Wednesday, September 17, 2014

The Scary Specter of Code Size Ignorance 

It’s one of my favorite examples of how tax ignorance afflicts the nation. When something simple about tax cannot be understood, what happens when something complicated is tackled? What happens to confidence in tax policy decision-making when so many people who should know better just can’t get it right.

I’m talking about the “size of the Internal Revenue Code” nonsense about which I’ve commented many times. I first visited the issue in Bush Pages Through the Tax Code?, and revisited many times, starting with Anyone Want to Count the Words in the Internal Revenue Code?, Tax Commercial’s False Facts Perpetuates Falsehood, How Tax Falsehoods Get Fertilized, How Difficult Is It to Count Tax Words, A Slight Improvement in the Code Length Articulation Problem, and Tax Ignorance Gone Viral, Weighing the Size of the Internal Revenue Code, Reader Weighs In on Weighing the Code, Code-Size Ignorance Knows No Boundaries, and continuing through Code-Sized Ignorance Discussion Also Is Growing.

The problem is that someone deliberately or negligently proclaimed that the Internal Revenue Code consists of 70,000 pages. Other outrageous size claims also circulate, but the 70,000 assertion is the easiest to dissect. The 70,000-page figure is the number of pages in the CCH Standard Federal Tax Reporter. It includes not only the text of the Internal Revenue code, but also the text of Treasury Regulations, the text of some cases and rulings, commentaries, charts, indices, annotations, and all other sorts of things. NONE of these items are part of the Internal Revenue Code.

Now comes yet another repetition of this misrepresentation. Serving up The Cost of Tax Compliance, Joshua D. McCaherty graces us with a chart carrying the label, “Tax Complexity Keeps Piling Up.” The y-axis carries the label, “Pages in the CCH Standard Federal Tax Reporter.” The pattern along the x-axis, mapped against the y-axis, carries the label, “Length of Tax Code.” Put simply, McCaherty equates the length of the tax code with the number of pages in the CCH Standard Federal Tax Reporter. That is simply wrong. Wrong.

Curious, I followed the link on the page to McCaherty’s biograpy. He is a “policy intern” for the Tax Foundation. He holds a bachelor’s degree in Business Administration and Economics from Liberty University, and is an MBA student at the same institutions. “He has been active running political campaigns, owning his own company, participating in student government, and as a member of College Republicans. Josh is particularly interested in how taxes effect sustainable business growth. After graduation, Josh is considering a career in public policy or the non-profit sector.”

Perhaps it is not his fault that he doesn’t understand the difference between the Internal Revenue Code and Treasury Regulations. Perhaps it’s not his fault that he does not understand that annotations and commentaries are not part of the tax law, let alone the Internal Revenue Code. Perhaps his instructors do not understand these things and thus were unable to explain reality to their students. Perhaps his instructors talk about tax but don’t understand enough about it. Or perhaps his instructors deliberately fueled this disinformation campaign, as part of the “if we scare them with code length, we can abolish taxes” project.

It is particularly frightening to think that the next generation’s tax policy and economics experts are going to be populated, to a greater or lesser extent, by individuals who either do not know the difference between the Internal Revenue Code and things that are not part of the code, or who are willing participants in a disinformation campaign waged to further questionable purposes.

As I wrote in Code-Sized Ignorance Discussion Also Is Growing:
Would it not be so much better if the folks who have fueled the misinformation come forward, admit their mistakes, correct the record, and turn their energies into something more productive? They face one of the few times where admitting a mistake does not risk arrest, litigation, imprisonment, job loss, or eviction. To the contrary, the tax world will bestow respect on those who can put aside the ignorance.
On the other hand, perpetuating the ignorance will bring not only disrespect but also lack of confidence and, ultimately, tax policy decisions no less unwise and no less dangerous.

Monday, September 15, 2014

The Persistence and Danger of Tax and Other Ignorance 

Facebook is a wonderful window into the minds of Americans. Examining the posts that show up provides insights that shatter many of the stereotypes that mythologize this nation. For example, though this country allegedly has the world’s best educated citizens, it takes only a moment to realize that a good bit of intellectual deficiency, analytical failures, and embarrassing ignorance permeate the national culture.

Recently, two exchanges in response to Facebook posts, one mine and one by a friend, reminded me of how much more work needs to be done to unravel the consequences of educational failures in this country. Both, of course, involved taxes, one directly and one indirectly.

One post, by a friend, criticized opposition to adjusting the minimum wage to reflect inflation since the last time that wage was adjusted. One of that friend’s friends defended the existing minimum wage amount by claiming that people earning the minimum wage do not pay taxes. Unable to resist the opportunity to try to fix this person’s misunderstanding, I pointed out that a person earning minimum wage still paid social security tax, Medicare tax, income tax in some states and localities, earned income tax in some localities, and unemployment compensation tax in some states. The person’s response was that everyone earning minimum wage received an earned income tax credit that wiped out their tax liabilities. So, once again, I replied, explaining two aspects of taxation that this person did not comprehend. First, the earned income tax offsets federal income tax liability, and to the extent it generates a refundable credit, does not necessarily wipe out the other federal taxes and the state and local taxes faced by the person. Second, many people who work for minimum wage do not qualify for the earned income tax credit. And that was it. There was no response, no thanks for the explanation, no admission of error, no promise to retract the erroneous assertion and undo whatever damage it did.

The other post, by me, was a sharing of a friend’s post that pointed out the hypocrisy of voting for a combination of tax cuts and spending increases and yet complaining bitterly about deficits and deficit spending. I commented that when the amount of tax cuts plus the spending increases exceed whatever excess of revenues over expenditures that might have existed, deficits will be created. Someone commented that my views were naïve. Really? If revenues are $100 and spending is $95, cutting revenues by $25 and increasing spending by $30 will create a deficit. How is it naïve to point that out? I suppose it’s because I don’t believe in the nonsense that the $25 tax cut will generate so much additional economic activity that taxes will increase by at least $55 to prevent a deficit from coming into existence. If anyone is naïve, it’s the person who believes the Pied Piper promises of the tax cut takers.

This is not the first time that my commentary on these topics have generated responses of this sort. What is alarming is that, although the responses come from different people, they are almost word-for-word identical to each other. That suggests to me that these folks aren’t doing independent thinking, but are simply, like a weak law student, regurgitating information without dissecting it, and pondering it, and thus coming to understand its flaws. Almost cult-like, they take in the propaganda and toss it out as would a mindless robot. In some ways, I feel sorry for these people, because they are victims of one of the most perfidious misinformation campaigns yet waged in American history, if not that of the world. The people who generate the false talking points that lead, for example, to claims that the earned income tax credit wipes out all tax liabilities of all minimum wage workers, surely know that they are misleading people, if not lying to them, but they rest comfortably in their understandable supposition that enough people will buy into the nonsense without checking it out. Enough people to outvote the diminishing population of Americans who are able and willing to work through a thinking process to realize the sinister manipulations of the puppet masters. This, along with gerrymandering and big money vote purchasing, is how a small and dangerous minority oligarchy stands ready to totalitarianize the nation.

Friday, September 12, 2014

When They Talk About “Cutting Spending,” Why Is This Sort of Outlay Ignored? 

The other day, I read a Philadelphia Inquirer article that gave me yet another reason to question the wisdom and cerebral skills of certain elected officials and the people who put them in office. According to the article, the Commonwealth of Pennsylvania is forking over more than $10 million in “grants” to a developer who is building an apartment and retail complex. The developer plans to construct stores, restaurants, a parking garage, and “upscale” apartments. Aside from the usual zoning, density, traffic-impact, and similar concerns that accompany most projects of this sort, what bewilders me is the justification for the state dropping $10 million on a private developer when the state has been cutting funding for all sorts of critical public responsibilities, such as education and health.

The developer asserts that the project will create 300 jobs and $100 million of economic activity to the local economy. Cannot similar "good for the public" arguments be made for every construction project of this sort? What’s to stop the legislature from dishing out millions to every development project in the state? Ought state legislatures be shelling out taxpayer dollars to these developers? Seriously?

The grant supposedly comes with a condition. Specifically, the funds cannot be used for construction of the residential units, but must be used for the parking garage and retail establishments. What difference does that make? The grant reduces the amount that the developer must pay for the garage and stores, which frees up more than $10 million that the developer ought to have spent on the garage and stores, to be used to offset the cost of building the apartments. Bookkeeping dancing aside, the bottom line is that the developer is getting money that most other business entrepreneurs don’t get. And some of them are doing something more useful than building even more stores in an area where retail space is abundant and some storefronts are empty because the economy isn’t strong enough to support full-capacity occupancy of what currently exists. That, of course, is because consumers have less money to spend, in part because of the shifting of wealth and in part because they’re paying taxes to fund these “grants” to developers who are far from bankrupt.

If the development cannot stand on its own financial feet without taxpayer dollars, then the development ought not take place. If the development of a parking garage has public value sufficient to attract taxpayer dollars, then the state should build and own the garage, collect the fees from operating, and recoup for the taxpayers not only their investment but a positive return that can offset future taxes. That’s how a democracy should work, rather than funneling tax revenue into the hands of a developer who is engaged in private enterprise.

There are more than a few people who question the wisdom of these “grants” to private individuals. If they don’t like this pattern of state government, then they ought to stop voting into office the people who are causing the state government to do this. The anti-tax crowd likes to complain about poverty-stricken “takers” but perhaps it is time to talk about the wealthy takers, and the elected officials who support them. If governments need to cut spending, let’s start with the tax breaks and the outright “grants” to the wealthy. Let’s not be misled by the smokescreen of the anti-tax crowd, a deception that is being used to shift, not reduce, government expenditures by changing the identities of those getting government assistance.

Wednesday, September 10, 2014

How the Rich Get Richer, Technique No. 49323 

It just doesn’t stop. And it won’t stop, until the people adversely affected make their objections known rather than assuming someone else will fix what is wrong. According to this report, and others, the governor of Nevada is preparing to transfer to Tesla a variety of tax breaks and cash incentives to persuade it to build a battery factory in the state. Arguments are being advanced by opponents of the deal that it violates the Nevada Constitution. The more far-reaching questions, though, are why this sort of giveaway would be considered, and why those who complain about a few dollars transferred to poverty-stricken individuals in need of food are quiet when millions are transferred to cash-rich corporations.

The standard explanation for these giveaways is that, without them, the business, and its presumed economic benefits for the state, would go elsewhere. Perhaps. A business should choose a location based on a variety of factors, including tax. But the tax factor ought to be the same for all businesses. It’s one thing to reduce business taxes generally. It’s a totally different thing to cut a tax break for one specific company, especially when, as in this case, the company is owned by an extremely wealthy individual. Why aren’t similar grants of largesse conferred on the small business operated by the struggling entrepreneur?

The answers are easy. The giveaway benefits people who contribute huge amounts to the financing of the political careers pursued by those who, in turn, present tax breaks and cash subsidies to the companies owned by their benefactors. When the smoke clears, the campaign donor ends up more than reimbursed, and the cost is shifted to the taxpayer. Every tax breaks costs the taxpayer, either in the form of higher taxes to make up the difference, a foregone tax reduction because the funds are no longer available, reductions in public spending because revenue is reduced and checks are diverted to the politician’s donor, or economically adverse consequences such as traffic congestion, environmental damage, and similar disadvantages.

In this particular case, the product manufactured by the favored company is beyond the purchasing power of most individuals, including those in the middle class. The public funding permits the company to reduce the price it charges its wealthy customers for its vehicles. This is yet another ploy by which the little wealth owned by the 99 percent is redirected in favor of the one percent. And yet there’s not a peep from the supporters of the one percent, including the dreamers who think they can join that group, who are so opposed to the notion of government transfer payments. Government transfer payments are detested by these people because they transfer funds to the poor, and yet these same people have no problem with the transfer of wealth from the poor to the rich. Is it that difficult to see what is happening, to identify those who are responsible for it, and to take steps to bring these schemes to an end?

Monday, September 08, 2014

Tax-Exempt Status Benefits Aren’t Necessary Unless There is Net Income 

In a Room for Debate commentary, Ryan Alexander questions the need for, and the appropriateness of, the tax-exempt status of the National Football League. The NFL qualifies, not because it fits within a definition, but because the Internal Revenue Code specifically exempts professional football leagues. No such exemption exists for the NBA or major league football, but somehow the NHL and the PGA also managed to get this treatment.

According to Alexander’s sources, the NFL collected roughly $327 million in 2012. Those uninitiated in how the income tax functions, as demonstrated by some of the comments posted to the article, might think that tax rates ought to apply to that amount. However, the NFL turned around and spent some amount of money to pay its employees, pay rent on its offices, and to fund other business expenses. Those amounts should be deductible. In theory, the dues paid by NFL teams to the NFL ought to be enough to cover expenses, and the NFL should break even, or come within some de minimis amount of doing so. The Joint Committee on Taxation estimates that roughly $11 million of tax revenue is lost each year, which suggests that the NFL is collecting more in dues from its member teams than it is spending on its behalf. It seems to me that more information is needed to get a better picture of why and how this tax-exempt benefit was sought and is being used. An organization that collects dues from its members and spends those dues on behalf of those members, thus breaking even, doesn’t need tax-exempt status. If the NFL is making money, why should it be exempt from income taxation?

Friday, September 05, 2014

Placing Blame for the Tax Mess 

In a letter to the editor of the Philadelphia Inquirer, titled Rewrite, Don't Blame, Michael Colgan, chief executive officer of the Pennsylvania Institute of CPAs, claims that President Obama “missed the mark” by placing “blame for corporate inversions on ‘accountants going to some big corporations . . . and saying we found a great loophole.’” Colgan asserts, “The real blame lies at the feet of the president and Congress for not tackling the long-overdue rewrite of the U.S. tax code.” Though Colgan is correct that inversions are not illegal, including the president, or any president, among those deserving of blame for the mess that is the Internal Revenue Code totally misses the mark.

Colgan should know and understand that the Internal Revenue Code is a product of the Congress. The President cannot enact, declare, create, or amend the Internal Revenue Code. Yes, a President can make suggested changes, as every President, including the current one, has done. But Congress is free to accept, reject, or modify those rejections. In the case of the current President, the Congress has demonstrated no inclination to do much of anything with his or anyone else’s suggestions with respect to reforming the tax law. The Congress is too busy listening to the tax wish lists of the mega-millionaires and billionaires who fund their campaigns and tell them what to do.

Colgan lets us know that the Internal Revenue Code needs to be fixed and that doing so is a “monumental, yet critical, initiative.” He’s correct. He concludes, “[T]he CPA community stands ready to assist in this enormously important endeavor.” The CPA community can begin its assistance by joining in efforts to clean up and reform the Congress. That means putting an end to lobbying for the clients and, instead, advocating for the public common weal.

Wednesday, September 03, 2014

Fixing Tax Messes 

On Sunday, Mark Zandi published a commentary in the Philadelphia Inquirer in which he shared some thoughts about corporate inversions. A few weeks ago, in Spinning the Inversion, I criticized those who defend inversions by relying on claims that inversions are good for the economy and that shareholder profits trump all else.

Zandi, on the other hand, tries to get at the root of the problem. He concludes that “the U.S. corporate tax code . . . is a mess.” He’s right. So, too, is the tax law for individuals, trusts, estates, partnerships, and tax-exempt organizations.

Zandi points out, “Some companies pay little tax because of loopholes in the code designed just for them.” Again, he is right. The issue isn’t the nominal tax rate, but the effective tax rate, and the problem is that corporations are not taxed at a uniform effective rate. Zandi notes that “[f]inancial institutions, energy companies, and some manufacturers” benefit from tax breaks. I’ll add that in some way those companies managed to “persuade” Congress to cut their taxes, not by playing with the rates, but by enacting narrowly applicable deduction and credit provisions of use only to those who hired the “lobbyists” who “persuaded” Congress to make the tax laws messier on behalf of those companies or industries.

It would be helpful to look at the list of companies going the inversion route, determine their effective tax rates, and then compare those rates with those incurred by corporations that are not inverting. There’s a research project in that proposal for some enterprising LL.M. (Taxation) or M.T. student who is about ready to ask for paper topic suggestions. My guess is that those corporations paying taxes at effective rates of fifteen, ten, and even zero percent have no reason to spend money doing an inversion.

The lesson here is simple. Let’s stop with the special treatment for a favored few. Though those favored with special tax breaks can throw together arguments why they are so much more important to the economy than anyone else, careful consideration and thought generates the conclusion that they’re no special than anyone else. If the citizens of this nation stand up to demand an end to the economic bullying that afflicts federal, state, and local tax systems, as well as the not-so-free free market, the nation will thrive in ways that presently are unattainable.

As Zandi points out, eliminating the special breaks permits a reduction of the corporate tax rate for all corporations. That sort of fairness might be objectionable to those presently doing well as a result of the economic bullying, but that sort of fairness is a core ingredient in what makes the American economy prosper. When fairness is compromised, everything else will collapse, sooner or later.

Monday, September 01, 2014

The Frequent Flyer Flap Follow-Up 

A little more than two years ago, in The Frequent Flyer Flap, I discussed the tax consequences of receiving frequent flyer miles. The discussion included consideration not only of miles received from the airline, but also miles received from third party vendors in connection with the making of a purchase or the opening of an account. I explained how the IRS positions with respect to the receipt of frequent flyer miles for tickets purchased on employer accounts and miles received from banks for opening an account could be reconciled. I also pointed out that all sorts of questions remained to be answered.

Last week, in Shankar v. Comr., 143 T.C. No. 5 (2014), the Tax Court held that the value of frequent flyer miles received by the taxpayer for opening a Citibank account was includable in gross income. The taxpayer’s testified that he knew nothing about the miles and did not receive an award from the bank. Thus, the court was left with the IRS determination of when the gross income occurred and the value of the tickets. The IRS produced evidence from the bank that the miles had been redeemed in 2009 for tickets worth $668, the price that otherwise would have been paid. This was the amount that the bank included on a Form 1099 sent to the taxpayer. The taxpayer did not include this amount on his return. The facts played out as I had predicted in in The Frequent Flyer Flap:
Citibank, which transfers frequent flyer miles to customers who open an account with the bank, issued Forms 1099 to its customers, reporting the value of the miles – that is another issue – as miscellaneous income. The practical effect is that failure by the customer to report the income will cause the IRS computers to make an adjustment because there is no entry on the customer’s income tax return matching the Form 1099.
The court treated the miles received from the bank as interest, that is, an amount provided to the taxpayer for depositing money into an account available to the bank for its use. The court did not discuss why the valuation was based on the price of the tickets at the time of redemption rather than the value of the miles at the time of receipt. Nor did it discuss why the gross income occurred in the year of redemption rather than the year of receipt, though it is unclear from the opinion when the account was opened and the frequent flyer miles provided to the taxpayer, and if that transaction also occurred in 2009, it would not have been an issue worth discussing in this case. In a footnote, the court simply stated that the parties had not addressed, nor was it considering, whether award of the frequent flyer miles was the taxable event. The taxpayer appeared pro se, which explains in part why the issue was not presented.

The narrow holding of the case simply confirms a position the IRS expounded several years ago, namely, that frequent flyer miles received for opening a bank account were taxable. Other questions remain to be answered. For example, what if the taxpayer already had frequent flyer miles, and those received from the bank were added to the ones he already had, perhaps from making previous ticket purchases? How would it be determined if the taxpayer used the miles from the bank, the previously accumulated miles, or some combination, to purchase the $668 tickets? Would some sort of specific identification method be used, such as determining if the coupon or other document from the bank was transferred to the ticket agent? If so, who is responsible for keeping track of the transaction? In this case, the redemption apparently was processed somehow through Citibank, which issued the Form 1099. But apparently not all redemptions are processed in this manner.

The decision does not apply to all incentive rewards. As I explained in The Frequent Flyer Flap, the law is more complicated:
Does the IRS position mean that all items received as an incentive to doing business with a company includible in gross income? No. If the incentive is in the form of a rebate, it is not includible in gross income. Nor should there be gross income if the incentive is part of a package. For example, a buy-one-get-one-free promotion is nothing more than a reduction of the market price to half the stated price. Similarly, a buy-three-suits-get-a-free-tuxedo arrangement falls into the same category. On the other hand, if no purchase is involved, such as opening a bank account, there is no transaction to which a rebate can be connected. There is gross income. As the IRS spokesperson put it, whether something received for doing business is taxed as a prize or award "depends on the nature, value, and other facts and circumstances." That's a way of generalizing what I just explained in the preceding sentences. When the author of the story claims that the IRS explanation is "a fancy way of saying the IRS doesn't know," he is falling into the trap of wanting a definitive answer for a range of situations that cannot be bundled together for analytical purposes.
For example, how should frequent flyer miles or similar incentives or points provided by credit card companies be treated? Clearly they do not represent interest paid to the taxpayer was the case in Shankar. Are they rebates from the vendor selling the product or service charged on the credit card, and thus simply a reduction of the purchase price? Are they compensation payments from the credit card company for using its credit card? It’s not a reduction of the interest charged by the credit card company because they are awarded even if the cardholder pays all balances and thus is not charged any interest. Is it a rebate to the merchant for using the credit card company’s system which the merchant chooses to share with the customer by having the credit card company make the payment on its behalf? Is it simply a rebate of the purchase price along the lines of the auto manufacture rebates to customers of automobile dealers, which the IRS concluded were not gross income and reduced the purchase price of the vehicle? The IRS did not grace us with its reasoning for its conclusion with respect to the manufacturer rebate. Why is a payment from a third-party to a buyer of something a reduction in the purchase price? There needs to be some sort of underlying rationale – constructive this or that, agency, something – to limit the scope of the conclusion. The incentive to the manufacturer and the relationship between the manufacturer and dealer are fairly easy to see. The relationship between the credit card company and the merchant isn’t quite so clear. Some sort of rationale is needed to explain how far the Revenue Ruling conclusion can be taken.

This case supports three observations about tax law. First, contrary to the misguided beliefs of many, tax law does not always involve numbers and in fact often does not. Second, there do not exist answers to every tax question. Third, tax law and tax analysis is convoluted because the business world has become convoluted. In The Frequent Flyer Flap, I shared this thought:
The author of the follow-up article [in 2012, describing reaction to Citibank’s issuance of Forms 1099] notes that “this whole thing is a perfect illustration of why our tax system is so messed up.” Perhaps the tax system is so messed up because business transactions are so messed up. Once upon a time, a person paid a price for an item and that was it. Then the marketing gurus jumped in with all sorts of gimmicks, incentives, cross-arrangements and other “deals” that appear to be price breaks but in the long run cost the consumer. When Citibank buys frequent flyer miles, it incurs a cost, and to maintain profits, it must reduce the interest it pays on its accounts. . . . So if people want a simple tax system, simplify the unnecessarily complicated business arrangements.
Don't hold your breath.

Friday, August 29, 2014

Principal Residence Principles 

A recent Tax Court decision, Oxford v. Comr., T. C. Summ. Op. 2014-80, delivers an interest insight into the intersection of the first-time homebuyer credit and the meaning of principal residence. Though the taxpayer argued that she was entitled, alternatively, to the credit as either a “first-time homebuyer” or as a “long-time resident,” the court did not reach the latter possibility because of how it analyzed the former.

The taxpayer purchased a home in 1998 in Wichita, Kansas, and used it as her principal residence until 2004, when she sold it because she became unemployed. She put her furniture into storage and moved into a mobile home owned by, and on the property of, her daughter. In 2005, the taxpayer started a new job in Palmdale, California, while continuing to live with her daughter, traveling not only between Wichita and Palmdale, but also between Wichita and employer sites in Texas and Georgia. When in Kansas she continued to live in the mobile home on her daughter’s property.

In 2007, the taxpayer purchased a fifth-wheel trailer, which she placed in an RV park in Palmdale. The trailer was hooked up to utilities in the park, but every six months, in accordance with park rules, the taxpayer moved the trailer to a different site within the park. The taxpayer had a car in Palmdale, registered it and the trailer in California, had a post office box near the park, filed California income tax returns using her California address, and had third-party information returns mailed to that address.

In March 2009, the taxpayer entered into a contract to build a house in Wichita. She moved into the house in November 2009, and began to use it as her residence.

The Court explained that the first-time homebuyer credit is available to a first-time homebuyer, which is an individual who had no present interest in a principal residence during the three-year period ending on the date of the principal residence in question. For constructed property, the purchase date is the day that the individual first occupies the residence. In this case, that took place in November of 2009. Thus, the question was whether the taxpayer had a present interest in a principal residence during the three years ending in November of 2009.

The IRS argued that the taxpayer owned a present interest in a principal residence during the three years ending on the day she moved into the residence constructed in Kansas, because she owned the trailer in which she lived in California. The taxpayer argued that although she owned the trailer, it was not her principal residence because her principal residence was on her daughter’s property in Wichita.

The Court sidestepped the dispute between the IRS and the taxpayer by first focusing on whether the trailer could be a principal residence. Because section 36 incorporates the definition of principal residence in section 121, the court applied the definition in the regulations under section 121. Those regulations provide that property used as a residence does not include personal property that is not a fixture under local law. Under California law, personal property is all property that is not real property, and real property is land, property affixed to land, property incidental or appurtenant to land, and property that is immovable by law. California law provides that something is affixed to land when it is attached to it by roots, imbedded in it, or permanently attached to something that is permanent. The Court explained that whether the trailer was affixed to the land depends on the facts and circumstances. The Court concluded that the trailer was not affixed to the land, despite being hooked up to utilities, because it did not sit on a foundation, it was supported by its wheels, it was required to be moved every six months, and it was moved every six months. Accordingly, the trailer could not be a principal residence, which meant that the taxpayer did not own a present interest in a principal residence during the three years ending in November of 2009. And with that conclusion, the other issues did not need to be addressed.

Had the taxpayer sold the trailer at a gain, the taxpayer would have had reason to try to persuade a court that she had sold a principal residence and was eligible for section 121 gain exclusion. Of course, she would not have prevailed. Yet in this situation, the fact that the trailer was not a principal residence was a good thing for the taxpayer. As I tell my students, sound bite generalizations and 140-character tweets oversimplify things. Though it might appear that characterizing a residence as a principal residence is an overriding tax planning goal, there are times when it is better not to make or win that argument.

Wednesday, August 27, 2014

Bridges, Tunnels, Privatization, and Taxes 

Not quite a year ago, in Tolls, Taxes, and User Fees in a Public-Private Context, I wrote about a decision by the Supreme Court of Virginia rejecting a citizen’s claim that he could not be compelled to pay a toll for use of a previously toll-free tunnel that had turned over to a private company to which the state legislature had given toll-setting authority. The Court concluded that the legislature’s grant of toll-setting authority to the private company was not the unlawful delegation of the legislative power to tax, because the toll was not a tax.

Now the tide has turned. This time, it’s a matter of local jurisdictions trying to impose property tax on privately-owned bridges in the same area of Virginia. According to this article, the city of Portsmouth wants the owners of the South Norfolk Jordan Bridge to pay property taxes.

The bridge owners argue that the bridge is exempt from taxation because state law exempts from taxation any bridges and tunnels in Chesapeake Bay, its tributaries, or the Atlantic Ocean. They point to an amendment to recent budget legislation that declares, as a matter of restating existing law, that any bridge constructed and operated under specific statutory provisions “shall not be deemed to be within any locality to which it is attached,” without naming the Jordan Bridge.

The city argues that the legislation does not address taxation but simply deals with boundaries, as the amendment does not affect the state’s tax code but only its boundary-setting statutes. The city points out that the owners of the bridge rely on public services that are provided by the city, such as emergency response to accidents.

The dispute may end up in court. Or perhaps the legislature will address the situation. The author of the amendment in question claims that he and others in the state capital did not know the issue existed, and would have discussed the matter with legislators from the city had they known.

The deadlock demonstrates another reason why public services ought not be put into the hands of money-seeking private enterprises. Taking a position that public services ought to be made available to a private enterprise that doesn’t pay for those services is emblematic of the problems presented by post-modern capitalism. It would not be surprising to discover that the owners of private structures have paid lobbyists to “persuade” state legislators to exempt them from paying their fair share of the cost of the services that they use.

Perhaps the city should announce that it will accept the bridge owners’ argument that the bridge is not within the boundaries of the city, and that, accordingly, the city will continue to provide public services to those people and structures within its boundaries. What will happen when people realize that if they use the bridge and have an emergency, no help will be forthcoming? Perhaps they will stop using the bridge, which in turn would cut down bridge revenue. Post-modern capitalists need to understand that one needs to spend money to make money, and the idea of getting free public services is akin to trying to run a business on unwaged labor.

Monday, August 25, 2014

The Lap Dance Tax Dance Marathon 

Earlier this month, in Philadelphia Lap Dance Tax Effort Bumped Up to Court, Which Grinds It Down, I continued the saga of the attempt by Philadelphia to impose its amusement tax on lap dances, a commentary started in Lap Dance Tax? and continued in Tax Review Board Strips City’s Lap Dance Tax Attempt. Now comes another development in the tale, in an article that prematurely suggests the final chapter has been written, “Court fight over lap-dance levy won't grind on.” To the contrary, a sequel may be waiting in the wings.

According to the story, the city of Philadelphia, which lost its appeal of the Tax Review Board’s adverse decision, has let the deadline for appealing the judge’s decision pass by without taking any action. A representative of the mayor confirmed that no appeal would be taken, but added no additional information. It has been suggested that the city may attempt to raise the revenue by amending the amusement tax statute to make it cover the dancers. If legislation of this sort is introduced, rest assured that it will be debated and the lobbyists will be busy. The lawyer for the entertainment venues in question suggested that there are First Amendment issues, and also pointed out that this sort of legislation could reach other activities, such as karaoke singing.

Though the entertainment venues prevailed in this dispute, even if no legislative action develops, they incurred what their lawyer called “a small fortune” in resisting the city’s taxation attempt. Hopefully their tax advisors remember that there could be a deduction to offset part of the cost.

Somehow, I don’t think we’ve heard or read the last of this. Sequels are produced because someone thinks there’s money to be made. It only takes one member of City Council to propose legislation.

Friday, August 22, 2014

Collecting Taxes Requires Funding 

Though the report of the U.S. Treasury Inspector General on the collection of the medical device tax carries a July 17 date, it was issued just a few days ago. The report explains that the tax is not yielding as much revenue as was predicted, nor are as many companies filing returns as had been anticipated. The tax, which is controversial, probably is being ignored by some businesses that are required to pay it.

According to the report, the IRS lacks the ability to identify the companies that should be paying the tax. Nor does the IRS, according to the report, have the appropriate systems in place to ensure that the amount of tax being paid is correct.

To identify taxpayers and compute the appropriate tax, the IRS needs resources. Because the Congress continues to short-change the IRS, the resources must come from other tax enforcement programs. For all we know, the IRS shifted funds from other programs, but the amount that it was able to shift was insufficient to identify all of the taxpayers required to pay the tax.

When the Congress enacts a tax but fails to provide funding to collect the tax, the enactment of the tax is nothing more than window dressing. This approach probably is intended to make those favoring the tax pleased that it has been enacted while also pleasing those who oppose the tax by ensuring that some, most, or all of it will not be collected. When the tax was enacted, I considered it to be counter-productive, because it does not contribute to the diminishment of health care costs. For example, medical devices that screen for diseases and permit remediation before the disease generates a more expensive health problem ought not be taxed. What should be taxed are processes, habits, performances, and items that contribute to health care cost increases, though this sort of tax needs to be applied across the board and not just to a few items.

For me, this situation is just another example of how ineffective Congress has become. In time, if the trend continues, Congress will become irrelevant, and that’s not a good outcome.

Wednesday, August 20, 2014

“Give Us a Tax Break and We’ll Do Nice Things.” Not. 

Almost two years ago, in Public Financing of Private Sports Enterprises: Good for the Private, Bad for the Public, I pointed to the fiasco surrounding the financing of the Yankee Stadium parking garages as yet more proof of why public money should not be spent, either directly or through tax subsidies, to defray some or all of the cost of a private undertaking. To refresh the collective recollection:
When the new Yankee stadium was built, the owners managed to extract all sorts of public benefits to assist them. New York City waived $2.5 million in taxes. New York State waived $5 million in taxes. Federal tax breaks amounted to $51 million. New York City dished out $32 million to replace public parks seized by the state legislature. The state’s Empire State Development Corporation contributed $70 million. Some claim that public investment in the stadium and its parking garages comes in at $1.3 billion. Critics has opposed the garages because sufficient public transportation existed in the area, and because the garages are not what is needed to revitalize the neighborhood. Critics predicted that the garages would not be economically feasible.

So what happened? As predicted, the garages are an economic failure. Not surprisingly, the Bronx Parking Development Company has defaulted on $237 million of bonds that qualified for tax-exempt status under three tax systems, city, state, and federal. New York’s mayor has proposed that, “If the owners of the parking garage can’t make money, that’s sad. We’ve got to find a way to help them.” Really? What about the people who can’t make money because the jobs for which they are educated and qualified have been shipped overseas? Should “we” help them? If welfare is so bad, as the anti-tax and anti-government forces claim, why do we find the same folks supporting public assistance for millionaires and billionaires? Why?
Now comes news that the parking garages are helping themselves. According to the report, some Yankee fans who use the garages are being required to pay twice, first to a ticket machine that fails to generate a validation ticket and then again to an attendant who refuses to accept as payment the time-stamped receipt generated by the ticket machine. It happens frequently, and a police officer told one disgruntled fan, “They do it to everybody. It’s a scam.” Another police officer explained, “This happens all the time. They’re not going to budge.” I’m no expert in criminal law but it seems to me that some arrests are in order.

New York City’s Department of Consumer Affairs has handled 45 complaints against garages operated by the company in question. It earned an F from the Better Business Bureau.

Of course neither the development company that built the garages nor its partner company that operates the garages have commented. The development company benefited from $237 million in tax-exempt bonds as part of the deal that was described in Public Financing of Private Sports Enterprises: Good for the Private, Bad for the Public. Worse, it has racked up $48 million in unpaid rent, taxes, and other fees owed to the city.

There were those who said, “Cut out taxes and we’ll create jobs.” We know how badly that turned out. There were those who said, “Use public resources to fund private enterprise and it will do wonderful things for the citizens.” Now we’re seeing how that is turning out. Yet these are the folks who dare to label the disabled, the poor, the injured veterans, and the furloughed workers as “takers.” We know who’s doing the taking. It’s time for those who have been supporting these takers because they don’t like takers to figure out how ridiculous their thinking has been when they enter the voting booth.

Monday, August 18, 2014

Campaign Promises of Cheap Gasoline and No Taxes 

Last week, on a visit to my son and daughter-in-law in Rhode Island, we drove past a campaign billboard on which the candidate’s promise was proclaimed. If elected, he would lower gasoline prices to $2.50 per gallon. I asked, “What’s the story with this guy?” I was told that Leon Kayarian had made that promise not only the highlight of his campaign but the only issue of his campaign. I was assured he almost certainly would not win.

Rhetorically, I asked, “How would he do that? Repealing the state gasoline tax would not lower prices that much.” To find the answer, I went to his web site, where he advocates adherence to the “Pickens Plan.” The gist of the Pickens Plan is that America needs to be energy independent. The Plan consists of using natural gas for fleets and heavy-duty trucks, modernizing the electrical transmission grid, developing renewable energy sources, and increasing energy efficiency in buildings. Those are all excellent goals, but how would achieving them reduce the price of gasoline? The Pickens Plan doesn’t appear to address that question.

Kayarian, however, claims that “THE KEYSTONE PIPELINE APPROVAL COULD BRING GASOLINE PRICES DOWN TO $2.50 A GALLON, OR AS LOW AS $1.87 A GALLON, LIKE IT WAS IN 2008.” The pipeline would move Canadian tar sand oil to the United States coast for export. It does not appear to have any effect on the refining of gasoline. Gasoline prices are affected by both supply and demand, and the reason for the low price in 2008 was the Bush Recession that drove down demand as the economy suffocated.

But Kayarian’s campaign puts the proposition in terms of a promise. If elected, how would he keep that promise? What power does he have as a state governor to affect the prices charged for a commodity traded on a global market? Would he dictate a price limit? All that would do is to drive the gasoline suppliers out of the state.

Yet the Pied Piper promises of cheap gasoline, $5 per month mortgage payments, nickel candy bars, three-dollar dinners, and zero taxes resonates with those whose inability to bring rational analysis to their decision making also prompts them to invest in the “guaranteed 40 percent annual return” and “triple your money in a week” investment offers. The number of people afflicted with this psychological impediment is much more than a few, which is why I wonder if perhaps Kayarian just might gather enough votes to win in a multiple-candidate election. Consider what similar campaign tactics have done at the national level. Not that it’s desirable, but it’s a genuine possibility. And a dangerous one.

Friday, August 15, 2014

Tax Is More Than Numbers: Words Matter 

A recent case, Chapel v. Comr., T.C. Memo 2014-151, illustrates why the “tax is numbers” mentality that convinces too many law students to ignore tax courses is so wrong. Though numbers matter, much of tax analysis involves words. In Chapel, a divorce decree incorporated a separation agreement into which two spouses had entered. The agreement provided that the former wife would receive “[a]n award of property settlement in the sum of $63,500.00, which amount shall be paid within thirty (30) days” of June 6, 2008. The agreement also provided the former wife an additional property settlement of $85,723. The agreement contained separate provisions under which spousal support would be paid to the former wife until she remarried or died or the former husband died.

In each of the first seven months of 2008, the former husband wrote checks to the former wife. The first five were for $4,300, the sixth for $4,944.33, and the seventh for $321.34. He also wrote a check, on July 23, 2008, for $63,500. The words “spousal support” were handwritten on the check and then crossed out. The former husband deducted $90,264 as alimony on his 2008 federal income tax return, with no explanation for the $1.67 discrepancy between that amount and the $90,265.67 total of the eight checks. The amount of another check, written in September for $3,761, was not deducted.

The IRS issued a notice of deficiency, determining that $63,500 of the payments was not deductible because it was a property settlement payment and not alimony. The Court concluded that the payment failed the requirement of section 71(b)(1)(B), which provides that, among other things, a payment is not deductible alimony unless “the divorce or separation instrument does not designate such payment as a payment which is not includible in gross income under this section and not allowable as a deduction under section 215.” Because property settlement payments are not alimony, designating a payment as a property settlement is the equivalent of designating it as not includible in gross income and not deductible. The Court relied on several facts. First, the agreement stated that the former husband was required to make a $63,500 property settlement payment. Second, the $63,500 was provided in one category of issues addressed by the agreement, and spousal support, or alimony, was addressed in another category. Third, the July 23, 2008 payment was the exact amount of the property settlement specified in the agreement.

The Court rejected the former husband’s argument that the July 23, 2008 payment was an alimony payment reflecting proceeds of his sale of stock, and that the $63,500 property settlement payment required by the agreement had been made in another transaction. The bank statement provided by the former husband to prove that the $63,500 payment was made in another transaction contained no information supporting that claim.

The former husband lost more than a deduction. The Court upheld the IRS imposition of the section 6662(a) accuracy-related penalty.

Words matter. The parties in Chapel could have arranged their financial settlement differently, reducing the property settlement and increasing the alimony. There are non-tax reasons why this might not appeal to one or the other of the parties. It is unknown whether they considered other options, but once they agreed that there would be a $63,500 property settlement payment, it was too late, when it came time to file the tax return, to characterize the payment as something other than a property settlement payment. Words matter. They tell us what we can do with the numbers.

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