When Tax Troubles Never Go Away

It’s been quite some time since I wrote about the tax troubles of former Pennsylvania State Senator Vincent Fumo. In Real Property Tax Assessment System: Broken and Begging for Repair, How to Fix a Broken Tax System: Speed It Up?, and Not the Sort of Tax Loss Taxpayers Prefer I described the Philadelphia real property tax woes that beset the former Senator.

Now comes a Philadelphia Inquirer story that explains Fumo is now facing federal income and gift tax troubles. On Monday, the United States Tax Court will hear Fumo’s petition to set aside an IRS notice of deficiency seeking roughly $3 million in back income taxes and penalties. The IRS asserts that Fumo received economic benefit from the transactions that were at the root of his 237-count criminal conviction 13 years ago. Examples provided by the IRS include “overpaying his Senate staff while using them as personal servants and campaign foot soldiers, and * * * hiring a taxpayer-paid private eye to investigate political enemies, an ex-girlfriend, two strippers and even his own son,” along with “other abuses.” The IRS notice of deficiency also includes penalties for “exploiting the South Philadephia nonprofit he created, the former Citizens Alliance for Better Neighborhoods, tapping its money to pay for political polls, a stealth lawsuit against a legislative enemy, a campaign to protect the ocean view at his shore home, for tools and consumer goods, and more.” In another proceeding, he IRS is seeking more than $300,000 in unpaid gift taxes on a transfer from Fumo to his son, which Fumo contends was not a gift.

Fumo’s lawyer claims the IRS position is “fundamentally flawed because the money in question went to people other than Fumo.” The lawyer gave as an example roughly a quarter of a million dollars paid to pollsters and “not Fumo,” but taxpayers can have gross income even when payments go to a third party if in turn the taxpayer benefits from something done by the third party.

Though the notice of deficiency was issued in 2012, while Fumo was in prison, an assortment of delays, including the pandemic, has let the suit stagnate for a decade. Those sorts of delays are not unusual in the American justice system. Hopefully the trial doesn’t take a decade, even though the IRS has listed 80 witnesses it plans to call to testify. Sadly, ten of the 80 have died since the memo was filed and the IRS intends to use their testimony preserved in transcripts from the criminal trial.

If the IRS succeeds, the outcome will put Fumo in a difficult financial position. During the criminal investigation he surrendered his $900,000 annual salary and position as a member of a law firm. The conviction cost him not only prison time but also his $100,000 state pension and his law license. He was required to pay roughly $4.5 million in restitution. His net worth, estimated to be $11 million when he went to prison, has fallen to $3 million. A few weeks ago, he put up for sale the 29-room mansion that was the subject of those real property tax woes. The asking price is almost $4 million.

According to his lawyer, Fumo is “tired of being a punching bag,” and “would like to move on with his life.” When asked by the Inquirer for comment on the Tax Court case, “Fumo replied by email: ‘have you no shame!!!’ ”

It is more likely than not that the outcome of the Tax Court trial will be known in less than a decade. Perhaps the case will settle. Perhaps the Tax Court’s opinion won’t be appealed. Perhaps there will be continuances. No matter, what is certain is that at least for another year or two or three, Fumo’s tax troubles will not be going away. Perhaps they will never go away.

Need a Question for the Exam in a Basic Federal Income Tax Course?

If I were still teaching a basic federal income tax course, I would use a quotation from this press release to set up one of the examination questions. The press release was brought to my attention by reader Morris, who asked, tactfully, “Is the IRS agent misstating a basic federal income tax principle?” The answer is, “Yes.”

The press release announced the charging by information of Michael Garrison, accused of conspiracy to commit wire fraud, conspiracy to destroy an energy facility, wire fraud, destruction of an energy facility, and filing a false tax return. The information “alleges that * * * Garrison broke into shuttered coal-fired power plants that had been decommissioned * * * in order to steal copper wire and other metal, which he then sold to scrap yards.” Garrison allegedly failed to report the amounts received in 2020 for the scrap metal on his 2020 federal income tax return.

With respect to the charge of filing a false tax return, the press release quotes IRS Criminal Investigation Special Agent in Charge Yury Kruty as saying, “No matter the source, all income is taxable.” If indeed he said that, he is flat out wrong. The language of Internal Revenue Code section 61(a) clearly states, “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived.” The Internal Revenue Code contains various exclusions, which provide that certain types of income are not included in gross income and thus not taxable, because something not included in gross income does not find its way into taxable income. The exception language at the beginning of section 61(a) highlights the existence of those exclusions.

So the exam question would be along these lines: “Someone says, ‘No matter the source, all income is taxable.’ Is this statement correct? Why or why not?” It would fall into the category of “question placed in the exam to determine if the student passes the course,” in contrast to the more challenging question in the category of ‘question placed in the exam to determine if the student has attained the level of an A grade.”

If you use the question, feel free to credit MauledAgain.

Numbers and Logic

Today I received an email from the utility company that supplies me with electricity and natural gas. The email was titled, “Your monthly energy usage is higher than usual.” The email told me that my projected bill for the month (presumably a billing period ending at some time in September) was projected to be $73 more than the same time last year. All but $6 was attributable to the electricity portion of the bill.

The email then posed the question, “What caused your bill to change?” It provided this answer: “The weather has been similar to this time last year, and may not have affected your bill. Factors like heavy appliance use or household guests may have contributed.” The email suggested that I could reduce my bill if I would “Run your pool pump during off-peak hours to lower demand,” and “To lower your demand, use a timer on your pool pump so you can time it to only run during off-peak hours. If you have to run your pool pump during peak hours, avoid running large appliances at the same time.”

Of course, I’ve had no household guests and my appliance use is either unchanged or so little changed as to be negligible. And there is no pool.

It took me far less time to figure out the problem than it has taken me to type out this commentary. The reason my bill is more this year than the same period last year is that the cost per unit of electricity and natural gas has been increased, by that utility company, at a rate that explains the price increase.

So what is happening? I have identified three possibilities. Perhaps there are more.

The first possibility is that someone at the utility company thinks that there is a direct correlation between cost and usage that does not take into account price variations. Though one might think no one would miss that point, it does not surprise me. Recollect my many previous comments about the state of education in this country.

The second possibility is that the utility company decided that fear – your bill is jumping up – will encourage people to engage in energy saving practices. Yet why suggest to me, someone without a pool, that I need to run a pool pump during off-peak hours? Perhaps the company doesn’t know who owns a pool, a fact it could easily determine, and sent the pool pump message to everyone because it thinks pool pumps are the, or a, significant reason for excessive energy usage.

The third possibility is that the utility company wants people to think that their higher utility bills are because they have increased their energy usage and not because of rate increases. Yet rate increase notices accompany almost every monthly bill.

What puzzles me is that every month the utility company sends me a chart showing my monthly electricity and natural gas usage for the 12 preceding months, matched against “all neighbors” and “energy efficient neighbors.” I don’t know how they determine who are my energy efficient neighbors, though I’ll guess that it’s the neighbors whose energy usage falls in the bottom 10 or 20 or 25 percent of all my neighbors. My usage usually falls between “all neighbors” and “energy efficient” neighbors though in some months matching or slightly falling below “energy efficient neighbors,” with a month here or there matching “all neighbors.” Yet the company nonetheless decided to warn me that my utility bill is projected to be higher than for the same period last year.

Surely there is some logical explanation. Surely. I hope.

The Price of Low and Lowering Taxes

When reader Morris sent me a link to this story, he gave the email an appropriate subject line. He wrote, “You get what you pay for!” He makes a good point.

Mike Brant, the writer of the story begins by noting, “Who would've thought our ridiculously high taxes could actually cause more good than harm? Apparently, there are benefits to paying higher taxes after all.” That is a point that I have made in my posts in which I explain why the privatization of government functions rarely work out well for anyone who isn’t in on the deal. When the privatization is structured as a monopoly, the situation is even worse.

Brant notes that although in his opinion New Jersey taxes are too high, he admits that “higher taxes do allow for more benefits when it comes to quality of life.” He gives as an example a story he heard from a New Hampshire couple he met on vacation in Cape Cod. The New Hampshire couple moved to New Hampshire from a town where taxes were higher. One of the benefits they had received in their former town is that they put out their trash and the town picked it up. When they arrived at their new home in New Hampshire, they discovered that if they wanted their trash picked up they needed to enter into a contract with, and pay, a private trash removal company. The first time they put out trash, they put out a many boxes, a consequence of the trash generated by moving into a new home. The private contractor told them it was too much, and that “it was not allowed,” refusing to take anything until the amount of trash at the curb was reduced. He refused to take any of the trash. So they had to take most of the trash back into the house. The following week they had another run-in with the private contractor though exactly what triggered it is unclear from the story.

The New Hampshire couple had no other options. There is no other private trash removal company operating in the town. The town does not have a dump, so they cannot do their own trash removal. They were compelled to comply with the terms and conditions imposed by what their neighbors called “the garbage can monopoly.” They have no ability to vote the company in or out of the town. The writer of the story notes that because the town had no control over the situation, it and its residences are at the mercy of the private contractor. He explains, “It's the unfortunate side of very low taxes sometimes.” He advises New Jersey residents, “So before we go complaining too much about our taxes, be glad we don't have to worry about things like a garbage can monopoly.”

My guess is that “free market” advocates would argue that the solution is someone starting another company and offering residents a better deal, not only in terms of price but also service. Yet why has that not happened? Monopolies don’t surrender territory, unless forced to do so by government. That’s why antitrust laws have been enacted, and why they are opposed by “free market” advocates who have been successful in recent decades in taking the teeth out of antitrust laws. As I’ve pointed out many times, there’s not much free in a “free market” when that market lets monopolists and oligarchs be free to run roughshod over those who are less powerful and less wealthy. It is the government, local in this sort of situation, state or federal in others, that exists to keep the powerful from taking advantage of those less fortunate. And to do that, government requires funding.

So for the anti-tax group, or more specifically, for those who are attracted by the siren songs of the anti-tax advocates, imagine a world in which there are no taxes, and thus no government. What happens when one or perhaps two or three, or even several dozen, mega-oligarchs own and control every activity and function that affects every facet of your life? The situation in New Hampshire gives us a peek into what that sort of world would be.