Who Is It That Is Making You Do This?

Last week, CNN reprinted a report from Motley Fool with the attention grabbing headline, “4 things the IRS doesn't want you to know." The introduction to the story explained:

It's the IRS's job to collect taxes for the federal government, so it's not surprising that most people are less than fond of the agency.
The IRS, in turn, does its best to keep certain facts under wraps -- either because it would make it easier for the agency if people don't know these details, or because taxpayers can use this information to get some of their money back .

The commentary then listed and described four supposed secrets, including for example, “You probably won’t be audited.” That’s not news to anyone who’s been paying attention.

It was the third item that caught my eye. Under the tag line “Qualified charitable distributions in lieu of RMDs,” the report explained, “Once you hit age 70½, the IRS requires you to withdraw a certain minimum amount from your tax-deferred retirement accounts every year. It doesn't want you to be able to hang on to that money forever; after a certain point, it wants to be able to start collecting taxes on the money in these accounts.” That’s not correct, it’s inaccurate, it’s imprecise, it’s misleading, and it contributes to the antipathy Americans hold for the IRS. Do you know who imposed the “begin distributions by age 70.5” rule? Here’s a hint. The answer is the same as the answer to the question, Do you know who “doesn’t want you to be able to hang on to that money forever?” Here’s another hint. The answer to those two questions is the same as the answer to the question, Do you know who “wants to be able to start collecting taxes on the money in these accounts?” The answer is not a three-letter acronym or a three-word phrase. It’s one word. Congress.

Yes, it is Congress that enacts the tax laws. It is Congress that determines what is and is not deductible. It is Congress that establishes tax rates. It is Congress that requires taxpayers to file tax returns. It is Congress that establishes credits. And it is Congress that does such a wonderful job of fooling Americans into thinking that the Internal Revenue Service is responsible for these things.

The inability to identify those responsible for a law or regulation that a person does not like guarantees that the person’s attempt to change things will be misdirected. Asking the IRS to let the beginning of retirement plan distributions wait until age 75 is like asking a police officer to eliminate the stop sign at the end of the neighborhood street. The police officer didn’t put the sign there, nor enact the ordinance establishing a stop sign at the intersection. Misdirected requests, misdirected complaints, and misdirected anger are useless. The solution is education, learning who is responsible for what, who it is that is making someone do something. I wonder how many millions of readers went away from that article thinking, or reinforcing already formed thoughts, that the IRS is responsible for the “begin distributions by age 70.5” rule. I wonder how many member of Congress are chuckling, and congratulating each other on once again duping America.

If Users Don’t Pay, Who Should?

As readers of this blog know, I am a strong supporter of mileage-based road fees. I have written about the mileage-based road fee many times, beginning with Tax Meets Technology on the Road, and continuing through 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?, 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 And Now It’s California Facing the Road Funding Tax Issues. I support the mileage-based road fee because I think that, where possible, users of services should pay for those services, and those who, for good reason, are unable to pay for essential services should receive assistance in receiving those services.

A reader directed my attention to a study that was released about six months ago. In a press release describing the study, Indiana University explained that, according to a survey of 2,000 Americans, mileage user fees were opposed by a four-to-one ratio. Support would increase if GPS tracking was not part of the measurement system. At least 23 states are studying the mileage-based road fee, but it remains to be seen how many states enact such a system.

The problem, though, isn’t so much a switch from fuel taxes to a mileage-based road fee. The problem is deeper and symptomatic of one of the deep problems afflicting this nation. According to the survey, ”two-thirds of Americans do not believe roads should be financed under the user-pays principle, whether that’s through a fuel tax or mileage fee.” Are they kidding? Then who should pay? Leprechauns? Unicorns? Fairy godmothers? Mommy and daddy? Santa Claus?

The sense of entitlement to getting something for nothing is a serious problem. The deeper problem is that many of those who complain the most loudly and the most frequently about “takers” and “freeloaders” are themselves immersed in their own sort of taking and entitlement. To me, it’s simple. You use the road, you pay. You pay an amount that reflects the wear and tear that you impose on the transportation infrastructure. Those who use the road and don’t pay a fair share are takers, plain and simple.

So Would YOU Do Any of These Things to Avoid Paying Taxes?

Last month, in So What Would YOU Do to Avoid Taxes?, I shared and commented on a new Survey from Wallet Hub, which revealed what people would be willing to do to avoid paying taxes in the future. The choice with the most votes, though coming in only at 20 percent, was getting an “IRS” tattoo. You would not find me selecting that option, nor the option of not talking for six months.

These surveys are fun, and so it’s not surprising that a GOBankingRates survey has polled people with the same question. The choices, though, were different. Almost one-third of the respondents would be willing to perform five karaoke songs for their company, an action that the survey’s headline writers tagged as an “embarrassing stunt.” First, considering that at least one-third of people sing well enough to avoid being embarrassed when singing in public, it very well could be that those selecting this option know that they can do at least a creditable job of crooning for their co-workers. Second, even if someone isn’t all that good of a singer, but especially if they are, singing is surely a very inexpensive price to pay for being relieved of tax liability.

The second most popular option was giving up WiFi for a year. Senior citizens were the most willing to give up WiFi, perhaps because for some, it’s easy to give up something one doesn’t use. If giving up WiFi does not include giving up one’s cable connection to the internet, this again becomes a rather low price to pay for escaping tax liability.

Only 5 percent would surrender half of their retirement savings. Certainly, those with very little tucked away would be giving up not much to avoid taxes. According to the survey, people aged 35-44 years were more than three times more likely to select this option that those aged 25-34. That is a bit surprising, because it seems that the older group would have more retirement savings and thus would be paying a relatively higher price to escape taxes.

It was surprising to learn that more members of Generation X would be willing to have their internet browsing history made public, as a price to pay for avoiding taxes, than would senior citizens. That certainly cuts against stereotypes.

Though these survey questions, and the responses, are interesting and even amusing, they are theoretical. The choices are not an equivalent trade-off for government revenue. I wonder what would happen if people were given a chance to reduce or eliminate their tax liabilities in exchange for doing work on public projects, such as filling potholes, cleaning parks, and painting government buildings. Perhaps the next survey will ask questions of that sort.

The Tax Value of a Name

Names matter. We encounter names everywhere. Though occasionally a name strikes us as unusual, or noteworthy, usually we take names for granted. Everyone has a name.

But sometimes, even though names matter, a person doesn’t have a name. I encountered this phenomenon in two different contexts during the same day last week. In one instance, someone posted an inquiry to a genealogy web site, asking why someone’s name on a birth certificate would simply be “baby.” Others replied that sometimes parents had not yet agreed on a name, and that the birth certificate would be updated at a later time. In the other instance, I noticed a story about the Georgia Department of Health refusing to issue a birth certificate for a newborn because the Department did not approve of the name chosen for the child. Without getting into the question of whether the Department’s action is justified, a point made by the story’s author caught my eye. The author correctly noted that by not having a name, and thus no birth certificate, the child cannot obtain a social security number. If the child does not have a social security number, the child’s parents will face huge, and perhaps insurmountable hurdles, getting the child insured, getting the child enrolled in school, and getting the child a passport.

What the story’s author did not mention was something that naturally popped into my head, which still has tax things wandering around in it. If the child does not have a social security number, the parents cannot claim the child as a dependent on their federal income tax return, nor on their Georgia income tax return. Eventually, if the dispute with the Department of Health is resolved quickly enough, the parents will need to file amended returns for those taxable years for which their unnamed child did not have a social security number.

Names matter. Even for tax purposes.

And Now It’s California Facing the Road Funding Tax Issues

It’s the time of the year when states examine highways and bridges, evaluate the damage caused by winter weather, usage, and deterioration caused by aging, and realize that, yes, repairs are necessary. Though the extent of repairs can vary from state to state, in part because of differences in the harshness of winter weather, determining that none of a state’s highways and bridges need repairs just doesn’t happen.

California, according to several reports, including this one, needs $52 billion to fix its roads. The governor and some legislators are rallying behind a proposal to raise gasoline taxes for the first time in more than twenty years, increase car registration fees, and impose a fee on emission-free vehicles. The plan is meeting with resistance, particularly because in the past, transportation revenues have been diverted to other uses. That happens in many states, and it’s not just transportation revenues that are diverted from their intended purpose. The advocates of this most recent proposal in California have also proposed an amendment to the state Constitution to prevent this sort of fund diversion.

If anyone in California has suggested the mileage-based road fee as a source of funding, it hasn’t become public. Eventually, as transportation technology evolves, that fee is the most likely replacement for taxes that will cease to work because, for example, the decline in gasoline sales will eviscerate the gasoline tax base. I have written about the mileage-based road fee many times, beginning with Tax Meets Technology on the Road, and continuing through 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?, 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, and What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?

The California proposal represents a shift in the direction of highway funding for several reasons. The fee on emission-free vehicles, which are not subject to the gasoline tax because they don’t use gasoline, acknowledges that emission-free vehicles contribute to the wear-and-tear on public highways. The scaling of the registration fees based on a vehicle’s value is a step in the direction of scaling the fee based on weight. Generally, heavier vehicles have a higher value, though the correlation isn’t very strong.

California’s governor made a point that I’ve been making for years. He explained that, under the plan, most drivers would pay less than an addition $10 each month, and that they would benefit from reduced vehicle repair expenses. It continues to puzzle me that so many citizens object to small tax or fee increases that will reduce or eliminate huge repair bills caused by highways in disrepair. In some respects, paying for highway repairs is good insurance against paying even higher amounts for vehicle repairs, but in recent months it has become painfully obvious that many Americans do not understand what insurance is, how it works, and why it makes sense.

One drawback to the proposal is that it does not appear to raise enough funding. California needs $59 billion to fix existing problems on state highways, and its local governments collectively need $78 billion to fix local roads. It doesn’t seem that $52 billion will make enough of a dent in that backlog, especially while the list of required repairs continues to grow each month.

It is unclear whether the proposal will pass. Even if it does, it will take years before the risk of vehicle damage, accidents, injuries, and deaths attributable to damaged highways begins to recede. For some, it will be too late.

Kansas As a Role Model for Tax Policy?

There is no question that supply-side-based tax policy, and its related “trickle down” theory, do not work. They cause far more problems than the difficulties they allegedly were designed to fix.

One of the best examples of how trickle-down supply-side tax policy is a total failure is the Kansas experience. I have written about the terrible outcome in that state on several occasions. In A Tax Policy Turn-Around?, I explained how the Kansas income tax cuts for the wealthy backfired, causing the rich to get richer, the economy to stagnate, public services to falter, and the majority of Kansans to end up worse than they had been. In A New Play in the Make-the-Rich-Richer Game Plan, I described how Kansas politicians have been struggling to find a way to undo the damage caused by those ill-advised tax cuts for the wealthy. In When a Tax Theory Fails: Own Up or Make Excuses?, I pointed out that the Kansas experienced removed all doubt that the theory is shameful. In Do Tax Cuts for the Wealthy Create Jobs?, I described recent data showing that the rate of job creation in Kansas was one-fifth the rate in Missouri, a state that did not subscribe to the outlandish tax cuts for the wealthy that Kansas legislators had embraced. In Kansas Trickle-Down Failures Continue to Flood the State and The Kansas Trickle-Down Tax Theory Failure Has Consequences, I described how large decreases in tax revenue, the opposite of what is promised by the supply-side theorists, triggered cuts in public education, and in turn stoked the fires of voter frustration. The voter reaction, however, did not push out of office enough supply-side supporters. In Who Pays the Price for Trickle-Down Tax Policy Failures?, I described how the governor of Kansas, who claimed that tax cuts for the wealthy would generate increased revenues, proposed to deal with the resulting revenue shortfall by cutting spending for essential services.

Yet, despite the unquestionable failure of his state’s foray into the world of trickle-down supply-side tax policy, the governor of Kansas actually recommended that what he did in Kansas be used as the template for federal tax reform, as reported in this article. Does it make sense to take reading lessons from illiterate people?

Now comes a report that the Kansas policy of cutting taxes for the wealthy with the unwarranted promise of resulting revenue increases and economic prosperity is on the verge of total collapse. Brownback, a Republican, has watched a Republican-controlled Kansas legislature come close to dumping his economic and tax policies. Many expect that the next state budget will put those policies to rest. The state, facing a huge budget deficit, has exhausted short-term tweaks and borrowing capacity, and must choose between undoing the tax cuts or pretty much terminating education funding. The latter approach would face court challenges likely to succeed. Not unlike the situation in the nation’s capital, centrist Republicans find themselves in disagreement with the extreme conservative Republicans who support Brownback. One Republican state senator has described Brownback’s tax and economic legacy as “going down in flames.” Yet Brownback thinks his failure is a role model for the nation.

Brownback, not surprisingly, places the blame elsewhere. He attributes the state’s economic mess to oil price declines and reductions in crop prices. Though claiming that his policy of cutting taxes for the wealthy created new businesses and jobs, job growth in Kansas last year was worse than all but five states. The practice of assigning blame to others rather than admitting a mistake seems to be a popular approach among certain segments of the political world. Interestingly, the Republican-controlled Kansas House voted to restore teacher tenure and expand Medicaid, and if that bill passes it would undo two other Brownback policies the results of which have not fared well with the people who voted Brownback and his legislative allies into office some years ago.

Kansas indeed is a role model for national tax policy, but it’s not the lesson Brownback wants to teach. What the Congress needs to understand from the Kansas fiasco is that supply-side trickle-down tax and economic policies do not work. If Congress wants to learn what works, it can examine states where demand-side policies have been enacted and have worked. Otherwise, as a Republican legislator warned, economic failure makes voters angry, and when voters get angry, they “go to the polls and get rid of you.” That, too, is a lesson.

Tax Deduction for Donating Clothing

A recent United States Tax Court case, Gaines v. Comr., T.C. Summ. Op. 2017-15, provides some insight into claiming a charitable contribution deduction for donating clothing to a charity. The taxpayers were a married couple, but the issues involved the transactions of the wife. She worked as a independent contractor in the foster care industry, and also worked in the women’s clothing department of Saks Fifth Avenue and Neiman Marcus. The taxpayers’ income tax return included a Schedule A, Itemized Deductions, and a Form 8283, Noncash Charitable Contributions. On the Schedule A, the taxpayers claimed an $18,000 charitable contribution deduction for gifts other than cash on the Schedule A. The Form 8283 indicated that the deduction was attributable to clothing donations made to “Goodwill”. At trial the wife testified that the
deduction related to donations of clothing that were made to a church that might or might not be still in existence. The IRS disallowed the deduction.

The Tax Court agreed with the IRS. The court pointed out that the taxpayers had not complied with any of the requirements applicable to deductions of $5,000 or more for property other than cash. The taxpayers did not explain the discrepancy between the donee identified on Form 8283, “Goodwill,” and the wife’s testimony that the donee was a church. The taxpayers did not provided details as to the number of specific items donated or the value of any specific item. They did not present any written substantiation for the deduction, nor could the wife recall how the value of the items was calculated.

What especially struck me, though the court did not elaborate on the point, was the amount of the deduction. Used clothing, unless it is something once owned by a celebrity, is like a used car. Its value diminishes from the moment it is purchased, and continues to do so as it is worn. Though the court did not disclose the taxpayers’ total income, the facts permit a guess that it wasn’t particularly huge. It seems plausible that the cost of $18,000 of used clothing would be in the range of $50,000 to $100,000. That’s a lot of clothing. I wonder if the clothing was purchased by the wife as an employee of Saks Fifth Avenue and Neiman Marcus at a deeply discounted price, and that she computed the donation by using the retail price of the clothing. The retail price surely exceeded the employee price, and surely exceed the value of the clothing after it was taken home and used.

If the amount of clothing donated to a charity is so massive that it has a five-digit value, or the clothing includes items remarkable for having been owned by a celebrity or a similar reason and thus has a five-digit value or more, it certainly makes sense to spring for an appraisal. The cost of the appraisal is but a fraction of the tax savings generated by the charitable contribution deduction.

When Tax Revenues Continue to Be Less Than Required

The Philadelphia soda tax remains controversial, and hasn’t started off very well. The controversy has accompanied it since its proposal, as I’ve described in posts such as What Sort of Tax?, The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, What Gets Taxed If the Goal Is Health Improvement?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, Updating Two Tax Cases, When Tax Revenues Are Better Than Expected But Less Than Required, and The Imperfections of the Philadelphia Soda Tax.

The tax, in place now for two months after years of disagreement, has fallen short of what it needs to generate in revenue. In When Tax Revenues Are Better Than Expected But Less Than Required, I discussed the significance of the city’s report on the tax for January. The city has committed to spending $91 million annually from soda tax revenues. That requires an average of $7.58 million per month in tax collections. In January, the city collected only $5.7 million. A bit of arithmetic reveals that to reach $91 million for the year, the average monthly collection for the remaining 11 months needs to be $7.75 million per month. A few days ago, according to this report, the city announced that it collected $6.4 million. Though more than what was collected in January, it is still below the required average monthly collection. A bit more of arithmetic reveals that to reach $91 million for the year, the average monthly collection for the remaining 10 months needs to be $7.89 million per month. Each month that the revenues fall short, the target for the remaining months of the year increases.

According to the report, the city needs to increase its monthly totals to $7.7 million beginning in April. I don’t see how that would bring the total to $91 million unless somehow the city brought in $9.6 million in March or succeeds in bringing in $7 million of unpaid taxes. It’s unclear whether the unpaid taxes are amounts collected by distributors and not remitted, or amounts that the city thinks should have been collected and that might not actually be due. The city also suggests that holidays and weather affect collections, so perhaps the city is banking on a beverage buying spree come summertime. Unfortunately for the city, stories and anecdotes suggest that the buying spree might take place outside of the city limits.

My conclusion in When Tax Revenues Are Better Than Expected But Less Than Required is no less a concern:

All of this, of course, is tentative, because the challenge to the tax is on appeal in Commonwealth Court. What happens if it is struck down? Spending money that the city might be required to refund is unwise, as I discussed in Gambling With Tax Revenue. And even if the city prevails, it still appears to be a huge gamble, considering the likelihood of revenues falling short of $91 million.

It is going to be interesting tracking these monthly reports as 2017 progresses.

What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?

Hawaii has a problem. According to this report, its State Highway Fund is $100 million short of what is needed to keep its highways in functional condition. Of course, Hawaii is not alone when it comes to highway funding. Almost every state is facing the same problem, with the amount of the shortfall varying from state to state.

So the Hawaii legislature is considering ideas to fix the problem. Its Senate Transportation Committee has opted for an increase in the fuel tax. Another proposal is to replace the current weight tax with a tax based on the value of the vehicle. The weight tax rests on the principle that heavier vehicles cause more damage to highways and bridges than do lighter vehicles, and thus the heavier vehicles should pay a higher tax. Proponents of a shift to a value-based tax simply explain that it would generate more revenue. Clearly, some higher-value vehicles do more damage to roads, but there isn’t that strong of a correlation between a vehicle’s value and its weight, or between its value and the wear and tear it puts on roads.

There is another option. Readers of this blog know what it is. The legislators in Hawaii, working with the state’s Department of Transportation, should consider the mileage-based road fee. I have written about this approach many times, beginning with Tax Meets Technology on the Road, and continuing through 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?, Mileage-Based Road Fee Inching Ahead, Rebutting Arguments Against Mileage-Based Road Fees, On the Mileage-Based Road Fee Highway: Young at (Tax) Heart?, and To Test The Mileage-Based Road Fee, There Needs to Be a Test. Surely a state caught between higher fuel taxes and arguments about vehicle weight and value would find merit in an idea that takes the best of the weight-based tax and blends it with another measure of wear and tear, vehicle mileage. But I’m not holding my breath.

Tax Return Preparation as a Side Job

Though from time to time I find material for this blog when I watch television court shows, there are far more shows and episodes than I’ve had an opportunity to view. A reader sent me a link to an episode of Judge Faith, a show that I have not seen, which involved a dispute between two former friends. One friend had prepared the other friend’s tax return, but the second friend refused to pay the bill.

The judge concluded that the second friend owed the first one the return preparation fee. There was a contract between the two friends, which required the second friend to pay by a certain date or when her tax refund was received. The refund check did not show up, and it turned out that it had been stolen and cashed in another city. The IRS opened an investigation that was still underway at the time of the case in question. The second friend argued that she did not owe the tax return preparation fee because she had not received the refund. The judge explained that under the contract, receipt of the refund was one of two payment requirements. Because the specified date had passed, the fee was due.

But the best part of the case was the revelation at the outset by the first friend. The plaintiff opened her case by saying, “I’m a tax preparer and I’m an adult entertainer. So I dance full time and I do taxes seasonally.” The judge replied, “You have no problem counting those dollar bills is what you’re telling me.” The plaintiff rejoined, “Oh, I count money very well.”

Many people are seasonal tax return preparers. Some are retired. Most have other jobs. Many of those with other jobs are accountants, and some are lawyers. I wonder how many seasonal tax return preparers who have other jobs, when asked to describe their other job, would reply, “adult entertainer.” It surely is an interesting combination. I suggest not asking your tax return preparer what he or she does in the off-season.

Commas and (Tax) Statutes

One of the key ingredients of tax law practice is the ability to parse statutes. As I tell my students, sometimes the answer is in the statute, and if it isn’t, the statute should guide the analytical path to an answer, if there is one.

One aspect of interpreting a statute, tax or otherwise, is punctuation. One type of punctuation that matters is the comma. For years, writers, grammarians, lawyers, and others have debated the use of the so-called “Oxford comma.” The Oxford comma is used to separate the next-to-list item in a list. For example, one could write, “I gave the instructions to Bob, Mary, Rachel and Tony.” Proponents of the Oxford comma argue that the sentence should be, “I gave instructions to Bob, Mary, Rachel, and Tony.” In this instance, with or without the Oxford comma, a reader can easily determine that the instructions were given to four people. But sometimes the absence of the Oxford comma can make a difference in meaning.

Recently, in O’Connor et al v. Oakhurst Dairy et al, the United States Court of Appeals decided that the absence of an Oxford comma in a statute was the critical element of its decision. The case involved a dispute between a diary company and its drivers over the drivers’ rights to overtime pay. Under Maine law, which governed the employment relationship, overtime pay generally is required if the employee works more than 40 hours in a week. Among the exceptions to this requirement is Exemption F, which states that overtime pay protection does not apply to “The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment or distribution of: (1) Agricultural produce; (2) Meat and fish products; and (3) Perishable foods.

The drivers argued that these words refer to the single activity of “packing,” whether the “packing” is for “shipment” or for “distribution.” The drivers explained that though they handle perishable foods, they do not engage in “packing” them. Thus, the drivers contended that they were not within the Exemption F exception.

The dairy argued that the statute refers to two distinct exempt activities, one being “packing for shipment” and the other being “distribution.” Under this interpretation the drivers are within the Exemption F exception because they unquestionably distribute perishable foods.

When the case was filed in the district court, it was referred to a Magistrate Judge, who decided that the dairy’s argument was the better one, and recommended granting the dairy’s motion for partial summary judgment. The district court agreed, and granted summary judgment for the dairy on the ground that “distribution” was a stand-alone exempt activity. The drivers appealed.

The Court of Appeals began by setting aside an unpublished opinion of the Maine Superior Court cited by the dairy. The Maine Superior Court had ruled that Exemption F provides an exemption “for the distribution of the three categories of foods.” The federal Court of Appeals pointed out that it is not bound by a Maine Superior Court decision because a Maine Superior Court decision does not bind the Maine Law Court. The Court of Appeals also noted that the cited case had been appealed to the Maine Law Court, which did not follow the Superior Court’s approach but decided the case on other grounds.

The Court of Appeals concluded that Exemption F was ambiguous, even after taking account of interpretive aids, the law’s purpose, and the law’s legislative history. The dairy argued that the words “distribution” and “shipment” are synonyms, that accordingly “distribution” is not a type of “packing,” and that “shipment” describes the exempt activity of “packing” whereas “distribution” is a separate exempt activity. The dairy also relied on the linguistic convention of using a conjunction to mark the last item on a list, and thus argued the lack of a conjunction before “packing” made “distribution” a separate item. The dairy conceded that if a comma had been placed after the word “shipment,” its interpretation would be unquestionable, but tried to block the conclusion that the lack of the comma required the opposite outcome by pointing out a rule in the Maine Legislative Drafting Manual that stated, “when drafting Maine law or rules, don’t use a comma between the penultimate and the last item in a series.”

The drivers argued that “shipment” and “distribution” are separate activities. They explained that “shipment” refers to outsourcing delivery to third-party carriers, and “distribution” refers to a seller’s in-house transportation of products to recipients, relying on dictionary definitions. The Court of Appeals noted that if the dairy was correct in treating “shipment” and “distribution” as synonyms, it would be odd for the legislature to use both terms. Additionally, the court noted that in other statutes, the Maine legislature treated “shipment” and “distribution” as different activities. Thus, using both terms was consistent with an exemption for “packing for shipment” and “packing for distribution.” The drivers also argued that because each exempt activity was described by using a gerund – a word ending in “ing” – the use of “shipment” and “distribution” should be treated as having the same grammatical role under the parallel usage convention. Thus, the drivers concluded, those two words are objects of the preposition “for” that follows the gerund “packing.” The drivers responded to the dairy’s reliance on the Maine drafting manual by highlighting a caution in the manual that drafters should “be careful if an item in the series is modified.”

After explaining why the arguments based on grammar did not resolve the matter, the Court of Appeals proceeded to explain why the arguments based on legislative history did not provide an answer. The court turned to the principle of interpreting a statute in favor of those whom the statute is intended to protect. In this instance, it was intended to protect employees. Accordingly, the Court of Appeals held that the drivers were not within the overtime requirement exception, and reversed the district court.

The lesson is simple. Had a comma been placed after the word “shipment,” the dairy would have prevailed. Though the dispute between advocates of the Oxford comma and those who do not subscribe to it will continue, it is clear that using the comma can provide clarification that its absence cannot offer. Those who draft statutes, regulations, rulings, contracts, or any other document need to pay very careful attention to each word and each punctuation mark, including the comma. The cost of a missing Oxford comma can be steep.

So What Would YOU Do to Avoid Taxes?

A few days ago, a new survey from WalletHub was released, revealing some interesting responses from Americans with respect to taxes and a few other topics. Because I mention only a few of the questions, I recommend visiting WalletHub’s web page and browsing through the survey results.

The folks at WalletHub asked people what they would be willing to do to achieve a future in which they did not pay taxes. The most prevalent response was “other,” which included everything except the eight specific choices presented to those surveyed, though respondents were permitted to select more than one answer. Of the eight specific choices, the winner was surprising. Of the respondents, 20 percent would get an “IRS” tattoo as a price to pay for avoiding future taxes. Not me. Another choice that I just simply could not accept was selected by 10 percent of the respondents. They would agree to stop talking for six months. Wow. That’s just not me. Check out the survey at the link above to see some of the other choices. Naming your first-born child “Taxes?” Really?

Another question brought unsurprising responses. When asked whom they liked more than the IRS, respondents paraded out a litany of individuals, including Barack Obama, the Pope, several members of the Trump family, Vladimir Putin, and OJ Simpson. Again, take a look at the full list. Yet 88 percent of respondents thought the IRS was necessary, though most of those respondents thought significant improvement was needed.

Several other questions addressed taxes. Almost two-thirds of respondents did not think Donald Trump’s proposed tax reforms would save them money. The list of things people would rather be doing than preparing tax returns is long, and includes things like changing diapers, spending the night in jail, and breaking an arm. Wow.

Not surprisingly, people fear identity theft more than they fear getting audited. In fact, they fear getting audited less than they fear making a mistake on their return or not having sufficient money to pay taxes that are due.

There are some other questions dealing with taxes, and a handful addressing related political issues. My favorite non-tax question was “Whom We’d Most Like to Punch.” Curious? Take a look at the survey.

Most of us believe taxes are not fun. Perhaps. But surely asking questions about taxes and reading the responses definitely is fun.

If At First You Don’t Succeed With a Tax Rule, . . .

A recent case, Jackson v. Comr., T.C. Summ. Op. 2017-11, provides an example of when persistence is not worth the effort. Deciding when to be persistent and when to relent isn’t always easy, but sometimes it is.

The taxpayer lived with his girlfriend in a home that she had purchased in 2005. She financed the purchase with a mortgage on which she alone was liable. Because of credit problems, the taxpayer was not included on the deed or joined in the mortgage. His girlfriend paid all of the interest on the mortgage, all of the property taxes, and all of the homeowner’s insurance. The mortgage company issued Forms 1098 to the taxpayer’s girlfriend but did not issue any to the taxpayer. In 2015, the taxpayer’s girlfriend sent a letter to IRS counsel stating that the taxpayer “has paid the amount of $1,000 per month on the Mortgage payment * * * for the past 10 years.”

The taxpayer claimed an interest deduction for taxable years 2011 and 2012. The IRS issued a notice of deficiency disallowing the deduction. The taxpayer filed a petition with the Tax Court, which held, on July 5, 2016, in Jackson v. Comr., T.C. Summ. Op. 2016-33, that the taxpayer was not entitled to the deduction. The court concluded that the taxpayer had no legal obligation to make mortgage payments, and held no legal, beneficial, or equitable ownership in the residence.

The taxpayer also claimed an interest deduction for taxable year 2013. Again, the IRS issued a notice of deficiency disallowing the deduction. Again, the taxpayer filed a petition with the Tax Court. The taxpayer appeared at the calendar call on October 3, 2016, but did not appear at the trial two days later. He did not testify, nor did he call any witnesses. When the Tax Court received a stipulation of facts filed by both parties on November 16, 2016, it ordered the taxpayer to confirm that he wanted to submit the case fully stipulated. The Tax Court did not receive a response. On January 5, 2017, the court closed the record and ordered the case submitted as a fully stipulated case.

Again, the taxpayer did not provide any objective evidence that he paid the interest or that he had a legal, beneficial, or equitable interest in the property. The court gave no weight to the girlfriend’s letter because it did not state that he had any interest in the property. The court also noted that there were no bank records or Forms 1098 supporting the taxpayer’s position. During the calendar call, the taxpayer had requested the court to follow the decision in Bronstein v. Commissioner, 138 T.C. 382 (2012). But that case involved the amount of the debt on which an interest deduction could be claimed, and did not include any disagreement that the taxpayer had paid the interest. Once again, the Tax Court upheld the deficiency.

Though the taxpayer filed his 2013 federal income tax return three years before learning that the claimed interest deductions for 2011 and 2012 was not allowable, by the time the case was ready for disposition in October of 2016, the taxpayer already knew that the same deduction, under the same circumstances, had been disallowed. The prudent course of action would have been to concede the case before or at the October calendar call. I suppose the taxpayer figured that he had nothing to lose by raising a case that was not on point, but then he failed to show up for trial and failed to respond the court’s request for confirmation of the stipulation.

When I was a child and trying to accomplish something unsuccessfully, I was told, “If at first you don’t succeed, try, try, try again.” I have a dim memory of this being told to me at least several times, perhaps when I was trying to learn to ride a bicycle. What I remember more clearly is my early attempt at playing lawyer. I had asked for something, probably cookies, and was told no. I asked again, and again, until I was told to stop, and cautioned that it was pointless to keep pestering my mother. Of course I replied, “But I was told if at first you don’t succeed. . . “ I don’t think I finished the sentence before I was commanded to leave the kitchen. Never again did I pull that stunt. Sometimes persistence pays dividends. Sometimes it does not. Somewhere, somehow, we try to learn to distinguish the two situations.

Here’s Your Tax Refund, Oops, Wait, No, It’s Not There

The word glitch has become an everyday word in twenty-first century America. Essentially, it means a defect or malfunction in a machine or a plan. Its use masks the underlying problem, which is the defect or malfunction almost always can be traced back to a person or persons.

Recently, according to this story, a glitch of unidentified origin played havoc with the bank accounts of Massachusetts taxpayers. Thousands of them filed tax returns on which they specified that their refunds be deposited into their bank accounts. The deposits occurred, and far more than a few of the taxpayers wrote checks and made withdrawals after seeing their bank balances increase by the amount of the refund. But, unbeknownst to them, shortly after generating the refund deposits, the software used by the Department of Revenue reversed the deposits and pulled the refund amounts back out of the taxpayers’ accounts. For some people, this meant that their checks and withdrawals triggered overdraft fees.

The governor explained the cause as “a tech glitch.” The question that was not answered is, “What caused the glitch?” Was it poorly written software? Did someone run the software twice, after clicking on the wrong selection before the second run? Was there a hack? Was it a hacking test designed to determine if the malware could make the refunds appear to be going to one bank account even though the funds were placed in the hackers’ accounts and masked by a reversal that would not be caught until several days later?

Does this mean that taxpayers who have refunds deposited into their bank accounts should wait a week before spending the money? Should they wait two weeks? Three weeks? Longer? Your guess is as good as mine.

Horrors! Say It Isn’t So!

Yet again, while in the shower and listening to the local Philadelphia news station, I heard another story that caught my attention. Though I could not find the story on the station’s web site, I did find the story elsewhere. The part that made me pause for a moment is encapsulated in this sentence: “The maker of Lindor chocolate balls continued a clean-up of Russell Stover’s portfolio of more than 2,000 products last year, while the American chocolate market declined for the first time in years.” Or, as more succinctly reported by Bloomberg Gadfly, “But the American chocolate market declined in 2016, Lindt & Sprungli AG said Tuesday.”

How can that be? Are people confused? Is the pressure to reduce soda consumption somehow being interpreted as a message to give up on chocolate? Probably not. It’s more likely that the increases in chocolate prices during 2016 had an impact, though prices began to fall later in the year. Though some commentators predict even higher prices, including a dire prediction of prices doubling by 2020, there are those who disagree. According to this report, the price of chocolate is “set to fall as the world cocoa market shifts from a deficit to the largest surplus in six years.”

But because chocolate candy also includes other ingredients, such as sugar, milk, and dairy fat, increases in the prices of those items can cause the price of chocolate candy to increase even though the cost of chocolate itself is dropping. Though prices of those items soared in 2016, it appears as though they are stabilizing.

So what’s a chocolate connoisseur, or even someone using chocolate for medicinal purposes, to do? Stock up? Invest in a chocolate hedge fund? The answer depends on what a person thinks will happen, their aversion to risk, and their willingness to reduce chocolate consumption.

The good news, I suppose, is that the decrease in chocolate consumption during 2016 was not the result of decreased desire for chocolate but simple economics. Fear not. I am not going to advocate for a chocolate consumption tax credit. If chocolate really matters, cut the consumption of something else, like brussel sprouts.