Friday, September 28, 2012

Taxes and Services 

There was an interesting editorial in Monday’s Philadelphia Inquirer, which reacted to a recent study by the Pew Charitable Trusts indicating that the “middle-class tax burden in Philadelphia is now comparable to what suburbanites pay.” The editorial writer concluded that this “makes it even more urgent to improve schools and make neighborhoods safer so the city can attract families and businesses.”

There is no doubt that people are less likely to bring their businesses or their families into a city that lacks good schools and that presents risks to safety beyond what people are willing to tolerate. And there is no doubt that good schools and acceptable public safety require money. And there is no doubt that in order for there to be sufficient money, there need to be taxes.

The editorial makes an important observation. It specifically refers to “suburban residents' willingness to pay higher taxes for better schools and municipal services - public safety in particular.” It also notes that the city isn’t collecting taxes that it ought to be collecting, because of the problems with real estate assessments, an issue I’ve previously explored in An Unconstitutional Tax Assessment System, Property Tax Assessments: Really That Difficult?, Real Property Tax Assessment System: Broken and Begging for Repair, Philadelphia Real Property Taxes: Pay Up or Lose It, How to Fix a Broken Tax System: Speed It Up? , Revising the Board of Revision of Taxes, How Can Asking Questions Improve Tax and Spending Policies?, This Just Taxes My Brain, Tax Bureaucrats Lose Work, Keep Pay, Testing Tax Bureaucrats Just Part of the Solution, A Citizen Vote on Taxes, Freezing Real Property Tax Reassessments: A Nice Idea, The Tax Price of a Flawed Tax System, Can Bad Tax Administration Doom the Tax?, Taxes and Priorities, R.I.P., BRT, A Tax Agency Rises from the Dead, and Tax Law as Subterfuge: Best Use Valuation v. Current Market Valuation, How to Kill a Bad Tax System That Will Not Die?, The Bad Tax System That Will Not Die Might Get Another Lease on Life , Robbing Peter to Pay Paul, Tax Style, Don’t Rob Peter to Pay Paul: Collect Unpaid Taxes, The Philadelphia Real Property Tax: Eternal Circles, A Tax Problem, A Solution, So Why No Repair? , and Can the Philadelphia Real Property Tax System Be Saved?.

The editorial then suggests that “The suburbs need to pay as much attention to the Pew study as Philadelphia, but for the opposite reason. They are going to lose residents if they continue on this course. Their rising tax burdens have become a much heavier lift for families still struggling after the recession. But without more revenue, it's hard for towns to keep up with residents' demands to maintain or improve services.” Exactly. You get what you pay for. The question is who is going to pay for what.

The editorial concludes by proposing that “The situation begs for consolidating many of the taxing districts in the region. The suburbs are cluttered with mayors, superintendents, and police chiefs, all doing the same jobs in side-by-side jurisdictions. The inefficiencies, duplication, and growing personnel costs are becoming a luxury that suburban taxpayers cannot afford.” The risk, though, in consolidation and centralization is that voices are no longer heard, people are crowded out in the larger throngs jamming into township buildings for hearings, and students get less individualized attention and more bureaucratic lock-step treatment. So, again, the question is, what really matters enough to be worth paying for through taxes?

Wednesday, September 26, 2012

Biting the Tax Hand That Feeds the Tax Critic 

The Republican candidate for the presidency holds in disdain people he describes as dependent on government. He considers this dependency to be a bad thing, bad for the economy, bad for the country, and surely bad for his wealthy friends and supporters.

Thanks to a reader, I’ve identified someone who is dependent on government. This person attended the Naval Academy. Who paid? The government. This person attended the U.S. Naval War College. Who paid? The government. This person started a business, borrowed half a million dollars, on a loan guaranteed by the federal government. Who pays when the business defaults? The government. Another of his businesses collected money on government contracts. This person also received other government benefits. Who pays? The government. The business that received the government-guaranteed loan hasn’t paid taxes. Governments have had to spend money auditing this person and his businesses, paying for filing liens, and in one instance incurring costs in shutting down a business for not paying state registration fees. Who pays for all of this? The government, but we know that this means other taxpayers are paying. So one must suppose that some taxpayers who resent paying taxes, those who hail the Republican candidate as the font of all wisdom, must resent forking over money to finance someone getting government benefits and not paying taxes.

Incidentally, what does the Republican candidate think of taxpayers who should be paying taxes but aren’t? Does he include them among his famous 47 percent as freeloaders?

One might think that this person whose business hasn’t paid taxes considers government spending is a good thing. One might think that this person would be disturbed that the Republican candidate for the presidency has a dismal view of government programs and government assistance. One might think that this person considers himself to be held in disdain by the Republican presidential candidate.


This person has said that government is the problem. He claims that government stimulus programs are a bad thing. He insists that government spending must be cut. In fact, he blames government stimulus programs for the failure of his business. How?

According to this person, the current president is responsible for his business failure. He explains, “Our business was closely linked to commercial real estate, so when that market faltered, so did ours.” Here’s some news for this person. The real estate market collapsed before the current president was sworn into office. It collapsed as a result of shenanigans by the wizards of Wall Street coupled with decreased government regulation advocated by the Republican party. This person continued to explain that his business “crater[ed] again as uncertainty grabbed hold of the economy.” The uncertainty is the product of obstructionism in the Congress. And everyone knows who is responsible for obstructing progress, not only announcing their plans to do so but proudly proclaiming that they have succeeded. That success, according to the owner of the business in question, is a reason that the business failed.

So who is this person? According to this report, it is Ernie Liediger, a Republican member of the Minnesota House of Representatives. Yes, that’s right. A Republican. A Republican who got his from the government and now wants to close the door on those who follow him. There’s a word to use that describes someone who benefits from government programs and government spending while criticizing it. Look it up. This sort of attitude reminds me of teenagers who, while eating meals at their parents’ dinner tables, complain that their parents don’t love them and don’t do anything for them. There’s a word for that, too. Look that one up, too.

Monday, September 24, 2012

Raising the Tax Shame Noise Level 

Attempts to shame people into paying their taxes are multiplying and taking on new forms. Back in March, I considered the effectiveness of the shaming approach, in Taxes, Citizenship, and Shame. I noted that, “We live in an age when shame does not have the effect it once did.” A month later, in Cheating, Taxes, and Shame, I examined a survey that revealed most people do not consider being caught cheating on one’s taxes as shameful as three other behaviors. Earlier this month, in Taxes, Citizenship, and Something More Than Shame, I discussed the California reaction to the limited effect of shaming, one in which the state revokes or denies professional and business licenses to tax delinquents.

During the past week, a reader sent me several references to news items discussing the use of shame in dealing with nonpayment of taxes. One dealt with the globalization of the shame technique, one dealt with finding new ways to shame taxpayers, and the third dealt with both issues.

Tax shaming is not limited to the United States. According to this article, Croatia disclosed the names of tax delinquents, which in turn has brought calls for similar action in Bosnia. According to another article, tax authorities in India are taking steps to shame delinquent taxpayers.

According to this article, officials in Great Falls, Montana, tried a new tactic when sending tax bills to delinquent taxpayers. They stamped the word DELINQUENT on the envelope. Although collection agencies are prohibited from stamping an envelope in that manner or even identifying their status as a collection agency, governments are not similarly restricted. Yet the fallout from the stamping practice was enough to convince the local government to ditch the stamp next year. According to the article, “And if Americans hate anything, they hate being shamed,” but yet that survey indicated many Americans are not particularly shamed by failure to pay taxes. My concern about stamping DELINQUENT on the envelope is that there are times when the local tax collector is in error, the records are jumbled, the person no longer owns the property in question, or some other circumstances preclude the person from being delinquent. Shaming someone ought not occur if the person has not yet been given an opportunity to exonerate herself from having done anything deserving of shame. The strange thing about envelopes – in contrast, for example, to a sign on the front lawn of the property – is that the only people who see the envelope are the postal workers handling it, and the people who live at the same address and might see the front of the envelope when they bring in or open the mail. Odds are that the people in those circumstances either already know of the problem or ought to know of the risk in which they are being placed.

In India, according the previously mentioned article, the South Delhi Municipal Corporation has decided to send drummers to pound out rhythms at dawn outside the homes of property owners who are delinquent in paying their property taxes. It is unclear whether the drummers will visit the homes where the property owners live or the property itself even if the taxpayers live elsewhere. The authorities also intend to inform the neighbors about the tax delinquents. Otherwise, I suppose, the neighbors would wonder why all of the racket early in the morning. I doubt, though, that the explanation is going to soothe the anger and annoyance felt by law-abiding citizens when noise keeps them from sleeping, from focusing on their take-home work, or from trying to get a sleepy infant to nap. At least the authorities also plan to publish a list of the top delinquents and to seize their properties for auction.

If the drumming doesn’t work, what’s next? Trumpet blasts? Amplified heavy metal music? If they need other ideas, there are some at this sound experiment site. If all else fails, perhaps they will roll in a blackboard on wheels under the care of someone with long fingernails.

Friday, September 21, 2012

Subsidies and Tax Breaks 

In an effort to defend tax breaks available only to the oil, gas, and extractive mineral industry, a variety of commentators are claiming that reference to “subsidies” received by the industry ought not include tax breaks. For example, in this American Spectator article, Bernard L. Weinstein asserts that:
But the industry doesn't actually receive "subsidies." What it does receive is access to the same "deductions" that are available to most corporations. Simply put, deductions from gross revenue allow businesses to write off legitimate expenses incurred in the production of that revenue to ensure that taxes are levied on net income.

By contrast, a "subsidy" is a direct payment from the government -- i.e. taxpayers -- to a business enterprise.
It’s not only commentators who make this claim. Senator Scott Brown has stated that “Oil companies don’t get subsidies. . . . I’m positive. They’re able to take deduction like every other business.”

There are two different issues to consider when analyzing these statements. One involves the meaning of subsidy. The other involves the tax breaks available only to the oil, gas, and extractive mineral industry.

About a year and a half ago, in Whether There is Money Depends on Who’s Asking, I explained, “Tax breaks, of course, are nothing more than government spending equivalent to a direct grant to the taxpayer getting the tax break.” Weinstein wants people to think there is a difference between getting a check from the government and getting a reduction in tax liability from the government. If A wants to give $10 to B, does it matter whether A writes B a check or A tells B to reduce the amount that B owes A on a previous loan? A list of experts who agree that tax expenditures are the equivalent of subsidies, and it surely is not a complete list, is nicely set forth by EcoWatch and include the Joint Committee on Taxation, the Tax Policy Center, the Pew Charitable Trusts SubsidyScope, and the Center for American Progress. The attempts by Weinstein, Brown, and the others who are trying to mask subsidies as something other than subsidies are simply wrong, and though some of them may be ignorant and misled by the industries in question, others are deliberately incorrect.

At about the same time, addressing the issue of tax breaks for the oil and gas industry, in One of the Great Mysteries of Tax Law?, I explained why it is disingenuous to claim that a subsidy is not a subsidy if it is clothed as a tax break:
Distinguishing tax incentives from subsidies for special interests is very difficult, if not impossible, because in many instances they are the same thing. It can be argued that all subsidies for special interests embedded in the Internal Revenue Code are tax incentives, because these subsidies are in the form of incentives that reduce tax liability. However, there are tax incentives that are not subsidies for special interests because they are available generally and are not limited to a select group of taxpayers. For example, . . . the deduction for income or sales taxes, because that deduction is available to all taxpayers. Yet there are tax incentives in the form of subsidies for special interests. For example, section 181 permits taxpayers who produce films and television programs to deduct costs in a more favorable manner than taxpayers in other industries whose deduction is computed under less generous depreciation deductions.
There is no question that every tax break available to an oil, gas, or extractive minerals business that is not generally available to all businesses is a subsidy.

The resolution of the first issue turns attention to the second issue. Are there tax breaks available to the oil, gas, or extractive minerals industry that are not available to other taxpayers? Absolutely. In in One of the Great Mysteries of Tax Law?, I explained two of the tax breaks available only to oil and gas companies, specifically, the deduction for depletion and the deduction for intangible drilling costs. There are at least seven others, as outlined in this list.

Consider the percentage depletion deduction. It permits a taxpayer to deduct the cost of its oil by subtracting from gross income a percentage of the income generated by the sale of that oil. For example, if a taxpayer pays $100 for the right to extract the oil in a specific place, and sells that oil for $1,000, the taxpayer’s depletion deduction easily can exceed $100. Taxpayers in other industries do not have this tax advantage, though surely they would like to benefit from such a tax break. Imagine paying $10,000,000 for a building and deducting $50,000,000 over the period of time that the building is owned. To claim, as Weinberg and others do, that “What [the industry] does receive is access to the same "deductions" that are available to most corporations” is to misstate completely the reality of the tax law and the tax break in question.

When a special interest or specific industry gets a tax break, it causes one or the other, or a combination, of two things to happen. First, if nothing else is adjusted, the reduction in tax revenues causes an increase in the federal deficit, which in turn adversely affects everyone. Second, if revenue is maintained, it means other taxpayers must pay more in taxes to make up for the reduction in taxes for the special interest or specific industry, and that clearly affects everyone. I wonder if, when the hero of the business world speaks with disdain about those who allegedly think they are entitled to government hand-outs, subsidies, and similar breaks, the special interests and specific industries that benefit from tax breaks are crossing his mind. Or does he, too, erroneously conclude that a tax break for a specific industry or special interest is not a subsidy?

Wednesday, September 19, 2012

Taxes and Teachers 

I’ve known for many years that K-12 teachers dip into their own funds to provide supplies and materials for their students because school districts, constrained by insufficient tax revenues, are unable to provide what is necessary for children to learn. I’m aware of this problem not only because there are K-12 teachers in my near and extended family, but also because for taxable years beginning during 2002 through 2011 the federal income tax law provides a tax break for these expenses. Under section 62(a)(2)(D), an exception to the requirement that employee business expenses be treated as itemized deductions, and thus often wasted on account of the standard deduction, exists for employee business expense deductions “not in excess of $250, paid or incurred by an eligible educator in connection with books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used by the eligible educator in the classroom.” This exception permits the taxpayer to deduct the expenses in computing adjusted gross income, the effect of which, generally speaking, is to reduce taxable income by the amount of the deduction, thus reducing tax liability. The $250 limitation means that somewhere between $10 and $75 of federal income taxes is saved by the K-12 teacher who is bearing a disproportionate burden of financing the education of the nation’s future.

Last week, I received an email directing me to the web site for Takepart’s Great Back-to-School Challenge. What got my attention is the scope of the problem. According to the web site, American teachers dish out THREE BILLION DOLLARS each year to buy supplies for their students. I don’t think the three billion dollars includes the amounts paid by teachers to provide their own teaching supplies. According to census figures, there are about 7 million K-12 teachers in the United States, some of which surely teach at private academies whose staff is not required to dig into their own pockets to fund the education system. If roughly 5 million teachers are privately funding their students’ education, the three billion figure means each teacher is spending about $600 each year to help their students with expenses that the citizenry fails to fund. A federal income tax savings of $10 to $75 doesn’t make much of a dent in what amounts to a $600 pay cut.

The sad thing about section 62(a)(2)(D) is not that it is more symbolic than anything else, but that it even was needed in the first place. How many wait staff in restaurants end up paying, out of their own pockets, for tablecloths and utensils for the customers to use? How many bank loan officers are required to pay, out of their own pockets, the cost of the forms that they hand to customers to fill out? How many electric utility repair personnel pay, out of their own pocket, the cost of the trucks they use to travel to, and repair, downed wires? How many hedge fund managers are required to pay, out of their own pockets, the cost of the computer software used by their firms?

In many respects, the three billion dollars shelled out by teachers is a hidden tax. It’s a tax on teachers. It’s not a tax paid by wait staff, bank loan officers, utility workers, or hedge fund managers. Section 62(a)(2)(D) does not solve the problem, nor could it, nor should it. At best it was a very leaky band-aid. So when proponents of reducing taxes on the wealthy complain about how little in taxes allegedly are paid by the non-wealthy, they ought to take this hidden tax, and others like it, into account.

Monday, September 17, 2012

When Tax Ignorance Meets Political Ignorance 

If asked which I dislike the most, tax ignorance or political ignorance, my reaction is to duck the question, not by saying “both, equally,” but by pointing out they are difference facets of the same thing, namely, civic ignorance. The sad and sorry state of knowledge and understanding among the citizens of this nation is appalling. I’ve shared my views on tax ignorance in posts such as Tax Ignorance, Is Tax Ignorance Contagious?, Fighting Tax Ignorance, Why the Nation Needs Tax Education, Tax Ignorance: Legislators and Lobbyists, Tax Education is Not Just For Tax Professionals, The Consequences of Tax Education Deficiency, The Value of Tax Education, More Tax Ignorance, With a Gift, Tax Ignorance of the Historical Kind, and A Peek at the Production of Tax Ignorance. Now there is an opportunity to appreciate the extent to which the two aspects of civic ignorance reinforce each other.

According to recent Reuters article, describing a Reuters/Ipsos poll, when asked if the wealthiest Americans should pay higher taxes than they now do, more than 80 percent of those interviewed agreed. But when asked who had the “better approach” to taxes, 35 percent favored Mitt Romney and only 25 percent favored Barack Obama. That means at least 55 percent of those polled, though agreeing with a major element of Obama’s tax policy approach, preferred the approach of someone who wants to reduce taxes on the wealthy. The same sort of incongruent poll responses were generated by questions dealing with health care and public assistance. If the poll results are extrapolated across the population, there are a huge number of very confused or very irrational people in this nation. Or perhaps it’s a matter of people letting their emotions, subconscious or otherwise, color their analysis. Read the article, to the very end.

Friday, September 14, 2012

Building It With Publicly-Funded Tax Breaks 

Here’s a question for NFL fans. Can you identify the only NFL stadium built without any public funding? The answer is provided in this article. The point of the article is that all sorts of private enterprise sports businesses grab funding from the government revenue streams that many of their owners attack as unwarranted. The article, for instance, notes the Bloomberg News analysis showing that $4 billion of taxpayer subsidies have been pumped into sports stadium and arena construction since 1986, through tax exemptions and subsidized bonds. One example provided by the article is the property tax exemption granted to the owner of the Dallas Cowboys franchise for its stadium.

The point made by the article isn’t new. Eight years ago, in Tax Revenues and D.C. Baseball, I explained why, given the finite limits of government revenue and spending, private sports franchise owners ought not be grabbing for public financing when so many other more basic needs, such as food and shelter, are unmet. Earlier this year, in Putting Tax Money Where the Tax Mouth Is, I again explained the problem: “Private enterprise, which for the most part rejects taxation and government regulation, is quick to find ways to tap into public funding that is financed by the very tax systems that private entrepreneurs detest.” These are but two of the several posts that I’ve shared focusing on the misdirection of tax revenues from the hands of the average taxpayer into the wealthy owners of private enterprise.

It amuses me to listen to the private sector claim that “we built it.” Surely the private sector has built things, but the public funding of sports arenas and other private enterprise facilities, such as warehouses, factories, and office buildings, makes it impossible to consider the private sector claim as anything other than, at best, a gross exaggeration, and at worst, a calculated lie. Perhaps what is lost on the folks making this argument is the irony of the location selected by the Republican Party for its convention. The Tampa Bay Times Forum was built by, and is maintained with, public funds, as described on its website. Perhaps the solution is to cut taxes and simultaneously cut all tax breaks for the “we can build it ourselves without any government help” private sector. What better way to bring the anti-tax crowd out to show its true vision of tax policy.

Wednesday, September 12, 2012

Taxes, Citizenship, and Something More Than Shame 

Six months ago, in Taxes, Citizenship, and Shame, I reflected on the effectiveness of publishing the names of tax scofflaws, noting “We live in an age when shame does not have the effect it once did.” A month later, in Cheating, Taxes, and Shame, I reacted to a survey showing that being caught cheating on one’s taxes did not generate as much shame as three other behaviors. With almost half of Americans, according to the survey, unashamed about cheating on their taxes, some other incentive is necessary.

One of my readers brought to my attention something that California is doing with respect to tax cheaters. He pointed me to this article, which describes how California Assembly Bill 1424, enacted a year ago, will allow the Medical Board of California to deny an application for licensure or to suspend the license of any licensee owing more than $100,000 in California taxes. The article referred to a press release from the Board.

The reader asked, quite understandably, “Do certain occupations or professions have a higher duty to pay their taxes in full and on time?” In other words, why pick on doctors?

Curious, I dug up Assembly Bill 1424. Among the many things it does, it requires the State Board of Equalization and the Franchise Tax Board to publish a list of the 500 largest tax delinquencies. It requires the Franchise Tax Board to include additional information on the list with respect to each delinquency, including the type, status, and license number of any occupational or professional license held by the person or persons liable for payment of the tax and the names and titles of the principal officers of the person liable for payment of the tax if the person is a limited liability company or corporation. Assembly Bill 1424 also requires a state governmental licensing agency that issues professional or occupational licenses, certificates, registrations, or permits, to suspend, revoke, and refuse to issue a license if the person’s name is on the list of delinquents.

So it turns out that California is not picking on doctors, though it appears to be picking on tax delinquents engaged in a business or activity that requires any sort of state licensing. But, not surprisingly, there are exceptions. The provision does not apply to the Department of Motor Vehicles, the State Bar of California, the Alcoholic Beverage Control Board, or the Contractors’ State License Board. So, it turns out after all that California is singling out some professions and occupations, but not all, for this income-jeopardizing consequence. For most licensed professions and occupations, loss of license is tantamount to loss of income.

The first set of questions addresses the scope of the provision. Why not permit the revocation of law licenses held by lawyers who are delinquent in their taxes? Why not revoke the licenses of bars and restaurants that are delinquent? What about contractors who aren’t current in meeting their tax liabilities? And why limit this approach to licensed professions and occupations? Why not pull the driver’s license held by a delinquent taxpayer?

The second question addresses the effectiveness of the provision. If losing one’s license to practice a profession or occupation reduces or eliminates the person’s income, would that not also reduce state revenue by reducing the tax base? I suppose that the answer is an expectation that the business would be taken to another professional or entrepreneur, who thus would earn more income and pay more taxes to offset the revenue loss incurred by the income reductions afflicting those whose licenses have been revoked.

Assembly Bill 1424 also prohibits California state agencies from buying goods or services from a contractor whose name is on the delinquent taxpayer lists. Though this cuts back to some extent the exception made in favor of contractors, it doesn’t have any impact on contracts not involving California.

The new law appears designed more as an incentive to compliance than as a punishment for noncompliance. Yet something more than mere shame is involved when a person not only sees his or her name appear on a tax delinquent list but also sees his or her license to practice or engage in an occupation revoked and watches that revocation receive state-wide publicity. The question is whether this “something more” is enough.

Monday, September 10, 2012

Do-It Yourself Lawyering Brings Tax Unhappiness 

It is understandable why do-it-yourself lawyering has become popular. Although there always have been a few people who, for reasons of thrift or to prove to themselves that they were no less capable of handling their own legal matters than an educated lawyer, decided to be their own lawyer, in recent years do-it-yourself lawyering has become ever more commonplace. Part of the reason is that the cost of retaining an attorney has become increasingly less affordable for growing numbers of people in a shaky economy, and part of the reason is the proliferation of web-based do-it-yourself lawyering kits.

A recent Tax Court case, Larievy v. Comr., T.C. Memo 2012-247, demonstrates the adverse tax consequences of venturing into do-it-yourself lawyering. Acting as one’s own lawyer without the appropriate training can pose all sorts of other adverse outcomes aside from tax, but I leave those issues aside. In Larievy, a husband and wife decided to divorce. In 2004, they agreed to separate. Without consulting an attorney or any other professional, they reached an oral agreement that the husband would pay $2,605 each month for the living expenses of his soon-to-be former wife and for their children. Four years later, in May 2008, they filed for divorce, again without consulting an attorney or other professional. On December 1, 2008, the court entered a divorce decree, which included a provision that the former husband would pay $1,400 each month in alimony to his former wife, to continue until either one died, but that beginning on June 1, 2009, the amount would be reduced to $1,100 through June 1, 2013. The husband made the $2,605 payment each month, except for one month in which he wrote a check for $2,600. In the papers filed with the court in 2008, the former spouses included a document that recited the history of the payments made since 2004 but did not indicate how much of the $2,605 was for spousal support and how much was for child support. Apparently the husband and wife had an understanding of how the $2,605 was split but they did not reduce that understanding to writing until it was set forth in the December 1, 2008, divorce decree.

The former husband deducted the payments as alimony. However, no deduction is allowed for alimony unless the amount that has been determined is in writing. The statute, the regulations, and previous case law establishes that principle. Even if the agreement to pay $2,605 per month had been put in writing, the failure to designate the portion that was child support also would have precluded the deduction. In this instance, as the court explained, “no qualifying written divorce or separate agreement existed until December 1, 2008.”

It is unfortunate that because, for whatever reason, the former spouses did not have the benefit of professional advice, the former husband lost significant deductions and thus paid more federal income tax than would have been payable had the simple task of putting in writing the agreement and the specific alimony and child support amounts. The taxpayers were not trying to game the system. They were not trying to hide income in overseas bank accounts. They were not trying to make use of offshore tax shelters. They simply did not understand the technical requirements of the tax law.

How can similar outcomes in the future be prevented? Although simplifying the tax law is one quick response, it isn’t applicable in this situation because the whole point of requiring a writing is to provide the requisite proof of the agreement. In this instance, the taxpayers were derailed by failing to put an agreement in writing, a wise move in most transactions in life, and not just for tax purposes. Somewhere along the line, the taxpayers either did not hear or did not get the message, put it in writing. Lawyers often are accused of slowing down transactions or complicating deals when they insist on a writing, and even face charges of being unromantic when advising couples to sign ante-nuptial agreements, but there are too many situations in which the lack of a writing worked to the detriment of someone. Under the circumstances at issue in Larievy, the risk of being unromantic surely was not a concern. It’s just that there was no one, lawyer or otherwise, reminding the taxpayers that a written document is a wise choice even when not required by law.

Friday, September 07, 2012

Using Taxes (or Money) to Measure Generosity (or Values) 

Last week, in Using Taxes to Measure Generosity, I made the point that using tax information to determine the relative generosity levels of states whose electoral votes went one way or the other in the last presidential election is unwise for three reasons. First, using the charitable contribution deduction as a determinant of charitable giving ignores the donations made by taxpayers who do not itemize. Second, the charitable contribution deductions in a state of any given “color” are not necessarily proportionately attributable to taxpayers who vote a particular “color.” Third, failure to remove contributions to religious organizations for activities and facilities that benefit the donors skews the results.

An alert reader pointed out a fourth flaw in the study that was the subject of Using Taxes to Measure Generosity. The charitable contribution deduction does not reflect contributions of time. The IRS does not collect any information that shows how many hours a person volunteers for charitable purposes. The reader correctly pointed out that most charities would not survive solely on the monetary contributions they receive if they were not the beneficiaries of unpaid volunteer labor. Even if the IRS could get past the legal and practical barriers to collecting and disclosing information on a taxpayer’s voting record and the identity of the taxpayer’s charitable contribution recipients, it would not necessarily have any information about volunteers’ time contributions.

I pointed out to the reader that collecting information about volunteer hours through a survey runs the same risk of using surveys to identify contributions of money. The risk of over-reporting is very real. I also pointed out that in measuring generosity, limiting the analysis to contributions of time and money to charitable organizations still falls short. Is there not generosity when a 5-year old shares a cookie with a friend? Or when an adult opens the door for an older person? Or when a teenager helps someone pick up the groceries she has spilled?

Perhaps the true flaw in the study examined in in Using Taxes to Measure Generosity is the attempt to quantify a moral value with dollars. As questionable as it might be to try to quantify a moral value with any sort of number, the use of dollars reflects the extent to which money addiction has permeated present-day culture. For too many people, all that matters is money and money equivalent. Turning to money as the measure when trying to evaluate generosity might be the poster child for what ails this nation. As I try to entice my basic federal income tax students to comprehend and express, the value of a stranger’s smile is not included in gross income.

Wednesday, September 05, 2012

A Peek at the Production of Tax Ignorance 

Readers of this blog know that I do not like tax ignorance. That dislike is one of the many reasons I teach and write about taxes. In posts such as Tax Ignorance, Is Tax Ignorance Contagious?, Fighting Tax Ignorance, Why the Nation Needs Tax Education, Tax Ignorance: Legislators and Lobbyists, Tax Education is Not Just For Tax Professionals, The Consequences of Tax Education Deficiency, The Value of Tax Education, More Tax Ignorance, With a Gift, and Tax Ignorance of the Historical Kind, I have lamented the sorry state into which the collective understanding of the body politic has fallen when it comes to taxation.

Though I think I have a pretty good idea of how and why tax ignorance has spread throughout the nation in a frightening exhibition of an intellectual pandemic, I read an article several weeks ago that highlighted the danger of sound bites and misleading headlines. The story described the decision by a retail chain to open a store in Delaware. The headline proclaimed, “Tax-free Cabela’s planned for I-95 site.” What’s a reader to think if the reader does not know or understand taxation? It is not unlikely for the reader to think, “Oh, I can shop there without being taxed.” But that’s not true. About a year ago, in Collecting the Use Tax: An Ever-Present Issue, I explained that residents of states surrounding Delaware who make purchases in Delaware without paying a sales tax are obligated to pay a use tax to their state of residence. As states become more immersed in the challenge of balancing budgets, increasing attention will be given to use tax payment shortfalls. That effort is already well underway in many states. So is it helpful when a taxpayer’s ignorance of use tax responsibilities is bolstered by a headline suggesting that the taxpayer’s outlook is correct?

As I wrote in Tax Ignorance of the Historical Kind:
Yet every time I hear or read tax misinformation, and realize how many people are making decisions based on erroneous premises, I shudder at the outcome. From pockets of tax ignorance, the educational deficiency now grips the nation from village schoolhouse to the halls of Congress. I wonder if some future historian – if there are any – will caption the chapter dealing with the early twenty-first century as “The Triumph of Ignorance.”
If watching tax legislation is like watching sausages get made, what does watching tax ignorance being fertilized resemble?

Monday, September 03, 2012

Tax Labor 

If asked to define “tax labor,” many taxpayers would think of a tax on labor, such as the inclusion of wages in gross income. Others would probably think of the effort required to fill out income tax returns and to file them with the IRS or appropriate revenue department. Business entrepreneurs would add to the list the many other returns that are required.

But tax labor involves more than filling out returns. It includes the effort required to gather up the records from which information is extracted that permits the entry of numbers and text on a tax return. But it also includes the creation of the records at the time that the event occurs which has an impact on the taxpayer’s tax situation.

A good example of how failure to generate records works to the taxpayer’s disadvantage is presented by Watley v. Comr., T.C. Memo 2012-240. The Watley case presented four issues, specifically, whether the taxpayer was entitled to a dependency exemption deduction for her sister’s two children, whether the taxpayer was entitled to file as head of household, whether the taxpayer was entitled to additional child tax credits related to the two children, and whether the taxpayer was entitled to an earned income credit. Because the taxpayer failed to prevail on the first issue, the unfavorable outcome with respect to the other three issues was unavoidable.

There were two alternative avenues for the taxpayer to take to qualify for the dependency exemption deduction for the two children. One was to show that each child was a qualifying child. The other was to show that each child was a qualifying relative.

One of the requirements that must be satisfied to show that someone is a qualifying child is that the person and the taxpayer have the same principal place of abode for more than one-half of the taxable year. In Watley, the taxpayer and the IRS stipulated that the children lived in the home of the taxpayer’s sister from January 1, 2009 through September 9, 2009. At trial, however, the taxpayer claimed that the children started living with her in July 2009. According to the court, her testimony was unclear, because at another point in the trial she testified that the children had been in her care since August 2009. The court noted that the taxpayer “did not introduce documents that showed the children lived with her before September of 2009.” But even if the taxpayer could produce documentary evidence supporting her claim that the children moved in with her in July of 2009, it would have been insufficient to meet the one-half year abode requirement. The taxpayer offered into evidence a letter from a real estate company stating that the taxpayer had taken possession of her mother’s apartment and would reside there with two minors, but the taxpayer testified that she moved into the apartment after her mother died in April of 2010. The taxpayer conceded that the date on the letter was wrong, and the court excluded the letter as hearsay.

One of the requirements that must be satisfied to show that someone is a qualifying relative is that the taxpayer provide more than one-half of the person’s support for the taxable year. The court noted that the taxpayer failed to “introduce documents showing that she paid expenses related to” the children. She “also did not show the total amount of child support furnished to [the children] by all sources for 2009.”

The Court held that the taxpayer was not entitled to a dependency exemption deduction for either child. With that outcome, the taxpayer lost on the other issues.

For most issues, the tax law is quite demanding that the taxpayer offer evidence to support the taxpayer’s claims. What may seem obvious to the taxpayer isn’t necessarily obvious to the IRS or a court. The taxpayer’s testimony almost always must be taken with a grain of salt because it is self-serving. Valuable evidence includes documentation. Yet how many people, when engaging in a transaction, think of creating or retaining a document? In the Watley case, the taxpayer’s nieces and nephews were found alone after the taxpayer’s sister headed off to another location. In the turmoil of dealing with what appears to have been an emergency, in the uproar of relocating children, it is highly unlikely that anyone would be aware of the labor that needed to be expended to preserve any sort of tax benefit. True, in Watley, if the children did not, in fact, move into the taxpayer’s abode until July, there would have been no point in gathering evidence, but the lesson is there to be learned by taxpayers in other situations. If the taxpayer waits until the tax return is being filed, it might still be possible to find and safeguard the evidence, but even more labor and effort must be undertaken.

Tax is work. Work is taxed. Tax is laborious. It is laborious to learn, and it is laborious to apply, whether planning or complying with return filing requirements. In the tax world, as in some other worlds such as raising children, every day is a labor day.

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