MauledAgain

Friday, January 19, 2024

Should Tax Return Preparers Use Their Full Legal Names?

I don’t write every time I read an article or press release announcing the arrest, indictment, or conviction of a tax return preparer. In many instances there’s nothing particularly instructive because the preparer in question has repeated what another preparer has done. Other than differences in the number of returns and the dollar amount of lost revenue, there usually isn’t anything that grabs my attention. But a press release issued yesterday by the Department of Justice caused me to think about an aspect of tax return preparation I had not previously considered.

According to the press release, a tax return preparer pleaded guilty to inflating her clients’ tax refunds by preparing and filing “false tax returns that claimed fraudulent deductions and fictitious business profits and losses.” These filings caused a revenue loss of at least $400,000. The preparer also obtained more than $83,000 in Paycheck Protection Program loans by submitting false IRS forms with fake business income from “bogus businesses.” She also filed a false claim for unemployment insurance with the Maryland Department of Labor based in false federal income tax forms, and as a result, receiving more than $55,000.

What caught my eye was that the preparer did business as “The Tax Lady” and as “5 Starr Business Solutions.” Starr is the preparer’s surname. Should individual preparers be required to do business using their full name, or at least display their full name underneath any business name? Without such a requirement, a prospective client who is doing due diligence vetting needs to do research to learn the legal name of the preparer in order to see if that preparer operates other businesses under different names for which there are records of inappropriate or worse business practices. Most people do not know how to learn the legal name behind a business. Sometimes it’s easy. Too often it’s difficult and occasionally almost impossible.

But what of the corporate tax return preparation companies that employ hundreds or thousands of tax return preparers? Those companies are much easier to find. They are accountable for misdeeds by any of their employees. They are big enough that they cannot hide the way some individual preparers do and have done.

And what of individual tax return preparers who operate through a corporation using an invented corporate name? Again, it isn’t all that easy to identify the preparer who is behind that corporation. Should tax return preparers be prohibited from operating through an invented name?

When certain professionals, such as physicians and attorneys, operate a business that isn’t their actual name, whether or not in partnership, LLC, or corporate form, they are required to display their name or names in the appropriate place. Their names are on the firm’s or practice’s website, on emails, on letterheads, on court filings, on prescriptions, on medical reports, and on any other relevant document. If they can do that, so, too, can tax return preparers. Note that some states permit the use of fictitious names by physicians but from what I can figure out, the physicians need approval and it’s granted when a physician wants to omit a middle name, use their original name after changing their legal name due to marriage, or shortening their name if it is long and difficult to pronounce. That is a totally different issue than practicing medicine or law using an invented name that disguises the person’s identity.

People want to know who is giving them legal advice, representing them in negotiations or litigation, giving them a medical examination, or prescribing their medications. Do not people want to know who is preparing their tax return?

Thursday, January 04, 2024

Not That More Proof is Needed, But Here’s Yet Another Example That Taxes Aren’t “Just Numbers”

Many people, including law students who approach enrollment in a basic federal income tax course, think and often fear that tax is nothing more than manipulating numbers. Of course, that’s not the case. Though numbers are used in tax, just as they are used in other areas of law and life, numbers are just a tiny part of what tax practitioners do. I wrote about this in Why Tax Practitioners Must Be Good With Words, and Not Just Numbers. I offered examples of tax issues in which words were in play mattered and numbers were on the sideline in posts such as Medical Expense Deductions for Embryo and Cord Blood Storage, Pets and the Section 119 Meals Exclusion, and Not That More Proof Is Needed, But Here’s Another Example That Taxes Aren’t “Just Numbers”.

Today one of my tax-related email alerts drew my attention to another example of why tax is much more than just numbers. In Philadelphia Energy Solutions Refining and Marketing, LLC v. U.S., 2022-1834 (Fed. Cir. 3 Jan. 2024), the U.S. Court of Appeals for the Federal Circuit affirmed the decision of the Claims Court that a mixture of butane and gasoline did not qualify for the alternative fuel mixture credit. That credit is designed to offset the excise tax on alternative fuels. There also is an excise tax on taxable fuels, which by definition are not alternative fuels. An example of a taxable fuel is gasoline. Examples of an alternative fuels include benzol, benzene, and liquefied petroleum gases. The petroleum industry treats butane generally as a liquefied petroleum gas.

About ten years after Congress enacted the credit, the taxpayer filed refund claims for each taxable quarter in the years 2014 through 2017, claiming that it paid excise taxes on a mixture of butane and gasoline, and that it was entitled to an alternative fuel mixture credit to offset those taxes. It argued that the mixture in question was an alternative fuel. The IRS did not respond to the taxpayer’s filing so the taxpayer sued for a refund in the Claims Court. The Claims Court denied the taxpayer’s claim, holding that butane is not an alternative fuel and that a mixture of butane with gasoline is not an alternative fuel.

The Court of Appeals pointed out that although this was the first time it had faced the question, two other Courts of Appeal had done so and had held as did the Claims Court. Somehow I did not notice those other two Court of Appeals decisions.

The Court of Appeals explained that under the statutory definition, an alternative fuel mixture is “a mixture of alternative fuel and taxable fuel (as defined in subparagraph (A), (B), or (C) of section 4083(a)(1)) which— (A) is sold by the taxpayer producing such mixture to any person for use as fuel, or (B) is used as a fuel by the taxpayer producing such mixture.” The Court explained that there was no dispute between the parties that gasoline is a taxable fuel. Under the statute, taxable fuel “means—(A) gasoline . . . .” The parties also did not dispute that under the same definition, butane is a taxable fuel, because the statute provides that the term gasoline includes “any gasoline blend stock.” The regulations under the statute state that gasoline blend stocks “means (A) Alkylate; (B) Butane; (C) Butene; . . . .” Accordingly, because both gasoline and butane are not alternative fuels, a mixture of the two is not an alternative fuel because an alternative fuel requires a mixture of a taxable fuel and an alternative fuel.

Nonetheless, the taxpayer argued that the credit should apply to the mixture because liquified petroleum gas is included in the definition of alternative fuel, and under industry understandings, butane is a liquified petroleum gas. The taxpayer argued that because the Congress did not provide a cross-reference in the credit statute to the definition of alternative fuel even though it provided a cross-reference to the definition of taxable fuel, it must have intended that the definition of alternative fuel for purposes of the credit was not the same as the definition of alternative fuel for purposes of the excise tax on alternative fuels. The taxpayer pointed out that the definition of alternative fuel in the credit statute states that alternative fuel “means—(A) liquefied petroleum gas, (B) P Series Fuels . . . .” Accordingly, argued the taxpayer, because the statute did not define liquified petroleum gas for purposes of the credit, the definition should reflect the industry understanding that it includes butane. The Court rejected the argument because even though looking at the credit statute in isolation it might appear that the taxpayer had a point, the analysis required looking at the “statutes as a whole,” which makes it clear that butane is not an alternative fuel. This conclusion was buttressed by the fact that a taxable fuel, such as butane, was by definition excluded from the definition of alternative fuel.

There are several lessons to be learned from this case. First, as pointed out at the beginning of this post, tax practice is more than dealing with numbers. Second, as I’ve pointed out many times, those who practice tax end up dealing with everything in life, not just meal exclusions, medical expense deductions, and similar transactions, but also the definition of fuels. Third, though law students think accounting majors “have the edge for grades” in the basic federal income tax course, they don’t, but perhaps when it comes to the alternative fuel credit chemistry majors would have an advantage but for the fact that no basic federal income tax course of which I’m aware covers these taxes (not only because it is a complex and specialized area but also because it involves an excise tax). Fourth, to no one’s surprise, once again we are blessed with an example of inadequate statutory drafting by the Congress, reinforced by the fact that after the years in issue in the case Congress amended the statute to provide that a mixture of gasoline and butane is not an alternative fuel.

Thursday, December 21, 2023

Should (Will) Implementing the Mileage-Based Road Fee Cause Privatization of Highway Infrastructure?

This morning, reader Morris directed my attention to a commentary that supports implementation of the mileage-based road fee, but that also suggests, and seemingly supports, the idea that the implementation will open the door to privatization. The author argues that privatization is “a concept supported by numerous studies showcasing the efficiency and performance improvements possible through transparent and well-structured public-private partnerships,” and adds, “The private sector has a proven track record of driving innovation in transportation safety. Extending this partnership to infrastructure allows for the implementation of cost-effective technologies, ultimately making our roads safer and more efficient.”

What I do not support is the privatization of government functions. I have explained my objections to public-private partnerships and privatization of public functions in posts such as Are Private Tolls More Efficient Than Public Tolls?, When Privatization Fails: Yet Another Example, How Privatization Works: It Fails the Taxpayers and Benefits the Private Sector, Privatization is Not the Answer to Toll Bridge Problems, When Potholes Meet Privatization, and Will Private Ownership of Public Necessities Work?

Why do I believe that public functions belong in the public sector. There are several principal reasons that I oppose putting public functions into the hands of those who control the private sector.

First, public-private partnerships don’t work out well, as I explained in posts such as Selling Off Government Revenue Streams: Good Idea or Bad?, Are Citizens About to be Railroaded on Toll Highway Sales?, Turnpike Cash Grab Heats Up, Selling Government Revenue Streams: A Bad Idea That Won't Go Away, Turnpike Lease: Bad Policy and Now a Bad Deal , How Do Toll Road Lessees Make a Profit?, The Pennsylvania Legislature Gets It Right, Killing the Revenue Idea That Won't Die, Are Private Tolls More Efficient Than Public Tolls?, and More on Private Toll Roads. These posts pointed out failures in places like San Diego, Orange County, and South Carolina. The failure list grows, and now includes arrangements that did not work for the Interstate 69 project in southern Indiana, and the Pocahontas Parkway in Virginia. From the searching that I undertook, it appears that the problem is a global one and not limited to the United States.

Second, when public functions are re-routed into the hands of private sector businesses, voters lose the ability to control, vote out, or do much of anything with respect to the private entities now running government functions. It is a regression from democracy to a blend of feudalism and authoritarianism.

Third, these arrangements contribute to the corruption of government. They are the product of legislative attempts to find funding without raising taxes while generating revenue for their private sector donors, with hopes that the outcry against tolls and similar charges will be directed against the private entity involved in the project. When things go wrong, legislators don’t react because they perceive themselves at risk of losing funding from the favored private entities and thus at risk of losing the next election, something on which they focus too much.

Aside from the long-term disadvantages of privatizing public functions, the arguments offered in support of that path are flawed. To argue that privatization is “a concept supported by numerous studies showcasing the efficiency and performance improvements possible through transparent and well-structured public-private partnerships,” totally ignores the repeated failures, perhaps because from the viewpoint of the companies and individuals collecting public funds not only find these partnerships to be a success for themselves but manage to persuade everyone else that the success of these private sector participants translates to success for everyone, which is the opposite of reality. The claim that “The private sector has a proven track record of driving innovation in transportation safety” is hilarious when one considers the track record of the private sector when it comes to safety. Aside from noting the Corvairs and Pintos of the world, it has been government that has compelled the implementation of safety features and insisted on recalls due to flawed manufacturing despite the sing-song of the anti-government crowd that chants “we don’t need no regulation.” Yes, you do.

The claim that “Extending this partnership to infrastructure allows for the implementation of cost-effective technologies, ultimately making our roads safer and more efficient” ignores the reality that even if the roads are made safer and more efficient, an questionable claim in and of itself, it makes voter control more difficult rather than more efficient, it funnels public money into the hands of private individuals and companies, and in the long run it increases the cost to the public of using highways, bridges, and tunnels to levels higher than they would be if there weren’t a need to generate profits for those private individuals and companies.

It is sad and alarming that, yet again, when a good idea in the public sector begins to gain traction, the wealthy who yearn for even more wealth, and their acolytes, turn their thoughts into how they can milk more money from the proposal. Enough with the outsourcing of government to privateers.

Tuesday, December 05, 2023

When the Lack of Facts Produces “Rough Justice” in a Tax-Related Case

It’s been a while since I wrote about a television court show. My previous explorations include posts such as Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other, One of the Reasons Tax Law Is Complicated, An Easy Tax Issue for Judge Judy, Another Easy Tax Issue for Judge Judy, Yet Another Easy Tax Issue for Judge Judy, Be Careful When Selecting and Dealing with a Tax Return Preparer, Fighting Over a Tax Refund, Another Tax Return Preparer Meets Judge Judy, Judge Judy Identifies Breach of a Tax Return Contract, When Tax Return Preparation Just Isn’t Enough, Fighting Over Tax Dependents When There Is No Evidence, If It’s Not Your Tax Refund, You Cannot Keep the Money, Contracts With Respect to Tax Refunds Should Be In Writing, Admitting to Tax Fraud When Litigating Something Else, When the Tax Software Goes Awry. How Not to Handle a Tax Refund, Car Purchase Case Delivers Surprise Tax Stunt, Wider Consequences of a Cash Only Tax Technique, Was Tax Avoidance the Reason for This Bizarre Transaction?, Was It Tax Fraud?, Need Money to Pay Taxes? How Not To Get It, When Needing Tax Advice, Don’t Just “Google It”, Re-examining Damages When Tax Software Goes Awry, How Is Tax Relevant in This Contract Case?, Does Failure to Pay Real Property Taxes Make the Owner a Squatter?, Beware of the Partner’s Tax Lien, Trying to Make Sense of a “Conspiracy to Commit Tax Fraud”, Tax Payment Failure Exposes Auto Registration and Identity Fraud, A Taxing WhatAboutIsm Attempt, When Establishing A Business Relationship, Be Consistent, as the Alternative Can Be Unpleasant Litigation, and Sadness on Multiple Levels: Financial Literacy, Factual Understanding, Legal Comprehension.

There are several reasons that I have written fewer television court show commentaries. Almost all of the episodes that have been broadcast during the past year have been reruns. Fewer television court shows are being broadcast. Almost all, if not all, of current episodes are airing on one of the many dozen streaming alternatives, which I do not care to chase down because it is prohibitive to subscribe to all of the streaming services that offer a television court show.

Today, reader Morris picked up an a Judge Judy episode from several years ago. It was an episode I had not seen. He shared with me several questions which I will answer as I describe the episode and the outcome.

The plaintiff was the mother of a child and the defendant was the father of the child. They were not married, and when they broke up they entered into an agreement to alternate claiming the child on their tax return. The plaintiff mother would claim the child in odd years and the defendant father would claim the child in even years. In 2017, the defendant father claimed the child. He explained that he did so because the child’s mother had been sentenced to jail in 2017 for a nine-month sentence though she ended up serving only three months. The defendant received a $6,000 refund on his 2017 federal income tax return though no evidence was submitted to show how much of the refund was attributable to his claiming of the child. The plaintiff sued the defendant for one-half of the $6,000. The defendant had previously paid the plaintiff $1,000, and he counterclaimed for return of that payment.

Judge Judy held that the defendant had violated the agreement. She held that he was required to pay the plaintiff $2,000, and dismissed his counterclaim.

I now answer the questions posed by reader Morris by analyzing the situation.

The agreement between the two parents controls. The agreement provides that the claim alternates yearly, without regard to number of days of residence with either party and without regard to the amount spent on support. So the conclusion that the father should not have claimed the child in 2017 is correct.

What wasn’t correct was the computation of damages. However, that was not the fault of Judge Judy. Here’s why.

First, a procedural issue. The plaintiff should have asked for an order requiring the defendant to amend his return, which would then permit the plaintiff to file an amended return claiming the child. The amount of the refund that the father should not have received (which could have been less than $6,000) would go back to the Treasury, and the plaintiff would get a reduced tax liability, an increased refund, or some combination (which cannot be determined because no evidence was submitted that disclosed whether she had received a refund or had to pay additional tax on her 2017 return).

Second, because the plaintiff did not seek that relief, it is unavailable for Judge Judy to order. It might be that the statute of limitations had run. On that we lack necessary information.

Third, the parties apparently did not provide sufficient evidence for Judge Judy to do the “what if” computations reflecting what the tax liabilities would have been had the plaintiff and not the defendant claimed the child. So she did “rough justice.” That was the best that could be done under the circumstances.

Fourth, there is insufficient evidence to determine if the reduction in the defendant’s refund would exceed or be less than the increase in the plaintiff’s refund. It is possible that collectively they saved taxes compared to what would have happened had the returns been properly filed in the first place.

Fifth, it is possible that both parties will be audited. We don’t have sufficient information. If, for example, the IRS does audit and determines that the father received too much of a refund, there would be more litigation as he would seek to recover from the plaintiff what he paid her.

The last question posed by reader Morris was “Do we have enough facts?” The answer is no. We are missing many facts. When precision matters, facts are important. When important facts are missing, precision disappears. Then guesswork, “rough justice,” and even injustice run rampant.

Thursday, November 23, 2023

A Different Thanksgiving

This year, Thanksgiving is different. My mother will not be joining us, because she left this life back in June. It was one thing when she stepped back from being the Thanksgiving cook, as she gradually reduced her participation in Thanksgiving from the sole organizer, shopper, cook, and server to a contributor to a guest at the home of younger family members. It’s a totally different thing when she’s not there in person. I am confident she is here in spirit. Yet I am thankful that for a many dozens of years she was with us, and I remain thankful for all that she did for me and our family. For those interested, this is her obituary.

As I have noted in each of the past ten years, “I have presented litanies, bursts of Latin, descriptions of events and experiences for which I have been thankful, names of people and groups for whom I have appreciation, and situations for which I have offered gratitude. Together, these separate lists become a long catalog, and as I have done in previous years, I will do a lawyerly thing and incorporate them by reference. Why? Because I continue to be thankful for past blessings, and because some of those appreciated things continue even to this day.” When I re-read those lists, I realized that the people, events, and things for which I am appreciative are far from obsolete.

So once again on this one day I will look back at the past twelve months, and remember the people, events, and things for whom and for which I give thanks and have given thanks throughout the year. If some of these seem repetitive, they are, for there are gifts in life that keep on giving:

I am thankful for my mother’s life, her advice, her stories, her silly antics, her encouragement, and her tending to the care of her family.
I am thankful for the many phone calls with my mother, later in her life, during which we spent hours discussing genealogy, family history, and theology, a most interesting combination of topics.
I am thankful for a wonderful son, daughter, daughter-in-law, grandson, and granddaughter.
I am thankful for all the people who continue to help update the multiple family trees I develop, maintain, update, and publish.
I am thankful for the cousins I have met through FTDNA, ancestry, and 23andme, who I did not know existed, and for the opportunity to get in touch with cousins who I knew existed but with whom I had no contact until they showed up on one or more of those genetic genealogy sites.
I am thankful that a member of the Maull family of Delaware agreed to take a BigY700 DNA test, which proved that the Maull family and the descendants of Thomas Maule of Salem, Massachusetts, share a common paternal ancestor about 400 years ago, and so I am thankful I now have more clues for one of my major genealogy research projects.
I am thankful that my congregation’s choir has been able to continue singing, and now without masks.
I am thankful that we continue to gather in the sanctuary for worship, and, yes, that I continue to ring the narthex bell.
I am thankful for all the people in the world who continue to fight ignorance, crime, terror, evil, and corruption.
I am thankful that awareness of what needs to be done to fight ignorance and corruption is growing and that more steps in that direction are being taken.
I am thankful my health is holding steady.
I am thankful for people being willing to read the things I write.

Sixteen years ago, in Giving Thanks, Again, I shared my Thanksgiving advice. I liked it so much that I repeated it again, in 2009 in Gratias Vectigalibus, yet again in 2013 in “Don’t Forget to Say Thank-You”, still again in 2014 in Giving Thanks: “No, Thank YOU!” , even yet again in 2015 in Thanks Again!, even still again in Thankfully Repetitive, yet once more in Never-Ending Thanks, yet even once more in Particularly Thankful This Time Around, again in Quest'anno è il Ringraziamento, once more in Different, But Thanksgiving Nonetheless, again in in Still Different, But Thanksgiving Nonetheless, and last year in One Day of Thanksgiving, A Year of Thanks. For me, it does not lose its impact:

Have a Happy Thanksgiving. Set aside the hustle and bustle of life. Meet up with people who matter to you. Share your stories. Enjoy a good meal. Tell jokes. Sing. Laugh. Watch a parade or a football game, or both, or many. Pitch in. Carve the turkey. Wash some dishes. Help a little kid cut a piece of pie. Go outside and take a deep breath. Stare at the sky for a minute. Listen for the birds. Count the stars. Then go back inside and have seconds or thirds. Record the day in memory, so that you can retrieve it in several months when you need some strength.

I am thankful to have the opportunity to share those words yet again. And I am thankful that it is possible for even more of us to do all of those things, and for others of us to most of those things.

Monday, November 20, 2023

Why Is Road Repair and Maintenance Funding So Difficult for Public Officials to Figure Out?

Concerns about highway repair and maintenance funding continue to grow. Reader Morris directed my attention to a letter to the editor of the Everett, Washington, Herald newspaper responding to an article addressing the question. The letter writer proposed increasing funding by repealing tax exemptions for “vehicles owned by the state, the counties, the municipalities, school districts, fire departments,” along with “other special fuel use tax exemptions.”

Here’s the problem with this proposal. Requiring states, counties, municipalities, school districts, and fire departments to pay fuel taxes means that those entities would need to increase other taxes to provide the funds with which those entities would pay fuel taxes. In effect, that shifts the cost of road repair and maintenance to people paying other taxes who do not necessarily use the roads or use them minimally and are already paying fuel taxes or the alternative surcharge for electric vehicles. As for the special fuel exemptions that the letter writer mentions, those apply “boats or farm machinery or construction equipment (a very broad set category) as well as ferries, and passenger-only ferries, Even aircraft fuel.” Though the letter writer complains that “The actual cost of supporting the state highway infrastructure falls on the personal private non-exempt automobile owner,” it makes no sense to impose fuel taxes to support road repairs and maintenance on boats, ferries, airplanes, and farm equipment because they do not use the roads.

Reader Morris also directed my attention to a referendum in Perris, California that puts to the voters a proposed special business license tax on warehouses. This tax would provide funding for repairs and maintenance of roads in Perris that have been identified as heavily used by trucks servicing warehouses in the city. The rationale for the proposal is that these trucks are causing the roads to deteriorate faster than they otherwise would. There are several flaws in this proposal. It imposes the tax on only some businesses that are serviced by trucks. It doesn’t correlate the computation of the tax with the weight of the trucks and the frequency of their arrivals and departures from the warehouses. It appears that the proposal did not get the required two-thirds approval from voters.

I continue to wonder. Why is it taking so long for government officials and voters to figure out what needs to be done and to take steps to make it happen? I know, I know, it’s a matter of politics, money, and misinformation. As is the case with too many other issues.

Wednesday, November 15, 2023

Another Wealthy Stadium Owner Grabs Taxpayer Money

Here we go again. Those who read MauledAgain are familiar with my opposition to public funding of, and tax breaks for, businesses owned by multimillionaires and billionaires. I have written about this problem, particularly with respect to public financing for the sporting dreams of billionaires, 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, Tax Breaks for Wealthy People Who Pretend to Be Poor, When One Tax Break Giveaway Isn’t Enough, It’s Not Just Sports Franchise Owners Grasping at Tax Breaks, Grabbing Tax Breaks, Sports Franchises, Casinos, and Now, a Water Park, and Tax Breaks For Starving Team Owners.

Now comes news that the Wisconsin legislature has passed, and the state’s governor intends to sign, legislation that shifts almost half a billion dollars from taxpayers to the owners of the Milwaukee Brewers so that the stadium in which they play can be repaired. I’ll leave to the engineers the question of whether one building that needs that much money for repairs should be fixed or demolished. The legislation succeeded even though the Brewers have sufficient funds to pay for the repairs.

When the legislation passed, a Brewers official stated, ““It’s a great day for the franchise but I think an even greater day for the state.” But is it a great day for taxpayers in the state who aren’t fans of the Brewers?

The governor justified his support by noting that the money will create jobs. On that theory, perhaps all jobs should be financed by taxpayers. Of course, that would make no sense. Just as many jobs would be created if the Brewers paid for their own repairs, just as other property owners pay for their own repairs. Isn’t it interesting that the same politicians who object to government programs to help poor people fix their homes are ferociously eager to use taxpayer funds to help wealthy individuals and corporations fix their properties? There’s some hypocrisy lurking behind this charade.

Of course, the team used the well-worn threat of leaving town if they didn’t get taxpayer money. Then let them leave. If Milwaukee is a great place to have a baseball team and stadium, then free market capitalism will entice another set of owners to move to Milwaukee. And if that doesn’t happen, it demonstrates that Milwaukee cannot support a baseball team in a free market capitalism world. So be it. Interestingly, after making that threat, Brewers officials backed off. Apparently that sort of threat doesn’t make for good public relations.

Supposedly the public funding is palatable because the team is kicking in about 20 percent of the cost. Using that approach, ought not taxpayer funds be used to finance 80 percent of whatever it is that someone wants to purchase? Or is that deal reserved for the wealthy?

Some Republicans in the Senate balked at the original funding plan, and scaled back the state’s contribution from $411 million to $386 million, while the city and county of Milwaukee would kick in $135 million. So where do they get the funds? Unlike the deal in Buffalo that I criticized in Tax Breaks For Starving Team Owners, they apparently aren’t chopping $800 million off the funding of the state’s equivalent of New York’s Office of Children and Family Services. No, instead, they have added a $4 “surcharge” on tickets to non-baseball events and an $10 “surcharge” on luxury suite tickets to non-baseball events. I wonder how baseball fans would react to a “surcharge” on baseball game tickets to fund opera, ballet, and symphonies.

The supporters who claim that it makes sense to fund the wealthy because doing so benefits the public and creates jobs ignore the logic that taking this approach in a fair manner requires public funding for almost everyone, because almost everyone engages in employment, activities, and enterprises that benefit the public and creates jobs. Why doesn’t the person who hires contractors to repair their home get this treatment? Because that homeowner lacks the resources to fund politicians’ campaigns, to hire lobbyists to pressure public officials, and to pay marketers to make the public think that government funding for the stadiums owned by wealthy individuals and corporations is a wonderful thing to do. Worse, they manage to impose “surcharges” on people who are not necessarily fans of baseball or the Brewers. These supporters of public funding for stadiums proclaim their worship of free market capitalism, but when free market capitalism fails to help the wealthy achieve a goal, they are quick to jump in with what gets condemned as socialism if that sort of assistance is proposed for the poor and middle class who encounter free market capitalism failures. The hypocrisy is disappointing and dangerous.

Tuesday, October 31, 2023

Does This Halloween Practice Foretell a Scary Future?

From the outset of this blog, I have made it a point to work Halloween into MauledAgain, usually looking for the silly or goofy but occasionally taking a more serious approach. The posts began with Taxing "Snack" or "Junk" Food (2004), and have continued through Halloween and Tax: Scared Yet? (2005), Happy Halloween: Chocolate Math and Tax Arithmetic (2006), Tricky Treating: Teaching Tax Trumps Tasty Tidbit Transfers (2007), Halloween Brings Out the Lunacy (2007), A Truly Frightening Halloween Candy Bar (2008), Unmasking the Deductibility of Halloween Costumes (2009), Happy Halloween: Revenue Department Scares Kids Into Abandoning Pumpkin Sales (2010), The Scary Part of Halloween Costume Sales Taxation (2011), Halloween Takes on a New Meaning and It Isn’t Happy (2012), Some Scary Halloween Thoughts (2013), The Inequality of Halloween? (2014), When Candy Isn’t Candy (2015), Beyond Scary: Tax-Based Halloween Costumes (2016), Another Halloween Treat? I Think Not (2017), If Halloween Candy Isn’t Food, Is it Medicine? (2018), The Halloween Parent Tax: Seriously? (2019), Halloween Chocolate Construction Project (2020), The Tax Consequences of Halloween Candy Buy Back Programs (2021), and Two Not Very Amusing, But Scary, Halloween Tax Challenges.

Last week, reader Morris directed my attention to a story that addressed an issue I discussed in The Halloween Parent Tax: Seriously? back in 2019. In that commentary I reacted to the practice of parents taking some or even quite a bit of their children’s candy, with the justification that it teaches them about taxes and prepares them for the “real world.” I pointed out that when my parents consumed a small portion of what my siblings and I brought home from our multi-neighborhood, four-hour Halloween candy collection, it was a lesson in sharing. We learned why it was appropriate and generous to offer candy to our parents in appreciation of their help, not only in accompanying us around the neighborhood when we were younger but also in assisting the design and construction of costumes. So even when we grew older, designed and made our own costumes, and went out on our own, we continued to share candy with our parents.

In the story shared by reader Morris, I learned that New Zealand’s Inland Revenue Department had tweeted that “parenting trends like a lolly tax teach kids responsibility by taking some of their lollies and taxing their trick or treat haul.” It suggested that parents take 33 percent of their children’s candy because that is the top income tax rate in New Zealand. The tweet was quickly criticized, particularly by members of Parliament who object to the government’s tax policies. The story itself shares some of the interesting comments made by people who viewed the tweet as inappropriate. Though the Department explained that the tweet was intended to be “lighthearted” and “in the spirit of Halloween,” it apologized and then deleted the tweet. Of course, the Department did not invent the concept of the “candy tax,” “parent tax,” or “dad tax,” to mention three of the phrases used to describe the parental confiscation of candy, as the idea was shared initially on a variety of parenting blogs and social media platforms. The story also referred to a 2019 survey that revealed 74 percent of parents admitted eating some of the children’s candy, with 17 percent taking more than half. Wow.

It is worth repeating what I noted in The Halloween Parent Tax: Seriously?:

So although some people think Halloween presents an opportunity to teach children that “the government” is going to “take some of what you earn,” I think it provides an even better opportunity to teach children the concepts of generosity, empathy, and sharing. Those character traits are disappearing too rapidly among certain segments of society.

Now, four years later, in a world increasing afflicted by self-centeredness, I wonder what lessons are actually being learned by children who observer their parents taking substantial portions of their candy, not through sharing but by fiat. Thirty years from now, how will today’s children raised under those circumstances treat their children? How will they treat other people? Will generosity, empathy, and sharing be part of their worldview? The reality could turn out to be scarier than Halloween.

Friday, October 20, 2023

Will “Tax and Spending” Get Support in a Place Traditionally Hostile to Taxes and Government Spending?

Eleven years ago, in How Not to Spend Tax Revenues, I criticized the school district in Allen, Texas, for spending $60 million on a high school football stadium. School district officials explained that it was not their intention to recoup the costs through revenues from the stadium, pointing out that it was not practical to do so. The bonds undertaken to fund the construction are being paid back by the taxpayers. The stadium, for high school students, has a 38-foot wide high-definition video screen, spacious weight rooms, separate practice areas for the wrestling and golf teams, and concrete rather than aluminum stands. The absurdity of the cost was highlighted by the fact that in 2012 dollars, the Cotton Bowl cost $4.5 million, and the stadium being built at the time by the University of North Carolina-Charlotte cost about $45 million. I pointed out that someone’s making money on this deal, and it isn’t the taxpayers and it isn’t the students.

What surprised me at the time was the inconsistency exhibited by those who object to “excessive government spending” but who vote for what one person called “monumentally stupid” and another called “pathetically ridiculous.” Dare I say that opposition to spending peaks when the dollars would benefit “the others” but disappears when it helps “one’s own.” As I pointed out in the 2012 commentary:

The father of one football player provided a comment that could be considered a response: “There will be kids that come through here that will be able to play on a field that only a few people will ever get the chance to play in.” So it’s good to fork over tens of millions of taxpayer dollars to benefit a few kids? In return, what do the taxpayers get? A more educated nation? A nation whose citizens are competitive in a global marketplace? A healthier citizenry? Or just another version of taxpayer-funded entertainment for the benefit of a select group? What about facilities for the debate team? The language clubs? The science fair? The math contestants? Do they not matter?

Apparently my 2012 commentary didn’t find its way to a sufficient number of people, or perhaps they ignored it, or perhaps they didn’t understand it. Why do I say that? Keep reading.

The other day reader Morris directed my attention to this report about a proposed high school stadium in Prosper, Texas. The school district in that town has put several bond propositions on the ballot, one of which, if approved, would authorize the borrowing of $94 million to build a second high school football stadium. In an attempt to justify what would be the most expensive high school stadium in Texas (and, I think, perhaps anywhere), a spokesperson for the school district claimed that the stadium should not be considered a stadium but “the district’s largest classroom.” The spokesperson explained that students would run concessions, organizations such as the band, cheerleaders, and spirit squad would “contribut[e] to the game day atmosphere,” the stadium would be used for community events, several spring sports, and graduation. Note that the existing stadium would not be closed but instead football teams would “rotate” between the two facilities.

In all fairness, the district is also presenting three other bond propositions. One would finance six new elementary schools, a second early childhood school, two ne middle schools, a new high school, an outdoor learning center, an administration and professional learning center, and modernization and expansion of existing schools. Another would provide updated technology for students, teachers, and staff. The third would finance a new performing arts center. And in all fairness, it appears that voters could approve one or more of the propositions without approving all of them.

So what will the voters do? Approve all, which would require significant increases in tax revenues, something abhorrent to most Texans? Approve the financing for a professional-level football stadium for a high school and reject the others? Vote for the stadium and the new schools but turn down the technology upgrades and performing arts center? Approve all but the football stadium?

What the voters do will tell us quite a bit about what the voters think is important. It will also reveal some truths about the extent to which objections to “tax and spending” is an objection only to certain taxes and spending. It will be interesting to learn, years from now, how much complaining blossoms as taxpayers in the district begin looking closely at their tax bills.

Friday, October 13, 2023

Does the Size of the Tax Gap Matter?

The tax gap is the difference between what taxpayers should be paying if they comply with the tax law and what taxpayers actually are paying. For each type of tax in each jurisdiction there is a tax gap. There are sales tax gaps, real property tax gaps, and, of course, income tax gaps. The income tax gap that gets most of the attention is the federal income tax gap because it is the largest of the tax gaps.

According to an IRS news release issued yesterday,* the federal income tax gap for 2020 is projected to be $601 billion, and for 2021, $688 billion. The amounts are projections because audits and case closings are not yet completed. Projections for earlier years in the mid-2010s were lower, ranging from $596 billion to $550 billion.

Yet in 2021, according to this report, the then IRS Commissioner pegged the tax gap at “some $1 trillion . . . every year.” That’s a significantly higher number. It’s unclear whether the Commissioner was using a different algorithm to measure the tax gap or if he was acknowledging the claim many of us have made, that the tax gap is much higher than the official amounts released by the IRS.

But does the amount of the tax gap matter? In some respects, yes, it does. The larger the gap, the more the nation must borrow and the more it must cut spending, or some combination thereof. That’s a serious problem for the country. On the other hand, arguing about the size of the tax gap is similar to a driver contesting a speeding ticket by reacting to the police officer’s claim that the driver was operating a vehicle at 130 miles per hour with a defense that the driver was going “only 100 miles per hour.” At either speed, the risks are extraordinary and totally unacceptable.

So even using the lower numbers, it means that over the past decade, somewhat in the range of $5 trillion in federal income taxes has been unpaid and uncollected. Imagine if it were possible to collect that amount. It would have a significant impact on the economy and on the lives of every American.

Of course, that amount cannot be collected. There are two principal reasons. First, some of the taxpayers who owe these taxes have little or no funds or property. Trying to collect the funds would indeed be trying to “get blood from a stone.” Second, as a political matter, the anti-tax anti-government folks who are dead set on collapsing government simultaneously complain about the federal budget deficit, complain about the social conditions that are the consequence of spending cutbacks, and oppose funding the IRS to give it the ability to try to collect at least some of the outstanding unpaid taxes.

Arguing about the size of the tax gap is a distraction from the more important and more serious problem. Legislative paralysis, incompetence, grandstanding, and acquiescence to high-end donors is crippling the nation.

*Thank you, reader Morris, for finding the IRS news release. You were better at this than I was, and better than the search engines.

Tuesday, September 26, 2023

Stop the "Stop EV Freeloading Act" Because The Mileage-Based Road Fee Is a Much Better Way to Go

Senator Deb Fischer has introduced the “Stop EV Freeloading Act,” a description of which is provided here. The justification for the proposal makes sense, as do all the other attempts to deal with the fact that fuel taxes are not collected with respect to electric vehicles. But the proposed solution is unfair and burdensome in terms of compliance and paperwork.

Fischer proposed a two-tier tax. A tax of $1,000 would be imposed “at the manufacturer level, at the point of sale.” The $1,000 is computed by multiply 10 (because the average lifespan of an electric battery is 10-15 years) by $100 (the high end of the average $87 to $100 in federal liquid fuel taxes paid with respect to light-duty vehicles to the Highway Trust Fund). Another tax of $550 would be imposed on each battery module weighing more than 1,000 pounds, imposed at the manufacturing level. The $550 is the cap on the excise tax paid with respect to heavy trucks.

The rationale for the proposal rests on the claim that these taxes would “offset the damage to roads and bridges” caused by electric vehicles. The problem with the proposal is that it assumes each electric vehicle causes the same amount of damage. Yet the amount of damage caused by a vehicle varies depending on the number of miles driven, the weight of the vehicle, the distribution of the weight based on the number of axles and wheels, and the type of road surface on which the vehicle is driven. The proposal subsidizes high-mileage drivers at the expense of low-mileage drivers. That’s not fair. The proposal would require manufacturers to keep all sorts of records and fill out a variety of forms in order to comply with the manner in which the taxes are imposed and collected.

Thursday, September 21, 2023

What Is “Net Annual Taxable Income” for Alabama Homestead Exemption Purposes?

Reader Morris sent me an email the other day, captioned “I am confused.” After looking at the sources he provided, I think everyone is or should be confused, unless I am missing something that I did try to find.

Reader Morris directed me to an MSN explanation of the Alabama homestead tax exemption for seniors. The explanation first noted that one of the requirements is that the person must “have a net income of $12,000 or less,” but in a subsequent paragraph described the requirement as, “Your net taxable income on your most recent federal income tax return should not exceed $12,000.”

In an attempt to resolve that discrepancy, reader Morris also sent me another link, this one to section 810.-4-1-.23 of the Alabama Administrative Code. This provision requires the person to have “net annual taxable income of $12,000 or less, as shown on the taxpayer's and spouse's latest United States income tax return.”

So now we have three articulations, each one slightly different. The one that is controlling is the one in the Administrative Code. But what is “net annual taxable income . . . as shown on the . . . latest United States income tax return”? I searched the Income Tax Code on the Cornell University Law School Legal Information Institute site for “net annual taxable income” and found nothing. Curious, I then searched for “net taxable income,” and came up with only one reference, that to a provision once used in section 911 but repealed by Public Law 95-600 some time ago. So, again, nothing. Nor did I find anything in the Treasury Regulations promulgated under the Internal Revenue Code.

So what did the Alabama legislature and Department of Revenue mean when it used the term “net annual taxable income”? There is no definition in section 810.4-1-.23. That’s not surprising, because the language is in effect saying, “We aren’t giving you the definition because we are relying on the definition used for federal income tax purposes.” The challenge is figuring out what that term means for federal income tax purposes. A similar puzzle is why the author of the MSN commentary used both “net income” and “net taxable income” instead of “net annual taxable income” Perhaps the legislature, the Department of Revenue, and the MSN author mean, “taxable income”? I don’t know.

But perhaps I’m missing something. Over the years I’ve learned that statutes and regulations often resemble word-based treasure hunts, in which a term is defined in some obscure place, not necessarily with cross-references that assist someone in resolving the definition of a term. But I remain curious, and invite anyone who has the definition of “net annual taxable income” as Alabama intends for it to be defined to let us know.

Saturday, September 02, 2023

Are Business Expenses Tax Expenditures and Does Tax Expenditure Have an Opposite?

The other day, in Is a “Tax Expenditure” Necessarily Bad Policy?, I reacted to David Henderson’s commentary in which he claims that the term “tax expenditure” rests on the “implicit assumption . . . that there shouldn’t be a deduction for home mortgages.” I pointed out that treating all tax expenditures, that is, every exclusions, deduction, or credit, as something that “shouldn’t be” an exclusion, deduction, or credit would remove all exclusions, deductions, and credits from the tax law.

Reader Trent Robinson shared with me his understanding that deductions for ordinary and necessary business expenses are not normally considered a tax expenditure even though those expenses do have the effect of decreasing tax liability from what it would be absent those expenses being deducted. I replied to Trent that I think he makes a good point about ordinary and necessary business expenses. For example, should cost of goods sold, sometimes characterized as a deduction, be tagged as a “tax expenditure”? To the extent that Henderson suggests deductions are tax expenditures because deductions exist at the whim of Congress, should trade or business expenses be considered absolutes along the lines of cost of goods sold? Though it makes sense to answer in the affirmative, the reality is that there are all sorts of business expense that are ordinary and necessary but that Congress has chosen either to deny or to limit. Congress limits the amount that can be deducted as compensation, limiting it to what is reasonable. There are limits on the deduction of meals, entertainment, and travel expenses. Deductions are not permitted for certain fines and penalties paid in the course of operating a business. So even with trade or business expenses Congress is making judgments about which expenses should be subsidized through a tax expenditure and which ones should not.

Trent Robinson also noted that some legitimate expenses to generate non-business income are not allowable, often because Congress needed revenue raisers and denying or limiting these expenses as deductions was the most politically expedient method of increasing taxes. He asked, should there be a concept of a negative tax expenditure, perhaps with a different name, that is worth measuring and reporting on? I replied, that a name for expenses that are not deductible (or income that is not excluded) could “revenue generator” because in contrast to expenses that are allowed as deductions and income that is excluded, income that is not excluded and expenses that are not deductible tax liability.

Every income exclusion, every deduction, and every credit (aside from credits in the true nature of a reduction on account of actual payment or prepayment of taxes) involves policy decisions and political considerations. What matters is not so much the name given to them, or to their opposites (inclusions and disallowed deductions), but whether they are wise and fit a well-designed revenue system.

Thursday, August 31, 2023

Is a “Tax Expenditure” Necessarily Bad Policy?

David Henderson has written for the for Policy Innovation an interesting commentary addressing “The Bizarre Economics of 'Tax Expenditures'” He points out that tax policy discussions almost always include reference to the term “tax expenditure.” He classifies that term as “internally contradictory.” He bases his conclusion on the premise that something cannot be both a tax and an expenditure.

Henderson gives an example of a tax expenditure. He describes a person who deducts mortgage interest, and in doing so causes his federal income tax to be less than what it would be without the deduction. The reduction in tax liability due to the deduction is a tax expenditure. In that, he is correct.

Henderson then asks, “Why do they call it a tax expenditure?” His answer is wrong. He claims that the term “tax expenditure” rests on the “implicit assumption . . . that there shouldn’t be a deduction for home mortgages.”

Why is he wrong? Let’s step back. There are two ways that the federal government can move money into the private sector. One is a direct expenditure. A direct expenditure is the delivery of a check, an electronic fund transfer, or the delivery of some sort of prepaid card. The other way is to shift money by providing an income tax exclusion, a deduction, or a credit to a taxpayer. A technically precise term for that sort of expenditure would be “expenditure accomplished through the tax system.” Another technically precise term would be “expenditure accomplished through providing an income tax exclusion, deduction, or credit.” Both of those technically precise terms are mouthfuls and make it difficult to speak, to understand when listening, to write, or to read because they clutter sentences and paragraphs. So as shorthand for those technically precise, but verbose, terms people speaking about tax policy and government spending shortened the term to its two most important words, tax and expenditure.

Henderson, proceeding on his claim that the term “tax expenditure” is used to describe exclusions, deductions, and credits that should not exist, says that instead of using the term policymakers and those discussing policy should simply state that “the deduction is bad policy.” But this demonstrates the flaw in Henderson’s position. At present, EVERY exclusion, deduction, and credit is classified as a tax expenditure because EVERY exclusion, deduction, and credit has the same effect of reducing tax liability. According to Henderson’s method of reasoning, because anything termed a “tax expenditure” is something that policymakers and those discussing policy should simply describe as “bad policy,” logic mandates that every tax expenditure, that is, every exclusion, deduction, and credit is “bad policy.” That surely is not the case.

A tax expenditure is nothing more than an equivalent of a direct expenditure. For example, instead of providing a deduction for mortgage interest, the federal government could provide a direct cash subsidy to the homeowner. Currently, the amount of that subsidy would be measured by the homeowner’s tax status. Whether there should be subsidy, however paid or measured, is a different issue than the terminology used to describe one way of providing that subsidy. Tax has a language all its own. Tax expenditure is a term that is part of that language. Calling something a tax expenditure is not, in and of itself, an evaluation of the wisdom of the tax provision causing the tax expenditure.