go to people who are scraping by as they do volunteer work during the pandemic or are working in low-paying health-care-related positions? Ought they not go, as another example, to hard-hit small businesses to assist in covering the costs of deep cleaning and other health mitigation steps?

What’s next? Tax credits to encourage people to drink alcohol, watch movies, and party? Seriously, the tax policy system in this country is so far down the wrong road it would be a miracle if a U-turn could get it back to where it ought to be.

When people encounter charities, they usually think, “Here is an organization doing good work.” When people are asked to donate to a charity, sometimes they continue to think that because it’s a charity it is deserving of contributions. Some people, of course, do research if the charity is one with which they are unfamiliar even if its name suggests a cause with which someone is, in fact, familiar. When people donate to a charity, yes, they usually are thinking of a tax deduction but they also expect that the people operating the charity are doing the right thing. Sometimes that doesn’t happen.

For example, as described in this Department of Justice press release, the operators of a charity in California have pleaded guilty to mail fraud and tax evasion. The operators, a married couple, ran a tax-exempt organization “whose stated mission was to provide assistance to low income families and individuals in need.” Over a six-year period ending in 2016, more than $16 million in donated clothing and other items was contributed to the charity. But instead of distributing all of these items to people in need, the married couple sold a portion for $1.35 million and pocketed those sale proceeds. They used the $1.35 million to purchase vehicles, vacations, and entertainment, along with personal expenses for family members. They filed false returns for the charity, and also failed to report on their individual income tax returns the amount that they had siphoned from the sales of items donated to the charity.

The Acting FBI Special Agent in charge commented, “While fraud is always wrong, the theft of charitable donations that were to be used to help San Diego’s low income families is particularly disheartening. This type of fraud and deceit for personal gain simply cannot be tolerated. The FBI is committed to ensuring that white collar predators don’t prevent those less fortunate from receiving all the benefits that generous donors provide to seemingly legitimate non-profit organizations.”

Sentencing of the married couple is scheduled for August. They face a maximum sentence of five years in prison for EACH count of mail fraud and tax evasion, in addition to restitution, monetary penalties, and supervised release after serving any prison term. Of course, not everyone who misuses tax-exempt organizations ends up in prison. Sometimes they simply are ordered to, or agree to, reimburse the organization for improper distributions, disburse the organization’s remaining funds to other charities, and dissolve the organization. Perhaps the married couple will get that sort of deal. We’ll see.

A few days ago, in this editorial in the Villages-News titled “The real math behind the 25% Sumter County tax increase,” Craig Estep attempted to explain the math behind a property tax increase enacted last year by an all-Republican Board of County Commissioners in Sumter County, Florida, where The Villages, a huge retirement community, is located. He was reacting to claims by three of those Commissioners, who are up for re-election, that the increase was “moderate.” The 2018 rate was 5.3365 mills and for 2019 it was increased to 6.7 mills. That 1.3635 mill increase is a 25.55 percent increase. Estep also suggests that one needs to “account for the increases in assessed values.” I was unable to find any reliable information on how many properties were assessed at higher values, how many were assessed at lower values, how many did not experience a change in assessed values, and what magnitudes of changes were involved.

My first reaction was, “Wow, that’s a big increases for one year.” I also was surprised by the fact that the increase was enacted by an all-Republican Board of County Commissioners. Rather than jumping onto social media with some sort of meme, I decided to do more research.

I discovered this editorial from last year when the increase was being debated. The Orlando Sentinel Editorial Board made several interesting points.

First, it explained that The Villages is growing at the fastest rate in the country, as more and more retirees move into Florida. It refuted the claim made by developers that “growth pas for itself” by describing the financial burden that development puts on local government, as the county must add police and fire services, build roads, and undertake maintenance costs associated with the addition of almost 2,500 new homes and 159 commercial buildings holding more than 2.5 million square feet of space. In theory, adding all of those properties increases the property tax base, thus generating revenue to pay for the additional county expenditures. But to the surprise of many, but not to those who study the hidden costs of development, those revenues are insufficient to cover those new costs.

Second, the Editorial Board highlighted the fact that Sumter County had the fourth-lowest property tax rate in Florida. It trumpeted that low rate to attract development. The county has been so successful in using low tax rates as an enticement that in less than ten years population increased by 40 percent, and developers have plans for tens of thousands of new homes. It is no surprise that lowering taxes in order to promote growth is a bad strategy if the taxes are reduced by too much.

Third, the Editorial Board notes that Sumter County tries to pay for the cost of building roads by imposing a $2,600 transportation impact fee on each new home. But then the county cuts that rate to $901 for each new home in The Villages, and considering that most of the new homes are in The Villages, the Board pretty much chopped its impact fee revenue to levels too low to support the costs it is intended to cover. I’m guessing that this move was an attempt to grab votes from residents of The Villages.

Fourth, the Editorial Board conceded that development creates jobs. But those jobs are low-paying service jobs. As a consequence, workers cannot find affordable housing in the county. Something’s wrong with the planning underlying the rapid development in the county.

But here’s the kicker. According to this report of the public hearing preceding the enactment of the property tax rate, the increase is the first in 15 years and even after it went into effect Sumter County still ranks among the Florida counties with the lowest property tax rates. The report points out that residents of The Villages don’t find that news comforting, and insist that the developers of The Villages should pay for the road maintenance. But, of course, the developers would then raise the price of the homes they are building and selling.

So let’s continue the math computation that Estep started. A 25.55 percent increase over 15 years is equivalent to a roughly 1.5 percent annual increase in each of those 15 years. That’s not a very big tax increase. Would it not have been better to raise the rate each year by 1.5 percent than to wait 15 years and then raise it by 25.55 percent? Politicians anxious to get votes by proclaiming “not tax increases” in the face of inflation pretty much gave a good deal to residents of those past 15 years, who saw on average a cumulative Social Security increase during those 15 years of roughly 30 percent. But many of those folks are long gone. Instead, the politicians have given a bad deal to those who recently moved into the county and are now paying the price of a “no tax increase” deal enjoyed by their predecessors. No wonder residents are unhappy with the Board of Commissioners. But they ought to be very unhappy with politicians who dupe people into thinking that taxes can be frozen or cut because, in theory, tax cuts generate growth that generates revenue. Practical reality tells us that this theory is nonsense, and the property owners in Sumter County are just one example of the many people who are paying, and will pay, the price for the foolishness of gathering votes by proclaiming foolish promises while shifting even higher costs into the future. And if it’s that bad at the local level, think of how bad it is, and how much worse it will become, at the national level. The country is in deep trouble, financially and socially. Very deep trouble.

Nine years ago, the previous administration and the Congress enacted a payroll tax cut in order to stimulate the economy. I wrote about this provision in Do Lower Taxes, Less Regulation Create Jobs? Do Payroll Tax Cuts, Employment Credits, More Section 179 Expensing, Unemployment Benefits Create Jobs? I reacted to the payroll tax cut with these words:

The payroll tax cut did little, if anything, to fix the problems, because the economy is no better at this point than it was when that cut was enacted, and it might even be, by some measures, worse. As a short-term band-aid, it was worth the attempt. As long-term surgery, it fails. It costs too much. It undermines funding for the Social Security program.

A few months ago, the current administration resurrected the payroll tax cut concept as a tool to fix the economy. I wrote about this idea in Taxes and the Virus, in which I made it clear that I oppose cutting payroll taxes. Some might ask, “Considering that the payroll tax cut is a demand-side approach, which you claim to support, why do you oppose it?” The answer is that a payroll tax cut puts money into the pockets of the poor and middle class while taking it out of their other pockets. It is another instance of borrowing today in spite of a much higher price in the future.

Now, the current administration once again, according to reports such as this one, is touting payroll tax cuts as an answer. In addition to hastening the arrival of the Social Security and Medicare crises, payroll tax cuts don’t put any money into the hands of the unemployed. They are in greater need of assistance than are those who have jobs, even jobs that don’t pay much, because not much still is more than zero.

But there is a solution. In researching this question, I came upon two of my previous commentaries on the issue, How Politics Generates Tax Complexity and Tax Statutes: More than Just the Internal Revenue Code. When the payroll tax cut enacted in 2011 was extended to include the first two months of 2012, it included a tax of 2 percent of wages received during what was then the two-month extension of the payroll tax cut, to the extent those wages exceeded $18,350. However, when Congress extended the extension to include all of 2012, it repealed the 2 percent tax retroactively.

If there is to be a payroll tax reduction, cutting the payroll tax for taxpayers earning less than, say, $90,000 per year while increasing it for taxpayers earning more than, say, $150,000 per year, would solve two problems. First, it would mitigate the adverse impact of a payroll tax cut on Social Security and Medicare funding. Second, it would provide a tiny offset to the multi-decade shift of income and wealth from the poor and middle class to the elite. That tiny offset could open the door to the remediation that is necessary to fix the problem at the root of the economic mess. When a substantial portion of the population has little or nothing to lose, some people behave in ways that are counterproductive to making progress. Any society in which wealth and income continue to increase disproportionately for the elite, whether monarchs and nobles or their modern-day equivalents, is a society that becomes increasingly unstable.

So, ultimately, I prefer other solutions than cutting payroll taxes. But if they are to be cut, they must be offset with a revenue stream from those who are not in need of relief. And any offset mechanism must be designed to prevent the wealthy and cash-rich corporations to grab benefits as they did with stimulus assistance. Those who are not needy ought not be greedy.

One of the points I try to get across to my students is that analysis of the law cannot be undertaken properly until and unless the facts are determined. Yes, it is possible to do legal analysis in the absence of all the facts, but that sort of analysis requires bifurcated reasoning along the lines of “if the facts are X then the analysis is 1 and the conclusion would be sigma but if the facts are Y then the analysis is 2 and the conclusion would be gamma.” That sort of analysis helps in planning transactions, in guiding litigation strategy, in helping someone learn the significance of facts and their impact on analysis, but it doesn’t, of course, resolve disputes or provide definitive answers.

So with one of the goals of a legal education being the importance of paying attention to facts before making legal arguments or engaging in legal analysis, it was disappointing to read what happened in a case brought to my attention by reader Morris. In Benton v. Comr. T.C. Summ. Op. 2020-12, the IRS challenged various deductions claimed by the taxpayer in connection with his picture framing business.

The taxpayer operated his picture framing business out of a house in a residential neighborhood. The taxpayer rented the house, and paid rent of 38,576 to the owner. For unknown reasons, the taxpayer claimed a rent deduction of $42,000 on the tax return. The house included a living room, a dining room, a kitchen, three bedrooms, and two bathrooms. Neither the taxpayer nor his wife resided in the house. The taxpayer testified that he used the house exclusively for business purposes and offered photos to show that he displayed framed pictures and various types of artwork in some of the rooms. One of his customers testified at trial that she visited the house two or three times during the year in issue to pick up photos that the taxpayer had framed for her and it was her impression that he used the house to conduct the framing business. And the parties stipulated that neither the taxpayer nor his wife resided in the house.

The IRS argued that the entire deduction for rent expense should be disallowed because section 280A(a) provides the general rule that a taxpayer may not claim a deduction “with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence.” The court rejected this argument. It stated:

Respondent’s reliance on section 280A(a) in this case is misplaced. The parties stipulated that petitioners did not reside in the house where [the taxpayer] conducted his business. [The taxpayer] testified that he used the house exclusively for business purposes and offered photos to show that he displayed framed pictures and various types of artwork in some of the rooms. In addition one of [his] customers appeared at trial and testified that she visited the house two or three times during the year in issue to pick up photos that [the taxpayer] had framed for her and it was her impression that he used the house to conduct the framing business. We conclude that petitioners did not use the house in question as a residence, see sec. 280A(d), and that section 280A is not applicable.

Although conducting a picture framing business in a house in a residential community might be considered unusual, we conclude that the rent [the taxpayer] paid was an ordinary and necessary expense within the meaning of section 162(a). The expense was ordinary in that obtaining adequate space to display framed photos and other artwork is one that commonly or frequently occurs in connection with a picture framing business. The expense likewise was necessary in that [the taxpayer] had a convenient place to meet with potential customers and otherwise conduct business with them. It follows that [the taxpayer is] entitled to a deduction for rental expenses of $38,576.

If there had been a dispute over whether the taxpayer used the house for residential purposes, then arguing that section 280A applied would make sense because it would be the logical consequence if the IRS prevailed in showing that the use of the house was not exclusively for business purposes. But there was no dispute on this issue. The parties stipulated that the house was not used for anything other than business purposes. The taxpayer drove that point home with his testimony and that of his customer, but even without that testimony, the IRS had, in effect, conceded the point. Once the fact exists, whether stipulated or proven in a dispute, that the house was not used as a residence, section 280A should not have been given any attention.

Put plainly, lawyers should not make arguments that are inconsistent with the facts. Actually, that advice applies to anyone making an argument about anything. In today’s world, too many people want to jump into a discussion with an argument that appeals to them emotionally without taking the time to determine if the facts are consistent with that argument. Perhaps the title of this post could have been “When Debating Anything, First the Facts, Then the Argument.”

Readers of MauledAgain know that I have no sympathy for starving oligarchs who use some of their wealth to lobby for tax cuts that increase their wealth by more than the costs of lobbying, who fail to create most of the jobs they claim the tax cuts will permit them to create, and who in some instances respond by cutting existing jobs. Readers also know that I have warned that the failure of Congress to provide adequate resources to the Internal Revenue Service contributes to lax tax enforcement and promises to add to the erosion of revenue already underway because of multiple instances of unnecessary tax handouts to the wealthy and large corporations.

About a week ago, the Treasury Inspector General for Tax Administration issued a report, the title of which serves as a warning: High-Income Nonfilers Owing Billions of Dollars Are Not Being Worked by the Internal Revenue Service. The news is bad.

After pointing out that the tax gap – the shortfall between what the law requires taxpayers to pay and what taxpayers are in fact paying – is estimated to be $441 billion for 2011, 2012, and 2013, the report reveals that $39 billion is due from taxpayers who fail to file tax returns. Most of this shortfall is attributable to “high-income nonfilers.” The Inspector General determined that although the IRS is developing a new approach to dealing with nonfilers, it has not yet implemented that approach, and when implemented, it will be “spread across multiple functions with no one area being primarily responsible for oversight.”

Worse, the Inspector General determined that for taxable years 2014 through 2016, 879,415 high-income nonfilers failed to pay roughly $45.7 billion in taxes. Of those 879,415 high-income nonfilers, the IRS did not pursue 369,180 of them, accounting for an estimated $20.8 billion in unpaid taxes. Of the 369,180 were not put into the queue for pursuit of the unpaid taxes and the cases for 42,601 were closed without further action. The other 510,235 of the 879,415 high-income nonfilers “are sitting in one of the Collection function’s inventory streams and will likely not be pursued as resources decline.”

Even worse, because the IRS works on each tax year separately rather than combining cases when a taxpayer fails to file for more than one year, it “is missing out on opportunities to bring repeat high-income nonfilers back into compliance.” Of these high-income nonfilers for 2014 through 2016 that the IRS failed to address or resolved, the top 100 owed an estimated $10 billion in unpaid taxes. The Inspector General has proposed seven changes to deal with these problems, but the IRS agreed in full only to two of them, partially agreed with four, and disagreed with one. The IRS objected to putting the nonfiler program under its own management structure.

Here and there a failure to file arises from an understandable problem, such as a taxpayer falling ill without anyone realizing it in time, or developing dementia or similar mental impairments. Sometimes the failure to file arises from financial setbacks for taxpayers who don’t realize that in those situations it is best to file and indicate the inability to pay. Some instances of failure to file are expressions of principled protest against specific government policies. A significant portion reflect a deep greed rooted in a taxpayer’s perception that they have no obligation to contribute to society, with the failure to file and pay almost always defended as a justified expression of the taxpayer’s anti-tax philosopy.

Is it any wonder that so many people are enraged? Though there are many ingredients fueling social unrest, an important one is the growing sense among Americans that they are fools for complying with tax laws when “high income nonfilers” are “getting away with it.” Would it be a surprise if more taxpayers choose not to file, knowing that the IRS lacks the resources to chase them down? This sort of mob mentality is no less likely to spread among taxpayers as it can spread among crowds encouraged to break other laws.

Though it is easy to suggest that Congress needs to wake up and provide sufficient funding to the IRS, especially because every dollar invested returns roughly seven, but the Congress is incapable of doing this. Enough of It is controlled by the anti-tax, anti-government crowd that it lacks the ability to do what needs to be done. Until the makeup of the Congress changes, the tax gap will persist and even increase, adding to the growing deficit that threatens to cause havoc more catastrophic than what currently afflicts the nation. The greed that is fueling the income and wealth inequality contributing to so many of the nation’s problems is growing as though on steroids, and needs to be neutralized expeditiously.

Not all taxpayers realize that unemployment compensation payments are gross income for federal income tax purposes, and for purposes of state income taxes in some, but not all, states. Not all taxpayers realize that penalties are imposed if withheld taxes plus estimated tax payments are insufficient. In New Jersey, as explained in this article, not all recipients of unemployment compensation are aware that the state is not withholding federal income tax on the $600 portion of unemployment compensation provided by the federal government in response to the virus-caused economic crisis. Even if a recipient wants the New Jersey Department of Labor to withhold on the $600, there is no way to make that happen.

The Department of Labor, when asked, explained that it preferred to get the payments out to unemployed workers as quickly as possible, rather than delaying payments for several weeks while it updated its operating procedures and software. Even though New Jersey withholds federal income taxes on the basic state-provided payments, bringing the supplemental payments within the system is not something that can be done overnight or over a weekend. In the meantime the state is attempting to update the system to permit withholding on the supplemental payments but there is no clue as to when, or if, that will happen. According to the U.S. Department of Labor, New Jersey is not the only state with this issue. It notes that “a number of states” are having “technology challenges” setting up withholding, but I have not attempted to dig into the unemployment payment withholding systems in other states to identify those states, nor do I assume it would be possible to get that information.

States that do not withhold on the supplemental payments must notify recipients that the payments are subject to federal income tax, and must issue a Form 1099-G early in 2021 to the recipients. Recipients thus have two choices. They can make estimated tax payments. Or they can sit back and hope that they qualify for an exemption from underpayment penalties. How are underpayment penalties avoided? First, if the taxpayer owes less than $1,000, the penalties do not apply. Second, there are no underpayment penalties if combined withheld taxes and estimated tax payments equal 90 percent of federal income tax liability or 100 percent of the previous year’s income tax liability (with the 100 percent increased to 110 percent for taxpayer with adjusted gross income over $75,000 (or $150,000 for married taxpayers filing joint returns)).

What this means is that some unemployment compensation recipients may discover that because no federal income taxes have been withheld from the supplemental portion of the unemployment compensation payments, not only will they need to pay taxes in early 2021 with respect to their 2020 federal income tax return, they may also be subject to underpayment penalties. It also is possible that the additional payments push the taxpayer into a higher bracket, so that the withholding on the basic unemployment compensation payments generates an additional tax payment shortfall, because the withholding rate on those payments is only 10 percent.

My advice to any taxpayer is to use an online calculator, or the tax estimation feature of tax preparation software, to get a rough idea of what the 2020 tax situation will be for the taxpayer, and to make estimate tax payments if the calculations suggest the need to do so. The challenge is that many taxpayers are, and will remain, unaware of the problem, and even some of those who realize there is an issue will not concern themselves about it until it is too late. Though it is unfortunate that some states, like New Jersey, are not withholding on the supplemental payments, even if they did, or even if they do, it will not necessarily solve the problem. Failure to make estimate tax payments has been a trap for the unwary for many years, and now will grab even more taxpayers.

This time, reader Morris directed my attention to a web page directed at barbers who participate in the St. Baldrick Foundation’s head-shaving events held to raise money for childhood cancer research. Specifically, reader Morris pointed out this question and answer on the web page:

Does the St. Baldrick's Foundation provide a tax write-off for barbers who volunteer their services?

Yes, we do! Please fill out the In-Kind Donation Form and a letter stating your average hourly pay, and turn it in to your event treasurer. St. Baldrick's will issue you a tax receipt for your services!

Reader Morris then commented, “I believe the Foundation issuing a tax receipt for barber services based on average hourly pay is incorrect or illegal. The barber can't deduct the charitable contribution for the value of his{her} time or services.” He is correct. There is no charitable contribution deduction for donating services. Treasury Regulations section 1.170A-1(g) states, “Contributions of services. No deduction is allowable under section 170 for a contribution of services.”

Reader Morris then asked, “Is this tax fraud?” I explained that his question cannot be answered until and unless additional information is ascertained. If those who are issuing receipts stating that a barber has contributed a dollar amount to the Foundation, which appears to be a qualified charity, compute that amount based on the barber’s hourly rate knowing that charitable contribution deductions are not allowed for the donation of services, then it is very likely that tax fraud is being committed. Whether the IRS notices what is happening is a different question, as is the question of whether the IRS would choose to pursue the matter. That decision would reflect the amounts involved, resources available to the IRS, whether its tax fraud investigators are focused on other situations, and its evaluation of how likely it would be that it could obtain a conviction or plea.

It is also possible that those issuing these receipts are unaware of the tax law or have been given bad advice. In this instance, the requisite intent to violate the tax law would be missing and tax fraud would not be an issue. However, there are a variety of negligence and other penalties that the IRS could choose to impose. It also could choose to impose these penalties if it decided that it was not worth pursuing the tax fraud possibility.

The Foundation is located in California. California follows the federal income tax rule prohibiting deductions for donated services. It appears that the Foundation sponsors head-shaving events in other states, but as best as I can determine, every state with an income tax follows the federal income tax prohibition on deducting the value of services donated to a charity. So certainly with respect to events held in California, the possibility of IRS audits, fraud charges, and penalties is compounded by the possibility of California Franchise Tax Board audits, fraud charges, and penalties.

The rationale for the denial of the deduction is worth mentioning. The barber participating in the event could charge the person whose head is being shaved, collect the cash, report the gross income, transmit the cash to the Foundation, and claim the deduction. The net effect on taxable income would be zero. If the barber simply provides the shaving services without charging, the net effect on taxable income should still be zero, and allowing a deduction for the value of the services would be inconsistent with that outcome. Because the person donating services does not include the value of those services in gross income there is no tax basis to support a deduction.

That’s the question reader Morris posed to me a few days ago. He directed my attention to a February 2020 article with the interesting title, “How to donate a piece of your brain to science—while you’re still alive.” The article describes how this can be done. When a person undergoes brain surgery, they can agree that “a piece of their brain that would otherwise be tossed away” can be used by researchers to increase understanding of how human brains function, particularly the function of each neuron. Otherwise brain-healthy individuals are not candidates for this sort of donation.

Reader Morris noted that out-of-pocket expenses for brain surgery, whether to treat epilepsy or remove tumors, are medical expenses that qualify for the medical expense deduction. He suggests that the donation of the brain tissue would also qualify for the deduction.

First, I would want to see the contract between the patient and the hospital, the surgeons, and the laboratory. If there is a separate payment to the patient, which I do not think is the case, then there would be no deduction, and the tax consequences would parallel those that I describe in Tax Consequences of Kidney Sales. If, instead, the amount charged to the patient is reduced because of the permission granted by the patient to do research on the brain tissue, the amount qualifying for the medical expense deduction would be similarly reduced.

If the patient is not paid for the brain tissue and is not given a reduced invoice, then the question is different. Because there is no authority, the patient or the patient’s tax advisor must consider the question of whether there should be a deduction. One hurdle that needs to be addressed is putting a value on brain tissue. I don’t know how to do that. I don’t think there is a legal market for brain tissue. But even getting past the valuation question, how would the IRS react if a deduction were to be claimed and the taxpayer’s return audited? My guess is that the IRS would take the position that there is no deduction. I rest my guess on the position that the IRS takes with respect to the donation of blood. The IRS treats the donation of blood as a service and thus places it within the prohibition of charitable contribution deductions for contributing services. Is the IRS position correct? I think it is wrong, but that’s me, though I think there are others who would agree with me.

Interestingly, some states have enacted deductions for donations of organs for transplants. These statutes avoid the valuation issue by specifying a dollar amount. For example, Maryland provides for a $7,500 deduction against Maryland state income tax for an organ donation for transplant, with legislation pending to increase it to $10,000. However, letting a lab do research on a piece of brain tissue is not a donation for organ transplant and would not generate a deduction for state income tax purposes.

More than a few commentators, academics, researchers, politicians, and others have written articles, op-ed pieces, and blog posts advocating for a federal income tax deduction for organ donations for transplants. Unless such a statute were drafted to reach more than organ donations, the patient who permits the lab to do research on otherwise discarded brain tissue would not be entitled to a deduction.

Reader Morris found a doozy. The folks at TaxAct offer a free Tax Code sleep track which they have named Tax Code Coma. Someone had the unenviable task of reading aloud the Internal Revenue Code.

So reader Morris asked me how long it takes to read the Internal Revenue Code. The answer, of course, rests on two factors. One is the number of words in the Internal Revenue Code. The other is the speed with which a person reads.

As to the first factor, it’s been a while since I last computed the answer. I have written about the size of the Internal Revenue Code, mostly in response to absurd claims about the number of pages it fills, in many posts, beginning with Bush Pages Through the Tax Code?, and continuing with Anyone Want to Count the Words in the Internal Revenue Code?, Tax Commercial’s False Facts Perpetuates Falsehood, How Tax Falsehoods Get Fertilized, How Difficult Is It to Count Tax Words, A Slight Improvement in the Code Length Articulation Problem, and Tax Ignorance Gone Viral, Weighing the Size of the Internal Revenue Code, Reader Weighs In on Weighing the Code, Code-Size Ignorance Knows No Boundaries, Tax Myths: Part XII: The Internal Revenue Code Fills 70,000 Pages, Not a Surprise: Tax Ignorance Afflicts Presidential Candidates and CNN, The Infection of Ignorance Becomes a Pandemic, Getting Tax Facts Correct: Is It Really That Difficult?, Reaching New Lows With Tax Ignorance, Incorrectly Breaking Down the Internal Revenue Code, and Is Tax Ignorance Eternal?. When I last did a rough count, I determined that there are about 400,000 words in the Internal Revenue Code. That’s not counting annotations, notations of repealed or amended portions, and references to the specific legislation adding, amending, or repealing provisions. By now, with various additions and amendments, the word count probably is 425,000, but for the sake of determining how long it takes to read the code, I’ll use 500,000.

As to the second factor, the answer depends on how fast a person reads. The average person reads roughly 200 to 250 words per minute. Note that it’s one thing to read, and a totally different thing to understand. Someone trying to understand written text might need to read more slowly, or to go back and reread some or all of the text. The focus of the question posed by reader Morris is read, not understand. If his question had been how long it takes to understand the Internal Revenue Code, the answer would be years at the very least.

The next step is arithmetic. Reading 500,000 words at 250 words per minute means it takes 2,000 minutes to read the Internal Revenue Code. At 200 words per minute, it would take 2,500 minutes. So anywhere from 33 hours to 42 hours. Of course, because no one in his or her right mind would want to, or could even, read for that many hours without taking a break, it would not be surprising for someone who has read the Internal Revenue Code to state that it took a week or two, reading perhaps 3 to 6 hours each day.

The folks at TaxAct, on the page offering the free Tax Code Coma, claim that “It would take 19 days straight to read the entire U.S. Tax Code.” It is unclear how they computed that number. Perhaps they meant to say that it takes 19 days straight to read the Internal Revenue Code out loud. But I doubt that is the case, because the average person reads about 150 words out loud per minute. That would translate to roughly 55 hours. Nineteen days contain 27,360 minutes. Someone reading aloud 150 words per minute could read roughly 4,000,000 words. That suggests they are running with the impossible-to-exterminate erroneous claim that the Internal Revenue Code contains tens of thousands of pages. Over at The Motley Fool, Maurice Backman, disclosing reliance on the 74,000-page Internal Revenue Code nonsense, concludes that it would take 1,200 hours to read the Internal Revenue Code. How many days is that? Fifty. That’s two and a half times what the Tax Act folks computed.

I have read the Internal Revenue Code. No, not in one sitting. No, not cover-to-cover like a novel. But because I wrote a series of Tax Management, Inc., portfolios that covered gross income, deductions, and credits, I had no choice but to read all of those provisions, accompanying procedural provisions, and some other portions of the Code. Many years earlier, before I started writing tax books and articles, I did read the Internal Revenue Code, in an effort to teach myself what I had not yet learned in tax courses. Granted, though I continued to read provisions as they were added and amended, I did not keep up with the excise tax portion of the Internal Revenue Code, so it’s safe to say that at this point there are some Internal Revenue Code sections I have not read in their present form. And, no, my experience is not unique. There are people in this world who have read all of the Internal Revenue Code, though almost certainly not cover-to-cover. Yet we are far and few between. The vast majority of Americans who are subject to one or another federal tax, and that means all Americans, have never read any portion of the Internal Revenue Code. That is, in many ways, unfortunate.

For me, there are advantages to watching television court shows. Whenever I see one that involves a tax issue, or in which tax is a factor, I take the opportunity to write about it. For example, I have written about television court shows involving tax dozens of times, including these posts: Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, 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, Another Easy Tax Issue for Judge Judy, Yet Another Easy Tax Issue for Judge Judy, Be Careful When Selecting and Dealing with a Tax Return Preparer, Fighting Over a Tax Refund, Another Tax Return Preparer Meets Judge Judy, Judge Judy Identifies Breach of a Tax Return Contract, When Tax Return Preparation Just Isn’t Enough, Fighting Over Tax Dependents When There Is No Evidence, If It’s Not Your Tax Refund, You Cannot Keep the Money, Contracts With Respect to Tax Refunds Should Be In Writing, Admitting to Tax Fraud When Litigating Something Else, When the Tax Software Goes Awry. How Not to Handle a Tax Refund, Car Purchase Case Delivers Surprise Tax Stunt, Wider Consequences of a Cash Only Tax Technique, Was Tax Avoidance the Reason for This Bizarre Transaction?, Was It Tax Fraud?, Need Money to Pay Taxes? How Not To Get It, and When Needing Tax Advice, Don’t Just “Google It”.

But, for me, there are disadvantages to watching television court shows. There are so many of them that sometimes I get fooled. How? The other day I noticed the word “tax” in the cable guide, so I paid close attention. It was episode 63 of season 6 of Hot Bench. It began well, with one judge opening the proceedings by describing the case as involving “the thing Americans fear most, being audited by the government.” As I watched and started taking notes, I realized, “Wait! I’ve seen this episode. I think I blogged it.” I checked. Indeed, I had, in, When the Tax Software Goes Awry.

But it wasn’t a total loss of a blogging opportunity. As I watched the episode, a thought occurred to me that had not crossed my mind when I wrote about the case in November of last year. Before describing that thought, I will share the facts of the case as I summarized them last November:

The plaintiffs, a married couple, sued the accountant who prepared their federal and state tax returns. The Commonwealth of Virginia Department of Revenue, after noticing larger than usual deductions and credits, contacted taxpayers, asking for an explanation. In turn, the plaintiffs contacted the defendant, who examined the returns and concluded there had been a software error.

The defendant explained to the court that when he examined the returns, he figured out that the software pulled amounts from the federal return onto the state return, generating erroneous deductions and credits. He also explained that when he spoke to someone at the Department of Revenue, that person informed him that thousands of Virginia taxpayers had been affected by this software glitch. Accordingly, the Department of Revenue waived all penalties but did not have the authority to waive interest.

The plaintiffs argued that the defendant should have noticed the error before filing the returns, and wanted him to pay the entire amount demanded by the Department of Revenue. The defendant replied that it was an error by the software and not his fault. He also pointed out that he was willing to pay the interest owed by the plaintiffs, but that during negotiations the plaintiffs refused that offer because they wanted him to pay the entire amount due, including the tax.

The court concluded that the defendant had not acted intentionally or maliciously and that the tax that was due was an obligation of the taxpayers that they would have paid on time had the software error not occurred. Accordingly, the court held that the defendant was liable for the interest.

As I listened, I began to think more carefully about the decision to issue a decision in favor of the plaintiffs for the amount of the interest they had been required to pay.

In one sense, the defendant’s statement that he was willing to pay the interest tilted the judges’ decision. What would have happened had the defendant not agreed to pay the interest but had refused any obligation to do so?

Yes, it is possible to argue that the defendant’s software error, or more accurately, failure to notice and do something about the error, was the reason that the plaintiffs incurred interest charges, and that the defendant should reimburse the plaintiffs. Had there been no error, the plaintiffs would not have received a larger refund than that to which they would have otherwise been entitled.

On the other hand, the plaintiffs received the use of an excess refund for the time between when their account was credited with the excess refund and when they repaid the excess refund. So though they had to pay interest, they had the use of the money. In effect, they borrowed money. Suppose they had invested the money and earned interest or other income. In that event, how could they claim that they suffered damages, unless the interest rate charged by Virginia exceeded the rate of return they earned on their investment? Imagine borrowing money, investing it, making a return, and having someone else pay the interest on the loan. Even if they consumed the excess refund, for example, by taking a vacation, they were able to do something they otherwise would have been unable to do, because they had the use of money that wasn’t theirs and that they were obligated to repay. Using someone else’s money has value, measured by the interest charged by the lender.

Had I been representing the defendant, from the outset, I would have cautioned him about the dangers of offering to pay the interest, especially when the defendant’s clients wanted him to pay the excess refund. Once the case went to trial, I would have advised the defendant not to disclose the negotiations that failed to lead to a settlement. I also would have argued that the plaintiffs, by having the use of the money, did not suffer damages when they were required to pay interest on the borrowed money. I would have asked the plaintiffs to disclose what they did with the excess refund when it was received.

I don’t know if my approach would have spared the defendant from paying the interest. But I certainly would have taken that position, made the argument, and advised the defendant not to disclose he had offered to pay the interest.

The caption for this morning’s commentary comes from reader Morris. It’s the subject line from his email, though I put “not” in upper case letters for emphasis. When I went to the story he referenced, the headline made me gasp. It reads, “Swiss dog tax: Pay it or your pet dies.” Are you kidding me? Is this from the Onion? Sadly, no, it’s not. Though it is a nine-year old story, and I usually focus on recent developments, this is so shocking I had to express my reaction.

The town of Reconvilier, Switzerland has a yearly dog tax. In American dollars, it’s $48.50. Not surprisingly, some people fail to pay. Town officials decided to make use of a law from 1904, a law “that allows officials leeway to kill dogs as a last resort for collecting unpaid taxes.” Threatening to exercise the power authorized by this law was triggered by the fact some dog owners had failed to pay the tax for years. According to the story, one town official noted that “as recently as the 1960s, [the town] dealt with troublesome dogs in a brutally straightforward fashion.” It’s one thing to put down a rabid dog. But the failure of a dog owner to pay a tax does not make the dog “troublesome.”

The law should never have been enacted. It should be repealed. Until it is repealed, it should be ignored. Not only is it wrong on so many counts, morally, politically, theologically, philosophically, it also would be absurdly ineffective. Killing a dog doesn’t put money into the town treasury. Surely there are some individuals who have failed to pay the tax but who no longer own a dog. Does the law then authorize killing some other family pet that isn’t a dog and with respect to which there is no tax?

Logically, the approach taken when this law was enacted would generate similarly unacceptable statutes. If a person fails to pay a per capita, or head, the person is decapitated. If a person fails to pay a real property tax, the person’s home is burned down. If a person fails to pay an automobile registration fee, the person’s car is taken to the car-crushing facility. I can’t imagine what was going through the minds of those who enacted the 1904 town statute in question.

Fortunately, as the article explains, “the town is facing criticism from all corners.” One town official explained that he has “been overwhelmed by insults and threats" since the town disclosed that it was going to implement the 1904 law. Petitions to stop the town’s plans, such as this one and this one, circulated, and according to this web site, the town council “heard the public outcry and is now proposing to amend or abolish the archaic law so the threat of killing dogs is no longer on the books.”

I have not been able to determine if the law was repealed or amended. My guess is that something was done, and my guess and hope is that town officials found a different, and more sensible, way to collect the unpaid taxes.

Those television court shows with a tax angle do come in bunches. There’s another one to add to the list of these shows on which I have commented. They include Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, 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, Another Easy Tax Issue for Judge Judy, Yet Another Easy Tax Issue for Judge Judy, Be Careful When Selecting and Dealing with a Tax Return Preparer, Fighting Over a Tax Refund, Another Tax Return Preparer Meets Judge Judy, Judge Judy Identifies Breach of a Tax Return Contract, When Tax Return Preparation Just Isn’t Enough, Fighting Over Tax Dependents When There Is No Evidence, If It’s Not Your Tax Refund, You Cannot Keep the Money, Contracts With Respect to Tax Refunds Should Be In Writing, Admitting to Tax Fraud When Litigating Something Else, When the Tax Software Goes Awry. How Not to Handle a Tax Refund, Car Purchase Case Delivers Surprise Tax Stunt, Wider Consequences of a Cash Only Tax Technique, Was Tax Avoidance the Reason for This Bizarre Transaction?, Was It Tax Fraud?, and Need Money to Pay Taxes? How Not To Get It.

This time it is episode 155 of Hot Bench season 6. The plaintiffs entered into a contract to purchase a home from the defendant. There was a contingency in the contract that required the plaintiffs to prove that they had sufficient liquidity to make the purchase in the event that the defendant received a better offer. The defendant did get a better offer, notified the plaintiffs, and asked for proof of liquidity. The plaintiffs provided the defendant with a bank account statement and a stock account statement.

The defendant, who admitted she was not a lawyer, treated the stock account statement as a 401(k) plan statement even though nothing on it indicated that it was a 401(k) plan statement. The defendant explained that she then “googled it” to find out how much of the stock account statement could be withdrawn to purchase a home She determined that only $50,000 could be taken out of the account to purchase a home.

The plaintiffs testified that they had informed the defendant’s real estate agent that the account in question was a stock account. They also testified that they gave the agent guidance on learning more about how long it would take to get cash out of the account and the process through which they could do so.

The defendant, relying on her conclusions with respect to 401(k) plans, cancelled the contract. The defendant did not give any explanation for why she treated the stock account statement as a statement with respect to a 401(k) plan.

The defendant admitted she did not seek professional advice with respect to the liquidity available to the plaintiffs from the two accounts. In fact, the plaintiffs had much more liquidity in the two accounts combined than they need to purchase the home outright for cash.

The plaintiffs had sued not only for return of the deposit, but also for the expenses they incurred because of the cancellation. For example, because they had already entered into a binding contract to sell their existing home, they had to pay rent for temporary living quarters.

The court entered judgment for the plaintiffs in the entire amount they sought. One of the judges pointed out to the defendant that using google to interpret a sophisticated legal contract is unwise. Indeed.