Wednesday, December 16, 2015

I Got Mine From a Tax Break, So Let’s Repeal It Before You Can Get Yours From It 

When I was a child, I remember being told by various adults that it was not uncommon for someone, or several people, once they climbed to the top of a hill, to try to prevent anyone else from reaching the summit. As the years passed, I realized how true this is, in many different contexts. For example, it is not unheard of for athletes, once they retire, to be in favor of changing rules that they used to their own benefit, sometimes because their perspective of the rule has evolved but sometimes because a rule change would benefit the team with which they are associated in some post-player status.

And so it is not surprising to see the same game plan play out in the tax arena. The news in this report is almost a year old, but it just recently came to my attention thanks to a long-time reader. It is a wonderful illustration of how things that ought not be part of a game get played to the detriment of taxpayers.

In January, 2002, a Florida newspaper reported that David Koch claimed a Florida historic restoration tax credit for a $12 million remodeling of his 1923 villa in Palm Beach. The credit cost the city’s taxpayers $48,000.

Fast forward to 2015. North Carolina’s historic property renovation tax credit had expired, under the terms of its enactment, at the end of 2014. The state’s Republican governor, among others, advocated renewal. So guess who objects? Americans for Prosperity, which happens to be one of the organizations founded and operated by and on behalf of David Koch and his brother. Does this make sense? An Americans for Prosperity spokesperson explained that it opposed the credit because it complicates the tax code and because renovation of historic properties ought not be financed by taxpayers. It is true that tax credits complicate tax codes. But isn’t it interesting that complication becomes a bad thing only after a tax credit complicating Florida’s tax law was used by someone now objecting to tax credits that complicate tax law? There is much sense in refraining from handing out tax dollars for the renovation of private homes. But isn’t it interesting that an organization claiming to find restoration tax credits objectionable was co-founded by someone who made use of such a tax dollar handout?

The same spokesperson tried to justify this inconsistency with an interesting twist. He tried to differentiate expired credits and existing credits. It is not inconsistent, in other words, to object to the renewal of a credit while taking advantage of a similar credit that is in effect. What’s wrong with this argument? If the credit is a bad idea, then it’s a bad idea whether or not it exists. And someone who takes advantage of the credit ought not be first in line to prevent others from doing likewise.

Translated, it works out to this. “I reduced my taxes from a tax break, but now that I got what I want and you want in, I’m going to stop you. I got to the top but I will prevent you from getting to the top doing what I did to get there.” There’s a word for that approach. Actually, there are several words for that approach. Think about it.

Monday, December 14, 2015

The Wonderful Wacky World of Taxes and Politics 

For the past several decades, the Republican Party has been closely tied to tax reduction advocacy and to anti-tax groups. The Grover Norquist “no new taxes” pledge is a creed for most politicians who belong to that party. During the same time period, politicians who are members of the Democratic Party have not hesitated to increase taxes when necessary, and are perceived as proponents of higher taxes. Whether or not this perception is fully accurate, there is an alignment of the parties and tax policy issues.

So what should one expect from a Republican who is elected governor of a state, albeit as an independent? I’m referring to Governor Bill Walker of Alaska. He is an attorney and politician who ran for governor in the Alaska 2010 Republican primary. He lost to the incumbent, Sean Parnell. So Walker decided to run as an independent, and selected the Democratic nominee as his running mate. Walker defeated Parnell in the general election. One might consider this a squabble within the party, not unlike what some expect to happen at the national level if Donald Trump does not win the Republican nomination.

So Walker would appear to be a Republican dressed as an independent. There are more than a few non-politician voters who dress that way. Yet the other day, according to this report, Walker has proposed an income tax for Alaska. There has not been an income tax in Alaska since 1980. Alaska did not need an income tax once revenues began flooding in from its oil production. The problem for Alaska is that oil prices are plummeting, which means its revenues are dropping. When the same thing happened in the late 1980s, a recession gripped the state and, among other things, homes were foreclosed at a rapid pace. Walker seeks to prevent history from repeating itself.

It would not be surprising to hear die-hard anti-tax Republicans brand Walker as “not really a Republican.” Is that the case? Or is he a Republican dressed as an independent who has come to understand the reality of economics and taxes, and the foolishness of opposing taxes on principle no matter the situation? If he is, in fact, considered by Republicans as not really one of them, would that similarly be the situation with voters who are independents dressed as Republicans? Will they feel rejected and turn away from Republican candidates? No matter how the chaos, to use the nicest word that comes to mind, presently infecting the national, state, and local politics plays out, it will affect tax policy decisions in the next few years. The challenging question is, “How?” That remains to be seen. Attempting to predict much of anything at this point is nothing more than guessing.

Friday, December 11, 2015

Tax versus Fee: Barely a Difference? 

A reader sent me an email with the contents of this link and a question. Going through the material, I was grateful that he did not pose to me any of the other questions that popped into my brain. I’m confident he realizes I’m no expert in the definition of “live nude entertainment” or what it means to host a sexually oriented business event.

OK, now that I have your attention, let’s turn to the reader’s question. He noted that commentators have been referring to the sexually oriented business fee as a tax, such as Texas Strip-Club Owners Pressured to Pay Nude Entertainment Tax, and EXPO 2015 To Tackle the Resurrection of Sin Taxes. He then asked, “Is it a tax or fee?”

Though a variety of definitions and distinctions have been suggested over the years, I distinguish a fee from a tax by identifying a fee as an amount paid in exchange for a service provided by a government directly to the person making the payment. Thus, for example, the amount charged by a township for trash pick-up is a fee. The amount charged by a state government or agency for the use of a toll highway is a fee. The amount charged by a local government for filing a zoning variation application is a fee. On the other hand, amounts paid to a government that bring indirect benefits, such as an income tax, is not a fee. A portion of what is paid in federal income tax funds national defense, which in turn provides a benefit to citizens, but there is no one-on-one relationship between the amount of tax paid that ends up financing national defense and the value of military protection afforded to a particular individual or business. Sometimes the line is blurred. The township in which I live charges a storm water fee, but it is a flat amount regardless of the size of the lot or the amount of storm water discharged from the property into the storm sewer system. Is it truly a fee? Yes, in the sense that the township provides a system for removing storm water back into the creeks. No, in the sense that a person who diverts most storm water into on-site tanks nonetheless pays the fee, which makes it more difficult to describe the payment as one made for a direct service.

The reader also asked, “Does it matter?” According to some commentators, for example, Lawrence Reed, one can escape a fee but not a tax, because one can refuse the service. There is some sense in that view. One can choose to avoid the toll highway. One can choose not to seek a zoning variance. On the other hand, one cannot refuse to pay the township storm water fee. Does that make it a tax? Before jumping to a conclusion of yes, consider the income tax or the sales tax. One can avoid or reduce an income tax by turning down income, and one can avoid or reduce the sales tax by turning down the opportunity to purchase taxable items.

This is not my first commentary on taxes and fees. I addressed the question in Please, It’s Not a Tax, and So Is It a Tax or a Fee?. Ultimately, whatever it is called, it ought to be measured sensibly, imposed only after appropriate public notice, hearings, and legislative action, and paid if the legal obligation to do so exists.

Wednesday, December 09, 2015

A Tax Break That Deserves to be Sunk 

Sales taxes generally are regressive. That’s because people with relatively little income spend most of their income on items subject to the sales tax, whereas people with substantial income put much of their income into investments, transactions that are not subject to sales tax. So it’s no surprise most people dislike sales taxes. Of course, most people dislike any sort of tax.

One might think that the wealthy, who aren’t reduced to poverty by paying taxes, would be less frustrated by the tax system. That’s in contrast to poor people, who must give up something, perhaps a necessity, to pay taxes.

Yet it’s the wealthy who scream the loudest for tax cuts. Able to afford lobbyists, and with money to pay people to think up sales pitches for why a tax that affects the wealthy ought to be reduced if not repealed, they have succeeded on several occasions on setting the economy back to the detriment of those who are not wealthy. Over the past several decades they have attacked the federal income tax, and have succeeded to the point that not only national infrastructure, public health, and education have been impaired but even national defense has started to weaken. And now, they have attacked the New Jersey sales tax, to the extent it applies to the purchase of yachts. Very few of us have purchased or will purchase yachts. We know who purchases yachts.

So what’s up with the sales tax on yachts in New Jersey? According to this story, the initial proposal would have exempted yacht purchases from the sales tax if they were used in the state for fewer than 90 days. The governor suggested that escaping the tax should be limited to those who use the yacht in New Jersey for fewer than 30 days. The initial proposal and the suggestion went nowhere. Next came a bill that limited to $20,000 the amount of sales tax imposed on yacht purchasers. This meant that those of the middle class or upper middle class who could afford a boat costing $285,000 or less would be hit by the sales tax in full, whereas those springing for the million-dollar and multi-million-dollar ships would pay effective sales tax rates equal to a slight fraction of what applied to everyone else. The governor vetoed that bill. But the advocates of tax relief for yacht buyers didn’t give up. They came back with a proposal to reduce the sales tax rate on yachts to 3.5 percent. That bill passed the legislature and headed to the governor’s office.

The vetoed bill would have reduced state revenue by somewhere between $1 million and $4 million. The latest bill reduces state revenue by somewhere between $8 million and $12 million. This in a state struggling to provide basic services to its citizens, and yet caught up in dishing out tax breaks to wealthy companies and now, yacht purchasers.

Proponents of the tax break claim that it will help people in the marine industry, such as mechanics, manufacturers, and marina operators, whose sales have declined because they have lost sales to other states. For this tax break to generate enough offsetting revenue, it would need to bring hundreds of millions of dollars of yacht sales into the state. That isn’t going to happen. Nor does reducing the sales tax on yachts mean that the purchasers will use the services of New Jersey yacht mechanics or marina operators. The argument is nothing more than a variation on the thoroughly disproven “trickle down” nonsense that was sold to gullible Americans who are now paying the price for buying into that nonsense.

Monday, December 07, 2015

When Congress Dilly-Dallies on Tax Issues 

It’s no secret to those familiar with tax practice that the inability or refusal of Congress to stay on top of tax issues and move legislation in a timely manner causes all sorts of headaches not only for tax practitioners but also for their clients and taxpayers generally. The tale of repeated short-term extensions of tax provisions as part of a scheme to jack up campaign contributions is oft-told, though unfortunately not heard by the voters who keep sending these money extractors back to Washington. About two years ago, in Let’s Not Extend The Practice of Tax Extenders, I explained why this money-raising game, even if good for the campaign coffers of politicians, is bad for the nation. In that essay I agreed with the point made in an essay published by the Institute for Policy Innovation, a group with whose positions I don’t always agree, and perhaps more often disagree. And now, again, I find myself agreeing with another essay from that organization.

In 'Tis the Season for PITFA, Tom Giovanetti points out the problems caused by the failure of Congress to act in a timely manner with respect to the Internet Tax Freedom Act. He explains that this provision, which bars federal, state, and local governments from imposing taxes on Internet access, has been allowed to expire and then re-enacted multiple times. Each time, the re-enactment passed by a wide margin, demonstrating there is strong bipartisan support for the policy represented by the act. Now, with expiration due on December 11, Congress would need to move very quickly to prevent chaos.

The chaos will be triggered by laws that have been enacted in some states, providing that the moment the ITFA expires, state taxes on Internet access take effect. These aren’t sales and use taxes on purchases made over the internet. These are taxes that are computed on accessing the internet. They can be flat amounts, they can be a percentage of the fees charged by internet service providers, and they can be based on the number of bytes uploaded and downloaded. No matter how computed, these taxes make internet access more expensive, and yet return nothing to the taxpayer in exchange for what the state or locality is collecting. The pre-digital world analogue is a tax on walking to the mailbox to get postal mail, or walking to the store to make a purchase.

And imagine the confusion if the ITFA expires, these taxes are imposed and collected, and then Congress gets its act together, and re-enacts the ITFA retroactive to December 11. Imagine the administrative aggravation of obtaining refunds of the tax that has been collected by the states with these automatically-triggered taxes in place. It will cost money. Either the taxpayers will need to expend time and resources to file refund claims, or internet service providers will need to do so, passing their costs back to the customer-taxpayers. Either way, it is the sort of adverse consequence that arises when members of Congress put re-election ahead of public service.

In his essay, Tom Giovanetti calls for a Permanent Internet Tax Freedom Act. I support that call. He asks, “Does Congress think there will ever come a time when discriminatory taxes on ecommerce and taxes on Internet access will be a good idea? Is that the option Congress is trying to hold open?” My answer is that the option Congress is holding open is the option to raise more campaign cash by holding ITFA hostage.

Thus, I realize that the likelihood of Congress giving up a money-maker is very low. Congress is no more likely to enact a PITFA than it is to enact permanent extensions of the dozens of income tax provisions showing up year after year in tax extender legislation. It’s a miserable way to run a country, but we’re stuck with it until the voters clean House. And Senate. And the likelihood of that happening also appears to be very low. It’s a miserable way to run a country.

Friday, December 04, 2015

Rubbing Tax Penalty Salt Into the Tax Liability Wound 

A recent case, Yguico v. Comr., T.C. Memo 2015-230, demonstrates how a tax problem can spiral out of control. By the time the dust settled, the taxpayers had been hit with multiple penalties.

The husband taxpayer was a real estate attorney. In 2009 he became an equity partner in a law firm. As the court stated, they “thereafter began to see large increases in their tax liabilities.” This is an aspect of “making partner” that not every law firm associate understands. It is not unusual for “take-home pay” to decrease when an associate makes partner.

So by 2011 the taxpayers “owed a significant amount of tax-related debt” and thus took $80,685 out of a qualified retirement account. They received Forms 1099-R, but were unable to “testify categorically that they actually supplied” those forms to their tax return preparer. The tax return preparer provided an affidavit stating that he did not remember receiving Forms 1099-R from the taxpayer. The taxpayers stipulated that they were aware that the withdrawals from their qualified retirement accounts “represented taxable income.”

The preparer did not include the $80,685 on the return. Nor did the return include the 10-percent section 72(t) penalty. The preparer filed the taxpayers’ return electronically just before the filing deadline. The taxpayers did not review the 2011 return before it was filed, or at any time thereafter.

The IRS issued a notice of deficiency. The deficiency consisted of the tax liability caused by including the $80,685 in gross income, the $8,069 section 72(t) penalty, and a section 6662(a) accuracy-related penalty. The taxpayers conceded that their 2011 return showed a $29,416 income tax deficiency.

The Tax Court concluded that the IRS met its burden of production with respect to the penalty because $29,416 exceeded both $5,000 and 10 percent of the tax required to be shown on the taxpayers’ 2011 return. Thus, there was a substantial understatement of income tax.

Next, the Court considered whether the taxpayers could show there was reasonable cause for the understatement and that they acted in good faith. The Court concluded that the taxpayers could not rely on the fact that a preparer prepared the return, because they failed to supply the preparer with all necessary information and because they failed to show that the incorrect return was a result of the preparer’s mistake. The Court also pointed out that even if the taxpayers had provided the preparer with all the necessary information, they did not act reasonably because they failed to review the completed return before it was filed. The Court reasoned that had they looked at the return they would have noticed that the $80,685 was not included.

There are two lessons here. First, if using a preparer, be certain to provide the preparer with all necessary information, even if that means providing the preparer with more information than is needed. It is better to over-include than to under-include. Second, review the return. Whether self-prepared, prepared by a preparer, or prepared using software, eyeball the return to make certain there are no glaring errors.

Wednesday, December 02, 2015

Tax Credit Giveaways Don’t Deserve Credit 

According to this this story from last week, the state of Michigan and Fiat Chrysler Automobiles have agreed to limit the tax credits available to Fiat in the future. Why? Because the credits are threatening to wreak havoc on the state’s budget.

When the credit was enacted, it was estimated that it would cost the state $1.3 billion in lost revenue. Now it appears it will cost closer to $2 billion. Although Michigan terminated the program four years ago, it did not, and apparently could not, disregard agreements already in place. But it has negotiated amendments to deal with the problem. Limiting the total credit is part of the deal that has been reached.

This situation demonstrates why handing out tax credits to companies that promise all sorts of economic benefits is bad business for states and their citizens. The proponents of these sorts of business credits argue that they generate jobs in the state, and that the jobs generate taxes. The wages that allegedly are created are subject to the income tax. The workers spend their after-tax dollars on items that generate sales taxes. They buy houses and pay real property taxes, or they rent, generating taxable income for landlords, and increasing the value of rental properties, thus generating more real property tax revenue.

That’s all wonderful, in theory. But like most theories, it falls apart when practical reality pops up. If the Michigan tax credit had done what it was promised to do, the increased tax revenues should have more than offset the cost of the credit. But that hasn’t happened, as evidenced by the budget deficits that were spiraling out of control on account of the tax credit giveaway. It’s not just hindsight that suggests the state would be better off without the credits. Careful analysis, free of lobbying dollars and backroom deals, leads to the same conclusion. Fiat claims it has added 15,000 jobs, but those jobs have not produced the tax revenues that would justify handing several billion dollars to Fiat.

Once upon a time, business tax credit giveaways did not exist. The nation prospered. Yet those who clamor for a return to whatever they think constitute the “good old days” don’t seem to advocate returning to the good old days when tax dollars weren’t being handed out to wealthy companies and individuals who don’t need financial assistance from anyone, including governments and ordinary taxpayers.

Monday, November 30, 2015

No Money to Pay Tax Debt? Say Goodbye to Overseas Travel 

One of the surface transportation funding bills pending in the Congress contains a provision that would permit the State Department to withhold, revoke, or limit the passport of a person who has a seriously delinquent tax debt in an amount in excess of $50,000. It provides that a tax debt is seriously delinquent if a lien or levy has been put in place with respect to the debt.

One commentator suggests that this approach to collecting tax debts is ineffective. The commentator writes: “I’ve gotta tell you, I had no idea delinquent American taxpayers were willing to have liens imposed upon their property just to avoid paying money they actually have lying around. Maybe it’s all earmarked for a trip to Tuscany? Huh.” The underlying assumption in this comment is that people who owe tax debts don’t have money to pay the debt and thus don’t have money to take vacations. Yet the reality is that more than a few people who owe money, whether to the IRS or another creditor, let the debt sit unpaid while spending money on other items or activities. Legion are the stories of parents who owe child support, don’t pay child support, and yet live lifestyles full of discretionary spending. Some of the cases on television court shows involve defendants who owe money, claim that they cannot pay, and yet are shown to be spending money on a variety of items or activities.

How do they do this? It’s a combination of things. It includes the classic “one step ahead of the bill collector.” It involves moving from one place to another, making it more difficult to be found. It involves stashing cash overseas, beyond the reach of creditors.

Perhaps the legislation will act as leverage. If wealthy Americans are denied passports so that they cannot travel to another country to spend the money they have stashed in that country, and if that other country wants the tourism business, perhaps that other country will have an incentive to participate in shutting down the “stash cash overseas” tax evasion tactic. Or perhaps not. But is there any harm in trying and seeing what happens?

Friday, November 27, 2015

Tax Challenge: Keeping Up With Technology 

Many years ago, New Jersey enacted a business personal property tax. Among other things, it applies to telephone poles, telephone wires, and switching facilities, including those owned by local municipalities. The tax is paid to those local jurisdictions. One of the companies that pays this tax is Verizon. The tax payable to a particular town applies to Verizon if its market share for phone service in that town is more than 51. According to this report, the amount of this tax being paid by Verizon to some towns has been decreasing, and the number of towns in which the tax payments have been decreasing has been increasing. The reason is simple. People are abandoning traditional landlines and turning to cell phones, internet-based telephone, and similar new technologies. The amount of revenue in question is substantial. Even as recently as 2009, Verizon paid more than $50 million in business personal property taxes to New Jersey towns. At least 143 towns in the state are looking at revenue decreases. One town, for example, that collected almost $16,000 in business personal property taxes two years ago will receive a little more than $3 this year. Some towns have lost revenue measured in six digits.

Towns that have sued Verizon have lost. The issue is how market share is calculated. At best, as newer technologies displace old, it’s only a matter of time. Even if a particular town can demonstrate that Verizon’s market share is, for example, 53 percent, it only will be a matter of one or two years before it slips below 51 percent. From a long-term perspective, litigating the market share issue buys little and might not even be cost effective.

As a consequence of losing business personal property tax, towns are turning to other revenue sources, such as the property tax. This shifts the cost of public services from the business sector to the homeowner sector. Some citizens consider this to be an inappropriate outcome. Perhaps it is. But the solution rests with the state legislature. State legislatures, just like Congress, are notoriously sluggish when it comes to enacting legislation that deals with changes in technology, society, and culture. The problem reaches not only taxation but other areas of law as well. When the subject of a tax fades away, a replacement tax is necessary. If a legislature waits too long to enact the replacement or amend the existing tax, the revenue fix ends up looking like a dreaded “new” tax even though it isn’t new in that regard.

When a government enacts a tax on something that isn’t necessarily long-lived, it runs the risk of losing the tax base. On the other hand, imposing a tax on something that is likely to exist for a long time makes more sense. Pennsylvania, for example, does not tax equipment but instead taxes real property owned by utilities. Thus, it does not matter whether the utility is offering wire or wireless communications. The longer New Jersey waits to fix this problem, the greater the chances that the outcome will be disadvantageous for the towns and for those who pay local property taxes.

Wednesday, November 25, 2015

Thanks Again! 

It is not uncommon for someone who has been the beneficiary of a gift, a favor, or a helping hand not only to say “Thank you!” but to close out the encounter with “Thanks again!” It never hurts to repeat an expression of gratitude. Nor does it cost anything. Once again we have come to the time of the year when we focus on saying “Thank you” even though that does not mean the rest of the year is, or should be, thankless.

For as long as I’ve been writing this blog, I’ve been sharing a Thanksgiving post to express my gratitude for a variety of people, events, and things. Aside from 2008, when I did not post and I don’t have any recollection of why or how that happened, I’ve dedicated a post on or around Thanksgiving. I started in 2004, with Giving Thanks, and continued in 2005 with A Tax Thanksgiving, in 2006 with Giving Thanks, Again, in 2007 with Actio Gratiarum, in 2009 with Gratias Vectigalibus, in 2010 with Being Thankful for User Fees and Taxes, in 2011 with Two Short Words, Thank You, in 2012 with A Thanksgiving Litany, in 2013 with “Don’t Forget to Say Thank-You”, and in 2014 with Giving Thanks: “No, Thank YOU!” .

As I stated the past two 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.”

The idea of a finite list suggests that there is some sort of limit on what deserves gratitude. That is not the case. The simple reason for a finite list is the absurdity of an infinite list, which, given enough time, I probably could compile. With that caveat, here are some of the things that brightened 2015 for me:Nine 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”, and even again in 2014 in Giving Thanks: “No, Thank YOU!” . 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.

Monday, November 23, 2015

Old Tax Returns Have Value 

Recently on the ABA-TAX listserv, the “how long must I retain past years’ tax returns?” question resurfaced. And again, all sorts of advice was shared. Three years. Seven years. Ten years. Scanning and digitizing old returns also was suggested, though some think the time, effort, and cost isn’t worth it.

I have written about this issue several times. In Why the “Toss Tax Records After Three (or Seven) Years” Advice is Bad, I shared the adverse consequences to a particular taxpayer of failing to keep tax records. In The Importance of Tax Record Keeping and The Aggravation of Tax Paperwork, I have stressed the need to be careful with respect to generating and retaining records for tax purposes. It may be an inconvenience, and it may contribute to paper or digital clutter, but it is essential.

Eleven years ago, in To E-File or Not to E-File: That is The Question, I noted:
Though some people don't hold onto their tax returns for more than say, 3 or 7 years, relying on the statute of limitations, I recommend holding onto all returns, if for no reason other than to maintain records of basis and to guard against the strange day when the IRS claims a return from some years ago was not filed, which would open the statute of limitations, and which can be rebutted quite easily by providing a copy of the return.
Last week, in a webinar, an IRS expert on S corporations explained that tax returns from previous years can help taxpayers figure out their adjusted basis in S corporation stock. Though I would expect this to be common knowledge in the tax practice world, the IRS apparently thought it necessary to drive the point home. Perhaps they had been noticing the listserv discussion and the many websites advocating tossing out tax returns after three or seven years.

And, of course, it’s not just adjusted basis in S corporation stock that requires examination of previous years’ tax returns. And it’s not just tax returns. When a person sells his or her home, and needs to determine adjusted basis, how old are the records proving the cost of improvements made to the property? Often they are more than three or seven years old. The ability to separate value from clutter is important. Yet very few people learn this skill in school, only some learn it from their home environment, and many end up suffering because they aren’t aware of the need to distinguish between the two. Is it time for me to create and teach a new course?

Friday, November 20, 2015

Flat Tax Flat Lines 

We are told by Katie Pavlich that “Carly Fiorina has proposed a three page tax code” and that ”This is what it looks like.” Curious, I took a look. It’s certainly out of date, or would require a lot of amended returns, because it would be effective for taxable years beginning after December 31, 1994. Other than that, it suffers from the same flaws afflicting every simplistic and unrealistic flat tax plan. In its effort to avoid anything requiring critical thinking, the proposal leaves unanswered all sorts of questions. Policy concerns aside, and there are piles of bad policy decisions implicit in the thing, a taxpayer trying to comply with this sort of statute would be stymied. What happens, for example, if a customer writes a check to a business on December 30, mails it on December 31, and it arrives at the business office on January 2? In what year does the business report it as income? Oh, the flat tax crew would argue, it makes no difference because the rate is the same. Clearly, the absence of any provisions dealing with method of accounting or timing suggests that the concept of time value of money is totally alien to these folks. How would installment sales be reported? How would a taxpayer computed gain? How would debt be treated? Check out the use of the term “dependent” in section 201(a)(2), look at the definition of dependent in section 201(a)(4), and try to synchronize them.

There are rules that prohibit people from performing open heart surgery if they lack the appropriate education, training, and certification. Ought there not be a similar rule that prohibits people lacking the appropriate education, training, and certification from designing tax, or any other sort of, law? Oh, wait, the folks who advocate the “flat tax” are almost coterminous with those who want to rid the world of government regulations. I wonder what they will be thinking when they’re being wheeled into the flat-line operating room. Good luck.

Wednesday, November 18, 2015

The Fallacy of “Job Creating” Tax Breaks, Yet Again 

Readers of this blog know that I am not a fan of tax break giveaways to wealthy corporations as rewards for moving jobs from one state to another. Job relocation is not job creation. One of the states that engages in this game of giving to the rich is New Jersey. As I’ve described in When the Poor Need Help, Give Tax Dollars to the Rich, Fighting Over Pie or Baking Pie?, Why Do Those Who Dislike Government Spending Continue to Support Government Spenders?, When Those Who Hate Takers Take Tax Revenue, and Where Do the Poor and Middle Class Line Up for This Tax Break Parade?, New Jersey has handed out tax dollars to companies that are doing well for themselves, claiming that by doing so New Jersey residents would get jobs. Instead, the employees of those companies keep their jobs.

Now comes commentary about the effectiveness of these sorts of tax breaks for the corporate wealthy. Joel Naroff summarizes a report by KPMG and the Tax Foundation comparing companies that receive these tax breaks with the companies that do not qualify for them. The summary matches my previous conclusions: “But when it comes down to it, the tax breaks usually just move firms around a region and, on net, rarely yield much.” Well, they rarely yield much for the taxpayers footing the bill, but they yield quite a bit for the corporate owners who are already drowning in cash and profits. New Jersey has handed tax breaks to such impoverished outfits as the Philadelphia 76ers, Lockheed Martin, and Subaru.

The report also reveals who creates the new jobs, and it’s an eye opener. Of the new jobs created in a state, 80 percent are generated by companies already operating in the state. Another 19 percent are generated by companies started up in the state. A mere one percent comes from companies that relocate into the state or that decide to remain in the state when faced with the option of leaving. In New Jersey, which, according to Naroff, “opens its wallets wide when it comes to new companies,” ends up imposing high taxes on its resident companies while letting businesses that come into the state pay low taxes even though they are not among the 99 percent creating jobs.

And that brings up the next issue. The owners of companies doing business in a state that see tax breaks being handed to out-of-state companies that bring jobs across the border must wonder why they should stick around and contribute to state-funded increases in local competition. A state that hands out tax breaks, and gets next to nothing in terms of new job creation, risks watching its native companies head out for another location. And that produces, not job creation, but job loss for the state.

Monday, November 16, 2015

Not a Surprise: Tax Ignorance Afflicts Presidential Candidates and CNN 

The CNN Reality Check Team fell down when it fact-checked the latest Republican Presidential Debate. Among the many assertions made by the candidates that came within the scrutiny of the CNN team were two claims about taxation. Carly Fiorina informed the world that the tax code consists of 73,000 pages. Ted Cruz told everyone that there are more words in the “IRS code” than there are in the Bible.

When I read the CNN Reality Check Team’s response to Fiorina’s claim, I was delighted. The team explained that Fiorina probably was “referring to an oft-cited report from CCH” that contains more than 72,000 pages, but that the tax code is only a small part of it. The team correctly noted that most of the almost 73,000 pages consisted of regulations, explanations, and legal analysis. I even deluded myself for a moment that someone on CNN’s Reality Check Team had read one or more of my posts on the question. In a series of posts beginning with Bush Pages Through the Tax Code?, and continuing with Anyone Want to Count the Words in the Internal Revenue Code?, Tax Commercial’s False Facts Perpetuates Falsehood, How Tax Falsehoods Get Fertilized, How Difficult Is It to Count Tax Words, A Slight Improvement in the Code Length Articulation Problem, and Tax Ignorance Gone Viral, Weighing the Size of the Internal Revenue Code, Reader Weighs In on Weighing the Code, Code-Size Ignorance Knows No Boundaries, and Tax Myths: Part XII: The Internal Revenue Code Fills 70,000 Pages, I explained why the Code is nowhere near 70,000 pages, how the misinformation was developed and spread, and why the Code is no more than two thousand pages long. The 70,000-page claim, or one of its variants, is silly, easily debunked, and indicative of America’s tax ignorance, yet it is sustained by those who use it as a vote-grabbing ploy as well as by those who do not want to pay taxes though they enjoy the benefits of government revenue.

But when I read the next assertion analyzed by the CNN Reality Check Team, it became clear that I had deluded myself into thinking that anyone on the team had read any of my commentary on the issue of tax code size. The team relied on a statement by the IRS Taxpayer Advocate describing the code as having “reached nearly 4 million words.” It concluded that Cruz was correct, because the Bible contains about 800,000 words. But as I explained in and Tax Ignorance Gone Viral, the IRS Taxpayer Advocate reached the wrong conclusion because she, or someone on her staff, simply used a word processing program to count the words in an annotated version of the Code, that is, an edition that contained extraneous information that is not part of the Internal Revenue Code. The CNN Reality Check Team actually noted that the count had left in “components such as amendment descriptions and cross-references,” which any intelligent person would realize meant that more than the words in the Code itself had been counted and included in the 4 million total. But another aspect of thinking things through should have caught the attention of the team. The team had concluded there were 2,652 pages in the Code. It also agreed that there are 4 million words in the Code. That works out to 1,508 words per page. Either the font is microscopic or the pages are on the order of three feet by two feet. There are about 400,000 words in the Code, or about half of what is in the King James version of the Bible.

Of course, I sent feedback to CNN, though its web pages make it challenging to do so, and do not provide any way of sending a reaction to the team or the two members of the team whose names are attached to the analyses of the Fiorina and Cruz tax code nonsense. So far, I've had no response and have not seen any published correction. One would think that a news organization would welcome, and find ways to encourage, acquisition of information that enlightens its viewers and readers.

For all of the talk from candidates about jobs, do they not realize that without education the chances of creating or finding a job are significantly reduced, if not eliminated? For all of their talk about international competitiveness, do they not understand the advantage of education and the detriment of ignorance? However understandable, though outrageous, it is for candidates to spew nonsense and misinformation, it is even more threatening to the survival of democracy for journalists to participate in this behavior and to fail to do sufficient research, or even to make it possible for research to be handed to them, free of charge.

I’ve been asked by readers why this issue of Internal Revenue Code size repeatedly gets my attention. It’s not the issue in and of itself. My concern is that twisting such simple facts is but the tip of the iceberg when it comes to the twisting of facts on other, and more serious, issues. Lying for the purpose of advancing an agenda not only is wrong, but also suggests that the agenda is deficient, because if it cannot gain support when the truth is told, it ought not be advanced. As long as Americans buy into the ignorance, the nation will continue sliding on its downward path to the disappearance of democracy and freedom. Count on it.

Friday, November 13, 2015

Federal Government Inflation Adjustments: They’re On the Congress 

Several days ago, a Philadelphia Inquirer reader expressed bewilderment at the different inflation adjustment rates used for different federal purposes. Jim Ryan noted that no cost-of-living adjustments would be made to social security recipients in 2016 because there was no inflation in 2015, yet the inflation-indexed rate for U.S. savings bonds was set at 1.54 percent, and the IRS adjusted the 2016 tax brackets by 2 percent because of inflation. Ryan concluded, “Nice to see the different sectors of our government rowing together.”

Each government department or agency that computes an inflation adjustment does so in accordance with a formula provided in a statute. The formula for one adjustment is not necessarily the same as the formula for another. Different indexes of inflation are used. The benchmark year differs. Depending on what is being adjusted for inflation, one or another index is used. Some of those indexes are explained by the Federal Reserve. Does it make sense to use different indexes? Yes. The index used to adjust tax brackets is the Consumer Price Index. The index used to make adjustments to social security payments is the Consumer Price Index for Urban Wage Earners and Clerical Workers, known as CPI-W. Does it make sense to use different benchmark years? Maybe.

But, in any event, the reason that the “different sectors” of government are using different formulas for computing inflation is the difference among the governing statutes. Has the Congress studied these inflation adjustments from an overarching perspective? No. Even the different dollar amounts in the Internal Revenue Code are treated differently; some are indexed, and others are not. The same index is not used for all of the adjustments. The reason? It depends on how much revenue loss can be absorbed in the revenue estimates. In some instances, inflation adjustments are omitted because doing so reduces the revenue loss over the long-term periods used in the budgetary analysis.

Does it make sense to do things this way? Perhaps. Should there be an overarching review of inflation adjustments throughout federal statutes and programs? Yes. Is it going to happen? I doubt it. Who is responsible? Congress. And that’s why I doubt it will happen.

Wednesday, November 11, 2015

So What Would You Do With a Duplicate Tax Refund? 

A recent tax case, not unlike many other tax cases, provides a disappointing insight into human nature. Unlike cases involving improper exclusions and unjustified deductions, this case poses the question, “What should I do if someone makes a mistake in my favor and pays me twice?” In Willson v. U.S., No. 14-1109 (D.C. Cir. 6 Nov 2015), the Court of Appeals for the D.C. Circuit provided the answer that most people would give.

The problems for the taxpayer began in 2005. When filing his 2004 federal income tax return, the taxpayer determined that he overpaid his taxes by more than $28,000. He applied the overpayment as a credit on his 2005 return. A year later, that credit was more than enough to cover his 2005 liability, so he applied the remaining $13,193.55 overpayment to his 2006 return. In 2007, when filing his 2006 return, the taxpayer computed a zero liability, qualified for a refundable $30 credit, and ended up with a $13,223.55 overpayment. This time, the taxpayer requested a refund of $10,000 and applied the remaining $3,223.55 as a credit for subsequent returns.

As simple as that is, the IRS made a mess. When it processed the taxpayer’s 2006 return, it did not apply the $3,223.55 as a credit for future years. Instead, it send a check for $13,223.55 rather than the $10,000 that was requested. When the taxpayer filed his 2007 return, the IRS applied $13,223.55 as a credit from the 2006 overpayment. In other words, the IRS somehow managed to take one $13,223.55 overpayment and turn it into a $13,223.55 refund AND a $13,223.55 credit. The IRS increased that credit by a $600 tax relief credit and $85.48 in interest, applied $3,223.55 as a credit for 2008 and thereafter, and made a direct deposit of $10,685.48 to the taxpayer’s bank account.

When the IRS figured out it had done something wrong, it reversed the overpayment credit for the 2006 taxable year, which created a $13,193.55 tax liability for that year. In March 2011, the IRS sent the taxpayer final notice of intent to levy on his property to recover that amount. The taxpayer requested a collection due process (CDP) hearing. As that procedure moved along, the IRS processed the taxpayer’s 2009 return, which reported an overpayment credit, from 2007 and 2008, of $2,206.55. Because the taxpayer, in March 2010, had paid $100 applied to his 2009 liability, the IRS increased the 2009 overpayment to $2,306.55. The IRS did not refund this amount, nor did it apply it as a credit for subsequent years. Instead, it applied it as an offset to the $13,193.55 2006 liability created by the overpayment credit reversal.

It was at this point that the taxpayer realized he had received his expected refund twice. On May 24, 2011, he sent a letter to the IRS acknowledging he had received more than he was due, estimated the overpayment to him was about $10,000, and enclosed a check for $5,000 “not as payment for the 2006 demands which are clearly errors but as an immediately affordable amount to being returning an overpayment made entirely as an IRS error.” He offered to pay another $6,000 over three years.

On July 6, 2012, the IRS Appeals Office issued a final notice of determination sustaining the proposed levy. The $13,193.55 had been reduced by the $5,000 payment from the taxpayer and the $2,306.55 2009 overpayment, to $5,887. The taxpayer appealed the IRS determination to the Tax Court. The IRS conceded it was not permitted to collect the duplicate refund by creating a new assessment for 2006. Its options were to pursued an erroneous refund action, for which the statute of limitations had expired, to accept the taxpayer’s voluntary repayment, or to exercise its common-law right to offset a debt owed to the government with a debt owed to the taxpayer provided it did so within two years of the date of the erroneous refund. Because the assessment for 2006 was improper, the IRS abated the assessment, leaving a zero balance on the taxpayer’s 2006 liability. It determined it was barred by the statute of limitations from applying the 2009 overpayment to the refund, and refunded that amount to the taxpayer.

At that point, because there was no unpaid liability and no pending levy, the IRS moved to dismiss the case as moot. The taxpayer objected. The IRS had not refunded the $100 tax payment made in March 2010, which was within two years of the erroneous refund. The IRS did not return the $5,000 the taxpayer paid voluntarily in May 2011. The taxpayer requested that those amounts be returned and that the Tax Court had the power to order the requested repayment. The Tax Court disagreed, and the taxpayer appealed.

The Court of Appeals affirmed the decision. It held that the Tax Court’s jurisdiction was limited to the tax liability underlying the proposed levy. The underlying tax liability had been abated. The $5,100, according to the court, was not held against an underlying tax liability but was retained to recover an erroneous refund. The debt created by an erroneous refund is not a tax liability. Instead, it is an amount owed to the government by reason of unjust enrichment. The Court dismissed the taxpayer’s other arguments contesting the levy because the proposed levy would not occur due to the abated assessment.

It is unclear why the taxpayer sought the return of the $5,100. What makes it even more puzzling is that the taxpayer acknowledged he had received a double refund, had returned part of it, and proposed paying back the rest. Once the IRS abated the 2006 liability, the taxpayer was no longer at risk of losing property to levy, and thus had the choice of paying back the rest of the erroneous refund, doing nothing, or seeking a return of the $5,100. Rather than paying back the balance, and rather than doing nothing and taking the benefit of a windfall caused by an error, the taxpayer went for a much bigger windfall. In other words, the taxpayer argued for an outcome that amounted to a right to keep a duplicate refund. Whatever the law might provide or require, the decent thing to do is to return the money.

Most people don’t end up with duplicate refunds from the IRS. But many people have experienced store clerks handing them too much change. I have had that experience. What have I done? What I have done has brought gasps of “thank you” from store clerks who would have been held accountable personally for the error. And that just would not have been right. The sad part is that there are people who disagree with me. And they have told me so. The happy part is that they are outnumbered by those who agree with me. So what would you do if you happened to receive duplicate, or, can one imagine, triplicate, refund checks?

Monday, November 09, 2015

So Why Are Workers Struggling? 

Tom Giovanetti, of the Institute for Policy Innovation has released a commentary criticizing the myRA, Treasury’s latest retirement savings opportunity. He makes several good points, including the fact it doesn’t offer anything more than existing Roth IRAs, the fact it invests only in Treasury securities, and that the rate of return is on the low side.

Had he stopped at that point, the commentary would not have inspired me to write anything. But Giovanetti then proceeded to offer this claim:
Workers don't have money to save because of 1) the increasingly anemic Obama economy, 2) skyrocketing health insurance premiums mandated by Obamacare, and 3) the Social Security payroll tax, which comes out of the first dollar of a worker's earnings and funds a Social Security benefit that doesn't even keep up with inflation for most recipients.
He couldn’t be more wrong. Workers don’t have money, to save or spend, because the oligarchs are jacking up corporate CEO salaries while cutting the pay of rank-and-file employees, with more than 95 percent of economic gains over the past seven years benefitting the top one percent. The economy has grown, but only to the benefit of the oligarchs, and to the extent it is anemic, it is because consumers lack money to make purchases, in turn a consequence of stagnant rank-and-file wages, the trimming of worker hours to spare the oligarchs the cost of paying for worker benefits, and the laying off of employees as huge corporations gobble up other businesses and sack the employees of the acquisition. Health insurance premiums are skyrocketing because private companies, which exist to make profits, are doing what profit-seekers will do in the absence of any countervailing pressure, namely increase revenues by increasing prices. And as for the social security tax being a problem, that tax has existed when the economy was robust and rank-and-file shared in the nation’s prosperity, and it has existed when the economy has stagnated or regressed. Thus, if it is to be blamed for stagnation in the economy it also should be credited with economic prosperity.

Isn’t it time for those who have created the economic mess to admit that there is a mess and that what was done has failed? Isn’t it time for those who keep singing the praises of those who messed up the economy to admit that they are fans of losers, and to shift their allegiances and advocacy to what worked in the past and ought to be revived?

Friday, November 06, 2015

Income and Wealth Inequality Becoming a Disaster 

Everyone who reads MauledAgain knows that I consider the increasing income and wealth inequality in this country to pose serious short-term and long-term effects on its economy. In the long run, income and wealth inequality makes it quite likely that there won’t be any income or wealth. In other words, income and wealth inequality sows the seeds of income and wealth destruction.

Now comes news that income inequality is “transforming the chocolate business.” According to Hershey Co., the “growing gap between low and high-income households .. . has changed buying patterns.” High-income consumer are shelling out big bucks for premium brands, and low-income consumers are making fewer shopping trips, thus reducing the impulse purchase of chocolate (and other items).

Hershey calls it “consumer bifurcation.” In other words, those who share in the new prosperity exist in a market close to those who have been shut out of the new prosperity. Hershey is not alone, as other companies, such as Campbell Soup, have experienced the same consumer bifurcation.

I doubt that those who consider income and wealth inequality to be a good thing care one whit about its effect on chocolate consumption or, for that matter, the availability of any other sort of consumer product. But eventually they will, as they discover, just as these food companies are discovering, that a healthy economy is demand-driven. Demand drives supply because it creates a market. Supply does not drive demand because demand cannot exist when income and wealth are concentrated in a few. Perhaps now that people are finding chocolate to be more expensive and are consuming less, they might devote some serious time to thinking and learning about economics. Part of me, though, thinks it won’t happen until consumer bifurcation reaches the coffee market. Then we might see some very angry consumers.

Wednesday, November 04, 2015

Are Sellers of Cheap Pizza Tax Scofflaws? 

According to a recent story from Finland, authorities in that country are cracking down on restaurants that sell pizza for less than six Euros. Their rationale is that in order to sell pizza at that low of a price, the sellers must be evading the taxes that are due. So they are asking customer to report restaurants selling pizza for less than that price. This presents several questions.

First, would people not be tempted to avoid reporting places where they can get good deals on pizza? Knowing why they’re being asked to provide information to law enforcement officials, are they not likely to conclude that doing so would cause closure of their favorite pizza shop?

Second, is it not possible to question the reasoning of the authorities that brought them to the conclusion that cheap pizza equals tax evasion? According to the authorities, roughly one-third of the cost of a pizza covers ingredients, another one-third covers labor, and the rest is split among rent, miscellaneous fees, and taxes. Is it not possible for a pizza seller to find a good deal on rent or ingredients? Of course, perhaps there is some law-breaking underway but it’s not necessarily tax evasion. Are they skimping on wages? Are they obtaining cheap ingredients from an unsafe or unregulated source, or perhaps on a black market? Or perhaps some pizza shops are bringing in other revenue under the table. Are pizzas being sold as a cover for the sale of other items? Or perhaps an effort is underway to take over competitors by pricing them out of the market.

Seems to me that the best way to figure out if taxes are being evaded is to audit the pizza shops. Compare the volume of observed and reported transactions, and the taxes due on them, with the actual taxes being paid. Otherwise folks in Finland will end up being asked or required to report every transaction that they think is a “good deal.”

Monday, November 02, 2015

Taking and Giving Back 

It’s a familiar story. A private sector business asks for special tax breaks and taxpayer funding for an enterprise that already is extremely profitable and that will continue to be profitable. The justification is that the business generates economic benefits for the public at large. Some of the most egregious instances of this money grab occur in the professional sports industry. I wrote about this eleven years ago in Tax Revenues and D.C. Baseball, and three 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.

Now comes a report that the taxpayers of St. Louis are going to be on the hook for financing a good chunk of the cost of building a new football stadium in that city for the St. Louis Rams. The proposed legislation, which the politicians hope “is generous enough” for the impoverished folks of the NFL, would give to the team two-thirds of taxes generated by the stadium. The city and the state would be required to come up with $390 million of the cost of the $1 billion stadium, in addition to giving up two-thirds of the tax revenue. Allegedly an NFL executive considered tax dollars used to finance the city’s share of the construction costs to be “private dollars, not public.”

It is unclear, according to several city officials, how the numbers add up. Under the current arrangement for the existing stadium, the city collects $4 million a year in tax revenue from the team but pays $6 million each year to pay down construction debt. An assistant to the mayor projects that under the proposed deal, the city will continue to pay $6 million annually but receive only $2 million in tax revenue. Supporters of the proposal claim that the city will receive additional revenue from the construction and that the tax revenue might grow more than is expected.

As I asked in Where’s the Promised Trickle-Over?, where is the guarantee that this will work for the taxpayers as promised? Why are those who so intensely claim that the latest giveaway to the wealthy will benefit everyone else so reluctant to ensure that if it doesn’t work out as promised that they will step up and make up the shortfall? The answer is that they know that these deals do not deliver as promised, but they’ve learned the tricks of selling bad deals.

The same people who are quick to complain about spending and tax breaks that help people in need are just as quick to insist on spending and tax breaks that enrich the rich. The claim that it helps those in need has been disproven repeatedly. When people complain that a state or local government fails to support highway maintenance, education, environmental protection, and public health, do they ever consider that the shortage is attributable to giveaways to those who are the first to condemn “takers”? The perspective that taking is good when it benefits the wealthy but is bad when it benefits those in need reflects a deeper outlook. The notion that those in need are in that condition because they are lazy, and that those who have wealth and deserve even more because they are hard-working flies in the face of reality. There are plenty of people who want to work but cannot for a variety of justifiable reasons, and there are too many people who are wealthy simply because of the accident of birth or other incident of sheer luck. It is time for the self-designated “makers” to make something more than increased wealth for themselves.

The NFL and its teams, as well as the other professional sports leagues and franchises, do not need financial assistance from the public. They do not need, and ought not seek, additional funds that require increased taxes for others or reductions in public benefits for everyone else. If a professional sports league or one or more of its teams cannot survive on its own revenue and must go out of business, so be it. People who want these enterprises to succeed can patronize them, and find other ways to support them financially without shifting that burden to others.

Newer Posts Older Posts

This page is powered by Blogger. Isn't yours?