Monday, October 19, 2020
The episode carries the title, “Tax Lien & Gutted Getaway” but I do not have a season or episode designation. Though the television guide on the screen has given that information for other court shows, for this one it did not. Nor did an internet search turn up the information. But those who want to view the episode can find it by searching for its title.
The case involved two dance teachers who formed a partnership to teach dance. Each had previously operated her own business as a sole proprietor. When one of the two partners, the plaintiff, tried to pay an expense of the business, she discovered that there was only $2,000 in the business joint account rather than the expected $8,000. Where was the $6,000 that was missing? It was taken by the state after it imposed a tax lien on the account for back taxes owed by the other partner, the defendant, on her personal income unconnected with the business.
The plaintiff was upset that the defendant did not tell her about the money being taken from the account because of the defendant’s tax lien. The defendant argued that she did not tell the plaintiff because it happened quickly, testifying that “it all happened in two days.” But Judge Ross refused to accept her explanation. He explained that she would have received a notice, would have been given a period of time to dispute the tax claim, and would have received a second notice. The defendant explained that she did not receive the notice because she had changed her address after she moved to another state.
The defendant then testified that she straightened out the tax lien and the state that had imposed the lien and seized the $6,000 returned the money. But the money did not go back into the joint account because it was closed. It was closed when the plaintiff used the $2,000 balance to pay expenses of the business.
There was some dispute over the computation of the business profits and how much each partner was entitled to receive. A complicating factor was the partners’ agreement at the outset that the defendant would be compensated for engaging in marketing activities for the business. The defendant testified that she not only invested additional time in marketing efforts, for which she was to be compensated, but also that she paid marketing expenses on behalf of the business, for which she should be reimbursed. These amounts, she argued, should offset most of what the plaintiff was claiming she was due from the joint account that had been closed.
The defendant counterclaimed. She claimed that because of the situation with the account, the plaintiff resigned from the partnership, causing both the plaintiff and defendant to return to teaching dance as sole proprietors. The defendant testified that when the parent of one of her students asked why the business had closed, the plaintiff told the parent that it was because the defendant was going to jail for not paying taxes. So that parent withdrew her child as a student of the defendant, causing the defendant a loss of revenue. The plaintiff denied having said the defendant was going to jail, and testified that she had said to the parent, after explaining why the business closed, “You can’t cheat Uncle Sam and that’s how those big celebrities go to jail.” The judge explained that the plaintiff’s statement was not an allegation that the defendant was going to jail but was equivalent to saying that if someone fails to pay taxes, there is a possibility that person would go to jail. Thus, Judge Ross explained, truth is a defense and because the plaintiff’s statement was true, the defendant had no claim.
After doing some computations, the judge held that the plaintiff was entitled to $500, much less than what she sought. He then dismissed the defendant’s counterclaim.
The primary lesson to be learned from this case is that people should operate a business in a manner that insulates its assets from the personal debts of each of the partners or owners. That is fairly easy to do when operating in corporate form but much more challenging when operating as a partnership. The details are a matter of business organization law, and the debts can arise from a variety of transactions. In this case, they happened to arise from taxes. The case would not have been very different had the lien been a mechanics’ lien imposed on the defendant for failure to pay an invoice for work done on her residence. I leave discussion of business formation to those whose blogs and other commentaries focus on that subject.
Another lesson to be learned from this case is to be careful when making allegations about another person’s legal problems, including tax issues. In this case, the plaintiff wisely or luckily made her statement in a manner that stood true as a general rule rather than as a specific allegation about the defendant. But too often people make statements about other people without having done research, without knowing all the facts, and without necessarily having a need to make any statement at all. In this case, for example, it turned out that because of her change of residence to a state without an income tax, the amount that was taken under the tax lien was returned to the defendant.
With respect to both business formation and making statements about existing or former business partners, it is best to be careful. Carefulness appears to be another beneficial behavioral trait that is less evident than it once was.
Friday, October 16, 2020
When I pointed out in Monday’s post that “It definitely is a still-developing story,” I didn’t expect that even more allegations would show up so quickly. Reader Morris, also fascinated by this story, directed my attention to this story. According to the report, the former tax collector has been accused of “ ‘practicing’ how to make fake concealed weapons permits.” According to federal prosecutors, earlier this year, when the section of the tax collector’s office that issues concealed carry permits was closed because of the pandemic, the former tax collector called an employee to find out how to fix the special printer that prints the permits, and when asked by the employee why he needed to use that printer when permits were not being issued, the former tax collector replied that he was simply “messing” with the printer. After he resigned his office, unspecified individuals found in his office pieces of the special card stock paper used for those permits, ad some show that he was experimenting at printing fake concealed weapons permits, particularly the security stripe.
One would think that a tax collector should be collecting taxes. For some reason, in Florida, tax collectors also do other things unrelated to tax collection, such as renewing and replacing drivers’ licenses, issuing copies of birth certificates, issuing hunting and fishing licenses, issuing concealed weapons permits, and other services best confined to other agencies. Concentration of too much power and authority in one office or one person is dangerous. The situation with the former Seminole County tax collector is proof enough of the need to diversify who provides these services.
Wednesday, October 14, 2020
When asked about the economy, Senator Harris, at 25 minutes and 16 seconds into the debate, referred to the 2017 tax legislation, and said, “On day one, Joe Biden will repeal that tax bill.” Vice President pence, at 27 minutes and 27 seconds into the debate, in replying to a variation on the same question, said, “you just heard Senator Harris tell you, on day one Joe Biden's gonna raise your taxes.” But then after the moderator turned that question over to Senator Harris, the Vice President, on his third interruption of her response at 29 minutes and 59 seconds into the debate, asserted, “Joe Biden said twice in the debate last week that on day one he was going to repeal the Trump tax cuts.”
Curious, I examined the transcript for the debate between the candidates for President. At no point did Joe Biden state that “on day one” he was going to repeal the 2017 legislation. What he said was, “but that's why I'm going to eliminate the Trump tax cuts. And we're going to eliminate those tax cuts.”
But Biden did say, not during the debate but some months earlier at the South Carolina Democrat Convention, "And folks, on day one, I will move to eliminate Trump's tax cuts." During the Poor People’s Forum in June 2019, he stated, “The first thing I would do is eliminate the President’s tax cut.”
On the first day of his Presidency, if he were to be elected, Joe Biden certainly could “move” to repeal or amend the 2017 legislation. That is, he could ask one or more members of Congress to introduce legislation to that effect. As a practical matter, if he were to be elected, he would have time before the inauguration to make arrangements with members of Congress to introduce tax legislation even though the success of that legislation would depend on the make-up of both the Senate and the House.
What a President cannot do on the first or any other day of a Presidency is to eliminate or repeal legislation. Only Congress can do that. Perhaps that is why during the debate, after saying “but that's why I'm going to eliminate the Trump tax cuts,” he quickly switched pronouns, stating, “And we're going to eliminate those tax cuts.” He demonstrated that this sort of change in the tax law is not a matter of “I” but a matter of “we.” As for why Senator Harris claimed that “On day one, Joe Biden will repeal that tax bill,” something he would not be able to do, my guess is that she was trying to compress a more accurate, “At the top of the list of what he plans to do, Joe Biden will ask the Congress to repeal the 2017 legislation” into the highly compressed time frame into which two people are asked to analyze and explain positions on dozens of issues.
But shorthand can be dangerous. Tweets and sound bites and compressed debate quips can be misleading. They can create anxiety when none is necessary. They can create unfortunate opportunities for opponents to misconstrue what was intended by focusing on poor choices of words. They can contribute to, and reinforce, ignorance.
Words matter. The claim of “That’s not what I meant” often is rebutted with “But that’s not what you said.” Words matter. They need to be chosen carefully, even when time is short, or even when the protest placard is of limited size. Words matter, and sometimes more words are necessary than the advocates of tweets, sound bites, slogans, buzz phrases, quips, and two-minute debate responses would prefer. Language is a gift. It ought to be used carefully.
Monday, October 12, 2020
It definitely is a still-developing story. It amazes me how inadequate our political system is to prevent these sorts of situations. Reader Morris also has been engrossed in this story. This week he alerted me to three more reports focusing on the plight of the Seminole County tax collector.
First, reader Morris directed my attention to what I had written in What Qualifications Are Needed to Be a Tax Collector?:
As for reader Morris’ observation that “anyone would be better than the previous Seminole county tax collector,” I note that as bad as things seem to be, they can always get worse. Life is full of stories about people hitting rock bottom only to have the bottom fall out. I can imagine tax collector behavior even worse than what has been alleged against the former Seminole County tax collector, but I will refrain from putting ideas of this sort into people’s heads. Yes, it could be worse though the chances of that are very slim, and with any luck, things will get better for the people of Seminole County when it comes to the tax collector.Reader Morris then noted that he “did additional research about the previous tax collector of Seminole County,” and suggested, “I believe if you had seen and read this story, you may have written this same conclusion from your blog.” So, of course, I looked at the story reader Morris mentioned.. The short version is that the previous Seminole County tax collector, who held the position for almost 30 years, allegedly increased his net worth twenty-fold by taking advantage of his access to tax deeds and auctions by using aliases, his corporation, and his limited liability company to purchase properties up for auction. He allegedly omitted his limited liability company from his financial disclosure forms. Though there have been calls for prosecutors to investigate and bring corruption charges, and other reports of misdeeds, it appears as though no prosecution has occurred. So, yes, had I been writing about the office of Seminole County Tax Collector in 2016, I probably would have noted that things can always get worse. But perhaps then I would have been accused of jinxing the people of Seminole County once it became apparent things did get worse. But it does seem as though misbehavior by the Seminole County tax collector is not just a one-tax-collector show.
Second, reader Morris directed my attention to another story about the Seminole County tax collector who recently resigned. Soon after taking office, the tax collector announced that he and some of his staff would openly carry firearms, claiming that he was required to do so as a state revenue officer. However, the state’s Attorney General’s office issued an informal opinion stating that although revenue officers are permitted to “carry guns and act like law enforcement officers,” tax collectors do not qualify as revenue officers. What triggered the opinion was a complaint filed against the tax collector who, apparently unhappy with how someone was driving, followed the driver home using a white strobe light on his personal vehicle, flashing a badge and carrying the gun, and confronted the driver. The tax collector’s reaction to the opinion was to note that he disagreed, pointing out that the Attorney General’s term was over in a few days, and that he would try to work out something with the incoming Attorney General. If there has been a more recent opinion, I cannot find it, though it does appear that there are some tax collectors in Florida who claim to be revenue officials. Nonetheless, the idea that a tax collector can make traffic stops using a private vehicle is unwise, and if Florida law permits that sort of behavior it needs to be revised. Reader Morris asked if impersonating a law enforcement officer a crime in Seminole County or in Pennsylvania. To the best of my knowledge, anyone who is not a law enforcement officer who impersonates one is committing a crime in every state.
Third, reader Morris informed me about yet another story involving the Seminole County tax collector. According to this report, representative Matt Gaetz is now coming under criticism for what he said in 2017. According to this story, Gaetz had this to say about the Seminole County tax collector and the then-upcoming campaign for the Seventh District of Florida:
That is a Republican seat. That is a seat that really should be won by Republicans. Joel Greenberg has gone to the Seminole county Tax Collector’s office and been a disrupter. If you look at what people want in the country right now, they want that disrupter.Had the tax collector entered that race and won, imagine the damage that would have been done. Though in the same report the Seminole County tax collector described himself as not a career politician, if even a few of the allegations are true, he surely has been acting as badly as have some career politicians.
Friday, October 09, 2020
Now comes a report that drives home the danger to taxpayers whose returns are prepared by unscrupulous tax return preparers. In a sense, the headline is an attention-grabber: “Customers under IRS audit after local company prepared their tax returns; Clients promised ‘maximum’ tax refunds must now give money back to government.”
The tax preparation firm followed through on its promise of “maximum” tax refunds by entering erroneous information on their clients’ tax returns. I wonder, did the taxpayers look at their returns before allowing them to be filed? Did they see any entries that did not seem right? For example, did they see charitable contributions listed for amounts far in excess of what they knew they paid? Did they see names of dependents that they did not recognize? Part of me finds it difficult to be totally sympathetic with taxpayers who don’t look a the returns prepared for them, or who, if doing so, ignore what clearly is erroneous information. On the other hand, to the extent the erroneous information was buried in worksheets not filed with the return, it becomes a bit easier to sympathize with the taxpayer who, after having spend the refund, learns that there is now a debt payable to the IRS. That can’t be fun.
One customer of the tax preparation firm expressed a desire that the company refund to her the tax return preparation fees she paid to the company. Good luck. I wonder how much cash or other resources the company will have after the IRS and prosecutors are finished with it. This customer recalled that after asking the employee preparing her return, :How is it possible that you’re getting people back a lot of money?” and he replied, “We get you the most exemptions and deductions possible.” She said that she did not immediately notice that her return had more deductions that it should have had. But that was because the preparer did not give her a copy of Schedule A, which listed the details of the deductions. Should a customer be required to ask for that schedule? No. Many, perhaps most, people using commercial tax return preparers would not know if Schedule A had been prepared or to ask for it if it was missing from “the copy of the return” provided by the preparer. This customer did not learn of the problem until contacted by the IRS. On the other hand, with the 1040 form showing $33,000 in gross income and almost $33,000 in deductions, perhaps some sort of red flag should have popped up. But perhaps not. Yet this customer explained that she told the preparer she did not have any deductions, although the preparer then entered almost $9,900 in gasoline expenses, $9,900 in miscellaneous expenses, and $9,857 in charitable contributions on the customer’s return. Though the return prepared by the company showed the customer getting a refund of $2,456, when the IRS finished its audit, the customer’s refund was only $166. The company took its $1,058 fee out of the customer’s refund and put the balance into her bank account. So although only $1,398 went into her bank account, she is on the hook for repaying $2,290 to the IRS. This customer was not alone. Others also had similar experiences, including a couple for whom the company prepared a return showing a refund of $4,379 but who, after the IRS audit, ended up owing $1,095 and not being entitled to any refund.
At least six of the customers filed complaints with the Better Business Bureau. Because the company did not respond to the Bureau’s request for explanations, it issued an “F” rating for the company. Other complaints have been filed with at least one state agency.
What makes the story more interesting is the claim by the owner of the company that “he was unaware of the customer complaints” and that “he did not realize most of the phone lines at his company’s nine Central Florida locations had been disconnected.” With the phone lines down, customers who have been audited are unable to get help from the company. The owner shifted blame to his “management team.” After this news broke, the company established a new phone line and issued an apology.
What’s a taxpayer to do? Talk with relatives, friends, and business associates. Ask them to describe their experiences with the tax return preparer that they use. Seek out a tax return preparer who has been preparing the other person’s returns for many years free of problems. Beware of the advice to use a tax return preparer who has been used only once, or even not at all. Look at reviews on various web sites. Google the name of the tax return preparer. If the preparer is a company, ask for the names of its owners and managers, and google those names. If the return that is prepared is “too good to be true,” don’t agree to its being filed, but ask for a copy and take it to another preparer for a second opinion. If it’s good to go, return to the original preparer and approve the filing. If it’s not good to go, file a complaint about the preparer with the IRS, and seek a fee refund from the original preparer.
Wednesday, October 07, 2020
As reported in this Philadelphia Inquirer story, the school districts’ attorney took a “creative” approach by arguing that the value of the taxable land was increased by the existence of the billboards. The owners of the billboard companies objected, and after the Board of Assessment and Appeals agreed with them, the school districts appealed to the Court of Common Pleas. They lost.
The attorney for the school districts explained, “If I own a piece of ground and I’m renting it to a billboard company for $2,000 a month, why shouldn’t I have to pay tax on the ground as if I can rent it for $2,000 a month?” I pointed out two flaws in this rhetorical question. First, in addition to income, replacement cost and comparable sales are factors in determining the value of property. Second, the presence of the billboard increases the value of the property, but that doesn’t mean that it increases the value of the land. For example, assume that the small plot of land is worth $10,000. Assume that a billboard is constructed and that it has a value of $40,000. The property is now worth $50,000. The school district’s “creative” argument is that the land is now worth more than $10,000. But because the property continues to be worth $50,000, assigning a value of, for example, $30,000, to the land means that the billboard is being treated as worth $20,000. If the billboard is removed, the land continues to be the same $10,000 piece of land that it was before the billboard was installed (assuming that the land was not otherwise damaged or improved, which is most likely the case). In other words, the issue is a matter of determining how much of the property value to allocate to the land. The land’s value does not change when an improvement is made. What changes is the value of the property. Those are two different things. I then pointed out the flaw in treating billboards, wind turbines, amusement park rides, and animal feed silos differently from, for example, cell towers.
The School districts appealed to Pennsylvania Commonwealth Court. I discussed in the court’s decision in If It’s Real Property, It Should Be Subject to the Real Property Tax. According to this Philadelphia Inquirer article, the court concluded that the land on which billboards are placed is subject to the real property tax even though the billboards themselves are not exempt from the tax under the statute. In other words, the court rejected the taxpayers’ argument that because the billboards are exempt, the land on which they sit is exempt. The court’s conclusion makes sense because otherwise putting property that is not real property and thus not subject to the real property tax, such as vehicles, tables, chairs, tools, or equipment, on land would make the land exempt. The court also rejected the taxpayers’ argument that the legislature intended to exempt the land, for the simple reason that the statutory language does not exempt the land but only the billboard. The court reversed the decision of the Court of Common Pleas and held that the assessment of the taxed land on which the billboard sits could reflect the increase in the value of the land due to the existence of the billboard.
The taxpayers appealed to the Pennsylvania Supreme Court. Last week, the Court issued its decision. The Court framed the question as follows: “Where a real estate owner leases real estate or grants an easement to a billboard owner to situate a billboard upon the real estate, is a taxing district prohibited by the statutory exclusion for “signs and sign structures” contained in [the statute] from considering the rents and other payments from the billboard owner to the parcel owner when valuing the real estate for the purposes of real estate tax assessment.”
The Supreme Court began by pointing out that the assessment of taxable real property must reflect its fair market value, defined as “the price a purchaser, willing but not obliged to buy, would pay an owner, willing but not obliged to sell, considering all uses to which the property is adapted and might reasonably be applied.” Because the landowners receive rent or easement payments from the billboard companies, the Court concluded that so long as purchasers of the land would continue to receive those payments, those payments would enhance the fair market value of the land using the income approach to real estate valuation. The Court rejected the taxpayers’ argument that taking into account the rent income from the billboard would put part of the billboard’s exempt value into the value of the tax-exempt land, reasoning that although the value of the billboard reflects the income it generates from advertisers, its actual value must also take into account the expenses of operating it. The Court treated the premise of the taxpayers’ argument as conflating income from the advertisers to the billboard owner with the income the landowners received from the billboard owner. In other words, the Court disagreed with the taxpayers’ description of the “billboard’s value” as the value before the lease payments are taken into account whereas the Court considered those payments not to be a part of the billboard’s value. The Court concluded that the capitalized value of the lease payments, not being part of the billboard’s value, can be considered as part of the value of the land without shifting any value of the exempt billboard into the value of the tax-exempt land. And, the Court continued, this conclusion does not violate the exempt status of the billboard because it does not include the value of the billboard, net of lease payments, in the value of the land. Accordingly, the Court affirmed the decision of the Commonwealth Court.
How does the Court’s analysis change the analysis I shared in the example I provided several years ago. In that example, I posited a small plot of land worth $10,000, and the construction of a billboard on the land with a value of $40,000, making the value of the property $50,000. I argued that the approach taken by the school district, and approved by the Court, shifts some of the value of the billboard to the land. In other words to treat the land as worth $20,000 would require treating the billboard as worth $30,000. What the Court appears to be saying is that the existence of the billboard creates additional value, such that the billboard continues to be worth $40,000, while the land increases in value to, say, $20,000, making the property in its entirety worth $60,000. There is some sense to this conclusion, which can be demonstrated as follows. When the land was empty, it had a value of $10,000. With a billboard on it that generates an income stream to the landowner, the land has more value. A third party would be willing to pay more than $10,000 for the land if it came with an income stream. But is the purchaser buying the land for more than $10,000, or is the purchaser paying $10,000 for the land and, say, another $10,000 for the income stream? Put another way, should the income stream be treated as part of the land because the land generates that income stream? According to the Court, the answer is yes. The flaw In the reasoning is that the land is not generating the income stream. The billboard is generating the income stream. Without the billboard, the income stream does not exist. To use another example, suppose someone owns land, parks vehicles on the land, and rents those vehicles to individuals needing cars under year-long leases. The value of the vehicles has nothing to do with the value of the land. If the landowner sells the land, along with the vehicles and existing leases, the fact that the purchaser would pay more for the package than for just the land does not change the value of the land. Put another way, the capitalized value of the lease payments from renting out the cars does not increase the value of the land on which the cars are parked. The fact that the owner of the land is the owner of the car should not make a difference.
All of this is attributable to a deeper flaw. What generated this litigation is the statutory exemption for billboards, an exemption that also applies to wind turbines, amusement park rides, and animal feed silos, but not, for example, cell towers. If the legislature would treat all structures on land as real property, the dispute over the valuation of the land and the structure would be unnecessary. The law would be less complicated, an outcome that is desirable when the complication is necessary only because of special interest lobbying.
Interestingly, the Philadelphia Inquirer article that alerted me to the Pennsylvania Supreme Court’s decision characterized the court as having “overturned a long-accepted property tax exemption for billboards.” Technically, it did not overturn the exemption. The outcome of the case does not cause the entire value of the billboard to be included in the value of the taxed land on which it sits. Some commentators suggest that school districts and other taxing authorities might try to increase the assessments on land occupied by wind turbines, amusement park rides, and animal feed silos. The attorney for the school districts noted that the revenue to the school districts generated by the Court’s decision will continue “at least until lobbyists get to the legislators again and change the law.” My guess is not that the legislature will remove the special treatment of billboards, wind turbines, amusement park rides, and animal feed silos, but will add cell towers and who-knows-what-else to the list of exempt items. Unfortunately, it is unlikely that people’s residences would be added in their entirety to such a list of exempt items.
Monday, October 05, 2020
For example, in the CNN Report with the grammatically incorrect but attention-getting headline of “Why you pay taxes, and rich Americans -- like Donald Trump -- don't always have to,” Anna Bahney asks, “How is it that a millionaire can pay hardly any income taxes -- or none at all -- while most people, earning far less, owe more?” Among her explanation is this quote from Frank Clemente, executive director of Americans for Tax Fairness: “Real estate professionals are able to claim losses from depreciation of their properties. Even if the property value goes up, because the building located on the property depreciates, it reduces tax liability.”
As I wrote in The Parade of Tax Horribles Never Ends, “The depreciation deduction is not one of my favorites. Too often, it permits taxpayers to report, and pay tax on, a taxable income amount that is much less than the taxpayer’s economic profit.” Anyone who browses my MauledAgain commentary, or who has been reading them as they’ve been published, notices that my complaints about the depreciation deduction appear at least once a year. Why? Because every time we blink, the folks who benefit the most from the depreciation deduction, use some of their resources to persuade the Congress to expand the scope of the deduction to reach even more properties. They claim that doing this for them will make the economy better, though that’s not the case, and of course, any attempt to rein in this ill-conceived deduction is met with claims that cutting back on it will destroy the economy.
More than eleven years ago, in Instead of More Favorable Depreciation Deductions, Eliminate Them?, reacting to proposals to expand depreciation, I pointed out “the bizarre impact of a deduction that is allowable to a taxpayer even when the taxpayer is becoming wealthier.” I explained, “Deductions should be triggered by a decline in wealth, or out-flow, just as gross income is triggered by in-come. Not all income becomes gross income, and not all out-flow becomes a deduction, but it's flat out silly to permit a deduction to someone on account of a pretensive decline in value of property that has not only failed to decline in value but that has increased in value.” Reacting to those who justify depreciation of buildings that increase in value by pointing out the less favorable depreciation rates applicable to real property, I tagged the differences as misleading, noting that “Giving two pounds of cheese to a wealthy person when distributing five pounds of cheese to a poor person when operating a food bank for the hungry doesn't reduce the absurdity of giving free food to someone who is not financially bereft.”
At about the same time, in Abolish Real Estate Depreciation Deduction? An Idea Gathers Attention, I offered this analysis:
As the debate over an economic recovery stimulus package continues, the idea of eliminating a deduction that is inconsistent with economic reality may find more advocates. Tax breaks ought not be extended to those who don't need them. Casualty loss deductions don't exist for taxpayers who have not endured casualties, trade or business deductions are not allowed to taxpayers who are not carrying on a trade or business, interest deductions aren't provided to those who are not in debt, and thus depreciation deductions ought not be permitted for properties that aren't depreciating.Five years ago, in The Parade of Tax Horribles Never Ends, I wrote, “It’s time to limit depreciation to the economic decline in the value of the property. If it remains acceptable to provide deductions for economic losses that haven’t happened and that may never happen, perhaps it’s time to tax future economic gains that haven’t happened and that may never happen. Imagine the outcry.”
So to the extent that Donald J. Trump’s low taxes are attributable to depreciation deductions claimed on real estate that has increased in value – and I doubt that this accounts for more than a small portion of his “tax saving” strategy – he is not to blame, except to the extent he contributed to the funding of the lobbyists who pushed for continuation and expansion of depreciation deductions for real property and to the funding of campaigns waged by Congressional candidates who support the deduction in order to gather campaign contributions and votes. The American people are responsible for who sits in the Congress, so to the extent the American people are repulsed by the idea of letting real estate owners reduce their taxes through the use of an unjustified deduction, they can vote for legislators who support ending this unnecessary economic lifeline to people being given tx breaks while their real properties increase in value.
Friday, October 02, 2020
Sometimes, perhaps often, Indictments of tax return preparers lead to guilty pleas or convictions. In turn, that leads to sentencing. Last week, the Department of Justice announced the sentencing of a tax return preparer. He was sentenced to 46 months in prison and ordered to pay restitution to the United States “for aiding and assisting in the preparation of false returns.” Not only did he prepare false tax returns on which false education credits and false business losses were claimed, he “trained his employees to prepare false tax returns.”
What remains to be learned is what these employees do in the future. Are they aware of what has happened to their employer? Will they learn from his experience that it is unwise to file false returns? Will they set aside the tricks and techniques he taught them? Or will they decide that his mistake was getting caught, conclude that they can avoid getting caught, and open their own tax return preparation businesses in which they engage in the same or similar behavior? It is not unusual for subordinates or associates of an imprisoned criminal to pick up where the convict left off.
Perhaps the Department of Justice spoke with the employees and explained the risk of continuing the practices of their former employer. Will the Department of Justice keep an eye on the former employees? Surely there are answers to these questions, but I don’t have them.
Wednesday, September 30, 2020
In season 25, episode 15, Judge Judy dealt with a plaintiff who sued the defendant for back rent and a tenant who counterclaimed for damage to a generator. Two years before the trial, the plaintiff acquired a property “for free,” though it appears that title to the property was conveyed to the plaintiff at a time when the mortgage on the property exceeded its value. The property included a house and a trailer. The plaintiff rented space in the house and trailer to five people, including the defendant. Those five people paid rent to the plaintiff. At some point the electricity to the house was cut off, so the tenants obtained electricity from the defendant’s generator, which eventually broke down from the continuous use. The defendant stopped paying rent.
The mortgage creditor foreclosed on the property. The plaintiff testified that she had paid a monthly premium to another company to keep the property out of foreclosure. She could not produce any documentation proving this allegation.
The plaintiff failed to pay real property taxes on the property for the entire period that she owned it. When she characterized the defendant as a squatter for living on the property without paying rent, Judge Judy characterized the plaintiff as a squatter for owning and renting out property on which she had not paid the property taxes.
Accordingly, Judge Judy dismissed the plaintiff’s claim. She summarily dismissed the defendant’s counterclaim without getting into the details. During the post-trial hallway interview, the plaintiff claimed she had paid several hundred dollars to repair the defendant’s generator.
Technically, an owner of property who uses the property, either by occupying it or renting it to others who occupy it, is not a squatter. Failure to pay real property taxes or any other obligation associated with the property, such as mortgage payments or utility bills, does not make the owner a squatter. It gives the creditor, whether the local government, the bank, or the utility company, a right to take steps that can result in the creditor or a purchaser at a foreclosure sale becoming the owner. In that situation, if the former owner fails to vacate the property, at that point the former owner becomes a squatter. It was unclear whether in this case the foreclosure proceedings had reached the sale stage, but even if they had, the plaintiff was not occupying the property and apparently was no longer collecting rent.
That does not mean Judge Judy reached the wrong result. The plaintiff’s failure to pay the real property taxes meant that she was coming into court with “unclean hands,” which justifies dismissing her complaint against a defendant who, by admittedly not paying rent, also had unclean hands. That also would justify dismissal of the defendant’s counterclaim.
Of course, the fact that someone failing to pay real property taxes is not a squatter does not justify failure to pay those taxes. This case, though, is a warning to those who are delinquent on tax payments that they face a steeper, or perhaps unsurmountable, challenge when bringing a lawsuit concerning the property in question.
Monday, September 28, 2020
Reader Morris picked up on a related story. According to this report, radio personality Moira, legally Lynn Dictor, is running for the office of tax collector in Seminole County. The story inspired reader Morris to ask me, “What qualifications do you need to be a tax collector?” He also observed, “It would appear anyone would be better than the previous Seminole county tax collector.”
The short answer to his question is, “It depends.” The duties and responsibilities of tax collector depends on the language of the statute or ordinance that creates the position. In Seminole County, according to the Seminole County Tax Collector web site, the tax collector issues certified copies of birth certificates, collects the county local business tax and issues receipts for payment of those taxes, serves as agent for “performing limited permit application processing functions” for concealed weapons permits, handles title, education, and other services for vehicle dealers, provides most driving license services for county residents, sells hunting, fishing, and related licenses and permits, maintains records for those licenses and permits, and collects property taxes. In contrast, in New Jersey, according to state rules, municipal tax collectors computes and bills taxpayers, cooperates with the assessor, the board of taxation, and other financial authorities, designs and implements efficient methods of issuing bills, has a working knowledge of property tax exemptions, abatements, and deductions, and electronic data processing of tax rolls and tax billing, receives and accounts for payments of taxes, ensures proper disposition of collected funds, maintains detailed accounting records, processes electronic data related to collections, initiates and implements enforcement, assists in foreclosures, provides reports to the governing body and appropriate municipal officials, ensures compliance with all statutes, rules, regulations, and directives pertaining to municipal tax collection, and may be assigned certain secondary duties such as, but not limited to, tax search officer, collector of utility accounts, municipal treasurer, and treasurer of school monies. In New Jersey, tax collectors are not involved with issuing birth certificates or concealed weapons permits, and is not involved in supervising vehicle dealers apart from taxes. Both Florida and New Jersey, and presumably other states, have specific, detailed requirements for certification as a tax collector that relate to the skills and knowledge necessary to carry out the specified duties. In New Jersey, the qualifications include successful completion of courses though it appears this need not be done until the collector is elected or appointed. It seems a similar provision applies in Florida. Thus, running for office does not require having any specific qualifications, though winning election subjects the successful candidate to the education and other requirements.
As for reader Morris’ observation that “anyone would be better than the previous Seminole county tax collector,” I note that as bad as things seem to be, they can always get worse. Life is full of stories about people hitting rock bottom only to have the bottom fall out. I can imagine tax collector behavior even worse than what has been alleged against the former Seminole County tax collector, but I will refrain from putting ideas of this sort into people’s heads. Yes, it could be worse though the chances of that are very slim, and with any luck, things will get better for the people of Seminole County when it comes to the tax collector.
Friday, September 25, 2020
A few days ago, up popped a re-run of a Judge Judy episode, specifically season 25, episode 10, from earlier this year. It probably aired originally on a day that I was teaching or otherwise occupied. It was a contract case, and I was not expecting the focus on tax that developed.
The plaintiff had hired the defendant, a tutor, to assist her two children with their academic studies. The defendant is a tutor by profession, with roughly 25 clients for whom he renders tutoring services each week. In March of the academic year in question, the defendant sent a letter to his clients, indicating that he was going to reduce his tutoring activities. However, he explained that he was still in school, that school was expensive, and that he would appreciate a donation of $3,000 from each client as a thank-you for having tutored their children. He promised that for any client who transferred $3,000 to him, he would continue to tutor their children.
The plaintiff testified that she received the letter and thereafter had a conversation with the defendant about the letter. She agreed to pay him $3,000 in exchange for his agreement to tutor one of her children until that child’s graduation. The graduation was in the following year. The defendant argued that by “graduation,” he meant the end of the current academic year. That is when he stopped tutoring, after engaging in five one-hour tutoring sessions with the plaintiff’s child. The plaintiff sued for return of $2,500, based on the defendant’s $100-per-hour fee.
Early in the proceedings, as the plaintiff was describing the situation, Judge Judy asked her, “Did you 1099 the defendant?” After explaining what she meant by that, namely, sending a Form 1099 to the IRS for both the previous tutoring payments and the later $3,000 amount, the plaintiff replied, “No.” Judge Judy then asked the defendant how much income he had reported on his income tax return for the year. He replied with a number a little bit in excess of $42,000. The testimony had already revealed that the defendant had an hourly rate of $100 sometimes discounted to $90, and that he tutored roughly 25 clients per week for an hour each. Using these numbers, Judge Judy determined that his income would be at least $112,500, assuming he tutored 50 weeks a year. The defendant and Judge Judy went back and forth on the appropriate number of weeks, with the defendant pointing out that he did not tutor during the summer and during school breaks. Judge Judy finally decided that 39 weeks was a more appropriate figure, and concluded that his income was at least $80,000.
So why was this discussion of Forms 1099 and the defendant’s tax return relevant. Judge Judy explained that she asked these questions “to know who I am dealing with.” After holding that the plaintiff was entitled to a $2,500 refund from the defendant, Judge Judy repeated what she had earlier mentioned, specifically addressing the defendant with these words: “Cross your fingers that the IRS is not watching.”
Though there are complex rules about the introduction of tax returns into evidence in a case that is not a tax case, in this instance tax returns were not introduced. Instead, Judge Judy simply asked the defendant for one piece of information from his tax return. She formed an opinion about him, not by questioning the truthfulness of his answer, as there was no basis to know what actually was reported on the return, but by estimating what he should have reported. That estimate may or many not have been within range of reality, but unless the defendant was overstating the amount of tutoring he did or what he charged, there seemed to be a discrepancy big enough to cause Judge Judy to consider the defendant someone of questionable character. It would have been interesting to observe this case tried in a different venue with lawyers representing the parties, to see if the line of questioning would have been pursued, to see if an objection would be raised, and, if so, to see what the ruling on the objection would be.
Of course, we will never know if the IRS, or more accurately, someone working for the IRS, watched the episode. And we will never know if the defendant was audited or, if he was, what the outcome of the audit turned out to be. But we do know that we never know when what was done on a tax return will be the subject of some sort of inquiry.
Wednesday, September 23, 2020
Now comes news that the Administration has cancelled the tariff, not quite a month after they went into effect. It claimed that the reason for the cancellation was a return of Canadian imports to normal, yet that was the case back in August when the tariff went into effect. The more likely reason was the realization, by someone with the capacity to see the bigger picture, that Canada’s retaliation would be damaging to American jobs. Of course, the realization might be a narrower perception, namely, that the loss of even more American jobs because of an ill-advised tariff is unwelcome as an election approaches.
Canadian officials took pains to emphasize that, contrary to Administration statements suggesting otherwise, Canada had not negotiated the cancellation of the tariff nor had it agreed to conditions that the Administration stated it expected of Canada. Nowhere has anyone apologized for an unwise decision that was the opposite of what the Administration advertised.
This sort of “deal making” demonstrates that headlines and tweets mean more to the President than does substance, in the same vein that peace agreements between countries that have never been at war is all bluster and disguise. Hailed as a triumph for American workers, the tariff is nothing more than a menace to American workers. Again I ask, how many people complaining or worrying about their economic situation, their health challenges, and their safety will take the time to understand what actually is happening?
Monday, September 21, 2020
Six cents? How does this happen? The story doesn’t answer my question.
What the stories tell us is that somehow a 90-year-old woman suffering from Alzheimer’s disease came up six cents short on her 2019 real estate taxes. Somehow, with interest and administrative costs, her debt grew to $300.
The town put the woman’s house on the market, on the same day the woman’s daughter learned what had been happening. The daughter noted that even if her mother knew about the six cents, she probably would have quickly forgotten. Though the town’s tax collector had spoken with the woman and realized that something was wrong because she wasn’t understanding the problem, the town moved forward with the planned tax sale. After contacting everyone in the town’s government, the daughter received a response from the mayor, who stated, "Naturally it's really embarrassing the town would put someone's home up for sale over six cents. It's silly." The mayor admitted that “the system needs fixing.” The system, he explained, “is all computer-generated, not something that a human can correct.” It was only a movie, but it’s becoming real: “Open the pod bay doors, please, HAL. Open the pod bay doors, please, HAL.” Seriously, nice programming. End sarcasm. The daughter wondered why no one in the tax collection office could figure out how to come up with six cents in order to prevent the tax sale mandated by state law from being triggered. The daughter paid the tax bill and the house was taken off the market.
Two things make the story even more disturbing. The woman had enough money to pay the six cents. The woman now doesn’t remember or understand that the house won’t be sold, and is calling her daughter almost constantly asking if her house is going to be sold, if she needs to pack, if she will find a place to live.
So here is my question. Why aren’t the real estate taxes in that town, or in New Jersey, rounded down, or down and up? The IRS, for example, permits taxpayers to round amounts to the nearest whole dollar. Pennsylvania requires rounding. As explained, for example, in the instructions to form PA-40, “On the PA-40 form and schedules, show money amounts in wholedollars. Eliminate any amount less than $0.50 and increase any amount that is $0.50 or more to the next highest dollar.” If the woman’s tax bill in the New Jersey story had been rounded, it would have been rounded to zero. That would have prevented the attempted tax sale, the time invested by the daughter making phone calls, and the anxiety endured by the woman and her daughter. Perhaps some good will come out of this story and New Jersey and the town will fix the problem before another person gets snagged by the broken system.
Friday, September 18, 2020
Now comes another press release from the Department of Justice describing a guilty plea in response to yet another indictment of a tax return preparer. The preparer was arrested and charged by criminal complaint rather than indictment. That might be the reason I was unaware of the case, or perhaps it’s because I didn’t notice any press releases about the criminal complaint.
This time, it is a former IRS employee charged with aiding and assisting the preparation and filing of at least 70 false tax returns for herself and others. The preparer has pleaded guilty to four counts of aiding and assisting the filing of a false tax return and four counts of filing a fraudulent tax return by an employee of the United States. The preparer was an IRS employee for more than 22 years, serving as a Lead Contact Representative. A Lead Contact Representative assists other IRS employees who are trying to resolve difficult and complex questions from taxpayers. During those 22 plus years, the preparer was given training in tax law, ethics, information protection and disclosure, privacy, identity theft, and identity protection.
From 2012 through 2018, the preparer electronically filed more than 500 tax returns for herself and other taxpayers. She did so in violation of IRS rules that prohibit employees from “Engaging in the preparation of tax returns for compensation, gift, or favor.” In pleading guilty, the preparer admitted that between approximately February 2012 and April 2018, she prepared or assisted in preparing and filing of at least 70 tax returns for herself and others that she knew contained materially false items such as false individual retirement account deductions, false medical expenses, false and inflated unreimbursed business expenses, false tax preparation fees, and false child and dependent care credits.
Someone seeking assistance in preparing and filing a tax return might find it tempting to get help from a friend or relative who works for the IRS. The temptation finds strength not only in the assumption that an IRS employee understands tax law – many do but not all IRS employees deal with taxes – but also on the assumption that an IRS employee has some sort of insight into how to file a return that is highly beneficial to the taxpayer and in a manner that reduces or eliminates the risk of audit. That’s a temptation deserving of nothing but complete rejection. It never occurred to me, until now, to suggest that taxpayers ask their potential preparers if they are current IRS employees. If the answer is yes, stop and go find someone else. On the other hand, if the person is a former IRS employee, they can offer expertise and experience that is helpful. The distinction matters, so it is best to do some background checks and research just as one would do when looking for a physician or roofer.
Wednesday, September 16, 2020
About a month later, in Perhaps Yet Another Reason Not to Run for Tax Collector, I reacted to another story about the same tax collector. Additional federal charges were brought, accusing him of using information from surrendered drivers’ licenses to manufacture fake IDs with his picture on it. After this indictment was handed down, he resigned his office.
A month after that, in Running for Tax Collector (or Any Other Office)? Don’t Do These Things, I shared my thoughts on yet more news about the same tax collector. In a superseding federal indictment, was been charged with sex trafficking a minor. According to the indictment, he was able to get “personal information from motor vehicle records to engage in commercial sex acts and accessed personal information to engage in ‘sugar daddy’ relationships, including with someone who was between the ages of 14 and 18.” The tax collector’s attorney said that his client denies the charges.
Two days ago, in When Behaving Badly as a Tax Collector Gets Even WorseI wrote about still more news about the same tax collector. According to the story, six women who worked for him at the tax collector’s office settled lawsuits and complaints against the Tax Collector’s Office, based on allegations of sexual harassment, racial discrimination, and First Amendment violations. Shortly after I wrote Monday’s post, reader Morris sent me a link to the same story published by another news outlet. I let him know that I had seen the story and that my commentary would appear on Monday. Soon thereafter, reader Morris sent me a link to yet another story about the same tax collector. Somehow I missed this story, which was published about a month ago. According to the story, Seminole County records reveal that the tax collector spent more than $65,000 in county funds to purchase computer servers for a blockchain company that he had formed. Eventually he repaid the county, at about the time the Tax Collector’s Office retained an attorney to represent it in one of the criminal investigations underway with respect to the tax collector’s activities. At this point the County undertook a forensic audit and discovered that the tax collector had funneled roughly $3.5 million to friends and associates through consulting contracts and employment. The tax collector, who has been charged with using information from surrendered drivers’ licenses to manufacture fake IDs and using motor vehicle records to engage in commercial sex acts, planned to use his private blockchain company to take information from property tax records, tax payments, and drivers’ licenses onto a blockchain to start a digital ID arrangement. The tax collector had a private business partner in his enterprise, and he caused the Tax Collector’s Office to hire that partner as blockchain advocate and legislative affairs director drawing a taxpayer-funded salary. The tax collector referred to these allegations with a word describing excrement from a bull, and launched into criticism of the federal government and its “all out assault on anyone that attempts to embrace crypto and change the way our financial system is set up.” I suspect that when people voted for this fellow they did not know what he had been doing and what he would end up doing. Perhaps close investigation, analysis, and critical thinking would have revealed something. Perhaps not. But I fear that even if it did, too many people would simply see the candidate’s party affiliation and pull the lever or push the button or check the box or do whatever was necessary to put the candidate into office despite the red flags. That has happened with the nation’s highest office so it’s likely that it would have happened with a minor office such as tax collector even if the electorate knew what was happening. There’s ignorance and there’s willful disregard of information. Both are dangerous. Both put people at risk. Both threaten democratic (lower case “d”) values. Both are a sorry testament to the deterioration of this nation.