Monday, January 23, 2017
When it comes to tax refunds, the questions also tend to be unsurprising. “Am I getting a refund?” “How much is my refund?” “How long until I get my refund?” “Can my ex-spouse get any of my refund?” “Can the credit card companies grab my refund check?” But rarely is a tax professional asked, “Should I spend my refund or invest it” or “How should I spend my refund?” Financial advisors surely get the first question, and perhaps get the second. But tax professionals who are not in the business of giving investment and spending advice don’t expect, and probably don’t want to provide, advice on what to do with a tax refund.
Taxpayers who, for whatever reason, are unsure of what they should do with their refund ought not despair that their tax return preparer has no advice or doesn’t care to provide any. There is another source. A reader of this blog turned my attention to a web site that provides advice on what to do with tax refunds based on the taxpayer’s astrological sun sign. Yes, your eyes aren’t deceiving you. Astrologists claim to have the answer. Years ago, a friend of mine who was deeply into astrology and studied with one of the world’s most celebrated astrologists explained to me that astrology requires much more than the sun sign, which is based on date of birth, but on a wide range of planetary signs that depend on a person’s precise date, time, and place of birth. Though I understood the gist of it, I’ve never explored these nuances in any detail. Nor would I base financial decisions on astrological predictions, whether based on sun signs or the full array of determinants.
All of this leaves me wondering, “Are there people who make financial decisions based on astrological guidance?” If so, what’s their track record compared to those whose decisions reflect other approaches? A few minutes of research did not provide me with an answer.
Friday, January 20, 2017
The link to which the reader sent me begins with a posting that is almost seven years old, and ends with one that is almost three years old. Though the discussion apparently has run its course, I doubt that the practices being described have fallen into disuse.
The initial post was a question. The person asked, “Has anyone out there had any success with getting rid of a tax issue? The state where I reside is assessing more penalties and fees than the actual tax liability was over 8 years ago. I would appreciate any assistance with getting this matter resolved.” One response suggested getting “a reading to see what is involved in getting this situation under control,” and provided a link to a list of “psychic readers and conjure doctors.” Another response suggested that if legal proceedings were in the offing, the person should “start a court case honey jar. I would do a separate honey jar for the tax collectors--get their seal and names of the specific people you are dealing if possible and burn brown candle's on the honey jar anointed with LMC's Law Keep Away oil.” The person who asked the question replied that there would not be any legal proceedings, that they were faced with interest and penalties far in excess of the tax due from five to nine years ago, and that they would be negotiating to get the payments down or have the debt cancelled. The person then asked, “Would a bend over, commanding, or law stay away ritual would work best? I did a freezer spell over a year ago when I received the first assessment. I had the name of an auditor, and I put the whole thing in the freezer. I did not hear anything until last week since that freezer spell. I just need this to go away.” Someone else then asked how to remove a lien that had been placed on a parent’s business by the IRS. Someone suggested using “LM court case products” and praying to St. Jude. But this person also recommended getting legal advice, especially from a tax attorney, and using the “Lucky Mojo products” as a backup to the legal advice.
The focus of the thread then shifted. Someone asked, “the state of maryland has been taking my taxes for yrs now, i have never received any tax money from them at all, this year i need help and my money, is there a saint or spell i could use to make sure i get all my money an what they have stolen from me from all the yrs past.” Another person recommended, “Seek the help of an Accountant or a Tax Attorney,” and also recommended using a “pay me” product and trying some tips from a “Hoodoo and Herb and Root Magic” book.
Another person noted, “Well we all have to pay taxes. It isn't wise to avoid that. If you have an issue with your tax return hire a tax attorney, or even an accountant to look over your books and find out what is going wrong here.” This person added a suggestion to use “Law Keep Away to keep them from coming after you, Compelling to compel them to give you a tax return, and Money Stay with Me so they can't take too much money from you.”
Another person asking for help with a “a mistake the IRS has made” was told to “Get a Court Case honey jar. If you know the name of the IRS agent, put his or her name in the jar. You can also use the notice they sent you. Make a copy for your records and use the original in your work. You can also get a Court Case vigil candle, or dress a brown candle with Court Case oil. Lucky Mojo also has a Court Case Spell Kit.” The person then added, “You may need an attorney to help you. Use Court Case and Attraction to find the right one.”
Several people who had requested assistance in dealing with their tax problems reported that they eventually had success. Was it because of the spells, the oils, the powders, the candles? Was it because of the assistance of tax professionals? From the posts, it would seem that they attributed the success to the spells, oils, powders, candles, and other materials. In another post, someone noted, “This Forum is not a substitute for any legal or tax advice. Seek the advice of an accountant or an attorney.” Another contributor advised, “And when you have found your attorney, bless his work with King Solomon Wisdom and Court Case supplies.”
I’ve known and do know people who do tarot readings, who claim to have successfully cast spells, and who pray to saints. The believers are convinced these practices work. Others figure that there’s no harm in trying. What was news to me was the use of these approaches in dealing with taxes, finding lawyers and other tax professionals, and helping lawyers win cases. Those who have described to me the use of tarot cards and spells almost always spoke in terms of fixing or finding relationships or dealing with health problems. So I learned something.
The reader who shared the link with me also wondered, “Maybe a new tax course Introduction to Federal Taxes and Magic Spells?” I doubt it. Aside from trying to picture the law faculty being presented with a course proposal of this sort and reacting favorably, I also doubt that even if such a course were approved, there would be much of an enrollment. Law students are swamped with courses, internships, externships, seminars, and other academic demands. But perhaps another department in a university would include tax issues in an undergraduate course devoted to spells, magic, wizardry, or voodoo. However, I’m unaware of any such courses at Villanova.
When the car breaks down, see a mechanic. When the house catches fire, call the fire department. When the dog gets sick, visit the veterinarian. When the IRS or a state revenue department comes calling, find a tax professional. At that point, if you believe, pray, cast spells, go to a reading. But relying solely on the latter and ignoring the professional is dangerous and ill-advised.
Wednesday, January 18, 2017
Though to some it may appear to be hyper-technical, there is a big difference between exclusions and deductions. An exclusion reduces gross income, and thus adjusted gross income, which is used as the starting point in computing a variety of limitations on deductions and in computing how much of certain types of income can be excluded from gross income. The exclusion also has the effect of reducing taxable income. Some deductions cause adjusted gross income to be reduced, but most deductions do not, though they can reduce taxable income. They don’t necessarily do so, because many of these deductions are in turn limited, and often end up being irrelevant. Generally speaking, given the choice between an exclusion and a deduction, a taxpayer would prefer a tax break to be an exclusion.
When I taught the basic federal income tax course, the difference between an exclusion and a deduction was one of the dozen or so principles that were on the list of concepts students needed to master if they were to earn a grade of C or above in the course. Someone who conflated exclusions with deductions and deductions with credits, who did not understand the difference between a ceiling limitation and a floor limitation, who did not understand the difference between income and gross income and the difference between gross income and taxable income, among other things, pretty much would fail the course or perhaps escape with a D.
Thus my surprise at seeing Turbo Tax describe the parsonage allowance exclusion as something that is deductible. Interestingly, though the response to the FAQ initially refers to deducting the allowance, and uses that verb yet again, in the last sentence, the response refers to “the excludable portion” of the allowance. There definitely is a lack of consistency in the response.
I’ve not yet loaded this year’s Turbo Tax program. Because I do not receive a parsonage allowance, I’m not in a position to determine if the software treats it as an exclusion or as a deduction. My guess is that it is treated as an exclusion and that the problem is with the FAQ documentation, almost surely written by someone other than those coding the software.
So is the FAQ tax ignorance? I don’t think so. I think it is a mistake, probably the result of carelessness, especially in light of the correct use of “excludable” in part of the response. I have made those sorts of mistakes, generally as a consequence of being distracted by some externality.
Monday, January 16, 2017
Those who support shrinking the federal government and putting more power into the hands of the states present, as one argument for that position, the value of states as “laboratories” in which policy theories can be tested on a smaller scale rather than imposed on the entire nation. There is some value in this view, because as the instructions for some cleaning substances often advise, use it on a small out-of-the-way portion of the item to be cleaned to see if there are any unexpected unwanted consequences.
One of the best laboratories demonstrating the total failure of trickle-down supply-side economics and its resulting tax policy is Kansas. I’ve written about the Kansas debacle several times. In A Tax Policy Turn-Around?, I explained how the Kansas income tax cuts for the wealthy backfired, causing the rich to get richer, the economy to stagnate, public services to falter, and the majority of Kansans to end up worse than they had been. In A New Play in the Make-the-Rich-Richer Game Plan, I described how Kansas politicians have been struggling to find a way to undo the damage caused by those ill-advised tax cuts for the wealthy. In When a Tax Theory Fails: Own Up or Make Excuses?, I pointed out that the Kansas experienced removed all doubt that the theory is shameful. In Do Tax Cuts for the Wealthy Create Jobs?, I described recent data showing that the rate of job creation in Kansas was one-fifth the rate in Missouri, a state that did not subscribe to the outlandish tax cuts for the wealthy that Kansas legislators had embraced. In Kansas Trickle-Down Failures Continue to Flood the State and The Kansas Trickle-Down Tax Theory Failure Has Consequences, I described how large decreases in tax revenue, the opposite of what is promised by the supply-side theorists, triggered cuts in public education, and in turn stoked the fires of voter frustration. The voter reaction, however, did not push out of office enough supply-side supporters.
Now comes news that in order to deal with the almost one billion dollar budget shortfall confronting Kansas, its governor, Sam Brownback, architect of the state’s fiscal disaster and prominent supporter of the trickle-down theory, has proposed a series of debilitating spending cuts, impractical sin tax increases, and golden-goose killing. These proposals, if enacted, would simply push the underlying problem down the road, to loom even more catastrophically after Brownback leaves office and cannot be held responsible for the damage. Brownback wants to take money out of the state highway fund. He wants to sell off a future income stream from a tobacco litigation settlement. He wants to increase alcohol and tobacco taxes. He wants to postpone the increases in the state’s payments to an underfunded state employee pension fund. He wants to ignore the planned decrease in the income tax rate on the lowest tax bracket.
The consequences of these proposals, if enacted, adversely affect middle and low income Kansans. For example, failing to lower the income tax rate on the lowest tax bracket harms low and middle income taxpayers much more than it hurts the wealthy taxpayers. The spending cuts would reduce the quality of rural highways and adversely affect hospitals. State employees would suffer from the failure to increase payments to their pension fund. Selling off the tobacco settlement income stream would mean loss of funding after 2018 for programs supported by that income, programs such as Early Head Start.
Nor is there any guarantee that the revenue increases projected in the budget would materialize. As discussed in this story focusing on the proposed alcohol tax increase, Kansans living near the Missouri border would simply make their purchases in that state. A sizeable portion of the Kansas population lives in that area.
Even some Kansas Republicans recognize the problems with the governor’s attempt to fix the mess he created by cutting taxes for the wealthy. Democrats call it the worst budget ever.
Yet the governor refuses to repeal the income tax exemption for limited liability companies, S corporations, and other closely held businesses. The cost of this exemption is roughly 25 percent of the budget shortfall. Some Kansas legislators want to repeal the exemption, pointing out that it would reduce the shortfall by as much as could be obtained by selling off the tobacco litigation income stream.
So what has the nation learned from the trickle-down economics experiments in Kansas? It depends. Some people, including some former devotees of supply-side economics, recognize what I’ve argued for quite some time. As I explained in A Tax Policy Turn-Around?, tax cuts for consumers are more valuable than tax cuts for money stashers. Improving the economic posture of the middle class and the poor generates more sales, which drives up sales tax revenue, and increases corporate profits, which increases corporate income tax receipts as well as shareholder return. As I explained in Job Creation and Tax Reductions, people don’t create jobs unless they need workers. They don’t need workers unless they have customers who want to purchase the goods and services that they would provide. If the American middle class and those living in poverty or near-poverty don’t have money, they don’t make purchases. In fact, they cut back on purchases. And that, understandably, causes the owners of capital and the entrepreneurs of the business world to cut, not create, jobs. In Kansas Trickle-Down Failures Continue to Flood the State, I explained that those who think more tax cuts for the wealthy will solve the problems created by tax cuts for the wealthy are suggesting, in effect, that the solution to flash floods is more rain, that the solution to car theft is more car theft, and that the solution to food poisoning is eating more spoiled food. Seriously, that sort of thinking is not what made the nation’s economy great, nor is it a pathway to future prosperity.
Unfortunately, there still are people, and politicians, who subscribe whole-heartedly to supply-side trickle-down economics and tax policy. Despite the disaster in Kansas, and in other states that also took this approach, the Congress is readying itself to move forward on the same catastrophic path. Unable to learn from facts, unable to break away from devotion to the oligarchy, and unable to think critically, the national legislature is about to plunge into a tax and economics adventure that makes the disastrous budget insanity of 2001-2008 pale in comparison. Who will be hurt? Not the oligarchy. Spending cuts have little or no effect on oligarchs. But they can harm, agonize, sicken, and kill the poor and middle class. Yet some of those people continue to vote for politicians and policies that cause, and will continue to cause, all sorts of problems for them. Why? It comes back to ignorance. There’s a reason scammers pretending to be Nigerian princes, IRS auditors, and FBI agents persist. Their con games work. For a reason. Ignorance. Ultimately, the ignorant pay the price.
Friday, January 13, 2017
Several thoughts raced through my brain. First, “does it ever!” Second, my friend’s comment is not unlike many I have made while complaining about the rapid spread of the ignorance infection throughout post-modern culture, in posts such as Tax Ignorance, Is Tax Ignorance Contagious?, Fighting Tax Ignorance, Why the Nation Needs Tax Education, Tax Ignorance: Legislators and Lobbyists, Tax Education is Not Just For Tax Professionals, The Consequences of Tax Education Deficiency, The Value of Tax Education, More Tax Ignorance, With a Gift, Tax Ignorance of the Historical Kind, A Peek at the Production of Tax Ignorance, When Tax Ignorance Meets Political Ignorance, Tax Ignorance and Its Siblings, Looking Again at Tax and Political Ignorance, Tax Ignorance As Persistent as Death and Taxes, Is All Tax Ignorance Avoidable?, and Tax Ignorance in the Comics. Third, there are enough tax provisions in the legislation to consider it as part of the tax family, and thus eligible for inclusion in the tax ignorance list.
A day later, another facebook friend posted a link to an article that touched on the same subject though it did not involve someone in a doctor’s waiting room. It was enough to make me think that yet another piece of misinformation is making the rounds on social media. According to the article, someone happy with the Senate vote to repeal “Obamacare” rejoiced that the nation is “One step closer to fixing this mistake.” A second person then complained about Republicans “celebrating the ACA’s repeal in the senate.” The first person then tried to correct the second person by explaining, “First, we’re talking about Obamacare, not the ACA. Secondly, my health insurance is through the ACA, so I’m definitely not the kind of person to look down on others for needing help.” A third person points out, “If you’re on Obamacare why * * * are you celebrating the outcome of this vote? If the Republicans get what they want you’ll lose your insurance.” The first person replied, “My insurance is through the ACA (Affordable Care Act), which is what they had to come up with after Obamacare crashed and burned as bad as it did. So I’m gonna be fine.”
This is beyond frightening. Is there not a civic duty on every citizen of voting age to be informed and to do what is necessary to become, and stay, informed? According to the article, the first person, apparently realizing that he was rejoicing at his own health care demise, “fell silent,” but additional individuals jumped in to point out the first person’s “stupidity.” It’s not stupidity. It’s ignorance. Once the first person had been exposed to the facts, that person did not lack the ability to understand. There was enough intellectual ability to process the facts. What was lacking was the set of facts necessary to reach a logical and intellectually sound conclusion. It turns out that voting for those promising to repeal “Obamacare” was the same as voting for those promising to repeal the ACA. Someone dependent on the ACA and not wanting it to be repealed ought not vote for those promising to repeal it. The person did demonstrate a bit of intellectual deficiency, because their belief that the ACA replaced Obamacare ought to have caused the person to question why there was a need for certain politicians to campaign on promises to repeal Obamacare, considering that in this person’s mind, Obamacare had already been repealed and replaced with the ACA.
The article points out that whoever shared the exchange redacted the names, making it extremely difficult, if not impossible, to verify that the online conversation occurred. Similarly, it’s unclear if the comment overheard in the doctor’s office was real. My guess is that both the conversation and the comment did take place. It’s simply very consistent with the sort of illogic that has overtaken the nation as the ignorance infection does its work. These are not isolated instances. The writer of the article suggests, “Millions of individuals in the United States believe exactly as the individual in the conversation does.” I agree. Consider how widespread the foolishness and ignorance about the size and name of the Internal Revenue Code has become, as I have pointed out in posts such as 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, Tax Myths: Part XII: The Internal Revenue Code Fills 70,000 Pages, and Not a Surprise: Tax Ignorance Afflicts Presidential Candidates and CNN.
The degree to which ignorance is dangerous varies. Despite my annoyance at the false claims about the name and size of the Internal Revenue Code, the ignorance of those who get it wrong is more disturbing as a symptom than it is in terms of the particular risks it poses. The Code exists, its name is set forth at the beginning, and its size is there for anyone with a smattering of intellect and diligence to compute. If the exaggeration is designed to promote calls for reduction in size, it does not detract from the reality of the Code’s actual size, which is big even using the true page count, and complexity, which is very real. On the other hand, thinking that the ACA will remain in place, providing health care coverage for tens of millions of Americans, if “Obamacare” is repealed, is dangerous because it generates support for the repeal of the ACA. That, in turn, will harm tens of millions of Americans many of whom thought that they would not be hurting themselves by supporting those who want to repeal the ACA, a/k/a Obamacare. Then again, way too many Americans do things that harm themselves because they are unaware that what they are doing is harmful. That is the price paid for ignorance. It’s only a matter of time, given the current cultural climate, for collective ignorance about something existential to exact an ultimate price.
Wednesday, January 11, 2017
Bob Martin, the author, opened his commentary by pointing out something that had already been publicized but that deserved another moment in the spotlight, especially for the benefit of those who had not caught on. If a person at the Philadelphia International Airport s in Terminals B through F and purchases a soda or other beverage subject to the “soda tax,” the price is increased by the 1.5-cent-per-ounce exaction. But if a person is in Terminal A-West or A-East, the tax does not apply. Does that seem strange? Perhaps. The reason is simple. The latter two terminals are not within the city limits. The Philadelphia International Airport occupies land on both sides of the border between Philadelphia and Tinicum Township in Delaware County. I wonder if officials in that township are eyeing the revenue potential and pondering the possibilities of cashing in on what might appear to them to be a sweet deal.
One of the other tidbits Bob Martin addresses is the traffic jam at the Breezewood Interchange of the Pennsylvania Turnpike. That’s where interstate 70 intersects with the Turnpike, and from that point heading west, Interstates 70 and 76 are aligned on the same highway, namely, the Turnpike. To get from interstate 70 to the Turnpike, or vice versa, motorists must travel through a congested quarter-mile-long strip of hotels, restaurants, fueling station, and other stores. Why not a direct connection? Years ago, a federal law, since repealed, prohibited a non-toll road, such as interstate 70, from terminating at a toll road, such as the Turnpike. A similar situation exists for motorists trying to get from Interstate-95 to the Turnpike in Bucks County, or vice versa, but that mess will be alleviated soon when the new interchange that is being built is opened. Will that happen in Breezewood? Bob says there is no plan for doing so. He doesn’t expect one. Neither do I. So I laugh. I laugh at the foolishness and the short-sightedness.
The closing entry in Bob Martin’s list of insanities for which humor appears to be the only effective immediate remedy is the best of the bunch. It doesn’t involve taxes, at least not directly, nor highways, nor chocolate chip cookies, nor model trains, nor family histories, so I’ll simply recommend highly clicking on the link and investing a quick minute. The entire commentary provides a good dose of laughs and smiles useful at the start of tax season.
Monday, January 09, 2017
Problem fixed? Not really.
Does this happen? Yes. It happened to the taxpayer in Sullivan v. Comr., T.C. Memo 2017-2. Despite fixing the error and despite paying the tax, the taxpayer was hit with a late filing penalty.
The Tax Court upheld the penalty, reasoning as follows. The penalty applies if a taxpayer fails to file a return on time. An unsigned return is not a return, so what the taxpayer initially sent to the IRS was not a return. The taxpayer argued that because it was an honest mistake, there was reasonable cause and no willful neglect, thus negating the penalty. The Tax Court concluded that, although the circumstances did not indicate willful neglect and appeared to be a reasonable attempt to correct the lack of signature, it was bound by an earlier decision that “overlooking” a signature is not reasonable cause.
It appears to be, and is, a harsh result. Most instances of failing to file income tax returns are deliberate and accompanied by other violations, such as failure to pay the tax that is due. Simply forgetting to sign is something that can happen to anyone, especially when stressed from working on an income tax return. Yet, sometimes in life, being forgetful can be dangerous or lethal. The key is to find a way to remember the things that cannot be forgotten without bad consequences. Taxpayers using tax return preparation software are reminded and assisted with the signing process. Perhaps taxpayers still using paper forms can make the very first thing that they do the placing of a yellow post-it note next to the signature line, and the placing of another on the envelope with a “don’t forget to sign” message.
Friday, January 06, 2017
Sometimes, in trying to help people understand the facts beneath tax policy issues, I wonder why many have difficulty grasping the essentials, and thus being misled or even duped by the sound bit and buzz phrases tossed about by politicians and lobbyists. The inability of so many people to understand why flattening tax rates does just about nothing to simplify tax law, or to comprehend how phase-outs cause tax rates on middle incomes to be higher than those on high taxable incomes, probably correlates with deficiencies in arithmetic understanding.In other words, it is essential that Americans understand arithmetic, which is, of course, a subset of mathematics.
In a recent commentary in the Philadelphia Inquirer, Melissa E. Libertus and and Roberta Michnick Golinkoff examined the arithmetic skills deficiency problem. They begin by pointing out, “Educators and parents alike are alarmed over the persistent gaps between 15-year-olds in the United States and their international peers on science and math outcomes.” They then share some of the overwhelming evidence of the problem. No matter what the “science is irrelevant” folks might claim, there is no doubt that Americans, including American children, do not fare well when it comes to math. The problem is not a secret, and it’s something I noted almost a decade ago, in Who Should Test the Students?:
I wonder how many people are going to take offense at my thoughts on what is turning out to be a major legislative battle in Pennsylvania. A while ago, the governor of Pennsylvania proposed that high school diplomas be awarded only to those students who passed state high school graduation tests in ten subjects. * * *So the issue isn’t whether there is a problem, but what should be done.
The governor's motivation rests on several concerns. First, even though tens of thousands of eleventh graders fail one or more state school assessment tests, almost all receive diplomas at the end of their senior years. Considering that as many as 45 percent of juniors have fallen short on one or more of these tests, either an amazing amount of catch-up is being accomplished or students are graduating high school deficient in particular skills. Second, increasing numbers of college students are being funneled into remedial courses to learn what they ought to have learned by the time they graduated high school. Third, employers complain that many high school graduates whom they hire have little or no reading skills, are incapable of doing arithmetic, or both. Are these believable accounts? I think so. Why? Because among law students whom I teach, far too many cannot spell, cannot write well, do not understand grammar, and struggle with simple arithmetic. Considering that law students are drawn from college graduates with grade point averages on the high end of the scale, it is rather disappointing and worrisome that among the very best there is so much deficiency.
Libertus and Golinkoff offer an important insight. They write:
Evidence suggests that the road to strong STEM education starts not in elementary or middle school, but at home and in preschool with very young children. Some parents and teachers talk about numbers and math frequently so that their children are hearing words such as two, twelve, more, less, count, and add repeatedly in various contexts. Other parents and teachers, however, rarely use number and math words or engage children in meaningful math-learning activities.I am in total agreement with Libertus’ and Golinkoff’s suggestions. There is no doubt that children absorb the environment in which they are raised. Children who are surrounded – or as I put it in Doing Arithmetic: An Insight into Tax Policy Conundrums, immersed – in numbers grow up to be better at arithmetic, just as children who are exposed to, and immersed in, books grow up to be better readers, children who watch and help their parents cook are better chefs, and children who are engaged in cerebral activities at home develop better critical thinking skills. The challenge, as I see it, is that too many of America’s children are growing up in environments lacking in literacy, numeracy, and cerebral activities. They absorb the prejudices of their parents, and too many fail to get past those barriers. When parents send the message that “book learning” is for fools, that reading is unimportant, and that numbers don’t matter, they are depriving their children of the opportunity to do well in life. Though Libertus and Golinkoff also suggest that the pre-school numeracy environment also needs to be improved, there is only so much that can be accomplished by educational institutions when the tide at home is pushing back in the wrong direction. What the nation needs is an improvement in the parental environment, and that requires parental education. Though some adults who failed to complete high school eventually see the light and return to school, too many do not do so. It’s time to tackle this growing illiteracy and innumeracy problem. Nothing less will do in the fight against ignorance.
* * * We must bring math into our homes and preschools.
To be specific, research indicates that some parents of toddlers use an average of more than 30 number words every hour * * * Other parents, however, use only one number word every two hours, on average. This creates close to a 6,000 percent difference in math input at home. * * *
* * *
Numbers can be a natural part of parents' talk with their children. At the grocery store, for example, parents can talk about the number of bananas in a bunch and how many would remain if you picked off two, the cost of a child's favorite cereal, and what it means to be "on sale." At home, they can count the number of plates needed to set the table, and they can weigh and measure flour and salt when they bake together. When children ask how long it takes for the cookies to bake in the oven, parents have another opportunity to use number talk.
When traveling by car or bus and children ask the perennial "Are we there yet?," parents can talk about the number of miles and minutes to reach their destination. Board games like Chutes and Ladders that require counting give numbers real meaning as they correspond to how many spaces children can advance with each throw of the dice. Building with blocks or doing puzzles together can fuel the spatial skills that undergird math knowledge.
Wednesday, January 04, 2017
Now, thanks to a reader, another story can be added to the list. The reader directed my attention to this story about the mayor of Hialeah who, back in November of 2015, tried to pay a $4,000 fine entirely in coins. The fine had been imposed by the Miami-Dade Commission on Ethics and Public Trust for intentional breach of commission rules, when he lied about collecting interest from someone who had set up a Ponzi-type arrangement. The mayor brought in 28 buckets filled with 360,000 nickels and pennies. The commission rejected the payment because it was “commercially unreasonable” and ran afoul of yet another commission requirement that fines be paid by check. So the mayor, claiming that he was unaware of such a requirement, suggested that the commission sue him, arguing that he was making payment in valid United States currency. The commission proceeded to sue the mayor. And that is where the story ended.
Curious, I decided to discover the outcome of the litigation. According to this report, the case settled when the mayor agreed to count and box the coins himself. He did so, and delivered 140 boxes of pennies and five boxes of nickels. He made the delivery to a bank where the commission has an account.
My immediate reaction was yet more questions. Did anyone double-check the mayor’s counting? Did the bank take the coins out of the boxes and run them through a coin counter? If so, why not skip the boxing process? Did the bank weigh the boxes? Perhaps someone has the answers. I don’t.
Monday, January 02, 2017
Shortly thereafter, in An Ever-Expanding Tax To-Do List, I discussed reports that the legislature would face competing suggestions and conflicting interests when it tries to fix the problem. I pointed out that the localities depending on the tax revenue from the casinos must prepare budgets for 2017 long before the 120-day suspension period set by the Supreme Court expires. Once again, bad drafting years ago planted the seeds of public finance crises in the present day.
So while the legislature fiddles with the issue as the clock winds down, two different approaches appear to be taking hold among localities. According to one report, Valley Forge Casino will continue paying an amount to Upper Merion Township, calculated as though the overturned tax were still in effect. The agreement between the casino and the township has permitted the township to move forward with its 2017 budgeting process, and has eased concerns that it would need to raise other taxes or severely cut services to balance that budget. The report also points out that several other casinos have agreed with the localities in which they are located to continue making payments along the same lines.
But according to another report, the Sands Casino Resort Bethlehem, rather than agreeing to continue making payments, will wait to see what the state legislature does. That leaves Northampton County in a quandary as it tries to establish its financial and services plans for 2017. In response, the county district attorney has informed the casino that he “can’t justify the use of his office’s resources to help a profitable corporation that isn’t a good corporate citizen,” and thus “may not prosecute cases involving bad checks or chip thefts” at the casino. It is unclear whether a public official can refuse to perform services that the official is required by law to provide simply because a taxpayer has not paid taxes. There are two variants at work in this instance. Consider a homeowner who is delinquent in paying real property taxes. Does that justify the police in not responding to an armed break-in at the residence, or the fire department from showing up to put out a blaze? I think not, on both legal and common sense grounds. The comparison breaks down, though, for two reasons. First, the prosecutor has discretion when it comes to pressing charges and investigating crimes. Second, and perhaps this is more important, the casino is not under a legal obligation to pay the overturned tax or any amount in lieu thereof. Unfortunately, Northampton County cannot sue the legislature or the individual legislators who haven’t solved the problem, nor can they sue the legislators who in 2004 enacted a badly drafted statute.
There is an important lesson to be learned, and it isn’t a question of how a county or its officials should deal with a potential revenue shortfall. The lesson is that those who enact legislation, or promulgate regulations, need to do as good a job as neurosurgeons, welders, engineers, and others must do. In other words, get the required education and experience, think, think again, think it through, visualize what will happen, focus on the job at hand, obtain third-party oversight, inspect the work, and monitor the outcome. The nation’s federal and state legislatures and executive departments are increasingly filled with people who think they know what they are doing but who have not much of a clue, and who generate more and more laws and regulations that don’t work, that cause hardship, and that fail to address the underlying problem. The reason is simple. People are turning more to their limbic systems as they push aside their critical thinking systems. The mess in Pennsylvania is a harbinger of what the nation risks in the near future.
Friday, December 30, 2016
Now comes another story involving the use of coins to pay a government bill to the city of Lancaster, though in this instance it is a $20 parking ticket and not a tax. The parking offender tried to pay the ticket with loose change that he had accumulated, but the clerk refused to take the money unless he rolled up the coins. When asked for a copy of the policy, the clerk sought a police officer. The director of administrative services for Lancaster claims that it is not the city’s job to count out $20 in loose change. What’s next? Because the person who received the ticket refuses to pay unless Lancaster accepts the coins, the dispute will end up in magistrate’s court. By trying to pay the $20, the parking offender pretty much has admitted he owes the $20, so all he can do when in front of the magistrate is again to offer to pay with his loose change. I do hope we find out what happens.
Another jurisdiction in Pennsylvania refuses to accept home-rolled coins. It’s easy to understand why. That same jurisdiction had been refusing to accept pennies and nickels for transactions exceeding 25 cents, relying on a federal law that had been repealed decades ago. Fortunately, the jurisdiction relented when it learned, though efforts by a newspaper and members of the public, of the obsolescence of its policy, which it quickly changed. [Yes, I know, I know, and it was unintentional!]
For the curious, it is permissible to pay taxes, debts, dues, and other charges with coins. According to 31 U.S.C. section 5103, “United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues.” It also is permissible for private businesses and organizations to refuse to take currency or coins as payment for services or the sale of goods. The difficult question, which continues to be debated, is whether a person, business, organization, or government agency can refuse to accept currency or coins as payment for a debt, a public charge, a tax, or dues. Though debates continue to flourish over this question, the answer is no. The tougher question is whether the parking fine is a debt or public charge? The answer isn’t clear. It makes sense to conclude that when the offender’s obligation to pay the fine is established, for example, through admission or by trying to pay the fine, the fine become a debt.
This entire set of question could easily be resolved through a well-drafted statute. I wonder how long it will take for that to happen.
Wednesday, December 28, 2016
A recent case, Arkow v. Comr., T.C. Memo 2016-87, reaffirms the importance of documentary language in evaluating a taxpayer’s assertion that damages received by the taxpayer fit within the exclusion. The taxpayer entered into a settlement agreement with a defendant sued by the taxpayer, in which the taxpayer released all claims in exchange for $3,000, which was then paid to the taxpayer. The taxpayer did not include the $3,000 in gross income, arguing that it represented damages for physical injury. Nothing in the settlement agreement mentioned physical injuries or physical sickness. The taxpayer had sued the defendant alleging violations of the Telephone Consumer Protection Act. Nothing in the complaint mentioned physical sickness or injury, nor does the Telephone Consumer Protection Act allow for damages based on physical injury or sickness. The taxpayer admitted that nothing in the complaint or the settlement agreement referenced any physical injury suffered by the taxpayer. Unsurprisingly, the Tax Court upheld the determination by the IRS that the $3,000 was not excluded from the taxpayer’s gross income under section 104.
It is unclear what the taxpayer was thinking. Did the taxpayer think that all damages are excluded from gross income? That is not, of course, the case. Did the taxpayer think that someone adversely affected by a violation of the Telephone Consumer Protection Act automatically suffers a physical injury? Did the taxpayer decide, when it came time to file a tax return, to classify the damages payment as compensation for physical injury because it would reduce the taxpayer’s tax liability? The Tax Court’s opinion does not indicate if the taxpayer or a tax professional prepared the tax return. The taxpayer and his wife represented themselves in the Tax Court case, but that does not mean that a tax professional did not prepare the return. Nor is there any guarantee that all return preparers would have properly reported the $3,000 payment.
To the extent this issue appears to be complicated, it really isn’t very complicated. For those who think that tax law is complicated because it involves numbers, this is yet another example of the many tax issues that do not involve numbers. For those who think that tax law can be simplified by reducing the number of tax brackets, this case provides yet another example of a situation in which the number of tax brackets is completely and totally irrelevant to the level of tax complexity. The case also demonstrates the need for careful attention to the language of documents, the need for all citizens to learn basic tax law, and the danger of falling victim to gross oversimplifications and the misinformation infecting the postmodern world.
Monday, December 26, 2016
During the past eight years, I have described the various failings of the so-called “soda tax” enacted by Philadelphia, which applies to items other than soda, does not apply to certain soda products, and also applies to some, but not all, products containing sugar. The commentaries started with What Sort of Tax?, and continued with The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, What Gets Taxed If the Goal Is Health Improvement?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, and Gambling With Tax Revenue. Last week, according to this report, a Philadelphia Common Pleas judge dismissed a challenge to the soda tax. The judge rejected the argument that the tax was preempted by the state sales tax and violated state law requiring items to be taxed at the same rate. He decided that the soda tax and the sales tax are fundamentally different because one is imposed on sales and the other on distribution. He also rejected the argument that applying the tax to items purchased through food stamps would violate the prohibitions on subjecting food-stamp-financed purchases to sales tax, by reasoning that the soda tax is not imposed on purchases but on distributions of soda. The losing plaintiffs promise to appeal.
Earlier this month, in So How Long Does It Take to Determine a Tax Liability?, I described a tax dispute between Comcast and the state of California that had dragged on for 17 years. Last week, according to this report, Comcast’s challenge to the tax asserted by California was denied. The court concluded that the termination fee received by Comcast on account of a losing merger bid constituted business income subject to California tax. Comcast is considering an appeal. In the meantime, Pennsylvania tax authorities continue to review the extent to which Comcast owes tax to Pennsylvania on account of the transaction.
Just as tax is a sure thing, so too are tax disputes and tax litigation. And that’s part of the reason tax professionals are busy. I expect them to continue to be busy.
Friday, December 23, 2016
A recent Tax Court case, Mack v. Comr., T.C. Memo 2016-229, illustrates how a tax return preparation and filing process can go haywire. The taxpayer is an attorney admitted to practice law in New York. He is a partner in a law firm. In 2011, the law firm and a related entity, both partnerships, issued Schedules K-1 to the taxpayer. They reported, respectively, income shares for the taxpayer of $18,357 and $461,386, totaling $479,743. The taxpayer explained that because of the 2008 recession, other partners of the firm could not cover their shares of the firm’s expenses, putting the firm into “significant negative capital”. The taxpayer decided that under New York partnership law he had a fiduciary obligation to cover those other partners’ expense shares. The expenses that the other partners were unable to cover were, in fact, reflected in the computation of the partnership income, and the taxpayer agreed that no partnership expenses were omitted from the partnership returns and the Schedules K-1.
The taxpayer concluded that because the partnership used its cash to pay the expenses rather than paying to the taxpayer his share of the income, the cash that was not paid to him ought not be treated as his income. The taxpayer consulted the firm’s accountants and tax return preparers. They advised him that the law was “unfair and unjust under the circumstances,” and that his options were to report the income or, instead, dissolve the firm, take a distribution of what remained of the firm’s capital, let the other partners “fend for themselves,” and “let the employees go on unemployment.” The taxpayer was also told that if he did not report the income, the IRS likely would disregard “the financial realities of the firm and not respect the state law fiduciary partnership duties.” The taxpayer ignored this advice and instead reported income from the two partnerships of $75,000, rather than the actual total of $479,743. On December 23, 2013, the IRS issued a notice of deficiency for 2011, determining that the Schedule E omitted $454,743 of income, asserting that only $25,000 of partnership income was reported on the return. The notice also determined an accuracy-related penalty of $28,060. In the petition to the Tax Court, the taxpayer argued that New York partnership law imposed a fiduciary duty on the taxpayer not to make the law firm fail, and that the expenditure of law firm funds to pay the firm’s expenses left the firm with no money to pay the taxpayer his share of the income and left him with no money to pay his Federal income tax liability. The IRS moved for summary judgment, to which the taxpayer essentially offered the same two arguments as set forth in the petition.
The Tax Court explained that under section 702(a), the taxpayer was required to include on his Schedule E his distributive share of the firms’ income as shown on the Schedules K-1. The distributive share of income is taxed to the partner even if no distributions are made to the partner. Because the taxpayer did not dispute the firm’s income or the computation of the taxpayer’s share shown on the Schedule K-1, there was no outcome other than a conclusion that the taxpayer had failed to report his distributive share of the firm’s income. By leaving his share of the income in the partnership, the taxpayer in effect made a capital contribution to the firm, but no deduction is allowable for capital contributions to partnerships. The Tax Court rejected the taxpayer’s argument that he could not reasonably be expected to pay tax on money never paid to him. The Tax Court noted that inability to pay might be relevant in a collection due process case but has no effect on determining the amount of income that must be reported on the Schedule E.
The taxpayers tried to avoid the accuracy-related penalty by showing that there was a reasonable cause for the omission and that he acted in good faith. Though most taxpayers who try to avoid the penalty in this manner offer proof that they relied on a tax professional, this taxpayer consciously ignored the advice provided by the tax professionals with whom he consulted. The court upheld the penalty.
Most lawyers do not take partnership tax courses when they are in law school. Most law students do enroll in a basic business organizations law course, but only in some of those courses do students get even a superficial overview of how corporations and partnerships are taxed. So it is not unusual for lawyers to rely on tax professionals to prepare their law firm tax returns and their individual returns. In this instance, the taxpayer deliberately chose to disregard the tax law and the advice provided by the tax professionals. It did not turn out well. Nor would it be surprising that more bad news is in this lawyer’s future, because filing a tax return on which significant amounts of income are deliberately omitted will not sit well with the New York State Appellate Court Attorney Grievance Committee with jurisdiction over this attorney.
Wednesday, December 21, 2016
It’s a meme circulating throughout Facebook and elsewhere. You can see it here. Designed as a graphic, it says this:
Let’s say milk costs $1.00The errors in this analysis come in a flood.
and let’s say
You make $1.23 a day.
After taxes, you bring home $1.00
Right now you can afford
one gallon [of milk] per day.
So now you get a minimum wage raise to $18.45 a day. That’s awesome!! You have more money, right? Well, now in order to stay in business the milk man has to pay his employees that same $18.45, so the cost of milk goes to $15.00 a gallon. No big deal, but you can still afford it, right? Well, no, you can’t.
You see, thanks to the minimum wage increase that you are begging for, you’ve moved up to a new tax bracket. Now, instead of 23%, you pay 29%. 18.45 – 29% = $13.10. You can no longer afford the milk you once could. Let that sink in a minute.
The only winner in raising minimum wage is THE GOVERNMENT!
First, without an indication of whether the writer is referring to a gallon, a quart, a pint, or some other quantity of milk, the figure of $1.00 makes no sense. Perhaps the intent was to refer to a quart of milk, but it’s pretty clear that the writer simply invented a round number.
Second, the writer then makes up another number, and this one is absurd. About the only way to make $1.23 in a day is to do some small chore for a neighbor who hands you the change in his or her pocket. Considering that the writer is making an attempt, feeble as it is, to prove that the minimum wage should be cents per day, let’s go with a minimum wage of $15 per hour. For someone working a standard work week, that amounts to an annual wage of $30,000, allowing for 40 hours per week and two weeks of vacation.
Third, the writer things that the tax on a $1.23 daily wage is 23 cents. Is the writer referring to the federal income tax? Federal and state income taxes? Federal, state, and local income taxes? Income and sales taxes? Twenty-three cents is 18.7 percent of one dollar and twenty-three cents. Even if the person earns $1.23 every day, the person’s annual wage would be so low that no income taxes would apply.
Fourth, the writer, however, claims that the person earning $1.23 per day is in the 23 percent bracket. That’s simply wrong. It is totally wrong. If the applicable bracket were 23 percent, and clearly it would not be, the tax would be 28 cents, not 23 cents.
Fifth, the writer then decides to create a minimum wage of $18.45 per day. That is nonsense. Minimum wage is set per hour, because “per day” has too many interpretations. Translated into an hourly minimum wage using an eight-hour day, the minimum wage assumed by the writer is the equivalent of $2.30 per hour. More nonsense.
Sixth, the writer then decides that the milk vendor needs to increase the cost of milk from $1.00 to $15.00 per gallon. Is that an increase from $1.00 per gallon to $15.00 per gallon? Or an increase from $1.00 per quart to $15.00 per gallon? Why does the cost of milk increase? Does not the per-item cost depend on the quantity of milk sold and the number of employees? Even assuming that the milk vendor sells nothing but milk, the increase is much different if the milk vendor has one employee and sells thousands of gallons per week compared to having ten employees and selling hundreds of gallons per week.
Seventh, the writer then decides that the tax on an $18.45 wage would be $5.35. Where does that number come from? Is it simply invented? Someone earning $18.45 per day, and working 250 days per year, based on five days per week and two weeks of vacation, would earn $4,612.50 per year. This person would encounter no federal income tax, would almost surely encounter no state income tax, and might encounter a one percent local earned income tax in some jurisdictions.
Eighth, using a $15.00 hourly minimum wage, and thus an annual wage of $30,000, the federal income tax liability of an employee claiming the standard deduction and one personal exemption would be, in 2016, $2,484. That is the equivalent of an average rate of 8.28 percent. That’s far from the 23 and 29 percent rates tossed about by the writer of the meme.
Ninth, using the current minimum wage of $7.25 per hour, the employee would earn $14,500 annually. The federal income tax on that amount, assuming the employee claims the standard deduction and one personal exemption, would be, in 2016, $415. So, an increase in the minimum wage from $7.25 to $15 per hour would increase the employee’s take-home pay from $14,085 to $27,516.
Tenth, would an almost-doubling of the minimum wage cause the cost of milk to increase to fifteen times its cost? No. Nor would it cause the cost of all items sold by the employer to go up by a multiple of fifteen, or even by a multiple of two. Wages are only a portion of the employer’s cost, and the chief component of the retail cost of the milk is the wholesale price.
Eleventh, the employee who takes home the additional amount is almost certain to spend that money, thus injecting more stimulus into the economy. The employee is unlikely to stash the cash in a Swiss bank. This, by the way, is why demand-driven economies perform at much higher levels than those infected with supply-side nonsense and trickle-down false promises.
Twelfth, it is true that government tax collections increase, though tagging the government as the only winner ignores the impact on the minimum wage worker is silly. Yet the increase in government tax collections means a reduced budget deficit, or perhaps better services for the employee, such as improved roads, more public safety, or other benefits of living in a cooperative society.
Readers of this blog know that dislike ignorance of any kind, and tax ignorance is particularly bothersome to me. I’ve written about it time and again, in posts such as Tax Ignorance, Is Tax Ignorance Contagious?, Fighting Tax Ignorance, Why the Nation Needs Tax Education, Tax Ignorance: Legislators and Lobbyists, Tax Education is Not Just For Tax Professionals, The Consequences of Tax Education Deficiency, The Value of Tax Education, More Tax Ignorance, With a Gift, Tax Ignorance of the Historical Kind, A Peek at the Production of Tax Ignorance, When Tax Ignorance Meets Political Ignorance, Tax Ignorance and Its Siblings, Looking Again at Tax and Political Ignorance, Tax Ignorance As Persistent as Death and Taxes, Is All Tax Ignorance Avoidable?, Tax Ignorance in the Comics. So it ought not be a surprise that my reaction to this goofball meme is one that goes beyond annoyance. There is no doubt that the writer made up numbers that would fit a preconceived, though thoroughly incorrect, perception of how economies and minimum wage increases work. This sort of behavior is no different than making up, and inventing, false news stories, false accusations of criminal behavior, and false promises while negotiating business contracts.
Why does this meme and its writer deserve the criticism to which I subject them? Because people see it, read it, and believe it. Then, based on this ignorant belief, they make decisions that disadvantage other people. They make decisions that adversely affect the nation. They make stupid decisions. And if the nation, its leaders, and its people continue to make enough stupid decisions, none will survive for very long. Ignorance is a destructive force, and it must be resisted. And resist it I do and I will.