Friday, February 27, 2015

Testing Tax Knowledge 

According to a report on a recent NerdWallet survey, “[m]ost American adults get an ‘F’ in understanding income tax basics.” The survey posed 10 questions to 1,015 people. The average score was 51 percent.

Readers of MauledAgain know that I am no fan of tax ignorance. 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, and A Peek at the Production of Tax Ignorance, I have lamented how poorly Americans, to say nothing of legislators, fare when dealing with tax issues.

The NerdWallet survey report shares eight of the ten questions that were posed to the people who were surveyed. In all fairness, three of those questions touch topics that are not covered in the basic income tax course that I have taught. The topics – Roth IRAs, section 529 plans, and flexible spending plans – aren’t included because they cannot be understood until the basics are mastered, are complex, and would displace more fundamental topics if squeezed into the course. Yet the performance of those surveyed on those three questions was roughly the same as on the other five that were shared. With the exception of one of the five questions that I would expect a student who completes the basic income tax course to answer correctly, fewer than half of those surveyed chose the correct answer for any of the questions.

It would be fun to require members of Congress and candidates for that office to take this survey, or one like it. I cannot imagine the outcome would be any better than that achieved by the 1,015 survey takers.

Wednesday, February 25, 2015

So Who Should Pay for Roads? 

According to a recent report, the decision by the Michigan legislature to come up with road repair funds by asking voters to approve an increase in the state sales tax has been criticized by Senator Gary Peters. Peters made the point that “additional road money raised from those who use the roads, not through a sales tax.” He’s right. The sales tax takes a higher percentage of low income individuals’ incomes than it takes from the wealthier individuals, yet vehicle ownership and use is lower for low income individuals than it is for those economically more advantaged.

Trying to get legislatures to adopt a mileage-based road fee is an ongoing effort that will require some years before it is widely adopted. In the meantime, it is totally irresponsible to let the transportation infrastructure fall into deeper disrepair while politicians and privateers try to squeeze dollars for themselves out of the process. I’ve discussed the mileage-based road fee in a long series of posts, beginning with Tax Meets Technology on the Road, and continuing through Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, Liquid Fuels Tax Increases on the Table, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, Mileage-Based Road Fees: Privatization and Privacy, and Is the Mileage-Based Road Fee a Threat to Privacy?.

But if Michigan is unwilling to take on the mileage-based road fee, it ought to enact, or put to a referendum, a funding mechanism that aligns use of roads with revenue for the maintenance of roads. Though the liquid fuels tax has its flaws, it’s a much more appropriate means of funding highways than is the sales tax.

Monday, February 23, 2015

Using the Tax Law to Administer Health Care: An Unwise Idea Again Proves Itself Unwise 

Almost five years ago, in a series of posts including IRS Ought Not Be the Health Care Enforcement Administrator, Health Care: Enlarging the Code and Stressing the IRS. and More Challenges of IRS Health Care Oversight, I criticized the Congress for saddling the IRS with responsibility for administering and enforcing much of the Affordable Care Act. Doing so violated a principle to which I have subscribed for decades, that is, the Internal Revenue Code ought not be used to accomplish goals that ought to be spelled out in other legislation.

Now comes news that the Department of Health and Human Services sent incorrect tax information to as many as 800,000 taxpayers. The information permits taxpayers to determine if they qualify for a subsidy to assist them in paying for health care, a determination that affects income tax returns. The catch is that the information provided by HHS was computed by the IRS, as pointed out in this editorial. The editorial notes:
Last week the U.S. Department of Health and Human Services announced that the IRS had miscalculated subsidies for 800,000 Americans. Figuring out taxes is what the IRS does.
But there’s the catch. The IRS did NOT err in computing taxes. It erred in computing a health care subsidy. It is no more surprising to discover a tax agency making a mistake computing a health insurance subsidy than it is to discover a clerk-typist making a mistake interpreting an MRI. Ought not HHS be computing the subsidy amounts and reporting those to taxpayers rather than simply passing along insurance subsidy information provided by the IRS? Why is the IRS doing what HHS ought to be doing?

If it is outrageous that the IRS has caused problems for almost a million taxpayers, is it not even more outrageous that the IRS was put in this position because the Congress was unwilling to charge HHS with the responsibility for administering the Affordable Care Act? Many members of Congress are quick to criticize the IRS, yet when trying to decide which federal agency ought to administer a program, gleefully turns to the IRS by enlarging the Internal Revenue Code and piling more work on the IRS. Oh, and then it cuts funding for the IRS. It seems to be a reflection of the same mindset that causes some employers, usually the large and impersonal ones, to fire some employees, reduce the pay of others, and to pile more work on those who remain because there’s a shortage of labor resources.

Of course, we don’t know what would have happened had HHS computed the subsidy information and sent out the information to taxpayers. Perhaps there would have been two or three times as many errors. Or perhaps not. But at least Congress ought to give the agency responsible for health issues an opportunity to show what it can do. Then the IRS could focus on its expertise, taxes, and stop focusing on health insurance computations.

Friday, February 20, 2015

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. One of the culprits is section 179, originally designed to spare taxpayers the task of computing annual depreciation on relatively small amounts expended for capital items, but expanded to provide half-million dollar write-offs that far exceed the economic cost to the taxpayer of making an investment. The justification is that this provision creates jobs.

Both sides of the aisle are guilty of supporting this unwise provision, as well as its cousin, section 168(k). In Just Because It Didn't Work the First 50 Times Doesn't Mean It Will Work Next Time, I criticized the Congress for renewing the provision. A year later, in If At First It Doesn’t Work, Try, Try, Try Again, I criticized the President for proposing yet another renewal of the expanded section 179 limitations.

In Just Because It Didn't Work the First 50 Times Doesn't Mean It Will Work Next Time, I explained:
Does it make sense to increase deductions for acquisitions of equipment? How does that restore confidence in the economy, which is essential to putting the nation back on track. How does a tax provision that encourages businesses to use their limited funds to buy machinery put people in this country back to work? Nothing in the provision requires that the property be built in the United States, and it's almost certain that such a requirement would violate at least a few trade agreements and treaties. What's the point of enacting tax breaks that create jobs in other nations? Dollar-for-dollar, a tax break for creating jobs directly is worth much more than a tax break for purchasing equipment.
Nothing that has happened during the past six years has changed my opinion on this point.

Now comes news that, again, Congress is planning to renew the provision. At the moment, the renewal proposal has passed the House of Representatives. My guess is that at some point, unless derailed by machinations with respect to unrelated provisions, it will pass the Senate. And it will be signed by the President.

This provision is one of many that is set to expire after a short time, creating incentives for its beneficiaries to fork over campaign contributions to ensure that it is renewed when the time comes. This is no way to run a nation or its tax policy, but it surely is a good way for wealthy political campaign contribution donors to run a Congress.

As I explained in Just Because It Didn't Work the First 50 Times Doesn't Mean It Will Work Next Time, “The depreciation provisions, including bonus depreciation and first-year expensing, have contributed to the current economic mess by allowing taxpayers to compute taxable income as though their economic position declined when in fact it remained the same or improved. Packaged into tax shelters, LILO deals, tax-exempt leasing arrangements, and other devices that contribute to the tax gap, these provisions ought not be considered remedies for the very economic diseases that they have caused and aggravated.”

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. That alone demonstrates the absurdity of making section 179 anything more than a short-cut for deducting the cost of de minimis expenditures.

Wednesday, February 18, 2015

You Can’t Save What You Don’t Have 

Last week, in a CNN Money commentary, Jordan Wathen compared what he described as getting rich the easy way with getting rich the hard way. He pointed out that although people generally think that getting paid millions of dollars a year to do something a person loves to do is getting rich the easy way, it’s actually the opposite. People who get rich, for example, by playing a professional sport have invested tens of thousands of hours learning the game and honing their skills.

Wathen takes the position that there is a much easier way to get rich. He explains that by saving money at a higher rate and patiently holding on to an investment, a person can do quite well. He notes that the average savings rate is between 4 and 5 percent, and that mutual fund investments are held for an average of 3.3 years. In contrast, he suggests, a savings rate of 15 to 20 percent, and a mutual fund holding period of 20 to 40 years, would be outstanding.

Wathen is correct. A person’s savings, or investment, will be higher, and generally much higher, if the person saves 15 or 20 percent of income rather than 4 or 5 percent, even if the person doesn’t hold assets for several decades. Adding long-term holding periods to the mix makes the outcome even better.

The challenge, of course, is finding a way to save more money. Wathen suggests living in smaller home, driving a less expensive vehicle, and “shopping around for the best prices on routine monthly expenses like cable or insurance” will generate funds that can be invested. That might work for someone who is living in a 2,500 square foot home who can move to an 1,800 square foot home, as Wathen suggests. But how many people are living in homes of that size? And how many can move? Additional money might be within reach by trading in a European sports car for a Japanese vehicle, as Wathen suggests. But how many people are driving European sports cars? And of the people living in large homes and driving these sports cars, how many already have more-than-sufficient savings and investments? In other words, how many already are rich? For the wealthy, investing 80 to 90 percent of annual income is easy, because it’s easy to live on 10 percent of a $12,000,000 annual income.

But what about the folks whose income doesn’t cover the costs of sub-standard housing, nutritionally deficient food, second-hand clothes, and emergency-room-only health care? How does someone scraping by on basement wages set aside 4 to 5 percent of income, let alone 15 to 20 percent? How does someone whose annual income just about covers those costs set aside money for the future? By cutting back on a non-existent cable bill? By selling the fancy European sports car?

One of the underlying cause of the current national economic disequilibrium is the lack of long-term savings. That will happen when pensions are discontinued, employee benefits are cut by classifying workers as independent contractors, and wages are cut to the bare minimum. There wouldn’t so many “needy” people if the value of labor were fairly determined.

And, incidentally, when those who are able to do so cut back consumer spending by reducing cable bills and insurance costs, by eating in more than eating out, and by decreasing discretionary spending on entertainment and sports events tickets, what does that do to “consumer demand”? Consumer demand is what makes the economy move.

I’m not against savings. I’m just being practical. A person can’t save what the person doesn’t have. Unless incomes are more than sufficient to cover the costs of living, savings rates will remain too low.

Monday, February 16, 2015

Are the Cuts in Education Funding Part of a Plan? 

Last week, in Priorities, Priorities: What to Do With Tax Revenues, I explained how Wisconsin’s Governor Scott Walker plans to cut education funding while simultaneously plowing tax revenue into the hands of a privately-owned professional sports franchise owner for a new arena that is far from a necessity.

In at least two other states facing budget shortfalls caused by tax cuts for the wealthy, tax breaks for the wealthy, and expenditures in the form of handouts to the wealthy, Republican governors are seeking to eliminate the deficits by cutting education funding. This is happening in Louisiana, and Kansas.

Why not fix the problem by reversing the cause of the problem? Is there something horrible about eliminating the tax cuts for the wealthy so that the citizens of the state have access to quality, affordable education? Perhaps the reason is a desire to reduce the number of educated people. Why do that? Educated people are less likely to fall for the fear-stoking and lie-infested campaign slogans tossed about by those whose goal is to shift wealth into the hands of a tiny oligarchy.

One would hope that by now enough Americans would realize that the promises offered as enticements to vote for politicians determined to shift wealth to the oligarchy are empty, unfulfilled, and dangerous. The nation is still waiting for the jobs promised more than a decade ago. Those that have developed in the past few years reflect steps taken in spite of the increase in wealth and income inequality. The nation is still waiting for repair and maintenance of the country’s infrastructure, a goal not achieved by the privatization technique that also shifts wealth to a tiny handful of wealthy individuals.

An epidemic of ignorance is about to sweep across the land. If voters let it happen, the outcome will be most unpleasant. Citizens need to ask, “Who benefits from cuts to education funding?” and “Who benefits from handouts to the wealthy?”

Friday, February 13, 2015

Self-Employment Income Not Offset by NOL Carryforward 

Sometimes a principle of tax law is uncomplicated, easy to understand, and easy to apply. This can be the case even if taxpayers don’t like the result or don’t understand the reason for the principle. An example of this concept popped up in a recent Tax Court case, Stebbins v. Comr., T.C. Summary Op. 2015-10. The taxpayer incurred a net operating loss in 2007. In 2008, the taxpayer generated self-employment earnings, on which the self-employment tax was due. The taxpayer took the position that the self-employment earnings in 2008 could be offset from the NOL carried forward from 2007. The IRS disagreed. The Tax Court agreed with the IRS, citing section 1402(a)(4). That provision clearly states that in computing self-employment earnings, the NOL deduction is disallowed.

Whether the provision makes sense can be debated. Should an NOL be permitted to offset self-employment earnings? Perhaps, but at the moment that’s not how the tax law works. Unless it is changed, taxpayers cannot do what the taxpayer in Stebbins tried to do.

Wednesday, February 11, 2015

Priorities, Priorities: What to Do With Tax Revenues 

The anti-tax crowd claims to dislike taxes because, among other reasons, they enable government spending. To these folks, government spending is a bad thing. Or at least that’s what they say.

So, when the governor of Wisconsin, Scott Walker, as reported in various sources, including this one and this one, proposed a state budget cutting $300 million in funding for the University of Wisconsin, the anti-tax crowd must have rejoiced. Finally, a reduction in the expenditure of public funds to improve the education of citizens, to reduce and eliminate ignorance, to foster knowledge, and to preserve civilization.

But wait!

That same anti-tax, anti-government-spending governor’s proposed budget also includes a payment of $220 million to assist the Milwaukee Bucks, a privately-owned professional sports team, build a new arena. The Bucks don’t need a new arena. But what’s to stop a wealthy sports team owner from grabbing some free money when it’s there to be grabbed? That it is coming from a governor who objects to people thinking they are entitled to government food and medical assistance makes no difference to those who preach one thing and practice another.

This is not the first time that I have objected to wealthy owners of professional sports teams grabbing taxpayer dollars, often with the assistance of people who claim to detest taxes because government spending is such a bad thing. Eleven years ago, in Tax Revenues and D.C. Baseball, I objected to the grabbing of tax dollars by those not in need, and revisited the issue in Putting Tax Money Where the Tax Mouth Is, Building It With Publicly-Funded Tax Breaks , Public Financing of Private Sports Enterprises: Good for the Private, Bad for the Public, When Tax Revenues Fall Short, Who Gets Paid?, and So Who Are the Takers of Taxpayer Dollars?.

But this time, it is inescapably obvious that the governor of Wisconsin has no qualms about taking money from education in order to fatten the wallets of his wealthy “sponsors.” He, of course, is not alone. He is joined by the other politicians who beckon to the siren song of rich donors’ money. Though campaigning on themes designed to get votes from unknowing and easily misled voters who struggle to pay taxes, these experts in transferring wealth from the poor and middle classes to the wealthy are now so emboldened by the success of their electoral strategies that they don’t care if the world sees them for what they are or notices what they are doing. These are people who think giving the wealthy even more money so that they can build basketball arenas for the simple purpose of keeping up with their wealthy friends’ new arenas is far more important than educating the nation’s citizens.

Today, Wisconsin. Tomorrow, considering Walker’s desire to be president, the nation? Is this really what the people of Wisconsin want? Is this what the people of this nation want?

Monday, February 09, 2015

So Who Gets Taxed on the Super Bowl Truck? 

The facts are easy. Tom Brady, by being named MVP of the Super Bowl, becomes the winner of a truck given by Chevrolet as a prize to the player named MVP. Brady, however, decided that Malcolm Butler, whose interception of Russell Wilson’s pass sealed the New England Patriots’ win, should get the truck, and announced he would transfer the truck to Butler. That’s a nice gesture, but it also raised tax questions. What would be the tax consequences?

The answer to the first “What would be the tax consequences” question is easy. Under statutory and judicial precedent, Brady would be required to include in gross income the fair market value of the truck. Depending on information not available, he might be subject to a gift tax on making a taxable gift to Butler, though the best guess is that Brady would simply use a small portion of his unified credit to offset any gift tax liability. Barring further changes in the law or in Brady’s financial situation, that decision would cause his estate tax in some distant future year to be a wee bit higher. For all practical purposes, the amount and the time lag make that tax burden minimal.

That answer, however, caused someone to ask Chevrolet to transfer the truck directly to Butler. And Chevrolet, according to this story, decided to do just that.

So again one must ask a question. What would be the tax consequences?

The answer to the second “What would be the tax consequences” question also is easy. What makes it worth discussing is that the wrong answer has been offered. In that same story, one Robert Raiola, a CPA, is reported to have said that “Now instead of Brady paying income taxes, Butler will have to.”

Because Brady won the prize, he must include the value of the prize in gross income. Not only did he win the prize, he took delivery of the vehicle when the keys were handed to him. In order to have avoided being taxed on the prize, he would have needed to reject the keys, and to have disclaimed the prize before he became entitled to it, in other words, at some point before he was named MVP. He could have done so by somehow declining to be named as MVP, though I don’t know if that is possible, or by rejecting any claim to the prize associated with being named MVP. He did neither. And even if he had not been handed the keys, he would have had constructive ownership of the truck by virtue of being named the MVP.

Many years ago, in Rev. Rul. 58-127, 1958-1 C.B. 42, the IRS concluded that a taxpayer who won a prize by submitting the winning entry in a contest was required to include the prize in gross income despite having directed the payor to deliver the prize to someone else. Did it matter that title to the prize did not pass through the taxpayer’s hands? No. The IRS explained, “It is not material whether the taxpayer actually acquired title to the prize.” In other words, Chevrolet, in transferring title directly to Butler, is acting as Brady’s agent, and the substance of the transaction remains the winning of a taxable prize by Brady and the making of a gift by Brady. This conclusion is strengthened by the fact that Brady didn’t reject the prize, but exercised dominion and control by dictating who would receive the prize, namely, Butler. That’s because Brady became economic owner of the truck when he was named MVP, and Chevrolet had no choice other than to deliver title to Brady or someone designated by Brady. Had Chevrolet, as suggested by some, awarded the truck to the Seattle offensive coordinator or head coach, Brady would have a contract claim for Chevrolet’s breach of the MVP prize agreement.

The last time Brady won a prize, he gave it to a charity. So the issue washed out, with the charitable contribution deduction offsetting the gross income. In contrast, Malcolm Butler is not a charity. There’s no deduction for Tom Brady to use to offset his gross income.

Unfortunately, this incorrect advice is popping up all over the internet, for example, not only in the ESPN story, but also on the website of ABC 7 in California, CBS Sports, and dozens of other sites. Raiola, who is described as an expert in sports management, is going to find it difficult to retract the bad tax advice.

Friday, February 06, 2015

So Does Anyone Pay Taxes? 

It’s time to ponder the tax issues in another Judge Judy episode. Readers of MauledAgain know that television court shows are among the various sources producing material for this blog. Surely I have missed many episodes that generated other tax issues, as I don’t get to see very many of the shows. In the past, I have commented on six, starting with Judge Judy and Tax Law, and continuing through Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, and Foolish Tax Filing Decisions Disclosed to Judge Judy.

In this most recently viewed episode, the plaintiff sued his former employer for unpaid wages. The defendant allegedly employed the plaintiff as a day laborer. There was no dispute that the plaintiff worked for the defendant. During the process of trying to determine how much was owed, Judge Judy asked a sensible question. Surely tax records would provide information. When asked if he had filed tax returns, the plaintiff answered no. When asked if he had filed business tax returns reporting the plaintiff as an employee, the defendant replied no.

Perhaps the parties keep up with the news and realize that the IRS lacks the resources to audit more than a handful of taxpayers. Perhaps they realize that Congress has made additional cuts to the IRS budget. Perhaps they will be joined by everyone else. Once we end up with no one paying taxes, it will be amusing, and tragic, to observe the outcome.

Wednesday, February 04, 2015

So Why Would a Senator Dish Out Misinformation? 

When I first read the claim by Senator Rand Paul that the earned income tax credit is afflicted by a 25 percent fraud rate and deprives the Treasury of between twenty and thirty billion dollars, I thought, “That cannot be so.” According to several reports, including this one, the senator’s claim is wrong.

The Government Accountability Office issued a report that concluded the earned income tax credit had a 24 percent improper payment error rate. But not all improper payment errors are fraud. Some are math mistakes. Some are the consequence of not understanding a complex slice of the income tax law. Some are made by taxpayers. Some are made b the IRS. Though the percentage that constitutes fraud wasn’t specified, it is far more likely it is on the order of 5 or 10 percent than it is to be 25 percent. Actually, it cannot be 25 percent, because that would require treating 104 percent of the errors as due to fraud.

The same GAO report concluded that as a consequence of all the errors, including those that are not due to fraud, the Treasury failed to collect roughly $14.5 billion. That’s a far cry from twenty to thirty billion dollars.

So why would a senator say what Rand Paul said? There are several possibilities.

One is that he was misinformed by a staff member or campaign consultant. That doesn’t create much confidence in the senator, does it?

Another is that he glanced at the report, but didn’t read it carefully. Would he do the same with the details of a proposed federal budget?

Yet another is that he looked at the report, but didn’t understand it. Though that might happen to most Americans considering the complexity of tax law, ought not those who aspire to direct tax policy have the requisite ability to do so?

Still another is that he very well knew the facts, but set them forth in a manner designed to exaggerate something so that he could cast in a bad light a program he does not like. Though modern politics has become a swamp of this sort of behavior, is this the sort of example the nation wants being set by its leaders?

Mistakes happen. But the higher one tries to climb on the ladder of responsibility, the more dangerous the consequences of mistakes, the more vociferous the criticism, and the more urgent the need to surround one’s self with those who can assist in preventing mistakes.

The candidate I admire is one who would simply say, “There are problems with the earned income tax credit. It is too complex. It would not be necessary if employers paid living wages.” Getting to the root of the problem makes it easier to solve the problem.

Monday, February 02, 2015

When Is A Building Placed in Service? 

After the Katrina disaster, Congress enacted section 1400N(d), a provision permitting taxpayers to claim more generous depreciation deductions for certain property used in the Gulf Opportunity Zone, used in the active conduct of a trade or business by the taxpayer in that zone, and purchased by the taxpayer after August 27, 2005, provided original use of the property in the zone begins with the taxpayer after August 27, 2005, and provided the property is placed in service before January 1, 2008, or January 1, 2009, if it is nonresidential real property or residential rental property. A recent case in the United States District Court for the Western District of Louisiana, Stine, LLC v. United States, No. 2:13-cv-03224 (27 Jan 2015), addresses the question of when a building was placed in service for purposes of this provision.

The taxpayer sells home building material and supplies. After Katrina, the taxpayer constructed two retail store buildings within the Zone. The taxpayer claimed the more generous depreciation deduction, generating a loss that it carried back to earlier years, which in turn generated refunds for those years. After receiving the refunds, the taxpayer then received a notice of deficiency because the IRS rejected the deduction. The taxpayer paid the deficiency and sued for a refund of that payment.

The government and the taxpayer agreed that all of the requirements for the more generous depreciation deduction had been satisfied except for one. The government contended that the buildings had not been placed in service before January 1, 2009, because they were not open for business by that date. The taxpayer argued that the buildings had been placed in service because they were substantially complete, were ready and available for their intended use, were staffed by employees to install the shelving and load the merchandise to be sold, and had been the subject of certificates of completion and occupancy issued by the appropriate local authorities.

The court rejected the government argument that the deduction should be disallowed because it violated the “matching principle.” According to the government, that principle would be violated because the deduction would not be claimed for a year in which revenue from use of the buildings would be received by the taxpayer. It is unclear where the government found that principle, because nothing in the depreciation deduction provisions include a revenue requirement, which probably is at least one reason the court characterized the arguent as “totally without merit.”

Under Treasury Regulation section 1.167(a)-10(b), property is placed in service “when first placed in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business, in the production of income, in a tax-exempt activity, or in a personal activity. . . In the case of a building which is intended to house machinery and equipment and which is constructed, reconstructed, or erected by or for the taxpayer and for the taxpayer's use, the building will ordinarily be placed in service on the date such construction, reconstruction or erection is substantially complete and the building is in a condition or state of readiness and availability. Thus, for example, in the case of a factory building, such readiness and availability shall be determined without regard to whether the machinery or equipment which the building houses, or is intended to house, has been placed in service. However, in an appropriate case, as for example where the building is essentially an item of machinery or equipment, or the use of the building is so closely related to the use of the machinery or equipment that it clearly can be expected to be replaced or retired when the property it initially houses is replaced or retired, the determination of readiness or availability of the building shall be made by taking into account the readiness and availability of such machinery or equipment.”

The government argued that a building used in a retail operation must be open for business in order to be considered placed in service. The court examined the three cases advanced by the government in support of its argument, and distinguished all three. One case involved an airplane, and not a building, and a taxpayer whose evidence was discounted and whose testimony was not credible. The second involved a facility containing interconnected components, unlike a building housing separate items of shelving and merchandise. The third case involved the placement in service of equipment housed in a building and not the building itself. The court noted that the taxpayer in the third case relied on yet another case, in which the Tax Court determined that a building was placed in service years before the equipment in question was installed and made operational.

The taxpayer cited proposed Treasury Regulation section 1.168-2(e)(3), which provides “For purposes of this section, a building shall be considered placed in service (and, therefore, recovery will begin) only when a significant portion is made available for use in a finished condition (e.g., when a certificate of occupancy is issued with respect to such portion).” The taxpayer also cited the IRS Audit Technique Guide for Rehabilitation Tax Credits, which indicates that for purposes of the rehabilitation credit placement in service requirement, “[A] ‘Certificate of Occupancy’ is one means of verifying the ‘Placed in Service’ date for the entire building (or part thereof).”

Accordingly, the court dismissed the government claim that a building must be open for business in order to be placed in service. The court explained that during oral argument, the government conceded that there is no authority for its proposition. Because the taxpayer presented undisputed evidence that certificates of occupancy had been issued, that the buildings were substantially complete, and that the buildings were fully functionally to house the shelving and merchandise, they had been placed in service within the required time period. Thus, the taxpayer was entitled to the deduction.

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