Sunday, October 31, 2021
The Tax Consequences of Halloween Candy Buy Back Programs
About two weeks ago, reader Morris directed my attention to this story about a dental office buying back Halloween candy. From doing a bit of research, this is not an isolated situation but one that is common, though I must point out that when I was in my Halloween door-to-door-with-two-large-pillowcases stage, I never did hear of any dentists buying Halloween candy from children. It now is a nation-wide undertaking. So how much are the children paid? This dental office offers $3 per pound.
Reader Morris then posed two questions. He asked, “Are the kids technically receiving gross income for the candy?” and “Can the dental office deduct the purchase cost as a business expense?”
The children receive the candy as a gift, though perhaps some people might claim that they dish out treats in order to “persuade” children not to refrain from stopping by the following year on Mischief Night, Soap Night, Egg Night, Chalk Night, or whatever other pre-Halloween night is being observed by some youth. Because it is a gift, the children have an adjusted basis in the candy equal to the price paid by the person giving the candy, and when they sell it to the dental office they probably are receiving an amount less than the adjusted basis. So they are realizing a loss, and it is not deductible because the children are not in the trade or business of selling candy, carrying on a for-profit activity, or suffering from a casualty (though some children “persuaded” by their parents to fork over their candy for cash might consider it a tragedy, but not all tragedies are casualties).
Why do I think the children are incurring a loss? On Amazon, a one-pound Hershey’s Bar sells for $19.99, so getting $3 for that bar (assuming anyone is handing out something like that) is far from generating gross income. Walmart sells a 40 ounce bag of small candy bars for $23.96, which is $9.58 per pound, a better deal than the one-pound Hershey’s bar but still much less than $3 per pound. I checked these prices when reader Morris sent his email so they may have increased or decreased, there may have been sales, there may be different prices at other retailers, but as a general proposition, $3 per pound is not generating realized gain for the children who sell their candy loot to the dental office.
Two years ago, Kelly Phillips Erb addressed the tax consequences of Halloween candy buy back transactions. She did so by examining exchanges of the candy “for other stuff.” She addressed the income question only by noting that if the “candy is exchanged for a similar item, there should be no gain and no tax consequences.” As a practical matter that is true, but if a child found someone willing to fork over a one-pound Hershey’s bar for half of the candy in that 40 ounce bag, that would generate gross income of $8.01. If “similar item” means candy of an equal value, she is correct both theoretically and pragmatically. Though she doesn’t mention a sale for cash, her reasoning would bring us to the same conclusion that my reasoning did. She also notes, as I have, that the children handing over the candy at a loss would not be allowed a deduction.
As for a deduction by the dental office, which is, of course, a trade or business, the question is whether the amount paid for the candy is an ordinary and necessary business expense. Is it? One argument in favor of a deduction is that the business is paying for some combination of advertising and public health information. The program is designed to reduce the amount of candy that children (and their parents) eat during Halloween season, and because the cost of publishing a “don’t eat or don’t eat too much candy” message would be deductible by a dentist, sending that message through a buy-back program would also be deductible. An argument in favor of denying the deduction would rest on the nature of what is being purchased. Unlike dental care supplies, dental tools, and similar items, dentists do not need to purchase candy in order to operate their businesses.
There are two twists to the tax consequences faced by the dental businesses that buy the candy. One is that under the national program the candy is donated to a charitable organization that distributes the candy to members of the Armed Forces. So instead of a trade or business deduction, the business would claim a charitable contribution deduction in an amount equal to what it paid (because the property is short-term capital gain property in the hands of the business). The other twist is that some businesses making the purchases do so with donated money. In this instance the business would not get a deduction because it is not expending any money for the candy. Determining whether the sponsors get a charitable contribution deduction requires identifying additional facts and is beyond the scope of the question that was asked. So, too, is the non-tax issue of why it makes sense to reduce the amount of candy in the hands of the children while increasing the candy in the hands of members of the Armed Forces, and I leave readers to explore what the national candy buy back program shares as an explanation.
Wednesday, October 27, 2021
Don’t Get Burned By a Tax Return Preparer
Among those readers is reader Morris, who spotted a story out of North Carolina about a tax return preparer who did something that ought not to have been done and that was something that, until now, I had not hear of a tax return preparer doing. According to the story, Andrivia Wells was sentenced to 70 months in prison after pleading guilty to filing more than 6,000 fraudulent tax returns claiming more than $3 million in fraudulent refunds unbeknownst to the clients, and then taking roughly $1.2 million in fees from her clients’ refunds without informing the clients. She also filed fraudulent returns on her own behalf. These actions aren’t novel for noncompliant tax return preparers. What Wells did was worse.
In 2017, when the IRS demanded that Wells turn over records, a suspicious fire broke out at her office on the day that Wells was to submit the records requested by the IRS, and the records went up in smoke. Two years later, Wells was indicted and arrested on charges of tax fraud and obstruction of justice. Ten days later, while in jail, Wells spoke with her daughter and two associates after a grand jury demanded records, discussing how to eliminate the evidence. The call, made from jail, was recorded. Someone on the call said, “We’ve got to get the stuff out before they put the locks on. . . . We have files in there, clients we’ve done. We’ve got to get a U-Haul and move all of that stuff out of the place at one time. A very large U-Haul.” They didn’t get a U-Haul. They set a fire that destroyed the records.
The sentencing judge described the second fire as “one fire too many.” I beg to differ. It was two fires too many. And it’s worse. Wells already had been convicted of a felony, having served eight years of a 151-month sentence for participating in a drug-trafficking conspiracy. So those fraudulent returns, stolen refunds, and fires were “way too many crimes too many.” The lesson is clear. As I’ve written many times, when retaining a tax return preparer, do some research and even a background check. No one wants to be burned by a tax return preparer.
Monday, October 25, 2021
Ignorant Meme About the Mileage-Based Road Fee Demonstrates the Value of Education as a Vaccine Against Ignorance and Propaganda
In that most recent post, I described how Mariya Frost of the Washington Policy Center, in an opinion piece on the pending federal mileage-based road fee pilot program, objected to the fact that the pilot program language is “buried deep in a larger infrastructure package that lawmakers have to vote for or against in totality.” That observation is correct, and I pointed out that it was not a rejection of the mileage-based road fee concept or the pilot program, but a complaint about the legislative process in general. That, of course, is a much bigger and more serious problem with this nation’s polity.
One of the side effects of burying a proposal in legislation is that very few people actually read the language of the proposal. Those who do have a choice. They can try to accurately report, or at least try to accurately summarize, the proposal, or they can twist it into propaganda used for questionable purposes. Granted, some people who try to accurately explain a proposal might suffer from an inability to understand it and generate misleading information. When proposals are complicated, or the language murky, that can happen. It’s bad, but it’s not evil. On the other hand, those who deliberately mis-inform the public do not have any sort of acceptable excuse.
Consider a meme now circulating on social media outlets. It reads, “The dems are trying to push through a 8 cents a mile vehicle tax. You say well 8 cents doesn’t sound to [sic] bad. Allow me to break it down for you. If you drive 12,000 miles a year, you will pay an extra $960 per year. If you get 18 miles to the gallon, it will cost you an extra $1.44 per gallon. If you put 20 gallons in your car, the cost comes out to an extra $28.80 per fill up. This will amount to the largest tax hike in history. Not to mention what this will do to the trucking industry. You think your groceries are expensive now! You just wait. It will cost a semi that drives 100,000 miles a year for example an extra $8000 dollars a year. Do you think the trucking companies are just going to eat that cost? No I don’t think they will. They will pass the cost onto their customers who will in turn pass it on to you. If this passes, it will be catastrophic for the economy I guarantee it.” It is unclear whether the person whose name appears below the meme is the author. It is unclear whether the the spelling, punctuation, syntax, and other errors is the product of someone lacking the requisite writing skills or is a deliberate attempt by polished propaganda artists to make the meme look as though it is coming from a grassroots source. Either way, it is full of nonsense.
First, the proposal is nothing more than the funding of a voluntary pilot program to study the mileage-based road fee. The volunteers will not be out any money. Second, there is no reference to 8 cents per mile in the proposal. The 8 cents figure comes from the report of a Pennsylvania commission set up to study transportation funding. Third, if a mileage-based road fee were adopted, it would be, as indicated in various proposals, a replacement for the liquid fuels tax, and thus not in its entirety an “extra” anything.
It's bad enough someone wrote this, whether out of ignorance or a deliberate intention to rile up the base and motivate the anti-tax anti-government crowd. What’s worse is that people read this, react emotionally without doing any research to determine its validity, and then re-post it so that this nonsensical piece of ignorance spreads like a virus among those unvaccinated against ignorance. Yes, education is the vaccine against ignorance and propaganda. Yes, there are people who are opposed to education because they are afraid of what it does, even though there is nothing to fear about making efforts to acquire knowledge and education and to learn how to separate emotion from critical thinking. Ignorance about a pilot program to examine the feasibility of a mileage-based road fee is a concern, but it is merely one facet of the widespread ignorance and lack of critical thinking about every important aspect of society that is eating away at the core of civilization. The clock is ticking, and time is running out.
Wednesday, October 20, 2021
Cutting Gasoline Tax Does Not Address Underlying Problem
According to the New York State Energy Research and Development Authority, the average price of gasoline in New York State in September 2021 was $3.22. Though it is a significant increase from the September 2020 pandemic-induced low price of $2.19, it is not as much of an increase from the September 2019 price of $2.65, the September 2018 price of $2.91. It is LESS than the September 2014 price of $3.59, the September 2013 price of $3.78, the September 2012 price of $4.04, and the September 2011 price of $3.83. So over the long run, the September 2021 price is consistent with the typical up-and-down roller-coaster change in gasoline prices that reflect supply and demand, which in turn reflect production, weather, alternative costs, and similar factors.
The article quotes a consumer who explained that he “can’t really afford to go anywhere, any more.” Though it’s unclear how many miles per week he drives or would want to drive, and thus unclear whether he’s facing a $10 per month or $100 per month increase in gasoline costs, a suspension of the state sales tax would not solve the problem for that consumer or others who are facing financial challenges. Was this consumer able to afford the $3.59 per gallon cost in September 2014? Did this consumer’s income go down? Did other costs go up? A suspension of the 40 cent per gallon state gasoline tax (which includes the sales tax component) is a band-aid on a deeper financial hemorrhaging faced by this consumer and others in a similar situation. Worse, suspending the gasoline tax provides a windfall to the gasoline purchasers who are not struggling financially. And even worse, it cuts off funding for keeping New York State roads, bridges, and tunnels in safe condition, thus trading off a short-term benefit to some residents in exchange for far more serious and much more expensive long-term costs in the form of accidents, deaths, injuries, and property damage.
Why not address the root cause of the problem instead of the symptoms? The problem for people unable to pay for gasoline at a rate that is lower than what it was earlier in the decade is that they have insufficient income to cover their expenses. Without seeing the budgets prepared and followed by these consumers, and thus assuming that there are no unnecessary expenses making demands on their financial resources, their incomes are insufficient because wages and similar payments have not kept pace with worker productivity and decades-long overall cost increases. What these consumers are suffering are symptoms of the income and wealth inequality disease that is eating away at the foundations of American democracy.
Emotionally, suspending the state’s gasoline tax appeals to many, particularly those who do not take the time to engage in full-blown analysis of their own and local, state, and national finances and economics. Suspending the gasoline tax does not solve the problem, and once those proposing it get the votes they need and want by making these sorts of emotional appeals, the tax will return and the problems faced by consumers claiming inability to pay will continue. Interestingly, those most adamant about the symbolic maneuver of reducing a small state gasoline tax are also the most adamant about doing anything to address the underlying problem of income inequality, rising CEO-to-worker pay ratios, and inequity in the overall taxation rates faced by high income and low income individuals.
Until people stop voting for those responsible for the problems that disturb, anger, and outrage those voters, they will continue to suffer, as do the individuals who insist on maintaining relationships with people who physically abuse them. Being easily distracted by small tokens of apology, such as temporary and useless suspension of a tax that is but a tiny fraction of the problem, is an emotional trait on which the servants of the oligarchs depend.
Friday, October 15, 2021
There Was Nothing Magical About This Tax Return Preparation Business
In a recent Department of Justice press release, an Acting United States Attorney and an IRS-Criminal Investigation Special Agent in Charge announced that two tax return preparers have pleaded guilty to aiding and assisting in the preparation of false income tax returns. The two preparers operated separate businesses. What they did wasn’t different from what other tax return preparers have done that got them into trouble. They knowingly claimed false deductions and credits on clients’ returns.
What caught my eye was the name of one of the businesses. According to the news release, the preparer “operated a tax preparation business under the name Magic Tax Service.” One can imagine the tag line. “Owe taxes? With a bit of magic I can turn that into a refund.” Magic, of course, involves deception. So, too, does fraud. If a tax return preparer asked about the wisdom of using Magic in the name of the business, I would ask if it would make sense to operate a business called “Fraudulent Tax Service.”
I wonder if the name of the business was a red flag for the IRS. Perhaps. How the IRS and the Department of Justice detected what was happening isn’t something that gets publicized. But it would not surprise me if certain business names, advertisements, and social media claims don't get noticed.
Monday, October 11, 2021
Royal Snub Generates Tax Payment Retort
Lewis Hamilton is an auto racing driver. Hamilton has set several records, and ended up on the Queen’s 2020 Honours list. In other words, he was knighted.
Another UK citizen, Tyson Fury, who holds the heavyweight boxing crown, was miffed that he was not on the Queen’s Honours list, and thus not knighted. In his gripe about being omitted from the list, he stated, “Unlike Lewis Hamilton I live and pay taxes.”
Hamilton lives in Monaco, which is a tax haven. Debate about his decision to live abroad has persisted in the UK for quite some time. Hamilton responded, race in 19 different countries, so I earn my money in 20 different places and I pay tax in several different places, and I pay a lot here as well.”
Despite their feuding over taxes and knighthood, when Fury retained his title this past weekend, Hamilton sent a message of congratulations and praise. He said that he respects Fury “no matter what he’s said about me.”
All of which goes to show that people can disagree about tax issues and still respect each other’s accomplishments. They can. Does everyone?
Thursday, October 07, 2021
When Dishonest Tax Return Preparers Are Married
Usually the preparers who get in trouble are sole proprietors, or working with a business partner, or perhaps working as employer and employees. This time, it’s a husband and wife who came under scrutiny and who, as reported by the Department of Justice, have been permanently enjoined by federal district court from “preparing returns for others and from owning, operating, or franchising any tax return preparation business in the future.”
According the complaint that was filed, the wife, who used two different personal names, and who did business as Su Casa Income Tax Service, prepared federal income tax returns containing false and fraudulent claims. After the IRS began investigating her, her husband, doing business as I-Tax Services, prepared fraudulent returns in concert with his wife. Then, she prepared and filed returns but used her husband’s name as preparer. The returns in question included false or inflated dependency exemptions and child tax credits, false filing statuses, and fictitious income so that the earned income tax credit could be claimed or inflated.
The two preparers joined in the motion for the injunction. It permits the federal government to continue post-judgment discovery so that compliance by the two preparers can be monitored. In addition, they must send a notification that they have been enjoined to each person for whom they prepared returns or claims for refund beginning in 2016 and continuing through the litigation.
What’s unclear is whether one of the two started filing fraudulent returns and then brought the other one into the schemes, or whether they collaborated from the outset. Perhaps one started while hiding the behavior and the other discovered what was happening and rather than reporting the activity was persuaded to jump on board. I cannot access the actual documents in the case, and it’s unclear whether the facts were memorialized in writing or simply provided orally at hearings.
Monday, October 04, 2021
Is Social Security Theft?
Curious, I tried to figure out how this Todd Hagopian computed his analysis. He doesn’t state his age, nor how long he has been subject to social security, nor if he has earned income each year equal to or exceeding the social security earnings cap for that year. There is no indication of when the meme was written. Yet he computed that his benefit would be $3,075, which suggests that the year he would start receiving social security benefits would be 2020. So perhaps the meme is a year old. Yet he states that he would begin getting benefits at age 67, which is the normal retirement age for persons born in or after 1960. He would not be 67 until at least 2027, and there is no way to compute benefits payable by Social Security in 2027.
So the best I could do was to do a computation for someone born in 1955, subject to social security through 2020 as an employee, earning income equal to at least the social security cap for each year, and retiring at the end of 2020. Such a person, over the 45 years of working, would pay $200,696 in social security taxes. The person’s employer would pay $200,696, for a total of $401,392.
What would that amount be worth if, instead of being paid into the Social Security Trust Fund, it was invested? First, not all of it would be available for investment, because the portion paid by the employer to the employee would be taxable to the employee, unlike the non-taxation of the amount paid by an employer into the Social Security Trust Fund on behalf of the employee. Though some contributions to retirement plans are tax deductible, I chose not to assume that a similar treatment would apply to the sort of comparison made in the meme. It is likely that someone with income of at least the social security cap would face a marginal rate of roughly 30 percent during the period in question. I did not try to compute the tax for each of the years in question. That would mean that a total of $341,183 would be paid in during the period in question.
I used the 5 percent rate of return rather than trying to compute returns for each year using some arbitrary measure of interest rates or stock market performance for each year. I then computed what each year’s total contribution would be if invested at that rate of 5 percent. The total? $894,022, not $1.9 million. If at the end of the 45-year-period, that amount were drawn down as an annuity, the annual payout would be, assuming the person lived for 25 years, $63,433, exhausting the fund at the end of the period.
Yes, getting $37,000 annually is nowhere near as good as getting $63,433 annually. But that is the nature of how social security works. One can do a computation for someone who earned minimum wage after entering the work force at age 50 after raising children and lives until age 100, and that person would do better under social security. So is the Social Security program theft? No. Why not? Because the program is insurance. There is no guarantee that a person will get back what the person paid in, let alone interest. Consider someone who dies before retiring, or who dies shortly after starting to take social security payments. Putting aside survivor benefits, the person is in the same position as someone who pays homeowner’s insurance and never suffers a loss, or automobile insurance and whose vehicle is never stolen nor involved in an accident. Why do I claim that social security is insurance? The social security tax is imposed by the Federal Insurance Contributions Act, which is why it is referred to as FICA, and funds the Old-Age, Survivors, and Disability Insurance program, the official name of the social security program. So as is the case with all insurance, some people will pay in more than they get back, some people will get back more than they pay in, and a handful of people might coincidentally get back what they pay in. So, no, it is not theft, no more than automobile or homeowner’s insurance premiums constitute theft.