Monday, April 29, 2024

Taxpayer’s Argument in Sales Tax Case Falls Flat 

Most people, when they hear the word “tax,” think not only of their distaste for paying taxes but also think of “numbers.” Sadly, many people dislike and even fear working with numbers. Anyone who has worked with taxes knows that taxes involve much more than numbers. They also know that although computers can handle the computational side of tax numbers, the non-numerical aspects of taxation require the sort of policy, judgment, wisdom, and subjective evaluation that have yet to show up successfully in software. I have written about this misunderstanding of taxation in Why Tax Practitioners Must Be Good With Words, and Not Just Numbers. I offered examples of tax issues in which words were in play mattered and numbers were on the sideline in posts such as Medical Expense Deductions for Embryo and Cord Blood Storage, Pets and the Section 119 Meals Exclusion, The Things Tax Lawyers Must Ponder, and Not That More Proof Is Needed, But Here’s Another Example That Taxes Aren’t “Just Numbers”.

Reader Morris has directed my attention to a decision by the Commonwealth Court of Pennsylvania that addressed the question of whether Perrier carbonated natural mineral water is water exempt from the sales tax or a soft drink subject to the sales tax. The court explained that the product is a soft drink because it is carbonated using the same process used to carbonate soft drinks. The court relied on the definition of “soft drink” in the statute, which includes “carbonated water.”

As I’ve also pointed out, those who practice tax law learn, and must learn, all sorts of things that are beyond the statutes, regulations, and other authorities that set forth the law of taxation. In this instance I learned that Perrier carbonated natural mineral water isn’t simply natural carbonated mineral water extracted from underground. Instead, the mineral water and the carbonic gas are extracted separately from the same geological formation and then are combined through a process that involves removing impurities, chilling the water, and removing air from the water. Surprisingly, any carbonation in the harvested water is removed before the carbonic gas extracted from a different area in the geological formation is added.

This case is an interesting illustration of why legislatures need to do what attorneys need to do. Before drafting legislation, and while reviewing legislation as it moves through the legislature, legislators should acquire as much information as possible so that they can craft statutes that answer questions. In this situation, because of the arguable ambiguity in the statute concerning the differences between water and soft drink, the legislature could have simply inserted the word “noncarbonated” before the word “water” in the section of the statute exempting water from the sales tax or the phrase “artificially” before the phrase “carbonated water” in the definition of “soft drink.” Either of these tweaks, or any other that would align with what the legislature intended once it made itself aware of the uncertain status of Perrier water would have spared the litigants the cost and time invested in the litigation, and would have reduced the court’s docket by at least one case. On the other hand, if the statute had been so drafted, I and others might have continued with our ignorance with respect to how Perrier carbonated natural mineral water is produced unless some other reason caused us to research the question.

I close by tipping my hat to the court for its clever work with the English language. No, I’m not talking about the word “water” and the phrase “soft drink.” I’m referring to this sentence from the court’s opinion: “The issues raised before this Court bubble down to one question.” With the court’s decision, barring a reversal on appeal, the ongoing dispute between the taxpayers and the Department of Revenue over this issue has fizzled out.

Tuesday, April 23, 2024

When Preparing False Tax Returns Seems to Lack a Financial Motive 

From time to time I have shared my thought about tax return preparers, particularly those who get into trouble. Sometime my focus is on the clients who end up being shortchanged by tax return preparers whose actions cause the clients to undergo audits that they would not have experienced had their returns been properly filed. I don’t write about every tax return preparer who is convicted, because in recent years that has been happening with increasing frequency. Most of the press releases don’t add new wrinkles but fall into the “here’s another one who did the same thing as the last several who were convicted” category. Those who are interested can take a look at my previous posts focusing on tax return preparers, in posts such as Tax Fraud Is Not Sacred, More Tax Return Preparation Gone Bad, Another Tax Return Preparation Enterprise Gone Bad, Are They Turning Up the Heat on Tax Return Preparers?, Surely There Is More to This Tax Fraud Indictment, Need a Tax Return Preparer? Don’t Use a Current IRS Employee, Is This How Tax Return Preparation Fraud Can Proliferate?, When Tax Return Preparers Go Bad, Their Customers Can Pay the Price, Tax Return Preparer Fails to Evade the IRS, Fraudulent Tax Return Preparation for Clients and the Preparer, Prison for Tax Return Preparer Who Does Almost Everything Wrong, Tax Return Preparation Indictment: From 44 To Three, When Fraudulent Tax Return Filing Is Part of A Bigger Fraudulent Scheme, Preparers Preparing Fraudulent Returns Need Prepare Not Only for Fines and Prison But Also Injunctions, Sins of the Tax Return Preparer Father Passed on to the Tax Return Preparer Son, Tax Return Preparer Fraud Extends Beyond Tax Returns, When A Tax Return Preparer’s Bad Behavior Extends Beyond Fraud, More Thoughts About Avoiding Tax Return Preparers Gone Bad, Another Tax Return Preparer Fraudulent Loan Application Indictment, Yet Another Way Tax Return Preparers Can Harm Their Clients (and Employees), When Unscrupulous Tax Return Preparers Make It Easy for theblo IRS and DOJ to Find Them, Tax Return Preparers Putting Red Flags on Clients’ Returns, When Language Describing the Impact of Tax Fraud Matters, Injunctions Against Fraudulent Tax Return Preparers Help, But Taxpayers Still Need to Be Vigilant, Will the Re-Introduced Legislation Permitting Tax Return Preparer Regulation Be Enacted, and If So, Would It Make a Difference?, Can Fraudulent Tax Return Preparation Become An Addiction?, Tax Return Preparers Who Fail to File Their Own Returns Beg For IRS Attention, Using a Tax Return Preparer? Take Steps to Verify What Is Filed on Your Behalf, When Dishonest Tax Return Preparers Are Married, There Was Nothing Magical About This Tax Return Preparation Business, Don’t Get Burned By a Tax Return Preparer, Tax Fraud School: When It’s Not Enough to Be a Fraudulent Tax Return Preparer, It’s Not Just Tax Return Preparers Assisting in the Preparation of Fraudulent Tax Returns, Overused Fraudulent Tax Return Preparation Ploys, It’s Not Just Law Enforcement That Confronts Misbehaving Tax Return Preparers, When An Injunction Doesn’t Stop a Tax Return Preparer from Filing False Returns, Filing a Fraudulent Tax Return Is Bad, Filing More Than 3,000 Is Outrageously Bad, When It Comes to Fraudulent Tax Returns, It's Not Always the Preparers, A Procedural Twist on Dealing with Fraudulent Tax Return Preparers, Can Tax Return Preparers Learn from the Misdeeds of Other Preparers?, Should Tax Return Preparers Use Their Full Legal Names?, Is There Ever a Free Lunch, Even in the Tax Return Preparation Business?, and Is the Tax Return Preparer or the Client Responsible For Unjustified Deductions?.

Today, the Department of Justice issued a press release describing the sentencing of a woman who had prepared more than 900 false tax returns. According to the press release, these fraudulent returns were prepared from at least January 2017 through June 2023. By claiming unjustified deductions, the preparer obtained for her clients larger refunds than they otherwise would have received. The IRS paid roughly $1.3 million in these fraudulent refunds.

The preparer charged at least $300 for each return that was prepared. That means that over seven tax preparation seasons the preparer collected at least $270,000. That’s only $38,571 annually. It is unclear if this was the total income collected by the preparer over those years from preparing returns, or if other returns also were prepared for which the preparer charged but did not subject to false deductions and credits. It also is unclear if the preparer had other income. I mention this because trying to live on $38,000 annually is difficult.

The preparer was sentence to one year and one day in prison, and to serve one year of supervised release. The preparer also was ordered to pay $1,349,314 in restitution to the IRS. The sentence leaves me with two questions.

First, was the preparer prohibited from resuming the tax return preparation business when released from prison? If not, why not?

Second, did the IRS recover from the preparer’s clients the $1.3 million in fraudulent refunds, and if so, then will the Treasury receive those amounts along with the restitution that the preparer has been ordered to pay? If so, does this constitute a sort of “double dipping” that ought not be permitted? Or should the $1.3 million that the preparer has been ordered to repay as restitution be more properly characterized as a fine or penalty, which would remove the specter of “double dipping” from the situation?

Other questions are not prompted by the sentence. Would the preparer have charged less than $300 for a return if the return did not include false deductions? Did the clients know about the false deductions? If the answers to those questions are “no,” then why not simply prepare false-free returns? I ask, because being required to pay more than $1.3 million and to sit in prison for a year is quite the price to pay in order to collect $270,000 in income, especially if that income could have been collected by preparing false-free returns. Something doesn’t add up.

Friday, April 05, 2024

Are Taxpayers Figuring Out the Games Played by the Starving Oligarchs? 

Those who read MauledAgain are familiar with my opposition to public funding of, and tax breaks for, businesses owned by multimillionaires and billionaires, as explained in previous commentaries, including Tax Revenues and D.C. Baseball, four years ago in Putting Tax Money Where the Tax Mouth Is, Taking Tax Money Without Giving Back: Another Reality, and Public Financing of Private Sports Enterprises: Good for the Private, Bad for the Public, Taking and Giving Back, If You Want a Professional Sports Team, Pay For It Yourselves; Don’t Grab Tax Dollars, Is Tax and Spend Acceptable When It’s “Tax the Poor and Spend on the Wealthy”?, Tax Breaks for Broken Promises: Not A Good Exchange, Tax Breaks for Wealthy People Who Pretend to Be Poor, When One Tax Break Giveaway Isn’t Enough, It’s Not Just Sports Franchise Owners Grasping at Tax Breaks, Grabbing Tax Breaks, Sports Franchises, Casinos, and Now, a Water Park, and Tax Breaks For Starving Team Owners.

Almost all of the time, until recently, owners of professional sports teams have succeeded in obtaining the public funding and tax breaks that they seek. It’s not as though they cannot make their enterprises profitable without public funding and tax breaks. It’s that they can make their enterprises even more profitable by increasing revenue through public funding and decreasing expenses through tax breaks. They often use the threat of moving to another location in an attempt to persuade public officials and, when the question is put to a referendum, voters. That works because there are locations eager to have a professional sports team even though many of those locations lack a population sufficient to support a professional team.

Now comes what might be good news, though in a complicated situation it may turn out to be short-term rather than long-term. According to this report, voters in Jackson County, Missouri, voted by a margin of 58 percent to 42 percent to reject a proposal to extend a sales tax to benefit the Kansas City Chiefs and the Kansas City Royals. What makes the situation complicated? The proposal was a combination of renovations to the Chiefs’ stadium and construction of a brand new stadium for the Royals. The former is much less expensive than the latter. Some predict that the Chiefs will now move forward by supporting a new proposal focused solely on renovations and thus requiring less public financing than demanded by the defeated proposal, freeing their issue from the more confusing situation enveloping the ever-shifting plans advanced by the Royals. If the separate sought the same amount as the Chiefs sought in the defeated proposal, it would seek $400 million from the taxpayers. Others suggest that if the Chiefs don’t get the requested $400 million, they should or could move across the border to Kansas City, Kansas and seek public financing and tax breaks from that state’s taxpayers though surely in amounts far exceeding $400 million.

Rodney Fort, professor emeritus of sport management at the University of Michigan, notes that owners of professional sports teams are increasingly failing to obtain the public financing and tax breaks that they have been seeking. He cites “the principle of taxpayers supporting venues where billionaire owners rake in profits seemingly one of the damning blows.” That characterization of the issue is in tune with what I have been writing for years.

David Carter, a sports consultant and business professor at the University of Southern California, asks, “Why not go after public subsidies?” He answers his own question: “Teams in (smaller markets) like the Chiefs, they’re delivering huge value for the residents in the community at large…You can argue that the taxpayers should pay for the benefit in their own backyard. That brand is so big and so important that there is some public value. And the owners try to gain that value through tax measures.” That answer resembles the defense offered by the governor of New York after agreeing to funnel $850 million of public money into the coffers of the Buffalo Bills, a few days before proposing a state budget that cut $800 million from the funding of the Office of Children and Family Services, as I explained in Tax Breaks For Starving Team Owners. New York’s governor praised and justified what was done with what I called “the typical ’doing good for the public’ and ‘creating lots of jobs’ claims. I reply to Carter the way I reacted to the governor of New York: “As I explained in Grabbing Tax Breaks, Sports Franchises, Casinos, and Now, a Water Park. ‘but this reasoning would support tax breaks for almost everyone, thus destroying government and civilization.’”

In an era when so many people vote against their own interests, it is refreshing to learn that some voters understood that billionaires don’t need tax breaks and public funding. It seems likely that the voters in Jackson County, Missouri, will have another opportunity to think critically about the impact of diverting taxpayer dollars to oligarchs who can survive, and do quite well, without those dollars. Time will tell.

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