Monday, October 31, 2022
Two Not Very Amusing, But Scary, Halloween Tax Challenges
In recent days, reader Morris has directed my attention to two stories that bring both tax and Halloween into play. One is from thirteen years ago and the other is from three years ago, yet neither caught my attention until reader Morris pointed them out.
In a discussion on HauntWorld, someone using the name Front Yard Fright posed this question and background:
I do not charge admission to my haunt (I'm zoned residential so I can't) so what I do is ask for a donation from everyone who enters. If people ask how much admission is, I say it's a $6.00 donation. It's not required, but we ask for $6.00 and do our best to get it out there that it IS in fact a DONATION, and is not required. A portion of my donations actually go towards a local humane society.Front Yard Fight explained that he asked his question because “there's a haunt near me that REALLY wants me shut down. He's called the city and has done a lot of messing with me. It was mentioned that he may come after me with the IRS about not paying taxes.”
My question for you guys is, would I have to pay taxes on these donations? Logic says no, but you never know!
Answers offered to Front Yard Fright included (1) no because it is a donation, (2) no provided the money goes to a charity and no charitable contribution deduction is claimed, hedged with “I would call your state tax office,” (3) yes, it is income, but deduct your expenses, and (4) treat it as a business, reporting the income and expenses. Other responses did not offer answers but what could best be described as sympathy.
So what is the answer for federal income tax purposes? Setting up a business appears to be prohibited by the zoning rules, though a closer look at the locality’s ordinances would be required. Not knowing the location, that’s not something I can do. It appears that Front Yard Fright does this every year, so it might make sense to treat this as an activity not engaged in for profit subject to section 183. If donations exceed expenses, the excess would be included in adjusted gross income, but if the excess is contributed to a charity then unless the standard deduction is utilized, the net effect on taxable income would be zero. If expenses equaled or exceeded donations, the excess would not be deductible but the impact on taxable income would again be zero.
What about other taxes? It depends on the locality. Is there a state income tax? Does it have the equivalent of section 183, directly or through using federal adjusted gross income as a starting point in the computation? Is there a state or local sales tax? Does it apply to these sorts of donations? Is there a gross receipts tax? Are these donations considered gross receipts? Are there other possibly applicable taxes? Are there de minimis exceptions? Perhaps Front Yard Fright is in New York State and hasn’t yet been haunted by what happened in the second story.
In a Lexology summary of a New York case, Hollis L. Hyans of Morrison & Foerster LLP describes the outcome in Matter of Ronald J. Doherty, Jr. Doherty was doing business as Eerie Production, operating a haunted attraction in Buffalo, New York. Doherty charged $23 to enter five separately themed haunted houses constructed out of temporary walls and containing various props and animations, along with actors hired to dress as ghouls, vampires, and killer clowns and “scare forward” people going through the attractions.
The Department of Revenue audited Doherty for the years 2010 through 2013 and imposed a sales tax on the entrance fees and on certain purchases. The audit was resolved without any reference to years after 2013. Doherty requested an advisory opinion, and the Department issued one stating that sales taxes were due on the admission charges. When a second audit was conducted with respect to 2014, Doherty asked for another advisory opinion, and again the Department issued one that reached the same conclusion.
Doherty took the matter to an administrative law judge, who concluded that the charges were taxable because Doherty operated a place of amusement, which are taxable under the sales tax law. The exception in place for amusement devices did not apply. Doherty appealed to the New York State Tax Appeals Tribunal. Doherty argued that his operation was not taxable because a previous case had held that the sales tax did not apply to sales of tickets for Ferris wheels, merry-go-rounds, and coin-operated games, and that his operation was within that exception because his haunted houses contained devices such as a dentist’s drill, a chainsaw, a CO2 gun, electric and pneumatic systems operating things such as animated snakes, an airbag, a gravity tilt bridge, vortex tunnels, and simulated ceiling drops. The Tribunal pointed out that customers paid to enter a space where they were entertained by actors to put on a show. It compared Doherty’s operation to peep-show booths held by the Court of Appeals to be places of amusement and not amusement devices. The Tribunal affirmed the decision of the administrative law judge.
In the commentary, Hyans points out that although the distinction between a taxable place of amusement and a nontaxable amusement device depends on the facts, the critical element in Doherty’s situation was that the patrons were not paying for a ride on a device or, I would add, to use a device, but as Hyans notes, they were paying for the “experience of being scared and entertained by live actors employing props and animated devices.” I also will add that perhaps a good bit of sales tax litigation and tax planning challenges could be avoided if sales tax laws did not make razor-thin distinctions between places of amusement and amusement devices or between “candy” and “food and food ingredients,” as I described in Another Halloween Treat? I Think Not, or between candy made of flour and candy not made of flour, as I described in When Candy Isn’t Candy.
Tuesday, October 25, 2022
The Death of Trickle-Down Theory in the United Kingdom: Will Americans Learn the Lesson?
We know that supply-side trickle-down economic and tax policy is a failure. It has failed. Miserably. Though its advocates occasionally write to me, claiming that I am wrong, that I don’t understand reality, that I have no clue about economics, and that I would be best served by supporting the desire of the wealthy for even more money, I continue to reject that nonsense. Study after study, for example this one from the London School of Economics that examined not one but 18 countries that have yielded to the demands of the oligarchs, demonstrate, as I pointed out in High Quality Tax and Economics Research Exposes Money Addiction, “tax breaks for the wealthy increase income inequality by sizeable amounts but have no significant effect on economic growth or employment.”
Why advocates of this foolish theory persist in clinging to their beliefs when it is clear that the theories don’t work puzzles me. Is it simply a belief that this approach to national tax policy increases the chances of each of these acolytes to join the ranks of the wealthy? Is it fear of change? Is it fear of losing clients?
So in the current atmosphere of economic panic, as inflation soars, rather than turning to the cause of inflation, such as the half of inflation fueled by corporate price gouging, populists are returning to that failed policy of cutting taxes for the wealthy. There is a lesson to be learned from what happened in the United Kingdom. After being named prime minister, Liz Truss announced that her cure for that country’s inflation mess was to eliminate the top income tax bracket, without providing any alternative source of revenue or spending cuts. If this sounds familiar, it ought to remind people of the mess created by Reagan, Trump, and their comrades in oligarch subservience when they delivered tax cut gift after tax cut gift to the wealthy in whose circles they played.
So what happened in the United Kingdom? When the announcement was made, that nation’s stock markets plunged, the value of the British pound against the dollar fell precipitously, financial institutions roared with criticism, and the Bank of England had to step in to prevent further collapse. The finance minister resigned, and shortly thereafter, Liz Truss stepped down as prime minister.
There is good news and bad news in these developments. The bad news is that there still are people in and close to political power clinging desperately to trickle-down economic and tax policy. Again, I ask why. Fear of change? Desire to become wealthy? Fear of losing political funding from the wealthy? The good news is that the people and institutions of the United Kingdom recognized the danger and reacted before the failed policy was implemented. This limited the damage that otherwise would have occurred.
According to this report, there are those who think that what happened in the United Kingdom is the “last gasp” and “death knell” of trickle-down economic and tax policy. Perhaps that’s the case in the United Kingdom, but I’m not so sure it’s the case in other places, such as the United States, where repressive regressive politicians dangle tax cuts for the wealthy as a carrot for middle-class and poor voters, too many of whom are so easily duped into thinking that they will benefit from something that widens income and wealth inequality and does nothing to reduce inflation. Perhaps I should mention that inflation will probably drop if the price gougers take control of enough legislatures after using inflation fears as a way to put into office politicians dedicated to cutting taxes on the wealthy and on corporations.
What, then, is the solution? As several experts interviewed in that report point out, the key to economic growth is to put investment into the middle class, and, I would add, the poor. What is needed is funding for quality education (not indoctrination), infrastructure, housing, technology, and cyber defense. Doing this creates jobs. How do we know that? It is what is happening at the moment in this country, with the passage of legislation doing those very things, while unemployment drops to near-record and record lows. Isn’t it sad that those who voted against that legislation are now claiming credit for supporting it, that is, lying as usual, while hiding their intentions to reverse that legislation when and if they return to power. They may not be learning the Truss lesson, but hopefully American voters are.
Monday, October 17, 2022
When a Tax PIN is Used Without Permission
The show that popped up today was episode 26 of Judge Judy’s season 22. The plaintiff sued the defendant, who was his girlfriend while he was in prison. He claimed that without his permission she used his credit cards for herself, took his federal and state tax refunds, and took some of his personal property.
The defendant explained that she obtained the plaintiff’s credit cards and personal property when the plaintiff’s lawyer gave her various items, such as the plaintiff’s wallet, including his credit cards, a watch, and some jewelry. Defendant claimed she gave the wallet to one of the plaintiff’s friends, and later gave other things to another of plaintiff’s friends. The plaintiff explained that he asked his friends to get his property after the defendant wrote a letter to the prison superintendent that caused the plaintiff to decide that she should not be custodian of his property. He also claimed that she wanted him to marry her, but she disagreed and claimed that it was the plaintiff who proposed to her, but the plaintiff denied having done so.
The defendant admitted to using the plaintiff’s credit cards to make purchases for herself. After reviewing the credit card bills, Judge Judy determined that the defendant made many more purchases for herself than the two transactions she had admitted. Judge Judy pointed out that the defendant, in her answer, claimed that the plaintiff planned on filing for bankruptcy and thus told her to use her credit cards. Judge Judy noted that if, knowing this, she used the credit cards, she was a co-conspirator in defrauding the credit card company.
The defendant claimed that the plaintiff gave her his tax PIN in order to let her get his tax refunds, which amounted to about $1,600. The defendant produced evidence from prison officials summarizing their recordings of the plaintiff’s phone calls with the defendant, in which he gave the defendant PINs. The plaintiff explained that the PINs he gave the defendant were for prepaid debit cards.
Other testimony from the defendant, including her attempt to explain why she had put her cable bill in the plaintiff’s name at her home after he asked her to cancel the subscription, caused Judge Judy to tell the defendant that she was a “hustler.” Judge Judy held for the plaintiff, awarding him the requested $5,000 (which included not only the tax refunds but also the credit card charges).
If the plaintiff did not give the defendant his tax PIN, how did she get it? I don’t know. All I can do is to guess, that it was somewhere in his wallet or in his other belongings. Or perhaps it was the same PIN he used for the debit cards and the defendant took a gamble.
The underlying issue isn’t so much the transfer of PINs and credit cards. It’s a matter of deciding who to trust with that information when it is necessary to find someone to trust with that information. I leave others who have the requisite skill sets to write about identifying who to trust and how to minimize the risk of breaches of trust.
Tuesday, October 04, 2022
When An Injunction Doesn’t Stop a Tax Return Preparer from Filing False Returns
The latest case that got my attention is one deserving of comment. According to Department of Justice news release issued yesterday, a tax return preparer has been penalized for violating a permanent injunction that prohibited him from filing, preparing, or helping to prepare federal tax returns for other people. In May of 2021, the United States sued the preparer, alleging that he prepared returns for customers that fraudulently understated customers’ tax liabilities, overstated their refunds, or both. He allegedly overstated withholdings, invented deductions, and included credits that customers were not entitled to claim. In September of 2021, the preparer consented to the permanent injunction.
In July of 2022, the United States filed a motion asking the court that issued the injunction to hold the preparer in contempt for violating the injunction. The United States alleged that the preparer used the preparer tax identification number assigned to his cousin to “covertly prepare at least 305 tax returns for customers in 2022 in violation of the injunction.” The motion also alleged that at least some of those returns included fictitious deductions and credits. Before the court held a hearing, the preparer stipulated that the United States could prove those facts by clear and convincing evidence, consented to an order finding him in contempt for continuing to prepare returns in violation of the injunction, and agreed to pay $213,500. On September 29, 2022, the court entered an order holding the preparer in contempt. It also ordered him to surrender the fees he had collected, and to reimburse the United States for its investigatory and injunction enforcement costs.
Without access to the order, I cannot determine if the $213,500 that the preparer agreed to pay represents the fees that were collected, the costs incurred by the United States, or a combination of both. If any of that amount represents fees, it is unclear if they will be returned to the customers or forfeited to the United States. The customers for whom these false returns were filed will need to file amended returns, and unless they do that themselves, which is unlikely, they will need funds to pay another preparer to fix the mess. If no part of the $213,500 finds its way to the customers, then presumably they would need to file a civil suit against the preparer, though that also requires funds and might not be successful if the preparer is incapable of paying civil judgments.
There is a saying that doing the same thing over and over and expecting different results is insanity. Though people debate the identity of the person who first offered this definition, it certainly is relevant to the case of the preparer who violated the injunction. He filed false returns, got caught, and was subject to an injunction. What did he think was going to happen when he once again started filing false returns? Worse, because his own preparer tax identification number had been taken out of service, he used someone else’s, which added to the list of violations. The press release doesn’t mention whether the cousin knew or did not know that his number was being used by the preparer who was subject to the injunction. Hopefully not, because if the cousin was in on the misuse the cousin also would be facing charges. Not knowing the cousin’s name there’s no way to check on that at this moment.
It's bad to do something wrong. It’s worse when getting caught and being subjected to punishments and restrictions. What’s worst is doing a repeat, because the punishments and restrictions will themselves get worse. Don’t mess with injunctions.