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Wednesday, September 02, 2015

When Tax Maneuvering Goes Bad 

The politicians outdid themselves this time. According to this story, a gerrymandering stunt has backfired, leaving the outcome of a vote on a local sales tax increase in the hands of one person.

When the promoters of the Business Loop 70 Community Improvement District in Columbia, Missouri, decided to finance their projects with a sales tax increase, they were required to comply with a state law that subjects the increase to approval of those who reside in the district. So the promoters gerrymandered the borders of the district so that it would not include any voters. In other words, they redrew the boundary lines to exclude residential properties. It might have worked – as it is unclear how something can be approved if there is no one qualified to vote – but those doing the gerrymandering stunt messed up. They overlooked a residence. And thus, 23-year-old Jen Henderson, a college student, has the only vote. She has suggested she will vote no, because the sales tax increase, as are all sales taxes, is regressive, hurting lower income individuals more than it affects higher-income people. She also noted that the director of the proposed district would benefit from the arrangement.

I dislike gerrymandering. It’s nothing more than manipulation. In this instance, it reflects an attempt to disenfranchise the voters who, under state law, have a right to approve or disapprove a tax that will fall upon them. The promoters want to impose a tax without giving those who are affected a say in the matter. Of course, disenfranchising voters has become a primary weapon in the attempt to take over more than a sales tax issue in one small town in the Midwest. It has become a staple of the oligarchy and its puppets. This time around, the effort backfired. I’m not so confident that next time, with a bigger playing field and more at stake, it will similarly falter. It could, if people would get educated about what is happening behind the scenes. After all, they don’t teach this stuff in our public schools. They don’t want people to know what actually transpires when political maps are redrawn. The best thing about this story is not the oversight by the promoters. It’s the opportunity it presents for Americans to learn that those who claim to be on their side aren’t. That’s the sort of lesson that, if learned too late, brings tears and no recourse.

Monday, August 31, 2015

The Tax and Benefits Conundrum 

The anti-tax crowd, along with those who are willing to tolerate minimal taxation but want to cut significantly government spending, must not be very happy with a photo and story making the rounds. I first saw the photo on facebook, where it has popped up multiple times, and so I looked for more information. According to this story, which also includes the photo, Brad Craig of Okanogan, Washington, thanked firefighters for saving his home from one of the many huge fires that are sweeping across Washington and Oregon. Someone thanking public servants for saving their lives or their homes is not particularly startling, and actually is nice to see.

But there’s a twist in this story. In the photo, Brad Craig is seen wearing a t-shirt that says “Lower Taxes + Less Government = More Freedom.” It is a shirt sold by a Tea Party organization, one that opposes funding for federal disaster relief. Federal funds contributed significantly to the cost of fighting the fire that threatened Brad Craig’s house.

So what we have is someone who is opposed to government and taxes but who is quite happy to benefit from taxes and government when in need. There is something woefully inconsistent at work. Someone who truly wants freedom to be free ought to say, “No thank you, I do not accept government benefits, and that means I do not accept your help in saving my home. I will do it myself.”

This situation is but one example of a widespread cultural phenomenon that helps put the “makers and takers” mantra into proper perspective. For example, people who oppose highway taxes don’t refrain from using public roads, and are among the first and loudest to complain when they incur hundreds of dollars in expenses because of potholes. It is human nature to want to take without paying. Rather than pointing the finger at those who allegedly take without making, mostly the poor, disabled, and unfortunate, there needs to be more use of mirrors.

Let’s see how many of the anti-tax, anti-government crowd are willing to give up all public benefits in exchange for not paying taxes. Let’s see how long it takes for those who go that route to cry uncle and surrender. Sometimes things are easier to learn through the experience of practical reality than through theoretical philosophies.


Friday, August 28, 2015

Traffic Ticket Fines Based on Income? 

Over at debate.org, TheUnapologeticTruth asked, “Should traffic tickets be scaled to personal income like taxes?” No matter one’s conclusion, it is helpful that this sort of question is asked every now and then to see if circumstances have changed in a manner warranting a change in how traffic tickets are priced.

Those favoring a “yes” answer to the question point out that a fixed traffic fine is but petty cash to a wealthy person but for a poor person it might mean no groceries for a week or two. If the fine is to be a deterrent, argued another, it needs to be set at an amount that has the same impact on rule-breaking driver, something that does not happen if the fine is a fixed amount.

Of those favoring a “no” answer to the question, one person argued that adjusting a fine to reflect income could generate a higher fine for a wealthy person who drives without a seatbelt than for a poor person who is speeding. Another explained that basing a fine on income would be the equivalent of imposing criminal sentences set as a percentage of remaining life expectancy, causing younger convicts to face longer prison terms than older ones. Still another pointed out that the income of the driver does not change the degree of risk to others created by the traffic violation. Yet another noted that under such a scheme, police would prefer to stop the expensive vehicle going 5 mph over the speed limit rather than the inexpensive vehicle going 15 mph over the limit. The final commentator asked if it would make sense to charge a higher-income person a higher fee for trash collection or for water usage.

It is no surprise to me that at the time I examined the web site, the replies were split 50-50. The question is one for which good arguments can be made in support of either response. Yet no one raised the concern that tipped my response to “No.” Basing a traffic ticket fine on income would require each traffic enforcement district, or agency, or court to engage in a determination of an offender’s income. What is income? Is it federal gross income? Federal adjusted gross income? State gross income? Taxable income? Does it include tax-exempt income? And who makes the determination, and how do they do so? Do they “plug into” the IRS or a state revenue department? Do they trust the offender to produce authentic copies of tax returns? Do they provide their own “income determination” form? What happens if, a year or two later, the offender is audited and the final determination is a significant increase, or decrease, in the offender’s federal or state income of whatever sort? Would an additional fine be due? How would the relevant traffic enforcement entity know of the audit?

So my bottom line is, yes, conceptually it is an interesting idea with some valid arguments in support, and with some valid arguments in opposition. But when I turn to practical reality, a benchmark too often overlooked, the answer for me is clearly, “No, it’s not worth it.”


Wednesday, August 26, 2015

A Rudeness Tax? 

A reader alerted me to an unusual book, Tax the Rude, Not Me!. The examples provided in the preview tend to confirm the depiction of the book as humor. For example, they propose an “outer limits tax” on “infuriating supermarket shoppers who insist on going through the supermarket "express" checkout ahead of you knowing full well they exceed the posted maximum limit” and a “petrie dish tax” on “restaurant customers who use the rest rooms, don't wash their hands, and then dig around in the candy dish at the cash register for their favorite after-dinner mint.” These impositions, even if they somehow were to be enacted, would be fines, or penalties, or perhaps in some instances user fees. In fact, there already exist penalties for littering, which would cover the behavior of smokers “who toss their butts everywhere,” which the authors would subject to a “butthead tax.”

But though it makes no sense to use taxation or even government intervention to teach rude people how to be polite, there is at least one example of an attempt by the private sector to deal with rude people economically. According to this story, the owners of a café in southern France created a variable-price menu in an attempt to reduce customer rudeness. According to the menu, those who requested “a coffee” would be charged five times the amount to be paid by those who said, “Hello, a coffee, please.” Omitting the “Hello” would trigger a price in between those two amounts.

The owner of the café has not actually charged the higher prices. Perhaps it is because customers quickly caught on. The owner explained that his customers’ behavior changed, and in fact many decided to exaggerate their politeness.

Here is what I fear. Modern American tax policy, which is in tatters, is of such a wrecked nature that it is only a matter of time before someone proposes a refundable politeness credit. The form would be fun, would it not? “How many times during 2017 did you hold a door open for another person?” Even better, the audits and the Tax Court litigation.

Seriously, learning politeness begins with those responsible for the education of a child. Tragically, teaching politeness requires an understanding of what politeness entails. It seems to be on a trajectory to oblivion. That’s what happens when greed predominates.

Monday, August 24, 2015

Tax Return Preparer Gone Bad 

It is not unusual to see stories about tax return preparers who are convicted of tax fraud, or of ripping off their clients. It happens too often. But a recent story about a convicted tax return preparer caught my eye because the actions of the preparer were especially egregious.

First, the preparer, who pleaded guilty to conspiracy, filing false tax returns, fraud, and aggravated identity theft, used the names of foster children and disabled children as dependents on his clients’ tax returns, even though those children were not dependents of the clients. The sentencing judge explained that “there was a moral ‘distaste’ for what [the preparer] did.” No kidding. But it gets worse.

Second, the preparer, after pleading guilty and while awaiting sentencing, then proceeded to prepare returns at another location using someone else’s name as preparer. When questioned about it under oath, he denied having done so. But after consulting with his attorney, the preparer, at the sentencing hearing, admitted in court that he had used another person’s name.

So what was the punishment? A prison term of 7 years and 10 months, followed by three years of supervised release, and restitution of $39,895.

The preparer is a citizen of Sierra Leone. Two questions come pop up. Should a non-citizen be permitted to do business as a tax return preparer? Should a non-citizen who commits tax fraud be deported?

Friday, August 21, 2015

Be Careful With Divorce Tax Planning, Part II 

About a month ago, in Be Careful With Divorce Tax Planning, I noted the lessons learned from two Tax Court cases in which the taxpayers ended up with federal income tax consequences worse than those that they would have experienced with careful tax planning when arranging their divorces. And now, as so many things seem to happen in threes, comes another Tax Court case with yet another divorce tax planning lesson. As I pointed out last month, the “the rules are fairly straight-forward, as tax rules go, [but] it is easy to get into trouble.

In Crabtree v. Comr., T.C. Memo 2015-163, a married couple divorced, entering into an agreement which the state family court entered as an order of the court. The state court order stated that it was issued “[w]ithout a hearing, without passing upon the substance, form, and/or fairness of the agreement,
and without knowledge by the Court of the facts and circumstances concerning the negotiations of the parties.” The sixth paragraph of the agreement provided that the former husband would pay “unallocated alimony/child support in the monthly sum of $5,232.00 for a continued 8 year period with the provision as long as [the former wife] should not remarry or cohabitate.” Nothing in the agreement addressed what would happen to the payment obligation if the former husband or former wife died during the 8-year period. The agreement also provided that the former husband would pay current tuition for both daughters of the marriage, then in elementary or high school, and for their undergraduate college tuition if they started college after graduating high school. Other provisions in the agreement disposed of the marital property and liabilities.

During 2010, the former husband paid $62,784 to the former wife. She did not report these payments as gross income. The IRS issued a notice of deficiency, determining that the $62,784 constituted gross income. The former wife disagreed, and filed a petition with the Tax Court, arguing that the payments did not constitute alimony for federal income tax purposes.

The Tax Court agreed with the former wife, reasoning that because the payments were not scheduled to stop if either former spouse died they did not meet the requirement of section 71(b)(1)(D) that there be no liability to make the payment for any period after the death of the payee spouse. The court explained that the sixth paragraph of the agreement, though not explicitly stating whether the payment obligation ended at the former wife’s death, created an inference that the obligation would not so terminate. The language referred to “a continued 8 year period,” with no indication that the period would be shortened. The same paragraph did contain two conditions terminating the obligation, namely, marriage or cohabitation by the former wife. The absence of any reference to her death suggested that the parties did not contemplate termination of the payment obligation for that reason.

The former wife argued that under state law, the payment obligation automatically terminated on her death, citing section 1512(g) of chapter 13 of the Delaware Code. However, the Tax Court explained that this provision only applies to alimony determined by the state court, in contrast to amounts voluntarily by the divorcing parties in a divorce agreement or similar contract. Even though the state court stamped the parties’ agreement as an order of the state court, that court expressly provided that there was no hearing, no evaluation of the substance, form, or fairness of the agreement. That took the analysis back to an interpretation of what was provided in the parties’ agreement, which the Tax Court determined did not cut off the payment obligation if the former wife died.

The opinion does not reveal whether the former husband deducted the alimony payments. If he did, the outcome in the former wife’s case would be inconsistent with a deduction by the former husband. It is possible that the former husband and IRS agreed to wait for the decision in the former wife’s case and proceed accordingly.

Though the taxpayer prevailed, the taxpayer was required to invest time and money, and probably some psychic energy, in a case that ought not have occurred. A simple sentence in the agreement, which the parties drafted without assistance of counsel, would have specified whether or not the payment obligation terminated if the former wife died during the 8-year period. There is no way of knowing if they considered the question. There is no way of knowing, if they considered the question, what they wanted the answer to be. There is no way of knowing if they thought that the answer did not require a provision in the agreement. What can be known is that it is risky to draft a divorce agreement without understanding the tax implications.

Wednesday, August 19, 2015

More Tax Fraud in the People’s Court 

Roughly a month ago, in Tax Fraud in the People’s Court, I described a case on one of the television court shows in which both parties engaged in tax fraud and when their arrangement fell apart, unsuccessfully sought relief from the judicial system. This post was the latest in a series of commentaries on the television court show episodes that I happen to see, often long after the original broadcast. Among those commentaries are 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?, and Learning About Tax from the Judge. Judy, That Is.

And as the title to this post suggests, there’s yet another episode involving disappointing behavior. The plaintiff sold a boat to the defendant, with delivery to occur when the full price was paid. The buyer paid part of the price. The plaintiff sued for the balance of the sales price, alleging that the agreed price was $3,500. However, the bill of sale showed a sales price of $500. The reason? An attempt to minimize the state sales tax on the transaction.

Worse, the check that was written by the purchaser for the amount that had been paid included the word “generator” in the memo section of the check. The judge figured that out quickly. It was an attempt to change a non-deductible cost of a boat into a business deduction. I’m guessing that the goal was to get one of the first-year expensing deductions.

The seller prevailed. Why? The buyer admitted that even though he had not paid the full price, he had gone, in the very early morning, to where the boat was stored and took it without having paid the balance of the purchase price.

This is more than a tax issue. Even if there were no applicable taxes, why does someone think that he or she is permitted to take possession of an item without having paid the full price when the contract provided that the transfer of the item would take place when the full price was paid? Perhaps the answer is greed, a disease that has become an infection on the order of a pandemic. I don’t think eliminating taxes or getting rid of government solves the problem.

Monday, August 17, 2015

Rebutting Arguments Against Mileage-Based Road Fees 

No sooner had I noted, in Mileage-Based Road Fee Inching Ahead, that the Editorial Board of the New York Times had published remarks favoring the mileage-based road fee than a reader sent along links to two articles in which commentators expressed serious dissatisfaction with the idea. As readers of MauledAgain know, I am a strong advocate of shifting to this twenty-first century means of financing road infrastructure. It began with Tax Meets Technology on the Road, and has continued through Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, Liquid Fuels Tax Increases on the Table, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, Mileage-Based Road Fees: Privatization and Privacy, Is the Mileage-Based Road Fee a Threat to Privacy?, So Who Should Pay for Roads?, and Mileage-Based Road Fee Inching Ahead.

Both commentators dislike what they perceive as an intrusion on privacy required by a mileage-based road fee system. In Oregon Tax Is a Drag on the Open Road, Stephen L. Carter argues that the system denies drivers the anonymity that can be obtained even if a person is acting in a public venue. He notes that if no one recognizes a person, that person remains anonymous. He concedes that “there are traffic cameras everywhere,” and that E-ZPass and its equivalents permit tracking. In Don't Track Me, Bro! The Perils of Tax by GPS, Glenn Harlan Reynolds laments that a mileage-based road fee will mean the demise of the freedom of driving a car that permits a person to “go anywhere without buying tickets, checking in, or otherwise operating under someone else’s nose.” He worries that the system could alert authorities if a driver is speeding. He concedes that cell phone tracking already exists, that license-plate cameras are tracking vehicles, and that the communication systems in vehicles can be accessed remotely. He argues that it is better to increase the gasoline tax, because a mileage-based road fee would be designed to generate as much additional revenue, making the increase in gasoline tax less of an intrusion. He doesn’t mention that the use of credit and debit cards to purchase the gasoline also permit tracking of motorists.

These concerns were addressed by me in previous posts. In Mileage-Based Road Fees: Privatization and Privacy, I explained:
And, yes, there is a risk that a mileage-based road fee system can be used to determine where a vehicle has been. Vehicles, of course, do not have privacy rights. But because people assume that an owner of a vehicle is wherever the vehicle happens to be, it is understandable that knowing where a vehicle has been might reveal where the owner has been. Of course, a mileage-based road system need not track location, though those being considered and those in place do so, provided that the fee did not change based on the road being used. Connecting to the odometer would suffice. It also is important to remember that for many decades, the location of vehicles has not been a private matter hidden behind the sacrosanct walls of a person’s home. For a long time, law enforcement officials, investigative journalists, and even nosy neighbors have been able to determine where a vehicle has been, aided by the existence of license plates, bumper stickers, and other identifying characteristics. There’s nothing private about being in public.
And in Is the Mileage-Based Road Fee a Threat to Privacy?, I argued:
Existing technology, such as roadside cameras, credit card receipts for fuel purchases, electronic toll systems such as EZPass, and observations by law enforcement authorities, already provide substantial information concerning the location of a vehicle. Similarly, the location of an individual when in public areas is not a secret. The mileage-based road fee does not generate a significant increase in the revelation of vehicle location information, and does nothing to increase the disclosure of individual location information.
Those who are holding on to a right of privacy that exceeds what presently exists are holding on to a dream. That dream is long gone.

Carter raises another objection to the mileage-based road fee. He claims that the gasoline tax is designed to encourage people to purchase fuel-efficient vehicles, that it has succeeded in doing so, and that once motorists’ vehicle purchase habits have been changed, the gasoline tax has served its purpose and should not be replaced with a tax that affects motorists who have purchased fuel-efficient vehicles. He compares the gasoline tax to the tax on tobacco, noting that if the tobacco tax succeeds in encouraging everyone to give up use of tobacco, the tax will disappear. The first flaw in Carter’s argument is the claim that the gasoline tax is designed to encourage people to purchase fuel-efficient vehicles. The gasoline tax was enacted to fund the construction and maintenance of highway infrastructure, and was enacted decades before anyone was thinking about fuel efficiency. Thus, until the need for road maintenance disappears, funding cannot stop. The attempt to analogize the tobacco tax is misplaced. The second flaw is Carter’s claim that the gasoline tax has “nudged people toward purchasing more fuel-efficient vehicles.” The gasoline tax has not been increased for a very long time, which is, of course, a chief cause of the problem. What affects consumer vehicle choices is the cost of gasoline and diesel fuel, which, though fluctuating, has increased over those decades.

Carter also argues that the impact of the mileage-based road fee, using computations from the Oregon experiment, would penalize purchasers of vehicles such as the Prius. Viewing the impact as a penalty is caused by too narrow a view of the situation. The increase is nothing more than an adjustment to account for the fact that electric vehicles use the roads, and cause them to wear down, and have been escaping contributions to their upkeep. The fact that a Prius causes less damage because it weighs less than Carter’s example of a Ford pickup truck is not a concern because weight can be built into the mileage-based road fee computation. The mileage-based road fee functions as a user fee, whereas the gasoline tax does not.

As for Carter’s claim that 40 percent of the mileage-based road fee collected by Oregon will end up in the hands of private vendors, it would be helpful to see a source other than the several news outlet sites that appear to be repeating someone’s talking point. If it is true, and the absence of anything in the enabling statute or the report of the Oregon Road User Fee Task Force mentioning a 40 percent fee, or any other percentage, suggests that it might not be, then there is an issue. It could be, however, that there is some fixed fee which is a higher percentage at the outset and will decline as increasing numbers of motorists sign into the system. Until someone provides a citation to an official record, it makes no sense to pursue the question any further.

Friday, August 14, 2015

Does It Make Tax Cents? 

The question of whether it is permissible to pay one’s taxes with pennies is one that does not seem to go away. In many instances, the issue isn’t simply whether one can use pennies. Often there is another angle. For example, in the situation this story, the taxpayer dumped the pennies all over the place in the tax office, and was arrested. In another situation, reported here, the taxpayer and public officials got into a spat about the taxpayer’s right to record the payment encounter.

Recently, as this story explains, a Pennsylvania taxpayer, who describes himself as a tax protester, decided to pay his real estate property tax bill with pennies. He encountered difficulties finding 83,160 pennies after visiting 15 banks over a three-day period. After getting his hands on roughly 50,000 pennies, he made up the difference with higher denomination coins and some dollar bills. He ended up paying the bill at a bank designated by the township, because the township accepts only checks and money orders.

What caught my eye about this story wasn’t the use of pennies and coins, an event which happens often enough to be almost boring. Instead, I was amazed at the reason given by the taxpayer. He considers the real property tax to be “financial slavery.” Why is it financial slavery? He claims that the taxes are used to finance the public school system, which for some reason he does not support. He also stated that he was paying in pennies because he was “being forced to pay for something against my own will.”

School taxes constitute only part of the tax bill paid by the taxpayer. The real property tax also pays for a variety of public services, including, for example, police protection and maintenance of local roads. The taxpayer apparently thinks that he is entitled to use those roads but cannot be compelled to contribute to the cost of maintaining them. That, to me, speaks volumes. So, too, did his revelation that he waited until the last minute to pay the taxes because he had other bills to pay.

Other than a few minutes of fame and attention, the taxpayer’s sense-less gesture did nothing to change tax policy or the township’s budget. What a waste of three days, to say nothing of the cost of the wheelbarrow that he somehow had the resources to purchase at Home Depot to transport the pennies.

Wednesday, August 12, 2015

Congress Fixes a Tax Problem 

Four years ago, in United States v. Home Concrete & Supply, LLC, et al, the Supreme Court held that a taxpayer’s overstatement of adjusted basis, causing a reduction in the amount of gain recognized reported as gross income on its tax return, did not constitute an omission from gross income, thus precluding the IRS from applying the six-year statute of limitations that supersedes the usual three-year statute. The Court decided not to overrule its previous decision in Colony, Inc. v. Comr., in which it had reached the same conclusion with respect to essentially identical language in the Internal Revenue Code of 1939. The Court again concluded that overstating basis is not the same as omitting gross income, even though a consequence of overstating basis is omission of gross income.

Section 2005 of the Surface Transportation and Veterans Health Care Choice Improvement Act Of 2015, H.R., 3236, amends section 6501(e)(1)(B) of the Internal Revenue Code to provide that “An understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income.” The change applies to tax returns filed after July 31, 2015, and to returns filed before August 1, 2015 for which the statute of limitations, determined without regard to the newly enacted provision, has not expired.

What’s shocking is not that the Supreme Court’s decisions in Colony, Inc., and Home Concrete have been overturned. Those decisions, though relying on a very precise and technical reading of the statute, generated the absurd result that a poorly drafted statute can create. What is shocking is that the current Congress passed legislation that changes the tax law. Though often attacked as a “do nothing” Congress, this development proves that the Congress can do something when it wants to do so. The implications of that realization reach far beyond the tax law.

Monday, August 10, 2015

This Tax Change Will Help But It Won’t End the Problem 

Taxpayers who are partners in partnerships, and tax practitioners preparing returns for partners, have far too often encountered the delays generated by the fact that for many years the due date for partnerships and for individuals has been the 15th day of the fourth month following the close of the taxpayer’s taxable year. For calendar year taxpayers, that rule produces the familiar April 15 due date. Because the partnership is not required to file its return and send schedules K-1 to its partners until April 15, the calendar-year partner cannot file a return by April 15 because the information has not been received. The situation gets more complicated if the partnership is a partner in another partnership, and so on. The practical solution is for the partner to make use of extensions of time to file, but those do not absolve the taxpayer of the duty to pay taxes by April 15. Failure to do so triggers interest and penalties. But how is the taxpayer to estimate a tax liability? My personal experience for clients has been that partnership tax return preparers willing to provide guesstimates often discover they were way off the mark.

What’s the answer? One possibility has just been enacted by section 2006(a)(2)(A) of the Surface Transportation and Veterans Health Care Choice Improvement Act Of 2015, H.R., 3236. It amends section 6072(b) of the Internal Revenue Code to provide that the due date for partnership income tax returns is changed from April 15 to March 15 for calendar year partnerships and, for fiscal year partnerships, from the 15th day of the fourth month following the close of the year to the 15th day of the third month.

Will this solve the problem? Yes and no. Certainly for partnerships that are not partners in other partnerships, the information should reach the partner in time to file without relying on extensions, unless, of course, the partnership takes advantage of an extension. But if the partnership is a partner in a partnership, which in turn is a partner in another partnership, and so on, there is no guarantee that the movement of information along the chain will finish in 31 days. It has become increasingly common to find chains of partnerships, designed for one or another of various reasons.

Though this particular partnership taxation challenge is far from the most complicated, considering that issues such as allocations and basis adjustments are far more likely to cause partnership tax practitioners to get headaches, it is on the list of reasons that subchapter K is too unwieldy, too impractical, and too vulnerable to tax planning abuse. My solution? Subject partnerships to the income tax, and permit the tax paid by the partnership to be claimed as credits by the partners, allocated in proportion to the partners’ profit-sharing ratios in effect for the taxable year for which the tax is paid. The credit would be available for the taxable year for which the tax was paid if the information return is provided to the partner by the fifteenth day of the fourth month following the taxable year, and otherwise it would be available the following year. This would generate an incentive for partnerships in partnership chains to get their tax returns completed earlier in the tax filing season.


Friday, August 07, 2015

Perhaps This is Why June 30 C Corporations Aren't Within the New Due Date Rule 

This morning, in So Who Is It That Gets Hit With This Special Tax Rule?, I asked why C corporations with a June 30 taxable year were not within the scope of the amendment that shifts C corporation return filing due dates from the fifteenth day of the third month following the close of the taxable year to the fifteenth day of the fourth month. A reader passed along a suggested reason. Under current law, the due date for a C corporation with a June 30 taxable year is September 15. Under the amendment, but for the special exception, it would be October 15. What I had neglected to consider is that the federal budget year ends on September 30. It appears that the Congress did not want to delay filing and, more important, tax collection from one federal budget year to the next because of the adverse impact it would have on the computation of receipts and expenditures, and thus the deficit. This explanation makes sense.

Note: the reader has since sent along a link to the blog post by James R. Beaudoin, who provided the suggestion. He calls the special rule "a budgetary gimmick." He's quite right.

So Who Is It That Gets Hit With This Special Tax Rule? 

Section 2006(a)(2)(A) of the Surface Transportation and Veterans Health Care Choice Improvement Act Of 2015, H.R., 3236, amends section 6072(b) of the Internal Revenue Code to provide that the due date for C corporation income tax returns is changed from March 15 to April 15 for calendar year corporations and, for fiscal year corporations, from the 15th day of the third month following the close of the year to the 15th day of the fourth month. The amendment achieves this result by removing corporations from section 6072(b), leaving them within the general rule of section 6072(a).

Under section 2006(a)(3)(A) of the Act, the change applies to tax returns for taxable years beginning after December 31, 2015. Thus, for calendar year corporations, the due date remains March 15 for 2015 returns. It will not be until the 2017 tax filing season, for 2016 returns, that the change will go into effect for calendar year corporations.

However, section 2006(a)(3)(B) of the Act postpones this one-month due date shift for “any C corporation with a taxable year ending on June 30.” It postpones the change until the filing of tax returns for taxable years beginning after December 31, 2025. That’s a ten-year delay. Why? And who is deprived of the due date shift?

If there is a committee report explaining the Act, I cannot find it. It appears from a search of the Library of Congress legislation site for H.R. 3236 that the bill was introduced in the house, passed by the house, passed by the Senate, and sent to the President for signature. It would be interesting to know why this exception was included. Someone knows. I don’t.

Wednesday, August 05, 2015

Mileage-Based Road Fee Inching Ahead 

For at least eleven years, beginning with Tax Meets Technology on the Road, and continuing through Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, Liquid Fuels Tax Increases on the Table, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, Mileage-Based Road Fees: Privatization and Privacy, Is the Mileage-Based Road Fee a Threat to Privacy?, and So Who Should Pay for Roads?, I have advocated the replacement of liquid fuel taxes with a mileage-based road fee. I have never been alone in this effort. Progress has been made. Experiments are underway.

Now comes what I consider to be wonderful news. The Editorial Board of the New York Times has come out in support of moving beyond gasoline taxes as the source of transportation infrastructure funding. The focus of the editorial is on mileage-based road fees. Though the editorial is not, and is not intended to be, a technical analysis of the advantages of shifting gears on highway funding, it addresses the major issues, such as mileage measurement and privacy. These and other issues have been the subject of my commentary in one or more of the posts listed in the preceding paragraph. The editorial also notes that anti-tax groups surely will try to derail any changes, though it does not mention the true reason, which is a desire to put public assets within the control of an oligarchy beyond the reach of the voting booth.

The best news is that the editorial has been published by a newspaper that is widely read. Among the readers are people in a position to make decisions. The conversation now will move from the world of blogs, academic publications, and the legislative halls of a handful of states, to the national stage. Unfortunately, it probably will take another infrastructure disaster or two to kick start the process of shifting into the twenty-first century while putting the needs of the people above the desires of the greedy.

Monday, August 03, 2015

Do Sales Tax Holidays Make Sense? 

As mentioned in several reports, including this one, the state of Massachusetts has set up another sales tax holiday. Under the terms of the provision, for a two-day period, sales taxes will not be imposed on sales of items costing $2,500 or less. The goal of the provision is to generate economic activity. But do sales tax holidays increase spending? I think not.

The only way that a sales tax holiday generates increased economic activity is if it causes people to make purchases that they otherwise would not make. Does this happen? Perhaps here and there, but certainly not on any grand scale. Why? Making the cost of a $100 item $100 rather than the $106.25 it would cost after imposing the Massachusetts sales tax is not going to motivate someone who does not have the $100 to make the purchase. Nor is it going to cause someone who does not need or want the item to purchase it. The only person who would make the purchase on account of the sales tax holiday is the person who has $100 but does not have $106.25 and who needs or wants the item.

So what does a sales tax holiday do? Pretty much, it does two things. First, it causes people to accelerate their purchases. Knowing that something with a price tag of $106.25 two months from now can be obtained for $100 today will encourage people who have the $100 to make the purchase now. But, of course, two months from now, sales, and thus economic activity, will be $106.25 less than they otherwise would be. Second, the prospect of a sales tax holiday – which has been enacted repeatedly in Massachusetts for the past decade but for one year – causes people to wait, if the purchase is not urgent, in hopes of avoiding the sales tax. So, in both instances, the provision does nothing but move sales around in the calendar. If it increases sales, it’s a drop in the bucket.

So why do legislators enact these provisions? They do so because they can acquire votes by relying on people who think that some wonderful gift has been bestowed on them. Deep thinking, that is, thinking through the entire situation, would illuminate the minds of those who think that they’re getting some sort of long-term economic benefit.

As a member of the Massachusetts legislature noted, “It’s a gimmick.” And that legislator is a member of the political party that is addicted to tax cuts. Even he realizes the smoke-and-mirrors game of a sales tax holiday.

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