Saturday, December 24, 2022
Does a Tax on Robot Value Help Retain Workers Or Is the Solution Less Simplistic?
If the suggested tax were to be imposed annually, the cost of a robot would increase significantly. But that’s not the only concern. Most employers live in jurisdictions that impose property taxes, so wouldn’t the robot-value tax simply be a duplication of the property tax?
Imagine where we would be had a similar “tax on worker replacements” had been in effect when street-cleaning vehicles with one driver replaced perhaps a dozen street sweepers, when one painter with spraying equipment replaced several or more painters using brushes, when one employee driving a snow plow truck replaced however many workers moving snow with shovels. In every instance of technological advance and replacement, the key has been to shift employee tasks. Individuals working in buggy whip factories took jobs in automobile factories. Employees of carriage making companies went to work for Fisher Body and similar companies.
As increasing numbers of robots are manufactured and placed into service, employees are needed not only to build robots, but to design them, to write programming code for them, to work in the factories that manufacture the components, to work for agencies that check the quality and safety of the robots, and to repair or reprogram robots that are misfunctioning or need to be adapted to a different use. The key to these shifts is education. The learning of new skills, especially as a person gets older, is challenging. Yet it often is a necessity, has been so throughout history, and will continue to be a requirement of progress and survival. Companies that want to manufacture and program robots, and companies that want to use them, need to retrain employees, and need to enter into arrangements with companies closing down or laying off employees because of robot replacement. Should those costs be funded by a tax on the owners of robots? On the manufacturers of robots? On the companies laying off employees? Or perhaps on the consumers of the goods and services provided by the robots, as part of a price increase that puts the burden on those who benefit from the lower costs generated by the use of robots that would be partially offset by the price increase? The analysis of how increasing replacement of human workers with robots needs to reach beyond the simplistic concept of a tax on the value of robots and examine instead the correlation between who benefits from the use of robots and the cost of retraining humans to function in a robot world.
Wednesday, December 14, 2022
The Tax Consequences of Social Media Influencing
This time I’m watching America’s Court with Judge Ross, a repeat episode from 2020 but the program doesn’t give me the episode number. The case is a breach of contract claim by a hotel against a social media influencer. The defendant, who bills herself as a social media influencer, approached the hotel and proposed that she be allowed to stay free for several night in exchange for her posting favorable commentary on social media. Because of questionable behavior by a member of hotel management, the defendant did not publish the second and third promised commentary. The hotel sued, seeking payment for the value of the hotel stay. The judge held in favor of the defendant because of the inappropriate behavior of the hotel employee. So the defendant ended up with the value of a hotel stay without paying for it, in exchange for one social media posting. Of course, my brain asked me, “What are the tax consequences?”
At the theoretical level, there’s no question that the value of whatever an influencer receives in exchange for a contractual obligation to publish favorable commentary is included in gross income. Social media influencers, who operate on their own, are independent contractors and are taxed as such.
At the practical level, depending on the value of what is provided, the person or entity providing cash, property, or services in exchange for the favorable commentary may or may not issue a Form 1099. The influencer is responsible to track the amount that is received even if no Form 1099 is received. As a practical matter, influencers probably find it easier to keep track of cash, checks, and digital payments, while overlooking the value of goods and services.
Another practical problem is liquidity. It’s one thing to receive cash or its equivalent and set aside a portion to pay taxes. When a substantial portion of the influencer’s receipts consist of goods and services, the influencer may face the need to sell some or all of the goods, apart from those that cannot be sold (for example, cosmetics), in order to raise cash to pay taxes. However, that’s more easily said than done, and even if a sale can be made the sale price might end up being less than what the influencer bargained for when entering the contracts with the providers of the goods. It is possible that savvy influencers who are paid with goods and services would request a supplemental amount of cash to fund the resulting tax liability, but providers might resist because it is much easier to provide an otherwise empty hotel room or excess inventory holding a sunk cost than to dip into cash accounts.
I suppose some readers might ask, “You’re just now realizing there are tax issues with social media influencing?” My response is, “Yes, because I don’t pay attention to that side of the digital world. I’m not into advertising and marketing, other than to be on the target end of incessant emails, phone calls, and postal mail. I’m not into the clout rage. I’m not a celebrity whose talent with one activity causes people to think I’m an expert on some unrelated service or product. I’m not a celebrity wannabe desiring to make efforts persuading people to use a particular service or purchase a particular product. I doubt the world has any interest in knowing what brand shoe I am wearing or cares about which automobile dealership I prefer to patronize. I suppose some might then ask, “Isn’t MauledAgain designed to influence? Haven’t you, as a teacher for many years, tried to influence students?” To those good questions, I point out that to the extent I try to influence people, it’s not to influence them to purchase or use particular goods and services, but to influence behavior. For me, that matters much more.
Saturday, December 03, 2022
When It Comes to Fraudulent Tax Returns, It's Not Always the Preparers
But it’s not always the preparer who is at fault. Not long ago, according to this Department of Justice press release, a jury convicted a Michigan attorney of filing five fraudulent tax returns. Were his tax return preparers at fault? Apparently not. According to the press release, the attorney, who also owned a real estate company and two medical-related companies, concealed income “from his tax preparers and the IRS” by depositing receipts into his lawyer’s trust accounts. These accounts, known as IOLTA, are used by lawyers to hold funds that belong to clients, are not to be used for any other funds, and are subject to strict regulation designed to protect clients.
The attorney was convicted of filing fraudulent individual returns for 2012, 2015, and 2018, for filing a fraudulent amended individual return for 2012, and for filing a fraudulent corporate return for one of the medical-related companies for 2015. The jury relied on evidence that the attorney did not report roughly $600,000 of income earned in 2012, $800,000 of income in 2015, $300,00 of income in 2018. Altogether the attorney failed to report more than $2,600,000 in income. Sentencing awaits.
I’m not sure if the three-year pattern of 2012, 2015, 2018 was by design or happenstance. Perhaps the usual three-year statute of limitations that apples in non-fraud situation was some sort of factor in the attorney’s thinking.
What should a preparer do when handling a client’s tax return? It is possible, as this case demonstrates, for a client to succeed in hiding information from a preparer. Preparers need to ask questions, and document the answers. Perhaps this attorney’s preparers did that. Imagine them asking, “And did you receive any other receipts or income?” and getting “No” as a response. Unless there are clues that raise suspicions, such as expenditures far exceeding receipts and income, preparers cannot search and seize the client’s records that the client doesn’t provide to the preparers. Of course, if the preparers are suspicious and are dealing with an uncooperative client, they can terminate the relationship.
Sadly, the conviction of this attorney leaves the clients in a bad spot. The challenges faced by the clients and the options for them to have their cases handled are mapped out in an article by an unrelated attorney whose firm handles the same sort of personal injury cases as did the convicted attorney. Though I leave the “how to switch attorneys” issue to commentaries by those who specialize in the impact of professional responsibility rules on personal injury cases, I did learn from the article that the convicted attorney used for marketing purposes a telephone number converted to the slogan “855-Car-Hit-U.” Clever, in contrast to the foolishness of plowing receipts and income into IOLTA accounts prohibited from receiving them.
I wonder who has the phone number “855-IRS-Hit-U” and, no, I did not and will not “dial” it. (I put “dial” in quotation marks because as its use as a verb in connection with telephone calls is fading away and has become one of those benchmarks used to guess a person’s age!)
Tuesday, November 29, 2022
Filing a Fraudulent Tax Return Is Bad, Filing More Than 3,000 Is Outrageously Bad
Today I read a Philadelphia Inquirer story about a tax return preparer, and then re-read part of the story to make certain I had seen what I thought I saw. According to the story, a New Jersey woman was sentenced to 159 months in federal prison and ordered to pay $565,091 in restitution for her role in a conspiracy to file fraudulent income tax returns using stolen identities. What made me re-read part of the story wasn’t the identity theft, the filing of false returns, the receipt of undeserved refund checks, and the hiring of people to cash the checks, because at this point those misdeeds aren’t novel. What caught my eye was the number of fake tax returns the group filed. The schemers filed more than 3,300 fraudulent tax returns for 2013 alone. The woman who was sentence cashed 13 of the checks, each of which for an amount exceeding $5,500. She also provided some of the runners involved in the scheme.
It's unfortunate that each guilty member of the conspiracy hasn’t been sentenced to one month in prison for each fraudulent return. Even one week for each fraudulent return could cause other would-be fraudsters to think twice about getting involved in this sort of antisocial conduct. The sentence handed down to this woman amounts to about one and a half days in prison for each fraudulent return. And what of the more than 3,300 people whose lives have been turned into misery because of the identity thefts?
Thursday, November 24, 2022
One Day of Thanksgiving, A Year of Thanks
As I stated the past nine years, “I have presented litanies, bursts of Latin, descriptions of events and experiences for which I have been thankful, names of people and groups for whom I have appreciation, and situations for which I have offered gratitude. Together, these separate lists become a long catalog, and as I have done in previous years, I will do a lawyerly thing and incorporate them by reference. Why? Because I continue to be thankful for past blessings, and because some of those appreciated things continue even to this day.” When I re-read those lists, I realized that the people, events, and things for which I am appreciative are far from obsolete.
So once again on this one day I will look back at the past twelve months, and remember the people, events, and things for whom and for which I give thanks and have given thanks throughout the year. If some of these seem repetitive, they are, for there are gifts in life that keep on giving:
- I am thankful for a wonderful son, daughter, daughter-in-law, grandson, and granddaughter.
- I am thankful for all the people who continue to help update the multiple family trees I develop, maintain, update, and publish.
- I am thankful for the cousins I have met through FTDNA, ancestry, and 23andme, who I did not know existed, and for the opportunity to get in touch with cousins who I knew existed but with whom I had no contact until they showed up on one or more of those genetic genealogy sites.
- I am thankful that my congregation’s choir has been able to continue singing, still using masks, and was able to present a concert for All Saints Day though not on that day.
- I am thankful that we continue to gather in the sanctuary for worship, and, yes, that I continue to ring the narthex bell.
- I am thankful for having had the opportunity to continue teaching a law course, this time back in a classroom.
- I am thankful for all the people in the world who continue to fight ignorance, crime, terror, evil, and corruption.
- I am thankful that awareness of what needs to be done to fight ignorance and corruption is growing and that more steps in that direction are being taken.
- I am thankful my health is holding steady.
- I am thankful that life for many is beginning to resemble what it was before a pandemic overspread the world.
- I am thankful for people being willing to read the things I write.
Have a Happy Thanksgiving. Set aside the hustle and bustle of life. Meet up with people who matter to you. Share your stories. Enjoy a good meal. Tell jokes. Sing. Laugh. Watch a parade or a football game, or both, or many. Pitch in. Carve the turkey. Wash some dishes. Help a little kid cut a piece of pie. Go outside and take a deep breath. Stare at the sky for a minute. Listen for the birds. Count the stars. Then go back inside and have seconds or thirds. Record the day in memory, so that you can retrieve it in several months when you need some strength.I am thankful to have the opportunity to share those words yet again. And I am thankful that it is possible for even more of us to do all of those things, and for others of us to most of those things.
Saturday, November 12, 2022
Alleged Ignorance of the (Tax) Law: A Justification or an Excuse?
According to the reports of the trial, “McConney testified that Trump Org.’s tax consultant from Mazars, Donald Bender, never told him the practices of underreporting taxable income were illegal,” though he also “acknowledged that Bender told him that he ‘wasn’t a fan’ of the practice of issuing bonuses using 1099 tax forms when they could be booked as part of annual compensation from the Trump Corporation and taxed using a W2 tax form.” Interestingly, in about “2011, Bender advised McConney to stop cutting a bonus check to an in-house lawyer at the company because they could lose their law license for receiving it as an independent contractor, but McConney testified that he never questioned whether the illegality of how they handled bonuses would apply to anyone else.” McConney explained that he and other Trump Organization accounting personnel stopped these practices in 2017 at about “the time that a tax consultant conducted an internal review for Trump Org. and President Donald Trump took office.”
Is it sufficient for a corporate controller to rely on an external tax consultant’s alleged failure to point out the illegality of what the controller is doing, whether or not the controller is acting at the direction of higher-ups? I think not. According to RoberHalf, “Candidates for controller jobs should have a minimum of a bachelor’s degree in accounting or business, but preferably an MBA. They should usually have at least seven years of experience in the accounting field, and some public accounting experience is often required.” According to accounting.com, a controller should “Earn a Bachelor's Degree . . . in accounting or finance, . . . Obtain a Master's Degree, . . . like a master's in accounting or an accounting MBA, . . . Take the CPA Exam, . . . Earn CPA Licensure, . . . Obtain Professional Accounting Experience, . . . [and] Pursue Employment as an Assistant Controller.” Similar or identical advice can be found in educational, career planning, and employment web sites.
Based on this advice, a controller should have an education, licensure, certification, and work experience that includes exposure to basic tax principles. Business and accounting education includes exposure to basic tax principles. It’s one thing for someone whose education and career are not focused on tax to rely on tax professionals’ advice for the tax aspects of complex international transactions, but it doesn’t require an LL.M. (Taxation) degree to know that treating an employee as an independent contractor, providing false residence information, and underreporting employee income are illegal. Those principles are taught in business and accounting programs. The tactic of blaming others for one’s own misdeeds, whether in the form of alleging someone else did the wrong act or in the form of alleging that someone else failed to prevent the commission of the wrong act, has become a feature of present-day culture, perhaps fueled by a widespread parenting technique of making children feel good by telling them that their misdeeds are the fault of others.
There is a fine line between a justification and an excuse. Both terms often are used interchangeably in common conversation but in law there are technical differences. A justification is a claim that the act occurred but that the act should not be punished because it is consistent with societal principles. An excuse is a claim that the act occurred but that the person committing it should not be held responsible because of circumstances beyond the person’s control.
There is no way that underreporting income, misreporting income, and misstating facts on a tax return can be justified. Nor should an excuse based on blaming someone else for something that the actor knew or should have known be accepted as relieving the actor from responsibility. Blaming someone else isn’t justification. It’s an excuse, and in this instance it’s an unacceptable excuse.
Monday, October 31, 2022
Two Not Very Amusing, But Scary, Halloween Tax Challenges
In recent days, reader Morris has directed my attention to two stories that bring both tax and Halloween into play. One is from thirteen years ago and the other is from three years ago, yet neither caught my attention until reader Morris pointed them out.
In a discussion on HauntWorld, someone using the name Front Yard Fright posed this question and background:
I do not charge admission to my haunt (I'm zoned residential so I can't) so what I do is ask for a donation from everyone who enters. If people ask how much admission is, I say it's a $6.00 donation. It's not required, but we ask for $6.00 and do our best to get it out there that it IS in fact a DONATION, and is not required. A portion of my donations actually go towards a local humane society.Front Yard Fight explained that he asked his question because “there's a haunt near me that REALLY wants me shut down. He's called the city and has done a lot of messing with me. It was mentioned that he may come after me with the IRS about not paying taxes.”
My question for you guys is, would I have to pay taxes on these donations? Logic says no, but you never know!
Answers offered to Front Yard Fright included (1) no because it is a donation, (2) no provided the money goes to a charity and no charitable contribution deduction is claimed, hedged with “I would call your state tax office,” (3) yes, it is income, but deduct your expenses, and (4) treat it as a business, reporting the income and expenses. Other responses did not offer answers but what could best be described as sympathy.
So what is the answer for federal income tax purposes? Setting up a business appears to be prohibited by the zoning rules, though a closer look at the locality’s ordinances would be required. Not knowing the location, that’s not something I can do. It appears that Front Yard Fright does this every year, so it might make sense to treat this as an activity not engaged in for profit subject to section 183. If donations exceed expenses, the excess would be included in adjusted gross income, but if the excess is contributed to a charity then unless the standard deduction is utilized, the net effect on taxable income would be zero. If expenses equaled or exceeded donations, the excess would not be deductible but the impact on taxable income would again be zero.
What about other taxes? It depends on the locality. Is there a state income tax? Does it have the equivalent of section 183, directly or through using federal adjusted gross income as a starting point in the computation? Is there a state or local sales tax? Does it apply to these sorts of donations? Is there a gross receipts tax? Are these donations considered gross receipts? Are there other possibly applicable taxes? Are there de minimis exceptions? Perhaps Front Yard Fright is in New York State and hasn’t yet been haunted by what happened in the second story.
In a Lexology summary of a New York case, Hollis L. Hyans of Morrison & Foerster LLP describes the outcome in Matter of Ronald J. Doherty, Jr. Doherty was doing business as Eerie Production, operating a haunted attraction in Buffalo, New York. Doherty charged $23 to enter five separately themed haunted houses constructed out of temporary walls and containing various props and animations, along with actors hired to dress as ghouls, vampires, and killer clowns and “scare forward” people going through the attractions.
The Department of Revenue audited Doherty for the years 2010 through 2013 and imposed a sales tax on the entrance fees and on certain purchases. The audit was resolved without any reference to years after 2013. Doherty requested an advisory opinion, and the Department issued one stating that sales taxes were due on the admission charges. When a second audit was conducted with respect to 2014, Doherty asked for another advisory opinion, and again the Department issued one that reached the same conclusion.
Doherty took the matter to an administrative law judge, who concluded that the charges were taxable because Doherty operated a place of amusement, which are taxable under the sales tax law. The exception in place for amusement devices did not apply. Doherty appealed to the New York State Tax Appeals Tribunal. Doherty argued that his operation was not taxable because a previous case had held that the sales tax did not apply to sales of tickets for Ferris wheels, merry-go-rounds, and coin-operated games, and that his operation was within that exception because his haunted houses contained devices such as a dentist’s drill, a chainsaw, a CO2 gun, electric and pneumatic systems operating things such as animated snakes, an airbag, a gravity tilt bridge, vortex tunnels, and simulated ceiling drops. The Tribunal pointed out that customers paid to enter a space where they were entertained by actors to put on a show. It compared Doherty’s operation to peep-show booths held by the Court of Appeals to be places of amusement and not amusement devices. The Tribunal affirmed the decision of the administrative law judge.
In the commentary, Hyans points out that although the distinction between a taxable place of amusement and a nontaxable amusement device depends on the facts, the critical element in Doherty’s situation was that the patrons were not paying for a ride on a device or, I would add, to use a device, but as Hyans notes, they were paying for the “experience of being scared and entertained by live actors employing props and animated devices.” I also will add that perhaps a good bit of sales tax litigation and tax planning challenges could be avoided if sales tax laws did not make razor-thin distinctions between places of amusement and amusement devices or between “candy” and “food and food ingredients,” as I described in Another Halloween Treat? I Think Not, or between candy made of flour and candy not made of flour, as I described in When Candy Isn’t Candy.
Tuesday, October 25, 2022
The Death of Trickle-Down Theory in the United Kingdom: Will Americans Learn the Lesson?
We know that supply-side trickle-down economic and tax policy is a failure. It has failed. Miserably. Though its advocates occasionally write to me, claiming that I am wrong, that I don’t understand reality, that I have no clue about economics, and that I would be best served by supporting the desire of the wealthy for even more money, I continue to reject that nonsense. Study after study, for example this one from the London School of Economics that examined not one but 18 countries that have yielded to the demands of the oligarchs, demonstrate, as I pointed out in High Quality Tax and Economics Research Exposes Money Addiction, “tax breaks for the wealthy increase income inequality by sizeable amounts but have no significant effect on economic growth or employment.”
Why advocates of this foolish theory persist in clinging to their beliefs when it is clear that the theories don’t work puzzles me. Is it simply a belief that this approach to national tax policy increases the chances of each of these acolytes to join the ranks of the wealthy? Is it fear of change? Is it fear of losing clients?
So in the current atmosphere of economic panic, as inflation soars, rather than turning to the cause of inflation, such as the half of inflation fueled by corporate price gouging, populists are returning to that failed policy of cutting taxes for the wealthy. There is a lesson to be learned from what happened in the United Kingdom. After being named prime minister, Liz Truss announced that her cure for that country’s inflation mess was to eliminate the top income tax bracket, without providing any alternative source of revenue or spending cuts. If this sounds familiar, it ought to remind people of the mess created by Reagan, Trump, and their comrades in oligarch subservience when they delivered tax cut gift after tax cut gift to the wealthy in whose circles they played.
So what happened in the United Kingdom? When the announcement was made, that nation’s stock markets plunged, the value of the British pound against the dollar fell precipitously, financial institutions roared with criticism, and the Bank of England had to step in to prevent further collapse. The finance minister resigned, and shortly thereafter, Liz Truss stepped down as prime minister.
There is good news and bad news in these developments. The bad news is that there still are people in and close to political power clinging desperately to trickle-down economic and tax policy. Again, I ask why. Fear of change? Desire to become wealthy? Fear of losing political funding from the wealthy? The good news is that the people and institutions of the United Kingdom recognized the danger and reacted before the failed policy was implemented. This limited the damage that otherwise would have occurred.
According to this report, there are those who think that what happened in the United Kingdom is the “last gasp” and “death knell” of trickle-down economic and tax policy. Perhaps that’s the case in the United Kingdom, but I’m not so sure it’s the case in other places, such as the United States, where repressive regressive politicians dangle tax cuts for the wealthy as a carrot for middle-class and poor voters, too many of whom are so easily duped into thinking that they will benefit from something that widens income and wealth inequality and does nothing to reduce inflation. Perhaps I should mention that inflation will probably drop if the price gougers take control of enough legislatures after using inflation fears as a way to put into office politicians dedicated to cutting taxes on the wealthy and on corporations.
What, then, is the solution? As several experts interviewed in that report point out, the key to economic growth is to put investment into the middle class, and, I would add, the poor. What is needed is funding for quality education (not indoctrination), infrastructure, housing, technology, and cyber defense. Doing this creates jobs. How do we know that? It is what is happening at the moment in this country, with the passage of legislation doing those very things, while unemployment drops to near-record and record lows. Isn’t it sad that those who voted against that legislation are now claiming credit for supporting it, that is, lying as usual, while hiding their intentions to reverse that legislation when and if they return to power. They may not be learning the Truss lesson, but hopefully American voters are.
Monday, October 17, 2022
When a Tax PIN is Used Without Permission
The show that popped up today was episode 26 of Judge Judy’s season 22. The plaintiff sued the defendant, who was his girlfriend while he was in prison. He claimed that without his permission she used his credit cards for herself, took his federal and state tax refunds, and took some of his personal property.
The defendant explained that she obtained the plaintiff’s credit cards and personal property when the plaintiff’s lawyer gave her various items, such as the plaintiff’s wallet, including his credit cards, a watch, and some jewelry. Defendant claimed she gave the wallet to one of the plaintiff’s friends, and later gave other things to another of plaintiff’s friends. The plaintiff explained that he asked his friends to get his property after the defendant wrote a letter to the prison superintendent that caused the plaintiff to decide that she should not be custodian of his property. He also claimed that she wanted him to marry her, but she disagreed and claimed that it was the plaintiff who proposed to her, but the plaintiff denied having done so.
The defendant admitted to using the plaintiff’s credit cards to make purchases for herself. After reviewing the credit card bills, Judge Judy determined that the defendant made many more purchases for herself than the two transactions she had admitted. Judge Judy pointed out that the defendant, in her answer, claimed that the plaintiff planned on filing for bankruptcy and thus told her to use her credit cards. Judge Judy noted that if, knowing this, she used the credit cards, she was a co-conspirator in defrauding the credit card company.
The defendant claimed that the plaintiff gave her his tax PIN in order to let her get his tax refunds, which amounted to about $1,600. The defendant produced evidence from prison officials summarizing their recordings of the plaintiff’s phone calls with the defendant, in which he gave the defendant PINs. The plaintiff explained that the PINs he gave the defendant were for prepaid debit cards.
Other testimony from the defendant, including her attempt to explain why she had put her cable bill in the plaintiff’s name at her home after he asked her to cancel the subscription, caused Judge Judy to tell the defendant that she was a “hustler.” Judge Judy held for the plaintiff, awarding him the requested $5,000 (which included not only the tax refunds but also the credit card charges).
If the plaintiff did not give the defendant his tax PIN, how did she get it? I don’t know. All I can do is to guess, that it was somewhere in his wallet or in his other belongings. Or perhaps it was the same PIN he used for the debit cards and the defendant took a gamble.
The underlying issue isn’t so much the transfer of PINs and credit cards. It’s a matter of deciding who to trust with that information when it is necessary to find someone to trust with that information. I leave others who have the requisite skill sets to write about identifying who to trust and how to minimize the risk of breaches of trust.
Tuesday, October 04, 2022
When An Injunction Doesn’t Stop a Tax Return Preparer from Filing False Returns
The latest case that got my attention is one deserving of comment. According to Department of Justice news release issued yesterday, a tax return preparer has been penalized for violating a permanent injunction that prohibited him from filing, preparing, or helping to prepare federal tax returns for other people. In May of 2021, the United States sued the preparer, alleging that he prepared returns for customers that fraudulently understated customers’ tax liabilities, overstated their refunds, or both. He allegedly overstated withholdings, invented deductions, and included credits that customers were not entitled to claim. In September of 2021, the preparer consented to the permanent injunction.
In July of 2022, the United States filed a motion asking the court that issued the injunction to hold the preparer in contempt for violating the injunction. The United States alleged that the preparer used the preparer tax identification number assigned to his cousin to “covertly prepare at least 305 tax returns for customers in 2022 in violation of the injunction.” The motion also alleged that at least some of those returns included fictitious deductions and credits. Before the court held a hearing, the preparer stipulated that the United States could prove those facts by clear and convincing evidence, consented to an order finding him in contempt for continuing to prepare returns in violation of the injunction, and agreed to pay $213,500. On September 29, 2022, the court entered an order holding the preparer in contempt. It also ordered him to surrender the fees he had collected, and to reimburse the United States for its investigatory and injunction enforcement costs.
Without access to the order, I cannot determine if the $213,500 that the preparer agreed to pay represents the fees that were collected, the costs incurred by the United States, or a combination of both. If any of that amount represents fees, it is unclear if they will be returned to the customers or forfeited to the United States. The customers for whom these false returns were filed will need to file amended returns, and unless they do that themselves, which is unlikely, they will need funds to pay another preparer to fix the mess. If no part of the $213,500 finds its way to the customers, then presumably they would need to file a civil suit against the preparer, though that also requires funds and might not be successful if the preparer is incapable of paying civil judgments.
There is a saying that doing the same thing over and over and expecting different results is insanity. Though people debate the identity of the person who first offered this definition, it certainly is relevant to the case of the preparer who violated the injunction. He filed false returns, got caught, and was subject to an injunction. What did he think was going to happen when he once again started filing false returns? Worse, because his own preparer tax identification number had been taken out of service, he used someone else’s, which added to the list of violations. The press release doesn’t mention whether the cousin knew or did not know that his number was being used by the preparer who was subject to the injunction. Hopefully not, because if the cousin was in on the misuse the cousin also would be facing charges. Not knowing the cousin’s name there’s no way to check on that at this moment.
It's bad to do something wrong. It’s worse when getting caught and being subjected to punishments and restrictions. What’s worst is doing a repeat, because the punishments and restrictions will themselves get worse. Don’t mess with injunctions.
Friday, September 30, 2022
When Tax Troubles Never Go Away
Now comes a Philadelphia Inquirer story that explains Fumo is now facing federal income and gift tax troubles. On Monday, the United States Tax Court will hear Fumo’s petition to set aside an IRS notice of deficiency seeking roughly $3 million in back income taxes and penalties. The IRS asserts that Fumo received economic benefit from the transactions that were at the root of his 237-count criminal conviction 13 years ago. Examples provided by the IRS include “overpaying his Senate staff while using them as personal servants and campaign foot soldiers, and * * * hiring a taxpayer-paid private eye to investigate political enemies, an ex-girlfriend, two strippers and even his own son,” along with “other abuses.” The IRS notice of deficiency also includes penalties for “exploiting the South Philadephia nonprofit he created, the former Citizens Alliance for Better Neighborhoods, tapping its money to pay for political polls, a stealth lawsuit against a legislative enemy, a campaign to protect the ocean view at his shore home, for tools and consumer goods, and more.” In another proceeding, he IRS is seeking more than $300,000 in unpaid gift taxes on a transfer from Fumo to his son, which Fumo contends was not a gift.
Fumo’s lawyer claims the IRS position is “fundamentally flawed because the money in question went to people other than Fumo.” The lawyer gave as an example roughly a quarter of a million dollars paid to pollsters and “not Fumo,” but taxpayers can have gross income even when payments go to a third party if in turn the taxpayer benefits from something done by the third party.
Though the notice of deficiency was issued in 2012, while Fumo was in prison, an assortment of delays, including the pandemic, has let the suit stagnate for a decade. Those sorts of delays are not unusual in the American justice system. Hopefully the trial doesn’t take a decade, even though the IRS has listed 80 witnesses it plans to call to testify. Sadly, ten of the 80 have died since the memo was filed and the IRS intends to use their testimony preserved in transcripts from the criminal trial.
If the IRS succeeds, the outcome will put Fumo in a difficult financial position. During the criminal investigation he surrendered his $900,000 annual salary and position as a member of a law firm. The conviction cost him not only prison time but also his $100,000 state pension and his law license. He was required to pay roughly $4.5 million in restitution. His net worth, estimated to be $11 million when he went to prison, has fallen to $3 million. A few weeks ago, he put up for sale the 29-room mansion that was the subject of those real property tax woes. The asking price is almost $4 million.
According to his lawyer, Fumo is “tired of being a punching bag,” and “would like to move on with his life.” When asked by the Inquirer for comment on the Tax Court case, “Fumo replied by email: ‘have you no shame!!!’ ”
It is more likely than not that the outcome of the Tax Court trial will be known in less than a decade. Perhaps the case will settle. Perhaps the Tax Court’s opinion won’t be appealed. Perhaps there will be continuances. No matter, what is certain is that at least for another year or two or three, Fumo’s tax troubles will not be going away. Perhaps they will never go away.
Friday, September 23, 2022
Need a Question for the Exam in a Basic Federal Income Tax Course?
The press release announced the charging by information of Michael Garrison, accused of conspiracy to commit wire fraud, conspiracy to destroy an energy facility, wire fraud, destruction of an energy facility, and filing a false tax return. The information “alleges that * * * Garrison broke into shuttered coal-fired power plants that had been decommissioned * * * in order to steal copper wire and other metal, which he then sold to scrap yards.” Garrison allegedly failed to report the amounts received in 2020 for the scrap metal on his 2020 federal income tax return.
With respect to the charge of filing a false tax return, the press release quotes IRS Criminal Investigation Special Agent in Charge Yury Kruty as saying, “No matter the source, all income is taxable.” If indeed he said that, he is flat out wrong. The language of Internal Revenue Code section 61(a) clearly states, “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived.” The Internal Revenue Code contains various exclusions, which provide that certain types of income are not included in gross income and thus not taxable, because something not included in gross income does not find its way into taxable income. The exception language at the beginning of section 61(a) highlights the existence of those exclusions.
So the exam question would be along these lines: “Someone says, ‘No matter the source, all income is taxable.’ Is this statement correct? Why or why not?” It would fall into the category of “question placed in the exam to determine if the student passes the course,” in contrast to the more challenging question in the category of ‘question placed in the exam to determine if the student has attained the level of an A grade.”
If you use the question, feel free to credit MauledAgain.
Monday, September 12, 2022
Numbers and Logic
The email then posed the question, “What caused your bill to change?” It provided this answer: “The weather has been similar to this time last year, and may not have affected your bill. Factors like heavy appliance use or household guests may have contributed.” The email suggested that I could reduce my bill if I would “Run your pool pump during off-peak hours to lower demand,” and “To lower your demand, use a timer on your pool pump so you can time it to only run during off-peak hours. If you have to run your pool pump during peak hours, avoid running large appliances at the same time.”
Of course, I’ve had no household guests and my appliance use is either unchanged or so little changed as to be negligible. And there is no pool.
It took me far less time to figure out the problem than it has taken me to type out this commentary. The reason my bill is more this year than the same period last year is that the cost per unit of electricity and natural gas has been increased, by that utility company, at a rate that explains the price increase.
So what is happening? I have identified three possibilities. Perhaps there are more.
The first possibility is that someone at the utility company thinks that there is a direct correlation between cost and usage that does not take into account price variations. Though one might think no one would miss that point, it does not surprise me. Recollect my many previous comments about the state of education in this country.
The second possibility is that the utility company decided that fear – your bill is jumping up – will encourage people to engage in energy saving practices. Yet why suggest to me, someone without a pool, that I need to run a pool pump during off-peak hours? Perhaps the company doesn’t know who owns a pool, a fact it could easily determine, and sent the pool pump message to everyone because it thinks pool pumps are the, or a, significant reason for excessive energy usage.
The third possibility is that the utility company wants people to think that their higher utility bills are because they have increased their energy usage and not because of rate increases. Yet rate increase notices accompany almost every monthly bill.
What puzzles me is that every month the utility company sends me a chart showing my monthly electricity and natural gas usage for the 12 preceding months, matched against “all neighbors” and “energy efficient neighbors.” I don’t know how they determine who are my energy efficient neighbors, though I’ll guess that it’s the neighbors whose energy usage falls in the bottom 10 or 20 or 25 percent of all my neighbors. My usage usually falls between “all neighbors” and “energy efficient” neighbors though in some months matching or slightly falling below “energy efficient neighbors,” with a month here or there matching “all neighbors.” Yet the company nonetheless decided to warn me that my utility bill is projected to be higher than for the same period last year.
Surely there is some logical explanation. Surely. I hope.
Wednesday, September 07, 2022
The Price of Low and Lowering Taxes
Mike Brant, the writer of the story begins by noting, “Who would've thought our ridiculously high taxes could actually cause more good than harm? Apparently, there are benefits to paying higher taxes after all.” That is a point that I have made in my posts in which I explain why the privatization of government functions rarely work out well for anyone who isn’t in on the deal. When the privatization is structured as a monopoly, the situation is even worse.
Brant notes that although in his opinion New Jersey taxes are too high, he admits that “higher taxes do allow for more benefits when it comes to quality of life.” He gives as an example a story he heard from a New Hampshire couple he met on vacation in Cape Cod. The New Hampshire couple moved to New Hampshire from a town where taxes were higher. One of the benefits they had received in their former town is that they put out their trash and the town picked it up. When they arrived at their new home in New Hampshire, they discovered that if they wanted their trash picked up they needed to enter into a contract with, and pay, a private trash removal company. The first time they put out trash, they put out a many boxes, a consequence of the trash generated by moving into a new home. The private contractor told them it was too much, and that “it was not allowed,” refusing to take anything until the amount of trash at the curb was reduced. He refused to take any of the trash. So they had to take most of the trash back into the house. The following week they had another run-in with the private contractor though exactly what triggered it is unclear from the story.
The New Hampshire couple had no other options. There is no other private trash removal company operating in the town. The town does not have a dump, so they cannot do their own trash removal. They were compelled to comply with the terms and conditions imposed by what their neighbors called “the garbage can monopoly.” They have no ability to vote the company in or out of the town. The writer of the story notes that because the town had no control over the situation, it and its residences are at the mercy of the private contractor. He explains, “It's the unfortunate side of very low taxes sometimes.” He advises New Jersey residents, “So before we go complaining too much about our taxes, be glad we don't have to worry about things like a garbage can monopoly.”
My guess is that “free market” advocates would argue that the solution is someone starting another company and offering residents a better deal, not only in terms of price but also service. Yet why has that not happened? Monopolies don’t surrender territory, unless forced to do so by government. That’s why antitrust laws have been enacted, and why they are opposed by “free market” advocates who have been successful in recent decades in taking the teeth out of antitrust laws. As I’ve pointed out many times, there’s not much free in a “free market” when that market lets monopolists and oligarchs be free to run roughshod over those who are less powerful and less wealthy. It is the government, local in this sort of situation, state or federal in others, that exists to keep the powerful from taking advantage of those less fortunate. And to do that, government requires funding.
So for the anti-tax group, or more specifically, for those who are attracted by the siren songs of the anti-tax advocates, imagine a world in which there are no taxes, and thus no government. What happens when one or perhaps two or three, or even several dozen, mega-oligarchs own and control every activity and function that affects every facet of your life? The situation in New Hampshire gives us a peek into what that sort of world would be.
Wednesday, August 31, 2022
Sadness on Multiple Levels: Financial Literacy, Factual Understanding, Legal Comprehension
It’s about a sad example of financial illiteracy and the sort of incomprehension that generates disagreements and unnecessary litigation. It comes from a television court show. I’ve written about television court shows many times, 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?, Beware of the Partner’s Tax Lien, Trying to Make Sense of a “Conspiracy to Commit Tax Fraud”, Tax Payment Failure Exposes Auto Registration and Identity Fraud, A Taxing WhatAboutIsm Attempt, and When Establishing A Business Relationship, Be Consistent, as the Alternative Can Be Unpleasant Litigation.
In this Judge Judy episode – Season 21, Episode 245 – the plaintiff sued the defendant to compel the defendant to put a headstone on the grave of the plaintiff’s grandson. The grandson and the defendant were engaged and had lived together for at least a year. The story begins when the plaintiff took out life insurances policies on the lives of her four grandsons. When asked by Judge Judy why she did that, the plaintiff explained that she and her husband were getting older and if something happened to them they wanted their grandchildren to have some money. It was evident that Judge Judy was as puzzled as I was, because protecting the grandsons from something happening to their grandparents would be accomplished by life insurance on the lives of the grandparents, not the grandchildren.
Then, when the one grandson and the defendant became engaged, the plaintiff changed the beneficiary on the life insurance policy on that grandson to the defendant. Sadly, that grandson then took his own life. The insurance company paid proceeds to the defendant. The defendant paid the cost of the funeral, though it wasn’t clear whether the defendant offered to do so or did so at the request of the plaintiff. The plaintiff took the position that she had the right to dictate how the defendant used the proceeds but Judge Judy pointed out that there was no contractual obligation giving the plaintiff that right.
The plaintiff was upset that the defendant had not purchased a headstone. The defendant explained that a headstone was already in place, paid for by the grandson’s father and his wife, who was the grandson’s stepmother. The plaintiff complained that her grandson’s name on the headstone was incorrectly spelled. The defendant provided a photograph of the headstone, with the name correctly spelled, and Judge Judy pointed out that the plaintiff’s father and stepmother apparently had caused the headstone to be corrected.
At that point, Judge Judy asked the plaintiff, “Are you satisfied?” but the plaintiff said, “No.” Judge Judy asked, “So why are you here?” The plaintiff responded, “I want a headstone on my grandson’s grave.” Judge Judy replied, “There is a headstone.” The plaintiff came back with a claim that the name was misspelled. Judge Judy rejected that assertion, asking the bailiff to show to the plaintiff the photograph of the headstone with the name correctly spelled. Judge Judy asked, “So what do you want?” The plaintiff stated, “I want a headstone with my grandson’s full name.” Judge Judy read the name from the headstone and asked, “Did he have more names than those?” The plaintiff replied, “We wanted the stone to include ‘loving grandson, . . . ‘” and at that point Judge Judy cut her off and dismissed her case.
I wonder who convinced the plaintiff and her husband to purchase life insurance on the lives of her grandsons, when there was no indication that she and her husband were dependent on the grandsons for financial support. Parents sometimes purchase term insurance on their children to cover the cost of funerals and burials, but because the chances of a child dying are very low, those policies are very inexpensive and usually expire when the child attains majority or can be turned over to the child at that point. I wonder if some salesperson saw an opportunity to sell four insurance policies by convincing the plaintiff and her husband that they needed to do so. Sad.
The plaintiff’s inability to understand that someone other than the defendant had paid for a headstone and her insistence that the defendant purchase one is bewildering. It is sad. The plaintiff’s misunderstanding of the facts and their significance, even after the judge explained it several times, is troubling. It’s sad.