Wednesday, April 29, 2020
The question posed to me by reader Morris was a simple one. He asked, “Is the insurance claim settlement of $400 gross income for Kramer? If so why?” Indeed, it is gross income. The tougher question is, “For whom.” If Kramer is treated as acting as an agent for Jerry, who owns the stereo, then the gross income is Jerry’s, not Kramer’s. Because the money is intended to acquire a replacement stereo for Jerry, it makes sense to treat Kramer as Jerry’s agent. On the other hand, there is a good argument that Kramer was acting on his own plan, collected the $400, and thus has gross income. He would then be treated as making a gift to Jerry, which would have no income tax consequences. Why is it gross income? Because gross income is income that is not within an exclusion. No exclusion applies. The insurance recovery is income because it is a clearly realized increase in wealth. The fact that the recovery is procured through fraud and is subject to being forfeited does not change the conclusion that it is gross income.
But what got my attention was the question posed on the Seinfeld Law blog: “Is it actually a write-off? Does anyone even know what a write-off is?” The blog writer then concludes, “Simply put, a write-off is another term for the deductions a person, business, or corporation can take to reduce their taxable income when filing their taxes.” Though it is true that people sometimes refer to tax deductions as “write-offs,” the term “write-off” has a much wider application. An expense taken into account in computing a profit and loss statement can be, and sometimes is, described as a “write-off.” Similarly, when a merchant gives a credit to a customer, the reduction of the price can be, and sometimes is, described as a “write-off.”
It gets better. The blog writer continues with this question: “Now that we know what a write off is, can the Postal Service just write off the payment they made to Kramer for Jerry’s broken stereo?” The write concludes that the $400 payment would be deductible by the Postal Service under section 162 in computing its taxable income because it is an ordinary and necessary business expense. There is, however, a serious flaw in the conclusion and the reasoning leading up to it. The Postal Service is tax-exempt. Though it computes a hypothetical federal income tax on the portion of its activities that involve sales of competitive products, it simply moves that amount from the Competitive Products Fund to the Postal Service Fund, rather than transferring it to the Treasury. A tax-exempt entity does not need to compute taxable income on its entire bundle of activities.
So, the $400 paid to Kramer would be a “write-off” for the Postal Service, but only for accounting and fund transfer purposes, but not for purposes of computing income tax deductions.
Monday, April 27, 2020
How were they caught? Internal Revenue Service software detected suspicious entries on returns. Specifically, the software looks at returns filed by a tax return preparer, and if the refund rate exceeds 50 percent, additional investigation is undertaken. The returns filed by these preparers reached as high as 86 percent. In other words, almost every client received a refund. The IRS sent an agent to the preparers’ office, posing as a client. The agent brought information that, if properly reported, would generate a tax due. During their meeting, one of the preparers told the agent that money would be owed, but that, “it’s your return and I can give you one of those charity things, but once you sign it, it’s you.” The agent agreed, and the preparer added a $2,000 charitable contribution deduction to the return even though the agent had told he preparer that he had not given anything to charity for the year in question. The IRS did not stop at that point. Instead, it interviewed the preparers’ clients and found 35 returns that it considered suspicious. Then the IRS interviewed the two preparers. One of them “allegedly admitted she sometimes exaggerated a client’s deductibles, adding that she ‘felt sorry’ for people who owed money.” In the complaint, an IRS special agent wrote that one of the preparers, Blakely, “stated if a client gives her a $500 amount for expenses, she might add a ‘1’ in front of it. Blakely stated that she knows she is held to a higher standard, but she wants to help her clients.”
That approach doe not “help” the clients. It makes a mess of their life. Not only are they interviewed by the IRS, they end up being required to pay back the refund along with the tax that they would have owed had the return been done properly. In theory, the clients can sue the preparers, but as a practical matter the chances of recovery are far from 100 percent.
What’s unclear from the facts is whether the preparers charged their clients more than they would have charged them had they not falsified the returns. In other words, were the preparers getting a portion of the refunds? If they did, then the claim that they were just trying to help their clients becomes less credible. Of course, even if they did not, their alleged actions still fall within the scope of conspiracy to file fraudulent tax returns.
Friday, April 24, 2020
Some background is in order. In 2017, in order to offset other tax breaks dished out to the wealthy, Congress imposed a limit on how much loss owners of pass-through entities can deduct from investment income. The provision snuck into the coronavirus legislation suspends that limitation. This is one of the oldest tricks in the legislative playbook. Get something by giving up something, and then take back what was given up without giving up what was taken. Of course, advocates for the wealthy claim that enactment of the 2017 limitation was a “mistake” and that suspending it provides “badly need liquidity” to the wealthy. Really? If there’s anyone in this country who isn’t being crushed by liquidity problems, it’s wealthy individuals who apparently see every crisis as an opportunity to add more feathers to their nests.
This tax break for the wealthy will cost $90 billion in 2020, and another $80 billion over the next 10 years. Imagine how much personal protective equipment, virus testing kits, and medical equipment could be acquired for that amount of money. Imagine how much replacement income for laid-off workers and genuinely small businesses could be provided with $80 billion this year.
Interestingly, in response to Democratic criticism of the tax break, a spokesperson for the Senate Finance Chair claimed that the criticism is a “stink of partisan politics” because the Democratic Senators voted for the bill. Of course they did. Had they balked, they would have been subject to the same criticism directed at House members who are holding up legislation that contains even more breaks for the wealthy while omitting necessary assistance for those truly harmed financially by the coronavirus crisis. Damned if they do, damned if they don’t is yet another tricks in the legislative playbook and finds it way into the political propaganda playbook.
As bad as the coronavirus has been, is, and will be, money addiction has been causing, is causing, and will be causing even more damage. I daresay a cure for, or a preventive vaccine against, this coronavirus will show up before a cure or vaccine for money addiction is discovered.
Wednesday, April 22, 2020
Sentence: “He has no tax credits or dependents and has few reasons to deduct money from his taxes.” What does that mean? What gets deducted from taxes? Technically, nothing. But using the word deducted to mean subtracted, one subtracts credits. When something is deducted, it is deducted from gross income or from adjusted gross income.”
Sentence: “This makes him . . . “ That ends the page, and when the page is turned, the thought is not continued.
Sentence: “He doesn’t think his adjusted gross income is enough money to be bringing home.” Perhaps this is an attempt to explain that his take-home pay is insufficient? One does not bring home adjusted gross income.
Sentence: “Since he makes enough money to support himself according to the government, he has a lot of taxable income.” The amount of money considered adequate to support a person is nowhere near “a lot of taxable income.”
Sentence: “His first idea was to cheat the Internal Revenue Service and lie about his income so he has a lower income regressive progressive tax.” The incoherence of this sentence might be attributable to formatting glitches, but it makes no sense.
Paragraph: “Then he gets a brilliant idea, get married! Then they can get married filing jointly and the FICA will decide that they together won’t have to pay as much. After their filing status they get a little more of their income. He will now be in a lot better place in the Federal Tax Bracket. The only bad thing would be that he can’t do the easy form, but he’ll have to fill out the W2 form.” First, filing status for the previous year’s tax return is not affected by a marriage after the close of that year. Second, if he gets married his taxes will increase unless his spouse has little or no income. It’s called the marriage penalty. Third, the FICA doesn’t decide anything. FICA is the acronym for the social security payroll tax. Fourth, the only taxpayers that fill out W-2 forms are employers.
Sentence: “After his genius idea, he’s a lot happier person, his job as a nurse provides for him and his family, he gets direct deposits with holdings paycheck standard deductions IRS Publication 561 with a smile.” The formatting makes it impossible to figure out what really is being said. It is possible to have a family without being married, but if that were the case, why is he not considering head of household filing status? IRS Publication 561 deals with “Determining the Value of Donated Property” and that has nothing to do with what’s being written.
The author of the book is “Ana Leigh.” Underneath the book is the word “analeighgoodwin.” Nothing on the web site provides any information about her, other than she joined the site in 2013. The book bears a copyright of 2010, but it is unclear if that was when the book was written. Attempts to figure out if she was a child or high school student when the book was written were not fruitful.
So I don’t know if the author of the book should be criticized for its content, because it could be the work of a fifth grader. Or it could be the work of a high school student who is reflecting what was taught or what she thinks was taught in a class. Or, horrors, it could be the work of an adult. In any event, running it by a tax professional would have been wise. As for the formatting mess, one would expect that the web site operators would provide some sort of screening, or at least the author would view the book and realize that portions are impossible to understand because of the formatting glitches.
If this story is intended to be read to or by children, and I have no clue how someone can read it without stumbling over incoherent sentences, then perhaps we have reached new lows. Yes, if these are being written by children and high school students, it is a good exercise to have them write, but they learn very little, if anything, unless someone reviews what they are writing and helps them learn from their mistakes. Otherwise, they will grow up and continue to crank out erroneous and confusing slop.
Monday, April 20, 2020
This newest addition to that list is from Hot Bench, season 5, episode 200. The plaintiff sued the defendant, her son, for reimbursement of $2,250 in accounting fees she paid a tax return preparer to refile tax returns. I wonder how many tax practitioners have dealt with a story like this.
From January 2015 until August 2015, the defendant lived with his mother. He did not pay rent, and contributed $200 per month for food while admitting he ate more than that amount. In August of 2015 he moved to college. From that point through at least the end of 2017 he lived in a dorm or in his own apartment. He testified that he paid his own rent and worked full-time as an office assistant. He used his earnings from his job to pay his expenses. When asked about tuition, he stated that it was paid with student loans, but it quickly was established that his mother took out the loans and made payments on them.
Questions from the bench revealed that the reason the mother took out the loans was to make it easier for the son to get financial assistance in the form of grants. To do this, the mother claimed the son as a dependent on her tax return. She explained that she has other children who are younger, and also claimed them. She testified that the father of the children, including the defendant son, had never claimed the children as dependents. The defendant knew that he was being claimed by his mother on her 2015, 2016, and 2017 tax returns.
On his 2015, 2016, and 2017 tax returns, the son claimed a personal exemption deduction for himself even though he knew he was being claimed on his mother’s return. One of the judges pointed out that the mother properly claimed the son as a dependent because the facts made it clear that she provided more than half his support. Nothing was mentioned about the other requirements but it appears they were met. One of the judges pointed out that he knew his mother was claiming him as a dependent.
One of the judges asked him why he claimed himself, which meant that he took the position that he provided more than half his own support. His reply? “Because I needed the money.” That caused a judge to comment, “You may have defrauded the government.”
Though it wasn’t clear how the mother found out what her son had done, she retained a tax return preparer to amend the son’s returns. She told her son she was doing this, and he agreed to reimburse her for the cost of getting the amended returns prepared and filed. When asked why she did this, the mother replied, “I’m worried he’s going to end up in prison like Wesley Snipes because of tax fraud.”
The son did not reimburse his mother. When asked why he didn’t reimburse his mother, the son said that he had helped her financially during the past year. Asked about her son’s behavior, the mother explained that in 2014 her son had an accident that caused serious injuries, and might have suffered a brain injury. No evidence about the son’s health was mentioned or introduced.
One of the judges asked, “Why are you defending yourself against your mother? Why not reimburse your mother?” Several more questions along those lines were asked, and eventually the defendant son conceded he should reimburse his mother.
The judges’ deliberations were brief. One of them concluded that the son had committed tax fraud, knowing he would be claimed by his mother, and that he had breached his agreement with her to reimburse her. The other judges agree.
When handing down the verdict, the court stated that the plaintiff mother had proved she had right to claim him as a defendant, had proved he committed tax fraud, had proved he agreed to reimburse her, and had proved that he had failed to do so. Judgement was entered for the plaintiff.
Did the son commit tax fraud? Taken facially, the facts indicate yes. Yet one of the facts, the possible brain injury, raises the question of whether a person commits tax fraud if they lack the requisite mental intent. The son made it clear he knew he was being claimed by his mother on her return, he knew he should not claim himself, he deliberately claimed himself, and he did so because he needed the money. Under those circumstances, it is pretty much impossible to show that a brain injury, if there was one that persisted, interfered with the son’s intention to do something he knew violated the law. I doubt, though, that the son was or will be prosecuted for tax fraud because the situation was quickly fixed and the amount of tax in question was small.
Friday, April 17, 2020
The impetus for this strange tax proposal is a population replacement problem in Japan. It is no secret that Japan has the oldest population in the world. Some predict that within 40 years its population will decrease by 30 percent. What is causing these demographic shifts? The birth rate is falling. Some point to the fact that increasing numbers of Japanese women are working and are focused on careers. Perhaps that is the reason. Perhaps it isn’t. There are plenty of nations where women have careers and work, but have more than zero children.
According to the economist proposing this “handsome man” tax, it will make it easier for “less-attractive men” to “find love.” His explanation needs to be quoted, “If we impose a handsome tax on men who look good to correct the injustice only slightly, then it will become easier for ugly men to find love, and the number of people getting married will increase."
Where do I begin? The easiest flaw to identify in this absurd proposal is the need to identify “handsome men.” If beauty is in the eye of the beholder, there surely are men who are considered handsome by some people but not by others. So who is the “beholder”? Some sort of government agency? A television reality show with audience or celebrity voting?
It gets worse. If Japanese men and women are refraining from having children for reasons of career and, finances, is that not a problem for men of every physical sort? Is there evidence that “less handsome” men in Japan want to have children but cannot find women to join them in the enterprise? If most or many Japanese women don’t want to have children, how will a tax on “handsome men” change their minds? The answer is, “It won’t.”
It gets crazier. Genuine love has nothing to do with money or looks, though for many or most of us, money and looks can interfere with, masquerade as, or otherwise distort conclusions with respect to love. All the money in the world cannot buy love. So taking money from “handsome men” is no more likely to cause a not-so-handsome man, whatever that means, to fall in love with or love someone.
It gets even crazier. How would a tax on “handsome men” take those men off the market and make room for “less handsome” men to succeed in having babies? If the tax were high enough to cause “handsome men” to cease socializing and marrying, all that it would accomplish is to decrease the pool of potential fathers.
It gets more interesting. Love and having children, although often connected, aren’t necessarily entwined. There apparently are plenty of Japanese couples who love each other but who are not having children. Taxing “handsome men” isn’t going to cause those couples to stop loving each other or prompt them to have babies. And as experiences throughout the word demonstrate, plenty of babies are born even though their parents aren’t in love and don’t love each other. Sometimes, sadly, they don’t even know each others’ names.
So is there anything a government can do to boost its nation’s birth rate? Yes. For the past few years, the Japanese government has been paying people to have babies. It appears that the increase in Japan’s birth rate is linked to these payments. That’s not surprising. In this instance, paying someone to do something is far more practical than imposing a tax that would not, and cannot, accomplish its stated goal.
When reader Morris drew my attention to this proposal, he asked, “is this a sin tax? Is this a progressive or regressive tax?" I didn’t answer his first question, but I will now. Whether it’s a sin tax depends on the definition of “sin” in Japan, and if failing to have babies is the “sin,” then the proposed tax is not a “sin” tax because it isn’t aimed at people who are failing to have babies. I doubt there is any evidence that “handsome men” make up all or most of the men who are not fathers.
As to his second question, I pointed out that it is impossible to answer his question because I don’t have, and I doubt there exists, any data that correlates adjusted gross income of Japanese men with how “handsome” they are. One might guess that more attractive people in Japan have higher incomes, but, again, who defines “attractive”?
So, I answered a question reader Morris did not ask. I shared my reaction to the tax proposal advanced by the Japanese economist. “It’s essentially a stupid idea.”
Wednesday, April 15, 2020
So why am I bringing this up? Several days ago I came upon an article with the title, “6 Things You Didn’t Know Were Tax Deductions.” One of the items, under the heading “Ongoing Education,” was described as follows:
If you continue your education after high school, some of your educational expenses might be tax deductible, even if you’re not a full-time college student. With the Lifetime Learning credit, you can deduct up to $2,000 per tax year of the cost for your ongoing education.The lifetime learning credit does not provide a deduction. It provides a credit.
If I were editing this article, or reviewing a student paper, I would point out two things with respect to this issue. First, the quoted language should be rewritten as follows:
If you continue your education after high school, some of your educational expenses might generate a tax credit, even if you’re not a full-time college student. With the Lifetime Learning credit, you can subtract from your tax liability up to $2,000 per tax year of the cost for your ongoing education.Second, I would retitle the article “6 Things You Didn’t Know Were Tax Breaks.”
It's that simple. Really.
Monday, April 13, 2020
The book begins with the first character sharing his desire to start a bike shop and asking the second character if he wants to start a bike shop together. The second character agrees, and the first character asks, “How would taxes work?” The second character replies, “The business itself doesn’t have to pay taxes. Us, the partners of the business pay taxes on the share of income that we generate.” The conversation then turns to other issues, such as management and resolving conflicts. The first character then states, “I also learned in law school that the law doesn’t require a written partnership,” and the second character responds, “Wow thats [sic] Great! Lets [sic] Start as soon as possible.” And the story ends.
Reader Morris asked me several questions. For ease of continuity, I take them out of order.
He asked, “Is the answer on pg. 6 correct?” Reader Morris is referring to the first character’s statement, “The business itself doesn’t have to pay taxes. Us, the partners of the business pay taxes on the share of income that we generate.” There are several problems with this statement. First, a partnership is required to pay a variety of taxes, such as real estate taxes on its real property, sales taxes it collects from its customers, taxes included in its utility bills, and a variety of state and local taxes applicable to a bike shop, depending on where the business is established. Second, the partners pay federal and state income taxes based on their distributive shares of partnership income, which could reflect the shares of income that they generate but which won’t necessarily be computed in that manner, depending on what is in the agreement. Third, the first character’s statement is incomplete because it says nothing about losses.
Reader Morris asked, “Is the statement on pg 10 correct? If so, would you give this advice to your students?” He is referring to the statement by the first character, “I also learned in law school that the law doesn’t require a written partnership.” I assume the first character intends to refer to a “written partnership agreement,” because the idea of a “written partnership” is very strange. Yes, it is true that a partnership can exist based on an oral, rather than written, agreement. But is that wise? No. Absolutely not. In the event of a dispute, the resolution becomes a matter of “one person said, the other person said.” Drafting a written agreement forces the partners to consider an array of issues that might arise and to agree on resolution, whereas an oral agreement rarely addresses more than a few issues, including tax allocation issues. My advice to students has always been, not only in the context of partnership agreements but any other sort of contract or agreement, “put it in writing.”
Reader Morris asked, “What grade would you give this book for accuracy?” Probably a low passing grade. If I were to take into account grammar, it would be a barely passing grade. Not only is the lack of apostrophes a sign of inattention to required detail, the use of “Us” when “We” is the appropriate word corroborates a concern about the attention to detail that is necessary when writing about, or giving, legal advice.
Unlike the case with Tax Story, I could not identify the author of this bike shop book. So I have no way of knowing anything about the author. I do hope it was not written by a lawyer or a tax practitioner.
Finally, reader Morris asked me, “Could you write a book explaining partnership taxation to children?” Yes, I could, but would I? No. I don’t think it is helpful for children to be taken into the weeds of partnership taxation. Writing a partnership taxation book for children would be just as unwise as writing a book for children about quantum physics, string theory, organic chemistry, or molecular biology. There’s no need to rush them into these sorts of complexities. Let them be children.
Friday, April 10, 2020
The imposition of an excess profits tax is not a new idea. It was used during both World Wars. That’s why Avi-Yonah uses the word “revive” in the title of his commentary. The design already exists, and only a few tweaks are needed to implement it.
Of course, those who are raking in substantial profits are likely to object to this tax. They surely would be vociferously opposed if the rate were set at what it was in some previous years when the tax applied. The rate was as high as 95 percent.
The excess profits tax was enacted during wartime because wars cause economic disruption. So, too, do pandemics, though that is not the reason several national leaders have referred to the effort to combat the SARS-CoV-2 virus as a war. The economic disruption adversely affects many individuals and businesses, while it provide a handful of individuals and corporations an opportunity to rake in significant profits, not because they have invented something but because they are benefitting from the distress of others. They are in a position to raise prices to shocking levels, and some have already done so. Others are manipulating markets to leverage themselves into profits that do not reflect improvements in the quality of what they are brokering, but their ability to take advantage o their relationships with those who supposedly are protecting the markets. Still others are putting buyers into the unfortunate position of competing for falsely scarce equipment and supplies by bidding up prices.
The anti-tax crowd surely will argue that an excess profits tax will discourage individuals and companies from selling what the marketplace needs in the time of a pandemic. That’s true. It will cause profiteers to decide that it’s not worth milking the market for every possible penny of a profit because almost all of that profit will be remitted to a federal or state Treasury. Thus, it becomes an incentive to cut prices and desist from price gouging. Whether economic benefit flows to the distressed portion of the economy through excess profits tax revenue or through the reduction and normalization of prices.
Wars and pandemics ought not be opportunities to businesses to make money hand over fist. That happens, it always has happened, but that doesn’t mean it ought to continue to happen. Even if an excess profits tax doesn’t put an end to pandemic profiteering, it can put a big dent into it. And that, in the long run, is much more beneficial for economic recovery than is the further enrichment of the wealthy and the further impoverishment of everyone else.
Wednesday, April 08, 2020
According to the book, Jack is a pirate who wants to claim his crew as dependents. That’s problematic, because it is unlikely that the crew will fit the definition. However, the story did not state that he did so, only that he wanted to do so. The story continues by stating that Jack went to the post office and “picked up his W-2 form.” Well, first of all, Jack is described as an independent contractor pirate so who would be issuing a W-2 form to him? And perhaps he is picking up mail at the post office, and the mail includes, weirdly, a W-2 form but the story also notes that Jack tries to pick up a 1040 EZ form, so the implication is that one goes to the post office to pick up W-2 forms and 1040 EZ forms. He doesn’t get a 1040 EZ form because “he made to [sic] much money.”
Jack then picks up IRS Publication 561 “so he could figure out the value of the goods he had donated.” Technically, that publication simply tells Jack HOW to figure out the value of the goods he had donated. That is a fact question and it requires evidence not found in Publication 561.
The story tells us that “Jack found out that he would only receive a standard deduction because he was not married filing jointly.” Someone who is married and files separately indeed can get a standard deduction, provided the spouse does not itemize deductions.
Jack then “discovered that he had sent to [sic] much in withholdings to the government,” but again, who is withholding taxes from Jack’s pay if Jack is an independent contractor pirate? Worse, Jack “had received several tax credits due to his charity work,” but not only does charity work not generate a tax benefit, as only donations of property do, but the benefit is not a credit but a deduction.
Jack then “requested a direct deposit, but because he did not have a bank account, an agent of the Internal Revenue Service (IRS) cane and gave Jack his large refund.” Goodness, that is not how refunds of any size are delivered to taxpayers. Absent direct deposit, a check is sent in the mail.
The author of the book is “jarredcope.” Nothing on the web site provides any information about him, other than he joined the site in 2013. The book bears a copyright of 2010, but it is unclear if that was when the book was written. A thought popped into my head. Perhaps he is himself a child and is writing a story based on what he has heard others say about taxes, or what he thinks he has heard others say about taxes. So I did a little research, and the only Jarred Cope I find graduated from high school in 2014. So if he is the author of the book, he published it when he was a high school junior. If he is the author, I then wondered if he based the story on what he was being taught in a high school business or similar course.
So I don’t know if the author of the book should be criticized, though perhaps running it by a tax professional would have been wise. Yet I don’t know what constraints were put on him when he wrote the book. Was he prohibited from doing research or getting advice? I don’t know to what extent he was misinformed. Perhaps he was restricted to what he was taught in a class, and there’s no way to know if he was taught the wrong things or didn’t pick up what was being taught correctly. Yet if it were the latter, would what I presume was an assignment that he later published not have been returned to him with corrections?
I worry how many people are reading this book and coming away with wrong ideas about how the federal income tax works. But, there are so many books and articles on the web with erroneous information that this book is just one drop of water in an ocean of error.
Monday, April 06, 2020
This time it was a rerun of Hot Bench season 6, episode 34, which I had not previously seen. So perhaps my viewing pattern is a factor in when I get to write about television court shows that involve tax issues.
The plaintiff, who operates a solar panel business, entered into an arrangement with a third party to purchase an interest in the plaintiff’s business. The plaintiff directed the third party to send a check for the purchase price of shares in the company to the company’s business manager rather than to the plaintiff. The plaintiff directed the business manager, who was inexperienced and on the job for only a few months, to deposit the check into a bank account in her name that had been set up by the plaintiff. The plaintiff also directed the office manager to then withdraw the amount of the check in cash and deliver the cash to him. The plaintiff sued the office manager because, according to the plaintiff, she failed to deliver the cash to him. The office manager testified that she did deliver the cash to the plaintiff.
When asked why he structured the transaction in this manner, the plaintiff replied that he did so because he did not have a bank account. But on further examination, he admitted that he did have a business bank account and that checks had been deposited into it. The plaintiff also added that the defendant office manager would be give a Form 1099 for the amount of the check she deposited. When asked to provide proof that the defendant did not give him the cash, the plaintiff offered several requests sent to the defendant shortly before the trial but could not provide proof requested by the judges that he had reacted at the time of the check deposit with inquiries about the alleged failure of the defendant to deliver the cash.
The third party who was buying shares in the plaintiff’s company testified that he wrote the check to the office manager because he was told to do so because her name was on the account, and that he was also told that the check would clear more quickly if he did it that way. He admitted on questioning that it did seem odd to him, and one of the judges remarked, not odd, but stupid. To prove what the transaction was, the plaintiff submitted a stock purchase agreement, which turned out to be unsigned, and to which was attached a notarized statement having nothing to do with the unsigned stock purchase agreement.
An independent contractor who worked as the operations manager for the plaintiff testified that in her time doing work for the plaintiff she had seen similar dealings that she characterized as shady. She described the defendant office manager as honest, and claimed that the defendant had paid the cash to the plaintiff. She noted that the office manager was retained as an employee of the plaintiff’s company for at least two more months after the check was deposited, and suggested that this retention was inconsistent with the plaintiff’s claim that the defendant did not pay him the cash. The plaintiff admitted that the defendant had continued to be employed by the plaintiff’s company for two months after the transaction. The independent contractor also testified that the plaintiff was being sued by other people in multiple cases, including one in which the independent contractor was suing the plaintiff for nonpayment.
During the trial, the judges offered several observations. One noted that it made no sense to issue a Form 1099 to the defendant, who was an employee and not an independent contractor. One of the judges described the situation as a bizarre arrangement and that its only purpose seemed to be tax avoidance, in an attempt to have the amount in the check taxed to the defendant. One of them pointed out that neither party seemed upset about not having the money, and said that something wasn’t “sitting right” about the situation. One of the judges suggested the situation should be referred for prosecution, pointing out that tax fraud puts a burden on taxpayers who pay what they owe.
In chambers, one judge said she was unclear if it was tax fraud or some other scheme. They all agreed that the plaintiff did not have clean hands. They also agreed that he did not prove that the defendant did not pay him the cash. The judges were unanimous that the plaintiff had committed a fraud.
In the closing interview, the plaintiff said he was going to file a police report against the defendant for theft. Asked about possible IRS action, he replied that he was unconcerned.
Surely there are missing facts. Something isn’t right. For example, if the check written by the third party was to purchase additional shares issued by the plaintiff’s company, it would not constitute gross income to anyone. So what would be the point of shifting it into the defendant’s bank account? Maybe the check was for stock owned by the plaintiff, with a significant amount of gain, possibly short-term capital gain. The transaction surely was designed to hide something, probably to hide it from the IRS. Whenever something is made more complicated than it needs to be, there’s something else happening. I doubt we will ever know what was underfoot in this situation.
Friday, April 03, 2020
The President explained that he had “asked Treasury Secretary Steven Mnuchin and Labor Secretary Eugene Scalia ‘to immediately start looking into the restoring of the deductability of meals and entertainment costs for corporations.’” Those deductions had been severely curtailed by that unwise 2017 tax legislation, and cut back the deductions not only for corporations, but also for individuals, partnerships, and limited liability companies. Repealing those restrictions would benefit hotels, golf clubs, and resorts owned by Trump and his family members, as they include “high-end restaurants on site.” Vongerichten operates the top-end restaurant in the Trump International Hotel and Tower. Is there some sort of mutual back-slapping underway here?
Apparently the President does not realize that his Treasury Secretary and Labor Secretary cannot change the tax law. He needs Congress to do that. Persuading Congress to lift the restriction on corporations but no one else might not be so easy to do.
Changing the deduction rules would have little or no immediate effect even on the restaurants that would benefit. So long as people are under stay-at-home orders, they should not be patronizing sit-down restaurants. I wonder if these top-end restaurants do take-out and delivery. I don’t know. I’ve never asked. I’ve never patronized one.
This proposal comes from a guy who back in 2015 claimed, “Who Knows Taxes Better Than Me?,” as I reported in ”Who Knows Taxes Better Than Me?”. Back then, I noted that his statements about “fair tax” and “flat tax” proposals “demonstrate [he] know[s] very little about taxation that matters.”
Ignorance is dangerous. It is particularly dangerous when exhibited by those with serious responsibilities.
Wednesday, April 01, 2020
This time, it was Judge Judy’s turn. The title of episode 183 of season 24 got my attention: “I'm a Cash Guy, Not a 'Tax' Guy!” Though the title suggested that a tax issue was front and center, after a few minutes of watching, I realized it was not. So it took a bit of time to make the connection, and it will take a bit of reading to get to the clincher.
The plaintiff sued his former friend, demanding the return of property, and seeking damages for the defendant’s alleged filing of a false police report. The facts weren’t too complicated.
The plaintiff had been doing work for the defendant. At a previous time, because the plaintiff needed a truck to do the work he was doing for the defendant, the defendant gave the plaintiff a truck in exchange for work that the plaintiff had done. That truck, however, became unreliable. So the plaintiff transferred that truck back to the defendant, and asked the defendant’s help in getting a new truck. The plaintiff had $1,000 but did not have adequate credit. So the new truck was purchased in the defendant’s name, and the defendant agreed to have the bank take monthly payments out of his bank account. The plaintiff and defendant agreed that the plaintiff would pay the defendant each month the amount taken out of the defendant’s bank account each month.
The truck was purchased in April 2019, with the first payment due in May 2019. The plaintiff made the agreed-upon payments to the defendant until September 2019. At some point there was discussion about refinancing the truck, but that did not happen.
In June, the plaintiff and defendant had some sort of dispute about the work that the plaintiff was doing. The outcome of that dispute was not clear, other than it resurfaced in September. Apparently the plaintiff thought he was entitled to payment for some work he did for the defendant, but the defendant disagreed. So the plaintiff decided not to make the required October payment to the defendant. The defendant’s wife contacted the plaintiff and told him he had a choice. He could either make the October payment or return the truck to the defendant. The plaintiff testified that he told the defendant that the finance company had put everything on hold because of the supposed refinancing plan. Whether that was true was not established. The defendant, however, wen to the police, told the police he had loaned a truck to a friend who refused to return it. The police tried to contact the plaintiff, and after he failed to respond, put the truck in the category of stolen. Shortly thereafter, the police stopped the plaintiff while he was driving the truck, took the truck, and put it into impound. The defendant’s wife and son got the truck out of impound.
The plaintiff sued for return of his property that he said was in the truck. He also claimed that the defendant had filed a false police report. Judge Judy first determined that the defendant had not filed a false police report, had told the police true facts, and had not characterized the truck as stolen, as that was something the police decided. So she dismissed that part of the plaintiff’s complaint. Next, after the defendant denied that he had any of the plaintiff’s property, the judge dismissed that part of the plaintiff’s complaint, and told the plaintiff that he should sue the defendant’s wife. The plaintiff claimed he had done so and the case was pending, but the defendant countered that his wife, who was not in the courtroom, had prevailed in that lawsuit.
As the trial progressed, Judge Judy asked the plaintiff why he was unable to purchase and finance the truck in his own name. The plaintiff explained he did everything “in cash.” He described himself as a “cash only” guy. Judge Judy remarked, “You’re a cash guy, not a tax guy,” noting that his cash-only approach prevented the accumulation of information that would contribute to a better credit score. When Judge Judy asked the plaintiff to provide proof he paid the defendant each month, the plaintiff answered that he had no receipts. Judge Judy pointed out that proving things is difficult when someone goes the cash-only route to avoid taxes. The plaintiff countered that he paid taxes, had been audited several years ago, and that the IRS “did my taxes.” My guess is that he was not filing returns and eventually was tracked down by the IRS, which then prepared substitute returns. It was unclear how many years were involved, how long ago it happened, and whether the plaintiff was now filing tax returns.
The lesson is simple. The cash-only-avoid-taxes approach damages those who take that route in more ways than simply being tracked down by the IRS and being required to pay up not only taxes but also interest and penalties. It wrecks credit scores, putting people into situations like the plaintiff found himself when he wanted to purchase a truck. It makes it almost impossible to prove things in court because the no-paper-trail aspect of the cash-only approach deprives those on that path from having evidence that would benefit them at some point.
With the evidence that a deadly virus can linger on cash and coins, with the ever-growing popularity of credit, debit, and gifts cards, and with the increasing use of mobile financial transfer apps, it would not be surprising to discover, in a few years, that cash has disappeared. When that happens, the cash-only tax avoidance crowd will find themselves looking for some other way to hide their transactions. Whether they succeed remains to be seen.
Monday, March 30, 2020
Four years earlier, in When Those Who Hate Takers Take Tax Revenue, I explained:
One of the arguments put forth by the anti-government-spending folks is that it is bad morally, socially, and politically to collect taxes from one group and to disburse the receipts to another group. These folks like to brand the first group as “makers” and the second group as “takers.” Yet when the takers are their friends and allies in the movement to feudalize America, not a peep is heard from them.A year before that, in More Tax Colors, I had written:
Those who are anti-tax seem quite happy to be among the takers even though their mantra in being anti-tax rests principally on a distaste for takers among whom, of course, they don’t count themselves.I wonder if the events of the past month have changed the outlook, the perspective, or even the minds of those who, perceiving themselves to be oppressed “makers” exploited for the benefit of the “takers,” rallied in defense of more than substantial tax cuts for the wealthy and for large corporations because they were delighted to get a few dollars of tax relief. Some, I know, changed their position after discovering they were among those laid off by companies promising to create jobs.
Several days ago, I read a commentary in the American Prospect by Alexander Sammon. It should be required reading for every American eligible to vote in November. I encourage everyone to read it. So it is with some hesitation that I share a few thoughts on what he has to say, because I don’t want to be the Cliff’s Notes version of his well-written essay. Sammon points out that many of the companies lining up for federal financial assistance have paid little or nothing into the national treasury for at least several, and in some cases many more than several years. He specifically mentions airlines, cruise lines, and fossil fuel companies. Though they may be lining up because of their lobbying efforts or because the Administration or certain members of Congress invited them to the big-corporation-get-more-money party, they have been using all sorts of tax loopholes, including those written into the Internal Revenue Code by that horrific 2017 legislation, to reduce their taxes to zero or almost zero. Granted, there are some companies on the bailout list that have paid taxes at rates much more closely aligned to what individuals have been paying, and that have not engaged in the waste of 2017-enacted tax cuts that has characterized a good bit of the American large corporation sector, but the amount of money being dished out, for which ordinary Americans are paying the price, is mind-boggling.
Sammon points out that since the enactment of the 2017 tax legislation, airlines have reported $30 billion of pretax income and paid federal income tax at an average rate of 2.3 percent, most of it coming from Southwest Airlines. If that company is removed from the computation, the statistics are even worse. At least three companies either had a zero tax rate or a negative tax rate. What did these airlines do with their tax breaks and profits? Did they establish contingency funds as do individuals fortunate enough to be able to do so, or as many state and local governments do? No. They bought back stock, which raised the price of the stock, contributing to what historians will call the Trump bubble in the stock market.
Sammon also explains that cruise lines have managed to register in countries other than the United States. They pay little or no income taxes to the United States. Some end up with negative tax rates. Yet they expect American taxpayers to bail them out. It’s pretty much the same in the fossil fuel industry. Except that it’s worse. Those companies also have a history of benefitting from federal loans, loan guarantees, and previous bailouts.
Sammon sums it up nicely:
So after years, or decades, of salting away record profits, or clamoring for lower and lower tax rates and funneling money to shareholders, the country’s largest corporations are threatening to shut down if the federal government doesn’t show them a bit of generosity. They were happy to reap federal contracts, enjoy federal subsidies, and rack up federal bailouts, taking out public money at every opportunity, all in the name of private profits. But they continue to have no interest in contributing money back into the public coffers, in good times or bad. Their belief in the value of the state, and the public purse, extends only to when they need it to balance out their books.Sound familiar? I’ve been trying to convey the same message for years. I’m sure Sammon will get the same sort of mixed responses as I do, some agreeing, and others characterizing my position as absurd.
Sammon also wonders why the bailouts are not accompanied by conditions, such as maintaining a certain level of operations, bringing operations back from offshore tax havens, ending artificial and unjustifiable tax breaks, and shutting down opportunities to take more than is given. Just as the Administration and too many in Congress refuse to stand up to these companies and their lobbyists, perhaps because of the flow of campaign cash, so too they refuse to attach the show-us-the-jobs-first precondition to tax breaks justified on false promises of job creation, a position I also have been advocating for quite a while.
It’s time for the self-styled “makers” to step out from behind the curtain and reveal themselves as the “takers” that they are. That would put an end to the constant complaining that the actual takers have been trumpeting about perceived takers – who are actually makers – that has adversely affected tax and other public policy decisions for the past several decades.
Friday, March 27, 2020
Now the nation, facing a serious pandemic, is struggling to deal with significant economic disruption. The solution, according to some, is to make payments to taxpayers with incomes of less than $75,000. But no sooner had that suggestion gained attention in the Administration and Congress than others jumped in to see what sorts of money they could get for corporations, some of whom did not use their earlier tax breaks wisely, such as setting aside contingency funds as most prudent individuals who budget their finances, and even some state and local governments, do. Still others want to limit the amount of payments made to individuals, or to limit how many individuals qualify for any sort of relief. Some of them claim that “we can’t afford to do this.” Well, perhaps we would find the financial challenges less obstructive if the Congress and Administration hadn’t squandered so many trillions of dollars on tax breaks to their friends.
Is there a solution? Yes. It surely won’t be adopted, is surely will meet with disapproval by oligarchs and their acolytes, but perhaps will find support among those who aren’t getting the help they need. The solution? Take back the tax breaks from those individuals and corporations that failed to live up to their job-creating promises. It might require chasing the money and obtaining the repayment from those to whom these tax giveaways were funneled. When promises are broken, the person breaching the contract must pay damages. That basic legal principle should be applied to this tax-giveaway fiasco.