Wednesday, November 04, 2020

Pandemics: Financially Bad for Most People, Good for a Few 

Pandemics can reshape societies, nations, and governments, and sometimes pandemics can destroy them. The current pandemic has not only killed more than 200,000 Americans but also has left many more than that, probably millions, with long-term adverse health consequences ranging from myocarditis and scarred lungs to liver damage and failed kidneys. In addition to these life and health impacts, the pandemic has crushed many people financially. People have lost jobs. Sole proprietors have had to pull back from, or shut down, their business activities. Tax collections have dropped, imperiling those who rely on government for services such as fire protection, well-maintained roads and bridges, and public health oversight. But as bad as it has been for the typical, or average, or run-of-the-mill, or everyday American, the pandemic has had quite the opposite effect on a handful of Americans.

So who are the Americans who have not only survived through the pandemic but have prospered during its run? According to the U.S. Billionaires Wealth Growth spreadsheet, maintained by the Americans for Tax Fairness, the total net worth of America’s 644 billionaires increased 31.6 percent from March 18 through October 13. Their collective net worth rose from $2,947,500,000,000 (that’s $2.95 TRILLION) to $3,878,233,000,000 (that’s $3.88 trillion). That’s an increase of $930,733,000,000 (that’s $931 billion, or nearly a trillion dollars).

In the meantime, as Americans for Tax Fairness reports, the collective work in come of rank-and-file employees in the private sector, constituting the bottom 82 percent of the workforce, fell by 3.5 percent from mid-March through mid-September. Almost 62 million lost work during that same time period. As of mid-September 25 million were on unemployment. Almost 100,000 businesses, almost all of which are small outfits, closed permanently. Employer-sponsored health care coverage for 12 million Americans terminated. Sadly, for the period September 2 through September 28, 22 million adults, with 14 million children in their households, reported not having enough food. Roughly 15 percent of renters were behind in September rent payments.

So how is that “trickle down” economic policy working out? What good is “supply side” economics when there are fewer and fewer people able to afford whatever it is that is being supplied?

Sadly, we are reaping the results of the bad decisions that certain politicians and their admirers have advocated and sown. The rich play, and everyone else pays.

And to think so much of this was avoidable. I wonder if historians, assuming there are any in the decades and centuries ahead, will call this “The Era When Ignorance Triumphed.”

Monday, November 02, 2020

Tax Lies and Misleading Tax Claims 

It pops up all over social media. It shows up time and again on facebook. It’s a meme that says, “Biden wants to put a 3% annual federal tax on your home. Do you want him for POTUS?” A variant, somewhat more precise in its claim, states, “Biden wants to put a 3.0 % Annual (Yearly) Federal Tax on the Value of your Home.”

Biden has not made any such proposal. Every organization and individual that has fact-checked the claim has concluded it is baseless.

Why would someone claim that he has? It’s simple. When truth doesn’t work to their advantage, some people turn to lies. Consider this example from a long time ago:

Parent: “Stop chewing your fingernails.”

Child: “Why?”

Parent: “It looks bad, and if your nails are dirty it can be unhealthy.”

Child: “I don’t care.”

Parent, frustrated: “And, by the way, one of your nails, but no one knows which one, is poison and chewing on it will kill you.”

Because the truth didn’t work, rather than exerting effort to find another, honest, approach to dissuading the child from fingernail-chewing, the parent turned to a falsehood. And what happens when the child learns, later, that the parent lied?

A similar absurdity pops up in political ads favoring Donald Trump. The ads contain a clip of Biden saying, “I’m going to raise taxes,” and then cuts to several people bemoaning the horrors of increased taxes and complaining how that will hurt them. Of course, the ad took Biden’s statement, “I’m going to raise taxes on people with incomes over $400,000” and clipped off the second part of the sentence. Of course, the people in the ads complaining about tax increases are portrayed as individuals who surely are not earning more than $400,000 annually. The point of the ad is, again, fear generated by a false or misleading statement.

I wonder how the liars and manipulators would feel if they were asked, “Did you rob the bank?” and they replied “Absolutely not,” and then discovered that someone cropped their words so that when asked, “Did you rob the bank?” their answer would show up as “Absolutely.” I suspect they would be screaming foul more loudly than anyone reacting to their mendacious political advertising.

Of course, if Americans were sufficiently educated about everything that matters, took the time to do research, made the effort to think critically, and troubled themselves to engage in critical analysis, the lies and misleading statements would have no effect. The purveyors of these lies and misleading statements would either fade out of the picture or learn to tell the truth and construct arguments based on truth.

Friday, October 30, 2020

Halloween Chocolate Construction Project 

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

Thanks to reader Morris, I have learned that this Halloween, people can buy kits that permit them to build haunted houses made out of chocolate. I suppose if Christmas can get gingerbread house builders all excited, why not let Halloween inspire those who want to use chocolate as construction material. Apparently the materials come in the form of cookies, candies, and icing.

Of course, reader Morris saw the tax angle. He asked, “What taxes {sales , VAT, use tax, sugar tax, etc.} if any, would you need to pay on this product if delivered to Pennsylvania from UK?”

My answer: “I know that the Pennsylvania use tax, not its sales tax, would apply. There is no sugar tax on a non-beverage item. I don’t know enough about the UK VAT to answer.” But I should amend that answer. The Pennsylvania sales and use tax does not apply to cookies, candy, and icing because they are food, and food is exempt, but perhaps if the food is used as a construction material it is not exempt. Yet should that matter? Think of how many children “play with their food” before eating it and who are told, “Don’t play with your food.” Playing with food does not cause it to be excluded from the sales tax exemption. Surely playing with it by building a haunted house does not cause it to be subject to sales or use tax. Or does it?

But then everything came crashing down. Curious, I tried to determine if the seller of the chocolate haunted house construction kit collected any taxes. What I quickly noticed was this frightening warning: “International Delivery: Not available for this item.” So much for my thoughts of doing some “tax research” by ordering this item. Oh, well, Happy Halloween!

Wednesday, October 28, 2020

How Not to Prove You Know Taxes and the Tax Code Better Than Anyone Else 

It was back in August of 2015 that Donald J. Trump spoke a question clearly designed to be a statement, “Who knows taxes better than me?” My response, in “Who Knows Taxes Better Than Me?”, I pointed out that if I were asking the question, “it would not be delivered in a manner suggesting that the answer is no one.” I also pointed out that “surely there are at least a few people who know taxes better than me.”

After setting out my benchmarks for determining if someone “knows taxes,” summarized again in Disinterest in Tax: Should Difficulty in Understanding Justify Ignorance?, I noted that his statements that the “fair tax is okay” and the “flat tax is okay” “demonstrate you know very little about taxation that matters.” I pointed out that his statements were “Certainly not enough to set yourself up as an omniscient tax expert.”

A few months later, in “Who Knows the Tax Code Better Than Me?”, I commented on Trump’s rhetorical quip, “Who knows the tax code better than me?” I answered the question, “a lot of other people.”

Reader Morris has shared with me story that brings home this maxim: what’s worse than being ignorant and declaring knowledge is demonstrating that ignorance. Here is the transcript between NBC’s Savannah Guthrie and tax expert Donald J. Trump:

GUTHRIE: It also says that you paid $750 in taxes in the year you were elected. Is that true or not?

TRUMP: Yes, because that’s a statutory number. It’s a statutory -- it’s not that --

GUTHRIE: But is that true?

TRUMP: I think it’s a filing number. You pay $750, it’s a filing -- or a filing fee.

GUTHRIE: But is that all you paid because most people here probably paid more?

TRUMP: No, I don’t know. I can’t tell you this, if they have my tax returns, as you know, they have to go to jail. It’s illegal. But their numbers were wrong.

A filing number? A filing fee? Hello! Tax experts would not say something like that in the context of the question that was asked. And who doesn’t have a rough idea of how much they have paid in federal income taxes?

Perhaps the self-anointed tax expert would be willing to sit down and take an exam in a basic federal income tax course. Then he could prove he knows taxes and the tax code better than anyone else. Or perhaps after reading the first question he would get up and storm out of the room.

Monday, October 26, 2020

Trying to Make Sense of a “Conspiracy to Commit Tax Fraud” 

Until now, each time I have watched and commented on a television court show in which taxes were mentioned, I have been able to understand the tax issue even if I did not understand why one or both of the parties did what they did, said what they said, or argued what they argued. This has been true for shows I have commented on in posts such as Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other, One of the Reasons Tax Law Is Complicated, An Easy Tax Issue for Judge Judy, Another Easy Tax Issue for Judge Judy, Yet Another Easy Tax Issue for Judge Judy, Be Careful When Selecting and Dealing with a Tax Return Preparer, Fighting Over a Tax Refund, Another Tax Return Preparer Meets Judge Judy, Judge Judy Identifies Breach of a Tax Return Contract, When Tax Return Preparation Just Isn’t Enough, Fighting Over Tax Dependents When There Is No Evidence, If It’s Not Your Tax Refund, You Cannot Keep the Money, Contracts With Respect to Tax Refunds Should Be In Writing, Admitting to Tax Fraud When Litigating Something Else, When the Tax Software Goes Awry. How Not to Handle a Tax Refund, Car Purchase Case Delivers Surprise Tax Stunt, Wider Consequences of a Cash Only Tax Technique, Was Tax Avoidance the Reason for This Bizarre Transaction?, Was It Tax Fraud?, Need Money to Pay Taxes? How Not To Get It, When Needing Tax Advice, Don’t Just “Google It”, Re-examining Damages When Tax Software Goes Awry, How Is Tax Relevant in This Contract Case?, Does Failure to Pay Real Property Taxes Make the Owner a Squatter?, and Beware of the Partner’s Tax Lien.

This time, however, I have struggled to understand the tax issue raised in the latest Judge Judy episode that I have watched. I paid close attention to episode 213 of season 23 because its title drew me in. Why wouldn’t I sit up and notice an episode entitled, “The Weaponization of Child Protective Services?!; Tax Fraud Conspiracy?!” ? Note that the first part of the episode title refers to a different case handled in the same episode that had nothing to do with taxes.

The case was not a tax case but involved a painting contract. The plaintiff contracted with the defendant for the defendant to do painting work in the plaintiff’s home. When Judge Judy asked for a copy of the contract, she was given an unsigned document. The defendant said that it was signed but that the plaintiff had the signed original. The plaintiff denied having the original. But both parties agreed that there was a signed contract under which the defendant would be paid $3,800 to do the painting work.

The defendant did the painting, and when the plaintiff requested additional work be done, the parties agreed on an additional cost. The defendant did the additional work and in November of the year in which the work was done presented the plaintiff with an invoice for $5,500. The plaintiff paid that amount. Two years later she sued for a return of the entire amount because she claimed the work was not done properly. The plaintiff offered evidence of defects, but the defendant denied that the flaws were his doing. As Judge Judy went through the video provided by the plaintiff, the defendant pointed out that the damage was done by the plaintiff’s actions or were problems that pre-dated his work. The defendant produced texts sent by the plaintiff after he was finished in which she described the work as “gorgeous.” The plaintiff claimed that the word “gorgeous” was a reference to the paint color. Judge Judy dismissed the plaintiff’s case.

Here’s the tax twist. After asking for the contract and learning of the agreement for additional work, Judge Judy asked for a copy of the invoice. She noted that the date on the invoice was January of the year following the year in which the work was done. She asked why, considering that the defendant had testified he finished the work and sent the invoice in November of the year in which he did the work, did the invoice had a date of January of the following year. The defendant testified that he changed the date on the invoice from November to January at the request of the plaintiff so that she “could use it on her taxes.” At first, the plaintiff disagreed but then did agree that she had asked for the change in the date and that she did so for tax purposes. Judge Judy remarked that what the defendant had described was “a conspiracy to commit tax fraud.”

What has baffled me is figuring out what advantage the plaintiff would obtain by shifting the date on the invoice to the following year. It certainly was not a sales tax issue, because she paid the invoice when it was received in November and presumably the defendant remitted any sales tax to the state in that year. It surely was not a real property tax issue, because a $5.500 paint job in the nature of maintenance does not add any realistically measurable value to a home and would not trigger a re-assessment. And if it did, the amount of the tax increase would be negligible, surely in the range of one or two digits.

So it must have been an income tax issue. But for that to be the case, the amount paid by the plaintiff would need to be deductible. The only possible deduction would be the portion of the invoice amount allocated to a home office, assuming the plaintiff had one. But moving the date of the invoice would not change anything. If the plaintiff did not want a deduction in the year the work was done because it would not reduce taxable income on account of the section 280A limitation or because taxable income was otherwise negative, it would simply have increased the loss carryforward shifted into the next year. So moving the deduction into the next year would not provide an advantage.

There must be more to the story, but no additional facts were presented during the proceedings that would answer the question or provide additional clues. Perhaps the plaintiff erroneously thought that postponing the deduction would be advantageous. In that case, it would be difficult to characterize the postponement as fraud, especially as it provided no advantage.

So what specific tax advantage motivated her to make the date change request of the defendant? Perhaps there is some tax angle I’m overlooking.

Friday, October 23, 2020

No, I Did NOT Reply to the Sender of This Letter 

Several days ago, I received a letter. The letter promised to make me a “beneficiary” of funds being held in trust by an asset management firm that had been owned by a person who died in 2009. The letter proposed splitting these funds one-third to me, one-third to the writer of the letter, and one-third to the decedent’s favorite charity.

Of course, alarm bells went off even before I reached that part of the letter. I read the letter because I knew it would be amusing. I wanted to see how many indications of scam I could identify. I will share those indications so that people who read this blog post can learn, if they don’t already know, what sorts of clues warn us that something that might appear to be genuine surely isn’t.

Clue number one: the letter arrived in an envelope without a return address. Legitimate business correspondence should carry a return address.

Clue number two: my name and address were not printed directly on the envelope but was printed on a peel-and-stick label attached to the envelope. Legitimate business correspondence should not be addressed as though it was one of at least thousands of similar mailings.

Clue number three: the letter lacked a letterhead. Legitimate business correspondence should carry a letterhead.

Clue number four: The letter opened with the writer’s introduction of what is allegedly his name. I will not repeat the name. I will refer to the person as the alleged sender. The alleged sender claimed to be based in Hong Kong. The envelope was mailed with a Canadian stamp, not a Hong Kong stamp.

Clue number five: The name given as the alleged writer is a real person based in Hong Kong. However, the person is not a lawyer, nor did the person identify himself as the executor of the decedent’s estate or as the trustee of a trust. Legitimate business correspondence would not be so vague.

Clue number six: The letter provided a legal citation that does not correspond to any existing legal authority.

Clue number seven: The surname of the alleged decedent is the same as mine. There are six individuals in my family database with the same first name stated in the letter. Three died long before the alleged decedent mentioned in the letter died, and the other three are alive.

Clue number eight: The letter claimed that the alleged decedent’s estate would forfeit to the Hong Kong Monetary Fund unless a beneficiary was nominated. Being familiar with intestacy provisions in American states, that claim struck me as rather unusual. It turns out that Hong Kong intestacy law is not unlike intestacy provisions in the United States, and there is no way I would be entitled to the amount in question. A legitimate business inquiry would ask if I was related within the specified degrees of relationship listed in the appropriate statute.

Clue number nine: The letter writer claimed that he intended to retire and wanted to close out matters on his desk. The alleged sender of the letter is decades from retirement, and is not involved in administering estates.

Clue number ten: The letter writer claimed to have exclusive access to the alleged decedent’s file. That is nonsense. Information about a decedent would also be held by the relevant probate court, creditors of the estate, and others involved in the administration of the estate.

Clue number eleven: The letter writer’s proposal to split the alleged funds in three ways explained that “you can be made the beneficiary of these funds, this would be made easy and will go unnoticed in the system.” Legitimate business correspondence about an inheritance does not brag about making transactions “go unnoticed in the system.” In addition, the grammar in the entire paragraph is not up to the standards expected in legitimate business correspondence.

Clue number twelve: The letter writer requested that I “please trust me on this,” which is not what a legitimate business correspondent in this sort of situation would write.

Clue number thirteen: The letter writer stated that the decedent “always talked about a relative who shared the exact same name.” In one respect, so what? That proves nothing. From another perspective, there are thousands of individuals who carry that surname. Nothing indicates that the alleged decedent mentioned me, and considering the peel-and-stick address label, surely this letter was sent to everyone the letter writer could find who bears the surname, hoping that even a one-tenth of one percent response rate would provide at least one potential victim.

Clue number fourteen: The letter writer stated, “there is no wrong-doing on your part as I am the sole architect of this project.” That is very close to an admission that the entire letter is the scheme of the letter writer.

Clue number fifteen: The letter writer claimed the he alone determines who “the inheritor is.” In every jurisdiction in which a decedent’s estate is administered, the probate court or its equivalent must approve the distribution of the assets. Clearly, the letter sender doesn’t know much about Hong Kong probate law.

Clue number sixteen: The letter writer asks to be contacted by telephone, fax, or email, but provides only one number and one email. Legitimate business correspondence does not exhibit that sort of mistake, especially in an era where use of facsimile transmissions is almost extinct.

Clue number seventeen: The email was a generic account and not within the domain of the company for which the alleged sender works.

Clue number eighteen: The phone number provided in the letter does not correspond to any legitimate business.

Curious, I did a bit more research. Apparently, scamsters have been circulating this letter, in varied forms. According to this South China Morning Post report, the names used and the companies alleged to be holding the money vary. The letters are being sent from various countries. The letters, though, share common characteristics, including the existence of an unclaimed estate left by a decedent whose surname matches the surname of the letter recipient. The South China Morning Post staff pursued the sender of the letter it obtained, and encountered the typical response from a scamster. Some of the language in that letter matches word-for-word the language in the letter I received.

So how does the scam work? At some point, after the victim responds and is pulled along into the trap, the victim is asked to pay a fee of some sort, usually because of a sudden and unexpected difficulty with some alleged government or a bureaucrat or some other invented situation. Too often, people send the money. Then the scamster disappears.

And that is why I have shared this story. It took me 20 seconds to identify the letter as a scam. It took me more than an hour to write this post and do some research. My goal is to educate people, to alert them to the fact that although scams seemingly have moved to the internet while still showing up in phone calls, there still are scamsters using postal mail. My goal is to stress the importance of critical thinking, of careful analysis of words, of attention to detail, of fact-checking, and of resisting what makes these scams work, which is, as the South China Post reporter explained, “by preying on people's greed.”

My last laugh at the scamster, who doesn’t know I laughed, arose when I thought, “I wonder if this clown realizes he sent this letter to a lawyer who happens to teach a course dealing with inheritance.” But then I realized, very few of the scamster’s letter recipients are lawyers, let alone lawyers who teach wills and trusts. And that is when I decided I needed to write this commentary. I hope it saves someone from being bamboozled by a scamster con artist.

Wednesday, October 21, 2020

Tax “Quadrupling”: Stupidity, Ignorance, Mendaciousness, or a Con Job? 

It is so disappointing to watch some Americans gobble up garbage. Several days ago, Donald J. Trump tweeted: “The Economy is about ready to go through the roof. Stock Market ready to break ALL-TIME RECORD. 401k’s incredible. New Jobs Record. Remember all of this when you VOTE. Sleepy Joe wants to quadruple your Taxes. Depression!!! Don’t let it happen! #MAGA”. He also shared this "quadrupling" claim at at least one of his rallies.

Quadruple taxes? Really? Is the man stupid? Ignorant? Full of mendaciousness? Or engaged in another con job?

The answer, I think, is all four.

There is absolutely nothing in Joe Biden’s tax plan that would quadruple anyone’s taxes. Rather than take my word for it, consider the debunking of this nonsense by Factcheck.org, CNN, the American Enterprise Institute, and dozens of other reputable and knowledgeable sources.

It is stupid to make a claim so outlandish that no one in their right mind would believe it. The claim demonstrates total ignorance of what Biden has proposed. The claim is a lie, nothing more and nothing less. It is not, as one commentator tried to excuse it, simply “campaign bluster.” And, of course, it is yet another attempt to trick, deceive, delude, and mislead gullible and naïve Americans into thinking that Trump has their back. He doesn’t. Granted, there are Trump supporters who know that his “quadruple” claim is nonsense, but they toss it aside because they’re not concerned so much about taxes as they are about the single issue for which they cheer on their hero.

So why make such an outrageously false and ridiculous claim? Because Trump knows it will resonate with the emotions of the segment of his base who make their decisions based on emotion rather than rational analysis. Taxes trigger emotional reactions in many people. Those emotions range from fear of the IRS putting them in jail for minor errors to anxiety about the seemingly economic devastation to the household budget if taxes are increased, blended with anger that everyone else is getting away with avoiding taxes and frustration with trying to understand an unnecessarily complicated tax law. Unfortunately, rational thought, if applied, would focus attention on those who have created the tax system these folks despise but it would create deep cognitive dissonance because the hero they support, and his oligarchic buddies, are major contributors to the complexity and unfairness of our tax laws.

Though it is good that so many sources, whether leaning left, leaning right, or trying to hold the center, have debunked this falsehood, very few of the people who cheered on the lie will bother to try deciding if it is indeed true or false and will not read the logical analysis demonstrating the absurdity of the claim. It’s one thing to be deceived by a lie that is within the realm of possibility but to be duped by a lie that makes an impossible claim is a demonstration of how much time, energy, and other resources need to be devoted to fixing the collective undereducation of too big of a segment of the American population. For someone like myself, who has always valued intellectual curiosity, analytical thinking, and education supporting those traits, watching collective American mentality regress is troubling. But then again, it is no wonder that regressive is the opposite of progressive, and it is only natural that those who dislike progressive ideas, such as easily accessible high quality education, would support regressive approaches to life. Tossing out false and ridiculous claims while engaged in rabble rousing surely isn’t progressive. If we keep on this path, eventually everyone will learn this, and it will be quite a hard lesson.

Monday, October 19, 2020

Beware of the Partner’s Tax Lien 

Though a new television season apparently has started for some shows, including court shows, the latest one that I have viewed is from 2019. This is the first time an episode of America’s Court with Judge Ross has made the list, a list that includes the other television court shows on which I have commented in posts such as Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other, One of the Reasons Tax Law Is Complicated, An Easy Tax Issue for Judge Judy, Another Easy Tax Issue for Judge Judy, Yet Another Easy Tax Issue for Judge Judy, Be Careful When Selecting and Dealing with a Tax Return Preparer, Fighting Over a Tax Refund, Another Tax Return Preparer Meets Judge Judy, Judge Judy Identifies Breach of a Tax Return Contract, When Tax Return Preparation Just Isn’t Enough, Fighting Over Tax Dependents When There Is No Evidence, If It’s Not Your Tax Refund, You Cannot Keep the Money, Contracts With Respect to Tax Refunds Should Be In Writing, Admitting to Tax Fraud When Litigating Something Else, When the Tax Software Goes Awry. How Not to Handle a Tax Refund, Car Purchase Case Delivers Surprise Tax Stunt, Wider Consequences of a Cash Only Tax Technique, Was Tax Avoidance the Reason for This Bizarre Transaction?, Was It Tax Fraud?, Need Money to Pay Taxes? How Not To Get It, When Needing Tax Advice, Don’t Just “Google It”, Re-examining Damages When Tax Software Goes Awry, How Is Tax Relevant in This Contract Case?, and Does Failure to Pay Real Property Taxes Make the Owner a Squatter?

The episode carries the title, “Tax Lien & Gutted Getaway” but I do not have a season or episode designation. Though the television guide on the screen has given that information for other court shows, for this one it did not. Nor did an internet search turn up the information. But those who want to view the episode can find it by searching for its title.

The case involved two dance teachers who formed a partnership to teach dance. Each had previously operated her own business as a sole proprietor. When one of the two partners, the plaintiff, tried to pay an expense of the business, she discovered that there was only $2,000 in the business joint account rather than the expected $8,000. Where was the $6,000 that was missing? It was taken by the state after it imposed a tax lien on the account for back taxes owed by the other partner, the defendant, on her personal income unconnected with the business.

The plaintiff was upset that the defendant did not tell her about the money being taken from the account because of the defendant’s tax lien. The defendant argued that she did not tell the plaintiff because it happened quickly, testifying that “it all happened in two days.” But Judge Ross refused to accept her explanation. He explained that she would have received a notice, would have been given a period of time to dispute the tax claim, and would have received a second notice. The defendant explained that she did not receive the notice because she had changed her address after she moved to another state.

The defendant then testified that she straightened out the tax lien and the state that had imposed the lien and seized the $6,000 returned the money. But the money did not go back into the joint account because it was closed. It was closed when the plaintiff used the $2,000 balance to pay expenses of the business.

There was some dispute over the computation of the business profits and how much each partner was entitled to receive. A complicating factor was the partners’ agreement at the outset that the defendant would be compensated for engaging in marketing activities for the business. The defendant testified that she not only invested additional time in marketing efforts, for which she was to be compensated, but also that she paid marketing expenses on behalf of the business, for which she should be reimbursed. These amounts, she argued, should offset most of what the plaintiff was claiming she was due from the joint account that had been closed.

The defendant counterclaimed. She claimed that because of the situation with the account, the plaintiff resigned from the partnership, causing both the plaintiff and defendant to return to teaching dance as sole proprietors. The defendant testified that when the parent of one of her students asked why the business had closed, the plaintiff told the parent that it was because the defendant was going to jail for not paying taxes. So that parent withdrew her child as a student of the defendant, causing the defendant a loss of revenue. The plaintiff denied having said the defendant was going to jail, and testified that she had said to the parent, after explaining why the business closed, “You can’t cheat Uncle Sam and that’s how those big celebrities go to jail.” The judge explained that the plaintiff’s statement was not an allegation that the defendant was going to jail but was equivalent to saying that if someone fails to pay taxes, there is a possibility that person would go to jail. Thus, Judge Ross explained, truth is a defense and because the plaintiff’s statement was true, the defendant had no claim.

After doing some computations, the judge held that the plaintiff was entitled to $500, much less than what she sought. He then dismissed the defendant’s counterclaim.

The primary lesson to be learned from this case is that people should operate a business in a manner that insulates its assets from the personal debts of each of the partners or owners. That is fairly easy to do when operating in corporate form but much more challenging when operating as a partnership. The details are a matter of business organization law, and the debts can arise from a variety of transactions. In this case, they happened to arise from taxes. The case would not have been very different had the lien been a mechanics’ lien imposed on the defendant for failure to pay an invoice for work done on her residence. I leave discussion of business formation to those whose blogs and other commentaries focus on that subject.

Another lesson to be learned from this case is to be careful when making allegations about another person’s legal problems, including tax issues. In this case, the plaintiff wisely or luckily made her statement in a manner that stood true as a general rule rather than as a specific allegation about the defendant. But too often people make statements about other people without having done research, without knowing all the facts, and without necessarily having a need to make any statement at all. In this case, for example, it turned out that because of her change of residence to a state without an income tax, the amount that was taken under the tax lien was returned to the defendant.

With respect to both business formation and making statements about existing or former business partners, it is best to be careful. Carefulness appears to be another beneficial behavioral trait that is less evident than it once was.

Friday, October 16, 2020

Lengthening the List of What Not to Do As a Tax Collector 

In a series of posts about the former Seminole County, Florida, Tax Collector, starting with A Reason Not to Run for Tax Collector (or Any Other Office)?, and continuing through Perhaps Yet Another Reason Not to Run for Tax Collector, Running for Tax Collector (or Any Other Office)? Don’t Do These Things, When Behaving Badly as a Tax Collector Gets Even Worse, Tax Collector Behaving Badly: From Even Worse to Even More Than Even Worse, What Qualifications Are Needed to Be a Tax Collector?, and The Legacy of Misbehaving Tax Collectors, I reviewed the still-developing story about his alleged misdeeds while in office. Claims against him include stalking and impersonating a political opponent, impersonating a student, manufacturing fake IDs using information from drivers’ licenses surrendered to his office, sex trafficking a minor using information accessed through his office, spending public funds on a private enterprise he had formed, openly carrying firearms while wrongly claiming to be a revenue officer, and making a traffic stop while driving his personal vehicle. He also settled lawsuits brought by employees who alleged sexual harassment, racial discrimination, and First Amendment violations. As the allegations piled up, he resigned his office.

When I pointed out in Monday’s post that “It definitely is a still-developing story,” I didn’t expect that even more allegations would show up so quickly. Reader Morris, also fascinated by this story, directed my attention to this story. According to the report, the former tax collector has been accused of “ ‘practicing’ how to make fake concealed weapons permits.” According to federal prosecutors, earlier this year, when the section of the tax collector’s office that issues concealed carry permits was closed because of the pandemic, the former tax collector called an employee to find out how to fix the special printer that prints the permits, and when asked by the employee why he needed to use that printer when permits were not being issued, the former tax collector replied that he was simply “messing” with the printer. After he resigned his office, unspecified individuals found in his office pieces of the special card stock paper used for those permits, ad some show that he was experimenting at printing fake concealed weapons permits, particularly the security stripe.

One would think that a tax collector should be collecting taxes. For some reason, in Florida, tax collectors also do other things unrelated to tax collection, such as renewing and replacing drivers’ licenses, issuing copies of birth certificates, issuing hunting and fishing licenses, issuing concealed weapons permits, and other services best confined to other agencies. Concentration of too much power and authority in one office or one person is dangerous. The situation with the former Seminole County tax collector is proof enough of the need to diversify who provides these services.

Wednesday, October 14, 2020

When It Comes to Taxes, Words Matter, Just As They Do With Everything Else 

It amuses me to read and listen to what politicians and their supporters write and say when they argue. Of course, I pay a wee bit closer attention to arguments about taxes because I happen to know a wee bit more about taxes than I do about, for example, the intricacies of environmental regulations. So the back-and-forth about the disastrous 2017 tax legislation during the debate between the candidates for Vice President amused me. It also disturbed me.

When asked about the economy, Senator Harris, at 25 minutes and 16 seconds into the debate, referred to the 2017 tax legislation, and said, “On day one, Joe Biden will repeal that tax bill.” Vice President pence, at 27 minutes and 27 seconds into the debate, in replying to a variation on the same question, said, “you just heard Senator Harris tell you, on day one Joe Biden's gonna raise your taxes.” But then after the moderator turned that question over to Senator Harris, the Vice President, on his third interruption of her response at 29 minutes and 59 seconds into the debate, asserted, “Joe Biden said twice in the debate last week that on day one he was going to repeal the Trump tax cuts.”

Curious, I examined the transcript for the debate between the candidates for President. At no point did Joe Biden state that “on day one” he was going to repeal the 2017 legislation. What he said was, “but that's why I'm going to eliminate the Trump tax cuts. And we're going to eliminate those tax cuts.”

But Biden did say, not during the debate but some months earlier at the South Carolina Democrat Convention, "And folks, on day one, I will move to eliminate Trump's tax cuts." During the Poor People’s Forum in June 2019, he stated, “The first thing I would do is eliminate the President’s tax cut.”

On the first day of his Presidency, if he were to be elected, Joe Biden certainly could “move” to repeal or amend the 2017 legislation. That is, he could ask one or more members of Congress to introduce legislation to that effect. As a practical matter, if he were to be elected, he would have time before the inauguration to make arrangements with members of Congress to introduce tax legislation even though the success of that legislation would depend on the make-up of both the Senate and the House.

What a President cannot do on the first or any other day of a Presidency is to eliminate or repeal legislation. Only Congress can do that. Perhaps that is why during the debate, after saying “but that's why I'm going to eliminate the Trump tax cuts,” he quickly switched pronouns, stating, “And we're going to eliminate those tax cuts.” He demonstrated that this sort of change in the tax law is not a matter of “I” but a matter of “we.” As for why Senator Harris claimed that “On day one, Joe Biden will repeal that tax bill,” something he would not be able to do, my guess is that she was trying to compress a more accurate, “At the top of the list of what he plans to do, Joe Biden will ask the Congress to repeal the 2017 legislation” into the highly compressed time frame into which two people are asked to analyze and explain positions on dozens of issues.

But shorthand can be dangerous. Tweets and sound bites and compressed debate quips can be misleading. They can create anxiety when none is necessary. They can create unfortunate opportunities for opponents to misconstrue what was intended by focusing on poor choices of words. They can contribute to, and reinforce, ignorance.

Words matter. The claim of “That’s not what I meant” often is rebutted with “But that’s not what you said.” Words matter. They need to be chosen carefully, even when time is short, or even when the protest placard is of limited size. Words matter, and sometimes more words are necessary than the advocates of tweets, sound bites, slogans, buzz phrases, quips, and two-minute debate responses would prefer. Language is a gift. It ought to be used carefully.

Monday, October 12, 2020

The Legacy of Misbehaving Tax Collectors 

In a series of posts about the former Seminole County, Florida, Tax Collector, starting with A Reason Not to Run for Tax Collector (or Any Other Office)?, and continuing through Perhaps Yet Another Reason Not to Run for Tax Collector, Running for Tax Collector (or Any Other Office)? Don’t Do These Things, When Behaving Badly as a Tax Collector Gets Even Worse, Tax Collector Behaving Badly: From Even Worse to Even More Than Even Worse, and What Qualifications Are Needed to Be a Tax Collector?, I reviewed the still-developing story about his alleged misdeeds while in office. Claims against him include stalking and impersonating a political opponent, impersonating a student, manufacturing fake IDs using information from drivers’ licenses surrendered to his office, sex trafficking a minor using information accessed through his office, and spending public funds on a private enterprise he had formed. He also settled lawsuits brought by employees who alleged sexual harassment, racial discrimination, and First Amendment violations. As the allegations piled up, he resigned his office.

It definitely is a still-developing story. It amazes me how inadequate our political system is to prevent these sorts of situations. Reader Morris also has been engrossed in this story. This week he alerted me to three more reports focusing on the plight of the Seminole County tax collector.

First, reader Morris directed my attention to what I had written in What Qualifications Are Needed to Be a Tax Collector?:

As for reader Morris’ observation that “anyone would be better than the previous Seminole county tax collector,” I note that as bad as things seem to be, they can always get worse. Life is full of stories about people hitting rock bottom only to have the bottom fall out. I can imagine tax collector behavior even worse than what has been alleged against the former Seminole County tax collector, but I will refrain from putting ideas of this sort into people’s heads. Yes, it could be worse though the chances of that are very slim, and with any luck, things will get better for the people of Seminole County when it comes to the tax collector.
Reader Morris then noted that he “did additional research about the previous tax collector of Seminole County,” and suggested, “I believe if you had seen and read this story, you may have written this same conclusion from your blog.” So, of course, I looked at the story reader Morris mentioned.. The short version is that the previous Seminole County tax collector, who held the position for almost 30 years, allegedly increased his net worth twenty-fold by taking advantage of his access to tax deeds and auctions by using aliases, his corporation, and his limited liability company to purchase properties up for auction. He allegedly omitted his limited liability company from his financial disclosure forms. Though there have been calls for prosecutors to investigate and bring corruption charges, and other reports of misdeeds, it appears as though no prosecution has occurred. So, yes, had I been writing about the office of Seminole County Tax Collector in 2016, I probably would have noted that things can always get worse. But perhaps then I would have been accused of jinxing the people of Seminole County once it became apparent things did get worse. But it does seem as though misbehavior by the Seminole County tax collector is not just a one-tax-collector show.

Second, reader Morris directed my attention to another story about the Seminole County tax collector who recently resigned. Soon after taking office, the tax collector announced that he and some of his staff would openly carry firearms, claiming that he was required to do so as a state revenue officer. However, the state’s Attorney General’s office issued an informal opinion stating that although revenue officers are permitted to “carry guns and act like law enforcement officers,” tax collectors do not qualify as revenue officers. What triggered the opinion was a complaint filed against the tax collector who, apparently unhappy with how someone was driving, followed the driver home using a white strobe light on his personal vehicle, flashing a badge and carrying the gun, and confronted the driver. The tax collector’s reaction to the opinion was to note that he disagreed, pointing out that the Attorney General’s term was over in a few days, and that he would try to work out something with the incoming Attorney General. If there has been a more recent opinion, I cannot find it, though it does appear that there are some tax collectors in Florida who claim to be revenue officials. Nonetheless, the idea that a tax collector can make traffic stops using a private vehicle is unwise, and if Florida law permits that sort of behavior it needs to be revised. Reader Morris asked if impersonating a law enforcement officer a crime in Seminole County or in Pennsylvania. To the best of my knowledge, anyone who is not a law enforcement officer who impersonates one is committing a crime in every state.

Third, reader Morris informed me about yet another story involving the Seminole County tax collector. According to this report, representative Matt Gaetz is now coming under criticism for what he said in 2017. According to this story, Gaetz had this to say about the Seminole County tax collector and the then-upcoming campaign for the Seventh District of Florida:

That is a Republican seat. That is a seat that really should be won by Republicans. Joel Greenberg has gone to the Seminole county Tax Collector’s office and been a disrupter. If you look at what people want in the country right now, they want that disrupter.
Had the tax collector entered that race and won, imagine the damage that would have been done. Though in the same report the Seminole County tax collector described himself as not a career politician, if even a few of the allegations are true, he surely has been acting as badly as have some career politicians.

Friday, October 09, 2020

When Tax Return Preparers Go Bad, Their Customers Can Pay the Price 

My commentaries about indictments of tax return preparers, in posts such as Tax Fraud Is Not Sacred, Another Tax Return Preparation Enterprise Gone Bad, More Tax Return Preparation Gone Bad, Are They Turning Up the Heat on Tax Return Preparers?, Surely There Is More to This Tax Fraud Indictment, Need a Tax Return Preparer? Don’t Use a Current IRS Employee, and Is This How Tax Return Preparation Fraud Can Proliferate?, have focused on the consequences to tax return preparers of their bad behavior, though I have also mentioned the need for taxpayers to be careful when selecting a tax return preparer.

Now comes a report that drives home the danger to taxpayers whose returns are prepared by unscrupulous tax return preparers. In a sense, the headline is an attention-grabber: “Customers under IRS audit after local company prepared their tax returns; Clients promised ‘maximum’ tax refunds must now give money back to government.”

The tax preparation firm followed through on its promise of “maximum” tax refunds by entering erroneous information on their clients’ tax returns. I wonder, did the taxpayers look at their returns before allowing them to be filed? Did they see any entries that did not seem right? For example, did they see charitable contributions listed for amounts far in excess of what they knew they paid? Did they see names of dependents that they did not recognize? Part of me finds it difficult to be totally sympathetic with taxpayers who don’t look a the returns prepared for them, or who, if doing so, ignore what clearly is erroneous information. On the other hand, to the extent the erroneous information was buried in worksheets not filed with the return, it becomes a bit easier to sympathize with the taxpayer who, after having spent the refund, learns that there is now a debt payable to the IRS. That can’t be fun.

One customer of the tax preparation firm expressed a desire that the company refund to her the tax return preparation fees she paid to the company. Good luck. I wonder how much cash or other resources the company will have after the IRS and prosecutors are finished with it. This customer recalled that after asking the employee preparing her return, :How is it possible that you’re getting people back a lot of money?” and he replied, “We get you the most exemptions and deductions possible.” She said that she did not immediately notice that her return had more deductions that it should have had. But that was because the preparer did not give her a copy of Schedule A, which listed the details of the deductions. Should a customer be required to ask for that schedule? No. Many, perhaps most, people using commercial tax return preparers would not know if Schedule A had been prepared or to ask for it if it was missing from “the copy of the return” provided by the preparer. This customer did not learn of the problem until contacted by the IRS. On the other hand, with the 1040 form showing $33,000 in gross income and almost $33,000 in deductions, perhaps some sort of red flag should have popped up. But perhaps not. Yet this customer explained that she told the preparer she did not have any deductions, although the preparer then entered almost $9,900 in gasoline expenses, $9,900 in miscellaneous expenses, and $9,857 in charitable contributions on the customer’s return. Though the return prepared by the company showed the customer getting a refund of $2,456, when the IRS finished its audit, the customer’s refund was only $166. The company took its $1,058 fee out of the customer’s refund and put the balance into her bank account. So although only $1,398 went into her bank account, she is on the hook for repaying $2,290 to the IRS. This customer was not alone. Others also had similar experiences, including a couple for whom the company prepared a return showing a refund of $4,379 but who, after the IRS audit, ended up owing $1,095 and not being entitled to any refund.

At least six of the customers filed complaints with the Better Business Bureau. Because the company did not respond to the Bureau’s request for explanations, it issued an “F” rating for the company. Other complaints have been filed with at least one state agency.

What makes the story more interesting is the claim by the owner of the company that “he was unaware of the customer complaints” and that “he did not realize most of the phone lines at his company’s nine Central Florida locations had been disconnected.” With the phone lines down, customers who have been audited are unable to get help from the company. The owner shifted blame to his “management team.” After this news broke, the company established a new phone line and issued an apology.

What’s a taxpayer to do? Talk with relatives, friends, and business associates. Ask them to describe their experiences with the tax return preparer that they use. Seek out a tax return preparer who has been preparing the other person’s returns for many years free of problems. Beware of the advice to use a tax return preparer who has been used only once, or even not at all. Look at reviews on various web sites. Google the name of the tax return preparer. If the preparer is a company, ask for the names of its owners and managers, and google those names. If the return that is prepared is “too good to be true,” don’t agree to its being filed, but ask for a copy and take it to another preparer for a second opinion. If it’s good to go, return to the original preparer and approve the filing. If it’s not good to go, file a complaint about the preparer with the IRS, and seek a fee refund from the original preparer.

Wednesday, October 07, 2020

Tax Exemptions, Billboards, Income Streams, and Property Assessments  

The story begins in 2017. Summarizing what I wrote in “Creative” Attempt to Boost Tax Revenue Fails Court Test, a dispute arose between school districts and owners of land on which billboards were located. The dispute centered on a Pennsylvania state law that, thanks to lobbyists, prohibits localities and school districts from subjecting billboards, wind turbines, amusement park rides, and silos used to store animal feed to the real property tax.

As reported in this Philadelphia Inquirer story, the school districts’ attorney took a “creative” approach by arguing that the value of the taxable land was increased by the existence of the billboards. The owners of the billboard companies objected, and after the Board of Assessment and Appeals agreed with them, the school districts appealed to the Court of Common Pleas. They lost.

The attorney for the school districts explained, “If I own a piece of ground and I’m renting it to a billboard company for $2,000 a month, why shouldn’t I have to pay tax on the ground as if I can rent it for $2,000 a month?” I pointed out two flaws in this rhetorical question. First, in addition to income, replacement cost and comparable sales are factors in determining the value of property. Second, the presence of the billboard increases the value of the property, but that doesn’t mean that it increases the value of the land. For example, assume that the small plot of land is worth $10,000. Assume that a billboard is constructed and that it has a value of $40,000. The property is now worth $50,000. The school district’s “creative” argument is that the land is now worth more than $10,000. But because the property continues to be worth $50,000, assigning a value of, for example, $30,000, to the land means that the billboard is being treated as worth $20,000. If the billboard is removed, the land continues to be the same $10,000 piece of land that it was before the billboard was installed (assuming that the land was not otherwise damaged or improved, which is most likely the case). In other words, the issue is a matter of determining how much of the property value to allocate to the land. The land’s value does not change when an improvement is made. What changes is the value of the property. Those are two different things. I then pointed out the flaw in treating billboards, wind turbines, amusement park rides, and animal feed silos differently from, for example, cell towers.

The School districts appealed to Pennsylvania Commonwealth Court. I discussed in the court’s decision in If It’s Real Property, It Should Be Subject to the Real Property Tax. According to this Philadelphia Inquirer article, the court concluded that the land on which billboards are placed is subject to the real property tax even though the billboards themselves are not exempt from the tax under the statute. In other words, the court rejected the taxpayers’ argument that because the billboards are exempt, the land on which they sit is exempt. The court’s conclusion makes sense because otherwise putting property that is not real property and thus not subject to the real property tax, such as vehicles, tables, chairs, tools, or equipment, on land would make the land exempt. The court also rejected the taxpayers’ argument that the legislature intended to exempt the land, for the simple reason that the statutory language does not exempt the land but only the billboard. The court reversed the decision of the Court of Common Pleas and held that the assessment of the taxed land on which the billboard sits could reflect the increase in the value of the land due to the existence of the billboard.

The taxpayers appealed to the Pennsylvania Supreme Court. Last week, the Court issued its decision. The Court framed the question as follows: “Where a real estate owner leases real estate or grants an easement to a billboard owner to situate a billboard upon the real estate, is a taxing district prohibited by the statutory exclusion for “signs and sign structures” contained in [the statute] from considering the rents and other payments from the billboard owner to the parcel owner when valuing the real estate for the purposes of real estate tax assessment.”

The Supreme Court began by pointing out that the assessment of taxable real property must reflect its fair market value, defined as “the price a purchaser, willing but not obliged to buy, would pay an owner, willing but not obliged to sell, considering all uses to which the property is adapted and might reasonably be applied.” Because the landowners receive rent or easement payments from the billboard companies, the Court concluded that so long as purchasers of the land would continue to receive those payments, those payments would enhance the fair market value of the land using the income approach to real estate valuation. The Court rejected the taxpayers’ argument that taking into account the rent income from the billboard would put part of the billboard’s exempt value into the value of the tax-exempt land, reasoning that although the value of the billboard reflects the income it generates from advertisers, its actual value must also take into account the expenses of operating it. The Court treated the premise of the taxpayers’ argument as conflating income from the advertisers to the billboard owner with the income the landowners received from the billboard owner. In other words, the Court disagreed with the taxpayers’ description of the “billboard’s value” as the value before the lease payments are taken into account whereas the Court considered those payments not to be a part of the billboard’s value. The Court concluded that the capitalized value of the lease payments, not being part of the billboard’s value, can be considered as part of the value of the land without shifting any value of the exempt billboard into the value of the tax-exempt land. And, the Court continued, this conclusion does not violate the exempt status of the billboard because it does not include the value of the billboard, net of lease payments, in the value of the land. Accordingly, the Court affirmed the decision of the Commonwealth Court.

How does the Court’s analysis change the analysis I shared in the example I provided several years ago. In that example, I posited a small plot of land worth $10,000, and the construction of a billboard on the land with a value of $40,000, making the value of the property $50,000. I argued that the approach taken by the school district, and approved by the Court, shifts some of the value of the billboard to the land. In other words to treat the land as worth $20,000 would require treating the billboard as worth $30,000. What the Court appears to be saying is that the existence of the billboard creates additional value, such that the billboard continues to be worth $40,000, while the land increases in value to, say, $20,000, making the property in its entirety worth $60,000. There is some sense to this conclusion, which can be demonstrated as follows. When the land was empty, it had a value of $10,000. With a billboard on it that generates an income stream to the landowner, the land has more value. A third party would be willing to pay more than $10,000 for the land if it came with an income stream. But is the purchaser buying the land for more than $10,000, or is the purchaser paying $10,000 for the land and, say, another $10,000 for the income stream? Put another way, should the income stream be treated as part of the land because the land generates that income stream? According to the Court, the answer is yes. The flaw In the reasoning is that the land is not generating the income stream. The billboard is generating the income stream. Without the billboard, the income stream does not exist. To use another example, suppose someone owns land, parks vehicles on the land, and rents those vehicles to individuals needing cars under year-long leases. The value of the vehicles has nothing to do with the value of the land. If the landowner sells the land, along with the vehicles and existing leases, the fact that the purchaser would pay more for the package than for just the land does not change the value of the land. Put another way, the capitalized value of the lease payments from renting out the cars does not increase the value of the land on which the cars are parked. The fact that the owner of the land is the owner of the car should not make a difference.

All of this is attributable to a deeper flaw. What generated this litigation is the statutory exemption for billboards, an exemption that also applies to wind turbines, amusement park rides, and animal feed silos, but not, for example, cell towers. If the legislature would treat all structures on land as real property, the dispute over the valuation of the land and the structure would be unnecessary. The law would be less complicated, an outcome that is desirable when the complication is necessary only because of special interest lobbying.

Interestingly, the Philadelphia Inquirer article that alerted me to the Pennsylvania Supreme Court’s decision characterized the court as having “overturned a long-accepted property tax exemption for billboards.” Technically, it did not overturn the exemption. The outcome of the case does not cause the entire value of the billboard to be included in the value of the taxed land on which it sits. Some commentators suggest that school districts and other taxing authorities might try to increase the assessments on land occupied by wind turbines, amusement park rides, and animal feed silos. The attorney for the school districts noted that the revenue to the school districts generated by the Court’s decision will continue “at least until lobbyists get to the legislators again and change the law.” My guess is not that the legislature will remove the special treatment of billboards, wind turbines, amusement park rides, and animal feed silos, but will add cell towers and who-knows-what-else to the list of exempt items. Unfortunately, it is unlikely that people’s residences would be added in their entirety to such a list of exempt items.

Monday, October 05, 2020

Who’s to Blame for This Tax Nonsense? 

During the past week or so, television news shows, social media posts, and newspapers have been abuzz with reports about the President’s tax returns and the assertion that he has paid little or no taxes in many of the years in which he has filed federal income tax returns. One of the recurring themes is the unhappiness about the higher rate of federal income tax paid by average taxpayers and the lower rate paid by millionaires and billionaires.

For example, in the CNN Report with the grammatically incorrect but attention-getting headline of “Why you pay taxes, and rich Americans -- like Donald Trump -- don't always have to,” Anna Bahney asks, “How is it that a millionaire can pay hardly any income taxes -- or none at all -- while most people, earning far less, owe more?” Among her explanation is this quote from Frank Clemente, executive director of Americans for Tax Fairness: “Real estate professionals are able to claim losses from depreciation of their properties. Even if the property value goes up, because the building located on the property depreciates, it reduces tax liability.”

As I wrote in The Parade of Tax Horribles Never Ends, “The depreciation deduction is not one of my favorites. Too often, it permits taxpayers to report, and pay tax on, a taxable income amount that is much less than the taxpayer’s economic profit.” Anyone who browses my MauledAgain commentary, or who has been reading them as they’ve been published, notices that my complaints about the depreciation deduction appear at least once a year. Why? Because every time we blink, the folks who benefit the most from the depreciation deduction, use some of their resources to persuade the Congress to expand the scope of the deduction to reach even more properties. They claim that doing this for them will make the economy better, though that’s not the case, and of course, any attempt to rein in this ill-conceived deduction is met with claims that cutting back on it will destroy the economy.

More than eleven years ago, in Instead of More Favorable Depreciation Deductions, Eliminate Them?, reacting to proposals to expand depreciation, I pointed out “the bizarre impact of a deduction that is allowable to a taxpayer even when the taxpayer is becoming wealthier.” I explained, “Deductions should be triggered by a decline in wealth, or out-flow, just as gross income is triggered by in-come. Not all income becomes gross income, and not all out-flow becomes a deduction, but it's flat out silly to permit a deduction to someone on account of a pretensive decline in value of property that has not only failed to decline in value but that has increased in value.” Reacting to those who justify depreciation of buildings that increase in value by pointing out the less favorable depreciation rates applicable to real property, I tagged the differences as misleading, noting that “Giving two pounds of cheese to a wealthy person when distributing five pounds of cheese to a poor person when operating a food bank for the hungry doesn't reduce the absurdity of giving free food to someone who is not financially bereft.”

At about the same time, in Abolish Real Estate Depreciation Deduction? An Idea Gathers Attention, I offered this analysis:

As the debate over an economic recovery stimulus package continues, the idea of eliminating a deduction that is inconsistent with economic reality may find more advocates. Tax breaks ought not be extended to those who don't need them. Casualty loss deductions don't exist for taxpayers who have not endured casualties, trade or business deductions are not allowed to taxpayers who are not carrying on a trade or business, interest deductions aren't provided to those who are not in debt, and thus depreciation deductions ought not be permitted for properties that aren't depreciating.
Five years ago, in The Parade of Tax Horribles Never Ends, I wrote, “It’s time to limit depreciation to the economic decline in the value of the property. If it remains acceptable to provide deductions for economic losses that haven’t happened and that may never happen, perhaps it’s time to tax future economic gains that haven’t happened and that may never happen. Imagine the outcry.”

So to the extent that Donald J. Trump’s low taxes are attributable to depreciation deductions claimed on real estate that has increased in value – and I doubt that this accounts for more than a small portion of his “tax saving” strategy – he is not to blame, except to the extent he contributed to the funding of the lobbyists who pushed for continuation and expansion of depreciation deductions for real property and to the funding of campaigns waged by Congressional candidates who support the deduction in order to gather campaign contributions and votes. The American people are responsible for who sits in the Congress, so to the extent the American people are repulsed by the idea of letting real estate owners reduce their taxes through the use of an unjustified deduction, they can vote for legislators who support ending this unnecessary economic lifeline to people being given tx breaks while their real properties increase in value.

Friday, October 02, 2020

Is This How Tax Return Preparation Fraud Can Proliferate? 

Every indictment of a tax return preparer discloses a unique set of allegations. I have written about indictments of tax return preparers in posts such as Tax Fraud Is Not Sacred, Another Tax Return Preparation Enterprise Gone Bad, More Tax Return Preparation Gone Bad, Are They Turning Up the Heat on Tax Return Preparers?, Surely There Is More to This Tax Fraud Indictment, and Need a Tax Return Preparer? Don’t Use a Current IRS Employee.

Sometimes, perhaps often, Indictments of tax return preparers lead to guilty pleas or convictions. In turn, that leads to sentencing. Last week, the Department of Justice announced the sentencing of a tax return preparer. He was sentenced to 46 months in prison and ordered to pay restitution to the United States “for aiding and assisting in the preparation of false returns.” Not only did he prepare false tax returns on which false education credits and false business losses were claimed, he “trained his employees to prepare false tax returns.”

What remains to be learned is what these employees do in the future. Are they aware of what has happened to their employer? Will they learn from his experience that it is unwise to file false returns? Will they set aside the tricks and techniques he taught them? Or will they decide that his mistake was getting caught, conclude that they can avoid getting caught, and open their own tax return preparation businesses in which they engage in the same or similar behavior? It is not unusual for subordinates or associates of an imprisoned criminal to pick up where the convict left off.

Perhaps the Department of Justice spoke with the employees and explained the risk of continuing the practices of their former employer. Will the Department of Justice keep an eye on the former employees? Surely there are answers to these questions, but I don’t have them.

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