Re-examining Damages When Tax Software Goes Awry

For me, there are advantages to watching television court shows. Whenever I see one that involves a tax issue, or in which tax is a factor, I take the opportunity to write about it. For example, I have written about television court shows involving tax dozens of times, including these posts: 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, and When Needing Tax Advice, Don’t Just “Google It”.

But, for me, there are disadvantages to watching television court shows. There are so many of them that sometimes I get fooled. How? The other day I noticed the word “tax” in the cable guide, so I paid close attention. It was episode 63 of season 6 of Hot Bench. It began well, with one judge opening the proceedings by describing the case as involving “the thing Americans fear most, being audited by the government.” As I watched and started taking notes, I realized, “Wait! I’ve seen this episode. I think I blogged it.” I checked. Indeed, I had, in, When the Tax Software Goes Awry.

But it wasn’t a total loss of a blogging opportunity. As I watched the episode, a thought occurred to me that had not crossed my mind when I wrote about the case in November of last year. Before describing that thought, I will share the facts of the case as I summarized them last November:

The plaintiffs, a married couple, sued the accountant who prepared their federal and state tax returns. The Commonwealth of Virginia Department of Revenue, after noticing larger than usual deductions and credits, contacted taxpayers, asking for an explanation. In turn, the plaintiffs contacted the defendant, who examined the returns and concluded there had been a software error.

The defendant explained to the court that when he examined the returns, he figured out that the software pulled amounts from the federal return onto the state return, generating erroneous deductions and credits. He also explained that when he spoke to someone at the Department of Revenue, that person informed him that thousands of Virginia taxpayers had been affected by this software glitch. Accordingly, the Department of Revenue waived all penalties but did not have the authority to waive interest.

The plaintiffs argued that the defendant should have noticed the error before filing the returns, and wanted him to pay the entire amount demanded by the Department of Revenue. The defendant replied that it was an error by the software and not his fault. He also pointed out that he was willing to pay the interest owed by the plaintiffs, but that during negotiations the plaintiffs refused that offer because they wanted him to pay the entire amount due, including the tax.

The court concluded that the defendant had not acted intentionally or maliciously and that the tax that was due was an obligation of the taxpayers that they would have paid on time had the software error not occurred. Accordingly, the court held that the defendant was liable for the interest.

As I listened, I began to think more carefully about the decision to issue a decision in favor of the plaintiffs for the amount of the interest they had been required to pay.

In one sense, the defendant’s statement that he was willing to pay the interest tilted the judges’ decision. What would have happened had the defendant not agreed to pay the interest but had refused any obligation to do so?

Yes, it is possible to argue that the defendant’s software error, or more accurately, failure to notice and do something about the error, was the reason that the plaintiffs incurred interest charges, and that the defendant should reimburse the plaintiffs. Had there been no error, the plaintiffs would not have received a larger refund than that to which they would have otherwise been entitled.

On the other hand, the plaintiffs received the use of an excess refund for the time between when their account was credited with the excess refund and when they repaid the excess refund. So though they had to pay interest, they had the use of the money. In effect, they borrowed money. Suppose they had invested the money and earned interest or other income. In that event, how could they claim that they suffered damages, unless the interest rate charged by Virginia exceeded the rate of return they earned on their investment? Imagine borrowing money, investing it, making a return, and having someone else pay the interest on the loan. Even if they consumed the excess refund, for example, by taking a vacation, they were able to do something they otherwise would have been unable to do, because they had the use of money that wasn’t theirs and that they were obligated to repay. Using someone else’s money has value, measured by the interest charged by the lender.

Had I been representing the defendant, from the outset, I would have cautioned him about the dangers of offering to pay the interest, especially when the defendant’s clients wanted him to pay the excess refund. Once the case went to trial, I would have advised the defendant not to disclose the negotiations that failed to lead to a settlement. I also would have argued that the plaintiffs, by having the use of the money, did not suffer damages when they were required to pay interest on the borrowed money. I would have asked the plaintiffs to disclose what they did with the excess refund when it was received.

I don’t know if my approach would have spared the defendant from paying the interest. But I certainly would have taken that position, made the argument, and advised the defendant not to disclose he had offered to pay the interest.

How NOT To Collect Unpaid Taxes

The caption for this morning’s commentary comes from reader Morris. It’s the subject line from his email, though I put “not” in upper case letters for emphasis. When I went to the story he referenced, the headline made me gasp. It reads, “Swiss dog tax: Pay it or your pet dies.” Are you kidding me? Is this from the Onion? Sadly, no, it’s not. Though it is a nine-year old story, and I usually focus on recent developments, this is so shocking I had to express my reaction.

The town of Reconvilier, Switzerland has a yearly dog tax. In American dollars, it’s $48.50. Not surprisingly, some people fail to pay. Town officials decided to make use of a law from 1904, a law “that allows officials leeway to kill dogs as a last resort for collecting unpaid taxes.” Threatening to exercise the power authorized by this law was triggered by the fact some dog owners had failed to pay the tax for years. According to the story, one town official noted that “as recently as the 1960s, [the town] dealt with troublesome dogs in a brutally straightforward fashion.” It’s one thing to put down a rabid dog. But the failure of a dog owner to pay a tax does not make the dog “troublesome.”

The law should never have been enacted. It should be repealed. Until it is repealed, it should be ignored. Not only is it wrong on so many counts, morally, politically, theologically, philosophically, it also would be absurdly ineffective. Killing a dog doesn’t put money into the town treasury. Surely there are some individuals who have failed to pay the tax but who no longer own a dog. Does the law then authorize killing some other family pet that isn’t a dog and with respect to which there is no tax?

Logically, the approach taken when this law was enacted would generate similarly unacceptable statutes. If a person fails to pay a per capita, or head, the person is decapitated. If a person fails to pay a real property tax, the person’s home is burned down. If a person fails to pay an automobile registration fee, the person’s car is taken to the car-crushing facility. I can’t imagine what was going through the minds of those who enacted the 1904 town statute in question.

Fortunately, as the article explains, “the town is facing criticism from all corners.” One town official explained that he has “been overwhelmed by insults and threats" since the town disclosed that it was going to implement the 1904 law. Petitions to stop the town’s plans, such as this one and this one, circulated, and according to this web site, the town council “heard the public outcry and is now proposing to amend or abolish the archaic law so the threat of killing dogs is no longer on the books.”

I have not been able to determine if the law was repealed or amended. My guess is that something was done, and my guess and hope is that town officials found a different, and more sensible, way to collect the unpaid taxes.

When Needing Tax Advice, Don’t Just “Google It”

Those television court shows with a tax angle do come in bunches. There’s another one to add to the list of these shows on which I have commented. They include 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?, and Need Money to Pay Taxes? How Not To Get It.

This time it is episode 155 of Hot Bench season 6. The plaintiffs entered into a contract to purchase a home from the defendant. There was a contingency in the contract that required the plaintiffs to prove that they had sufficient liquidity to make the purchase in the event that the defendant received a better offer. The defendant did get a better offer, notified the plaintiffs, and asked for proof of liquidity. The plaintiffs provided the defendant with a bank account statement and a stock account statement.

The defendant, who admitted she was not a lawyer, treated the stock account statement as a 401(k) plan statement even though nothing on it indicated that it was a 401(k) plan statement. The defendant explained that she then “googled it” to find out how much of the stock account statement could be withdrawn to purchase a home She determined that only $50,000 could be taken out of the account to purchase a home.

The plaintiffs testified that they had informed the defendant’s real estate agent that the account in question was a stock account. They also testified that they gave the agent guidance on learning more about how long it would take to get cash out of the account and the process through which they could do so.

The defendant, relying on her conclusions with respect to 401(k) plans, cancelled the contract. The defendant did not give any explanation for why she treated the stock account statement as a statement with respect to a 401(k) plan.

The defendant admitted she did not seek professional advice with respect to the liquidity available to the plaintiffs from the two accounts. In fact, the plaintiffs had much more liquidity in the two accounts combined than they need to purchase the home outright for cash.

The plaintiffs had sued not only for return of the deposit, but also for the expenses they incurred because of the cancellation. For example, because they had already entered into a binding contract to sell their existing home, they had to pay rent for temporary living quarters.

The court entered judgment for the plaintiffs in the entire amount they sought. One of the judges pointed out to the defendant that using google to interpret a sophisticated legal contract is unwise. Indeed.

The Meaning of an Interesting Phrase in a Tax Law

Like most states. Michigan has a sales tax. Like most states with sales taxes, Michigan provides for exemptions from its sales tax. Here is the relevant language from the statute:

GENERAL SALES TAX ACT (EXCERPT)

Act 167 of 1933

205.54a Sales tax; exemptions; limitation.
Sec. 4a.
(1) Subject to subsection (2), the following are exempt from the tax under this act:
* * * * *
(e) Except as otherwise provided under subsection (3), a sale of tangible personal property to a person engaged in a business enterprise that uses or consumes the tangible personal property, directly or indirectly, for either the tilling, planting, draining, caring for, maintaining, or harvesting of things of the soil or the breeding, raising, or caring for livestock, poultry, or horticultural products, including the transfers of livestock, poultry, or horticultural products for further growth.(emphasis added)

So what are things of the soil? The Court of Appeals of Michigan recently had an opportunity to answer that question.

TruGreen, a lawn care company, requested a refund of use taxes it had paid on “fertilizer, grass seed, and other products” that it uses to care for lawns. It took the position that these purchases fell within the exemption for “things of the soil.” Not surprisingly, the Michigan Department of Treasury rejected the refund claim, causing TruGreen to expand its refund claim for use taxes paid during the past four and a half years. TruGreen requested a conference with an independent referee, who agreed with TruGreen, but the Department decided not to pay the refund. So TruGreen sued in the Michigan Court of Claims, which held in favor of the Department. TruGreen appealed to the Michigan Court of Appeals.

In its decision, two of the court’s three judges held for the Department. One of those two judges wrote a concurring opinion. The third judge dissented.

The majority rejected TruGreen’s argument that because it plants and cares for grass it is engaged in “caring for things of the soil.” The majority considered TruGreen’s interpretation of the text to be erroneous because it was made “in isolation from the rest of the text.” Relying on the principle that tax exemption statutes should be strictly construed, the court noted that although “grass and trees” are “things of the soil,” the latter phrases is “surrounded by words describing activities that take place on farms.” The majority concluded that “things of the soil” means “the products of farms and horticultural businesses, not blades of well-tended grass.” The majority also concluded that “the Legislature intended the exemption to apply to agricultural activities,” and that “read as a cohesive whole, [the statute] was and is intended to benefit businesses that contribute to our state’s agricultural sector.” The court noted that in previous decision Michigan courts had referred to
the statute in question as the “agricultural-production exemption.”

The judge who concurred did so to “address some aspects of the dissenting opinion.” The dissent rested on the ideal that “things of the soil” is not a term of art. The concurring judge disagreed. The concurring judge also disagreed with the dissent’s argument that the definition of “things of the soil” can be found in a dictionary. The concurring judge also argued that for the 70 years the exemption has been in existence, “no case has ever suggested” that residential lawns are within the scope of “things of the soil.”

The dissent pointed out that the legislature did not use, though it could have used, the phrases “agricultural products” or “products of the soil,” but instead used the phrase “things of the soil.” It also pointed out that a proposed amendment to add the words “for agricultural purposes” after the words “things of the soil,” a change supported by the Department, failed to survive in the legislation that was enacted. The dissent noted that the original exemption was enacted for “agricultural producing” but was changed to “things of the soil,” and that this change must have meaning, namely, that “things of the soil” encompasses more than “agricultural producing.”

What none of the judges mentioned, and my guess is that neither of the parties mentioned, is the language used by the Michigan legislature in another exemption. One of the exemptions provided by Michigan to its property tax is found in this statute:

THE GENERAL PROPERTY TAX ACT (EXCERPT)

Act 206 of 1893

211.9 Personal property exempt from taxation; real property; definitions.

Sec. 9.

(1) The following personal property, and real property described in subdivision (j)(i), is exempt from taxation:

* * * * *

(j) Property actually used in agricultural operations and farm implements held for sale or resale by retail servicing dealers for use in agricultural production. As used in this subdivision, "agricultural operations" means farming in all its branches, including cultivation of the soil, growing and harvesting of an agricultural, horticultural, or floricultural commodity, dairying, raising of livestock, bees, fur-bearing animals, or poultry, turf and tree farming, raising and harvesting of fish, collecting, evaporating, and preparing maple syrup if the owner of the property has $25,000.00 or less in annual gross wholesale sales, and any practices performed by a farmer or on a farm as an incident to, or in conjunction with, farming operations, but excluding retail sales and food processing operations.

It is clear from the language that the exemption applies to agricultural operations and agricultural production. The legislature did not use the term “things of the soil.” This adds a substantial amount of strength to the argument that “things of the soil” is different from, and broader than, “agricultural products.” Yet the majority opinion concludes that “things of the soil” means “agricultural production.” That conclusion flies in the face of the fact that the legislature used two different phrases, something inconsistent with the claim that both exemptions are intended to have the same scope. I wonder why neither party directed the court’s attention to the language in the property tax exemption.

Need Money to Pay Taxes? How Not To Get It

Another television court show with a tax angle popped up on the screen recently. The list of these shows on which I have commented continues to grow, including 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?, and Was It Tax Fraud?.

Today’s post is based on episode 83 of Judge Judy’s season 24. The plaintiff’s husband died in an automobile accident, and she received a $20,000 settlement. The defendants were a husband an wife. The plaintiff’s husband had worked with the defendant husband, and through them, the plaintiff and the defendant wife became friends.

The defendants fell behind trying to pay their property taxes. The defendants claim that the plaintiff offered them some money to help them out. The plaintiff disagreed, claiming that she transferred money to them after they asked. Judge Judy pointed out that people don’t ask others out of the blue if they are behind in their taxes or if they need money. Surely, she concluded, the defendants had brought their financial troubles to the attention of the plaintiff. Defendant wife then admitted that she mentioned to the plaintiff that they were behind in paying their property taxes. She also claimed that she was going to go to the bank to get a loan. She also claimed that the plaintiff said that she would pay the defendants’ taxes, would not seek repayment, and would treat it as a gift.

Asked why the plaintiff would make a gift to the defendants, the defendant husband claimed that he and his wife previously did things for the plaintiff when the plaintiff’s husband died and at times thereafter, such as taking her on errands. He also claimed they offered to pay back the money to the plaintiff.

Judge Judy pointed out that the defendants had no problem paying their property taxes until the plaintiff received her settlement. Then suddenly they had trouble paying property taxes. The defendant husband claimed that they were short on money to pay property taxes because in the previous month they had used the money for unexpected repairs required for their truck.

The plaintiff claimed that there were other monies and a television transferred from the plaintiff to the defendants. The defendants denied the additional money transfers. They admitted the plaintiff had transferred a television to them, but that it also was a gift for what they had done for the plaintiff. Judge Judy pointed out that they had already used that as justification for the transfer of money to pay the property taxes. The defendants had previously testified that the plaintiff asked them to help her put the television in her apartment but they declined to go there because their cousins lived in the same complex and the defendants had a restraining order against the cousins. Judge Judy told the defendants that they were offering conflicting stories about the television.

The defendants counterclaimed, alleging that the plaintiff had made false allegations accusing them of elder abuse. The plaintiff had filed a complaint, and a social worker concluded that the allegation of financial exploitation was false. Judge Judy dismissed the social worker’s conclusion by noting that the social worker should “go back to school.”

Judge Judy described the defendants as two people taking advantage of an elderly lady. The defendants countered that the judge’s statement was inconsistent with the fac that the defendant husband was putting money into the plaintiff’s bank account. The defendants wife claimed that the plaintiff put the defendant wife’s name on the plaintiff’s bank account. Judge Judy gave no weight to these claims. She dismissed the counterclaim and entered judgment for the plaintiff, in the full amount of the money transferred along with return of the television.

The lesson from this case isn’t about substantive tax law or tax procedure. It’s something much simpler. When a person is having difficulties coming up with money to pay taxes, there are a variety of steps the person can take. The person can borrow money from a bank. The person can contact the appropriate tax authority and work out a payment plan. What the person ought not to do is to take money from someone, and then offer conflicting explanations about that transfer. To argue that it was a gift, but to also claim that repayment was offered is a red flag warning that something is amiss. One wonders whether they actually were having problems finding money to pay taxes or if, as Judge Judy noted, they simply figured they found a way to share in what they thought was the plaintiff’s windfall.

Actually, there is another lesson to learn from the case. If making a transfer to someone that is intended to be a loan, put the arrangement in writing if the amount is an amount that needs to be returned. Relying on friendship and trust might be noble, but the law requires more.

Using a Tax Agency to Collect Tithes: A Very Bad Idea

A little more than a week ago, in Using a Revenue Agency to Collect a Fine Does Not Convert the Fine Into a Tax, I answered a question from reader Morris, who asked whether using a tax agency to collect a fine converted the fine into a tax. My response was no. Using a tax agency’s collection mechanism to compel payment of a non-tax obligation is a practice in which a number of jurisdictions have used for many years. I pointed out that the IRS used to collect past-due federal taxes, unpaid state income taxes, certain state unemployment compensation repayments, child support obligations, spousal support obligations, and nontax federal debts such as student loans. I shared my observation that legislators eager to cut funding for revenue agencies because they don’t like taxes are rather quick to assign non-tax debt collection tasks to those same agencies.

Reader Morris followed up with a similar question, referring me to this story that describes a request from the Catholic archbishop of Kampala, Uganda, asking the government to collect on behalf of the church the 10 percent tithes that its members are encouraged to pay to the church. Reader Morris asked if the government agrees to do the collecting, does it convert the tithe into a tax. Again, the answer is no. I explained that the collected money goes to a non-government recipient, a church, just as child support collected by the IRS goes to the custodial parent and not a government. Using the government’s money collection apparatus to collect money does not make the collected money a tax.

Not surprisingly, thousands of Catholics have objected to any cooperation by the government in this collection effort. One person pointed out that giving to the church is voluntary and should not occur under threats from church authorities. They argue that using a government to collect tithes violates Catholic teachings. Leaders of other faiths also criticized the request. Some argued that Scripture does not support governments collecting tithes on behalf of churches.

The Ugandan archbishop offered as a model a provision in Germany under which the government collects a “church tax” for the Catholic Church. Critics claim that millions of people have left the church because of the German law. The archbishop wants the government to deduct the tithe from the wages of Catholics because the church is low on funds and many members do not voluntarily tithe. According to the archbishop, "The Bible says a tenth of whatever you earn belongs to the church, and you should give me support as I front this proposal because it is good for us."

Could it happen in this country? It should not. One of the motivations for the First Amendment separate of church and state was opposition to taxes imposed on colonists to support the payment of salaries for clergy in whatever denomination held power in a colony taking this approach. Of course, this tax was just one of many steps taken by dominant denominations to control a colony’s religious practices. Of course, there are those who argue that tax exemptions for churches are the equivalent of spending taxpayer money for those churches. With respect to property taxes, many churches pay user fees, and the question can be resolved by shifting as much of the general property tax to user fees. With respect to income taxes, most churches incur expenses that match income, but those for-profit religious enterprises that somehow bring millions into their fold of course should be paying income taxes.

Having a government collect revenues on behalf of a church is wrong. It invites religious denominations to fight for political dominance and opens the door to the winner of that struggle battle trying to impose its beliefs on the population. The Puritans in Massachusetts did that, until, among others, Thomas Maule challenged their authority and was acquitted of the charges they brought against him for opposing their religious dictatorship. Today, their theological descendants continue trying to compel others to adhere to their beliefs.

My response to churches trying to get governments to collect taxes on their behalf or trying to force their belief system on a country is simple. If a religion or denomination cannot attract and retain adherents, or persuade them to contribute, without the use of physical or legal force, it is demonstrating, by its very plea for government collection assistance or the desire to compel membership, that it lacks justification. It is not the business of government to prop up churches or function as their debt collectors.

Reading Tax Instructions Is Important But Why Not Make Things Easier for Taxpayers?

Reader Morris sent me an email titled “Read tax instructions carefully." I knew he wasn’t trying to get ME to read tax instructions carefully, so what was this about? He included a link to this story about an Oregon taxpayer, Michael Miller, who ran into problems when trying to donate a portion of the state’s “kicker credit” to the Oregon Department of Education. What happened?

Oregon has a “kicker credit” that permits taxpayers to claim a credit on their state income tax returns if state revenues for any two-year budget period exceed projected revenues by a specified percentage. Oregon permits taxpayers to choose between using the credit to reduce their state income tax liability or donating the credit to the Oregon Department of Education. Miller, using Turbo Tax, explained that he checked a box next to a Turbo Tax instruction that stated, “If you elect to donate your kicker to the State School Fund, check this box.” After checking the box, Turbo Tax inserted $75 in the following column. Miller decided that although “$75 is a lot of money,” he would make the donation because it was going to help schools needing help.

A few weeks later, Miller received a letter from the Oregon Department of Revenue, telling him that his state income tax return was being adjusted so that all $1,185 of his kicker credit would be donated to the Department of Education. Miller, understandably, was upset, and his distress was exacerbated when he learned that his decision to check the donation box was irrevocable. He complained, “It didn’t warn me” that “You are donating your entire kicker.”

A Department of Revenue spokesperson replied that “it’s important to read the tax instructions closely” and that taxpayers cannot donate just a portion of the kicker credit. Taxpayers who want to donate a portion need to avoid checking the donation box, and then to write a check t the Department of Education.

That seems to be a clunky way to administer the credit and the donation. It certainly is possible to program the software used by the Department of Revenue to separate the kicker credit into two portions, one to be transmitted to the Department of Education and the other to be applied to the taxpayer’s tax liability. The IRS and state revenue departments permit taxpayers to split overpayments into two portions, one to be refunded and the other to be applied to the following year’s estimated tax payments. So we know it can be done. In a day and age when electronic communication has become so widespread and even necessary, asking taxpayers to write checks to be sent through the mail seems so antiquated. Worse, taxpayers are less likely to share a portion of their kicker credits if they must engage in a separate transaction by writing a check than if they can simply indicate on the tax return how to split the credit.

I was unable to determine whether the “donate all or nothing” rule is based on statute or is something dictated by the Department of Revenue. For me, the answer to that question simply specifies who needs to fix the problem. True, if it’s a departmental regulation, it’s much easier to fix and can happen more quickly than if the legislature needs to make changes.

Fortunately for Miller, filing deadlines for 2019 returns have been extended because of the pandemic. Miller plans to file an amended return to remove the attempted donation. Even though the election is irrevocable, apparently it can be reversed through an amended return, because the Department of Revenue recommended that Miller file the amended return. It isn’t clear whether he plans to write a $75 check to the Department of Revenue. If he doesn’t, it’s unfortunate that someone’s decision to make the donation an “all or nothing” deal means $75 less for Oregon’s school children.

A Tax That Won’t Accomplish Its Purpose

Governments around the world are facing the challenge of persuading and compelling people to maintain physical distancing. Understandably, most people do not prefer to self-isolate or be in quarantine. Most people get tired of staying at home very quickly. Different governments take different approaches to achieving their physical distancing goals. Almost all use various sorts of announcements and publication of rules. Enforcement officials in some cases issue warnings. In other instances, tickets are issued and fines are imposed. In still other situations, arrests are made.

Government officials in Delhi, India, have come up with an interesting approach to dealing with the failure of people to comply with physical distancing. According to this story, these officials have enacted a tax of 70 percent on retail alcohol purchases. The stated goal is to “deter large gatherings at stores” while lockdown restrictions are gradually eased.

When I read the story, several questions popped into my head. Even if a tax on alcohol reduces the size of crowds at alcohol stores, how does it encourage those who are present to maintain physical distancing? Even if a tax on alcohol somehow encourages physical distancing at alcohol stores, how does it bring about physical distancing at grocery stores, hardware stores, clothing stores, shoe stores, and other retail outlets?

The answer, I think, to each of those questions is, “It doesn’t.” So if the question is, “Why enact that tax?” the answer is found in the fact that alcohol taxes are significant portion of the revenue stream for most of India’s states and territories. And, of course, like other governments around the world, they are facing severe revenue shortages.

This sort of tax is regressive. Its computation does not take into account the economic status of the alcohol purchaser. If the tax does deter some people from purchasing alcohol, it will be the poor and lower middle-class that don’t show up. The wealthy can afford to pay the tax, and they can order online or pay a poor person to stand in line.

There are other ways to encourage or enforce physical distancing at stores. Decades ago, when gasoline shortages generated long lines at service stations that spilled into roads and disrupted traffic, officials in some states put into place an even-odd license plate final digit system. This halved the number of vehicles waiting for gasoline on a particular day. Depending on the item being sold, purchasers can be separated on the basis of a variety of benchmarks, such as first letter of surname, first digit in home address, or some other similar characteristic.

One official commented that if physical distancing is violated, the government “will have to seal the area and revoke the relaxations there.” Though that makes sense, it does not make the tax in question sensible. Using taxes to encourage social behavior is, at best, only very marginally effective and then only in certain limited circumstances. That is especially the case when it seems the tax is intended to raise revenue rather than affect behavior though marketed as a means of controlling behavior.

Why Tax Law Is More of a Mess Than It Needs to Be

Ever wonder why the federal income tax law is a mess? Ever wonder why it keeps getting changed? Ever wonder why it’s unclear. Here’s a good example.

One of the relief provisions enacted by Congress in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) is the Paycheck Protection Program (“PPP”). As explained by the Small Business Administration (“SBA”), under the PPP loans are provided to small businesses to help them keep workers on the payroll. If a business keeps all of its employees on the payroll for at least eight weeks and uses the loan money for payroll, rent, mortgage interest, or utilities, the SBA will forgive the loan.

That brings us to the tax aspect of PPP. Under section 1106(i) of the CARES Act, if the loan is forgiven, the amount of the loan forgiveness is not included in gross income. This is an exception to the general rule that includes loan forgiveness in gross income.

In Notice 2020-32, the IRS explained that expenses paid with the proceeds of a forgiven PPP loan cannot be deducted. It based its conclusion on Internal Revenue Code section 265, and Regulations section 1.265-1, which provide that “no deduction shall be allowed for . . . any amount otherwise allowable as a deduction which is allocable to one or more classes of income other than interest . . . wholly exempt from the taxes imposed by this subtitle.” Citing several cases, the IRS explained that paying these expenses with the proceeds of a forgiven loan is equivalent to paying expenses and then being reimbursed. As any student of federal income tax law understands, a taxpayer who is reimbursed for paying an expense either includes the reimbursement in gross income offset by deducting the expense or excludes the reimbursement from gross income while not deducting the expense. Either way, the net effect on the taxpayer’s taxable income is zero. That makes sense because both in the case of reimbursement and in the case of the forgiven loan, the taxpayer is neither richer nor poorer, and thus taxable income is unaffected.

It didn’t take long for taxpayers and members of Congress to complain about the IRS Notice. Some tax advisors argue that because the CARES Act does not expressly deny the deductions, they ought to be allowed. Of course, if those tax advisors looked at the text of section 265 they would see that the answer to the question of whether the deductions should be allowed already is in the Internal Revenue Code. The answer is no.

One tax advisor, according to this report, claims that for taxpayers who are denied deductions means that “in effect they’re paying tax on this loan, which makes it worth less. Losing a deduction is the same as being taxed on something.” The lack of logic in this argument is appalling. Losing a deduction is not the same thing as being taxed on something if the something is, as is the case, excluded from gross income. Under this advisor’s argument, which apparently others share, the taxpayer should not only escape being taxed on the loan forgiveness but also should get a deduction that, in effect, has been paid by the Treasury (translation, other taxpayers) and not by the taxpayer. This advisor explains that “he believes PPP loan money wasn’t intended to be treated like normal tax-exempt income under the law.” We’ll get to that issue in a moment, but tax law should be based on reasoning and thinking, not believing and hoping.

Some members of Congress have chimed in. According to this article, Senate Finance Committee Chair Chuck Grassley argued, “The intent was to maximize small businesses’ ability to maintain liquidity, retain their employees and recover from this health crisis as quickly as possible. This notice is contrary to that intent.” My question to Grassley is simple. Where in the CARES Act is there an exception to section 265? If that is what you intended, why isn’t it in the legislation?

The writer of the article observes, “Still, there are good arguments for deductions too. There could be a dispute about what Congress really meant in the hastily passed CARES Act, and the push-back from some in Congress suggests that. Despite the IRS statement, some people have said they may try to deduct these expenses anyway and fight with the IRS about it if needed. And the tax law is sufficiently debatable that some of those taxpayers could win, too.” If such a case made it to court, would a judge ignore the language of section 265? Would a judge pretend that there is an exception in section 265 even though it isn’t there? Should the judge ignore the arguments of textualist Supreme Court justices, scholars, and others who argue that the applicable law is what is enacted and not what people think, or Congress says outside of legislation, what was meant? Will the opponents of “activist” judging stand up and cheer for a court’s rewriting of the statute?

As a practical matter, it would not be a surprise if Congress gets its act together and amends section 265. Whether that is a good idea in terms of tax policy is a different question. It’s not, but that’s not the answer that appeals to taxpayers who want to take deductions, and get tax savings, for expenses they are not paying. Imagine. Someone – in this case the Treasury (translation, other taxpayers) tell a business, “Hang in there, we will pay your expenses,” and the recipient of this assistance says, “Whoa! That’s not enough. Not only do I want you to pay my expenses, I also want you to give me an additional tax break computed as if I paid the expenses out of my own pocket.”

It's this sort of nonsense that make the tax law more complicated, and more unfair, than it needs to be. And the time and money expended in dealing with the dispute is another price that is paid for the Congress having failed to provide in legislation what it now claims it intended to provide.

Using a Revenue Agency to Collect a Fine Does Not Convert the Fine Into a Tax

Reader Morris directed my attention to this story and asked, “Is this a case where a fine becomes a tax?” According to the story, the president of Belgium’s top law enforcement agency has explained that fines imposed on people who violate the nation’s confinement measures would be added to their tax receipt. The tax receipt is equivalent to a tax bill. The issue is a serious one, with more than 60,000 instances of violations having been reported by police.

My answer to reader Morris was a simple “No.” I explained that the authorities are simply using their tax agency’s collection mechanisms to compel payment of the fine. It’s not a new idea. Similar approaches to enforcing payment of various obligations have been in place in the United States for years. Under section 6402 of the Internal Revenue Code, a taxpayer’s tax refund can be diverted to payment of past-due federal taxes, unpaid state income taxes, certain state unemployment compensation repayments, child support obligations, spousal support obligations, and nontax federal debts such as student loans. When a taxpayer’s refund is diverted to state unemployment compensation repayments, child support obligations, spousal support obligations, or nontax federal debts such as student loans, it does not convert those items into taxes. For example, a taxpayer who is delinquent in paying child support, and whose refund is diverted to payment of child support, is credited with having paid child support, not a tax.

Why do government authorities use revenue agencies to collect obligations that are not taxes? For the same reason creditors garnish wages. Go where the money is. As much as politicians delight in criticizing, and even seeking to eliminate, revenue agencies, they are quick to make use of the convenience they offer to collect debts that are not taxes.

When One Tax Break Giveaway Isn’t Enough

It’s been about a year since I last reiterated my opposition to the use of tax breaks to finance construction of facilities for, or operations of, professional sports franchises owned by wealthy individuals. Even though these individuals claim that they deserve tax breaks because they re doing something that is “good for the public,” their reasoning would support tax breaks for almost everyone, thus destroying government and civilization. I have explained this tax break grab game in posts such as Tax Revenues and D.C. Baseball, four years ago in Putting Tax Money Where the Tax Mouth Is, Taking Tax Money Without Giving Back: Another Reality, and Public Financing of Private Sports Enterprises: Good for the Private, Bad for the Public, Taking and Giving Back, If You Want a Professional Sports Team, Pay For It Yourselves; Don’t Grab Tax Dollars, Is Tax and Spend Acceptable When It’s “Tax the Poor and Spend on the Wealthy”?, Tax Breaks for Broken Promises: Not A Good Exchange, and Tax Breaks for Wealthy People Who Pretend to Be Poor.

Now comes more news about the tax break grab described in Tax Breaks for Wealthy People Who Pretend to Be Poor. In that commentary, I described how David Tepper, who owns the Carolina Panthers, an NFL team that plays in Charlotte, North Carolina, asked for $120 million from South Carolina so he could build the team’s practice facility in that state. Using a typical wealth sports owner threat, he explained that without the money he would keep the practice facility in North Carolina. The facility would be 30 miles from the stadium in Charlotte and would be built just inside the South Carolina state line. Fortunately, there was opposition to the demand. Unfortunately, the opposition failed to stop the money grab by Tepper, who is worth roughly $10 billion.

Shortly after I published my objections to Tepper’s money grab, the state, as reported in various articles, including this report, approved $115 million in assistance to the apparently financially struggling Tepper. As bad as that was, it gets even worse. Having pulled taxpayer money from the state that surely could have been put to better use that benefits all South Carolinians, or that could have been reduced for a tax cut, Tepper went after the county in which the practice facility is built. As reported in this story, York County, South Carolina, by a 4-3 vote of its Council, approved a plan by which Tepper would not pay property taxes for at least 20 years, but would pay fees at a lower rate that would be plowed back into the facility site. Fees paid to the city of Rock Hill would be returned to Tepper’s organization, while the county would give back 65 percent and the school district would give back 75 percent of the fees. So instead of getting property taxes to be used to educate students, the school district would get a token amount of money so that the taxes that otherwise would have been paid by Tepper are used to build “public infrastructure” necessitated by the construction of the practice facility.

One of the Council members supporting the giveaway explained, ““We’re creating a foundation for tremendous growth.” Another Council proponents claimed that hotels, restaurants, and “other attractions” would be built near the practice facility, making the city and county a “destination” for visitors. Seriously, considering that NFL teams rarely open practice to visitors, how many people are going to flock to a facility that is closed most of the time? And if any hotel operator or amusement park owner actually decides it is a good idea to build in that area, guaranteed they, too, will come hand held out begging for tax breaks.

At the public meeting held by the Council, most speakers wanted at least a delay in approving the giveaway, and many wanted the land to be reassessed. In response, the president of a local tourist organization claimed, “The majority of the people don’t understand the concept of this development, and what this is going to bring to the area. With everything that Rock Hill and York County has now from a tourism and economic development status, they’ve never seen anything like this.” Well, perhaps they haven’t seen the consequences of these tax break giveaways to wealthy professional sports franchise owners, but people in many other places in the country have, and it hasn’t worked out well for them. It only works out well for the billionaire owners who struggle to survive on their meager incomes. It would not surprise me that people will be charged to watch practice on the handful of days practice is open to the public.

In Tax Breaks for Wealthy People Who Pretend to Be Poor, I wrote:

Tepper’s response is almost laughable. He explains, “It’s going to cost us a lot of money to go down to South Carolina. We’re going to have to put out real money to go down there. So it’s not like we get that money from South Carolina, and that’s it. There’s a lot of money in a facility that we have to invest.” What nonsense. Here is how businesses should work, and did work until wealthy individuals and business owners started playing the pretend-you-are-poor game. Analyze the proposal. If it makes sense to spend business assets on the proposal, that is, if it generates profits for the benefits, then do it. If it doesn’t, then don’t do it. If it doesn’t generate profits without taxpayer assistance, then it’s not worth doing. All over America, small business owners develop proposals, and forge ahead without taxpayer financing because they do not have the requisite wealth and power to “persuade” legislators to dish out public funds. Another tactic available to Tepper is to solicit funds from Panthers fans, giving them access to the practice facility in exchange for some sort of subscription or stock in his business. In that way, the cost falls on those who are interested in his team. Tepper claims that “most of the people in South Carolina want this.” Then give those people in South Carolina who want this the opportunity to contribute funds directly to Tepper. I doubt the money will roll in, because I think, or at least hope, that most South Carolinians aren’t in the habit of giving freebies to wealthy people who claim to be in need of money. There’s a word for people drowning in money who beg for more. It’s called addiction. It’s time for Americans to stop the enabling of this woeful malady that is at the root of so many of the nation’s problems. To borrow a phrase, just say no.

Once again, the politicians said “yes” to a plan that hurts many more people than it helps. Do these politicians realize that people will not flock to Rock Hill, South Carolina, to see a football practice the way they flock to Branson, Missouri, Orlando, Florida, or Las Vegas? It will take decades for the tax revenue generated by the smattering of fans who show up to offset the tax breaks being grabbed by Tepper.

The lesson is simple. If it can’t be built with private money, it ought not be built unless it is something that is essential for the survival of society and civilization. A team’s practice facility does not qualify, and ought not be financed with public money. That logic, however, is wasted when shared with money-addicted billionaires.

Tax and “Write-Offs”

Reader Morris referred me to an entry on the Seinfeld Law blog. It describes one of the plot threads in the episode, “The Package.” The facts are simple. Jerry’s stereo malfunctions but because it is out of warranty the manufacturer will not replace it or pay for repairs. Kramer comes up with an idea. He breaks the stereo into pieces, puts them in a package, takes it to the post office, declares it to be a stereo, insures it, and mails it to Jerry. When Jerry gets the package, it contains, of course, a broken stereo, and Jerry puts in a claim on the insurance. When describing his plan, Kramer claims “that the $400 payment on the insurance claim is just a ‘write-off’ for the” Postal Service.

The question posed to me by reader Morris was a simple one. He asked, “Is the insurance claim settlement of $400 gross income for Kramer? If so why?” Indeed, it is gross income. The tougher question is, “For whom.” If Kramer is treated as acting as an agent for Jerry, who owns the stereo, then the gross income is Jerry’s, not Kramer’s. Because the money is intended to acquire a replacement stereo for Jerry, it makes sense to treat Kramer as Jerry’s agent. On the other hand, there is a good argument that Kramer was acting on his own plan, collected the $400, and thus has gross income. He would then be treated as making a gift to Jerry, which would have no income tax consequences. Why is it gross income? Because gross income is income that is not within an exclusion. No exclusion applies. The insurance recovery is income because it is a clearly realized increase in wealth. The fact that the recovery is procured through fraud and is subject to being forfeited does not change the conclusion that it is gross income.

But what got my attention was the question posed on the Seinfeld Law blog: “Is it actually a write-off? Does anyone even know what a write-off is?” The blog writer then concludes, “Simply put, a write-off is another term for the deductions a person, business, or corporation can take to reduce their taxable income when filing their taxes.” Though it is true that people sometimes refer to tax deductions as “write-offs,” the term “write-off” has a much wider application. An expense taken into account in computing a profit and loss statement can be, and sometimes is, described as a “write-off.” Similarly, when a merchant gives a credit to a customer, the reduction of the price can be, and sometimes is, described as a “write-off.”

It gets better. The blog writer continues with this question: “Now that we know what a write off is, can the Postal Service just write off the payment they made to Kramer for Jerry’s broken stereo?” The write concludes that the $400 payment would be deductible by the Postal Service under section 162 in computing its taxable income because it is an ordinary and necessary business expense. There is, however, a serious flaw in the conclusion and the reasoning leading up to it. The Postal Service is tax-exempt. Though it computes a hypothetical federal income tax on the portion of its activities that involve sales of competitive products, it simply moves that amount from the Competitive Products Fund to the Postal Service Fund, rather than transferring it to the Treasury. A tax-exempt entity does not need to compute taxable income on its entire bundle of activities.

So, the $400 paid to Kramer would be a “write-off” for the Postal Service, but only for accounting and fund transfer purposes, but not for purposes of computing income tax deductions.

Tax Fraud, Alameda Style

According to this story, two tax return preparers in Alameda, California, have been charged with conspiring to file dozens of fraudulent tax returns. The two preparers, a mother and daughter, are charged with 36 crimes.

How were they caught? Internal Revenue Service software detected suspicious entries on returns. Specifically, the software looks at returns filed by a tax return preparer, and if the refund rate exceeds 50 percent, additional investigation is undertaken. The returns filed by these preparers reached as high as 86 percent. In other words, almost every client received a refund. The IRS sent an agent to the preparers’ office, posing as a client. The agent brought information that, if properly reported, would generate a tax due. During their meeting, one of the preparers told the agent that money would be owed, but that, “it’s your return and I can give you one of those charity things, but once you sign it, it’s you.” The agent agreed, and the preparer added a $2,000 charitable contribution deduction to the return even though the agent had told he preparer that he had not given anything to charity for the year in question. The IRS did not stop at that point. Instead, it interviewed the preparers’ clients and found 35 returns that it considered suspicious. Then the IRS interviewed the two preparers. One of them “allegedly admitted she sometimes exaggerated a client’s deductibles, adding that she ‘felt sorry’ for people who owed money.” In the complaint, an IRS special agent wrote that one of the preparers, Blakely, “stated if a client gives her a $500 amount for expenses, she might add a ‘1’ in front of it. Blakely stated that she knows she is held to a higher standard, but she wants to help her clients.”

That approach doe not “help” the clients. It makes a mess of their life. Not only are they interviewed by the IRS, they end up being required to pay back the refund along with the tax that they would have owed had the return been done properly. In theory, the clients can sue the preparers, but as a practical matter the chances of recovery are far from 100 percent.

What’s unclear from the facts is whether the preparers charged their clients more than they would have charged them had they not falsified the returns. In other words, were the preparers getting a portion of the refunds? If they did, then the claim that they were just trying to help their clients becomes less credible. Of course, even if they did not, their alleged actions still fall within the scope of conspiracy to file fraudulent tax returns.

Even in a Crisis, Tax Breaks Disproportionately Benefit the Wealthy

In a report covered in many stories, including this Philadelphia Inquirer article, the Joint Committee on Taxation has revealed that more than 80 percent of a tax break squeezed into the recent coronavirus legislation will benefit people who earn more than one $1,000,000 a year. It is no surprise that the provision in question was pushed into the legislation by Senate Republicans.

Some background is in order. In 2017, in order to offset other tax breaks dished out to the wealthy, Congress imposed a limit on how much loss owners of pass-through entities can deduct from investment income. The provision snuck into the coronavirus legislation suspends that limitation. This is one of the oldest tricks in the legislative playbook. Get something by giving up something, and then take back what was given up without giving up what was taken. Of course, advocates for the wealthy claim that enactment of the 2017 limitation was a “mistake” and that suspending it provides “badly need liquidity” to the wealthy. Really? If there’s anyone in this country who isn’t being crushed by liquidity problems, it’s wealthy individuals who apparently see every crisis as an opportunity to add more feathers to their nests.

This tax break for the wealthy will cost $90 billion in 2020, and another $80 billion over the next 10 years. Imagine how much personal protective equipment, virus testing kits, and medical equipment could be acquired for that amount of money. Imagine how much replacement income for laid-off workers and genuinely small businesses could be provided with $80 billion this year.

Interestingly, in response to Democratic criticism of the tax break, a spokesperson for the Senate Finance Chair claimed that the criticism is a “stink of partisan politics” because the Democratic Senators voted for the bill. Of course they did. Had they balked, they would have been subject to the same criticism directed at House members who are holding up legislation that contains even more breaks for the wealthy while omitting necessary assistance for those truly harmed financially by the coronavirus crisis. Damned if they do, damned if they don’t is yet another tricks in the legislative playbook and finds it way into the political propaganda playbook.

As bad as the coronavirus has been, is, and will be, money addiction has been causing, is causing, and will be causing even more damage. I daresay a cure for, or a preventive vaccine against, this coronavirus will show up before a cure or vaccine for money addiction is discovered.

A Most Horrendous Children’s Tax Story

It started with “Tax Story,” which I discussed in A Frightening Tax Story, and continued with “The Bike Shop,” which I discussed in Another Children’s Tax Story. What started and continued? My reaction to tax stories that reader Morris dug up. Well, he found another one, called Sylvester overcomes Tax problems. I am going to go through the book, selecting particular sentences or paragraphs. One of the challenges is to deal with the formatting, because the larger font letters cover some of the smaller font letters.

Sentence: “He has no tax credits or dependents and has few reasons to deduct money from his taxes.” What does that mean? What gets deducted from taxes? Technically, nothing. But using the word deducted to mean subtracted, one subtracts credits. When something is deducted, it is deducted from gross income or from adjusted gross income.”

Sentence: “This makes him . . . “ That ends the page, and when the page is turned, the thought is not continued.

Sentence: “He doesn’t think his adjusted gross income is enough money to be bringing home.” Perhaps this is an attempt to explain that his take-home pay is insufficient? One does not bring home adjusted gross income.

Sentence: “Since he makes enough money to support himself according to the government, he has a lot of taxable income.” The amount of money considered adequate to support a person is nowhere near “a lot of taxable income.”

Sentence: “His first idea was to cheat the Internal Revenue Service and lie about his income so he has a lower income regressive progressive tax.” The incoherence of this sentence might be attributable to formatting glitches, but it makes no sense.

Paragraph: “Then he gets a brilliant idea, get married! Then they can get married filing jointly and the FICA will decide that they together won’t have to pay as much. After their filing status they get a little more of their income. He will now be in a lot better place in the Federal Tax Bracket. The only bad thing would be that he can’t do the easy form, but he’ll have to fill out the W2 form.” First, filing status for the previous year’s tax return is not affected by a marriage after the close of that year. Second, if he gets married his taxes will increase unless his spouse has little or no income. It’s called the marriage penalty. Third, the FICA doesn’t decide anything. FICA is the acronym for the social security payroll tax. Fourth, the only taxpayers that fill out W-2 forms are employers.

Sentence: “After his genius idea, he’s a lot happier person, his job as a nurse provides for him and his family, he gets direct deposits with holdings paycheck standard deductions IRS Publication 561 with a smile.” The formatting makes it impossible to figure out what really is being said. It is possible to have a family without being married, but if that were the case, why is he not considering head of household filing status? IRS Publication 561 deals with “Determining the Value of Donated Property” and that has nothing to do with what’s being written.

The author of the book is “Ana Leigh.” Underneath the book is the word “analeighgoodwin.” Nothing on the web site provides any information about her, other than she joined the site in 2013. The book bears a copyright of 2010, but it is unclear if that was when the book was written. Attempts to figure out if she was a child or high school student when the book was written were not fruitful.

So I don’t know if the author of the book should be criticized for its content, because it could be the work of a fifth grader. Or it could be the work of a high school student who is reflecting what was taught or what she thinks was taught in a class. Or, horrors, it could be the work of an adult. In any event, running it by a tax professional would have been wise. As for the formatting mess, one would expect that the web site operators would provide some sort of screening, or at least the author would view the book and realize that portions are impossible to understand because of the formatting glitches.

If this story is intended to be read to or by children, and I have no clue how someone can read it without stumbling over incoherent sentences, then perhaps we have reached new lows. Yes, if these are being written by children and high school students, it is a good exercise to have them write, but they learn very little, if anything, unless someone reviews what they are writing and helps them learn from their mistakes. Otherwise, they will grow up and continue to crank out erroneous and confusing slop.

Was It Tax Fraud?

It’s time for another television court show commentary, this time with tax front and center. Sometimes that happens, but often the tax issue is a side issue or part of the backstory. If curious, there’s a long list of MauledAgain posts dealing with television court shows that have episodes involving tax,including 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, and Was Tax Avoidance the Reason for This Bizarre Transaction?.

This newest addition to that list is from Hot Bench, season 5, episode 200. The plaintiff sued the defendant, her son, for reimbursement of $2,250 in accounting fees she paid a tax return preparer to refile tax returns. I wonder how many tax practitioners have dealt with a story like this.

From January 2015 until August 2015, the defendant lived with his mother. He did not pay rent, and contributed $200 per month for food while admitting he ate more than that amount. In August of 2015 he moved to college. From that point through at least the end of 2017 he lived in a dorm or in his own apartment. He testified that he paid his own rent and worked full-time as an office assistant. He used his earnings from his job to pay his expenses. When asked about tuition, he stated that it was paid with student loans, but it quickly was established that his mother took out the loans and made payments on them.

Questions from the bench revealed that the reason the mother took out the loans was to make it easier for the son to get financial assistance in the form of grants. To do this, the mother claimed the son as a dependent on her tax return. She explained that she has other children who are younger, and also claimed them. She testified that the father of the children, including the defendant son, had never claimed the children as dependents. The defendant knew that he was being claimed by his mother on her 2015, 2016, and 2017 tax returns.

On his 2015, 2016, and 2017 tax returns, the son claimed a personal exemption deduction for himself even though he knew he was being claimed on his mother’s return. One of the judges pointed out that the mother properly claimed the son as a dependent because the facts made it clear that she provided more than half his support. Nothing was mentioned about the other requirements but it appears they were met. One of the judges pointed out that he knew his mother was claiming him as a dependent.

One of the judges asked him why he claimed himself, which meant that he took the position that he provided more than half his own support. His reply? “Because I needed the money.” That caused a judge to comment, “You may have defrauded the government.”

Though it wasn’t clear how the mother found out what her son had done, she retained a tax return preparer to amend the son’s returns. She told her son she was doing this, and he agreed to reimburse her for the cost of getting the amended returns prepared and filed. When asked why she did this, the mother replied, “I’m worried he’s going to end up in prison like Wesley Snipes because of tax fraud.”

The son did not reimburse his mother. When asked why he didn’t reimburse his mother, the son said that he had helped her financially during the past year. Asked about her son’s behavior, the mother explained that in 2014 her son had an accident that caused serious injuries, and might have suffered a brain injury. No evidence about the son’s health was mentioned or introduced.

One of the judges asked, “Why are you defending yourself against your mother? Why not reimburse your mother?” Several more questions along those lines were asked, and eventually the defendant son conceded he should reimburse his mother.

The judges’ deliberations were brief. One of them concluded that the son had committed tax fraud, knowing he would be claimed by his mother, and that he had breached his agreement with her to reimburse her. The other judges agree.

When handing down the verdict, the court stated that the plaintiff mother had proved she had right to claim him as a defendant, had proved he committed tax fraud, had proved he agreed to reimburse her, and had proved that he had failed to do so. Judgement was entered for the plaintiff.

Did the son commit tax fraud? Taken facially, the facts indicate yes. Yet one of the facts, the possible brain injury, raises the question of whether a person commits tax fraud if they lack the requisite mental intent. The son made it clear he knew he was being claimed by his mother on her return, he knew he should not claim himself, he deliberately claimed himself, and he did so because he needed the money. Under those circumstances, it is pretty much impossible to show that a brain injury, if there was one that persisted, interfered with the son’s intention to do something he knew violated the law. I doubt, though, that the son was or will be prosecuted for tax fraud because the situation was quickly fixed and the amount of tax in question was small.

Perhaps the Most Absurd Tax Proposal Ever

Generally, when I am commenting about tax law and tax policy, I prefer to react to, and write about, current developments. But this time I need to make an exception. Somehow, reader Morris came across what I consider the most absurd tax proposal ever. It is a suggestion by a Japanese economist to impose a tax on handsome men.

The impetus for this strange tax proposal is a population replacement problem in Japan. It is no secret that Japan has the oldest population in the world. Some predict that within 40 years its population will decrease by 30 percent. What is causing these demographic shifts? The birth rate is falling. Some point to the fact that increasing numbers of Japanese women are working and are focused on careers. Perhaps that is the reason. Perhaps it isn’t. There are plenty of nations where women have careers and work, but have more than zero children.

According to the economist proposing this “handsome man” tax, it will make it easier for “less-attractive men” to “find love.” His explanation needs to be quoted, “If we impose a handsome tax on men who look good to correct the injustice only slightly, then it will become easier for ugly men to find love, and the number of people getting married will increase."

Where do I begin? The easiest flaw to identify in this absurd proposal is the need to identify “handsome men.” If beauty is in the eye of the beholder, there surely are men who are considered handsome by some people but not by others. So who is the “beholder”? Some sort of government agency? A television reality show with audience or celebrity voting?

It gets worse. If Japanese men and women are refraining from having children for reasons of career and, finances, is that not a problem for men of every physical sort? Is there evidence that “less handsome” men in Japan want to have children but cannot find women to join them in the enterprise? If most or many Japanese women don’t want to have children, how will a tax on “handsome men” change their minds? The answer is, “It won’t.”

It gets crazier. Genuine love has nothing to do with money or looks, though for many or most of us, money and looks can interfere with, masquerade as, or otherwise distort conclusions with respect to love. All the money in the world cannot buy love. So taking money from “handsome men” is no more likely to cause a not-so-handsome man, whatever that means, to fall in love with or love someone.

It gets even crazier. How would a tax on “handsome men” take those men off the market and make room for “less handsome” men to succeed in having babies? If the tax were high enough to cause “handsome men” to cease socializing and marrying, all that it would accomplish is to decrease the pool of potential fathers.

It gets more interesting. Love and having children, although often connected, aren’t necessarily entwined. There apparently are plenty of Japanese couples who love each other but who are not having children. Taxing “handsome men” isn’t going to cause those couples to stop loving each other or prompt them to have babies. And as experiences throughout the word demonstrate, plenty of babies are born even though their parents aren’t in love and don’t love each other. Sometimes, sadly, they don’t even know each others’ names.

So is there anything a government can do to boost its nation’s birth rate? Yes. For the past few years, the Japanese government has been paying people to have babies. It appears that the increase in Japan’s birth rate is linked to these payments. That’s not surprising. In this instance, paying someone to do something is far more practical than imposing a tax that would not, and cannot, accomplish its stated goal.

When reader Morris drew my attention to this proposal, he asked, “is this a sin tax? Is this a progressive or regressive tax?" I didn’t answer his first question, but I will now. Whether it’s a sin tax depends on the definition of “sin” in Japan, and if failing to have babies is the “sin,” then the proposed tax is not a “sin” tax because it isn’t aimed at people who are failing to have babies. I doubt there is any evidence that “handsome men” make up all or most of the men who are not fathers.

As to his second question, I pointed out that it is impossible to answer his question because I don’t have, and I doubt there exists, any data that correlates adjusted gross income of Japanese men with how “handsome” they are. One might guess that more attractive people in Japan have higher incomes, but, again, who defines “attractive”?

So, I answered a question reader Morris did not ask. I shared my reaction to the tax proposal advanced by the Japanese economist. “It’s essentially a stupid idea.”

Tax Deductions Do Not Include Tax Credits

Perhaps it is fitting that on April 15 I have an opportunity to remind everyone that tax credits are not deductions. That concept is one of the basic principles of income taxation that I expect students in a basic income tax course to understand if they want to earn a grade that is not the sixth letter of the Western alphabet.

So why am I bringing this up? Several days ago I came upon an article with the title, “6 Things You Didn’t Know Were Tax Deductions.” One of the items, under the heading “Ongoing Education,” was described as follows:

If you continue your education after high school, some of your educational expenses might be tax deductible, even if you’re not a full-time college student. With the Lifetime Learning credit, you can deduct up to $2,000 per tax year of the cost for your ongoing education.

The lifetime learning credit does not provide a deduction. It provides a credit.

If I were editing this article, or reviewing a student paper, I would point out two things with respect to this issue. First, the quoted language should be rewritten as follows:

If you continue your education after high school, some of your educational expenses might generate a tax credit, even if you’re not a full-time college student. With the Lifetime Learning credit, you can subtract from your tax liability up to $2,000 per tax year of the cost for your ongoing education.

Second, I would retitle the article “6 Things You Didn’t Know Were Tax Breaks.”

It's that simple. Really.