Wednesday, January 28, 2015
Now, in a case of first impression, the Tax Court has agreed. In Perez v. Comr., the Tax Court held that even though the amounts received by the egg donor were designated as compensation for pain and suffering in the contract with the fertility clinic, the payments constituted gross income, and not damages within the scope of the section 104(a)(2) exclusion.
When it came time to prepare her federal income tax return, the taxpayer “concluded that the money was not taxable because it compensated her only for pain and suffering.” She reached this conclusion [a]fter consulting other egg donors online.” She did not report the compensation on the return, and the IRS issued a notice of deficiency. Once again, we are given an example of why relying on advice from those not expert in a matter can be counter-productive.
The Court’s conclusion makes sense, and not simply because it reaches the conclusion I advocated for reasons I suggested relying on cases on which I relied. It makes sense because there is a long history of requiring employees and independent contractors to include in gross income the amounts they are paid for performing services, even if the services cause discomfort, pain, bruising, or other “damages” to the person. Though the Court did not cite me, it did cite an article which in turn cited the article in which I alerted the tax practice world to the tax issues in these types of transactions, Federal Tax Consequence of Surrogate Motherhood, 60 Taxes 656 (1982).
The outcome strengthens the likelihood that my position with respect to the tax consequences of kidney swaps, similarly will be the result when a court eventually deals with that issue. It further demonstrates the foolishness of describing my positions with respect to these sorts of transactions as “ivory tower academics,” a charge I refuted in Taxation of Kidney Swaps: Dispelling the “Ivory Tower” Myth. Indeed, the donation of eggs or the swapping of kidneys, even if properly categorized as “innocent events,” are taxable events.
The only downside to the decision is that it deprives tax law professors of a “question with no authoritative answer” examination or discussion question. That’s not a problem, though, because our supply of these sorts of questions is abundant.
Monday, January 26, 2015
In Milbourn, the divorce decree did not contain any provisions with respect to alimony. The decree subsequently was amended, but in a year later than the one in which the payments in question were made. Nor was a written separation agreement in place because, even though one had been drafted, the parties had not signed it.
Sometimes, it’s that simple. Or, from the perspective of trying to get the parties to agree, quite complicated. Tax issues constantly hover over the divorce proceedings. Everyone involved needs to be aware of that, and needs to be aware of what the tax law requires.
Friday, January 23, 2015
Perhaps as the news tricked down, it surprised people, who began the process of sharing it with friends and social media acquaintances. But it’s not a surprise to anyone who has been paying attention. The portion of the world’s wealth owned by the one percent has been climbing steadily. It was 44 percent five years ago, and 48 percent last year.
Does anyone expect the trend to stop? If it reaches 50 percent by 2016, it will reach 60 percent by 2025, or sooner. Eventually it will reach 100 percent. Unfortunately, some people will not accept the fallacy of the “trickle down” nonsense, that by giving more and more to the one percent everyone else becomes wealthier, until the one percent owns 100 percent. Guaranteed, 99.99999 percent of the people believing in trickle-down, supporting tax breaks for the wealthy, and acting as cheerleaders for the oligarchy will find themselves owning nothing, or perhaps, at best, near-nothing. Already, a mere 80 people own as much as the poorest 50 percent of the planet’s population. Two containers of wealth, one shared by 80, the other by more than 3.5 billion.
How difficult is it to understand that the one percent consists of people whose goal is to own as much as they can. Once they clean out the middle class and enlarge the ranks of the poor, they’ll start fighting among themselves. And who will do their fighting? Poor people, starving and homeless, will provide the troops.
So while some people wake up and view this realization of reality with alarm, a small handful is toasting halftime. “We’re halfway there.”
Wednesday, January 21, 2015
According to the story a person identified as “Dan from Marlton” called the governor of New Jersey on a radio show and reported that a car wash in Marlton Township was not charging its customers sales taxes. He claimed that the car wash had a sign telling customers they could avoid the sales tax if they paid in cash. The governor said, “I’m very interested. I’d love to have our consumer affairs people, if you’re listening out there, Attorney General Hoffman, it would be interesting to go to that car wash in Marlton.” Christie promised that the attorney general and the state treasurer would check into the matter.
Well, it turns out there are TWO car washes in Marlton Township. Each received a visit from a state tax investigator. The investigator was driving a black Jaguar. Car wash owners and employees tend to be pretty good at identifying vehicles.
The owner of one car wash provided cash register and other information, and explained that he charges the sales tax and that he is an “open book” with “nothing to hide.” The owner of the other car wash explained that he charges a fixed price that includes the sales tax.
Somehow, news of the visits reached a reporter. The reporter contacted the tax investigator, who had left a business card with both car washes. Asked about the visits, the investigator replied that “he did not know what a reporter was talking about” and that he could not “disclose anything.” Spokespersons for the treasury department, the attorney general, and the governor’s office declined to comment, using different articulations of the concept. The treasury department spokesperson declined to answer a question about department vehicles.
The questions are many. Which car wash, if any, was the subject of the phone call? Who is Dan from Marlton? Does he have any connection with either of the car washes? Does he have any evidence of the sign he described? Why did he call into the radio show? Do all tax investigators in New Jersey drive Jaguars? Is the Jaguar a government vehicle or a personal vehicle? Why did the spokespersons refuse to provide any information, especially state policy concerning departmental vehicles?
There’s not much else to say about this series of events until and unless more facts are ascertained. Opinions are fine but there needs to be something about which to express an opinion. But there's a little to say. If it turns out, though, that there is no sales tax avoidance at Marlton car washes, the governor ought to let the citizens of New Jersey know that, and also should track down “Dan from Marlton” to explain to him and everyone else that it’s not acceptable to make unfounded tax avoidance allegations about other people. If there is sales tax avoidance, then he ought to track down “Dan from Marlton” to thank him. Only the facts will tell.
Monday, January 19, 2015
In the meantime, after she was convicted, Hamline University terminated Magee, who had been granted tenure in 1994 after having been hired in 1990. Magee then sued the dean of the law school, the university’s trustees, and a St. Paul, Minnesota, police officer, alleging that they had “worked in concert” to terminate her position at the law school. She claimed that her constitutional rights had been violated, that there had been intentional interference with her employment contract, and that her contract had been breached. The district court dismissed her section 1983 claim with prejudice, and her state law claims on jurisdictional grounds. Magee appealed, and the dismissal was affirmed.
Roughly a year later, Magee sued the university and the dean, alleging that her dismissal was the result of racial discrimination. The action was dismissed based on the doctrine of res judicata, because the claim in the first lawsuit arose out of the same transaction as the new claim. Again, Magee appealed. Last month, the United States Court of Appeals for the Eighth Circuit affirmed the dismissal. The court explained that both lawsuits rested on “Magee’s termination from employment as well as the series of events precipitating that termination.”
In Why Teaching Isn’t Just a Matter of What One Knows or Understands, I wondered if Magee would “enlighten us by explaining why she hadn’t been filing state income tax returns.” Though there are indications that she disagreed with how the police handled a case on which she had worked in 2007, that doesn’t explain her failure to file reaching back to 1990. Nor, even if it is assumed something happened before 1990, would it explain why refusing to file state income tax returns is an appropriate or effective approach to dealing with an issue. So we still don’t have an answer. I doubt we will get one. The entire story remains puzzling, sad, and worrisome.
Friday, January 16, 2015
The tax issues are simple to spot. Is Hamm entitled to deduct the $975 million? First, does the amount constitute deductible alimony? Second, is the sending of a check that is rejected considered payment sufficient to support the deduction?
As for the first issue, it is difficult to determine from the facts if none, some, or all of the $995.5 constitutes deductible alimony. The payment was to be spread out over nine years. But that fact alone is not determinative. But in order to address the second issue, assume that at least some portion of the payment constitutes deductible alimony.
As for the second issue, it is generally understood that payment, for a cash-basis taxpayer, occurs when a check is mailed, even if it does not reach the other party until the following year. Does the other party’s refusal to accept the check mean that payment has not been made? Though there are cases dealing with the other side of the question, namely, whether the recipient has income if the check is rejected, I could not find much of anything on point considering the impact on the person delivering the check. So it becomes helpful to engage in a bit of reasoning.
For the recipient, rejection of the check does not prevent the receipt of income for tax purposes if the recipient is entitled to the payment. That is why, in the classic example, turning away from a paycheck in December in an attempt to move the income into the following year isn’t effective. On the other hand, if the employee arranges with the employer before the services are performed to prohibit the employer from making the payment until the following year, the income can be deferred. This suggests that the treatment of the person sending the check should reflect whether the person to whom the check is being sent is entitled to it. In the Hamm case, it appears that Arnall’s right to the check was dependent on how things turned out on appeal. It is possible that on appeal Hamm’s obligation could have been reduced or eliminated.
Another analogy can be found in the treatment of gifts for gift tax purposes. A gift tax is due on certain gifts. Suppose a person writes a check, notes “gift” on it, and mails it to someone who doesn’t want it. Surprising as it might be, accepting the gift could generate adverse tax or other consequences that the intended donee wants to avoid. The check is returned to the donor with a note of “thanks, but no thanks.” Is the donor obligated to pay a gift tax? No, because no gift has been made.
In many respects, the placing of the check in front of Arnall isn’t very different from making an offer during a negotiation. Surely, if Hamm had said, “How about if I pay you $975 million?” no deduction would be allowed. Making the offer more enticing by waving a check in front of her wouldn’t change that outcome. And putting it on the table in front of her, or in her mailbox, or in her purse does not change the outcome if she hands it back or rips it up.
Thus, if I were presented with this fact situation and asked to decide, I would conclude that no transfer had taken place, that accordingly no payment had been made and no alimony deduction would be allowed. On the other hand, Robert Wood, in this commentary suggests that Hamm’s “deduction sails through just fine.” That’s possible, but it doesn’t answer the question of whether it *should* sail through. Due to budget restrictions imposed by the Congress, all sorts of things sail through on tax returns, whether or not they should.
But, fortunately or unfortunately depending on one’s point of view, this fact situation no longer exists as a possible case. According to this report, Arnall changed her mind and cashed the check. That simply leaves the not very uncommon question of whether any part of the payment constitutes alimony. To the extent that it does, there is a deduction.
Wednesday, January 14, 2015
Now comes a report that Kansas politicians are examining ways of “undoing” the tax cuts that caused so much damage. Of course, the easiest thing would be to return to tax law status as of the day before the cuts. In other words, undo the income tax cuts. But instead, proposals have been floated to eliminate sales tax and income tax exemptions, to increase alcohol and tobacco taxes, to raise sales taxes, to delay additional income tax cuts, and to make the trigger for even more income tax cuts more difficult to reach.
These proposals need to be split into two groups. One group, consisting of the last two proposals, simply addresses the need to prevent further damage. The other group, consisting of the first three proposals, addresses the need to undo the damage caused by the tax cuts that already went into effect.
The proposals in the first group make sense. If the first set of tax cuts for the wealthy created damage, there’s no point in piling on even more catastrophic economic outcomes. Of course, delaying additional cuts and increasing the trigger for even more cuts is the second-best approach. The best approach would be to remove from the statute any sort of risk that more tax cuts would be thrown into the economic mess.
The proposals in the second group are wicked. The burden of undoing foolish tax cuts for the wealthy would be imposed on the non-wealthy. It is common knowledge among those who study taxes that sales taxes and taxes on alcohol and tobacco are regressive, that is, they consume a higher percentage of income the lower the income. The sales and income tax exemptions under consideration appear to be those that benefit the middle class and lower-income class more than they benefit the wealthy.
In some respects, it’s a matter of timing. If a legislature announced that it was simultaneously reducing income taxes on the wealthy and increasing taxes that burden everyone else, more than enough people presumably would object. Instead, the tax cuts for the wealthy are accompanied by nominal tax cuts for everyone else, and then a few years later taxes that burden the non-wealthy are jacked up. Clever, but wicked. Is it a matter of time before we see the same stunt being pulled at the federal level?
Monday, January 12, 2015
Would tax breaks work? Probably not. Like the economic benefits of shale gas, a good chunk of the economic benefits from these sorts of tax breaks would flow to investors outside the state. That’s if anyone went for the deal. Would tax breaks be enough to persuade businesses to locate in, and workers to seek jobs in, a state with a horrific transportation infrastructure? Businesses need good roads and bridges, and so do workers. Would tax breaks be enough to pay sufficient wages to workers so that they could avoid the crumbling school districts in the state? Would tax breaks be enough to bring the sort of weather, climate, and environmental quality that businesses and workers prefer? Probably not.
The state is in an economic mess because its imitation version of the federal cut-taxes-for-the-wealthy-and-cut-spending-for-the-common-good experiment similarly has failed. Unless the root causes of that failure are addressed, short-term tax breaks not only are unlikely to fix things, they are likely to make things worse.
Friday, January 09, 2015
Though I prefer implementation of a per-mile user fee, I am sufficiently aware of political realities and logistic issues to support a gasoline tax increase as the next best option. The anti-tax crowd may be shocked by the support of Republicans for a tax increase, but it isn’t rocket science to understand that there are costs to maintaining a highway system and those costs must be paid.
The surprise is that President Obama does not support an increase in the gasoline tax, though apparently he is “open to compromise.” He would pay for transportation infrastructure funding with the elimination of “unfair tax loopholes.” I disagree. If somehow the Congress could be persuaded to eliminate unfair tax loopholes, and I have my doubts it could or would do so, the revenue gains ought not be diverted to solving problems with a different tax system. The gasoline tax is, for all practical purposes, a user fee. Those who use the highway system ought to be the ones who pay for it.
Shocking as it may be to those readers who tell me that my positions are biased, this time around I support the Republican proposal to increase the gasoline tax. Of course, those few Republicans don’t speak for the large number of Republican members of Congress who will go down to the last bridge collapse obstructing any sort of tax increase no matter the circumstances. It would not shock me to see these Republican senators targeted by the extremist right-wing zealots during the next election cycle.
Wednesday, January 07, 2015
Ten years ago, after Hurricane Charley saddled insurance companies with billions of dollars in damage claims that caused some companies to go under, the state of Florida enacted a 1.3 percent assessment on insurance policy premiums to fund the state’s catastrophe fund. Technically the Florida Catastrophe Fund Emergency Assessment, the imposition quickly became known as the hurricane tax. According to several reports, including this one and this one, the tax is being terminated a year sooner than planned, because the fund now is solvent.
All things considered, Floridians did well. A Pennsylvania tax on wine and liquor sales, enacted to provide revenue needed after the Johnstown Flood, remains in place, despite efforts to repeal it and despite the fact that full recovery from the effects of the flood was made decades ago.
According to some experts, another serious hurricane in Florida might require restoration of the hurricane tax. In the meantime, it should get added to the list. That list is one that will continue to grow.
Monday, January 05, 2015
Candidate Tom Wolf is now governor-elect Tom Wolf, soon to be Governor Tom Wolf. So his proposal has not faded away as do most proposals by candidates who lose elections. His proposal is now front and center. Several days ago, Professor Anthony C. Infanti picked up on the issue, in a Philadelphia Inquirer opinion commentary entitled “Reform Pa.’s flat tax rate.” Prof. Infanti points out the same obstacle that I noted, namely, that the proposal runs up against the provision in the Pennsylvania Constitution prohibiting graduated income taxes and limiting the exemption to poverty-level-incomes. He suggests it is time to amend the state’s constitution to permit graduated income tax rates. I agree. Every other state with an income tax manages quite well with graduated rates, free of what Prof. Infanti calls the “excessively rigid uniformity requirement” of the Pennsylvania Constitution. The alternative, retaining one rate but amending the state’s constitution to permit a variety of scaled exemptions, which does get pretty much to the same result, is cumbersome and much more difficult to finely tune.
Of course, there will be opposition to the proposal. In order for the very small percentage of individual taxpayers who would incur higher taxes to persuade the majority of taxpayers who would benefit from the proposal to campaign against the proposal, they will need to deceive the majority with misleading claims. They will allege that the proposal would raise taxes on the middle class. They will allege that the only fair tax is a flat tax. They will allege that a flat tax is a simpler tax. Those are some of the tactics used at the federal level, with varying degrees of success, so I would expect to see the same tactics unveiled in Pennsylvania when the governor presents a tax reform plan to the legislature. If explained properly, Pennsylvania voters might get the chance to figure out who their friends in the legislature are and are not.
Friday, January 02, 2015
Earlier this week, in A Tax Policy Turn-Around, I commented on the trend, in states controlled by the anti-tax crowd, of slowing down or halting tax cuts. I pointed out that it will take time for attitudes to shift. But there now is more evidence that people, or at least some people, are figuring out that the anti-tax crowd consists of a parade of Pied Pipers. They are beginning to figure out that although government and taxes might not be a good deal for the wealthy, it’s better for the 99 percent than is the unelected corporate governance machine that the wealthy are trying to substitute for democracy.
Yesterday, as described in this report, the wholesale gasoline tax in Pennsylvania increased by 9.8 cents; a comparable increase affected other liquid fuels. The money will be used to repair more than 80 bridges and more than 1,600 miles of roads. A spokesperson for the Department of Transportation pointed out the obvious: “[M]ost drivers . . . want their pavements smooth and their bridges in a state of good repair.” Though it is unclear how much of the increase will show up at the pump, if the entire increase is passed on to drivers, a person who drives 12,000 miles a year in a vehicle getting 24 miles per gallon will pay an additional $49. That’s quite a good deal, considering that the alternative is hundreds, perhaps even more than a thousand, dollars in repairs from hitting potholes or other road hazards. And compared to the cost of being on a bridge when it collapses, it’s a grand bargain.
Wednesday, December 31, 2014
But, as these stories go, Congress did not pass the pending legislation. The Virginia legislature, though, had included in its legislation an alternative revenue source in the event that the federal legislation was not enacted. There’s no indication how many legislators voted for this “backup tax plan” thinking that it was unlikely to happen. Under the backup plan, the tax on wholesale gasoline sales increase by 5 cents per gallon. Surely this will be passed on at the retail level.
Interestingly, one of the opponents in Congress to enactment of the federal legislation is from Virginia. He had told state officials that the federal legislation was controversial and had been batted around for years. He told them “it was foolish . . . to count on revenues from a bill that” had not become law, and that they “should not assume legislation would be enacted within their time frame.”
With gasoline prices dropping, motorists might not notice the 5-cent per gallon increase. On the other hand, there’s a good argument that motorists face a higher fuels tax because their fellow citizens are not paying use taxes that they ought to be paying. If Virginia needs revenue, why not enforce the existing use tax law? To the extent that it costs too much money to collect the use tax, the legislature ought to re-think the wisdom of relying on a tax structure, namely the sales and use tax system, that is difficult to administer, inefficient, and regressive. There are better alternatives. Imposing involuntary tax collection servitude on out-of-state retailers with no say in whether the tax exists, its rates, or the scope of items to which it applies is wrong. And relying on the hope that Congress will let states do that indeed is foolish. Counting chickens before they hatch is risky, whether on the farm, in the derivatives market, or during a tax policy session.
Monday, December 29, 2014
Among the states that jumped on the “tax cuts for the wealthy” bandwagon, encouraged by campaign contributions from the wealthy, was Kansas. The folks who were running Kansas, under the leadership of governor Sam Brownback, chopped taxes for the wealthy. What happened? The rich got richer. The Kansas economy stagnated. Public services were impaired. The people of Kansas woke up, realized they had been sold a pig in a poke, and almost voted Brownback out of office in a state that is overwhelmingly Republican.
Now comes news, in a report by Rachael Bade, that other Republican governors are taking heed. She explains that Ohio governor John Kasich is advancing a tax plan that protects “against revenue gaps.” The Republican governors of Wisconsin and Arizona are delaying their goal of axing the income tax. Republicans in Missouri, stymied in their attempts to match the Brownback tax cuts in Kansas, are expressing gratitude for having had their plans thwarted. Republicans in Georgia and Iowa are moving much more slowly than planned in their respective attempts to gut state income taxes.
In Indiana, the senate majority leader is calling the experience “a cautionary tale on a national scale.” He then makes a statement similar to what I have been writing as I cautioned against these reckless tax cuts: “ We all like low taxes … but we have to ensure the stability of a revenue stream to provide basic services that our citizens expect.”
For the moment, Republicans have not abandoned the supply-side nonsense advocated by Arthur Laffer, the instigator who sold Republicans on the disproven theory that cutting revenue will increase revenue. Instead, they are talking about slowing down the speed with which cuts are adopted, shrinking the size of the cuts, and backing away from promising that tax cuts will solve problems. In Kansas, Republicans admit that they may need to undo at least some of the tax cuts. Ohio’s governor, for example, will not produce a plan that assumes revenue growth generated by tax cuts for the wealthy. One Republican was unwilling to admit that “the Laffer theory is disproven,” but then confessed that in his state “revenue numbers aren’t as robust as we need.” No kidding. Another Republican advised his colleagues to warn voters that “not all tax cuts pay for themselves.” No kidding. It’s fun to watch themes, warnings, and words from MauledAgain pop up in the mouths of the tax-cut fans. Unfortunately, some Republicans are still talking about the wealthy as being “job creators” even though it is now more widely understood that what creates jobs is demand from consumers, who far outnumber the handful of wealthy getting tax cuts.
One device that some Republicans are considering is a trigger mechanism that stops planned tax cuts if revenues fall short. I like that idea. I think it ought to go further. I think that tax cuts should be returnable, that is, if the jobs don’t appear, the people who promised to create jobs, or who paid politicians to make that promise for them, should pay a penalty in the form of the previously received tax cuts plus interest.
It’s true that Republicans haven’t yet reversed course. It takes time to make a U-turn. But it seems Republicans are slowing down the tax cut bandwagon and are changing its course. Even if it doesn’t do a one-eighty, perhaps Republicans will realize that the best way to create jobs and fuel the economy is to cut taxes for consumers, very few of whom are beneficiaries of tax cuts for the wealthy.
It’s all a matter of practical politics. If a Republican tax-cutter can barely squeak by in a re-election campaign in one of the most Republican states in the country, what will happen to his counterparts in states that are barely Republican? The writing on the wall has been read, at least by the members of the party who still have their wits about them and aren’t running around the country spewing forth idiotic economic theories and bizarre social concepts. Tax policy: never a dull moment.
Friday, December 26, 2014
The crime to which Grimm pled guilty carries a sentence of up to three years in prison. How can Grimm carry out the duties of his office if he is sitting in a prison? As an aside, why is his sentencing delayed until June 8? Does it take almost half a year to decide what should be done?
Grimm claims that the charges are “trumped up”. He was charged with hiding income from a business. Has he offered evidence that all of the income was properly reported? Surely if that’s the case he would have a wonderful opportunity to make fools of the prosecutors who brought the case. That he hasn’t is no surprise, for a public “servant” who has threatened reporters and has a long list of other criminal charges pending against him. Yet somehow, this guy was re-elected. What message does that send about law, society, and civilization?