Toll Increases Ought Not Finance Free Rides

When reality hits the ideal, the ideal almost always caves in. Consider what has been happening when the anti-tax crowd meets the reality of revenue shortfalls. They increase tolls, perhaps thinking that constituents will be fooled by the absence of the phrase “raise taxes,” and then use the increased toll revenue for purposes other than maintaining the toll road and paying for its wider adverse impacts. Worse, these anti-tax advocates, also staunch opponents of government borrowing, have instructed toll commissions to borrow money to be repaid through increased future tolls. Do they really think they are fooling the citizens who bother to educate themselves about this issue?

Fortunately, I’m not the only person trying to educate people on the “we won’t raise things called taxes but we’ll get you in other ways” anti-tax scam. In N.J., Pa. Tap Toll-Road Funds for General Road Projects, Paul Nussbaum, a Philadelphia Inquirer staff writer, describes how Pennsylvania and New Jersey have been diverting tolls from toll road maintenance to other projects. Those responsible for the toll roads project that over time those roads will deteriorate because of decreased monies available for maintenance.

There are some who argue that tolls should be diverted to other uses. The reasoning is questionable. One advocate claims that because the “transportation network is interconnected, . . . it makes sense to use toll revenue on projects that reduce traffic congestion” on the toll roads. Wait. It makes sense to divert revenue so that revenue can be decreased through reduced usage of the toll road? Why not a fee on train passengers to pay for the bridges that toll roads need to build to go over or under railroad tracks? The silliness of that question demonstrates the weakness of the toll diversion justification argument. When New Jersey’s governor proposed the toll-diversion scheme, I took it apart in User Fees and Costs, and the followup, When User Fees Exceed Costs: What to Do?.

The numbers are not insignificant. According to Nussbaum, last week the New Jersey Turnpike Authority agreed to divert another $324 million to the state. He also discloses that “[s]ince 2007, the Pennsylvania Turnpike Commission has sent $3.1 billion - more than it collected in tolls - to Harrisburg for statewide use.” How did they manage to do that? The legislature planned to impose a toll on I-80. Thinking that this was money in the bank, the legislature, before getting clearance from the Federal Highway Administration, ordered the Turnpike Commission to borrow billions of dollars, and to turn that money over for repairs to other roads and highways. The amount? Nearly one billion dollars a year. The folks who pulled this stunt have committed the turnpike to paying half a billion dollars a year for 47 years, to be funded by annual toll increases on a highway that had only five increases in 68 years. When the I-80 toll proposal was disapproved by the FHA, the legislature mandated toll increases on turnpike users to pay for the money it spent before it actually had that money. Keep in mind who did this. Politicians who have accumulated votes by criticizing deficit spending. Folks, spending money that one does not have and might not ever have, is deficit spending. Can you spell “hypocrite”?

And tolls are scheduled to increase in 2012 for all the toll roads in both states. In New Jersey the increases are at least 50 percent. Yes, you read that correctly, 50 percent. And this from the legislators and governors who claim to be anti-tax because increased government revenue is such a bad thing. Apparently it’s not a bad thing when it provides politicians with dollars to funnel to their pet projects without raising anything with the name of “taxes.” They think they can get away with this because they think citizens are ignorant (and if they are, the politicians are in many ways responsible, from underfunding public education to peppering society with misleading sound bites). In User Fees and Costs, I explained that “Supporters of the [New Jersey toll diversion] plan think that motorists using E-Z-Pass won't object as much as they otherwise would because the don't 'see the actual fees' being paid.” Who has the moral high ground on this point?

I had predicted that the I-80 tolling plan would not work, because it diverted tolls. Had the legislature been paying attention, it would have designed the plan as a true toll arrangement and not as a hidden revenue generator. In Are State Gasoline Taxes the Best Source of Highway Revenue?, I rejected the I-80 toll diversion plan by arguing, “It makes no sense to require drivers using the turnpike or I-80 to subsidize repairs to Routes 1, 3, 320, 252, or 202, to name but a few highways in the southeastern part of the state where I live.” In Raising Revenue Through Tolls Isn't Simple, I explained, “[The FHA] concluded that Pennsylvania's proposal did not adequately meet the threshold for the three-state federal plan. The FHA noted that Pennsylvania did not demonstrate that the tolls would be used only for I-80 improvements. The FHA did not seem to agree that toll revenues used to fund highways and bridges elsewhere in the state constituted operating costs of I-80.” I had that one right from the beginning. Harrisburg, though, was not listening or reading. Had it been sensible with the I-80 toll proposal, it would have generated sufficient funds for maintaining and improving that important road. But by reaching for too much more, the legislature proved once again the saying about bears, bulls, and pigs.

The diversion of tolls to other uses is not a new ploy. For example, for years the Delaware River Port Authority used tolls for all sorts of projects having nothing to do with maintenance and repair of the bridges under its supervision. I explored this in Soccer Franchise Socks It to Bridge Users, Bridge Motorists Easy Mark for Inflated User Fees, Restricting Bridge Tolls to Bridge Care, Don't They Ever Learn? They're At It Again, A Failed Case for Bridge Toll Diversions, DRPA Reform Bandwagon: Finally Gathering Momentum, and When User Fee Diversion Smacks of Private Inurement. The warning I provided in DRPA Reform Bandwagon: Finally Gathering Momentum is one that should be viewed carefully by turnpike users, other motorists, and legislators, though the latter might not do so until pressure is brought by motorists. I explained:

Some time ago, I criticized the decision of the Delaware River Port Authority to use toll revenues for contributions to the construction of a major league soccer stadium. In Soccer Franchise Socks It to Bridge Users, I pointed out that tolls paid for the use of a bridge should be used for the maintenance and repair of the bridge and not for other purposes, as the DRPA had become accustomed to doing. In a follow-up, Bridge Motorists Easy Mark for Inflated User Fees, I noted the absurdity of the DRPA’s call for increased bridge tolls because it needed money to repair its bridges. Perhaps had money not been diverted to soccer stadium construction and other projects, there would have been funds for the DRPA to perform its stated functions. The criticisms that I, and a few others, offered fell on deaf ears, as a year later, I explained in Don't They Ever Learn? They're At It Again that the DRPA had announced plans to funnel more toll revenues into projects having nothing to do with the bridges and waterways it is charged with tending. Shortly thereafter, in A Failed Case for Bridge Toll Diversions, I lambasted the governor of Pennsylvania for his unwise attempt to justify using bridge tolls for other purposes.

(emphasis added).

What should be funded by tolls? In User Fees and Costs, I explained:

The toll should be based on the cost of building, expanding, improving, repairing, maintaining, policing, and monitoring the road. It isn't difficult for a cost accountant to determine how much it costs to operate the New Jersey Turnpike, the Garden State Parkway, or any other toll road. Tolls should be increased as costs increase, and though it is preferable to recalculate the cost each year, it might be easier to use some sort of inflation index and do the cost recalculation every four or five years. . . .

. . . The analysis I support is one that looks at the impact of the toll road and its use on surrounding residents, neighborhoods, and infrastructure. Traffic volume surrounding a toll road interchange is higher than it otherwise would be, and that generates additional costs for the local government. It makes sense to include in the toll an amount that offsets the cost of widening adjacent highways, installing traffic signals, increasing the size of the local police force, adding resources to local emergency service units, and similar expenses of having a toll road in one's backyard. I understand the argument that because the locality benefits economically from the existence of the toll road and its interchange that it ought not be subsidized by the toll road. It is unclear, though, whether the toll road is a net benefit or disadvantage. If it were such a wonderful thing, why are new roads so vehemently opposed by so many towns and civic organizations?

Using toll revenue to maintain and repair roads and infrastructure far from the toll road is more difficult to justify. Other than relying on arguments such as the maintenance of a high quality state-wide road network that would attract more tourists and business ventures, proponents of siphoning toll revenue to distant areas have a, sorry, tough road to hoe. A better approach would be to impose tolls on heavily used roads in those distant areas.

I reiterated this analysis, more succinctly, in Timing, Quantifying, and Allocating User Fees, by explaining, “Tolls should be used to pay for the costs of building, repairing, maintaining, and operating the toll road, and to defray the economic burden that the road imposes on the surrounding neighborhoods. Tolls should not be used for programs unrelated to the road.”

The toll diversion arrangement rests on the erroneous claim that because most roads cannot be tolled because there’s no feasible way of installing toll booths and limiting access, the only solution true to fuel tax increase opposition is to jack up the tolls on whatever toll roads exist, and divert the excess to other roads. That approach, of course, opens the door to the DRPA misuse of tolls, by diverting the excess tolls to other purposes, a ploy now being used in New Jersey. There is of course, a viable and sensible alternative. As I wrote in Toll One Road, Overburden Others?:

Yes, it’s the mileage-based road fee. I’ve written about this approach many times, beginning in Tax Meets Technology on the Road, and thereafter in 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, and Is the Mileage-Based Road Fee So Terrible?

Will politicians figure this out before it’s too late? One can only hope.

In Are State Gasoline Taxes the Best Source of Highway Revenue?, I observed, “It doesn't help when a leading state legislator describes tolls as the 'wave of the future,' because in doing so, what he demonstrates is a surprising ignorance about the actual wave of the future that already is in the present, namely, mileage-based road fees.” Now I understand why state legislators like tolls. It would be much more difficult to pull off the diversion stunt with mileage-based road fees. Which is even more the reason to push for the replacement of tolls with mileage-based road fees.

Do Lower Taxes, Less Regulation Create Jobs? Do Payroll Tax Cuts, Employment Credits, More Section 179 Expensing, Unemployment Benefits Create Jobs?

On one thing, almost everyone can agree. The economy is a mess, as evidenced by the number of people lacking employment. On something else, almost no one can agree. Specifically, what is the recipe for fixing the economy?

President Barack Obama has proposed a plan that continues, expands, and extends to employers the existing payroll tax cut for employees, extends unemployment benefits, funnels money for hiring construction workers, police, firefighters, and teachers, continues and expands the 100 percent equipment purchase deduction, and adds credits for hiring workers. Republicans have a different solution. For example, according to Speaker of the House John Boehner, the solution is lower corporate tax rates and a roll back of environmental and labor regulations.

They’re all wrong. They parade out failed strategies and unsuccessful tactics. Albert Einstein’s definition of insanity is well known. When it comes to choosing between politicians and Einstein, I’m for Einstein.

Aside from one proposal, the linchpins of the President’s plan not only have a failed track record but also pose the risk of counterproductive consequences. The payroll tax cut did little, if anything, to fix the problems, because the economy is no better at this point than it was when that cut was enacted, and it might even be, by some measures, worse. As a short-term band-aid, it was worth the attempt. As long-term surgery, it fails. It costs too much. It undermines funding for the Social Security program. As I pointed out in Two Types of Tax Increases, “The answer might not be an extension of the social security tax cut.”

It should be obvious that extending unemployment benefits does not create jobs. The better thing to do is to exchange benefits for services, not unlike what happened in the 1930s when America, similarly burdened with a failing economy caused by the risky games of the wealthy, needed to get its financial position restored to its potential. This is why the proposal to spend money to fix America’s crumbling infrastructure, makes sense. I explained why this is so, four years ago, in Funding the Infrastructure: When Free Isn't Free. Four more years of rot and rusting only makes the situation worse.

The idea of continuing and expanding the section 179 expensing deduction for equipment purchases a senseless one. It may have been a worthwhile bandage a few years ago, but the economy continued to hemorrhage despite that provision. If anything, it benefits businesses that would have made purchases in any event. A business with no need to make a purchase will not make a purchase simply because the cost is deductible in the year of purchase rather than over a three or five year period. Among my several posts attacking this giveaway to those least in need is If At First It Doesn’t Work, Try, Try, Try Again, not my first criticism of the current President’s tax proposals (a point I make in response to those who consider my economic analysis to focused on criticism of one side of the partisan divide).

Tax credits for hiring people have been in the tax law for a long time. Congress has tinkered with those credits numerous times. Almost every year, the credit has been renamed, duplicated, fine-tuned, and expanded. Those efforts do no good. Why? A business with no need of an employee does not hire someone simply because a fraction of the salary will generate a tax reduction. A business with need of an employee possessing a particular skill needed by the business cannot simply hire just anyone who walks in the door, even if that person brings along a tax credit. Throughout the recession, the employment classifieds have continued to run, and to contain numerous listings. The problem is that too many Americans do not have the skills that businesses seek.

The Republicans’ position fares no better. The consequence of lower corporate tax rates would be retention by corporations of even more cash. Corporations already are drowning in cash. Corporations are not spending that cash, even though most corporate spending would bring reductions in taxable income and thus reductions in tax liability. Corporations are not spending cash because they are self-insuring against the next fiscal fiasco, while waiting, perhaps hopelessly, for the Congressional merry-go-round of continual tax and spending changes and battles to come to an end.

The desire to roll back, translate, and eliminate environmental and labor regulations is understandable once the philosophy of the advocates of this backwards move is understood. Labor regulations are all that stand between the greed of the multi-billionaires and the safety and wage security of workers. When left to their own devices, for example, in the nineteenth century, the barons of industry exploited the working class. Only after someone in authority -- translate, government -- stepped in to protect the downtrodden did the middle class begin to emerge. And only after the middle class emerged did this nation come to prosper in the second half of the twentieth century as the world’s leading economy and a nation to which people across the globe looked for inspiration and economic opportunity. Until, of course, the downtrodden barons of industry started dismantling it. Environmental regulations are all that stand between the greed of the multi-billionaires and the health of the citizenry. Repeal of environmental protection surely means reduced expenses, and thus increased profits, for the barons of industry. Before there was environmental regulation, the air in most cities was a health hazard, rivers were flowing with sewage and industrial pollutants, toxic waste dumps proliferated, and natural resources were ravished. Rolling back these regulations will create jobs. For morticians, undertakers, and grave diggers.

The answer, as I’ve explained for years, is to undo the cause of the economic mess. The Bush tax cuts need to expire. The Bush tax cuts were enacted in response to a promise that they would create jobs. They did not create jobs, at least not in this country. They created pools of money that were either stashed abroad, for example, in Swiss banks, or were invested in bad deals designed to extract up-front fee income while bundling bad loans into packaged investments that poisoned pension plans and small businesses. That, in turn, brought the Bush TARP boondoggle, which added economic insult to economic injury.

Though the defenders of low or even repealed taxes for the ultra-wealthy claim that they should be permitted to “keep what they earned,” the reality is that few of the ultra-wealthy earned what they have through physical or intellectual labor. As I predicted long before there was this or any other blog, the proliferation of Crummey life insurance trusts among the wealthy had the effect of creating an entire class of super-wealthy who had done nothing to attain their economic status other than by chance being born to the right parents. Even those who generate wealth through their own efforts benefit from the activities of others. A doubling of the world’s population doubles the demand for a product or service, and at least doubles the profits, without the provider of the product or service lifting so much as a fingernail to move up the economic ladder.

All of this could be excused if the outcome was beneficial across the board. Perhaps the middle and lower classes would not begrudge the “success” of the wealthy if the economic benefits indeed trickled down. But that’s not what trickled down. During the era of the Bush tax cuts, the rich got much richer, the poor barely held their own, the middle class began to disappear, jobs vanished, infrastructure corroded, and the nation’s international reputation as an economic dynamo went down the tubes. That is why more of the same, including the bulk of the President’s proposals and the bulk of the Republicans’ proposals are nothing more than insanity. Is it not time for rational thinking to trump the politics? Sadly, I doubt that will or can happen.

The IRS and Forms 1099-INT: We Remain Curious

One of the benefits of writing this blog is that it gives me the opportunity to learn. Last week, in Does the IRS Issue Forms 1099? Should It?, I asked whether the IRS is required to issue Forms 1099 when it pays interest, whether it does so, and whether it ought to do so. Two days later, in More on the IRS and Form 1099-INT, I shared one response that came my way. Mary Lew Kehm, a CPA and PFS (personal financial specialist) reported that she has had clients who received Forms 1099-INT from the Treasury Department. Like me, she could not figure out why the taxpayer in Megibow v. Comr., T.C. Memo 2011-211, the case that triggered my questions, did not receive a Form 1099 for interest paid by the IRS. After doing a bit more research, I shared my discovery that the Treasury Department issues Forms 1099-INT with respect to some, but not all, discounts on, and redemptions of, Treasury obligations. That there is inconsistency seems an inescapable conclusion.

Two more replies have arrived. A practitioner in upstate New York reports that “most” of his clients do receive Forms 1099-INT in connection with interest paid to them by the IRS. He suggests that but for those forms he might not otherwise know that the clients had received interest. James Brower, a CPA with a Masters of Science in Taxation who practices not far from me, also reports that Forms 1099-INT are issued with respect to interest paid by the IRS, though he does not think the IRS is required to issue those forms. He explains:

IRC §6049 spells out the rules regarding when payments of interest need to be reported to the IRS. However, IRC §6049(b) has its own definition of “interest” which is much narrower in scope from that of IRC §163. If you read through IRC §6049(b) you will see what payments constitute “interest” for purposes of 1099-INT reporting, and you won’t find interest paid on tax refunds listed there.

Also, if you look at Treasury Regulation §1.6049-5(b)(4) you will see that for purposes of 1099-INT reporting, interest does not include “interest that a governmental unit pays with respect to tax refunds.” I think that the Regulation pretty much answers the question.

Mr. Brower suggests that the IRS – and some states – issue the Form 1099-INT, even though not required to do so, because it encourages taxpayers to report the interest income. Perhaps, he surmises, the lack of the Form 1099 in Megibow caused the taxpayer not to report the interest income. Mr. Brower also suggests that “based on my 20+ years of dealing with the public in preparing tax returns, I’d say that a good segment of the population of this country honestly believes that income is taxable only if it gets reported to the IRS on a 1099, W-2 or other information return.” I agree. More than one student in my basic federal income tax over the past 20+ years has commented, not in these exact words, “If the IRS doesn’t know about it, is it really income that needs to be reported?”

In my reply to Mr. Brower, I said:

Thank you for your analysis. I agree with you. The lack of a requirement combined with the sending of Forms 1099 raised the same question for me. I think your answer makes sense. What continues to puzzle me is (1) did the IRS issue a Form 1099 to Mr. Megibow? (2) if not, why not? (3) if yes, why did the IRS not contest his assertion that it had not sent one?

When he in turn replied, Mr. Brower shared his guess that we will never know the answer to my first two questions. That’s frustrating. I’m confident I’m not the only one who wants to know. Those questions are at the heart of what inspired the initial post on this issue. As for the third question, his guess is that IRS counsel did not think it was necessary to contest Megibow’s claim that a Form 1099 had not been sent. The interest is includable in gross income whether or not a Form 1099 is sent or received, and thus the IRS can win – as it did – without that evidence. Yet, would it not be sensible to introduce proof that the Form 1099 was sent? Would that not chip away somewhat at the taxpayer’s factual presentation, gross income concepts aside? Could it be that IRS counsel tried to obtain a copy of the Form 1099 sent to Megibow, but was unsuccessful because someone on the Commissioner’s side could not find it? But if it cannot be found, ought one assume it was sent?

How many other taxpayers who receive interest from the IRS fail to receive a Form 1099 and then in turn do what Megibow did? Does anyone know? Yes, the IRS could cross-check its record of interest payments with the copies of the Forms 1099 it has sent. This sort of self-audit would be useful to the IRS, to taxpayers generally, and to the nation. So now my invitation is to someone at the IRS to enlighten the rest of us. We remain curious.

Even Giants Make Tax Mistakes

A practitioner pointed me in the direction of an H&R Block Press Center Newsroom Story Ideas posting, titled, “Renting Your Vacation Home: What Are the Tax Breaks?” The article points out the sort of expenses that qualify as deductible because of the rental activity, and correctly notes that if the property is rented for fewer than 15 days during the taxable year, those expenses cannot be deducted and the rental income is excluded from gross income. The article proceeds to define what constitutes a personal use day for purposes of determining whether the section 280A limitations apply.

The article provides an example of how to pro-rate rental expenses between personal use days and rental days. In the example, there are 90 days of rental use and 225 days of personal use. The taxpayer in the example has $4,500 in “mortgage insurance” – by which I assume is meant “mortgage interest” because there is no other item tagged as “mortgage interest” and there would not be “mortgage insurance” without “mortgage interest” – along with $3,000 in real property taxes and $17,200 in expenses deductible only on account of rental activity, such as cleaning, insurance, repairs, utilities, and depreciation. According to the example, the taxpayers are permitted to deduct 90/225 of this amount.

There are two errors in this example. The first is the use of a fraction 90/225. The total days of use equal 315 (90 + 225). Thus, the rental portion is 90/315, not 90/225. The second is the lumping together of the deductions allowable in any event (mortgage interest and real property taxes) and the deductions allowable only on account of the rental use. This approach is the position taken by the IRS, but it is a position rejected by taxpayers and by the courts.

Understanding the second error requires a bit of background and an exercise in statutory interpretation. Section 280A(e) provides as follows:

(e) Expenses Attributable to Rental.--
(1) In general.--In any case where a taxpayer who is an individual or an electing small business corporation uses a dwelling unit for personal purposes on any day during the taxable year (whether or not he is treated under this section as using such unit as a residence), the amount deductible under this chapter with respect to expenses attributable to the rental of the unit (or portion thereof) for the taxable year shall not exceed an amount which bears the same relationship to such expenses as the number of days during each year that the unit (or portion thereof) is rented at a fair rental bears to the total number of days during such year that the unit (or portion thereof) is used.

(2) Exception for deductions otherwise allowable.--This subsection shall not apply with respect to deductions which would be allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was rented.

Thus, it is appropriate in the example to multiply $17,200 by the rental use fraction (90/315, not 90/225). However, the mortgage interest and real property taxes are not subject to the section 280A(e) fraction. Instead, when computing the limitation on the total deductions attributable to the rental activity, as provided in section 280A(c)(5), the taxpayer must reduce rental gross income by “the deductions allocable to such use which are allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was so used.” Translated, the means the reduction equals “the mortgage interest and real property taxes allocable to the rental use” because those deductions are allowable whether or not the property is used as rental property. Thus, the question is, “What is the meaning of ‘allocable to such use’?” The IRS takes the position that the allocation is computed using the rental use fraction, and in the case of the example, by using 90/315. Thirty years ago, a taxpayer took the position that the appropriate fraction was 90/365, arguing that a portion of the interest and taxes relate to each day in the year, and pointing out that if Congress wanted to use the section 280A(e) fraction it would have used the section 280A(e) language in section 280(c)(5), something it did not do.

The taxpayer, in Bolton v. Comr., 77 T.C. 104 (1981), prevailed. The IRS appealed to the Ninth Circuit. It lost. See Bolton v. Comr., 694 F.2d 556 (9th Cir. 1982), aff’g 77 T.C. 104 (1981). In the many cases that have since arisen dealing with this issue, the taxpayers have prevailed, including a decision in the Tenth Circuit that followed the Ninth Circuit reasoning. Yet the IRS persists, perhaps hoping that another appellate court will decide in its favor, leading to a decision by the Supreme Court to resolve the dispute. Unfortunately, the IRS position is flat-out wrong, it has been consistently and uniformly rejected, and it puts taxpayers in the unfortunate position of choosing between an adverse tax outcome or the risk and cost of an IRS audit and litigation.

For a commercial tax return preparer to provide an example that makes no mention of the Bolton case or its progeny is appalling. How many taxpayers will end up paying more in taxes than current law requires? I’m told by the practitioner who alerted me to this web page that the same article appeared a year ago, the practitioner called and explained the errors, and the page was taken down. Now it has reappeared. The practitioner noted that another phone call this year is very unlikely.

Teaching section 280A in the shadow of Bolton and the IRS refusal to concede makes the basic tax course even more challenging, for me and for students, than it otherwise needs to be. The only silver lining in the cloud is that it provides an opportunity to help students think about the advice they would give to a client or tax return preparer who faces the issue. How should the tax return be filed? What are the advantages and disadvantages of using the Bolton approach? What are the benefits of following the IRS approach and ignoring the Bolton line of cases? Someone who relies on the H&R Block Press Center Newsroom Story Ideas posting would not be asking those questions because they are not being asked those questions. They would be living in an artificial tax world in which Bolton and its progeny do not exist. That’s not a good way to practice tax.

Destruction: Natural Disasters and Taxation

Many months ago, back in March, KVUE in Austin, Texas, ran a story that certainly did not get my attention and probably did not get much attention outside of Texas. Hundreds of firefighters, most of them volunteers, gathered in the state capital to honor colleagues who had died in the line of duty and to protest budget cuts that would reduce state funding for fire fighting services from $30 million to $7 million. Already under financial stress, volunteers report using personal funds to pay for equipment, repairs, supplies, and upkeep of fire houses. The executive director of the State Firemen’s and Fire Marshals’ Association of Texas, representing 21,000 firefighters, said of the impact of these cuts, “ . . . it doesn’t help us out any whatsoever, . . . I think the citizens and the public is going to see that.” These have turned out to be sadly prophetic words.

Fast forward to August. Numerous reports, including this one, bring news of wildfires throughout Texas that have destroyed more than 1,000 homes, including one 48-hour period in which 852 residences were devastated. One need only look at map of Texas wildfires to see the incredible scope of the problem.

Here’s the challenge. It costs money to fight wildfires. Yet the governor of Texas and his political allies, as a price for keeping taxes artificially low, decided to cut firefighting assistance funds by more than 70 percent. Surely, considering that firefighters already were laboring under financial shortfalls, this was not a matter of the typical “we need to cut wasteful spending” excuse for trying to shrink government. Here’s some wisdom for the anti-tax crowd: shrunken and destroyed governments cannot protect citizens from rampaging wildfires.

So what does the governor of Texas and his political allies propose to do? They want money from the Federal Emergency Management Agency (FEMA). Apparently it doesn’t matter that the governor of Texas has been very critical of FEMA. Now, according to this report, he claims that this is “not the time to worry about reforming the agency.” Apparently it doesn’t matter that FEMA is running out of money. According to many reports, including this one, FEMA is almost out of money, but House Republicans want any FEMA funding increase to be offset by spending in other areas. Perhaps we should cut salaries and benefits for Congress and its staff.

The governor of Texas is not the only advocate of lower taxes and small government to turn to the federal government to ask for funding. The governor of New Jersey sent a letter to the President asking for federal assistance. The governor of Pennsylvania, another anti-tax zealot, also asked for federal assistance. Neither specified whether that assistance should be funded with tax increases or cuts in spending, and though one should expect that they would prefer the latter, as do their ideological counterparts in Congress, neither one dared to suggest who should bear the burden of those spending cuts in order to assist their states.

As I pointed out recently in Storms, Public Infrastructure, and Taxes, the solution offered by the anti-tax zealots is to cut spending, which means reduced funding for fire departments, police protection, public sewage treatment plants, and other essential services. The anti-tax folks in Texas have provided a wonderful example of what happens when fire fighting funding is cut.

The mind-set of rejecting government, and opposing taxation in order to shrink, and as some anti-tax advocates explain, to eliminate, government, and yet begging for money from government when things get rough, makes me think of another mind-set. This behavior immediately reminds me of the teenager who wants nothing to do with his or her parents until the youngster realizes that the parents are needed for help. Anti-authoritarian suddenly become appreciative of the social benefits of a government using its authority protecting its citizenry when they or those on whom they rely for votes are in need of help. The anti-tax campaign is not so much a simple opposition to taxes as a philosophical ideal, but a desire to eliminate funding for regulation and supervision of business and other activity. That regulation, designed to protect workers and the environment, to give but two examples, prevents people from simply doing whatever they want to do, perhaps in pursuit of money and perhaps in pursuit of fun, without regard to the cost that they impose on other people when they shift the cost of their activity onto others.

The anti-tax crowd is more than anti-tax. That is another reason why I explained, in Storms, Public Infrastructure, and Taxes, that “I shudder in horror at the total inanity and stupidity of the anti-tax pledge.” From the perspective of the well-being of democratic, pluralized, just, and economically balanced society and the governments necessary to protect that lifestyle, destroying the life-blood of freedom by using a self-centered definition of freedom is stupid. Perhaps one of the most outspoken Republican candidates for the presidency is correct. Perhaps, as she claims, all of these natural disasters are a divine message, but not the message she thinks it is. Perhaps they are intended to educate people. Perhaps when the dangers of destroying government is highlighted by actual catastrophe rather than hypothetical scenarios posed by pundits will people wake up to the siren song of the self-centered. Perhaps one lesson is that not only can taxes be too high, they can be too low. A slew of natural disasters is bringing that point home, whether or not someone attaches a theological interpretation to these catastrophes. Taxes that are too low can be as destructive as natural disasters.

More on the IRS and Form 1099-INT

My Wednesday post, Does the IRS Issue Forms 1099? Should It? brought a response from Mary Lew Kehm, a CPA and PFS (personal financial specialist), who practices a few counties away from here. She reports that she has had clients who received Forms 1099-INT from the Treasury Department. Thus, she concludes either the government is not being consistent, or there was something unusual in Megibow v. Comr., T.C. Memo 2011-211, that the Tax Court did not disclose. I agree. I also think that whichever is the explanation, something is awry and needs attention.

A little more research discloses two interesting tidbits. According to William J. Coffey, Strengthening Treasury Direct:

Treasury Direct issues selected 1099 forms. Interest Form 1099-INT reports discounts on Treasury bills and interest payments on notes and bonds. Proceeds from redemptions of notes and bonds are reported on Form 1099B. The Internal Revenue Service requires Form 1099-OID for reporting an original issue discount on notes and bonds. However, Treasury Direct only issues this form for inflation-indexed notes.

First, the Treasury Department, of which the IRS is a part, does issue Forms 1099, but the issuance comes from a part of the Treasury Department that is not the IRS. Second, this form is issued with respect to some, but not all, discounts on, and redemptions of, Treasury obligations, and thus there is inconsistency in this regard.

Anyone who can enlighten me is invited to do so. What are the requirements? Are they being followed? And if the inconsistency is consistent with the requirements, why are the requirements inconsistent?

Does the IRS Issue Forms 1099? Should It?

A Tax Court opinion released last week made me stop and ask myself a question. Does the IRS issue Forms 1099?

In Megibow v. Comr., T.C. Memo 2011-211, the Tax Court rejected a taxpayer’s argument that he was not required to include in gross income the interest that the IRS had paid him on overpayments he had made. The conclusion is inescapable. Interest is included in gross income, unless it is tax-exempt, which the IRS payments were not. One of the arguments raised by the taxpayer was that he was not required to include the interest in gross income because the IRS had not issued to him a Form 1099 reporting the interest. The Tax Court pointed out that failure to receive an information return, such as a Form 1099, does not transform gross income into excluded income, citing Vaughn v. Comr., T.C. Memo 1992-317, aff’d without pub. Op., 15 F.3d 1095 (9th Cir. 1993). Apparently the IRS did not contend that it had issued a Form 1099, and that is what made me wonder if the IRS issues those forms.

Unless I am missing something, the IRS is not required to issue a Form 1099. Technically, the Form 1099 is an information return, conveying to the IRS tax-related information about a transaction in which other parties have engaged. The taxpayer receives a copy, but technically the taxpayer, by having engaged in the transaction, already knows the information. The taxpayer’s copy is, in this respect, a convenience. The IRS does not report to itself information concerning a transaction in which it has engaged.

The follow-up question is whether the IRS should issue Forms 1099, not only as a convenience to taxpayers, but also as a reminder to taxpayers that they have gross income in the specified amount. Compliance with respect to interest income reporting would increase. The IRS would spare itself the aggravation and cost of going through what it had to go through in this case. Because many taxpayers react to a Form 1099 with the thought, “I must report this because the IRS knows about it, and if I don’t report it, the IRS spotlight will shine on me,” the benefits of requiring the IRS to issue Forms 1099 – or of the IRS voluntarily choosing to do so – outweigh the costs.

One wonders how many other taxpayers failed to report interest paid by the IRS, how many were tagged by the IRS, and how much it cost to bring them into compliance. Surely those who are escaping taxation by failing to report the interest would not be happy with my suggestion, but anything that increases tax compliance is a step in the right direction. The tax and deficit burdens on those who comply are increased by those who do not comply. Having the IRS issue Forms 1099 would ease that inappropriate shifting of burden.

You Know the Election Cycle Has Started When The Tax Talk Gets Even Dumber

Taxes certainly get a lot of attention. This is particularly noteworthy when one considers that taxes are not like the matters that usually get lots of attention. Taxes are not celebrities, taxes are not weather crises, taxes are not sporting events or fantasy football. It certainly is amusing, almost, that something almost no one likes gets so much air time.

Jon Huntsman has entered the tax conversation. His plan, outlined here, is quite familiar. His plan “eliminates all deductions and credits in favor of three drastically lower rates of 8%, 14% and 23%.” Surely that cannot be so. Does he plan to eliminate the credit for taxes withheld from a person’s paycheck? Or the credit for making estimated tax payments? Does he plan to eliminate business deductions and impose an income tax on gross profit? Is the standard deduction headed for the dustbin of tax history? Will the deduction for personal and dependency exemptions also get trashed? The problem with this “soundbite” planning is that it would leave a person earning $20,000 with a federal income tax bill of $1,600, a social security tax bill of $1,530, and state and local income, sales, and other taxes of who knows how much. Under current tax law, a person scraping by on that sort of salary – a consequence of all the wonderful jobs created by the Bush tax cuts – would need to cut at least $1,600 from their other spending. Perhaps more, if this person qualified for the earned income tax credit. So, let’s see, the poor person’s taxes go up and the wealthy person’s taxes go down, down even more, as a reward for the superb performance of the economy triggered by the last round of tax cuts for the wealthy.

The Huntsman plan not only nails the poor, and to a lesser extent, the middle class, through its elimination of all deductions and credits, it also crushes those on the lower rungs of the economic ladder by eliminating all taxes on capital gains and dividends. This tax break goes to those who can afford to have capital gains and dividends. Again, it’s not the poor, and it’s not most of the middle class who will throw we-have-even-lower-taxes parties. Note that interest would remain taxable, as that is the type of investment income most predominant among the poor and middle class. Under Huntsman, the federal income tax burden would fall on wage earners. Happy Labor Day.

Huntsman’s rationale for not taxing capital gains and dividends is seriously flawed. According to Huntsman (or, more likely, the people who created “his” plan and financing its hype), “Because dollars invested had to first be earned, they have already been subject to the income tax. Taxing these same dollars again when capital gains are realized serves to deter productive and much-needed investment in our economy.” Testing this assertion with an example demonstrates why Huntsman or those hyping this plan don’t understand federal income taxes. Taxpayer T invest $1,000,000 in Z Corporation stock. Things go well, and eventually T sells the stock for $3,000,000. Current law taxes T on $2,000,000, not $3,000,00, and it already taxes T at a rate lower than the rate imposed on hard-working wage earners doing more than sitting back and watching stock price reports. Huntsman’s argument for not taxing capital gains makes sense in terms of not taxing the $1,000,000 that T “gets back” when T sells the stock, but current law doesn’t tax that $1,000,000. It’s called basis. On the other hand, the $2,000,000 of capital gain has not been taxed and thus taxing it at this point is not taxing “dollars [that] have already been subject to the income tax.” This is far from the most difficult and complicated aspects of federal income taxation. Just about every student in basic federal income tax courses learns this and understands this. Huntsman and his team – who perhaps never saw an income tax course – are the sort of people who require the use of “just about” as a limiting modifier on the word “every.” What is more likely is that Huntsman and his backers know quite well the truth, that the $2,000,000 has not previously been taxed, but are trying to dupe the American public into thinking that cutting taxes on capital gains is good for America. It’s good, but not for America. It’s good for the wealthy who are bankrolling Huntsman and the other politicians who parade out the same tax misinformation. If all Americans were required to learn tax in high school, as I have often proposed, it would be much more difficult for those selling this tax deception to find people willing to jump on the lie train. Is it any wonder that the same “tax only wages” crowd seeks to cut funding for education? An educated electorate is the enemy of the manipulators. And the manipulators know that.

If this nonsense about taxes is any indicator, we’re in for a long, lie-filled election season. At least it will give me plenty of topics for this blog.

Employee or Independent Contractor? For Taxes, It Matters

Whether a person who is performing services ends up characterized as an employee or as an independent contractor affects a variety of tax issues. For example, the payor’s withholding responsibilities differ, employees being subject to withholding but most independent contractors not being subject to withholding. As another example, if the person is an independent contractor, the person is subject to self-employment taxes barring the application of an exception, whereas the person’s status as an employee means that the social security and Medicare tax responsibility is split between the employee and the employer. A very recent case indicates yet another significance, namely, whether deductible expenses incurred in the performance of the services are deductible in computing adjusted gross income, on Schedule C, or are deductible as employee business expenses, on Schedule A, subject to the 2-percent-of-adjusted-gross-income floor. This recent case caught my eye because the taxpayer was performing services as an adjunct professor.

In Schramm v. Comr., T.C. Memo 2011-212 (30 August 2011), the Tax Court held that the taxpayer was an employee and not an independent contractor. The court analyzed eight factors in reaching its conclusion. The facts supporting employee classification overwhelmed those supporting independent contractor classification.

Degree of Control: Supporting employee classification: university specified textbook taxpayer was required to use, university determined the topics to be covered, university set the length of the course, university managed enrollment of students, university provided web site used for online portion of courses, university imposed employment policies, such as sexual harassment, drug use, and conflicts of interest, on taxpayer, university treated taxpayer as employee. Supporting independent contractor classification: taxpayer followed independent approach in teaching classes.

Investment in Facilities: Supporting employee classification: university financed staff for recruiting, registering, and keeping records with respect to students. Supporting independent contractor classification: taxpayer maintained home office for teaching purposes, purchased office supplies, paid for an internet connection and computer.

Opportunity for Profit or Loss: Supporting employee classification: taxpayer’s pay based on number of classes taught, with no opportunity to change it. Supporting independent contractor classification: none.

Right to Discharge: Supporting employee classification: despite lack of evidence, it appeared university could terminate taxpayer’s services at any time, university could decline to pay taxpayer to teach additional courses. Supporting independent contractor classification: none.

Work is Part of Principal’s Regular Business: Supporting employee classification: university’s regular business is education of students and evaluation of their work, for which taxpayer was hired to do. Supporting independent contractor classification: none.

Permanency of Relationship: Supporting employee classification: taxpayer had long-term, consistent contractual relationship with university. Supporting independent contractor classification: none.

Relationship the Parties Thought They Created: Supporting employee classification: university and taxpayer acted as though relationship was employment, university withheld taxes, issued a Form W-2 to taxpayer, and did not check the statutory employee box on that form, university informed taxpayer it had classified taxpayer as employee. Supporting independent contractor classification: none.

Provision of Employee Benefits: Supporting employee classification: none. Supporting independent contractor classification: despite lack of evidence, university did not offer taxpayer or other adjunct faculty the types of benefits offered to other categories of workers.

The taxpayer’s situation in Schramm is very similar to that of adjunct faculty generally. It certainly is very similar to the manner in which my Law School treats adjuncts. The major difference is that adjuncts are permitted to select textbooks rather than being told what textbook to use, though they do receive advice and recommendations on that point. It is possible that some of our adjunct faculty do not maintain home offices for their teaching activities, but I’ve never asked and I don’t think anyone has ever asked. Newly-hired adjunct faculty, of course, lack the permanency of relationship that existed in Schramm, though that factor alone will not change the outcome. Next time I speak with one of our adjuncts, I need to remember to ask if they receive a Form W-2 or a Form 1099. Strange that I’ve never had this conversation, but I’ve never been involved in the payroll side of things. Perhaps I’ll also ask if they have any deductible expenses related to their teaching, because the school does make available to adjuncts computers and similar equipment. My guess is that, like me, they do have computers used for teaching and other business purposes, and pay for an internet connection through which they connect to the on-line classrooms and exchange emails with students, other faculty, and law school administration.

I know I will get a response even before I see any of our adjuncts. Why? Because some of them read MauledAgain.

Addendum: As expected, I've heard from our adjuncts. They are treated as employees and receive Forms W-2. It has been this way for about five years. Previously, they had been the recipients of Forms 1099.

Storms, Public Infrastructure, and Taxes

Though the damage caused by Hurricane Irene along the east coast of the United States was not as severe as expected, and nowhere near what it could have been, and perhaps someday will be from another storm, the damage was bad enough. For example, as reported and shown in this news story, a 900-foot section of North Carolina Route 12 in the Outer Banks was destroyed. In New York, MTA train service on Metro-North lines is suspended indefinitely on account of flooding, power outages, landslides, and track bed erosion, as reported, among other places, in this report. Damage to public infrastructure extends from Maine to North Carolina.

Repairing the damage that the hurricane caused to public infrastructure requires money. To the best of my knowledge, few, if any, of these structures and facilities are insured. Self-insurance might exist in the form of contingency funds, but several years of recession have caused many, if not most, governments and public agencies to dip into those funds. Money can be taken from other portions of the locality’s budget, but what’s left to afflict with a shortage? Should the fire department be eliminated? Should half of the police force be pink-slipped? Should public sewage treatment plants be closed?

Sometimes, no matter what people want, we, and those representing us in government, must do what we prefer not to do. That’s life. That’s also why I shudder in horror at the total inanity and stupidity of the anti-tax pledge. Technically, there are four pledges, one for House members, one for Senators, one for governors, and one for state legislators. All share, however, a promise to oppose and vote against “any and all efforts” to increase taxes. With respect to the type of situation now facing more than a dozen states, the anti-tax pledge advocate explains:

Can the language of the Pledge be altered to allow exceptions?

No. There are no exceptions to the Pledge. Tax-and-spend politicians often use “emergencies” to justify increasing taxes. In the unfortunate event of a real crisis or natural disaster, the legislator should propose spending cuts in other areas to finance the emergency response.

So in the anti-tax world, the county that wants to replace the washed out bridge or the city that wants to restore train service needs to eliminate police departments, lay off fire fighters, close down the sewage treatment plant, or reduce already bare-bone services to the citizenry. I can’t imagine what these ideologues would have argued on December 8, 1941.

Highways, Trucks, Recessions, and Taxes

One of the sights I saw, frequently, on my recent very short journey part-way across the country, was the tractor-trailer. I haven’t seen this many tractor-trailers on a per-mile basis for a long, long time. Because of past experiences, I have convinced myself that when recessions occur, truck traffic decreases. I can remember several recessions during which truck traffic was so reduced that the definition of “open road” almost required rewriting. Past experiences also taught me that truck traffic declined on weekends and almost disappeared on Sundays. That wasn’t the case in August of 2011. Truck traffic was incessant.

One of the questions that popped into my head was a consequence of my curiosity. “What’s in the trucks?” Occasionally, the answer was apparent. Those hauling new cars or cattle pretty much reveal their cargoes. Most of the trucks, however, consist of a tractor and a box trailer or container on a flatbed. “What’s in there?” Food? Is more food being shipped by truck than in the past? Despite recessions, people eat, so I’ve figured that the trucks carrying necessities, such as food, don’t change in number very much. So what’s in these trucks? Not too long into the trip, when I caught sight of this news, a possible answer appeared. Were these trucks filled with $9,010 Chanel sequined tweed coats? Were they carrying $775 Christian Louboutin “Bianca” platform pumps? Even if I had the audacity to find a way to look into the truck trailers (not that I would and not that I’d see much but cartons and crates), I wouldn’t have recognized these things. I’m just copying what I read, because I have no clue as to what these items are and why they are so expensive other than the ever-present desire of the elite to possess something most others cannot afford and to have a name or tag attached so that they are certain the world recognizes them as special and elite. And wealthy.

One of the feelings I encountered during this trip was the rattling, shaking, and banging that is experienced when driving off-road. Yet I did not drive off-road. About the time that I embarked, I had noticed a puzzling statement by Peter King in his MMQB column. He wrote, “Then Lou [the driver of the bus] climbed into the driver's seat and we started buzzing up I-85 toward Redskins camp in Northern Virginia, 490 miles of bumpy bliss while writing this column. Let's just say I would have written longer overnight if the interstate highway system in this country weren't as much of a roller coaster.” Haven’t ventured on interstates during the past two years other than those within a few miles of home, I wondered what he meant. I found out, when I reached I-70 in Illinois. I thought I had crossed the border into a still-developing country. I was reminded of stories from people I know who have driven in some of the countries formerly behind the Iron Curtain. My thought that perhaps it was “last on the list” to be repaired was quickly dispelled as I encountered more and more interstate miles marked with PERMANENT “rough road” signs. On the return leg of the journey, I traversed the Indiana Toll Road, hailed by advocates of privatization of public assets as proof of the superiority of their “shrink government” mentality. Guess what? Parts of that road rivaled the atrocious condition of I-70 in Illinois. There’s no guessing in determining why these roads are a mess. The anti-tax movement is succeeding in wrecking the nation’s infrastructure, banking on an exasperated public giving in to the “private milking of public assets” game that, in the long run, as seen in Indiana, leaves the country no better off and a few special elites wealthier. Perhaps they’re trying to save up to buy a few more dozen pairs of shoes.

My conclusion is that there are two Americas. One, inhabited by the wealthy, is nowhere near a recession, doesn’t worry about highways because helicopters and private jets don’t use them, and detests paying taxes. The other, inhabited by everyone else, is in the economic doldrums, if not ready to fall into another recession or depression, endures deteriorating infrastructure and reduced services, suffers from unemployment or employment at wages falling in real dollar terms, and yet despite holding an overwhelming number of votes, manages to perpetuate the system that keeps them down. Perhaps after paying for more shock absorber and tire replacements, front end alignments, and suspension adjustments, they will decide that it’s cheaper, in the long run, to pay increased tolls.

Two Types of Tax Increases

Apparently there are two types of tax increases in this nation. And apparently one type is very bad and the other is very good. How does one tell the difference? Read on.

A story broke last week, reported by the Associated Press and other sources, that the Republican members of Congress are opposed to extending the social security tax cut that was put into effect for this year. This tax cut applies to a tax imposed on the first $106,800 of wages, and reduced the 6.2% employee portion of the tax to 4.2%. The purpose of the reduction was to put more cash in the hands of ordinary consumers, whose increased purchasing stimulates the economy and creates jobs.

Failing to extend the cut, in other words, permitting the tax rate to return to 6.2%, is viewed by many as a tax increase. As I explained about a month ago in Tax Semantics, allowing a temporary tax cut to remain temporary is not a tax increase, though arguing that point is a distraction from the real issue. But for purposes of this discussion, calling it a tax increase drives home the larger point.

A rational person who pays attention to national politics would not be amiss in concluding that the anti-tax crowd, and that includes almost every Republican member of Congress, would be horrified at the idea of letting the temporary social security tax cut expire. After all, they are livid at the idea of letting the Bush tax cuts benefitting the wealthy terminate. Yet these anti-tax crusaders do not hesitate in their willingness to let the social security tax cut expire. Representative Jeb Hensarling claims that although lower taxes are better than higher taxes, “not all tax relief is created equal.” In other words, for these anti-tax Republicans, tax relief for the wealthy apparently is much more important than tax relief for low and middle income wage earners. Representative David Camp, who chairs the Ways and Means Committee, explained that tax reductions, “no matter how well-intended,” will increase the deficit and make the task of reducing the deficit “that much harder.” Camp gets points for that obvious bit of wisdom. If tax reductions, however, are a problem, then are not the Bush tax cuts even more of a problem, considering that they dwarf the social security tax cut? Where was Camp when those cuts were scheduled to expire and his colleagues went all out, in the face of spiraling deficits, to extend those tax cuts? Do we sense a double standard?

According to anti-tax Republicans, there is consistency in opposing a tax cut extension for ordinary Americans while heaping tax reductions onto the mega-rich. It is better, they say, to reduce corporate taxes and the tax burdens of the wealthy than it is to extend the social security tax cut. A spokesperson for House Majority Leader Eric Cantor claims that Cantor “has never believed that this type of temporary tax relief is the best way to grow the economy.” If he means that temporary tax cuts are not the answer to economic growth, then why the support for the extension of the temporary Bush tax cuts? If he means that temporary tax cuts for low and middle income individuals is not the answer, but that tax reductions for corporations and upper income individuals is the solution to the nation’s economic problems, can he please explain why the Bush tax cuts, rather than helping the economy, contributed to its downturn?

The answer might not be an extension of the social security tax cut. After all, the social security trust fund needs to be maintained and expanded to cover the benefits that are due to retirees in future years. The answer is to let the Bush tax cuts expire, and, ideally, to recoup the tax breaks from those who took them under the pretext of creating jobs that they had no need to create and no intention of creating.

So is there a double standard? Indeed there is. Perhaps a better word is hypocrisy. It’s interesting to watch the anti-tax group get painted into a corner as they are compelled to confess that they are not anti-tax across the board, but opposed to taxation of corporations and wealthy individuals. That does make sense from one perspective. Consider who contributes to the cost of acquiring elective office.

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part X

This is the tenth in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I close the series with a Supreme Court tax case involving a Thomas Maule descendant.

Sarah Prudence (Sally) Ordway (1910-1997), 7-great-granddaughter of Thomas Maule of Salem, Mass., and my 8th cousin: Sarah’s interest in a trust set up by her father, John Gilman Ordway (6-great-grandson of Thomas Maule of Salem, Mass.) was the subject of a gift tax disclaimer case, U.S. v. Irvine, 511 U.S. 224 (1994).

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part IX

This is the ninth in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with two members of the single tax movement.

Louis Blaul (1854-1909), married to Mary Conard Clendenon, 3-great-granddaughter of Thomas Maule of Salem, Mass., and my 3rd cousin four times removed: According to the Single Tax Review (1910), on googlebooks, “The death of Louis Blaul of West Philadelphia, robs that city of an earnest and devoted Single Taxer.” His funeral, we are told, was conducted “as he had desired, not according to the rites of any church, but by officiating Single Taxers.” One of many explanations of the single tax, and its chief advocate Henry George, can be found in this article.

Earl Harrington Foote (1882 - ?), 6-great-grandson of Thomas Maule of Salem, Mass., and my 7th cousin once removed: In 1920, Earl was a candidate for governor of Ohio on the single tax party ticket. According to Our Campaigns, he received 1407 votes, 0.07% of the total. In the 1930 census of Ohio, his occupation is listed as real estate agent. Earl was a 4th cousin three times removed of Louis Blaul’s wife Mary Conard Clendenon, but it is not known if Louis and Earl knew each other or knew of each other, though both were adherents of the single tax.

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part VIII

This is the eighth in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with a tax return preparer.

Evelyn Newton (1919-2002), 7-great-granddaughter of Thomas Maule of Salem, Mass., and my 8th cousin: Among the many careers juggled by Evelyn was tax return preparer employed by H&R Block. Her interests and skills reached beyond taxation, as she was employed by Utah Power and Light, and the Bureau of Reclamation. She also was an Herbal Life and Vanda Make-up distributor for more than a quarter of a century. (Primary source: her obituary in the 5 July 2002 Salt Lake City Deseret News)

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part VII

This is the seventh in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with tax accountants.

Willard Clinton Warren (1922-2009), 5-great-grandson of Thomas Maule of Salem, Mass., and my 3rd cousin twice removed: Willard ended his long career as senior tax principal of KPMG Peat Marwick’s Boston office. After serving in the Army Air Corps during World War II, he returned to Bowdoin College to complete his degree, and then joined the family business, Warren Publications. After a few years as manager of Pro-Con, he joined Mount and Carter, a Boston accounting firm, which through a series of mergers, became part of KPMG Peat Marwick. (Primary sources: his obituary in the 16 April 2009 Portland (Maine) Press Herald, in the Bowdoin College Magazine, and in the Conway Daily Sun.

Charles Banks King (1927-2008), 6-great-grandson of Thomas Maule of Salem, Mass., and my 5th cousin once removed: Charles as a CPA, educated at Principia College and the University of Miami Graduate School of Business Administration. He was director of the Estate Planning Council of Greater Miami, was a member of committees of the Florida Institute of CPAs, and served in leadership capacities at many other civic and professional organizations. He was a director and treasurer of the Miami Beach Taxpayers Association. (Primary source: his obituary in the 21 Dec 2008 Miami Herald)

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part VI

This is the sixth in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with members of local tax boards.

Frederick William Savory (1927-2004), 7-great-grandson of Thomas Maule of Salem, Mass., and my 8th cousin: Frederick was a dairy farmer and crop supply company owner who served for many years on the Town of Greene (N.Y.) Tax Grievance Board. (Primary source: his obituary in the 11 August 2004 Binghamton Press & Sun Bulletin)

Richard Edgar Hewitt (1920 - ?), 5-great-grandson of Thomas Maule of Salem, Mass., and my 5th cousin twice removed: According to a 1982 clipping in an Evansville newspaper archive, Richard, who was president of the Hoover Abstract Corp., served on the Vanderburgh County Tax Adjustment Board as well as on several other civic and governmental boards and commissions.

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part V

This is the fifth in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with two local tax officials.

George Perry Worrell (1863-1942), married to Mary Louisa Ogden, 4-great-granddaughter of Thomas Maule of Salem, Mass., and my 4th cousin 3 times removed (in addition to being a cousin through my Ogden ancestry): In the 1930 census of Pennsylvania, George’s occupation is listed as tax collector. On the three previous census enumerations, he had been listed as a salesman for a grocery store, but it’s not known if the tax collector position followed a career path change or a second job. I haven’t been able to learn anything more about his public service as a tax collector.

Joseph M. J. Flaig (1882-1933), married to May P. Neave, 4-great-granddaughter of Thomas Maule of Salem, Mass., and my 4th cousin 3 times removed: In the 1930 census of Missouri, Joseph’s occupation is listed as tax assessor for the city of St. Louis. According to his death certificate, at the time of his death he was deputy assessor for the city of St. Louis. I know nothing else about him.

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part IV

This is the fourth in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with two IRS employees.

Juanita Maude Tucker (1922-2006), 4-great-granddaughter of Thomas Maule of Salem, Mass., and my 3rd cousin three times removed: According to her obituary, Juanita “retired in 1988 after an exemplary 20-year career with the IRS.” Before working for the IRS, she was a co-owner and operator of the Powder Puff Beauty Shoppe in Bloomington, Texas, a business she started after raising her children. I do not know in what capacity she worked at the IRS. (Primary source: her obituary.

Rose Marie Randolph Agnes Maule (living), 6-great-granddaughter of Thomas Maule of Salem, Mass., and my aunt: After raising her and uncle Joe’s children, aunt Rose worked for many years as an IRS tax examiner in Philadelphia before retiring some years ago. I’ve never tried to pry into the details of what she did, respecting the confidentiality restrictions to which she was subject. My career with the Chief Counsel to the IRS began before I had learned that Aunt Rose was a tax examiner, though shortly after she had taken the position.

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part III

This is the third in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with two employees of predecessors to the IRS.

Roy Levi Maule (1889-1940), 4-great-grandson of Thomas Maule of Salem, Mass., and my 4th cousin three times removed: In the 1930 census of Oregon, Roy’s occupation is listed as deputy collector for the Bureau of Internal Revenue. Many years ago, his cousin and son described his occupation as a public accountant, making no mention of his career with the BIR. In the 1920 census his occupation is listed as bank teller and in the 1910 census he is listed as a confectionary salesman.

Joshua Clendenon (1813-1892), great-great-grandson of Thomas Maule of Salem, Mass., and my 2nd cousin five times removed: During 1865 and 1866, Joshua was employed as a clerk by the Office of Internal Revenue, Department of the Treasury, in Washington, D.C. According to the 1860 census of Pennsylvania, he was working as a conveyancer before he moved to Washington. He eventually returned to Philadelphia, presumably after he retired. (Primary source: Congressional Serial Set, Issue 1293)

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part II

This is the second in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with an IRS and a Treasury official.

James Albert Mackey (1943-1999), 6-great-grandson of Thomas Maule of Salem, Mass., and my 7th cousin once removed: From 1971 through 1980, Jim was an assistant commissioner of the IRS. He had worked at Deloitte and Touche after completing military service, and after his departure from the IRS he founded the accounting firm of Mackey and Kirkner in Newtown Square, Pa., where I grew up. His son Jim was a student of mine at Villanova’s Law School in the 1990s. (Primary source: his obituary in the 23 Nov 1999 Philadelphia Inquirer)

Lorin Blodgett (1823-1901), 3-great-grandson of Thomas Maule of Salem, Mass., and my 4th cousin four times removed: Among Lorin’s many careers were positions as manager of the Treasury Department’s financial and statistical reports, as appraiser-at-large of customs, and as special assistant in the Treasury Department. When not busy with Treasury matters, he made time to found the U.S. Weather Bureau, serve as assistant at the Smithsonian Institution in charge of climatology research, present papers on atmospheric physics, direct the surveying and determination of gradients and altitudes for the Pacific railway, work in the War Office, write at least 150 books, 350 pamphlets, thousands of editorial articles, and countless reports, edit newspapers, serve as secretary of the Philadelphia Board of Trade, and take the industrial census of Philadelphia four times. His “Commercial and Financial Resources of the United States” was reprinted in Germany and was a significant factor in maintaining the nation’s credit in European money markets. (Primary source: Famous Americans)

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part I

This is the first in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. Why this 7-great-grandfather and not one of the other 511? In part because I carry his name and his y-DNA, in part because I have not identified all of the other 511, and in part because I have not done similar research for the descendants of the other 511 whom I can identify. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I begin with a legislator.

Francis E. Holman (1915-1991), 7-great-grandson of Thomas Maule of Salem, Mass., and my 8th cousin: Fran Holman, judge, state senator, and member of the state house in Washington, built his reputation as an independent legislator who “served the public rather than special interests” and was free from political influence. Former governor Dan Evans remarked, “Mr. Holman couldn’t be budged even by The Boeing Co., taking a stand involving taxation that Boeing opposed.” Reportedly that stand cost him his partnership in one of the state’s largest and most elite law firms. While in the state legislature, he was active in tax reform, “making [the issues] understanable to the public.” (Primary sources: his obituaries in the 11 June 1991 Seattle Post-Intelligencer and the 6 June 1991 Seattle Times)

Tax Complexity: Why?

It is no secret that I find the complexity of the Internal Revenue Code to be unjustified, oppressive, counter-productive economically, and the consequence of politicians creating new provisions rather than expanding existing ones, because the former is more advantageous to incumbents concerned about the source of their next campaign funding dollar. Last week I had the opportunity to gather some facts illustrative of this problem. After I finished writing the analytical portion of the next edition of Tax Management, Inc’s 597 T.M., Tax Incentives for Economically Distressed Areas, I turned to what is called the Portfolio Description Sheet. I counted up the number of issues that are discussed, and then, out of curiosity, I compared the results with their counterparts in the first edition of the Portfolio, written in late 2004 and published in early 2005. The Portfolio analyzes tax provisions that pump money into economically distressed areas, an approach that began in the 1990s as Congress chose to ignore direct grants that constitute spending and decided to use tax breaks that are, in effect, spending, though the beneficiaries of these provisions and their Congressional protégés refuse to treat them as spending and thus consider any reduction or elimination of these tax breaks to be tax increases rather than spending cuts.

The first edition dealt with six types of what I call qualified distressed areas. Early in the “use the tax law rather than spending grants” game, Congress created things such as empowerment zones, enterprise communities, renewal communities, and the District of Columbia Enterprise Zone. By 2011, the six had grown to 14, with the addition of an array of disaster areas, economically distressed production areas, and recovery zones. Though each of the 14 share the characteristic of being an area that has suffered or is suffering from economic set-backs, each one is defined differently.

The first edition of the Portfolio discussed 11 types of qualified assets, including enterprise zone businesses, renewal community businesses, qualified zone property, qualified renewal property, and DC Zone assets. The number of qualified asset types addressed by the second edition grew to 17. Added were things such as qualified equity investment and recovery zone property. Again, though these assets share the characteristic of being used in a qualified distressed area in some manner, the technical details buried in the definitions can make eyeballs spin. For example, try to imagine the differences among these types of property: qualified recovery assistance property, qualified section 179 recovery assistance property, qualified disaster assistance property, and qualified section 179 disaster assistance property.

The first edition analyzed 19 specific tax benefits available to taxpayers who meet the requirements for operating a business or making investments in a qualified distressed area. By 2011, the number had grown to 93. You read that correctly. From 19 to 93. Sounds like the title to the biography of someone’s adult life. The number of exclusions and deductions grew, and to that list were added more than a dozen credits. For example, there is a deduction for qualified disaster expenses and special rules for federally declared disaster area casualty losses.

Finally, the first edition described 12 tax detriments imposed on taxpayers who claimed one or more of the tax benefits. For example, amounts for which a deduction is provided cannot be used to increase basis, and in some instances, if property ceases to be a qualified asset, some sort of recapture applies. In the second edition, there are 51 tax detriments that need attention.

If that doesn’t demonstrate the unchecked growth of the tax law, try this. The manuscript for the first edition consisted of 172 single-spaced pages, with 1,708 footnotes. Using the same margins, font, and other parameters, the manuscript that I completed last week consists of 325 single-spaced pages, with 3,916 footnotes.

Isn’t it time that people get a handle on how much spending has been enacted in the tax law? Ought not economic benefits be treated in the same manner, whether they are direct grants or disguised grants hiding in complex Internal Revenue Code provisions? Is it not possible to create one set of rules for economically distressed areas? Why was it not enough to have empowerment zones? Why add renewal communities? And enterprise zones? Why are some tax benefits available to the Kansas disaster area but not the Hurricane Ike disaster area? Why are the special rules for the Midwestern disaster area different, and in some instances slightly different so as to catch the unwary off-guard, than those applicable to the Rita GOZone? Why are there different rules for the Hurricane Katrina disaster area and the GOZone, considering that the former is pretty much the latter? It’s not as though each time around, Congress refined the provisions and made them better or easier to understand. To the contrary, each of the many dozens of times Congress has added, modified, twisted, or tinkered with the provisions, the language became denser and longer. Why?

The Value of Tax Education

Yes, I’m a fan of education, and I am an advocate for the value of tax education. Tax education is what I do with much of my time, teaching law students, lawyers, and accountants, writing books and articles for tax practitioners and, from time to time, for others, and publishing a blog directed to an audience of tax professionals and those who do not make their livelihood in the tax world. I’ve touched on this in a variety of posts, including Tax Ignorance, Is Tax Ignorance Contagious?, Fighting Tax Ignorance, Why the Nation Needs Tax Education, Tax Ignorance: Legislators and Lobbyists, Tax Education is Not Just For Tax Professionals, and The Consequences of Tax Education Deficiency. Though usually my focus is on the inability of legislators to understand what they are doing, particularly the damage they are causing, and on the disadvantages of an electorate unschooled in tax reality, the problem also touches on individual situations that don’t get very much public attention. Nonetheless, they can be good examples of how tax ignorance adversely affects people apart from matters of national tax policy debate.

A Tax Court decision involving an accountant brings this issue back into the spotlight, if only for a moment. It is unclear from the opinion whether the taxpayer did any tax work. Most accountants take at least one basic tax course, and many enroll in multiple courses, even earning degrees such as the M.T., because of the impact tax rules make on accounting analysis, the “reserve for taxes” being one such example. In Mondello v. Comr., T.C. Summary Opinion 2011-97, the Tax Court held that the taxpayer was not permitted to accrue a deduction for the value of services he rendered to his sole proprietorship operating as an LLC under state law. The taxpayer, in addition to be employed by an unidentified business, owned a web site and spent time maintaining the site. He also performed web site services for unrelated parties, charging them between $45 and $55 an hour. Because he invested 1,000 hours in 2007 developing his own web site, the taxpayer accrued a $50,000 deduction on his Schedule C.

The Tax Court disallowed the accrued deduction for the taxpayer’s own labor performed for himself. The Court relied on three cases. In Rink v. Commissioner, 51 T.C. 746 (1969), the Tax Court explained that just as imputed income from the benefit of taxpayer’s own services is not included in gross income, neither is an imputed expense arising from his own labor for himself deductible. The Court specifically stated, “Labor performed by a taxpayer does not constitute an amount ‘paid or incurred’ by him, and consequently, cannot be deducted by him under section 162.” Later, in Grant v. Commissioner, 84 T.C. 809 (1985), aff’d without pub. op., 800 F.2d 260 (4th Cir. 1986), the Tax Court said repeated the conclusion that a taxpayer’s labor is not payment of a deductible business expense. In Maniscalco v. Commissioner, T.C. Memo. 1978-274, aff’d, 632 F.2d 6 (6th Cir. 1980), the Court reiterated the point, stating, “Whatever may be said in behalf of taking into account the value of one’s own services in lieu of paid labor, such services are not considered an element of the deduction under section 162(a), just as the flow of satisfaction from services arising from one’s own labor is not includible in his gross income.”

This outcome is a basic federal income tax principle. Students in basic tax courses learn it. Compared to much of what they must work through in such a course, this principle is easy as a rule and not particularly challenging in terms of learning its rationale. What’s surprising about the Mondello case is not the outcome, but the fact that the case exists.

The taxpayer tried to distinguish the three cases on which the IRS relied and that the Tax Court cited in support of its decision. The taxpayer noted that the taxpayers in those three cases were cash method taxpayers and that he was an accrual method taxpayer. The Court’s reply is the sort of opinion language that no litigant wants to read or have the world see: “Perhaps petitioner did not read Rink or he failed to read it carefully. The Court pointed out in that case that the taxpayer took the position, as petitioner does, that ‘he should be permitted to accrue currently, as a liability, amounts owed by him to himself on account of his labors, but include the value of such labor in income only when and if such labor gives rise’ to income in the future. The Court found the argument to be without any merit; ‘For one thing, we have found that the petitioner incurred no liability, in favor of himself or anyone else, to pay for the value of his services.”

Whatever may have inspired the taxpayer to claim the deduction, that gaffe was multiplied when the taxpayer did not look closely at the cases cited by the IRS. The cost of the litigation, the additional interest and penalties, and the aggravation of the entire situation could have been reduced. It is not beyond the realm of possibility that the taxpayer did read the cases, and did look closely at them, but did not understand them. Though many people think tax is all about numbers, it’s actually almost all about words. Perhaps therein is the answer. Perhaps the taxpayer, like some accountants learning tax, was looking for numbers rather than absorbing the meaning of the words.

Tax education. Priceless.