Analyzing the Federal Income Tax Consequences of a Crappy Barter Proposal

Reader Morris directed my attention to a story about Hunter Biden, his alleged failure to pay rent, and his alleged offer to settle the debt. After reading the story I decided to find the X posting that was the at the heart of the story. I found the posting. In it, Shaun Maguire wrote: “Hunter was our tenant in Venice, CA. Didn't pay rent for over a year. Tried to pay w/ art made from his own feces.” There are three allegations in the posting. There is no easy way at this point to determine if they are true or not, in the absence of evidence such as a lease, rent demands from the landlord, proofs of payment from Biden, and some sort of evidence that Biden made the strange and bizarre offer. But, for purposes of the question raised by reader Morris, let’s assume they are true.

Reader Morris asked, “What are the federal tax consequences of this barter exchange to each party on gross income, capital gains or losses, and ownership of the property?” In other words, reader Morris is asking, if the landlord accepted the offer, what would be the federal income tax consequences? It surely is a hypothetical question because I would be shocked if the landlord accepted the offer that is alleged to have been made.

If the parties went through with the proposed barter, the outcome would depend on the resolution of a fact question. The question is, what is the value of the “art” that is offered in satisfaction of the debt? Though the answer could be anything between $0 and the amount of the back rent, let’s consider two possibilities, one at either end of that spectrum.

If the fact finder determined that the value of the “art” was equal to the back rent, then the landlord, if on the cash method, would have rental gross income. If the landlord were on the accrual method and had already accrued the rental income, then receipt of payment would not have any tax consequences. No matter the outcome to the landlord, the tenant would be treated as having “sold or exchanged” property, which is a realization event. The tenant would have amount realized equal to the amount of the unpaid rent. The tenant’s adjusted basis in the “art” would be zero, a conclusion consistent with case law holding that the basis of blood and other body products sold by a taxpayer is zero. The resulting income would not be a capital gain because body products are not capital assets, a conclusion consistent with that same case law.

If the fact finder determined that the value of the “art” was less than the back rent, say zero or some token several dollars, and that the landlord accepted it in satisfaction of the unpaid rent, the landlord would have rental gross income equal to the value of the “art,” say zero or the token several dollars, unless the landlord was on the accrual method in which case there would be no income. The landlord would be treated as having released the balance of the debt (either the full amount or slightly less than the full amount), and would claim a bad debt deduction if the rent had already been accrued. The consequences to the tenant would be determined by application of the rules applicable to forgiveness of indebtedness. There would be gross income in the amount of the balance of the debt (either the full amount or slightly less than the full amount) unless one of the five exceptions apply. Was the debt discharged in bankruptcy? Under the assumed facts, most likely not. Is the tenant insolvent? We don’t know. The debt is not qualified farm indebtedness or qualified real property business indebtedness. Is the debt qualified principal residence indebtedness? No, because the debt related to rent and not to the acquisition cost of purchasing a residence.

The proposed transaction is about as likely to take place as the payment of a debt in the manner proposed by Shylock in the Merchant of Venice. And if Shylock had succeeded (for those unfamiliar with the story, he ended up with money and not flesh), and if the federal tax system or one identical to it applied, the analysis would be the same as that presented for the situation in the “art” for rent story.

Critics might wonder why invest intellectual capital in analyzing a transaction that did not happen and almost certainly will not happen. The answer is simply that doing this analysis, for example, on a federal income tax exam, strengthens one’s intellectual skill set just as running prepares the runner for an actual race. But to be honest, I analyzed the question posed by reader Morris not so much to strengthen or maintain the strength of my intellectual skill set as to explore a totally bizarre situation. A situation that adds to the long list of proofs that support what I, and other tax law professors, tell students, “We don’t need to invent hypotheticals, they’re out there just waiting for us.”

When Tax Fraud Is Admitted in a Civil Arbitration Proceeding Known As a Television Court Show

It’s time to look at another television court show. As readers know, I have addressed tax issues in television court shows many times, in posts such as Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other, One of the Reasons Tax Law Is Complicated, An Easy Tax Issue for Judge Judy, Another Easy Tax Issue for Judge Judy, Yet Another Easy Tax Issue for Judge Judy, Be Careful When Selecting and Dealing with a Tax Return Preparer, Fighting Over a Tax Refund, Another Tax Return Preparer Meets Judge Judy, Judge Judy Identifies Breach of a Tax Return Contract, When Tax Return Preparation Just Isn’t Enough, Fighting Over Tax Dependents When There Is No Evidence, If It’s Not Your Tax Refund, You Cannot Keep the Money, Contracts With Respect to Tax Refunds Should Be In Writing, Admitting to Tax Fraud When Litigating Something Else, When the Tax Software Goes Awry. How Not to Handle a Tax Refund, Car Purchase Case Delivers Surprise Tax Stunt, Wider Consequences of a Cash Only Tax Technique, Was Tax Avoidance the Reason for This Bizarre Transaction?, Was It Tax Fraud?, Need Money to Pay Taxes? How Not To Get It, When Needing Tax Advice, Don’t Just “Google It”, Re-examining Damages When Tax Software Goes Awry, How Is Tax Relevant in This Contract Case?, Does Failure to Pay Real Property Taxes Make the Owner a Squatter?, Beware of the Partner’s Tax Lien, Trying to Make Sense of a “Conspiracy to Commit Tax Fraud”, Tax Payment Failure Exposes Auto Registration and Identity Fraud, A Taxing WhatAboutIsm Attempt, When Establishing A Business Relationship, Be Consistent, as the Alternative Can Be Unpleasant Litigation, Sadness on Multiple Levels: Financial Literacy, Factual Understanding, Legal Comprehension, When the Lack of Facts Produces “Rough Justice” in a Tax-Related Case, Is the Tax Return Preparer or the Client Responsible For Unjustified Deductions?, and Tax Might Be Boring, But the Underlying Facts Often Are Not.

This latest examination of a television court show is happening thanks to reader Morris. He directed me to this Judge Pirro episode from . Most of the facts were very evident despite disagreement on one point, but what wasn’t clear was the basis for the plaintiff’s claim because the case never reached that point.

The plaintiff and defendant knew each other because they had worked together as servers for several catering events. The defendant mentioned to the plaintiff that she, the defendant, was not going to file a federal income tax return because she had earned less than the filing threshold. She had mentioned on more than a few occasions that she had two children, and that her boyfriend/fiancé was not the father of the children. It is at this point that the parties disagreed. The plaintiff testified that the defendant proposed that the plaintiff claim the defendant’s children on the plaintiff’s tax return, causing a tax savings/refund (the facts aren’t clear on that point) that would be shared by the parties. The defendant denied making that proposal but insisted she only told the plaintiff to “check the procedure,” whatever that means. However, the defendant admitted that she provided the plaintiff with her children’s social security numbers.

The plaintiff filed her federal income tax return, claiming the defendant’s children. It appears that the IRS paid the plaintiff a refund and then requested repayment, because at some point it noticed that there was a problem with the return. What is clear is that the IRS asked the plaintiff for corroboration with respect to the children, specifically, birth certificates and school letters. The plaintiff asked the defendant for those items. Though unclear, it appears that the defendant did not provide those items to the plaintiff. The plaintiff sued the defendant for breach of contract, though it isn’t clear what constituted the breach. The case did not get to that point.

Judge Pirro made it clear to the parties that what they did was federal tax fraud. The plaintiff claimed children who were not hers, and the defendant made that possible by providing the plaintiff with the social security numbers of the defendant’s children. When the plaintiff claimed that she did not know it was fraud to claim someone else’s children, and that “people claim other people’s kids all the time.” To that remark, Judge Pirro said, “They do?” and the plaintiff replied, “Well, in New York they do.” Judge Pirro responded, “Really? Who do you know that does that?” and the plaintiff declined to identify anyone due to “privacy.” Judge Pirro rejected that excuse, and said, “Do you know why? Because it’s illegal.” Eventually Judge Pirro threw out the plaintiff’s suit, because courts do not enforce illegal contracts.

There are several lessons to be learned from this case. First, once a person files a federal income tax return, they should continue to file even if their income is below the filing threshold. This lets the IRS know that the person has not died, and also makes it more difficult for identity thieves to file under the person’s name. Of course, it also would have made it even easier for the IRS to notice the fraud committed by the plaintiff in this case. Second, claiming children on a tax return when the requirements of the Internal Revenue Code are not met is wrong. It is fraud. Even if a person doesn’t end up convicted of a crime, it can wreck their credit report, impair their employment prospects, and make their life miserable.

Reader Morris asked, “Does Judge Pirro have a legal obligation to send the video or transcript to the IRS Criminal Division?” That is a great question. For any law faculty reading this who are teaching the Legal Profession course (or its equivalent) and who need exam question ideas, this case and the question posed by reader Morris is worth considering. What is the answer? It depends. On most television court shows, the judges are not acting as judges even though some have been judges in the past. They are acting as arbitrators, dealing with cases that are removed at the parties’ consent from the judicial system to binding arbitration that is marketed as a courtroom proceedings. The judge on the television court show might be a former judge, but also could be a former or active attorney, or law school professor. Several have no legal background. Are these “judges” legally required to report the admitted crime? It depends on the nature of the crime, the existence of statutes requiring mandatory reporting, including mandatory reporting by any person serving in a particular capacity. Beyond the issue of being legally required to report the crime, they may be ethically required to report the crimes, particularly if they are active members of the state bar. Again, it depends on state and federal statutes, ethics codes for active and retired judges, ethics codes for active and retired attorneys, and similar provisions.

If reporting is legally or ethically required, the next question is identifying the person or office to which the information should be reported. Again, it depends on the crime, the jurisdiction, and whether there are in place procedures for reporting that must be followed. In many instances, if the information is reported to the wrong office, that office will forward it to the appropriate authorities or advise the reporting person where the information should be reported.

The interesting twist in this particular Judge Pirro episode is that the IRS already suspected, or knew, that tax fraud had been committed. I am guessing that it figured this out when two children showed up on a tax return that was filed by a taxpayer who was not the taxpayer who had claimed the children for the previous taxable year. Knowing that, the only practical question is whether the existence of the arbitration, as evidenced by the video, must be brought to the attention of the IRS Criminal Division or the US Attorney. Why not? There is downside to not reporting it and no downside to reporting it. It is publicly available, and it would not surprise me if the IRS accessed the video sooner than any reporting information would reach it, thought that is not a reason to not report it.

Does Judge Pirro have an ethical obligation to alert the IRS Criminal Division or the US Attorney? I don’t know. I don’t know if she is still subject to New York’s code of conduct for judges. I don’t know what provisions exist in the contracts that the parties enter into with the show’s producers. I don’t know if any of the staff of the show are active or retired members of the bar who have an obligation to report it. And that raises more interesting questions. Do all of the active and retired attorneys who watched the show when it first aired have an ethical obligation to report the crime? What about those who watch the video at some much later date when the IRS cases against the parties have been closed? What about any viewer who sees reporting the crime as an opportunity to pick up a whistleblower reward? Does the fact that the video is publicly and widely available suggest that the answer is different from what it would be if knowledge of the crime was obtained through channels not open to the public?

Reader Morris also asked, "Why are people so stupid they admit tax fraud on national television? Why would you come to court and admit to a federal crime?" I don't think I need to answer these questions. They answer themselves. Yet I will succumb to the temptation and reply, “It’s another indication of how flawed the American education system has become when it’s a matter of understanding government, public policy, crime, citizenship responsibilities, and critical thinking.”

On Thanksgiving, There Always Are Reasons to Be Thankful

This year Thanksgiving is, for me, strange and conflicted. Yes, I am thankful for many things, as I will describe in a subsequent paragraph. But I also am disappointed that there are things for which I could be thankful but am not because they did not happen, and things that did happen for which I am not thankful. But I will leave those aside because there are people who will be thankful I am leaving those things aside.

As I have noted in each of the past eleven years, “I have presented litanies, bursts of Latin, descriptions of events and experiences for which I have been thankful, names of people and groups for whom I have appreciation, and situations for which I have offered gratitude. Together, these separate lists become a long catalog, and as I have done in previous years, I will do a lawyerly thing and incorporate them by reference. Why? Because I continue to be thankful for past blessings, and because some of those appreciated things continue even to this day.” When I re-read those lists, I realized that the people, events, and things for which I am appreciative are far from obsolete.

So once again on this one day I will look back at the past twelve months, and remember the people, events, and things for whom and for which I give thanks and have given thanks throughout the year. If some of these seem repetitive, they are, for there are gifts in life that keep on giving:

• I am thankful for a wonderful son, daughter, daughter-in-law, grandson, and granddaughter.
  
• I am thankful for my siblings, nephews, nieces, grandnephews, grandnieces, cousins of various degrees, and their families.
  
• I am thankful for my friends who listen to my stories, and tell me even better stories.
  
• I am thankful that I was finally able to make the journey planned for 2020 that was postponed for reasons I need not explain.
  
• I am thankful my sister and brother-in-law were able to join in part of that journey.
  
• I am thankful for the gracious hospitality and kindness that our cousins in Italy extended to the three of us.
  
• I am thankful that I returned with four 32GB USB sticks filled with additional genealogical data that I have been transcribing and will continue to transcribe.
  
• I am thankful for all the people who continue to help update the multiple family trees I develop, maintain, update, and publish.
  
• I am thankful for the cousins I have met through FTDNA, ancestry, 23andme, and myheritage who I did not know existed, and for the opportunity to get in touch with cousins who I knew existed but with whom I had no contact until they showed up on one or more of those genetic genealogy sites.
  
• I am thankful that a half dozen Maule men agreed to take BigY700 DNA tests, which showed that the Kings Sutton Maule family group and the Glastonbury/Somerset Maule family group share a common Maule ancestor with the Delaware Maull family group and the Thomas Maule of Salem, Massachusetts, family group, an ancestor who lived about 450 years ago, even though we learned that two other Maule family groups don’t connect in what is called “genealogical time” but link several thousand years earlier.
  
• I am thankful that my congregation’s choir has been able to continue singing.
  
• I am thankful that we continue to gather in the sanctuary for worship, and, yes, that I continue to ring the narthex bell.
  
• I am thankful for all the people in the world who continue to fight ignorance, crime, terror, evil, and corruption.
  
• I am thankful that awareness of what needs to be done to fight ignorance and corruption has not diminished.
  
• I am thankful my health is holding steady.
  
• I am thankful for people being willing to read the things I write.

Seventeen years ago, in Giving Thanks, Again, I shared my Thanksgiving advice. I liked it so much that I repeated it again, in 2009 in Gratias Vectigalibus, yet again in 2013 in “Don’t Forget to Say Thank-You”, still again in 2014 in Giving Thanks: “No, Thank YOU!” , even yet again in 2015 in Thanks Again!, even still again in Thankfully Repetitive, yet once more in Never-Ending Thanks, yet even once more in Particularly Thankful This Time Around, again in Quest'anno è il Ringraziamento, once more in Different, But Thanksgiving Nonetheless, again in in Still Different, But Thanksgiving Nonetheless, again in One Day of Thanksgiving, A Year of Thanks, and last year in A Different Thanksgiving. For me, it does not lose its impact:

Have a Happy Thanksgiving. Set aside the hustle and bustle of life. Meet up with people who matter to you. Share your stories. Enjoy a good meal. Tell jokes. Sing. Laugh. Watch a parade or a football game, or both, or many. Pitch in. Carve the turkey. Wash some dishes. Help a little kid cut a piece of pie. Go outside and take a deep breath. Stare at the sky for a minute. Listen for the birds. Count the stars. Then go back inside and have seconds or thirds. Record the day in memory, so that you can retrieve it in several months when you need some strength.

I am thankful to have the opportunity to share those words yet again. And I am thankful that it is possible for even more of us to do all of those things, and for others of us to most of those things.

It Turns Out the Supreme Court Didn’t Put An End to a Bad Tax Practice

A little more than four years ago, in Who Gets Surplus Proceeds From a Tax Sale?, I explained that I had learned about a dozen states seize property for failure to pay property taxes and instead of simply taking from the sales proceeds the unpaid taxes, interest, and penalties and returning the excess to the property owner, instead pocket all of the sales proceeds. What brought this to my attention was a Michigan Supreme Court decision that held this practice in Michigan to be a violation of the Michigan Constitution.

About a year and a half ago, in Supreme Court Puts An End to a Bad Tax Practice, I explained that the United States Supreme Court handed down a decision, Tyler v. Hennepin County, Minnesota, that involved a similar practice in Minnesota in which the excess of the sales price over the delinquent taxes was not returned to the property owner. The Court held that the property owner plausibly alleged that the retention of the sales surplus violated the Takings Clause. The Court explained that a government cannot take more from a taxpayer than is owed, and that this principle has its origins at least as far back as the Magna Carta, and that most states had statutes adopting this principle. Minnesota did not provide a way for the property owner to recover the excess in the case of delinquent real property taxes even though it did provide for return of the excess when property was seized on account of delinquent income taxes and personal property taxes. The Supreme Court rejected Minnesota’s argument that the property owner did not have a property interest in the excess sales proceeds because she constructively abandoned her home by failing to pay the property tax.

I wrote that the outcome was not, to me, surprising. I noted that the “obvious impropriety of what Minnesota and the other states have been doing is apparent from the fact that the Supreme Court’s opinion was unanimous, something that doesn’t happen very often these days.” I also noted that the decisions of the district court and the Eighth Circuit, which rejected the homeowner’s argument that the Supreme Court accepted, indeed was surprising. One expects better.

When it came time to put a headline or caption on my post, I chose “Supreme Court Puts An End to a Bad Tax Practice.” I was wrong. Reader Morris directed my attention to report from Reason explaining that states had found a loophole to get around the Supreme Court’s holding. The Supreme Court held that “a government cannot take more from a taxpayer than is owed.” The authorities in Oakland County, Michigan, decided to seize the home of a person who owed real property taxes and to give that home to a private company. The private company sold the house, remitted the unpaid taxes to Oakland County, and kept the balance. None of the proceeds went to the homeowner. The homeowner sued, claiming that the Takings Clause had been violated. The judge dismissed the case because “the government itself didn’t make a profit.” According to the report, quoting the lawyer who represented the homeowner, the private company is operated by the mayor and the city administrator. Apparently the company collected $10 million in selling houses in this manner.

If this practice disturbs you, good. Perhaps you will never find yourself owing back taxes on your home. Perhaps you don’t live and will never live in a jurisdiction where this circumvention of the Supreme Court’s holding is practiced. But perhaps you will end up as did these homeowners. What would be your reaction? Dismay? Anger? Frustration? Disappointment? Would you wonder why this happens? Would you be concerned about corruption in government? If corruption in government offends you, understand that there are tens of millions of people who are willing either to turn a blind eye to this sort of corruption or to actively support it because they see some sort of benefit to themselves from its application.

As readers of MauledAgain know, I’m not a fan of public-private partnerships. Too often, the private wins and the public loses. So now there is another public-private arrangement that does not bode well for taxpayers who should be protected by governments, but who end up losing when government officials ignore law.

I don’t know if the judicial decision that approved the use of a private company to circumvent the Supreme Court’s holding has been or will be appealed. Surely there is an argument that the private company is acting as an agent of, or in collusion with, the government that is prohibited from failing to return the excess proceeds to the homeowner. Perhaps it will take another visit to the Supreme Court to get the message across to the officials who are doing this. Perhaps the Supreme Court needs to recognize that it, surely unintentionally, did not succeed in putting an end to a bad tax practice.

Is Tax Neutrality an Achievable Goal?

Tom Giovanetti at the Institute for Policy Innovation has written an interesting commentary that is A Reminder about Tax Neutrality. He makes some important points, though he also makes several statements with which I disagree.

Tom begins by pointing out that both presidential candidates are trying to acquire votes by making promises to provide tax breaks to particular groups of people or for certain types of income or expenditures. He mentions the proposals to eliminate taxes on tips and social security benefits, to eliminate the SALT cap, to provide tax breaks for families with children, first-time home buyers, and African American men starting businesses. Tom notes that these promises have been made in response to where a candidate was campaigning, the audience the candidate was addressing, or particular poll results.

Tom notes that using the tax code to encourage or discourage behavior violates the concept of tax neutrality. He is correct. He writes that “[t]ax neutrality is a key principle of tax reform that was at the forefront of the Reagan tax policy in the 1980s, and that continued through the 1990s and the 2000s.” I disagree. Tax neutrality has been honored in the breach for many decades. For example, tax breaks for families with children and tax breaks for first-time homebuyers have been in and out of the Internal Revenue Code for many years. Every revenue act that has been passed since long before World War II has included a variety of tax breaks for one or another, in fact, many different, activities and statuses.

Tom writes, “[T]he tax code should not encourage or discourage individuals from buying a home, from going to college, from having children, from marrying, and it should not reward or punish businesses for whether they choose to purchase equipment or lease equipment, etc.” He is correct. For decades I have advocated letting agencies other than the IRS deal with these sorts of issues.

But then Tom writes, “The core philosophical idea behind tax neutrality is that in a free economy, it is not the government’s job to direct you to behave in a way that it prefers.” I totally disagree. Governments at every level must necessarily direct people to behave in certain ways under certain circumstances. With several exceptions, drivers are required to stop at red lights and stop signs. People are directed to refrain from littering. People are prohibited from robbing banks. Laws exist to enforce these rules and even though enforcement falls short of sufficiently comprehensive, using the tax law as a form of enforcement is inappropriate, and in the examples I provided the tax law has not, at least until now, been used to encourage compliance with these rules.

However, Tom then points out, “ You should be able to run your household, and run your business, based on your own criteria, and not based on the details of the tax code.” I do agree that the tax code should not be used to control how people run their households and businesses. But I disagree that people should run their households and businesses based on their own criteria, because without rules that protect people from harm, at least some people would run households and businesses in ways that harm people both directly and indirectly. A business owner’s “own criteria” might include dumping waste into nearby rivers but that is and must be prohibited. However, enforcement needs to be done through means other than cluttering the tax code with breaks and penalties dealing with those violations of law. And so, when Tom writes that “government does NOT know best,” he is overstating a proposition. There are matters on which government does not know best, but there also are matters on which government – provided it is not under the control of a dictator, oligopoly, or cabal – knows best because it reflects the wishes of society, such as the desire for clean water free of waste dumped into rivers by business owners operating by their “own criteria.”

Tom then writes, “Essentially, tax policy should raise the necessary revenue for government while introducing as few distortions as possible.” He is correct. This is a point that I have made consistently for a long time. I doubt it will happen, and though Tom doesn’t offer a prediction, I suspect that if pushed, he would admit that the likelihood of cleaning up the tax law and stripping the Internal Revenue Code of its various incentives and tax breaks is extremely low if not zero.

Tom concludes that “politicians should not use the tax code to buy votes or to reward favored constituencies,” and that this “would require candidates who operate from principle, and sadly that’s out of fashion in 2024 America.” I agree with Tom. Again, I doubt politicians will change their messaging, especially and as long as dark money is used by a handful of people to control the nation and to dictate what they want the tax law to be (which is something that enriches the wealthy and frustrates everyone else).

A Sad Task: Computing the Halloween “Parent Tax”

From the outset of this blog, I have made it a point to work Halloween into MauledAgain, usually looking for the silly or goofy but occasionally taking a more serious approach. The posts began with Taxing "Snack" or "Junk" Food (2004), and have continued through Halloween and Tax: Scared Yet? (2005), Happy Halloween: Chocolate Math and Tax Arithmetic (2006), Tricky Treating: Teaching Tax Trumps Tasty Tidbit Transfers (2007), Halloween Brings Out the Lunacy (2007), A Truly Frightening Halloween Candy Bar (2008), Unmasking the Deductibility of Halloween Costumes (2009), Happy Halloween: Revenue Department Scares Kids Into Abandoning Pumpkin Sales (2010), The Scary Part of Halloween Costume Sales Taxation (2011), Halloween Takes on a New Meaning and It Isn’t Happy (2012), Some Scary Halloween Thoughts (2013), The Inequality of Halloween? (2014), When Candy Isn’t Candy (2015), Beyond Scary: Tax-Based Halloween Costumes (2016), Another Halloween Treat? I Think Not (2017), If Halloween Candy Isn’t Food, Is it Medicine? (2018), The Halloween Parent Tax: Seriously? (2019), Halloween Chocolate Construction Project (2020), The Tax Consequences of Halloween Candy Buy Back Programs (2021), Two Not Very Amusing, But Scary, Halloween Tax Challenges (2022), and Does This Halloween Practice Foretell a Scary Future? (2023)

In 2019, in The Halloween Parent Tax: Seriously?, and last year, in Does This Halloween Practice Foretell a Scary Future?, I shared my thoughts about the Halloween “parent tax,” which also goes by the name of “dad tax.” I dislike the idea of parents summarily taking candy from their children. I prefer that parents, throughout the year, teach and encourage their children to share, so that when they return from collecting candy they offer some to their parents without being prompted. Children who are taught to share grow up to be different sorts of adults than children who are ordered to do things without explanation or efforts to deepen understanding so that behavior reflects inner conscience. Too many children raised in authoritarian environments grow up lacking an ability to think critically and end up wanting to live in an authoritarian world.

Sadly, a quick google search reveals that the practice of imposing a parent tax on children not only continues but is being practiced by increasing numbers of parents. That is sad. There even is a parent tax form. And it now has reached the point where the computation of the tax now generated disagreement. As noted in this parent tax advocacy, some parents take a set amount of candy no matter how much the child collects and other parents take percentage, with some taking as much as 50 percent and others advocating percentages such as 33 or 20 percent. If this trend continues, the parent tax will become increasingly complicated, not unlike actual taxes. That’s yet another reason to set aside imposition in favor of teaching children to share.

It is worth repeating what I noted in The Halloween Parent Tax: Seriously?:

So although some people think Halloween presents an opportunity to teach children that “the government” is going to “take some of what you earn,” I think it provides an even better opportunity to teach children the concepts of generosity, empathy, and sharing. Those character traits are disappearing too rapidly among certain segments of society.

Now, five years later, in a world increasing afflicted by self-centeredness, I wonder what lessons are actually being learned by children who observe their parents taking substantial portions of their candy, not through sharing but by fiat. Thirty years from now, how will today’s children raised under those circumstances treat their children? How will they treat other people? Will generosity, empathy, and sharing be part of their worldview? The reality could turn out to be scarier than Halloween.

Does the Mileage-Based Road Fee Work for Local Road Maintenance?

Reader Morris has directed my attention to the solution enacted by the City of Rock Island to deal with the fact its local gas tax collections have been falling for the same reason gas tax revenues have been falling at the national and state level. According to this article, Rock Island is replacing its local gas tax with a new “street improvement utility fee” that will cover the cost of maintaining roads, sidewalks, parking lots, traffic signals, and street lighting. The fee will raise roughly four times what the gas tax generated.

For me, someone who thinks user fees should be tied to what is being used, the snag is how the utility fee is computed. According to the article, the fee is based on the size of properties, making it, in effect, a property tax. The fees range from $7 per month for parcels less than 6,000 square feet to $30 per month for parcels larger than an acre. Putting aside the equity of having only four categories of property size, causing, for example, the fee to be the same for a ten-acre property as it is for a one-acre property, the bigger problem is that there is an inadequate connection between property ownership and road maintenance.

The Rock Island street improvement utility fee will be imposed in the same amount on two property owners who own identical-sized properties, one of whom drives a vehicle and the other of whom does not. Granted, the non-driving property owner benefits from the use of roads by vehicles making deliveries or rendering services to the property owner, but that usage is disproportionately less than the usage by the driving property owner. Worse, people who do not own properties but live in Rock Island pay nothing. Transients who travel through Rock Island pay nothing. At least with the gas tax, non-property-owners and transients did at times purchase gas in the city and thus help pay for maintenance of the roads they were using.

Readers of MauledAgain know what I offer as the solution. It’s the mileage-based road fee. That fee reflects the usage of a road by a vehicle, taking into account its weight and other factors. Having a city or town administer that fee at the local level could be challenging, but there is a simple implementation. The fee, imposed at the state level, could be shared among localities that are responsible for maintenance of local roads, though a state might decide to take over maintenance of all roads in the state and benefit from the economies of scale that would exist. The point is that funding road maintenance costs with a fee imposed on property owners is like funding road maintenance costs by imposing a fee on boat owners.

For those not familiar with the mileage-based road fee, I have written about it on numerous occasions, in posts such as Tax Meets Technology on the Road, 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, Is the Mileage-Based Road Fee a Threat to Privacy?, So Who Should Pay for Roads?, Between Theory and Reality is the (Tax) Test, Mileage-Based Road Fee Inching Ahead, Rebutting Arguments Against Mileage-Based Road Fees, On the Mileage-Based Road Fee Highway: Young at (Tax) Heart?, To Test The Mileage-Based Road Fee, There Needs to Be a Test, What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?, And Now It’s California Facing the Road Funding Tax Issues, If Users Don’t Pay, Who Should?, Taking Responsibility for Funding Highways, Should Tax Increases Reflect Populist Sentiment?, When It Comes to the Mileage-Based Road Fee, Try It, You’ll Like It, Mileage-Based Road Fees: A Positive Trend?, Understanding the Mileage-Based Road Fee, Tax Opposition: A Costly Road to Follow, Progress on the Mileage-Based Road Fee Front?, Mileage-Based Road Fee Enters Illinois Gubernatorial Campaign, Is a User-Fee-Based System Incompatible With Progressive Income Taxation?. Will Private Ownership of Public Necessities Work?, Revenue Problems With A User Fee Solution Crying for Attention, Plans for Mileage-Based Road Fees Continue to Grow, Getting Technical With the Mileage-Based Road Fee, Once Again, Rebutting Arguments Against Mileage-Based Road Fees, Getting to the Mileage-Based Road Fee in Tiny Steps, Proposal for a Tyre Tax to Replace Fuel Taxes Needs to be Deflated, A Much Bigger Forward-Moving Step for the Mileage-Based Road Fee, Another Example of a Problem That the Mileage-Based Road Fee Can Solve, Some Observations on Recent Articles Addressing the Mileage-Based Road Fee, Mileage-Based Road Fee Meets Interstate Travel, If Not a Gasoline Tax, and Not a Mileage-Based Road Fee, Then What?>, Try It, You Might Like It (The Mileage-Based Road Fee, That Is) , The Mileage-Based Road Fee Is Superior to This Proposed “Commercial Activity Surcharge”, The Mileage-Based Road Fee Is Also Superior to This Proposed “Package Tax” or “Package Fee”, Why Delay A Mileage-Based Road Fee Until Existing Fuel Tax Amounts Are Posted at Fuel Pumps?, Using General Funds to Finance Transportation Infrastructure Not a Viable Solution, In Praise of the Mileage-Base Road Fee, What Appears to Be Criticism of the Mileage-Based Road Fee Isn’t, Though It Is a Criticism of How Congress Functions, Ignorance and Propaganda, A New Twist to the Mileage-Based Road Fee, The Mileage-Based Road Fee: Simpler, Fairer, and More Efficient Than the Alternatives, Some Updates on the Mileage-Based Road Fee, How to Pay for Street Reconstruction, Stop the "Stop EV Freeloading Act" Because The Mileage-Based Road Fee Is a Much Better Way to Go, Why Is Road Repair and Maintenance Funding So Difficult for Public Officials to Figure Out?, Should (Will) Implementing the Mileage-Based Road Fee Cause Privatization of Highway Infrastructure?, The Freedom Caucus Doesn’t Understand that the Mileage-Based Road Fee is “PRO-Freedom,” Not the Opposite, and A Mileage-Based Road Fee by Any Other Name?.

Can We Find Tax Forms In “The Tax Code”?

Recently, reader Morris alerted me to a post on the AWS Machine Learning Blog. According to the post, “The tax code includes 15,000+ federal tax forms and state tax forms for individual and business tax filers in the U.S.” Reader Morris commented, “I have read parts of the Internal Revenue Code and various state tax codes and I have never seen a federal or state form in these publications.” I replied, “And you are correct, forms are not in the code or regulations.”

I spared Reader Morris a thorough critique of the sentence. It’s not only the absurd claim that forms are found in “the tax code.” It’s also the use of the term “The tax code,” a term that lacks specificity. There are hundreds of “tax codes” in the United States. The most well-known is the federal Internal Revenue Code. Every state and territory has a tax code, though with different names, such as revenue code. Most counties and many cities, towns, and townships have tax codes. So which tax code is being referenced by the sentence that begins with “The tax code”? Worse, how can one tax code (“’the’ tax code”) include federal AND state tax forms?

It’s easy to understand why tax forms rarely, if ever, included in legislation. Tax forms change from year to year. Legislatures, town councils, and county commissions don’t have the time and financial resources to amend legislation continuously to insert the latest version of a form. At best, legislation might contain a form template, or a list of fields or items that are required to be placed on a form. But surely, the idea that there are “15,000+” forms in whatever is that “the tax code” is beyond worrisome.

I wonder if the author of the AWS Machine Learning Blog can provide a list, with citations, of the 15,000+ forms that are in “the tax code.” Though I wonder, I very much doubt it.

I also wonder how many people read the AWS Machine Learning Blog and consider that sentence to be true. I wonder how many then share with other people their “discovery” that there are 15,000+ tax forms buried in “the tax code.” But I need not wonder how misinformation and untruths spread like wildfire, fertilizing the ignorance that is destroying civilization.

Lies About Tax Increases on Social Security Benefits

One of the traits that erodes a person’s character, that erodes institutions, that erodes governments, and that erodes civilization is dishonesty. Dishonesty manifests itself in various ways. There is embezzlement. There is shoplifting. And there is lying.

People lie for various reasons. They lie to protect someone from being insulted, thus saying something nice about a terrible haircut. They lie to keep themselves out of trouble, thus denying having committed a crime. They lie to gain an advantage, thus offering untruths to push aside whatever or whomever stands in their way.

Sometimes lies are easily recognized. Sometimes they are difficult to detect. In any situation, it is best to procure evidence that what appears to be a lie is in fact a lie.

That’s the situation I found myself in when I received a political advertisement in the postal mail, circulated by an organization trying to unseat an incumbent United State Senator. The advertisement stated that the incumbent senator had “voted three time for higher taxes on seniors’ social security benefits.” Knowing that the last time taxes on social security benefits had been increased was long before the incumbent senator took a seat in the Senate, I wanted to verify that the statement was a lie.

First, I confirmed that taxes on social security benefits had not been raised since the 1990s. To do that, I examined the amendment notes to Internal Revenue Code section 86, which provides for the inclusion in gross income of a portion of some individuals’ social security benefits. Not everyone who receives social security benefits is required to include them in gross income because individuals with modified adjusted gross income less than specified amounts, depending on filing status, do not include social security benefits in gross income.

Section 86 has been amended three times since the incumbent senator took office. It was amended in 2017 by 13305(b)(1) of title I of Public Law 115-97. It was amended in 2020 by 104(b)(2)(C) of title I of division EE of Public Law 116-260. It was amended in 2021 by 9042(b)(2) of title IX of Public Law 117-2. All three amendments made changes to text in section 86 that cross-references other Internal Revenue Code provisions that were themselves amended. None of the three amendments did anything to change the portion of social security benefits included in gross income. None of the three amendments increased taxes on social security benefits.

Second, I looked to see if the incumbent senator had tried, unsuccessfully, to increase the portion of social security benefits included in gross income or to increase taxes on social security benefits. The organization that circulated the claim included a footnote in its advertisement citing three instances it offers in support of its claim. It cited three roll call votes in the Senate, specifically, “Roll Call Vote #28, 1/25/07; Roll Call Vote #52, 3/13/08; Roll Call Vote #43, 2/4/09.” What did those roll call votes address?

The first, Roll Call Vote #28, 1/25/07, was on a motion to waive an amendment to the Congressional Budget Act. The amendment would “repeal the 1993 income tax increase on Social Security benefits.” The motion failed. The incumbent senator voted against the motion.

The second, Roll Call Vote #52, 3/13/08, was on a motion to amend Senate Congressional Resolution 70. The amendment would “repeal the tax increase on Social Security benefits imposed by the Omnibus Budget Reconciliation Act of 1993.” The motion failed. The incumbent senator voted against the motion.

The third, Roll Call Vote #43, 2/4/09, was on a motion to waive section 201 of Senate Congressional Resolution 21. The amendment would “suspend for 2009 the 1993 income tax increase on Social Security benefits.” The motion failed. The incumbent senator voted against the motion.

None of the three roll call votes cited by the organization in support of its false claim that the incumbent senator voted “for higher taxes on seniors’ social security benefits” involved a motion to increase taxes on social security benefits. The votes cast by the incumbent senator were votes against reducing or suspending taxes on social security benefits. Voting against a tax decrease is NOT a vote for a tax increase. It is a vote to leave things as they are. Here is an analogous example that drives home the distinction: Someone involved with the NFL, wisely or unwisely, proposes reducing the points awarded for a touchdown from 6 to 5. An NFL owner who votes against that proposal is NOT voting to “increase” the points awarded for scoring a touchdown. It is a vote to leave things as they are.

So why would an organization circulate a lie? It does so to gain an advantage. The goal of the lie is to use fear to motivate senior citizens, and perhaps others nearing social security retirement age, to vote against the incumbent senator. Removing the incumbent senator from the Senate contributes to the organization’s chances of controlling the Senate and turning its spending from untruthful political advertisement to enacting its agenda.

So how does someone refute a lie? How does someone undo the damage done by a lie? These are not easy things to do. The first step is to identify the lie. The second step is to explain why the lie is a lie and not truth. The third step is to circulate the explanation to all those to whom the lie was circulated. I’ve done the first two steps. Taking the third step depends on how quickly, if at all, my identification of the lie and explanation of why it is a lie circulates. It is possible that the same or a similar lie is being circulated about other incumbent senators. Hopefully when someone uses a search engine to look for “voted for higher taxes on social security benefits” that person will find their way to this blog post. Hopefully they will share it. Hopefully, those in the organizations who circulate the lie will recant. But I doubt that will happen.

The Price of Ignorance

There’s a meme circulating on social media. Here is what it claims:

JUST ONE LITTLE EXAMPLE OF UNREALIZED CAPITAL GAIN:

....your mom purchased her home 40 years ago. She paid $50,000 for it. It's all paid off which is great because mom is living on a fixed income. It is now worth $500,000!! Kamala wants her to pay 25% of that gain even though she has no plans on selling her home. Now mom has to take out a $112,500 loan on the home to pay the Kamala's 25% unrealized capital gain. Mom can't afford that loan on her fixed income with rising inflation so she loses the home she raised her family in and worked so hard to pay off. But don't worry. A big corporation will come in and buy her home and rent it back to her.

They said you'll own nothing and be happy. Do you now see how they will accomplish that? Drain your savings and tax you out of your home!

Capital Gains will also apply to your 401 etc. DO A LOT OF THINKING BEFORE YOU VOTE

It is disappointing that this sort of nonsense gets a life of its own as it spreads from the originator – more on that in a moment – throughout the internet thanks to reposting by people who react emotionally and fail to take time to ask themselves whether it is correct.

The proposal in question is in the Biden Administration proposed budget for fiscal year 2025. The Tax Foundation summarizes the proposal very succinctly and clearly:

The 25 percent minimum tax on unrealized capital gains has several novel features and would for the first time attempt to collect tax on a broad set of assets on a mark-to-market basis or on imputed returns, i.e., without a clear market transaction to firmly establish any capital gain or loss. It would apply to taxpayers with wealth greater than $100 million, requiring a new annual wealth reporting system.

Whenever I see a facebook post in which someone reposts this meme, often along with an expression of fear or dismay that this proposal will ruin them financially, I note that even if the proposal were to be enacted, which I very much doubt, I don’t worry about it because I’m nowhere near worth $100 million. I then write in these or similar words, “And I assume you, also, don’t have wealth anywhere near $100 million, so, please, relax.” Reactions range from expressions of surprise to claims that I am ignorant about taxes.

Of course, my attempt to provide free education to the people who so easily gobble up nonsense reaches an extremely tiny fraction of the people who read this absurd meme, even if they don’t repost it. Perhaps here and there someone else who has taken the time to learn the truth about the proposal shares the results of their research efforts. But the vast majority of Americans are being fed what at best can be described as a lie.

So who created this meme? Someone who does not want to be identified. It’s very likely that the person who created this meme isn’t someone who read the proposal and misunderstood it. The explanations, such as the one from the Tax Foundation, are within the reading level of a second grader. The person who created this meme did so in order to influence the votes of the middle class, by fueling fear of something that doesn’t exist. I ask you, who benefits from a lie about a proposal that seeks to increase taxes on the ultrawealthy? Surely those who oppose increasing taxes on the ultrawealthy. What better way is there to get the middle class to oppose increased taxes on the ultrawealthy than to lie to the middle class and claim that the proposal increases taxes on the middle class?

If the American population were not so ignorant about basic tax concepts, if the American population were more willing to do research rather than to treat as Gospel truth the utterances of the guy next to them at the bar or the words of a meme writer who spreads lies, if the American population understood the realities of economics, this meme would be doing the damage of a spitball directed at an elm tree. Instead, this meme, along with hundreds of other disinformation memes and misrepresentation memes, is fertilized by ignorance and threatens to undercut the foundations of democracy. Sadly, the price of ignorance will be paid not only by the ignorant but by everyone other than the handful who benefit from ignorance and lies.

How an Answer to a Tax Question Can Earn Zero Points

Recently, reader Morris sent me an email with the subject line, “What grade would you give this student?” In the body of the email was a link to The Bottom Line / Ask Marilyn: What to Do with a Financial Windfall.

The question posed by a reader of the column was a simple one. The reader found a diamond ring and wanted “to limit her tax liability around the sale” of the ring that the reader wanted to make.

The response was surprising:

“Yes, the gain of the sale is taxable. If you've held that asset less than a year, then it will be taxable at your regular income tax rate. However, the big question is your long-term tax rate of capital gains.

“Capital gains are defined as the profit from the sale of property or of an investment, and you have to pay taxes on it. (The IRS considers jewelry is considered a capital asset, not a “collectible,” which is taxed at a higher rate.) This rate could be as high as 20% or as low as 0%, depending on your income level.

“This means that if you hang onto the ring for over a year, the tax rate on the income from selling it will be lower.

“Even with the above, it might be beneficial to sell the ring under someone else's name–a parent or a child, for instance. However, that could affect that other person's tax liability, as well. For instance, if your parent is getting social security benefits, having them report the sale could end up making their benefits taxable. Make sure to consider the tax situation of anyone you consider having report the sale, so you can plan for the best outcome.”

Let’s begin at the beginning.

When the person finds the diamond ring and keeps it, whether or not legally doing so, the person has ordinary income equal to the value of the ring. That is well-settled federal income tax law. It is a topic that students in a basic federal income tax course encounter early in the course. As a corollary to that outcome, the person acquires a basis in the ring equal to the amount of gross income reported. If the person sells the ring within a short period of time, the person will have zero gain and zero loss. In fact, the sale price of the ring is a major factor in determining the value of the ring at the time it was sold, with the passing of a few weeks or months having no practical impact on the valuation issue. That means the determination of whether the gain is short-term or long-term is an issue that does not need to be addressed. Of course, if the reader holds the ring for a longer period of time and its value does change then there would be gain or loss, its long-term or short-term character depending on the length of time the ring is held before being sold.

The advice that “it might be beneficial to sell the ring under someone else's name” is tantamount to fraud unless the ring is the subject of a bona fide gift to the other person. That would require the finder to wash their hands of any involvement in the decision of the done to sell or not sell the ring or any of the details with respect to any sale. The idea of having someone else “report the sale” is downright dangerous advice.

So what grade would I give the answer if the question were an examination question and the answer came from a student in the course? My method of grading examinations generates scores, which are then combined with scores from other facets of the course to generate a course grade. The examination contains more than one question, so the best I can do is to offer two conclusions. First, this answer would earn zero points. Second, if this question was the only question on the examination and there were no other score-generating activities in the course, the course grade would be an F.

If I were to put a question as simple as this one on an examination it, along with one or two others, would fall into a category designed to make it easy for a student to show that they learned at least something in the course, and scoring well on those questions, and only on those questions, would bring the course grade to a D. In my grading construct, the D is the grade indicating “well, at least you learned something.”

For those who, not unlike students, would argue that the answer indicates a knowledge of short-term and long-term capital gain rates, my response is that the question did not seek any discussion of that point. One of many skills that need to be acquired or polished in law school – in fact, in every discipline – is to answer the question that is asked and not the question the person wishes would have been asked. To see how this works in the practice world, check out any Judge Judy episode when she asks a question and gets an answer that isn’t an answer to the question she asked. And let’s not mention the negative effect of the horrible advice to put the sale in another person’s name.

Some Tips About Tips and Taxes

Both major party candidates for the presidency have expressed support for the notion of eliminating federal income (and perhaps employment) taxes on tips. There is no question that this is a ploy designed to gather votes, especially since the proposal wouldn’t amount to much of a benefit, if at all, for most workers who rely on tips to make ends meet.

Why would this proposal do little or nothing for workers who rely on tips? According to several reports, such as this one from Axios, and this one from Alternet, Alex Morash of the advocacy group One Fair Wage, in a report compiled in collaboration of the University of California at Berkeley Food Labor Research Center, concluded that nearly one-half of tipped workers in restaurants earn less than the $13,850 cutoff for paying federal income taxes. About two-thirds of them live in households with income too low to create federal income tax liability. In other words, excluding tip income from the gross incomes of these workers does absolutely nothing for them. I think the number of workers who would not benefit is even higher, because these computations apparently do not take into account any credits to which the workers may be entitled to claim. This conclusion is supported by analyses offered by the Tax Policy Center. And if tips are exempted from employment taxes, it jeopardizes the eligibility of tipped workers for Social Security and Medicare coverage or reduces what they are eligible to collect.

So who would benefit from excluding tip income from gross income? Most likely, the small percentage of tipped workers who collect large amounts of tips. Those workers, estimated to constitute about 5 to 10 percent of tipped workers, gather their tips at luxury hotels and restaurants. Though they would welcome a reduction in their federal income tax liabilities, assuming they have any, in the long run it would work to their detriment. Let’s see why.

Cutting federal income taxes on tips gives the employers of tipped workers another argument against raising the minimum wage or at least reducing any increase. Though excluding tips from gross income would benefit only a small percentage of tipped workers, the concept would help employers spare themselves the expense of raising wages for all workers, including those who are barely getting by even with tip income.

Who else might benefit? Tips are nothing more than another form of compensation for the performance of services. It should make no difference whether money flows directly from a customer to a worker or from the customer to the worker through the employer. In both instances the worker is receiving compensation. If the handful of tipped workers who pay taxes on their tips should be excused from doing so because they are perceived to be earning insufficient income, then the same benefit should be given to all other workers who are earning the similar amounts of insufficient income. In other words, raise the standard deduction or make adjustments in the tax rate schedules rather than singling out one class of worker for special treatment.

Then there are those who would manipulate the system to convert non-tip forms of compensation into tips. Already there are planners thinking about ways to make this happen. It’s not my intention to provide blueprints for this sort of behavior other than to note that it is possible. Imagine the impact on the economy, to say nothing of the operation of government, if suddenly all wage earners were being paid minimum wage and the rest of their pay in “tips.” It could be worse, as clever planners find ways to convert partnership and S corporation distributions, C corporation dividends, and other forms of income into “tips.” At least the presumptive nominee for one major political party includes in the proposal plans to find ways to prevent this from happening.

Of course, as is the case with many special interest tax provisions, the proposal is nothing more than a band-aid designed to soften rather than address the impact of the underlying problem. Even if the proposal to exclude tips from gross income was a sincere effort to help underpaid workers and not a vote-grabbing ploy in the state where it was announced, a state where a high proportion of workers rely on tips, it is a feeble excuse of a solution for the problem of underpaid workers. There needs to be an increase in the federal minimum wage, which has not been changed since 2009. Even though some states have stepped up to deal with this Congressional neglect, there are workers in states that have not done anything to deal with the problem. Worse, the federal minimum wage is sharply reduced for workers in industries where tipping is the norm, so long as the tips bring the worker’s hourly pay up to the federal minimum wage. This exception encourages tipping.

Tipping is a major ingredient of American culture. It’s different in other countries, where workers are paid a living wage and do not need to rely on the decisions of customers. Though many customers tip based on the quality of service, too many cut tips if they are unhappy with other aspects of their experience beyond the control of the tipped worker, too many don’t leave tips (or leave very tiny tips) because they “don’t believe in tipping,” too many “forget” to tip, and too many, including the many tourists from other countries, simply don’t understand the tipping culture. Making a shift from the “American way” of compensating workers in certain service industries to the pattern in place in other countries would be difficult but not impossible, and in the long run far more efficient.

Those who oppose changing the culture of tipping want to retain “a way to show the business that its services is terrible.” The way to show a business that its service is terrible is to stop patronizing the business. Then the business in theory fixes the problems or goes out of business. If the problem is the worker, the worker needs to be retrained or released. If the problem is something else, as it often is though “taken out” on the worker through a reduced or eliminated tip, then the business either fixes the problem or goes out of business.

Once again, it is apparent that blurting out something that “sounds good” in a sound bite or tweet isn’t so good when the idea is subjected to examination, analysis, and critical thinking. Very few Americans understand the full ramifications of a simple “stop taxing tips” ploy. It’s not that simple.

Tax Might Be Boring, But the Underlying Facts Often Are Not

It’s been a while since I wrote about a television court show. Today reader Morris directed me to an episode of Justice For All with Judge Cristina Perez. He asked me about the tax consequences of the transactions at issue. I have addressed tax issues in television court shows many times, in posts such as Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other, One of the Reasons Tax Law Is Complicated, An Easy Tax Issue for Judge Judy, Another Easy Tax Issue for Judge Judy, Yet Another Easy Tax Issue for Judge Judy, Be Careful When Selecting and Dealing with a Tax Return Preparer, Fighting Over a Tax Refund, Another Tax Return Preparer Meets Judge Judy, Judge Judy Identifies Breach of a Tax Return Contract, When Tax Return Preparation Just Isn’t Enough, Fighting Over Tax Dependents When There Is No Evidence, If It’s Not Your Tax Refund, You Cannot Keep the Money, Contracts With Respect to Tax Refunds Should Be In Writing, Admitting to Tax Fraud When Litigating Something Else, When the Tax Software Goes Awry. How Not to Handle a Tax Refund, Car Purchase Case Delivers Surprise Tax Stunt, Wider Consequences of a Cash Only Tax Technique, Was Tax Avoidance the Reason for This Bizarre Transaction?, Was It Tax Fraud?, Need Money to Pay Taxes? How Not To Get It, When Needing Tax Advice, Don’t Just “Google It”, Re-examining Damages When Tax Software Goes Awry, How Is Tax Relevant in This Contract Case?, Does Failure to Pay Real Property Taxes Make the Owner a Squatter?, Beware of the Partner’s Tax Lien, Trying to Make Sense of a “Conspiracy to Commit Tax Fraud”, Tax Payment Failure Exposes Auto Registration and Identity Fraud, A Taxing WhatAboutIsm Attempt, When Establishing A Business Relationship, Be Consistent, as the Alternative Can Be Unpleasant Litigation, Sadness on Multiple Levels: Financial Literacy, Factual Understanding, Legal Comprehension, When the Lack of Facts Produces “Rough Justice” in a Tax-Related Case, and Is the Tax Return Preparer or the Client Responsible For Unjustified Deductions?.

The case that reader Morris brought to my attention interested me not only because of the tax issues, which are actually very straight-forward, but also because of the underlying facts. A young woman, who was tired of attending family events by herself because everyone else was married or had a significant other, hired a young man to pretend to be her date for Thanksgiving weekend with her family. She found the fellow on a website that provides a platform for those who want a date to contact those who are willing to be, as the judge put it, “fake dates.” The young woman not only paid the young man $750 per day for the four days, but also paid about $2,400 to cover the cost of his flight, hotel room, and transportation. One of the terms of the contract was that the young man’s status as a fake date was not to be revealed.

Things went well the first day. One of the young woman’s cousins who was at the family gathering stayed, with her boyfriend, at the same hotel at which the young man was staying. On Thursday night or Friday morning, the cousin broke up with her boyfriend because he was getting multiple phone calls from another woman, with whom he met up after the breakup. When the “fake date” showed up at the family home he was accompanied by the cousin, and the two of them were being very affectionate. According to the young woman who hired the date, he pretty much ignored her and focused on the cousin.

After the four-day date ended, unbeknownst to the young woman, the young man entered into a relationship with the cousin. About a month later, when the young woman’s family held its Christmas gathering, the young man showed up with the cousin, as boyfriend and girlfriend. Things took a bad turn when the cousin “told everyone” that the supposed boyfriend of the young woman was a “fake date” hired by her. It turns out that the young man had told the cousin about the hired date arrangement in order to assure her that he was not in a relationship with the young woman.

The young woman sued the “fake date” for a return of the $5,400 that she had paid directly to him and to provide him transportation and lodging. Judge Perez declared that it was the easiest case she had heard all week, and held in favor of the young woman for the full $5,400.

Reader Morris asked me four questions: “Does the defendant have gross income? Is it business income on Schedule C? Does the Plaintiff have any federal tax consequences? Can the defendant deduct the judgement for breach of contract as a business expense on his Schedule C?”

My answer was rather short. “Yes, the defendant has gross income that is reported on Schedule C. The defendant also offsets gross income by the amount refunded to the plaintiff, just as any service provider refunds a customer when the service fails to comply with the contract. Thus there is no need for a deduction. The plaintiff has no tax consequences because the transactions were personal in nature and not connected with a trade or business or for-profit activity.”

The tax conclusions aren’t novel or complex or bewildering. The underlying facts, though, are far more interesting than, for example, a lawn service customer suing a lawn maintenance company for damaging trees or breaking a fence. When people tell me that tax is boring, I reply that it often is but the underlying stories are what makes it interesting.

Internal Revenue Code Component (aa) Has Been Given a Name

More than 14 years ago, in Internal Revenue Code: Small Change, New Feature, New Look, I posed the question of what names should be given to two components of Internal Revenue Code section 4980I(b)(3)(C)(iii)(II)(aa) and (bb). I explained that although 4980I was the section, (b) was the subsection, (3) was the paragraph, (C) was the subparagraph, (iii) was the clause, and (II) was the subclause, I did not know nor could I find a name for (aa) and (bb).

Yesterday reader Morris sent me an email captioned, “The search of 14 years is over.” I must confess that during those 14 years I had not been actively searching for an answer. But reader Morris came upon what appears to be an answer.

According to this Wikipedia article, the name for (aa) and (bb) is item, and the name for the next component, (AA) and (BB), etc., is subitem. The Wikipedia article, apparently written in 2018, and updated in 2021, cites two sources, one of which I cannot find though it has been archived. The other source, the Detailed Guide to the United State Code Content and Features from the Office of the Law Revision Counsel for the United States Code, states, “Sections are often subdivided into a combination of smaller units such as subsections, paragraphs, subparagraphs, clauses, subclauses, and items.“ The Guide does provide a date for its creation or updates. The Wikipedia article citation to the Guide states, “Archived from the original on November 26, 2022. Retrieved February 2, 2021.”

It appears that the designation of “item” and “subitem” for the (aa) and (AA) components of the Internal Revenue Code is a fairly recent development. I’m certain that when the Guide was first written there was no need for those designations because legislation had not become as complicated as it now is, creating the need for deep levels of substructures.

If I were still teaching the introductory federal income taxation course, I would need to update the materials I provided to the students. Though I am no longer teaching that course, I decided to provide this update to the question so that those who do teach the course and give attention to the structure of the Internal Revenue Code (and Treasury Regulations) can update their materials. Because I know that there are at least a handful of law faculty using parts of the materials I developed it made sense to me to share this new information (that came to me thanks to reader Morris). I also figured that readers of this blog, many of whom are tax professionals or otherwise interested in tax, would benefit from knowing that (aa) and (AA) have been given names.

So You Want to Pay Zero Taxes?

The headline in this advice column surely catches the eye of many people as it caught mine. It’s simple and entice. It suggests, “How to make $100,000 or more and pay no income taxes” Many people think of the verb “make” in this respect as including “making money” by having a job. The advice on what someone should do to get their federal income taxes down to zero works, but there’s a catch. It requires that the person’s income consist of qualified dividends and long-term capital gains. Specifically, the advice applies to married couples though there is similar reasoning for unmarried taxpayers. The explanation? According to the advice, “The big thing to know, however, is that you can recognize as much as $94,050 in qualified investment income as a married couple and pay no income. Tack on another $29,200 in income that is tax-free from a standard deduction, and you can escape income tax on at least $123,250.”

So who can set up their finances to fit within the advice? Someone who earns their income by working? No, because wages are not long-term capital gains and they aren’t qualified dividends. Someone who adds to their wages by putting money in the bank an earning some interest? No, because interest payments are not long-term capital gains and they aren’t qualified dividends.

So who can arrange their finances so that their income consists of long-term capital gains and qualified dividends? Someone who has sufficient capital to generate $94,050 of those items. How much capital is required depends on the rates of return that one assumes would apply. A safe guess would be somewhere in the vicinity of $1.5 to $2.0 million.

But there’s another catch. If a person with sufficient capital to generate this sort of income also has wages, interest, or other ordinary income, some or all of the untaxed $123,250 will be taxed. So who’s still eligible to do the “pay zero taxes” thing? Someone with sufficient but not too much capital, who keeps their qualified long-term capital gains and qualified dividends within the zero-tax range, who doesn’t need or have any other type of income. There aren’t very many people who will end up taking advantage of the “pay zero tax” arrangement.

So it’s understandable when most Americans consider the federal income tax to be skewed in favor of the investing class and not workers. It is so skewed. What is missing in most instances is taking the next step, from recognizing the biases in the federal income tax, understanding how and why they came to exist, and then taking steps to vote for legislators who are willing to change the law so that it doesn’t disfavor those who need to work to make a living. That’s a tall order, because those who benefit from the skewed income tax law are the ones with the wherewithal to finance the campaigns of legislators who are unwilling to balance the income tax law but rather want to make it even more favorable to those who benefit from the imbalance. And, no, throwing a few crumbs to low-income wage earners does very little to help them and does nothing for the disappearing middle class.

I understand why people don’t want to pay taxes. People don’t want to pay for anything, at least until (and unless) they think about the consequences of trying to get something for nothing. Most people understand that trying to get a person to mow their lawn for free, or serve them a restaurant meal for free, is wrong for so many reasons, both legally and morally. Yet they don’t have the same hesitation when it comes to trying to get public services for free. I think the reason is that there is a more attenuated connection between taxes and public services than there is between the direct payment to the lawn mowing person or the restaurant. And that is where the education system has failed the nation, because too many people do not realize the extent of the public services they receive without being aware that they are benefitting. Why? Because they take them for granted.

So, no, I have no interest, if even I could somehow fit within the suggested financial structure, in paying zero taxes. Why? Because I know that if I pay no taxes I ought not expect anyone else to pay taxes. And I know what would happen if no one paid taxes. I do wish everyone else also would know what would happen. Then the “pay zero taxes” ploys would fall on deaf ears.

A Mileage-Based Road Fee by Any Other Name?

A pilot “road charge” program is underway in California. It is an implantation of the mileage-based road fee that I have supported for many years. I’ve also written about the fee many times, in posts such as Tax Meets Technology on the Road, 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, Is the Mileage-Based Road Fee a Threat to Privacy?, So Who Should Pay for Roads?, Between Theory and Reality is the (Tax) Test, Mileage-Based Road Fee Inching Ahead, Rebutting Arguments Against Mileage-Based Road Fees, On the Mileage-Based Road Fee Highway: Young at (Tax) Heart?, To Test The Mileage-Based Road Fee, There Needs to Be a Test, What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?, And Now It’s California Facing the Road Funding Tax Issues, If Users Don’t Pay, Who Should?, Taking Responsibility for Funding Highways, Should Tax Increases Reflect Populist Sentiment?, When It Comes to the Mileage-Based Road Fee, Try It, You’ll Like It, Mileage-Based Road Fees: A Positive Trend?, Understanding the Mileage-Based Road Fee, Tax Opposition: A Costly Road to Follow, Progress on the Mileage-Based Road Fee Front?, Mileage-Based Road Fee Enters Illinois Gubernatorial Campaign, Is a User-Fee-Based System Incompatible With Progressive Income Taxation?. Will Private Ownership of Public Necessities Work?, Revenue Problems With A User Fee Solution Crying for Attention, Plans for Mileage-Based Road Fees Continue to Grow, Getting Technical With the Mileage-Based Road Fee, Once Again, Rebutting Arguments Against Mileage-Based Road Fees, Getting to the Mileage-Based Road Fee in Tiny Steps, Proposal for a Tyre Tax to Replace Fuel Taxes Needs to be Deflated, A Much Bigger Forward-Moving Step for the Mileage-Based Road Fee, Another Example of a Problem That the Mileage-Based Road Fee Can Solve, Some Observations on Recent Articles Addressing the Mileage-Based Road Fee, Mileage-Based Road Fee Meets Interstate Travel, If Not a Gasoline Tax, and Not a Mileage-Based Road Fee, Then What?>, Try It, You Might Like It (The Mileage-Based Road Fee, That Is) , The Mileage-Based Road Fee Is Superior to This Proposed “Commercial Activity Surcharge”, The Mileage-Based Road Fee Is Also Superior to This Proposed “Package Tax” or “Package Fee”, Why Delay A Mileage-Based Road Fee Until Existing Fuel Tax Amounts Are Posted at Fuel Pumps?, Using General Funds to Finance Transportation Infrastructure Not a Viable Solution, In Praise of the Mileage-Base Road Fee, What Appears to Be Criticism of the Mileage-Based Road Fee Isn’t, Though It Is a Criticism of How Congress Functions, Ignorance and Propaganda, A New Twist to the Mileage-Based Road Fee, The Mileage-Based Road Fee: Simpler, Fairer, and More Efficient Than the Alternatives, Some Updates on the Mileage-Based Road Fee, How to Pay for Street Reconstruction, Stop the "Stop EV Freeloading Act" Because The Mileage-Based Road Fee Is a Much Better Way to Go, Why Is Road Repair and Maintenance Funding So Difficult for Public Officials to Figure Out?, Should (Will) Implementing the Mileage-Based Road Fee Cause Privatization of Highway Infrastructure?, and The Freedom Caucus Doesn’t Understand that the Mileage-Based Road Fee is “PRO-Freedom,” Not the Opposite.

What caught my attention wasn’t the pilot program, but something written about it by Andrew Leahy in Week in Insights: California ‘Road Charge’ Is Sensible, if Flawed. He wrote, “The ‘road charge’ should really be a ‘transportation charge.’ And it should transparently break down how the funds raised will be allotted to road maintenance, public transit, climate change initiatives, and state remediation programs.” I tried to find information about the intended use of the California road charge revenue other than for road repair and maintenance, but I was unsuccessful. If indeed some of the revenue is earmarked for public transit, climate change initiatives, and state remediation programs, then it violates the principle that user fees should be directed to the goods or services for which the fees are being paid. I understand, for example, that one might argue that a person using a highway ought to pay for the “privilege” of avoiding the use of public transit, but considering the awful state of public transit in this nation, that sort of reasoning would lead to the concept of public transit riders paying road users for refraining from overburdening inadequate public transit facilities.

Of course, changing the word “road” to “transportation” doesn’t change the underlying question of the uses to which the revenues are put. The word “transportation” would make sense if the fee were to be applied not only to the use of roads, but also the use of airports, air space, rivers, ports, and railroad tracks. Of course, the use of the word “road” neglects the fact that drivers also use bridges, tunnels, and rest areas. But “road” suffices to convey the message. The word “transportation” would suggest uses for other transport functions and if the revenue is directed to non-transportation purposes would be as inadequate as the word “road.” Directing revenue to other purposes would give the fee too much of a resemblance to a tax. And changing the word “fee” to “tax” would make it even more challenging to persuade people and legislatures to adopt the mileage-based road fee.