MauledAgain

Sometimes the simplest things get complicated, and often unnecessarily so. An example is found in the story provided by the opinion in Tilden v. Comr., No. 15-3838 (7th Cir. 1/13/2017). The IRS issued a notice of deficiency to the taxpayer. The due date for filing a petition with the Tax Court was April 21, 2015. When the petition arrived at the Tax Court on April 29, 2015, the Tax Court dismissed it as untimely. The taxpayer explained that on April 21, 2015, his attorney’s staff put the petition in an envelope, purchased first class and certified delivery postage from Stamps.com, printed the postage, affixed it to the envelope, and delivered the envelope to the post office on that same date. The post office did not put a postmark on the envelope. The taxpayer argued that because timely mailing is treated as timely filing, the Tax Court should not have dismissed the petition. Initially, though conceding that the envelope had been delivered to the post office on April 21, the IRS argued that under section 301.7502-1(c)(1)(iii)(B)(2) of the regulations, applicable because the postmark was not made by the postal service, the petition was not timely filed because it arrived at the Tax Court after a period of time longer than the period of time an envelope postmarked by the postal service would have arrived. The Tax Court, however, applied section 301.7502-1(c)(1)(iii)(B)(3) of the regulations, which provides that if the envelope has both a postal service postmark and a postmark not made by the postal service, the latter is disregarded, and the determination of whether the mailing was timely is made under section 301.7502-1(c)(1)(iiii)(A) of the regulations. Recognizing that the postal service had not placed a postmark on the envelope, the Tax Court noted that the postal service had entered the envelope into its tracking system on April 23, and treated that action as equivalent to a postmark. Accordingly, it treated April 23 as the date of filing, which made the petition late, and so the Tax Court dismissed the taxpayer’s petition.

The taxpayer sought reconsideration, arguing that the parties had not raised the issue of whether tracking data is equivalent to a postmark made by the postal service. The IRS agreed, abandoned its argument based on section 301.7502-1(c)(1)(B)(2) of the regulations, requested that the Tax Court apply section 301.7502-1(c)(1)(B)(1) of the regulations, and conclude that it had been satisfied. The Tax Court denied the motion, explaining that the 90-day limitation for filing petitions is jurisdictional, and thus cannot be altered by agreement between the parties.

The taxpayer appealed to the Seventh Circuit. At oral argument, the court and counsel for the parties focused on whether sections 6213 and 7502 of the Internal Revenue Code and section 301.7502-1 of the regulations create a rule that is jurisdictional. The Seventh Circuit requested supplemental memoranda on the issue. The Seventh Circuit then concluded that the provisions are jurisdictional. However, it concluded that although litigants cannot stipulate to jurisdiction, they can agree on the facts that determine jurisdiction. The court provided as an example the requirements under federal diversity jurisdiction, which require that the litigants be domiciled in different states. Though the parties cannot simply stipulate that diversity exists, they can stipulate that one party is domiciled in one state and the other party in another, and that agreement is binding unless the parties are colluding. Because the Tax Court did not suspect the taxpayer and the IRS of colluding, because the IRS conceded that the envelope was delivered to the postal service on April 21, and because there is nothing to establish that the postal service treats entry of an item into its tracking system as a postmark, the Seventh Circuit concluded that the petition was timely filed, and reversed the Tax Court.

The Seventh Circuit then shared its thoughts on what had happened:

Although the taxpayer thus prevails on this appeal, we have to express astonishment that a law firm (Stoel Rives, LLP, of Salt Lake City) would wait until the last possible day and then mail an envelope without an official postmark. A petition for review is not a complicated document; it could have been mailed with time to spare. And if the last day turned out to be the only possible day (perhaps the firm was not engaged by the client until the time had almost run), why use a private postmark when an official one would have prevented any controversy? A member of the firm’s staff could have walked the envelope to a post office and asked for hand cancellation. The regulation gives taxpayers another foolproof option by providing that the time stamp of a private delivery service, such as FedEx or UPS, is conclusive. 26 C.F.R. §301.7502–1(c)(3). Stoel Rives was taking an unnecessary risk with Tilden’s money (and its own, in the malpractice claim sure to follow if we had agreed with the Tax Court) by waiting until the last day and then not getting an official postmark or using a delivery service.

That paragraph should be included in whatever materials are used in tax procedure courses in every tax law program in the country. It also should find its way into every professional responsibility course in the nation’s law schools. Does it surprise me? Not at all. In How Not to File a Tax Court Petition, I commented on a case involving a taxpayer who, after receiving a notice of deficiency, relied on a third party to mail the petition which was due by March 3, 2014. The third party printed postage from Stamps.com, added extra postage for making the mailing certified, took the petition to the post office, noticed there were long lines, and dropped the envelope in the outgoing mail slot without getting a postal service employee to stamp certified on, and postmark, the envelope. Because the petition arrived at the Tax Court on March 10, 2014, bearing a postmark of March 4, 2014, the Tax Court granted the IRS motion to dismiss for failure to file the petition in a timely manner. The postal service postmark superseded the Stamps.com postmark. Foreshadowing what the Seventh Circuit would write, I reacted with these words:

There are two major lessons to be learned from this case. First, stand in line and get that hand-stamped postmark. Second, avoid the need to learn the first lesson by treating the petition as due EIGHTY days after it is mailed. That provides a cushion of time, an allowance for unforeseen circumstances, and contingency insurance. The inability of most people to deceive themselves in this manner has its roots in childhood, when too many missed deadlines are tolerated, and lessons in timeliness aren’t taught and when taught, aren’t absorbed. More than a few law students have encountered serious academic difficulties because a variety of circumstances, some unpredicted and some to be expected, caused them to miss deadlines. People complain that law schools should be teaching time management, but, seriously, why are people arriving at law school lacking time management skills? The answer is, for the same reason people not going to law school have the same issues. Better to learn the consequences when what’s at stake is something minor and not a taxpayer’s Tax Court petition.

To that commentary, I must add another lesson. “Third, at some point missing deadlines or handling a deadline in a fashion that requires one or more courts to sift through evidence and consumes the time and resources of litigants and lawyers will cause much embarrassment and consternation when an amazed, or annoyed, court takes time to use an opinion to reprimand those mishandling deadlines.”

One of the core principles that students need to learn in a basic federal income tax course is the difference between a deduction and a credit. Deductions are subtracting in computing taxable income. Credits are subtracted in computing tax. A one-dollar credit reduces tax by one dollar. A one-dollar deduction reduces taxable income by one dollar, ignoring limitations, floors, ceilings, and other complexities, and a one-dollar reduction in taxable income reduces tax by something between a penny and perhaps 40 cents. In other words, in most cases, credits are more valuable than deductions.

Some American taxpayers can list at least a few of the widely applicable deductions. One or more of items such as state income taxes, local real property taxes, mortgage interest, medical expense, and charitable contributions are mentioned by a some taxpayers when asked to name deductions. When it comes to credits, some taxpayers will mention the earned income credit, the credit for taxes withheld or paid as estimates, and perhaps the investment credit.

A student in the basic federal income tax course should not describe charitable contributions as something that generates a credit. Charitable contributions generate deductions. There probably are a good number of Americans who would not recognize the difference and might mention a “charitable contributions credit.”

So one of this blog’s readers was surprised to discover, on the New Orleans Saints ticket web site, a suggestion that ticket holders can “Offer your unused tickets to charity through the Saints so that others who are not able to go to games can enjoy the Saints' experience. And remember, you'll receive tax credit on these donations.

A bit of research determined that some states provide a state income tax credits for charitable contributions. Louisiana is one of those states; two others are Arizona and Missouri, though I did not attempt to survey all the states. The Louisiana credit, however, is based on the amount, if any, by which total charitable contributions and some other deductions exceed the amount permitted for federal income tax purposes. In other words, to the extent that federal limitations eliminate a portion of the taxpayer’s deduction, a credit against Louisiana state income tax liability is permitted.

As written, the advice on the web site is confusing and ambiguous. The words “And remember, you’ll receive tax credit on these donations” should be replaced with “And remember, it is possible that making these donations will generate a Louisiana state income tax credit for you, but it is best to consult with a tax professional.” To state that a tax credit is guaranteed is ambiguous. Federal income tax credit? Louisiana state income tax credit? And even if a proper reference had been made to Louisiana state income tax credit, there is no guarantee that the computation of the excess on which it is based would generate a credit. On top of that, it is best to provide a warning of some sort that tax advice is not being offered and to suggest that a tax professional be consulted.

The reader suggested that “It is obvious that the person who wrote this would have failed your tax course by not understanding the difference between a tax credit and a tax deduction.” Fortunately for a student, failing to understand one core principle is not a guarantee of failure in the course. Failure occurs when too many core principles are misunderstood or overlooked. In addition, failure to be precise in writing something also contributes to a lower grade but one error in and of itself does not generate a failing grade.

Precision matters. Lack of precision causes misunderstandings in communication, which can lead to all sorts of problems. Lack of precision causes engineering defects, which can lead to all sorts of problems. Lack of precision causes medical misdiagnoses, which can lead to all sorts of problems. In other words, to the chagrin of those who detest details and want to live in the world of sound bites and 140-character tweets, lack of precision leads to all sorts of problems. Not all of those problems involve the risk of failing a tax course, but too many of those problems involve the risk of existential catastrophe.

When I get the chance, I watch television court shows. Why? Among the reasons is the opportunity to see how the judge and the parties deal with tax issues when they happen to be in play during the case. Over the years, these shows have provided the materials for posts such as 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, and How Is This Not Tax Fraud?. A few days ago I encountered another episode of Judge Judy, which illustrated wonderfully the sort of confusion that can ensue when the facts are not clearly established.

In this episode, the defendant was a truck driver. He was described as working for the plaintiff. He also was described as having been employed by the plaintiff. While driving the plaintiff’s truck, the defendant had an accident. The insurance company covered the repair costs except for a deductible. The plaintiff sued the defendant to recover the deductible, and also to recover loans allegedly made to the defendant. When asked, the plaintiff said that the defendant was his business partner, but added, “but then we treat him as an independent contractor and provide a 1099.” Judge Judy then asked, “So he’s not a partner.” “No,” said the plaintiff, “He is a partner but gets a 1099.” One of the documents introduced as evidence describes the defendant as the plaintiff’s business partner. Judge Judy explained that either he is a partner and does not get a 1099 or he is not a partner. She added, “He worked for you, you gave him a 1099 instead of a partnership return.” Ultimately the case was dismissed because the plaintiff failed to prove other elements of his claim.

Any tax professional who has dealt with these business relationship issues should immediately spot the problem. It’s not just a question of whether the defendant was a partner or an independent contractor. There’s a third option. The defendant was described as working for the plaintiff and as having been employed by the plaintiff. The plaintiff owned the truck. If there was a partnership, would not the partnership own the truck? Probably, though perhaps the plaintiff was renting the truck to the partnership, but I didn’t get that impression. How can the defendant be an independent contractor if the plaintiff owns the truck and specifies the deliveries to be made and routes to be taken? Ought not both the 1099 and partnership return be set aside in favor of a Form W-2?

Because the plaintiff failed to prove other elements of his case, it ultimately did not matter whether the defendant was a partner, employee, or independent contractor. But had the plaintiff succeeded with the other elements of his case, the question would have been pivotal, both to liability and damages. There is no way that the question could be answered before additional facts were provided. Those facts, however, were not established in the case.

Tax professionals are peppered with requests for tax advice throughout their working days. The questions are unsurprising, and run the gamut from income to deductions, from exclusions to credits. “Should I report this?” “Can I deduct what I spent on the party?” “Do I get a credit for replacing my refrigerator?” Tax professionals take these questions in stride, provide the answers, sometimes after doing research, and counsel their clients to follow their advice.

When it comes to tax refunds, the questions also tend to be unsurprising. “Am I getting a refund?” “How much is my refund?” “How long until I get my refund?” “Can my ex-spouse get any of my refund?” “Can the credit card companies grab my refund check?” But rarely is a tax professional asked, “Should I spend my refund or invest it” or “How should I spend my refund?” Financial advisors surely get the first question, and perhaps get the second. But tax professionals who are not in the business of giving investment and spending advice don’t expect, and probably don’t want to provide, advice on what to do with a tax refund.

Taxpayers who, for whatever reason, are unsure of what they should do with their refund ought not despair that their tax return preparer has no advice or doesn’t care to provide any. There is another source. A reader of this blog turned my attention to a web site that provides advice on what to do with tax refunds based on the taxpayer’s astrological sun sign. Yes, your eyes aren’t deceiving you. Astrologists claim to have the answer. Years ago, a friend of mine who was deeply into astrology and studied with one of the world’s most celebrated astrologists explained to me that astrology requires much more than the sun sign, which is based on date of birth, but on a wide range of planetary signs that depend on a person’s precise date, time, and place of birth. Though I understood the gist of it, I’ve never explored these nuances in any detail. Nor would I base financial decisions on astrological predictions, whether based on sun signs or the full array of determinants.

All of this leaves me wondering, “Are there people who make financial decisions based on astrological guidance?” If so, what’s their track record compared to those whose decisions reflect other approaches? A few minutes of research did not provide me with an answer.

A reader sent me a link, and asked, “Is this tax ignorance or tax craziness?” After looking through what was posted on the web site, my response is, “Neither. There’s some good advice, and there’s some advice that probably cannot hurt even though few people would invest time or money following it.”

The link to which the reader sent me begins with a posting that is almost seven years old, and ends with one that is almost three years old. Though the discussion apparently has run its course, I doubt that the practices being described have fallen into disuse.

The initial post was a question. The person asked, “Has anyone out there had any success with getting rid of a tax issue? The state where I reside is assessing more penalties and fees than the actual tax liability was over 8 years ago. I would appreciate any assistance with getting this matter resolved.” One response suggested getting “a reading to see what is involved in getting this situation under control,” and provided a link to a list of “psychic readers and conjure doctors.” Another response suggested that if legal proceedings were in the offing, the person should “start a court case honey jar. I would do a separate honey jar for the tax collectors--get their seal and names of the specific people you are dealing if possible and burn brown candle's on the honey jar anointed with LMC's Law Keep Away oil.” The person who asked the question replied that there would not be any legal proceedings, that they were faced with interest and penalties far in excess of the tax due from five to nine years ago, and that they would be negotiating to get the payments down or have the debt cancelled. The person then asked, “Would a bend over, commanding, or law stay away ritual would work best? I did a freezer spell over a year ago when I received the first assessment. I had the name of an auditor, and I put the whole thing in the freezer. I did not hear anything until last week since that freezer spell. I just need this to go away.” Someone else then asked how to remove a lien that had been placed on a parent’s business by the IRS. Someone suggested using “LM court case products” and praying to St. Jude. But this person also recommended getting legal advice, especially from a tax attorney, and using the “Lucky Mojo products” as a backup to the legal advice.

The focus of the thread then shifted. Someone asked, “the state of maryland has been taking my taxes for yrs now, i have never received any tax money from them at all, this year i need help and my money, is there a saint or spell i could use to make sure i get all my money an what they have stolen from me from all the yrs past.” Another person recommended, “Seek the help of an Accountant or a Tax Attorney,” and also recommended using a “pay me” product and trying some tips from a “Hoodoo and Herb and Root Magic” book.

Another person noted, “Well we all have to pay taxes. It isn't wise to avoid that. If you have an issue with your tax return hire a tax attorney, or even an accountant to look over your books and find out what is going wrong here.” This person added a suggestion to use “Law Keep Away to keep them from coming after you, Compelling to compel them to give you a tax return, and Money Stay with Me so they can't take too much money from you.”

Another person asking for help with a “a mistake the IRS has made” was told to “Get a Court Case honey jar. If you know the name of the IRS agent, put his or her name in the jar. You can also use the notice they sent you. Make a copy for your records and use the original in your work. You can also get a Court Case vigil candle, or dress a brown candle with Court Case oil. Lucky Mojo also has a Court Case Spell Kit.” The person then added, “You may need an attorney to help you. Use Court Case and Attraction to find the right one.”

Several people who had requested assistance in dealing with their tax problems reported that they eventually had success. Was it because of the spells, the oils, the powders, the candles? Was it because of the assistance of tax professionals? From the posts, it would seem that they attributed the success to the spells, oils, powders, candles, and other materials. In another post, someone noted, “This Forum is not a substitute for any legal or tax advice. Seek the advice of an accountant or an attorney.” Another contributor advised, “And when you have found your attorney, bless his work with King Solomon Wisdom and Court Case supplies.”

I’ve known and do know people who do tarot readings, who claim to have successfully cast spells, and who pray to saints. The believers are convinced these practices work. Others figure that there’s no harm in trying. What was news to me was the use of these approaches in dealing with taxes, finding lawyers and other tax professionals, and helping lawyers win cases. Those who have described to me the use of tarot cards and spells almost always spoke in terms of fixing or finding relationships or dealing with health problems. So I learned something.

The reader who shared the link with me also wondered, “Maybe a new tax course Introduction to Federal Taxes and Magic Spells?” I doubt it. Aside from trying to picture the law faculty being presented with a course proposal of this sort and reacting favorably, I also doubt that even if such a course were approved, there would be much of an enrollment. Law students are swamped with courses, internships, externships, seminars, and other academic demands. But perhaps another department in a university would include tax issues in an undergraduate course devoted to spells, magic, wizardry, or voodoo. However, I’m unaware of any such courses at Villanova.

When the car breaks down, see a mechanic. When the house catches fire, call the fire department. When the dog gets sick, visit the veterinarian. When the IRS or a state revenue department comes calling, find a tax professional. At that point, if you believe, pray, cast spells, go to a reading. But relying solely on the latter and ignoring the professional is dangerous and ill-advised.

A reader sent me a web link, and asked, “Is this tax ignorance?” So I took a look at this Turbo Tax FAQ. The title of the FAQ is a question: “Is a parsonage or housing allowance deductible?” It’s unclear whether this is an actual question from a customer, or one “invented” by the author of the FAQ. The question is misleading, almost a trick question. Even if the question came from a customer confused about tax terminology, the correct response would be, “No, parsonage allowance, however called, is not deductible. However, if certain conditions are satisfied, some or all of the allowance can be excluded from gross income.” The Turbo Tax response begins, “As a licensed, commissioned, or ordained minister, you may be able to deduct the fair market value of a home, a parsonage (in-kind housing), or a housing allowance.”

Though to some it may appear to be hyper-technical, there is a big difference between exclusions and deductions. An exclusion reduces gross income, and thus adjusted gross income, which is used as the starting point in computing a variety of limitations on deductions and in computing how much of certain types of income can be excluded from gross income. The exclusion also has the effect of reducing taxable income. Some deductions cause adjusted gross income to be reduced, but most deductions do not, though they can reduce taxable income. They don’t necessarily do so, because many of these deductions are in turn limited, and often end up being irrelevant. Generally speaking, given the choice between an exclusion and a deduction, a taxpayer would prefer a tax break to be an exclusion.

When I taught the basic federal income tax course, the difference between an exclusion and a deduction was one of the dozen or so principles that were on the list of concepts students needed to master if they were to earn a grade of C or above in the course. Someone who conflated exclusions with deductions and deductions with credits, who did not understand the difference between a ceiling limitation and a floor limitation, who did not understand the difference between income and gross income and the difference between gross income and taxable income, among other things, pretty much would fail the course or perhaps escape with a D.

Thus my surprise at seeing Turbo Tax describe the parsonage allowance exclusion as something that is deductible. Interestingly, though the response to the FAQ initially refers to deducting the allowance, and uses that verb yet again, in the last sentence, the response refers to “the excludable portion” of the allowance. There definitely is a lack of consistency in the response.

I’ve not yet loaded this year’s Turbo Tax program. Because I do not receive a parsonage allowance, I’m not in a position to determine if the software treats it as an exclusion or as a deduction. My guess is that it is treated as an exclusion and that the problem is with the FAQ documentation, almost surely written by someone other than those coding the software.

So is the FAQ tax ignorance? I don’t think so. I think it is a mistake, probably the result of carelessness, especially in light of the correct use of “excludable” in part of the response. I have made those sorts of mistakes, generally as a consequence of being distracted by some externality.

Readers of MauledAgain know that I consider demand-side economics to be far superior to supply-side economics. As a recent facebook meme put it, put $100 in the hands of a poor person, and that person will spend it because that person needs to do so. Put the $100 in the hands of a rich person, and the rich person doesn’t do anything, because that person doesn’t need to do anything. The $100 gets stuffed in a bank overseas. The theory that it is used to finance economic growth fails, because the only people who qualify for borrowing the $100 are those who already own sufficient collateral and have enough income to pay the interest on the loan.

Those who support shrinking the federal government and putting more power into the hands of the states present, as one argument for that position, the value of states as “laboratories” in which policy theories can be tested on a smaller scale rather than imposed on the entire nation. There is some value in this view, because as the instructions for some cleaning substances often advise, use it on a small out-of-the-way portion of the item to be cleaned to see if there are any unexpected unwanted consequences.

One of the best laboratories demonstrating the total failure of trickle-down supply-side economics and its resulting tax policy is Kansas. I’ve written about the Kansas debacle several times. In A Tax Policy Turn-Around?, I explained how the Kansas income tax cuts for the wealthy backfired, causing the rich to get richer, the economy to stagnate, public services to falter, and the majority of Kansans to end up worse than they had been. In A New Play in the Make-the-Rich-Richer Game Plan, I described how Kansas politicians have been struggling to find a way to undo the damage caused by those ill-advised tax cuts for the wealthy. In When a Tax Theory Fails: Own Up or Make Excuses?, I pointed out that the Kansas experienced removed all doubt that the theory is shameful. In Do Tax Cuts for the Wealthy Create Jobs?, I described recent data showing that the rate of job creation in Kansas was one-fifth the rate in Missouri, a state that did not subscribe to the outlandish tax cuts for the wealthy that Kansas legislators had embraced. In Kansas Trickle-Down Failures Continue to Flood the State and The Kansas Trickle-Down Tax Theory Failure Has Consequences, I described how large decreases in tax revenue, the opposite of what is promised by the supply-side theorists, triggered cuts in public education, and in turn stoked the fires of voter frustration. The voter reaction, however, did not push out of office enough supply-side supporters.

Now comes news that in order to deal with the almost one billion dollar budget shortfall confronting Kansas, its governor, Sam Brownback, architect of the state’s fiscal disaster and prominent supporter of the trickle-down theory, has proposed a series of debilitating spending cuts, impractical sin tax increases, and golden-goose killing. These proposals, if enacted, would simply push the underlying problem down the road, to loom even more catastrophically after Brownback leaves office and cannot be held responsible for the damage. Brownback wants to take money out of the state highway fund. He wants to sell off a future income stream from a tobacco litigation settlement. He wants to increase alcohol and tobacco taxes. He wants to postpone the increases in the state’s payments to an underfunded state employee pension fund. He wants to ignore the planned decrease in the income tax rate on the lowest tax bracket.

The consequences of these proposals, if enacted, adversely affect middle and low income Kansans. For example, failing to lower the income tax rate on the lowest tax bracket harms low and middle income taxpayers much more than it hurts the wealthy taxpayers. The spending cuts would reduce the quality of rural highways and adversely affect hospitals. State employees would suffer from the failure to increase payments to their pension fund. Selling off the tobacco settlement income stream would mean loss of funding after 2018 for programs supported by that income, programs such as Early Head Start.

Nor is there any guarantee that the revenue increases projected in the budget would materialize. As discussed in this story focusing on the proposed alcohol tax increase, Kansans living near the Missouri border would simply make their purchases in that state. A sizeable portion of the Kansas population lives in that area.

Even some Kansas Republicans recognize the problems with the governor’s attempt to fix the mess he created by cutting taxes for the wealthy. Democrats call it the worst budget ever.

Yet the governor refuses to repeal the income tax exemption for limited liability companies, S corporations, and other closely held businesses. The cost of this exemption is roughly 25 percent of the budget shortfall. Some Kansas legislators want to repeal the exemption, pointing out that it would reduce the shortfall by as much as could be obtained by selling off the tobacco litigation income stream.

So what has the nation learned from the trickle-down economics experiments in Kansas? It depends. Some people, including some former devotees of supply-side economics, recognize what I’ve argued for quite some time. As I explained in A Tax Policy Turn-Around?, tax cuts for consumers are more valuable than tax cuts for money stashers. Improving the economic posture of the middle class and the poor generates more sales, which drives up sales tax revenue, and increases corporate profits, which increases corporate income tax receipts as well as shareholder return. As I explained in Job Creation and Tax Reductions, people don’t create jobs unless they need workers. They don’t need workers unless they have customers who want to purchase the goods and services that they would provide. If the American middle class and those living in poverty or near-poverty don’t have money, they don’t make purchases. In fact, they cut back on purchases. And that, understandably, causes the owners of capital and the entrepreneurs of the business world to cut, not create, jobs. In Kansas Trickle-Down Failures Continue to Flood the State, I explained that those who think more tax cuts for the wealthy will solve the problems created by tax cuts for the wealthy are suggesting, in effect, that the solution to flash floods is more rain, that the solution to car theft is more car theft, and that the solution to food poisoning is eating more spoiled food. Seriously, that sort of thinking is not what made the nation’s economy great, nor is it a pathway to future prosperity.

Unfortunately, there still are people, and politicians, who subscribe whole-heartedly to supply-side trickle-down economics and tax policy. Despite the disaster in Kansas, and in other states that also took this approach, the Congress is readying itself to move forward on the same catastrophic path. Unable to learn from facts, unable to break away from devotion to the oligarchy, and unable to think critically, the national legislature is about to plunge into a tax and economics adventure that makes the disastrous budget insanity of 2001-2008 pale in comparison. Who will be hurt? Not the oligarchy. Spending cuts have little or no effect on oligarchs. But they can harm, agonize, sicken, and kill the poor and middle class. Yet some of those people continue to vote for politicians and policies that cause, and will continue to cause, all sorts of problems for them. Why? It comes back to ignorance. There’s a reason scammers pretending to be Nigerian princes, IRS auditors, and FBI agents persist. Their con games work. For a reason. Ignorance. Ultimately, the ignorant pay the price.

Early in the week, as I was reading my facebook newsfeed, I noticed a post that had been placed on a friend’s facebook wall by a third person. The person wrote, “My daughter told me today that she was sitting in a doctor’s waiting room and overheard a woman say to her friend, ‘I thought they wanted to get rid of Obamacare, not the Affordable Care Act.’ “ My friend replied, “Ignorance reigns supreme in the U.S. nowadays.”

Several thoughts raced through my brain. First, “does it ever!” Second, my friend’s comment is not unlike many I have made while complaining about the rapid spread of the ignorance infection throughout post-modern culture, in posts such as Tax Ignorance, Is Tax Ignorance Contagious?, Fighting Tax Ignorance, Why the Nation Needs Tax Education, Tax Ignorance: Legislators and Lobbyists, Tax Education is Not Just For Tax Professionals, The Consequences of Tax Education Deficiency, The Value of Tax Education, More Tax Ignorance, With a Gift, Tax Ignorance of the Historical Kind, A Peek at the Production of Tax Ignorance, When Tax Ignorance Meets Political Ignorance, Tax Ignorance and Its Siblings, Looking Again at Tax and Political Ignorance, Tax Ignorance As Persistent as Death and Taxes, Is All Tax Ignorance Avoidable?, and Tax Ignorance in the Comics. Third, there are enough tax provisions in the legislation to consider it as part of the tax family, and thus eligible for inclusion in the tax ignorance list.

A day later, another facebook friend posted a link to an article that touched on the same subject though it did not involve someone in a doctor’s waiting room. It was enough to make me think that yet another piece of misinformation is making the rounds on social media. According to the article, someone happy with the Senate vote to repeal “Obamacare” rejoiced that the nation is “One step closer to fixing this mistake.” A second person then complained about Republicans “celebrating the ACA’s repeal in the senate.” The first person then tried to correct the second person by explaining, “First, we’re talking about Obamacare, not the ACA. Secondly, my health insurance is through the ACA, so I’m definitely not the kind of person to look down on others for needing help.” A third person points out, “If you’re on Obamacare why * * * are you celebrating the outcome of this vote? If the Republicans get what they want you’ll lose your insurance.” The first person replied, “My insurance is through the ACA (Affordable Care Act), which is what they had to come up with after Obamacare crashed and burned as bad as it did. So I’m gonna be fine.”

This is beyond frightening. Is there not a civic duty on every citizen of voting age to be informed and to do what is necessary to become, and stay, informed? According to the article, the first person, apparently realizing that he was rejoicing at his own health care demise, “fell silent,” but additional individuals jumped in to point out the first person’s “stupidity.” It’s not stupidity. It’s ignorance. Once the first person had been exposed to the facts, that person did not lack the ability to understand. There was enough intellectual ability to process the facts. What was lacking was the set of facts necessary to reach a logical and intellectually sound conclusion. It turns out that voting for those promising to repeal “Obamacare” was the same as voting for those promising to repeal the ACA. Someone dependent on the ACA and not wanting it to be repealed ought not vote for those promising to repeal it. The person did demonstrate a bit of intellectual deficiency, because their belief that the ACA replaced Obamacare ought to have caused the person to question why there was a need for certain politicians to campaign on promises to repeal Obamacare, considering that in this person’s mind, Obamacare had already been repealed and replaced with the ACA.

The article points out that whoever shared the exchange redacted the names, making it extremely difficult, if not impossible, to verify that the online conversation occurred. Similarly, it’s unclear if the comment overheard in the doctor’s office was real. My guess is that both the conversation and the comment did take place. It’s simply very consistent with the sort of illogic that has overtaken the nation as the ignorance infection does its work. These are not isolated instances. The writer of the article suggests, “Millions of individuals in the United States believe exactly as the individual in the conversation does.” I agree. Consider how widespread the foolishness and ignorance about the size and name of the Internal Revenue Code has become, as I have pointed out in posts such as 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, and Not a Surprise: Tax Ignorance Afflicts Presidential Candidates and CNN.

The degree to which ignorance is dangerous varies. Despite my annoyance at the false claims about the name and size of the Internal Revenue Code, the ignorance of those who get it wrong is more disturbing as a symptom than it is in terms of the particular risks it poses. The Code exists, its name is set forth at the beginning, and its size is there for anyone with a smattering of intellect and diligence to compute. If the exaggeration is designed to promote calls for reduction in size, it does not detract from the reality of the Code’s actual size, which is big even using the true page count, and complexity, which is very real. On the other hand, thinking that the ACA will remain in place, providing health care coverage for tens of millions of Americans, if “Obamacare” is repealed, is dangerous because it generates support for the repeal of the ACA. That, in turn, will harm tens of millions of Americans many of whom thought that they would not be hurting themselves by supporting those who want to repeal the ACA, a/k/a Obamacare. Then again, way too many Americans do things that harm themselves because they are unaware that what they are doing is harmful. That is the price paid for ignorance. It’s only a matter of time, given the current cultural climate, for collective ignorance about something existential to exact an ultimate price.

The headline of a recent Philadelphia Inquirer commentary caught my eye. It read, “With humor, life a little less taxing.” My immediate thought was, “Of course. Humor makes all sorts of things tolerable. And sometimes, absent humor, a person’s reaction, be it anger, frustration, or anxiety, can be deadly.

Bob Martin, the author, opened his commentary by pointing out something that had already been publicized but that deserved another moment in the spotlight, especially for the benefit of those who had not caught on. If a person at the Philadelphia International Airport s in Terminals B through F and purchases a soda or other beverage subject to the “soda tax,” the price is increased by the 1.5-cent-per-ounce exaction. But if a person is in Terminal A-West or A-East, the tax does not apply. Does that seem strange? Perhaps. The reason is simple. The latter two terminals are not within the city limits. The Philadelphia International Airport occupies land on both sides of the border between Philadelphia and Tinicum Township in Delaware County. I wonder if officials in that township are eyeing the revenue potential and pondering the possibilities of cashing in on what might appear to them to be a sweet deal.

One of the other tidbits Bob Martin addresses is the traffic jam at the Breezewood Interchange of the Pennsylvania Turnpike. That’s where interstate 70 intersects with the Turnpike, and from that point heading west, Interstates 70 and 76 are aligned on the same highway, namely, the Turnpike. To get from interstate 70 to the Turnpike, or vice versa, motorists must travel through a congested quarter-mile-long strip of hotels, restaurants, fueling station, and other stores. Why not a direct connection? Years ago, a federal law, since repealed, prohibited a non-toll road, such as interstate 70, from terminating at a toll road, such as the Turnpike. A similar situation exists for motorists trying to get from Interstate-95 to the Turnpike in Bucks County, or vice versa, but that mess will be alleviated soon when the new interchange that is being built is opened. Will that happen in Breezewood? Bob says there is no plan for doing so. He doesn’t expect one. Neither do I. So I laugh. I laugh at the foolishness and the short-sightedness.

The closing entry in Bob Martin’s list of insanities for which humor appears to be the only effective immediate remedy is the best of the bunch. It doesn’t involve taxes, at least not directly, nor highways, nor chocolate chip cookies, nor model trains, nor family histories, so I’ll simply recommend highly clicking on the link and investing a quick minute. The entire commentary provides a good dose of laughs and smiles useful at the start of tax season.

It’s an easy mistake to make. It’s not a matter of deliberate noncompliance. A taxpayer fills out a federal income tax return but forgets to sign it before mailing it to the IRS. The taxpayer has a balance due, so the taxpayer includes a signed check for the amount due. A few months later, the IRS sends the return back to the taxpayer, pointing out that it is not signed. The taxpayer signs it and returns it to the IRS.

Problem fixed? Not really.

Does this happen? Yes. It happened to the taxpayer in Sullivan v. Comr., T.C. Memo 2017-2. Despite fixing the error and despite paying the tax, the taxpayer was hit with a late filing penalty.

The Tax Court upheld the penalty, reasoning as follows. The penalty applies if a taxpayer fails to file a return on time. An unsigned return is not a return, so what the taxpayer initially sent to the IRS was not a return. The taxpayer argued that because it was an honest mistake, there was reasonable cause and no willful neglect, thus negating the penalty. The Tax Court concluded that, although the circumstances did not indicate willful neglect and appeared to be a reasonable attempt to correct the lack of signature, it was bound by an earlier decision that “overlooking” a signature is not reasonable cause.

It appears to be, and is, a harsh result. Most instances of failing to file income tax returns are deliberate and accompanied by other violations, such as failure to pay the tax that is due. Simply forgetting to sign is something that can happen to anyone, especially when stressed from working on an income tax return. Yet, sometimes in life, being forgetful can be dangerous or lethal. The key is to find a way to remember the things that cannot be forgotten without bad consequences. Taxpayers using tax return preparation software are reminded and assisted with the signing process. Perhaps taxpayers still using paper forms can make the very first thing that they do the placing of a yellow post-it note next to the signature line, and the placing of another on the envelope with a “don’t forget to sign” message.

One theme that runs consistently through my years of writing for MauldAgain is my how deficiencies in arithmetic skills nurtures tax and other ignorance. For example, in Doing Arithmetic: An Insight into Tax Policy Conundrums, I wrote:

Sometimes, in trying to help people understand the facts beneath tax policy issues, I wonder why many have difficulty grasping the essentials, and thus being misled or even duped by the sound bit and buzz phrases tossed about by politicians and lobbyists. The inability of so many people to understand why flattening tax rates does just about nothing to simplify tax law, or to comprehend how phase-outs cause tax rates on middle incomes to be higher than those on high taxable incomes, probably correlates with deficiencies in arithmetic understanding.

In other words, it is essential that Americans understand arithmetic, which is, of course, a subset of mathematics.

In a recent commentary in the Philadelphia Inquirer, Melissa E. Libertus and and Roberta Michnick Golinkoff examined the arithmetic skills deficiency problem. They begin by pointing out, “Educators and parents alike are alarmed over the persistent gaps between 15-year-olds in the United States and their international peers on science and math outcomes.” They then share some of the overwhelming evidence of the problem. No matter what the “science is irrelevant” folks might claim, there is no doubt that Americans, including American children, do not fare well when it comes to math. The problem is not a secret, and it’s something I noted almost a decade ago, in Who Should Test the Students?:

I wonder how many people are going to take offense at my thoughts on what is turning out to be a major legislative battle in Pennsylvania. A while ago, the governor of Pennsylvania proposed that high school diplomas be awarded only to those students who passed state high school graduation tests in ten subjects. * * *

The governor's motivation rests on several concerns. First, even though tens of thousands of eleventh graders fail one or more state school assessment tests, almost all receive diplomas at the end of their senior years. Considering that as many as 45 percent of juniors have fallen short on one or more of these tests, either an amazing amount of catch-up is being accomplished or students are graduating high school deficient in particular skills. Second, increasing numbers of college students are being funneled into remedial courses to learn what they ought to have learned by the time they graduated high school. Third, employers complain that many high school graduates whom they hire have little or no reading skills, are incapable of doing arithmetic, or both. Are these believable accounts? I think so. Why? Because among law students whom I teach, far too many cannot spell, cannot write well, do not understand grammar, and struggle with simple arithmetic. Considering that law students are drawn from college graduates with grade point averages on the high end of the scale, it is rather disappointing and worrisome that among the very best there is so much deficiency.

So the issue isn’t whether there is a problem, but what should be done.

Libertus and Golinkoff offer an important insight. They write:

Evidence suggests that the road to strong STEM education starts not in elementary or middle school, but at home and in preschool with very young children. Some parents and teachers talk about numbers and math frequently so that their children are hearing words such as two, twelve, more, less, count, and add repeatedly in various contexts. Other parents and teachers, however, rarely use number and math words or engage children in meaningful math-learning activities.

* * * We must bring math into our homes and preschools.

To be specific, research indicates that some parents of toddlers use an average of more than 30 number words every hour * * * Other parents, however, use only one number word every two hours, on average. This creates close to a 6,000 percent difference in math input at home. * * *

* * *

Numbers can be a natural part of parents' talk with their children. At the grocery store, for example, parents can talk about the number of bananas in a bunch and how many would remain if you picked off two, the cost of a child's favorite cereal, and what it means to be "on sale." At home, they can count the number of plates needed to set the table, and they can weigh and measure flour and salt when they bake together. When children ask how long it takes for the cookies to bake in the oven, parents have another opportunity to use number talk.

When traveling by car or bus and children ask the perennial "Are we there yet?," parents can talk about the number of miles and minutes to reach their destination. Board games like Chutes and Ladders that require counting give numbers real meaning as they correspond to how many spaces children can advance with each throw of the dice. Building with blocks or doing puzzles together can fuel the spatial skills that undergird math knowledge.

I am in total agreement with Libertus’ and Golinkoff’s suggestions. There is no doubt that children absorb the environment in which they are raised. Children who are surrounded – or as I put it in Doing Arithmetic: An Insight into Tax Policy Conundrums, immersed – in numbers grow up to be better at arithmetic, just as children who are exposed to, and immersed in, books grow up to be better readers, children who watch and help their parents cook are better chefs, and children who are engaged in cerebral activities at home develop better critical thinking skills. The challenge, as I see it, is that too many of America’s children are growing up in environments lacking in literacy, numeracy, and cerebral activities. They absorb the prejudices of their parents, and too many fail to get past those barriers. When parents send the message that “book learning” is for fools, that reading is unimportant, and that numbers don’t matter, they are depriving their children of the opportunity to do well in life. Though Libertus and Golinkoff also suggest that the pre-school numeracy environment also needs to be improved, there is only so much that can be accomplished by educational institutions when the tide at home is pushing back in the wrong direction. What the nation needs is an improvement in the parental environment, and that requires parental education. Though some adults who failed to complete high school eventually see the light and return to school, too many do not do so. It’s time to tackle this growing illiteracy and innumeracy problem. Nothing less will do in the fight against ignorance.

On Friday, in It Still Doesn’t Make Tax Cents, I commented on two more stories of someone trying to use coins to pay an amount owed to a government. This post was a follow-up to an earlier one, Does It Make Tax Cents?, in which I commented on several stories about taxpayers trying to pay tax bills with pennies.

Now, thanks to a reader, another story can be added to the list. The reader directed my attention to this story about the mayor of Hialeah who, back in November of 2015, tried to pay a $4,000 fine entirely in coins. The fine had been imposed by the Miami-Dade Commission on Ethics and Public Trust for intentional breach of commission rules, when he lied about collecting interest from someone who had set up a Ponzi-type arrangement. The mayor brought in 28 buckets filled with 360,000 nickels and pennies. The commission rejected the payment because it was “commercially unreasonable” and ran afoul of yet another commission requirement that fines be paid by check. So the mayor, claiming that he was unaware of such a requirement, suggested that the commission sue him, arguing that he was making payment in valid United States currency. The commission proceeded to sue the mayor. And that is where the story ended.

Curious, I decided to discover the outcome of the litigation. According to this report, the case settled when the mayor agreed to count and box the coins himself. He did so, and delivered 140 boxes of pennies and five boxes of nickels. He made the delivery to a bank where the commission has an account.

My immediate reaction was yet more questions. Did anyone double-check the mayor’s counting? Did the bank take the coins out of the boxes and run them through a coin counter? If so, why not skip the boxing process? Did the bank weigh the boxes? Perhaps someone has the answers. I don’t.

Several months ago, in Getting a Tax Statute Right the First Time is Much Easier Than the Alternative, I discussed a decision by the Supreme Court of Pennsylvania to strike down the state’s slots tax because it, in effect, subjected casinos to varying rates of taxation in violation of the uniformity clause of the state’s constitution. The court gave the legislature 120 days to fix the statute, by staying its order for that length of time. One reaction, from almost every direction, was a prediction that fixing the statute would be difficult, because, among other things, the legislature would be tempted to do more than simply redraft the slots tax provisions. For example, the emergence of video-gaming terminals and online gambling during the years since the statute was originally enacted most likely will entice legislators to offer provisions dealing with those activities.

Shortly thereafter, in An Ever-Expanding Tax To-Do List, I discussed reports that the legislature would face competing suggestions and conflicting interests when it tries to fix the problem. I pointed out that the localities depending on the tax revenue from the casinos must prepare budgets for 2017 long before the 120-day suspension period set by the Supreme Court expires. Once again, bad drafting years ago planted the seeds of public finance crises in the present day.

So while the legislature fiddles with the issue as the clock winds down, two different approaches appear to be taking hold among localities. According to one report, Valley Forge Casino will continue paying an amount to Upper Merion Township, calculated as though the overturned tax were still in effect. The agreement between the casino and the township has permitted the township to move forward with its 2017 budgeting process, and has eased concerns that it would need to raise other taxes or severely cut services to balance that budget. The report also points out that several other casinos have agreed with the localities in which they are located to continue making payments along the same lines.

But according to another report, the Sands Casino Resort Bethlehem, rather than agreeing to continue making payments, will wait to see what the state legislature does. That leaves Northampton County in a quandary as it tries to establish its financial and services plans for 2017. In response, the county district attorney has informed the casino that he “can’t justify the use of his office’s resources to help a profitable corporation that isn’t a good corporate citizen,” and thus “may not prosecute cases involving bad checks or chip thefts” at the casino. It is unclear whether a public official can refuse to perform services that the official is required by law to provide simply because a taxpayer has not paid taxes. There are two variants at work in this instance. Consider a homeowner who is delinquent in paying real property taxes. Does that justify the police in not responding to an armed break-in at the residence, or the fire department from showing up to put out a blaze? I think not, on both legal and common sense grounds. The comparison breaks down, though, for two reasons. First, the prosecutor has discretion when it comes to pressing charges and investigating crimes. Second, and perhaps this is more important, the casino is not under a legal obligation to pay the overturned tax or any amount in lieu thereof. Unfortunately, Northampton County cannot sue the legislature or the individual legislators who haven’t solved the problem, nor can they sue the legislators who in 2004 enacted a badly drafted statute.

There is an important lesson to be learned, and it isn’t a question of how a county or its officials should deal with a potential revenue shortfall. The lesson is that those who enact legislation, or promulgate regulations, need to do as good a job as neurosurgeons, welders, engineers, and others must do. In other words, get the required education and experience, think, think again, think it through, visualize what will happen, focus on the job at hand, obtain third-party oversight, inspect the work, and monitor the outcome. The nation’s federal and state legislatures and executive departments are increasingly filled with people who think they know what they are doing but who have not much of a clue, and who generate more and more laws and regulations that don’t work, that cause hardship, and that fail to address the underlying problem. The reason is simple. People are turning more to their limbic systems as they push aside their critical thinking systems. The mess in Pennsylvania is a harbinger of what the nation risks in the near future.

Sixteen months ago, in Does It Make Tax Cents?, I commented on several stories about taxpayers trying to pay tax bills with pennies. I noted that the basic question of whether it is permissible to pay one’s taxes with pennies sometimes develops into more volatile situations, such as the taxpayer who was arrested after dumping the pennies all over the tax office, and the taxpayer who got into an argument when he tried to record the payment transaction. The story that triggered that commentary in August of 2015 involved a taxpayer who was unable to find 83,160 pennies after visiting 15 banks over a three-day period, and who ended up paying his real estate property tax bill with an assortment of coins and paper currency.

Now comes another story involving the use of coins to pay a government bill to the city of Lancaster, though in this instance it is a $20 parking ticket and not a tax. The parking offender tried to pay the ticket with loose change that he had accumulated, but the clerk refused to take the money unless he rolled up the coins. When asked for a copy of the policy, the clerk sought a police officer. The director of administrative services for Lancaster claims that it is not the city’s job to count out $20 in loose change. What’s next? Because the person who received the ticket refuses to pay unless Lancaster accepts the coins, the dispute will end up in magistrate’s court. By trying to pay the $20, the parking offender pretty much has admitted he owes the $20, so all he can do when in front of the magistrate is again to offer to pay with his loose change. I do hope we find out what happens.

Another jurisdiction in Pennsylvania refuses to accept home-rolled coins. It’s easy to understand why. That same jurisdiction had been refusing to accept pennies and nickels for transactions exceeding 25 cents, relying on a federal law that had been repealed decades ago. Fortunately, the jurisdiction relented when it learned, though efforts by a newspaper and members of the public, of the obsolescence of its policy, which it quickly changed. [Yes, I know, I know, and it was unintentional!]

For the curious, it is permissible to pay taxes, debts, dues, and other charges with coins. According to 31 U.S.C. section 5103, “United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues.” It also is permissible for private businesses and organizations to refuse to take currency or coins as payment for services or the sale of goods. The difficult question, which continues to be debated, is whether a person, business, organization, or government agency can refuse to accept currency or coins as payment for a debt, a public charge, a tax, or dues. Though debates continue to flourish over this question, the answer is no. The tougher question is whether the parking fine is a debt or public charge? The answer isn’t clear. It makes sense to conclude that when the offender’s obligation to pay the fine is established, for example, through admission or by trying to pay the fine, the fine become a debt.

This entire set of question could easily be resolved through a well-drafted statute. I wonder how long it will take for that to happen.

Section 104 excludes from gross income damages received for physical sickness and injury. It is axiomatic that for these purposes the language of any settlement document is a significant factor in determining the nature of the claim for which the damages have been received, and in the absence of any definitive language in the agreement, the language of the complaint seeking damages becomes significant. In Contracting a Tax Outcome, I explained the importance of paying attention to language when drafting settlment documents.

A recent case, Arkow v. Comr., T.C. Memo 2016-87, reaffirms the importance of documentary language in evaluating a taxpayer’s assertion that damages received by the taxpayer fit within the exclusion. The taxpayer entered into a settlement agreement with a defendant sued by the taxpayer, in which the taxpayer released all claims in exchange for $3,000, which was then paid to the taxpayer. The taxpayer did not include the $3,000 in gross income, arguing that it represented damages for physical injury. Nothing in the settlement agreement mentioned physical injuries or physical sickness. The taxpayer had sued the defendant alleging violations of the Telephone Consumer Protection Act. Nothing in the complaint mentioned physical sickness or injury, nor does the Telephone Consumer Protection Act allow for damages based on physical injury or sickness. The taxpayer admitted that nothing in the complaint or the settlement agreement referenced any physical injury suffered by the taxpayer. Unsurprisingly, the Tax Court upheld the determination by the IRS that the $3,000 was not excluded from the taxpayer’s gross income under section 104.

It is unclear what the taxpayer was thinking. Did the taxpayer think that all damages are excluded from gross income? That is not, of course, the case. Did the taxpayer think that someone adversely affected by a violation of the Telephone Consumer Protection Act automatically suffers a physical injury? Did the taxpayer decide, when it came time to file a tax return, to classify the damages payment as compensation for physical injury because it would reduce the taxpayer’s tax liability? The Tax Court’s opinion does not indicate if the taxpayer or a tax professional prepared the tax return. The taxpayer and his wife represented themselves in the Tax Court case, but that does not mean that a tax professional did not prepare the return. Nor is there any guarantee that all return preparers would have properly reported the $3,000 payment.

To the extent this issue appears to be complicated, it really isn’t very complicated. For those who think that tax law is complicated because it involves numbers, this is yet another example of the many tax issues that do not involve numbers. For those who think that tax law can be simplified by reducing the number of tax brackets, this case provides yet another example of a situation in which the number of tax brackets is completely and totally irrelevant to the level of tax complexity. The case also demonstrates the need for careful attention to the language of documents, the need for all citizens to learn basic tax law, and the danger of falling victim to gross oversimplifications and the misinformation infecting the postmodern world.

During the past week, two judicial decisions have been handed down that deal with issues I have previously discussed on MauledAgain. It is likely these are not the last chapters in either story.

During the past eight years, I have described the various failings of the so-called “soda tax” enacted by Philadelphia, which applies to items other than soda, does not apply to certain soda products, and also applies to some, but not all, products containing sugar. The commentaries started with What Sort of Tax?, and continued with The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, What Gets Taxed If the Goal Is Health Improvement?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, and Gambling With Tax Revenue. Last week, according to this report, a Philadelphia Common Pleas judge dismissed a challenge to the soda tax. The judge rejected the argument that the tax was preempted by the state sales tax and violated state law requiring items to be taxed at the same rate. He decided that the soda tax and the sales tax are fundamentally different because one is imposed on sales and the other on distribution. He also rejected the argument that applying the tax to items purchased through food stamps would violate the prohibitions on subjecting food-stamp-financed purchases to sales tax, by reasoning that the soda tax is not imposed on purchases but on distributions of soda. The losing plaintiffs promise to appeal.

Earlier this month, in So How Long Does It Take to Determine a Tax Liability?, I described a tax dispute between Comcast and the state of California that had dragged on for 17 years. Last week, according to this report, Comcast’s challenge to the tax asserted by California was denied. The court concluded that the termination fee received by Comcast on account of a losing merger bid constituted business income subject to California tax. Comcast is considering an appeal. In the meantime, Pennsylvania tax authorities continue to review the extent to which Comcast owes tax to Pennsylvania on account of the transaction.

Just as tax is a sure thing, so too are tax disputes and tax litigation. And that’s part of the reason tax professionals are busy. I expect them to continue to be busy.

There are all sorts of things that taxpayers ought not to do when filing a tax return. There also are all sorts of things that taxpayers ought to do when filing a tax return, but which some taxpayers occasionally fail to do. Doing what ought not be done, or failing to do what ought to be done, doesn’t bode well for the taxpayer. This is particularly true when the taxpayer is an attorney.

A recent Tax Court case, Mack v. Comr., T.C. Memo 2016-229, illustrates how a tax return preparation and filing process can go haywire. The taxpayer is an attorney admitted to practice law in New York. He is a partner in a law firm. In 2011, the law firm and a related entity, both partnerships, issued Schedules K-1 to the taxpayer. They reported, respectively, income shares for the taxpayer of $18,357 and $461,386, totaling $479,743. The taxpayer explained that because of the 2008 recession, other partners of the firm could not cover their shares of the firm’s expenses, putting the firm into “significant negative capital”. The taxpayer decided that under New York partnership law he had a fiduciary obligation to cover those other partners’ expense shares. The expenses that the other partners were unable to cover were, in fact, reflected in the computation of the partnership income, and the taxpayer agreed that no partnership expenses were omitted from the partnership returns and the Schedules K-1.

The taxpayer concluded that because the partnership used its cash to pay the expenses rather than paying to the taxpayer his share of the income, the cash that was not paid to him ought not be treated as his income. The taxpayer consulted the firm’s accountants and tax return preparers. They advised him that the law was “unfair and unjust under the circumstances,” and that his options were to report the income or, instead, dissolve the firm, take a distribution of what remained of the firm’s capital, let the other partners “fend for themselves,” and “let the employees go on unemployment.” The taxpayer was also told that if he did not report the income, the IRS likely would disregard “the financial realities of the firm and not respect the state law fiduciary partnership duties.” The taxpayer ignored this advice and instead reported income from the two partnerships of $75,000, rather than the actual total of $479,743. On December 23, 2013, the IRS issued a notice of deficiency for 2011, determining that the Schedule E omitted $454,743 of income, asserting that only $25,000 of partnership income was reported on the return. The notice also determined an accuracy-related penalty of $28,060. In the petition to the Tax Court, the taxpayer argued that New York partnership law imposed a fiduciary duty on the taxpayer not to make the law firm fail, and that the expenditure of law firm funds to pay the firm’s expenses left the firm with no money to pay the taxpayer his share of the income and left him with no money to pay his Federal income tax liability. The IRS moved for summary judgment, to which the taxpayer essentially offered the same two arguments as set forth in the petition.

The Tax Court explained that under section 702(a), the taxpayer was required to include on his Schedule E his distributive share of the firms’ income as shown on the Schedules K-1. The distributive share of income is taxed to the partner even if no distributions are made to the partner. Because the taxpayer did not dispute the firm’s income or the computation of the taxpayer’s share shown on the Schedule K-1, there was no outcome other than a conclusion that the taxpayer had failed to report his distributive share of the firm’s income. By leaving his share of the income in the partnership, the taxpayer in effect made a capital contribution to the firm, but no deduction is allowable for capital contributions to partnerships. The Tax Court rejected the taxpayer’s argument that he could not reasonably be expected to pay tax on money never paid to him. The Tax Court noted that inability to pay might be relevant in a collection due process case but has no effect on determining the amount of income that must be reported on the Schedule E.

The taxpayers tried to avoid the accuracy-related penalty by showing that there was a reasonable cause for the omission and that he acted in good faith. Though most taxpayers who try to avoid the penalty in this manner offer proof that they relied on a tax professional, this taxpayer consciously ignored the advice provided by the tax professionals with whom he consulted. The court upheld the penalty.

Most lawyers do not take partnership tax courses when they are in law school. Most law students do enroll in a basic business organizations law course, but only in some of those courses do students get even a superficial overview of how corporations and partnerships are taxed. So it is not unusual for lawyers to rely on tax professionals to prepare their law firm tax returns and their individual returns. In this instance, the taxpayer deliberately chose to disregard the tax law and the advice provided by the tax professionals. It did not turn out well. Nor would it be surprising that more bad news is in this lawyer’s future, because filing a tax return on which significant amounts of income are deliberately omitted will not sit well with the New York State Appellate Court Attorney Grievance Committee with jurisdiction over this attorney.

Wow. Just wow. There is an epidemic of ignorance sweeping through the nation, and tax does not escape the tide. What has me so astounded?

It’s a meme circulating throughout Facebook and elsewhere. You can see it here. Designed as a graphic, it says this:

Let’s say milk costs $1.00
and let’s say
You make $1.23 a day.
After taxes, you bring home $1.00
Right now you can afford
one gallon [of milk] per day.
So now you get a minimum wage raise to $18.45 a day. That’s awesome!! You have more money, right? Well, now in order to stay in business the milk man has to pay his employees that same $18.45, so the cost of milk goes to $15.00 a gallon. No big deal, but you can still afford it, right? Well, no, you can’t.
You see, thanks to the minimum wage increase that you are begging for, you’ve moved up to a new tax bracket. Now, instead of 23%, you pay 29%. 18.45 – 29% = $13.10. You can no longer afford the milk you once could. Let that sink in a minute.
The only winner in raising minimum wage is THE GOVERNMENT!

The errors in this analysis come in a flood.

First, without an indication of whether the writer is referring to a gallon, a quart, a pint, or some other quantity of milk, the figure of $1.00 makes no sense. Perhaps the intent was to refer to a quart of milk, but it’s pretty clear that the writer simply invented a round number.

Second, the writer then makes up another number, and this one is absurd. About the only way to make $1.23 in a day is to do some small chore for a neighbor who hands you the change in his or her pocket. Considering that the writer is making an attempt, feeble as it is, to prove that the minimum wage should be cents per day, let’s go with a minimum wage of $15 per hour. For someone working a standard work week, that amounts to an annual wage of $30,000, allowing for 40 hours per week and two weeks of vacation.

Third, the writer things that the tax on a $1.23 daily wage is 23 cents. Is the writer referring to the federal income tax? Federal and state income taxes? Federal, state, and local income taxes? Income and sales taxes? Twenty-three cents is 18.7 percent of one dollar and twenty-three cents. Even if the person earns $1.23 every day, the person’s annual wage would be so low that no income taxes would apply.

Fourth, the writer, however, claims that the person earning $1.23 per day is in the 23 percent bracket. That’s simply wrong. It is totally wrong. If the applicable bracket were 23 percent, and clearly it would not be, the tax would be 28 cents, not 23 cents.

Fifth, the writer then decides to create a minimum wage of $18.45 per day. That is nonsense. Minimum wage is set per hour, because “per day” has too many interpretations. Translated into an hourly minimum wage using an eight-hour day, the minimum wage assumed by the writer is the equivalent of $2.30 per hour. More nonsense.

Sixth, the writer then decides that the milk vendor needs to increase the cost of milk from $1.00 to $15.00 per gallon. Is that an increase from $1.00 per gallon to $15.00 per gallon? Or an increase from $1.00 per quart to $15.00 per gallon? Why does the cost of milk increase? Does not the per-item cost depend on the quantity of milk sold and the number of employees? Even assuming that the milk vendor sells nothing but milk, the increase is much different if the milk vendor has one employee and sells thousands of gallons per week compared to having ten employees and selling hundreds of gallons per week.

Seventh, the writer then decides that the tax on an $18.45 wage would be $5.35. Where does that number come from? Is it simply invented? Someone earning $18.45 per day, and working 250 days per year, based on five days per week and two weeks of vacation, would earn $4,612.50 per year. This person would encounter no federal income tax, would almost surely encounter no state income tax, and might encounter a one percent local earned income tax in some jurisdictions.

Eighth, using a $15.00 hourly minimum wage, and thus an annual wage of $30,000, the federal income tax liability of an employee claiming the standard deduction and one personal exemption would be, in 2016, $2,484. That is the equivalent of an average rate of 8.28 percent. That’s far from the 23 and 29 percent rates tossed about by the writer of the meme.

Ninth, using the current minimum wage of $7.25 per hour, the employee would earn $14,500 annually. The federal income tax on that amount, assuming the employee claims the standard deduction and one personal exemption, would be, in 2016, $415. So, an increase in the minimum wage from $7.25 to $15 per hour would increase the employee’s take-home pay from $14,085 to $27,516.

Tenth, would an almost-doubling of the minimum wage cause the cost of milk to increase to fifteen times its cost? No. Nor would it cause the cost of all items sold by the employer to go up by a multiple of fifteen, or even by a multiple of two. Wages are only a portion of the employer’s cost, and the chief component of the retail cost of the milk is the wholesale price.

Eleventh, the employee who takes home the additional amount is almost certain to spend that money, thus injecting more stimulus into the economy. The employee is unlikely to stash the cash in a Swiss bank. This, by the way, is why demand-driven economies perform at much higher levels than those infected with supply-side nonsense and trickle-down false promises.

Twelfth, it is true that government tax collections increase, though tagging the government as the only winner ignores the impact on the minimum wage worker is silly. Yet the increase in government tax collections means a reduced budget deficit, or perhaps better services for the employee, such as improved roads, more public safety, or other benefits of living in a cooperative society.

Readers of this blog know that dislike ignorance of any kind, and tax ignorance is particularly bothersome to me. I’ve written about it time and again, in posts such as Tax Ignorance, Is Tax Ignorance Contagious?, Fighting Tax Ignorance, Why the Nation Needs Tax Education, Tax Ignorance: Legislators and Lobbyists, Tax Education is Not Just For Tax Professionals, The Consequences of Tax Education Deficiency, The Value of Tax Education, More Tax Ignorance, With a Gift, Tax Ignorance of the Historical Kind, A Peek at the Production of Tax Ignorance, When Tax Ignorance Meets Political Ignorance, Tax Ignorance and Its Siblings, Looking Again at Tax and Political Ignorance, Tax Ignorance As Persistent as Death and Taxes, Is All Tax Ignorance Avoidable?, Tax Ignorance in the Comics. So it ought not be a surprise that my reaction to this goofball meme is one that goes beyond annoyance. There is no doubt that the writer made up numbers that would fit a preconceived, though thoroughly incorrect, perception of how economies and minimum wage increases work. This sort of behavior is no different than making up, and inventing, false news stories, false accusations of criminal behavior, and false promises while negotiating business contracts.

Why does this meme and its writer deserve the criticism to which I subject them? Because people see it, read it, and believe it. Then, based on this ignorant belief, they make decisions that disadvantage other people. They make decisions that adversely affect the nation. They make stupid decisions. And if the nation, its leaders, and its people continue to make enough stupid decisions, none will survive for very long. Ignorance is a destructive force, and it must be resisted. And resist it I do and I will.

A long-time reader pointed me in the direction of a report about the impact of music on performing a task. A study by a team from Imperial College London and the Royal College of Music invited 352 visitors to play the game Operation, which involves removing body parts from a model. I haven’t played that game, but I suppose it is derived from the “Invisible Man” toy that was around the house when I was a child. The researchers compared the outcomes when three different background sounds were played while the volunteers undertook their tasks. One was Mozart’s Andante from Sonata for Two Pianos, the second was AC/DC’s Thunderstruck, and the third was the sound of an operating theatre. It turned out that men who listed to AC/DC were slower and made more mistakes compared to those listening to the other two background tracks. On the other hand, it made no difference for women which of the three tracks were playing. Though there is no explanation for the difference, researchers are guessing that rock music causes more auditory stress in men. It also turned out that hearing Mozart reduced mistakes only if they acknowledged deep appreciation for the Sonata.

According to the Centre for Performance Science, a joint project between the two colleges, nusic is played in operating rooms 72 percent of the time. Some research shows that Jamaican music and hip-hop increases operating speed and surgical instrument manipulation, whereas one in four anesthesiologists reported that it reduced their vigilance. One bit of advice from the research is to avoid rock music when operating or playing a board game.

So my long-time reader then pointed out how he selects music when preparing for the tax season and while doing tax returns:

In the weeks leading up to a new tax season, I do the opposite in which the article recommends to increase my concentration. I play loud music from Billy Joel concerts and albums of Maynard Ferguson a phenomenal trumpet musician while I am studying the tax laws. I do this for the following reasons: the tax offices I work in are far from quiet, the kids are running around and yelling, the clients sometimes argue , the multiple phones are ringing, the copiers and printers are working, the television is blaring, and other tax associates are working with their clients and asking me questions about their returns, while I am concentrating on completely my client's tax return while other clients are waiting to prepare their tax returns. Listening to Mozart just won't cut it.

I have colleagues who play music, of various genres, while they are in their offices preparing for class or working on their research and writing. There are tasks that I can do while music is playing, but there are other activities which I do not perform well if music is in the background. However, because I am often performing multiple tasks, it could be that my brain cannot handle music when I am undertaking two or more tasks. Perhaps it is time to experiment.

I do know that the reverse is true, at least for me. I have sung several Mozart compositions as part of my church choir, and it required my complete concentration during rehearsal and during the service for me to even have a chance of getting it right. On the other hand, singing “Happy Birthday,” which I do fairly often – as we sing to each choir member on his or her birthday – is something I can do while multitasking.

All of this leaves me wondering. How many tax return preparers have music playing in the background while preparing returns, or interviewing clients? How many tax practitioners put on music while studying changes in the law, researching an issue, or writing a letter or memorandum? Perhaps some foundation or other organization would be willing to underwrite a study. I’m confident it would be easy to find participants and to experiment with all sorts of music.

A recent Tax Court decision, Chaganti v. Comr., T.C. Memo 2016-222, following up on an earlier opinion, Chaganti v. Comr., T.C. Memo 2013-285, rejected an attorney’s claim that he was entitled to deduct fines imposed on him by a court for the way in which he conducted litigation. The outcome is not surprising, but serves as a lesson for other attorneys.

The dispute between the taxpayer and the IRS reaches more than a decade, and involves a long list of issues, only one of which is the focus of this post. The taxpayer is a licensed attorney practicing since 1998. In 2004, the taxpayer began performing legal services for a client who was the plaintiff litigating in a case filed in the U.S. District Court for the Eastern District of Missouri. On November 14, 2005, the district court order the taxpayer to pay a $262 fine for opposing counsel attorney’s fees and court reporter charges as a result of the taxpayer’s role in his client’s failure to appear at a deposition. The taxpayer did not pay the fine, and accordingly was held in contempt at a hearing on December 29, 2005. He was ordered to pay the $262 on or before January 2, 2006, and if it was not paid by that date, a daily fine of $100 would be imposed until the fine was paid. The taxpayer paid the fine on January 26, 2006. During the remainder of the litigation, petitioner engaged in behavior that the district court deemed unnecessarily protracting and contentious. The district court ruled against the taxpayer’s client and for the defendant on a motion for summary judgment in March 2006. The taxpayer, as plaintiff’s counsel, filed a motion to reconsider, vacate, and set aside the judgment, which was denied on April 12, 2006. The taxpayer appealed the ruling to the U.S. Court of Appeals for the Eighth Circuit, which affirmed the District Court’s decision on April 26, 2007.

After judgment was entered, the defendant filed a motion for attorney’s fees and bill of costs. The defendant’s motion requested that the taxpayer, as opposed to the plaintiff himself, pay the excess attorney’s fees incurred as a result of the taxpayer’s “bad faith, unreasonable, and vexatious multiplication of the proceedings”. On August 22, 2007, the district court granted this motion in part, allowing the award of excess attorney’s fees of $18,125 which it specifically attributed to the taxpayer’s misconduct. The district court ordered the taxpayer to pay $18,125 to opposing counsel and also ordered the taxpayer to pay to the clerk of the court a $2,300 fee for late payment of the original $262 fine, representing $100 for each of the 23 days that the payment was overdue. The taxpayer paid these amounts on December 28, 2007.

The taxpayer did not timely file federal income tax returns for 2006 and 2007. After the IRS prepared substitutes for returns on March 22, 2010, and June 15, 2009, respectively, the taxpayer eventually filed delinquent returns for 2006 and 2007 on May 26, 2010. On the 2007 return, the taxpayer petitioner claimed a business expense deduction of $20,425 for the court-ordered payments. This amount was the sum of the $2,300 fee for late payment of the $262 deposition fine, plus the $18,125 the taxpayer was ordered to pay for opposing counsel attorney’s fees. On January 6, 2012, the IRS mailed to the taxpayer a notice of deficiency for tax years 2006 and 2007. The determination of deficiencies was based on, among other things, a denial of the deduction for the court-ordered payments. On March 19, 2012, petitioner timely filed a petition in the Tax Court for review of the IRS determination.

On March 4, 2013, the taxpayer filed a motion for partial summary judgment, requesting the Court find in his favor in regard to several issues, including the deduction of the court-ordered payments, believed to be questions of law about which there existed no genuine issues of material fact. On March 12, 2013, the IRS filed a cross-motion for partial summary judgment on the same issues. Also on March 12, 2013, both the taxpayer and the IRS filed objections to each other’s respective motions for partial summary judgment.

Because section 162(f) bars the deduction of fines or penalties paid to a government or government agency for the violation of any law, and is not limited to criminal fines and penalties, the Tax Court held that the $2,300 was not deductible. It was a sanction for the violation of the taxpayer’s duties as an officer of the court in being held in contempt and failing to pay in a timely manner the $262 sanction, and it was paid to the clerk of the court for the district court, a governmental agency responsible for collecting these types of fines and penalties.

In contrast, the other two sanctions were not paid to a government or governmental agency but to opposing counsel. The Tax Court held that a genuine dispute of material fact existed with respect to the $262 amount, because the taxpayer argued that it was ordinary and necessary to keep his client from appearing at the scheduled deposition due to a unidentified unforeseen circumstance, because it was not known under which statute the taxpayer was ordered to pay the $262, what criteria were applied, and whether the imposition in and of itself indicated that the expense was not ordinary and necessary to the practice of law. Accordingly, the motions of the taxpayer and the IRS for summary judgment on this question were denied. The Tax Court held that the taxpayer was not entitled to deduct the $18,125 amount paid to opposing counsel because it was imposed under 28 U.S.C. section 1927 on account of the taxpayer’s improper conduct. The Tax Court concluded that the mere fact the taxpayer was ordered to pay that amount under the statute demonstrated that it was not ordinary and necessary to the practice of law, noting that the district court separately identified an additional amount paid to opposing counsel in the ordinary and necessary conduct of the practice of law.

But things did not end there. The parties continued to deal with the unresolved issues in the case, and went to trial on some of them. The IRS conceded the deductibility of the $262 payment. Ten days short of three years after issuing its earlier opinion, the Tax Court decided the remaining issues, including the deductibility of the $18,125 sanction. Though the court had decided it was not deductible as an ordinary and necessary business expense, it left open for the taxpayer the opportunity to justify the deduction on another theory. In this round, the taxpayer argued that the payment was deductible as a loss under section 165. The Tax Court held that because the sanction was penal in nature it could not fit within section 165(a)(1) as a loss incurred in a trade or business or within section 165(a)(2) as a loss incurred in a transaction entered into for profit. Nor, by its very nature, did it fit within section 165(a)(3) as a loss incurred because of a casualty or from theft. Prior case law established that loss deductions are denied if allowing the deduction would frustrate sharply defined national or state policies proscribing particular types of conduct. Allowing the deduction would, to paraphrase the Supreme Court, substantially dilute the actual punishment.

The taxpayer’s experience was a cascade of problems. It began with behavior sanctioned by a federal district court. It was compounded by failing to pay the sanction and being held in contempt. It was worsened by failing to pay the sanction by a deadline set after being held in contempt. It was made even worse by the consequences of imposing additional costs on opposing counsel, which were ordered to be paid along with an additional sanction. It was intensified by failing to file tax returns. It was exacerbated by claiming a deduction for amounts clearly not deductible.

Sometimes attorneys, particularly those who haven’t practiced for a long time, are disadvantaged by having absorbed bad lessons from the behavior of attorneys in movies and television shows and by the failure to grasp, or perhaps to have the opportunity to grasp, words of caution as they travel their educational path. It is important to understand that the consequences of inappropriate behavior include not only the direct response of a court but also the unwelcome tax consequences.