Litigation Risk Can Be Reduced When Legislation is Carefully Drafted

Section 9901(c) of the American Rescue Plan Act provides roughly $195 billion to be allocated among the 50 states, the District of Columbia, and specified territories to be used for one or more of four purposes: (1) providing assistance to “households, small businesses, and nonprofits” and “impacted industries such as tourism, travel, and hospitality”; (2) responding “to workers performing essential work during the COVID-19 public health emergency by providing premium pay to eligible workers”; (3) making up for pandemic-related reductions in state government revenue; and (4) paying for “necessary investments in water, sewer, or broadband infrastructure.” Id. § 802(c)(1)(A-D). The legislation also prohibited the states and territories from putting the money into “any pension fund,” or using the funds to “directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.” A group of states challenged the second restriction, and a few days ago a federal district judge, in West Virginia v. U.S. Dept. of Treasury held that the restriction is inconsistent with the limitations placed on the spending clause by Supreme Court precedent.

Id. § 802(c)(2)(A). The phrase “directly or indirectly offset” is not defined in the ARPA. The ARPA requires any State that receives funds to “provid[e] a detailed accounting” to the Secretary of “all modifications to the State's . . . tax revenue sources” for the covered period, as well as “such other information as the Secretary may require for the administration of” the Tax Mandate. Id. § 802(d)(2). The Secretary can recoup funds that she interprets were used in violation of the Tax Mandate. Id. § 802(e)(1). The Tax Mandate's “covered period” extends from March 3, 2021, until all funds “have been expended or returned to, or recovered by, the Secretary.” Id. § 802(g)(1). The ARPA also authorizes the Secretary “to issue such regulations as may be necessary or appropriate to carry out” the applicable statutory provisions. Id. § 802(f). The principal problem is that the legislation does not describe how it can be determined if the funds are used to directly or indirectly reduce state taxes.

To me, it seems as though the problem would not have arisen had the language of section 9901(c) been drafted more carefully. To ensure that the funds were used for the intended purposes, the legislation could have provided that the state demonstrate that the amount it spent for each of the four purposes during the covered period equaled or exceeded the average annual amount it had spent on each purpose during the, say, five-year period preceding the date of enactment of the legislation multiplied by the number of years in the covered period. In other words, require the states to select one or more of the four purposes and then increase the amount spent on each purpose. That would prevent the funds from being used to reduce taxes because reducing taxes would require the state to spend less than the required amount on the selected purposes which would cause a reduction in the funds being disbursed to the state. If the state reduced taxes in order to cut funding for purposes other than the four purposes, that would not involve using the allocated funds for the required increases in the four specified purposes. Thus, for example, a state could cut its gasoline tax if that tax was dedicated solely for highway infrastructure repair and maintenance, not one of the four specified purposes, and reduce spending on highway infrastructure repair and maintenance.

In all fairness, careful drafting takes time. Like most legislation, the American Rescue Plan Act was amended and altered in the hours leading up to passage. When faced with a deadline embedded in “get this drafted within the next 30 minutes,” the legislative language becomes more conceptual and theoretical rather than useful for practical application, which was the core of the complaint raised by state officials. This problem is just one example of how the Congress is dysfunctional in meeting its responsibility to tend to the legislative needs of the nation.

Is My Easy SALT Cap Conundrum Solution Getting Capitol Hill Attention?

Six days ago, in SALT Cap Conundrum: The Solution Is Easy, I proposed a solution to the SALT cap conundrum. An existing proposal to eliminate the cap on the state and local tax deduction would disproportionately benefit the wealthy. So I suggested that the cap should be a fixed amount, adjusted for inflation, reduced by ten percent of the taxpayer’s modified adjusted gross income. I did not get into the details of defining modified adjusted gross income other than suggesting that it include tax-exempt income. I selected $40,000 as the initial fixed amount because that amount, applied to the formula, would cause little or no loss of the state and local tax deduction for taxpayers with less than $400,000 of modified adjusted gross income, the breakpoint being used in the proposed legislation for other changes. My proposal would mean that taxpayers with $400,000 or more of modified adjusted gross income would be denied the state and local tax deduction.

I then invited anyone with “connections” to those who are drafting the legislation or engaging in negotiations to share this proposal, by sharing the URL for this post. So perhaps it is coincidence that yesterday, according to this Norman Transcript article and this Bloomberg report, among others, Senator Bernie Sanders announced that he and some of his colleagues are “working on a plan that would give an unlimited deduction on federal returns for state and local taxes, or SALT, under a certain income level that is still being negotiated.” His plan, unlike mine, would permit the wealthy to continue deducting up to $10,000 of state and local taxes. He added that he and his colleagues “are still discussing how the phase out of the unlimited write-offs would work.” My proposal isn’t the only way to accomplish this, but I am guessing that it, or at least its phase-out mechanism, is on the table. But don’t let that stop anyone with “connections” to share my proposal, as the more times it reaches the legislative staff, the more attention it will get.

Is There a Tax Twist to This Twin Tale?

The channel guide summary of a Justice with Judge Mablean episode caught my eye, for a reason I will describe below. As readers of MauledAgain know, when I get a chance to watch a television court show episode, I do so to see if a tax twist turns up in the proceedings. I have commented on television court show episodes 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, and A Taxing WhatAboutIsm Attempt.

The episode in question was season 7, episode 50, entitled, ““Broken Prom Promise & Help a Brotha Out.” The facts are amusing and yet instructive. The plaintiff and defendant are twins. The twins go out one evening and have a good time. The next morning, the defendant twin is so hung over that he calls the plaintiff twin and asks him to fill in for him at his job as a truck driver at an airport. Both twins testified that throughout their lives they had switched places. So the defendant twin goes to the airport, and drives the truck. When asked by the judge what would have happened had he simply not showed up, the plaintiff twin responded that he probably would have been suspended or perhaps even fired.

So the defendant twin, tired from the previous evening, decided to pull the truck over on the tarmac to take a quick nap. Somehow, as he was pulling over, he dozed off for a moment and was jarred awake from his truck hitting another truck. A supervisor or someone with the employer then suspended the employee twin for a week. The plaintiff twin, the one who was suspended, sued his brother for lost wages.

The judge held that Judge ruled that because the defendant twin replaced the plaintiff twin, the defendant twin “became” the plaintiff twin, so that legally it was the plaintiff twin who was treated as having hit the truck, and thus the suspension was on account of the plaintiff twin’s actions, and not the actions of defendant twin. Accordingly, the judge held for the defendant twin. I wonder, though, if the defendant twin had run over and killed a third party, which twin would be prosecuted for that act.

The episode’s summary, and then the episode itself, reminded me of a series of experiences I had early in my teaching career. One Friday afternoon, one of the students in the basic tax class came into my office with a tax question. The facts that he posited, and the way he phrased the question seemed a bit unusual but I attributed it to nervousness or insecurity or some other sort of uncertainty. As I started to reply, I heard lots of laughter in the hallway. In came several students, including, wait, one that looked totally identical to the one in my office. It turned out that the student had a twin brother, who, I learned, was in medical school.

A few weeks later they tried the stunt again. It didn’t work. For some reason I had noticed what the student twin was wearing in class that day – I think it was a t-shirt with a particular Philadelphia sports team logo – so when the medical student twin came in wearing a different shirt and with another fabricated tax question, I simply responded by asking what sort of medical test would be required. Immediately there was laughter from the hallway, and the two twins realized why the stunt failed.

Another few weeks go by, and in comes the student twin. Surely it was him, as he was wearing what he had been wearing in class that day, another Philadelphia sports team t-shirt but not the same team as the last time he stepped in. So he poses his pretensive tax question, and I begin to answer, and again there is laughter from the hallway. It turned out that the two twins had exchanged clothes just before coming to my office.

I lost touch with the twins. A few years ago, I am listening to a sports radio talk show and the host interviews a sports medicine doctor. The doctor’s surname matches that of the two twins. Is it him? He begins to speak, and indeed, it must be him. Because I was driving, I resisted the temptation to call into the show and try to pull a retaliatory stunt by asking a legal question of the doctor and then noting that “perhaps your brother would know.”

No, I am not going to disclose their names. Perhaps one of them will read this commentary and react. I doubt it. Perhaps one of the many students who were in on the pranks, will recognize them from reading this commentary and let them know that their prank has been memorialized in a blog post decades later. The good news is that unlike the twins in the Justice with Judge Mablean episode, these two’s switching prank did not turn out badly.

When Tax Ignorance Becomes Tax Obstinance

In 2015, Kenneth Warren Sauter received $20,712 from the Social Security Administration which it reported on a Form SSA-1099. He also received $97,188 from Alma Products Holdings, Inc., which it reported on a Form 1099-MISC. When he filed his 2015 federal income tax return, Sauter reported the income from the Social Security Administration but not the income from Alma Products. The IRS issued a notice of deficiency, Sauter filed a petition in the Tax Court, the IRS moved for summary judgment, Sauter did not respond, and the Tax Court granted the IRS’ motion, finding Sauter’s arguments in his petition to be frivolous and without merit.

Sauter appealed to the United States Court of Appeals for the Fifth Circuit. He did not dispute having received the $97,188 from Alma Products, but argued that the income is not taxable because “trade or business” in Internal Revenue Code section 7701(a)(26) is defined as “includ[ing] the performance of the functions of a public officer,” and, thus, only those trade or business activities that can be defined as “the performance of the functions of a public office” are taxable. In 2019, the Court of Appeals explained that section 61(a)(6) defines “gross income” as “all income from whatever source derived, including . . . [c]ompensation for services.” I.R.C. § 61(a). It explained that section 7701(c) further clarifies that “includes” and “including” when used in a definition “shall not be deemed to exclude other things otherwise within the meaning of the term defined.” Id. at § 7701(c). Agreeing with the Tax Court that this argument was frivolous and without merit, the Court of Appeals affirmed the Tax Court’s judgment.

On his 2016 federal income tax return, Sauter did not report $85,106 that he received from Alma Products. Again, the IRS, after issuing a Form CP2000 to Sauter and getting a reply reciting the same argument rejected by the Tax Court and the Court of Appeals, issued a notice of deficiency. Again, Sauter raised the same rejected argument, and again the Tax Court entered summary judgment pursuant to the IRS motion for summary judgment. It also imposed a penalty of $2,500 under section 6673(a)(1)(B), noting that Sauter had been warned at least three times in dealing with his 2016 return that his argument was frivolous and without merit.

Again, Sauter appealed to the United States Court of Appeals for the Fifth Circuit. Again, he did not dispute having received the $85,106 from Alma Products. Again, he raised the same argument he had raised previously. Again, earlier this week, the Court of Appeals rejected the argument as frivolous, pointing out that it had previously been presented with the same argument by Sauter and had concluded it was frivolous. As for the penalty, the Court of Appeals held that the Tax Court did not abuse its discretion when it imposed a penalty on a taxpayer who continued to advance “long-defunct arguments,” had been warned multiple times of the possibility of penalties, and had been put on notice that the Court of Appeals had previously concluded that his argument was frivolous. The Court of Appeals affirmed the Tax Court decision in its entirety.

Understanding that a definition that contains an “including” phrase does not restrict the application of the definition to items listed after the word “including” is not something limited to law, and is something many people not trained in law understand. Yet, it is possible that someone reading such a definition might be confused or otherwise not quite grasp the difference between the word “including” and the phrase “is limited to.” That is ignorance. Ignorance can be cured, and is cured through education. The Tax Court and the Court of Appeals educated Sauter multiple times with respect to the litigation involving his 2015 tax return. When Sauter persisted in advancing the same rejected argument, it was no longer a matter of ignorance. It was a matter of obstinance. Ignorance, of course, poses an deep threat to people and to nations. Obstinance, which is embraced ignorance, is an even greater danger, posing an existential threat to people, nations, and democracy.

SALT Cap Conundrum: The Solution Is Easy

Again I turn to commentary by Tom Giovanetti of the Institute for Policy Innovation, but this time to agree with an important point he makes about the SALT cap. The SALT cap is a limit on how much state and local taxes paid by a taxpayer can be deducted on the taxpayer’s federal income tax return. Ostensibly, it is targeted at the wealthy, because the wealthy generally pay more state and local taxes than do those who are not wealthy. However, the cap is set at an amount, primarily $10,000. This causes a reduction not only in how much wealthy taxpayers can deduct but also how much can be deducted by many middle-class taxpayers.

For that reason, some Democratic members of Congress want to repeal the SALT cap and return to the uncapped deduction for state and local taxes that existed before the 2017 tax legislation was enacted. Giovanetti, in Democrats' Massive Tax Cut for the Wealthy correctly points out that repeal of the cap would be a much bigger benefit for the wealthy than for a anyone else. He is correct. We could quibble over his claim that it is upper-income households and especially the wealthy who pay more than $10,000 in state and local taxes and thus are affected by the SALT cap, because there are taxpayers caught by the cap who surely are not “upper-income.” We also could quibble over how much the cap hurts the wealthy, because the benefit to the wealthy of an uncapped state and local tax deduction pales in comparison to the tax breaks they get from things such as depreciation deductions on real estate that is not depreciating, the step-up in basis at death, reduced tax rates, charitable contribution deductions for the value of appreciated property without taxation of the inherent gain, and dozens more provisions designed to help starving oligarchs, to say nothing of low audit rates. But those issues matter not to finding a solution to the SALT cap problem.

Here is what I think is the best idea for dealing with the SALT cap. The cap should not be a fixed amount. It should be a fixed amount, adjusted for inflation, reduced by ten percent of the taxpayer’s modified adjusted gross income. I’m open to which definition of modified gross income is used, but certainly tax-exempt income should be included. Here are some examples. Set the cap at $40,000 minus ten percent of adjusted gross income. What is the outcome? For someone with adjusted gross income of $400,000 or more, the cap would be zero, that is, no deduction for state and local taxes. For someone with adjusted gross income of $100,000, the cap would be $30,000, though taxpayers with adjusted gross income rarely, if ever, pay state and local taxes anywhere near $30,000. For someone with adjusted gross income of $50,000, the cap would be $35,000, though again, that taxpayer would not be paying that much in state and local taxes.

Why did I pick $40,000 as the fixed amount? Because that amount, applied to the formula, would cause little or no loss of the state and local tax deduction for taxpayers with less than $400,000 of modified adjusted gross income, the breakpoint being used in the proposed legislation for other changes. It also means that taxpayers with $400,000 or more of modified adjusted gross income would be denied the state and local tax deduction. This certainly would change the proposal from a repeal that benefits the wealthy more than other taxpayers to one that spares taxpayers who are not wealthy from the SALT cap while leaving it in place for the wealthy.

Supporters of the SALT cap cannot object to my proposal unless they want the SALT cap kept in place for the taxpayers who are not wealthy but who are caught by the cap. That would be rather telling. Opponents of the SALT cap cannot object to my proposal unless they are supporters of letting those with $400,000 or more of modified adjusted gross income have a deduction for state and local taxes of at least $10,000 if not an unlimited deduction. That, too, would be rather telling.

I invite anyone with “connections” to those who are drafting the legislation or engaging in negotiations to share this proposal, by sharing the URL for this post. I'm good at some things, but being my own publicist isn't one of them. But please attribute it to me so that if anyone wants to criticize it you can step aside and let the counter-arguments come my way. And, of course, if it gains traction, well, I don’t mind being credited.

Not a Reason to Avoid Taxing Unrealized Gains

Tom Giovanetti, of the Institute for Policy Innovation, thinks that, to quote the headline of recent IPI commenatry that “It's Impossible to Accurately Tax an Unrealized Gain.” His argument rests on the premise that the only way to determine “true value of something” is to wait until a willing seller and a willing buyer provide that information by engaging in a presumably arms’-length transaction. He argues that “Value cannot be accurately determined without a transaction between a willing buyer and a willing seller.” Therefore, he argues, “that’s just one reason why the tax on unrealized gains being proposed by some Democrats is such a terrible idea.”

Yet tax law, whether based on income or property value, contract law, tort law, and many other areas of law function smoothly in determining value without the benefit of an actual purchase and sale of the item in question. Local real estate taxes are assessed on the computed market value of real properties. Estate taxes and state inheritance taxes are computed by determining the value of property owned by a decedent or inherited by a beneficiary without that property having been sold to a willing buyer. Insurance claims on stolen or totaled vehicles are paid based on value reflecting other transactions. Losses from breach of contract are calculated without actual transactions having taken place. Business school classes on valuation take students through the details of the comparable sales method, the discounted cash flow method, the earnings multiplier method, and similar analytical approaches.

Giovanetti argues, “So an unrealized gain simply cannot be accurately valued, and how can you accurately tax wealth that cannot accurately be valued? You can’t. And that’s one of the reasons why we have never even attempted to tax unrealized gains.” On that score, he is wrong. Including unrealized gain in gross income already exists in the federal income tax law. Take a look, for example, at Internal Revenue Code section 475 (and state statutes based on it). The computation is based on the listed market price of securities, which is nothing more than a proposed price similar to the asking prices given by Giovanetti as examples of why it supposedly is impossible to put a value on something until that something is actually sold. The battle Giovanetti is fighting was lost long ago, when section 475 was enacted.

That’s not to say that taxing unrealized gains on everything every year is necessarily a good idea. There are worthwhile arguments against the idea, based on issues of liquidity, market disruption, administrability, and ease of avoidance. With those stronger arguments available, it makes no sense to rely on a “cannot determine the true value of something without a sale” objection. If that is perceived as the strongest, or only, argument being offered in opposition to the taxation of unrealized gains, section 475 might soon be expanded beyond the narrow set of situations to which it currently applies.

Of course, the idea that taxation should not take place until something is sold, when coupled with the step-up in basis at death, provides the foundation for the construction of the oligarchic dynasties that are causing far more problems for the nation than the few benefits, if any, that trickle down to the not-wealthy from these gargantuan money piles. Eliminating the step-up in basis at death does nothing to solve the problem because properties are passed from one generation of oligarchs to the next. A wealth tax is problematic, not only because of the administrability and evasion issues, but also because in years when wealth decreases, payments would flow from government to oligarch (not that government funds don’t already flow in that direction, outside of the spotlight that is aimed on payments to the impoverished and struggling middle class).

Perhaps the answer is to undo the cause of the wealth accumulation. Here is something to ponder. What would the nation’s economy look like, and what would the economic situation for the poor, the middle class, the wealthy, and the ultrarich look like if federal and state income tax rates had remained where they were when this nation was in the heyday of the “greatness” that so many want to revive? Why not undo the slide from those years of “greatness” by computing what each individual and corporation would have paid in income tax in each of the last 40 years (going back to when the oligarch takeover began), subtracting what was paid, computing interest, and sending invoices to the taxpayers or their successors in interest, with an exemption for all incomes under, say, $1,000,000 in 2021 dollars adjusted for each year’s equivalent amount. It is possible that under this formula, a few or some taxpayers would receive refunds rather than invoices, though most taxpayers in that situation would be those with incomes too low to have taken advantage of the tax breaks dished out to the ultrarich. Too computationally complicated? Not with modern digital technology.

If nothing is done, and people can debate what should be done, but if nothing is done, the exponential increase in the percentage of the economy owned and operated by the super-ultra-rich will continue and accelerate, the number of people sliding into poverty will increase, the disappearance of the middle class will get worse, and the realization that oligarchic capitalism is simply another version of feudalism and serfdom will come too late. So long as there are enough people willing to defend, and vote for, oligarchic capitalists and their operatives, the slide from “greatness” also will accelerate. What is most troubling is how so many people unhappy with the slide from “greatness” vote for the persons and policies that fuel that slide.

The Tax Consequences of Halloween Candy Buy Back Programs

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), and Halloween Chocolate Construction Project (2020). This year, it's a serious consideration.

About two weeks ago, reader Morris directed my attention to this story about a dental office buying back Halloween candy. From doing a bit of research, this is not an isolated situation but one that is common, though I must point out that when I was in my Halloween door-to-door-with-two-large-pillowcases stage, I never did hear of any dentists buying Halloween candy from children. It now is a nation-wide undertaking. So how much are the children paid? This dental office offers $3 per pound.

Reader Morris then posed two questions. He asked, “Are the kids technically receiving gross income for the candy?” and “Can the dental office deduct the purchase cost as a business expense?”

The children receive the candy as a gift, though perhaps some people might claim that they dish out treats in order to “persuade” children not to refrain from stopping by the following year on Mischief Night, Soap Night, Egg Night, Chalk Night, or whatever other pre-Halloween night is being observed by some youth. Because it is a gift, the children have an adjusted basis in the candy equal to the price paid by the person giving the candy, and when they sell it to the dental office they probably are receiving an amount less than the adjusted basis. So they are realizing a loss, and it is not deductible because the children are not in the trade or business of selling candy, carrying on a for-profit activity, or suffering from a casualty (though some children “persuaded” by their parents to fork over their candy for cash might consider it a tragedy, but not all tragedies are casualties).

Why do I think the children are incurring a loss? On Amazon, a one-pound Hershey’s Bar sells for $19.99, so getting $3 for that bar (assuming anyone is handing out something like that) is far from generating gross income. Walmart sells a 40 ounce bag of small candy bars for $23.96, which is $9.58 per pound, a better deal than the one-pound Hershey’s bar but still much less than $3 per pound. I checked these prices when reader Morris sent his email so they may have increased or decreased, there may have been sales, there may be different prices at other retailers, but as a general proposition, $3 per pound is not generating realized gain for the children who sell their candy loot to the dental office.

Two years ago, Kelly Phillips Erb addressed the tax consequences of Halloween candy buy back transactions. She did so by examining exchanges of the candy “for other stuff.” She addressed the income question only by noting that if the “candy is exchanged for a similar item, there should be no gain and no tax consequences.” As a practical matter that is true, but if a child found someone willing to fork over a one-pound Hershey’s bar for half of the candy in that 40 ounce bag, that would generate gross income of $8.01. If “similar item” means candy of an equal value, she is correct both theoretically and pragmatically. Though she doesn’t mention a sale for cash, her reasoning would bring us to the same conclusion that my reasoning did. She also notes, as I have, that the children handing over the candy at a loss would not be allowed a deduction.

As for a deduction by the dental office, which is, of course, a trade or business, the question is whether the amount paid for the candy is an ordinary and necessary business expense. Is it? One argument in favor of a deduction is that the business is paying for some combination of advertising and public health information. The program is designed to reduce the amount of candy that children (and their parents) eat during Halloween season, and because the cost of publishing a “don’t eat or don’t eat too much candy” message would be deductible by a dentist, sending that message through a buy-back program would also be deductible. An argument in favor of denying the deduction would rest on the nature of what is being purchased. Unlike dental care supplies, dental tools, and similar items, dentists do not need to purchase candy in order to operate their businesses.

There are two twists to the tax consequences faced by the dental businesses that buy the candy. One is that under the national program the candy is donated to a charitable organization that distributes the candy to members of the Armed Forces. So instead of a trade or business deduction, the business would claim a charitable contribution deduction in an amount equal to what it paid (because the property is short-term capital gain property in the hands of the business). The other twist is that some businesses making the purchases do so with donated money. In this instance the business would not get a deduction because it is not expending any money for the candy. Determining whether the sponsors get a charitable contribution deduction requires identifying additional facts and is beyond the scope of the question that was asked. So, too, is the non-tax issue of why it makes sense to reduce the amount of candy in the hands of the children while increasing the candy in the hands of members of the Armed Forces, and I leave readers to explore what the national candy buy back program shares as an explanation.

Don’t Get Burned By a Tax Return Preparer

Readers of this blog know that I pay attention to the adventures of tax return preparers who do things that they ought not to do or failed to do something they ought to have done. I have written about these situations on many occasions, including 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, and There Was Nothing Magical About This Tax Return Preparation Business.

Among those readers is reader Morris, who spotted a story out of North Carolina about a tax return preparer who did something that ought not to have been done and that was something that, until now, I had not hear of a tax return preparer doing. According to the story, Andrivia Wells was sentenced to 70 months in prison after pleading guilty to filing more than 6,000 fraudulent tax returns claiming more than $3 million in fraudulent refunds unbeknownst to the clients, and then taking roughly $1.2 million in fees from her clients’ refunds without informing the clients. She also filed fraudulent returns on her own behalf. These actions aren’t novel for noncompliant tax return preparers. What Wells did was worse.

In 2017, when the IRS demanded that Wells turn over records, a suspicious fire broke out at her office on the day that Wells was to submit the records requested by the IRS, and the records went up in smoke. Two years later, Wells was indicted and arrested on charges of tax fraud and obstruction of justice. Ten days later, while in jail, Wells spoke with her daughter and two associates after a grand jury demanded records, discussing how to eliminate the evidence. The call, made from jail, was recorded. Someone on the call said, “We’ve got to get the stuff out before they put the locks on. . . . We have files in there, clients we’ve done. We’ve got to get a U-Haul and move all of that stuff out of the place at one time. A very large U-Haul.” They didn’t get a U-Haul. They set a fire that destroyed the records.

The sentencing judge described the second fire as “one fire too many.” I beg to differ. It was two fires too many. And it’s worse. Wells already had been convicted of a felony, having served eight years of a 151-month sentence for participating in a drug-trafficking conspiracy. So those fraudulent returns, stolen refunds, and fires were “way too many crimes too many.” The lesson is clear. As I’ve written many times, when retaining a tax return preparer, do some research and even a background check. No one wants to be burned by a tax return preparer.

Ignorant Meme About the Mileage-Based Road Fee Demonstrates the Value of Education as a Vaccine Against Ignorance and Propaganda

I have written many commentaries about the mileage-based road fee, including 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, and What Appears to Be Criticism of the Mileage-Based Road Fee Isn’t, Though It Is a Criticism of How Congress Functions. Now it’s time to follow-up on the most recent post.

In that most recent post, I described how Mariya Frost of the Washington Policy Center, in an opinion piece on the pending federal mileage-based road fee pilot program, objected to the fact that the pilot program language is “buried deep in a larger infrastructure package that lawmakers have to vote for or against in totality.” That observation is correct, and I pointed out that it was not a rejection of the mileage-based road fee concept or the pilot program, but a complaint about the legislative process in general. That, of course, is a much bigger and more serious problem with this nation’s polity.

One of the side effects of burying a proposal in legislation is that very few people actually read the language of the proposal. Those who do have a choice. They can try to accurately report, or at least try to accurately summarize, the proposal, or they can twist it into propaganda used for questionable purposes. Granted, some people who try to accurately explain a proposal might suffer from an inability to understand it and generate misleading information. When proposals are complicated, or the language murky, that can happen. It’s bad, but it’s not evil. On the other hand, those who deliberately mis-inform the public do not have any sort of acceptable excuse.

Consider a meme now circulating on social media outlets. It reads, “The dems are trying to push through a 8 cents a mile vehicle tax. You say well 8 cents doesn’t sound to [sic] bad. Allow me to break it down for you. If you drive 12,000 miles a year, you will pay an extra $960 per year. If you get 18 miles to the gallon, it will cost you an extra $1.44 per gallon. If you put 20 gallons in your car, the cost comes out to an extra $28.80 per fill up. This will amount to the largest tax hike in history. Not to mention what this will do to the trucking industry. You think your groceries are expensive now! You just wait. It will cost a semi that drives 100,000 miles a year for example an extra $8000 dollars a year. Do you think the trucking companies are just going to eat that cost? No I don’t think they will. They will pass the cost onto their customers who will in turn pass it on to you. If this passes, it will be catastrophic for the economy I guarantee it.” It is unclear whether the person whose name appears below the meme is the author. It is unclear whether the the spelling, punctuation, syntax, and other errors is the product of someone lacking the requisite writing skills or is a deliberate attempt by polished propaganda artists to make the meme look as though it is coming from a grassroots source. Either way, it is full of nonsense.

First, the proposal is nothing more than the funding of a voluntary pilot program to study the mileage-based road fee. The volunteers will not be out any money. Second, there is no reference to 8 cents per mile in the proposal. The 8 cents figure comes from the report of a Pennsylvania commission set up to study transportation funding. Third, if a mileage-based road fee were adopted, it would be, as indicated in various proposals, a replacement for the liquid fuels tax, and thus not in its entirety an “extra” anything.

It's bad enough someone wrote this, whether out of ignorance or a deliberate intention to rile up the base and motivate the anti-tax anti-government crowd. What’s worse is that people read this, react emotionally without doing any research to determine its validity, and then re-post it so that this nonsensical piece of ignorance spreads like a virus among those unvaccinated against ignorance. Yes, education is the vaccine against ignorance and propaganda. Yes, there are people who are opposed to education because they are afraid of what it does, even though there is nothing to fear about making efforts to acquire knowledge and education and to learn how to separate emotion from critical thinking. Ignorance about a pilot program to examine the feasibility of a mileage-based road fee is a concern, but it is merely one facet of the widespread ignorance and lack of critical thinking about every important aspect of society that is eating away at the core of civilization. The clock is ticking, and time is running out.

Cutting Gasoline Tax Does Not Address Underlying Problem

According to this report, as gasoline prices increase, Republicans in New York State are asking the governor to suspend the gasoline tax. The leader of the state’s Senate Republicans argues that the current price of $3.46 per gallon is a 55 percent increase from “last year.” Before examining the suggestion to suspend gasoline taxes, it makes sense to review gasoline prices in New York state.

According to the New York State Energy Research and Development Authority, the average price of gasoline in New York State in September 2021 was $3.22. Though it is a significant increase from the September 2020 pandemic-induced low price of $2.19, it is not as much of an increase from the September 2019 price of $2.65, the September 2018 price of $2.91. It is LESS than the September 2014 price of $3.59, the September 2013 price of $3.78, the September 2012 price of $4.04, and the September 2011 price of $3.83. So over the long run, the September 2021 price is consistent with the typical up-and-down roller-coaster change in gasoline prices that reflect supply and demand, which in turn reflect production, weather, alternative costs, and similar factors.

The article quotes a consumer who explained that he “can’t really afford to go anywhere, any more.” Though it’s unclear how many miles per week he drives or would want to drive, and thus unclear whether he’s facing a $10 per month or $100 per month increase in gasoline costs, a suspension of the state sales tax would not solve the problem for that consumer or others who are facing financial challenges. Was this consumer able to afford the $3.59 per gallon cost in September 2014? Did this consumer’s income go down? Did other costs go up? A suspension of the 40 cent per gallon state gasoline tax (which includes the sales tax component) is a band-aid on a deeper financial hemorrhaging faced by this consumer and others in a similar situation. Worse, suspending the gasoline tax provides a windfall to the gasoline purchasers who are not struggling financially. And even worse, it cuts off funding for keeping New York State roads, bridges, and tunnels in safe condition, thus trading off a short-term benefit to some residents in exchange for far more serious and much more expensive long-term costs in the form of accidents, deaths, injuries, and property damage.

Why not address the root cause of the problem instead of the symptoms? The problem for people unable to pay for gasoline at a rate that is lower than what it was earlier in the decade is that they have insufficient income to cover their expenses. Without seeing the budgets prepared and followed by these consumers, and thus assuming that there are no unnecessary expenses making demands on their financial resources, their incomes are insufficient because wages and similar payments have not kept pace with worker productivity and decades-long overall cost increases. What these consumers are suffering are symptoms of the income and wealth inequality disease that is eating away at the foundations of American democracy.

Emotionally, suspending the state’s gasoline tax appeals to many, particularly those who do not take the time to engage in full-blown analysis of their own and local, state, and national finances and economics. Suspending the gasoline tax does not solve the problem, and once those proposing it get the votes they need and want by making these sorts of emotional appeals, the tax will return and the problems faced by consumers claiming inability to pay will continue. Interestingly, those most adamant about the symbolic maneuver of reducing a small state gasoline tax are also the most adamant about doing anything to address the underlying problem of income inequality, rising CEO-to-worker pay ratios, and inequity in the overall taxation rates faced by high income and low income individuals.

Until people stop voting for those responsible for the problems that disturb, anger, and outrage those voters, they will continue to suffer, as do the individuals who insist on maintaining relationships with people who physically abuse them. Being easily distracted by small tokens of apology, such as temporary and useless suspension of a tax that is but a tiny fraction of the problem, is an emotional trait on which the servants of the oligarchs depend.

There Was Nothing Magical About This Tax Return Preparation Business

As readers of this blog already know, I have written about fraudulent tax return preparers on many occasions, including 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, and When Dishonest Tax Return Preparers Are Married. When writing about these situations, I focus on what the preparer did that ought not to have been done. This time, my focus is different.

In a recent Department of Justice press release, an Acting United States Attorney and an IRS-Criminal Investigation Special Agent in Charge announced that two tax return preparers have pleaded guilty to aiding and assisting in the preparation of false income tax returns. The two preparers operated separate businesses. What they did wasn’t different from what other tax return preparers have done that got them into trouble. They knowingly claimed false deductions and credits on clients’ returns.

What caught my eye was the name of one of the businesses. According to the news release, the preparer “operated a tax preparation business under the name Magic Tax Service.” One can imagine the tag line. “Owe taxes? With a bit of magic I can turn that into a refund.” Magic, of course, involves deception. So, too, does fraud. If a tax return preparer asked about the wisdom of using Magic in the name of the business, I would ask if it would make sense to operate a business called “Fraudulent Tax Service.”

I wonder if the name of the business was a red flag for the IRS. Perhaps. How the IRS and the Department of Justice detected what was happening isn’t something that gets publicized. But it would not surprise me if certain business names, advertisements, and social media claims don't get noticed.

Royal Snub Generates Tax Payment Retort

I don’t follow boxing or auto racing, and I pay little attention to who gets knighted by Queen Elizabeth II. So it was by happenstance that I came upon an ESPN article that brought those topics together with tax. It was the headline. It stated, “Lewis Hamilton has 'huge respect' for Tyson Fury despite tax comments.” Not recognizing these two names, I had to read the article and do a bit more research.

Lewis Hamilton is an auto racing driver. Hamilton has set several records, and ended up on the Queen’s 2020 Honours list. In other words, he was knighted.

Another UK citizen, Tyson Fury, who holds the heavyweight boxing crown, was miffed that he was not on the Queen’s Honours list, and thus not knighted. In his gripe about being omitted from the list, he stated, “Unlike Lewis Hamilton I live and pay taxes.”

Hamilton lives in Monaco, which is a tax haven. Debate about his decision to live abroad has persisted in the UK for quite some time. Hamilton responded, race in 19 different countries, so I earn my money in 20 different places and I pay tax in several different places, and I pay a lot here as well.”

Despite their feuding over taxes and knighthood, when Fury retained his title this past weekend, Hamilton sent a message of congratulations and praise. He said that he respects Fury “no matter what he’s said about me.”

All of which goes to show that people can disagree about tax issues and still respect each other’s accomplishments. They can. Does everyone?

When Dishonest Tax Return Preparers Are Married

The list of tax return preparers getting in trouble continues to grow. I’ve written about these situations 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 the 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, and Using a Tax Return Preparer? Take Steps to Verify What Is Filed on Your Behalf.

Usually the preparers who get in trouble are sole proprietors, or working with a business partner, or perhaps working as employer and employees. This time, it’s a husband and wife who came under scrutiny and who, as reported by the Department of Justice, have been permanently enjoined by federal district court from “preparing returns for others and from owning, operating, or franchising any tax return preparation business in the future.”

According the complaint that was filed, the wife, who used two different personal names, and who did business as Su Casa Income Tax Service, prepared federal income tax returns containing false and fraudulent claims. After the IRS began investigating her, her husband, doing business as I-Tax Services, prepared fraudulent returns in concert with his wife. Then, she prepared and filed returns but used her husband’s name as preparer. The returns in question included false or inflated dependency exemptions and child tax credits, false filing statuses, and fictitious income so that the earned income tax credit could be claimed or inflated.

The two preparers joined in the motion for the injunction. It permits the federal government to continue post-judgment discovery so that compliance by the two preparers can be monitored. In addition, they must send a notification that they have been enjoined to each person for whom they prepared returns or claims for refund beginning in 2016 and continuing through the litigation.

What’s unclear is whether one of the two started filing fraudulent returns and then brought the other one into the schemes, or whether they collaborated from the outset. Perhaps one started while hiding the behavior and the other discovered what was happening and rather than reporting the activity was persuaded to jump on board. I cannot access the actual documents in the case, and it’s unclear whether the facts were memorialized in writing or simply provided orally at hearings.

Is Social Security Theft?

There is a meme floating around facebook, and elsewhere on social media. Purportedly written by a Todd Hagopian, it reads, “By the time I am 67, over $600,000 will be paid into #SocialSecurity on my behalf. That money would have been worth $1.9 million if I had gotten a 5% return. My annual interest would be $95K. The Government promise me $3,075/month at 67, which is $37K/year. How is that not THEFT?”

Curious, I tried to figure out how this Todd Hagopian computed his analysis. He doesn’t state his age, nor how long he has been subject to social security, nor if he has earned income each year equal to or exceeding the social security earnings cap for that year. There is no indication of when the meme was written. Yet he computed that his benefit would be $3,075, which suggests that the year he would start receiving social security benefits would be 2020. So perhaps the meme is a year old. Yet he states that he would begin getting benefits at age 67, which is the normal retirement age for persons born in or after 1960. He would not be 67 until at least 2027, and there is no way to compute benefits payable by Social Security in 2027.

So the best I could do was to do a computation for someone born in 1955, subject to social security through 2020 as an employee, earning income equal to at least the social security cap for each year, and retiring at the end of 2020. Such a person, over the 45 years of working, would pay $200,696 in social security taxes. The person’s employer would pay $200,696, for a total of $401,392.

What would that amount be worth if, instead of being paid into the Social Security Trust Fund, it was invested? First, not all of it would be available for investment, because the portion paid by the employer to the employee would be taxable to the employee, unlike the non-taxation of the amount paid by an employer into the Social Security Trust Fund on behalf of the employee. Though some contributions to retirement plans are tax deductible, I chose not to assume that a similar treatment would apply to the sort of comparison made in the meme. It is likely that someone with income of at least the social security cap would face a marginal rate of roughly 30 percent during the period in question. I did not try to compute the tax for each of the years in question. That would mean that a total of $341,183 would be paid in during the period in question.

I used the 5 percent rate of return rather than trying to compute returns for each year using some arbitrary measure of interest rates or stock market performance for each year. I then computed what each year’s total contribution would be if invested at that rate of 5 percent. The total? $894,022, not $1.9 million. If at the end of the 45-year-period, that amount were drawn down as an annuity, the annual payout would be, assuming the person lived for 25 years, $63,433, exhausting the fund at the end of the period.

Yes, getting $37,000 annually is nowhere near as good as getting $63,433 annually. But that is the nature of how social security works. One can do a computation for someone who earned minimum wage after entering the work force at age 50 after raising children and lives until age 100, and that person would do better under social security. So is the Social Security program theft? No. Why not? Because the program is insurance. There is no guarantee that a person will get back what the person paid in, let alone interest. Consider someone who dies before retiring, or who dies shortly after starting to take social security payments. Putting aside survivor benefits, the person is in the same position as someone who pays homeowner’s insurance and never suffers a loss, or automobile insurance and whose vehicle is never stolen nor involved in an accident. Why do I claim that social security is insurance? The social security tax is imposed by the Federal Insurance Contributions Act, which is why it is referred to as FICA, and funds the Old-Age, Survivors, and Disability Insurance program, the official name of the social security program. So as is the case with all insurance, some people will pay in more than they get back, some people will get back more than they pay in, and a handful of people might coincidentally get back what they pay in. So, no, it is not theft, no more than automobile or homeowner’s insurance premiums constitute theft.

Tax as a Deterrent

Tom Giovanetti of the Institute for Policy Innovation has published an interesting commentary about a likely doubling of the federal excise tax on cigarettes. About half to three-fourths of smokers, according to a Colorado School of Public Healthy survey, have one or more socioeconomic disadvantages, the proposed increase in the cigarette excise tax would fall chiefly on the economically disadvantaged. This, Giovanetti points out, is inconsistent with Administration assurances that taxes on people earning less than $400,000 annually would not be increased. Giovanetti is correct.

The cigarette excise tax, like other “sin” taxes, is designed primarily to discourage unwanted behavior, in this instance, cigarette smoking. If the proceeds of the cigarette excise tax were used exclusively to educate people about the dangers of smoking and to offset some of the public health care costs of treating diseases caused or aggravated by smoking, it would also serve a secondary purpose. However, those are not the uses to which the cigarette excise tax revenue is put.

Giovanetti notes that most people who want to stop smoking have done so. He suggests that “If you’re still a smoker today, you’re likely unwilling or unable to access programs and treatments designed to help you stop smoking.” He may be correct. It’s possible that a doubling of the federal cigarette excise tax might cause some people to reduce or terminate their smoking, but if so, it’s likely to be a small percentage of smokers.

Giovanetti also notes that increasing taxes on smokers, many of whom have low incomes, is inconsistent with professed goals of reducing income and wealth inequality. Yet if raising the cigarette excise tax did cause most smokers to stop smoking, then it would help reduce income inequality because the money otherwise spent on cigarettes could be spent on other, presumably healthier, options, reduce illness among smokers and thus permitting them to engage in more income-producing activities rather than racking up sick days or being unemployed on account of illness. Though my suggestion that raising taxes on smoking might help some people escape the confines of economically disadvantaged lives, my suggestion is nothing more than a great theory that, of course, in practice doesn’t get very far.

The interesting thing about sin taxes is that if they work as deterrents, eventually the revenue they produce drops, and if totally effective revenue would drop to zero. If a tax increase caused cigarette smoking to go the way of cocaine-laced cough syrup, the tax would be a dead letter, though, of course, shareholders in and employees of tobacco companies would suffer economic pain, perhaps some plunging into the ranks of the economically disadvantaged. Yes, tax policy is complex.

One point that Giovanetti does not address is the deterrent effect of a cigarette excise tax on those on the brink of taking up smoking. As a practical matter, most “new” smokers are young, often in their teens. Might the doubling of the excise tax cause some of them to decide it isn’t worth it? I don’t know. Nor do I know where Giovanetti would come out on that issue. Another point he does not make is why cigarettes are being targeted, whereas other forms of nicotine absorption aren’t being addressed. Perhaps they are, and the proposal isn’t yet fully crafted. Considering, for example, that vaping is becoming increasingly popular, and poses all sorts of health risks, would not heavy taxes on vaping be valuable in terms of helping people avoid the health issues that contribute to being in economically disadvantaged positions?

Libertarians, of course, would leave all of these things to the “freedoms” of the individual, namely, “it’s their choice to smoke or vape and get sick,” yet they do not focus on the costs imposed on the rest of society by individual behaviors that affect not only the individual but others. Put another way, if some people want to live in ways that confine them to the ranks of the economically disadvantaged, should the tax law be used as a deterrent to that sort of behavior? That question has been percolating for as long as there have been tax laws, and the debate over the answer has been pursued for just as long. The answer is education, which has succeeded to some extent with respect to smoking, and which is necessary to keep deterrence from being an oppression rather than a welcomed affirmation. Without education, tax as a deterrent is limited.

Using a Tax Return Preparer? Take Steps to Verify What Is Filed on Your Behalf

From time to time I write about tax return preparers who get in trouble. I’ve done so 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 the 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?, and Tax Return Preparers Who Fail to File Their Own Returns Beg For IRS Attention.

The things that tax return preparers do to get in trouble are as varied as there are tax return preparers who get in trouble, though often the same “technique” for helping clients evade taxes or for defrauding clients get repeat use as not-so-well-intentioned preparers notice what other noncompliant preparers are doing.

So what caught my eye with a recent attempt by the Department of Justice to shut down a preparer is a pattern of behavior that is new at least to me. According to the complaint filed by the Department of Justice, the preparer in Beaumont, Texas, would charge customers a fee, as little as $200 or as much as $500, for preparing a “tentative income tax return” that showed a small refund. The preparer then modified the tentative return by inserting inflated and fabricated deductions, credits, and losses, which increased the tax refund on the return. The preparer filed those modified returns with the IRS, requesting that the refunds be deposited with a third party company. That company would pay to the customer the refund shown on the tentative return, and the preparer pocketed an additional fee. Apparently a portion of the inflated refund went to the third party company for its services. All along, the customers knew nothing about this scheme because the preparer gave them either an incomplete copy of the return or a copy of the return different from what was filed with the IRS. The preparer in question prepared more than 3,100 tax returns for tax years 2018, 2019, and 2020. That’s a lot of taxpayers, many of whom could be liable for repayment of fraudulent refunds claimed in their names, along with penalties and interest.

What can taxpayers who use preparers do to protect themselves? First, as I wrote in Are They Turning Up the Heat on Tax Return Preparers?, “I will simply repeat what I have written several times in the past: ‘The lesson at the moment? Choose a tax return preparer as carefully as choosing a surgeon or child care provider. In other words, do research, talk to friends and neighbors, look at online reviews, and interview the preparer.’” Second, as I wrote In When Tax Return Preparers Go Bad, Their Customers Can Pay the Price, I elaborated:

What’s a taxpayer to do? Talk with relatives, friends, and business associates. Ask them to describe their experiences with the tax return preparer that they use. Seek out a tax return preparer who has been preparing the other person’s returns for many years free of problems. Beware of the advice to use a tax return preparer who has been used only once, or even not at all. Look at reviews on various web sites. Google the name of the tax return preparer. If the preparer is a company, ask for the names of its owners and managers, and google those names. If the return that is prepared is “too good to be true,” don’t agree to its being filed, but ask for a copy and take it to another preparer for a second opinion. If it’s good to go, return to the original preparer and approve the filing. If it’s not good to go, file a complaint about the preparer with the IRS, and seek a fee refund from the original preparer.

Third, insist on seeing the return before it is filed, looking not at some “tentative” print-out but at what’s on the preparer’s computer screen, and possibly take a photo of each page of the return that is on the screen. Fourth, insist on standing behind the preparer when the preparer is filing the return, looking at what is on the computer screen to make certain nothing has been changed, and insist on tracking the preparer’s steps as the return is filed. Fifth, insist on a printed copy of the return at that moment. Sixth, think about going to a second preparer to obtain a transcript of what was filed on your behalf, to see if there is a discrepancy between what was actually filed and what the prepare claimed was filed. Seventh, think about filing the return by yourself, using one of several software applications available to taxpayers.

When Tax Evasion is Publicized

When I saw the headline to this article in this morning’s Philadelphia Inquirer, I read the story because of my interest in technology and intellectual property. So I was somewhat surprised to see tax pop up. The headline gave no clue about the tax part of the story, as it simply stated, “Local YouTuber charged by FBI in one of the largest cable TV piracy cases ever.”

According to the article, an indictment has been issued against a man accused of digital piracy, allegedly accessing movies and shows from cable and streaming services and then re-selling access to individuals who did not have subscriptions to those services. There are some interesting legal questions to be answered because the alleged thefts took place before enactment of a law prohibiting what was done. I will leave that discussion to those who are expert in intellectual property law. Though I am familiar with the basics, I am not proficient in the nuances of the many applicable provisions.

Among the counts in the indictment are counts of tax evasion. According to the indictment, the accused and his partners netted more than $34 million between 2016 and 2019. He posted all sorts of images displaying what he purchased with his earnings, including high-end vehicles, jewelry, and even a photo of “his son holding stacks of cash.” He allegedly did not file any personal or corporate tax returns during the period in question. Before he embarked on his digital streaming venture he allegedly was making about $550 a year in advertising on his YouTube page. On that YouTube page he admitted to his tax violations, claimed they were “committed in ignorance,” and predicted imprisonment. But he also has claimed, “I made a ton of money … I’m only guilty of making money. I ain’t guilty of nothing else.” But did he not already admit to not filing tax returns and not paying taxes?

At this point, hopefully his attorney, if he has one, advises him to pay the back taxes, because until he does so, interest and penalties will continue to grow. Considering his open, public admission to not filing returns or paying taxes, his chances of avoiding a decision that he owes taxes, interest, and penalties are slim to none, mostly none.

Some tax evaders work in the shadows, and some of them never get caught, mostly because there aren’t enough investigators to discover all the tax fraud. But others, for reasons that the psychologists can explain, find it necessary to publicize their tax evasion accomplishments. That not only makes it easy for investigators to find them, it also makes it easier for the prosecutors to obtain convictions.

Those Anti-Tax Folks Don’t Get It But Yet Don’t or Can’t Give It Up

An interesting headline and article in today’s Philadelphia Inquirer reminded me that the anti-tax folks are hopelessly glued to their irrational position as fans are attached to their favorite teams. Their inability to adapt to changing circumstances is emblematic of the larger problem that exists because too many people cannot re-think and re-evaluate positions to which they are emotionally attached.

According to the article, Lou Barletta, a candidate for the Republican nomination for governor of Pennsylvania, has signed Grover Norquist’s absurd no-tax-increase pledge. Barletta claimed “he was proud to sign” the pledge. His campaign pointed out that “the last thing Pennsylvanians need is the government taking more of their hard-earned money.” Strange, because most proposed tax increases are aimed at those who are born into money, and those who don’t lift a finger to earn money. The current taxation systems, both federal and state, put much more of a burden on wage earners, that is, those who work hard, than it does on those who accumulate wealth and income without needing to be employed. Perhaps Norquist and his anti-tax colleagues can come up with definitions of “hard earned money” and “not hard earned money,” and then revise the pledge to spare tax increases on truly hard-earned money.

One wonders how history would have turned out had Franklin Roosevelt and the Congress of the late 1930s and the 1940s taken the Norquist pledge. The pledge has no accommodating language to deal with extraordinary matters. It is a simplistic salute to historical ignorance.

The article notes that Tom Corbett, the last Republican governor of Pennsylvania, signed the pledge. Later, he signed legislation raising fuel taxes, signed a law permitting counties to enact impact fees on gas wells, and signed legislation increasing a variety of fees. When asked to reconcile his actions with the pledge, he claimed that “he believed he had fulfilled the spirit of the pledge.” No, he did not. Perhaps he fulfilled the spirt of what the pledge would have been had it been drafted carefully. He was asked if he regretted signing the pledge, and replied that when he signed the pledge “he couldn’t have foreseen the demands on the state for new revenue.” I laugh at that. Anyone who pays attention to life, history, politics, economics, tax policy, and reality knows that all sorts of situations can arise that require increases in public revenue. Imagine if Barletta had been governor when the pandemic hit.

The anti-tax pledge does far more to protect the wealthy than it does to protect anyone else. It’s more than a political stunt. It is part of the Constitution of the oligarchy.