Wednesday, April 25, 2018
So when I read the headline to a recent article, I was not surprised. The headline said it all: “Big banks saved $3.6B in taxes last quarter under new law.” Nor was this a surprise to expert analysts, who predicted that banks would save $19 billion in taxes for 2018. Though higher interest rates charged on loans generated a small portion of the banks’ bottom line increases, most of the increases came from the tax cuts.
What are the banks planning to do with this infusion of funds? Most of it will be paid to shareholders as high dividends and stock buybacks. Employees will get raises, but I doubt they are holding their breath because they are probably praying that the raises keep them even with rising inflation.
What about bank customers? Will banks increase the insulting one-tenth of one percent interest rate on checking accounts and the paltry rates on money market and savings accounts? Will banks roll back the constantly-increasing overdraft fees, late charges, paper statement fees, ATM fees, and other charges and penalties? Will banks lower, or at least refrain from increasing, interest rates on loans?
The shift of assets from the 99 percent to the one percent continues. And the belief, deep in the hearts of most of the 99 percent, that they are destined to acquire membership in the one-percent club, and their desire that it be at least the economic paradise it presently is, blinds most people to economic reality even though most people sense that something is very wrong, and even though far too many people already are suffering. Oh, sure, the advocates of the asset shift will claim that there are more jobs now than during the past few years, but they neglect to mention that some of those jobs are part-time and most pay minimum wage or just a bit more than that. The writing is on the wall. Can enough people read? Can enough people understand? Can enough people do what needs to be done?
Monday, April 23, 2018
People who tithe contribute ten percent of their income. So they encounter the same question that greets students in basic income tax courses. “What is income?” The question is asked in both contexts for the same reason, specifically, to avoid double counting. For example, if a person pays tax on their wages, and puts some of their take-home pay into a savings account, that person does not have income subject to income tax when the person takes money out of the savings account, aside from any interest that is earned. Similarly, if a person tithes on their wages, they ought not consider themselves bound to tithe on amounts taken out of the account, aside from interest earned on the deposits.
An income tax refund, aside from the portion generated by refundable credits, is very similar to withdrawal of money from a savings account. The refund arises from the fact more money was put into the taxpayer’s account at the IRS, through withholding or estimated tax payments, than is necessary to pay the tax liability. The fact that some people like to pay in more than is necessary because it forces them to save, even without any interest being earned, demonstrates how similar putting some take-home pay into a savings account is to putting extra money into one’s IRS account.
I wonder, though, how many people tithe on amounts that are included in taxable income but that are not easily recognized as income because the amounts are not received in cash, do not pass through the person’s accounts, or are reinvested rather than being withdrawn. Do people who tithe compute the tithe on gross income as defined for federal income tax purposes, or on expanded income that includes amounts excluded from gross income? Do recipients of scholarships tithe on the scholarship amount? Under federal income tax law, the scholarship is income but is not included in gross income because of an exclusion. Do people tithe on gifts, another amount that constitutes income but is not included in gross income? The answers, we are told, are “the subject of debate within the Christian community.” Some claim, for example, that an inheritance is subject to tithing, but others disagree. Unlike the Internal Revenue Code, Scripture does not contain a definition of income.
Followup: Reader Morris has shared a reference to Adam Chodorow's paper, Maaser Kesafim and the Development of Tax Law, in which he "explores the development of the rules of Maaser Kesafim, the Jewish practice of non-agricultural tithing, and compares the income definition rules found in the halacha to those found in the Internal Revenue Code." Millenia ago, the "ancient rabbis" were struggling with the issue of what should be included in income. So it appears that the measurement of income for purposes of tithing is not only "the subject of debate within the Christian community" but also within the Jewish community, and has been for a long time.
Friday, April 20, 2018
Klarman focused on tax policy. Not unlike the handful of wealthy individuals who understand the foolishness of supply-side economics and trickle-down theory, Klarman stated, “I received a tax cut I neither need nor want. I’m choosing to invest it to fight the administration’s flawed policies and to elect Democrats to the Senate and House of Representatives.” Klarman holds members of the current Congress responsible for having “abandoned their historic beliefs and values.” One of those values is fiscal responsibility and the avoidance of needless federal deficits.
Though Klarman also has concerns about other issues, such as trade protectionism and the environment, it is his reaction to the recent tax law changes that gets my attention. It’s not that he agrees with my position on supply-side economics and trickle-down theory. It’s the opportunity he has to use money to influence or even control the debate about tax policy. Granted, he would have had that opportunity without the tax cut he received, but the tax cut gives him even more political clout. Unlike many other wealthy tax cut recipients, he has made no secret of his intent to step up his political campaign contribution and related efforts. Though I applaud him for his transparency and honesty, as well as his tax policy position, his disclosure inspired me to think about how tax policy, which affects everyone, is in the hands of a small group of Americans who have the resources to control legislatures and executive branch officials. Of course, this is a problem not only for tax policy, but for other issues, such as environmental, trade, labor, health, transportation, and housing problems.
The flaw in the system is the infusion of money into the political process. Perhaps every time someone uses money to try to influence a legislator or executive branch official, that person must bring along someone who holds the opposite view on the issues being discussed. Or perhaps wealthy individuals who fund political decisions should be required to provide funds to those whose voices are suppressed because they lack the financial resources to bring their views to the table. Oh, wait. There is an easier way to do that. Instead of giving the wealthy tax cuts that provide even more money to use in controlling the political process, repeal those tax cuts and instead provide substantial tax relief to the unvoiced, so that they can use their new-found economic gains in part to bring their viewpoints to bear on the decision makers.
One of the principal purposes of the income tax is to eliminate the wealth and income inequality that almost destroyed the nation’s economy during the era of unregulated wealth when a paradise existed for robber barons. By distorting the income tax, Congress has, over the past three and a half decades, reopened paradise for the wealthy. Congress claims to act on behalf of everyone, but it acts in accordance with the conditions imposed on the funding its members receive. One of those conditions is to make it even easier for the wealthy to restore the oligarchy of feudalism, which is their paradise.
Does it matter that Klarman is trying to undo the tax cuts? Does it matter that he has more economic power to do so because of the very thing he is trying to undo? It is a conundrum, for him and for all of us. Who should be deciding tax policy?
Wednesday, April 18, 2018
Recently, as recounted in this report, the state of Kentucky has provided a lesson the significance of taxation and the risks of not understanding what taxation involves. Two weeks ago, both houses of the Kentucky legislature, facing a budget shortfall, enacted a tax bill that cut both the individual and corporate income tax rates and increased and broadened the sales tax. It also increased the cigarette tax. Opponents of the legislation pointed out that the changes would increase taxes on poor and middle-income residents. The governor vetoed the bill, but not for those reasons. The governor wants a more comprehensive set of changes. He wants a tax system that is not “arbitrary and complicated.” He also argues that the legislation provides for hundreds of millions in spending that the state cannot afford to spend. It did not take long for the legislature to override the veto.
At the root of the problem is a simple concern. The governor claims that the legislation allows for spending that the state cannot afford to spend. But the question is whether that spending is spending that the state cannot afford not to spend. Without the tax revenue, spending on schools, prisons, Medicaid, and other essential programs would be cut in ways that would generate long-term costs far exceeding the tax costs.
Though there always is the issue of how tax burdens should be allocated among taxpayers, that issue does not seem to be at the center of the debate. The underlying concern appears to be the claim that taxes are bad, bad for workers, bad for business, bad for investment. Yet in every place that tax cutting has run rampant, such as Kansas, Louisiana, and Oklahoma, the longer-term consequences of cutting taxes has generated serious economic problems, and has not provided the economic paradise promised by the supply-siders.
Ultimately, anti-tax becomes anti-education, anti-health, anti-infrastructure, anti-safety, and anti-all-other-sorts-of-benefits best provided by government, that is, society. The anti-tax reply, that these programs should be turned over to the private sector, is nothing short of a death sentence for most of these programs, because the private sector yearns for profits above all else. When, for example, the private sector comes to own all streets, highways, bridges, and tunnels, the amounts people will be paying for their use will dwarf the amount that they would have been paying in taxes. They will have no voting booth into which to take their unhappiness. The return of royalty and nobility will be such a disappointment to the peasants.
Monday, April 16, 2018
Late last week, The Department of the Treasury and OMB reached a Memorandum of Agreement. Under the agreement OMB’s Office of Information and Regulatory Affairs will review tax regulations that may “create a serious inconsistency or otherwise interfere with an action taken or planned by another agency,” “raise novel legal or policy issues,” or “have an annual non-revenue effect on the economy of $100 million or more.” To implement this agreement, Treasury “will submit to OIRA a quarterly notice of planned tax regulatory actions that describes each regulatory action; identifies any significant policy changes proposed or resulting from the regulatory action; and articulates the basis for determining whether the regulatory action is covered by” the agreement.
Does anyone think this will speed up the need for tax guidance? I don’t. I’m convinced it will slow it down. Even allowing for the delay to permit OMB to hire people who have the experience and education necessary to analyze tax regulations, proposed regulations will sit on someone’s desk for some period of time rather than being moved along the already slow process. If OMB disagrees, the process will take an even longer period of time.
Aside from delays at OMB, Treasury and OMB will need more time to figure out which regulations need to be diverted to OIRA. Someone will need to do computations to figure out “annual non-revenue effect on the economy.” That’s more hiring that needs to be done. Who figures out if there are inconsistencies with what other agencies are doing? Considering the extent to which Congress has dumped just about everything into the tax law, which means that Treasury regulations bear on every other federal agency, it is quite likely that Treasury and other agencies will be arguing about implementation of tax law that affects what other agencies do. Of course, the solution to this nonsense is for Congress to stop using the tax law to handle defense, health, housing, environmental, labor, and other policies, and to strip the Internal Revenue Code of provisions that have nothing to do with the collection of tax revenue, especially the “do this and get a tax credit” provisions.
As I asked Friday a week ago, “Is this any way to run a business? A government? A tax regulation process? A tax system? Of course not. How long will it take, if ever, for Americans to figure this out?” I’m willing to guess that 99.9 percent or more of the nation’s adult population is totally ignorant of the ongoing Treasury-OMB power struggle. It doesn’t make for good sound bites, it lacks marketing buzz, and its connection with people’s everyday lives is not easily understood. What looms ahead is even more uncertainty and longer periods of waiting for clarification. How’s that going to work out?
Friday, April 13, 2018
Farrell notes that if tax refunds are going to be used to finance health care, the timing needs to be adjusted. Farrell explains that taxpayers cannot control when they receive refunds, aside from filing early, where possible. Even filing early doesn’t guarantee that a refund will be received a week sooner than it would have been received had the filing been delayed by a week. Farrell suggests, and I agree, that it is problematic to schedule health care based on when tax refunds arrive.
Farrell proposes a solution. She thinks that “policymakers and employers should consider making changes that would allow consumers to access funds throughout the year. Policymakers might consider offering periodic tax refund payments -- perhaps quarterly payments so that families wouldn't have to defer care until tax season.” She also proposes permitting taxpayers to receive advance refunds on an emergency basis. Another proposal she offers is to permit filing earlier and receiving a refund based on “year-to-date” income.
Though well-intentioned, the first proposed solution presents too many disadvantages. Implementing it would require more forms, more filing, more IRS employees, and more aggravation. Because the amount of the refund is not known until the beginning of the following year, advance refund payments would need to reflect estimation, speculation, and guesses. Worse, if too much is paid during the year, April could bring the shock of owing money. The second proposal poses similar challenges. The third proposal is unworkable. Imagine trying to obtain “year-to-date” Forms 1099, or computing partial-year deductions. Worse, it would mean filing another return for the entire year, thus at least doubling the number of returns being filed and the time invested in filling out those returns. Talk about increasing health risks by doubling the amount of stress to which a person is subjected.
The solution is much easier. Tax refunds exist because more tax is paid or withheld during the year than is owed. Too many taxpayers use tax withholding and estimated tax payments as a way to force themselves to save money, even though they earn no interest on the money. Does it not make sense to reduce the withholding and estimated tax payments, and to simultaneously put the reduction into an account dedicated to health care? Taxpayers subject to withholding could achieve the same, or a better, outcome by asking employers to reduce tax withholding to a more appropriate level and to put the difference into an account, whether or not it is a tax-favored account. This helps those without budgetary discipline experience forced savings without using the IRS as a bank that prohibits withdrawals until tax refund season.
Granted, that solution would be unnecessary if the American health care system were fixed so that premiums were paid evenly throughout the year and care could be obtained when necessary. How can that be done? A variety of solutions have been proposed, but rather than getting into an extensive analysis of the health care system, I will simply point out that what Farrell’s Institute has discovered is yet another instance where a non-tax problem ends up burdening the tax system.
Waiting for Congress to fix things is like waiting on the side of a desert road for an ice cream truck to appear. Better for Americans to turn to self-help, fix their withholding and estimated taxes, put money into accounts – an idea Farrell also suggests – and obtain timely health care that promises long-term health improvements and long-term reductions in health care costs.
Wednesday, April 11, 2018
One of the problems I noted in Kansas As a Role Model for Tax Policy? was the adverse impact of the supply-side tax policy legislation on the state’s public education system. Because the tax cuts reduced state revenue, the outcome predicted by critics of supply-side economics, proposals to cut funding of public education ended up being litigated. As reported in this article, the Kansas Supreme Court held that the state’s $4 billion funding allowance was insufficient to meet the requirement of the Kansas Constitution that the state provide a suitable education for every child in the state. Faced with the prospect of the court ordering a stop to distribution of state funds so long as the funding was not increased, in effect shutting down all state schools, some of the Republicans in the state Senate, all of the Democrats in the Senate, some Republicans in the House, and a few Democrats in the House voted to increase school funding by $534 million, the bill passing each chamber by very narrow margins.
Republicans who opposed the measure, which was endorsed by the state’s Republican governor and its Attorney General, are worried that they will need to raise taxes to generate the funds. Democrats who opposed the measure are concerned that it does not provide for enough funding to satisfy the Supreme Court’s order.
Some supporters of the funding increase think that tax revenues will increase sufficiently to provide the money. How that will happen has not been explained. Apparently belief in failed supply-side economics dies hard. Some people continue to believe that the planet is flat. Perhaps they went to underfunded schools. What a pity.
Monday, April 09, 2018
The proposition that the purchase is tax-free is true for Delaware residents, because there is no sales tax in Delaware. The proposition that the purchase is tax-free for Delaware nonresidents traveling from Pennsylvania, New Jersey, or other states is not true, because those purchasers are subject to a use tax in their home state. That the commercial is directed to potential purchasers beyond people living in Delaware is demonstrated by the use of “come to Delaware” as part of the sales pitch.
As I listened to the commercial, I immediately wondered whether the retailer had an obligation not to mislead purchasers with respect to their use tax obligations. If Pennsylvania, for example, identified a Pennsylvania resident who made a sales-tax-free purchase in Delaware and failed to remit Pennsylvania use tax, could that person sue the retailer for misleading the person into failing to pay the use tax? Or is the retailer absolved by the Pennsylvania resident’s independent obligation to know, and comply with, Pennsylvania use tax law? If the resident, when arriving at the Delaware store, is told that there is a use tax obligation in Pennsylvania, could the purchasers sue the retailer for a misleading commercial? If Pennsylvania revenue officials get wind of the commercial, could they, should they, initiate proceedings to compel the retailer to change or remove the statement about the purchase being tax free?
For the moment, I won’t answer or try to answer the questions. Someone might want to use this a moot court problem or as an examination question. I won’t, because I haven’t been teaching tax courses since 2016.
Friday, April 06, 2018
But now, the reality of incompetence, greed, power addiction, and egos threatens the implementation of recent tax legislation. In an article with a technically incorrect headline, White House Turf Battle Threatens to Delay Tax Law Rollout New York Times writers Alan Rappeport and Jim Tankersley explain how two Administration officials are making a mess of the tax law implementation system. Technically, the tax law has been enacted. It has been rolled out. What has not been rolled out is the guidance necessary for taxpayers and their advisors to comply with the law in situations not specifically addressed by the legislation.
What’s the problem? The Treasury Department is prepared to function as usual, drafting, proposing, and issuing Treasury Regulations. However, the head of the Office of Management and Budget wants oversight of the process. Though the Treasury Department and the Office of Chief Counsel to the Internal Revenue Service are staffed with tax experts, the Office and Management and Budget doesn’t have the experience and the staff to deal with technical tax issues to the same extent and to the same depth as does the Treasury Department. If it prevails, it will need to hire tax attorneys, a process that will add even more delay to the issuance of guidance.
The Office of Management and Budget wants to impose its cost-benefit analysis rules on the Treasury Department. Until now, the process of tax regulation issuance has not been subject to those rules. Underneath this debate is a political struggle, an attempt to control the scope of the tax breaks enacted in the tax law. Some members of Congress, and it takes one guess to identify them, want interpretations as favorable to taxpayers as possible, and see the Office of Management and Budget as the gateway to such an outcome. The Treasury Department has already issued rules designed to prevent hedge funds and private equity funds from circumventing provisions in the recently enacted tax legislation designed to curtail the carried interest tax break that the wealthy owners of those funds use to pay low capital gains rates on income generated from performing services, a tax break not available to most taxpayers. The reality of Washington politics is that as soon as someone cracks down on abuse, those being restricted look for every angle to wiggle out from the restrictions. Their lobbyists look for the weak spots. It appears they have found one, though these days the nation’s capital is flush with them.
Experts agree that if the Office of Management and Budget gets into the process, the process of interpreting tax laws will slow down even more, and taxpayers and their advisors will be making decisions blindly for even longer periods of time. Extending periods of uncertainty is the last thing the precarious national economy needs. Extending the regulations issuance process also has the effect of bringing more lobbyists into the picture. As one commentator put it, “The swamp is going to be enriched by this one.” Not, of course, that the current Administration has been draining any swamps, as it has been too busy enlarging them.
Is this any way to run a business? A government? A tax regulation process? A tax system? Of course not. How long will it take, if ever, for Americans to figure this out?
Wednesday, April 04, 2018
Now comes news that Oregon, which has been experimenting with the mileage-based road fee, has decided that its pilot program is now ready for implementation. As part of the next step in the process, Oregon is working out an arrangement with neighboring Washington to coordinate application of the fee to interstate driving. The state of Idaho and the city of Surrey in British Columbia are also involved in discussions to work out ways for each state to receive its share of the fees. Participants have concluded that the technology is ready but express concerns that the public isn’t ready to shift from paying taxes on fuel to paying fees for road use.
The only question is when, not if. As liquid fuel tax revenues decrease and highways continue to deteriorate, at some point enough drivers will demand legislatures do something other than continuing with a failing system. Opposition exists because there are those who see threats and those who see opportunities. Those who see threats fear the loss of their interests vested in the existing system. Those who see opportunities are those falling over themselves trying to privatize the system so that large, faceless, unresponsive, and unaccountable corporations can take over yet another public function.
Monday, April 02, 2018
Misclassifying Employees as Independent Contractors Can Be Even More Expensive Than Taxes, Interest, and Penalties
According to the decision by a federal district judge in Philadelphia, the strippers are employees, and thus must be paid minimum wage, must be compensated for overtime work, and are entitled to retain all of their tips. The judge based this conclusion on these facts:I then pointed out that
-- the club at which the strippers work determines the price paid by customers, and dictates the length of lap dances.
-- the club requires the strippers to share their tips with the club’s DJ, “house mom,” and “podium host.”
-- the club fines the strippers for arriving late, leaving early, using cell phones, chewing gum, entering and leaving the stage other than through the stairs, or not wearing their hair down.
-- the club specifies how the strippers are to make themselves appear physically, providing a salon on the premises for this purpose.
-- the club requires strippers to work at least four shifts a week to avoid paying shift fees.
-- the club keeps each stripper under management review.
The bottom line is that the club controlled the strippers’ work. That is the same principle that underlies the approach taken for tax purposes.
Though there are some differences between the tests used for labor law and for tax law purposes when trying to decide if someone is an employee or independent contractor, the analysis in the case is quite similar to that found in tax cases. It is reasonable to assume that when the tax aspects of these arrangements are raised, that the analysis will end up bringing a court to the same outcome.And I predicted:
That the IRS and state revenue departments will be paying attention to this decision is evident from the amount of money involved. There’s quite a bit of FICA, unemployment compensation tax, worker compensation premiums, and withholding when an employee stripper can earn, according to the club, as much as $1,600 per shift. With a minimum of four shifts per week, the arithmetic suggests a stripper could bring in north of $300,000 in a year.Although I’ve not seen any reports concerning the status of the club’s federal and state taxes for the years in question, I did notice a few days ago a story about the labor law cost of the misclassification. The strippers, described this time around as erotic dancers, sued the club for the wages they should have received had they been properly classified as employees. A federal district judge agreed, and awarded 353 dancers $4,594,722.73 for wages attributable to their work from 2009 through 2012. It is not unusual for cases to take years, as this one has, before being resolved. Nor is this one over, because it would not be surprising if the club filed an appeal.
Friday, March 30, 2018
For one thing, the legislation ignores other organs and tissues, donation of which is no less important than donation of the listed organs. The legislation encourages donation of organs that can be donated while alive. But what about other organs and tissues, such a hearts, heart valves, veins, corneas, skin, ligaments, tendons, and bones? Why not a tax break for the estate or heirs of a person who agrees to donate organs and tissues that cannot be donated until death? There is no less a need for those organs and tissues. What about a deduction for donating blood, another item often in short supply?
For another, the deduction is more valuable to taxpayers in higher brackets. Does that mean that the organs of higher income taxpayers are somehow more valuable than those of lower income taxpayers? How about taxpayers who don’t need more deductions because their income is so low? Are they not to be encouraged to donate organs and tissues, and not to be rewarded?
The donation of organs and tissue, while alive or at death, is a good thing to do. There are thousands of other things that are good things to do. Ought not each of these good things be the target of a tax break? If not, is the legislature proposing that some good things are better than other good things?
If the Maryland legislature wants to encourage people to donate organs and tissues, or to reward them for doing so, it would be much easier and simpler to announce that the state will send a check (or electronic funds transfer) for a particular number of dollars if and when a resident provides certified proof from the appropriate medical facility that a specific organ or organs, or tissues, have been donated. In the case of organ and tissue donation at death, the check would be issued to the donor’s estate. This simpler approach eliminates what otherwise would be even more complexity in the Maryland income tax, which, though not as absurdly complex as the federal income tax, is no paragon of simplicity. Sending a check also makes the process more transparent, and removes any discrepancy between the value of a donation to a higher income taxpayer and to a lower income taxpayer.
Wednesday, March 28, 2018
It appears that the small Swiss town is not alone. According to several reports, including this one and another one, California permits the use of cryptocurrency for financial transactions, including tax payments. Even though the number of jurisdictions accepting tax payments in cryptocurrencies is perhaps as low as two, it probably will not stay that way. As reported in several articles, including this one, the Arizona and Georgia legislatures are considering statutes that would permit the payment of taxes with cryptocurrencies. According to another report, similar legislation is pending in Illinois.
One downside to paying taxes with cryptocurrencies is the tax that will be due on the gain recognized from using cryptocurrency acquired for a price less than its value when used to pay the taxes. This effect is particularly disadvantageous to the very many cryptocurrency investors who currently are failing to pay taxes on their gains from selling cryptocurrencies, as revenue authorities struggle to keep pace with the digital money transactions.
Most Americans know very little, if anything, about cryptocurrencies. Will that change? Or are cryptocurrencies a fad and a bubble? Time will tell.
Monday, March 26, 2018
Now comes a report that Governor Cuomo of New York wants to impose a tax on prescription medicines that contain opioids and also on some medicines used in treating opioid addiction. His rationale is that the revenue would offset some of the cost of treating opioid addiction. The problem is that the tax, though paid by manufacturers, would be passed through to those who use opioids, including the many who fortunately do not become addicted. Studies also claim that the tax would increase health insurance premiums and health insurance costs in New York.
It is disappointing that when the nation, or a state, encounters a problem, one of the first, if not the first, responses is to cry, “Tax!” Obesity a problem? Tax soda. Gun violence a problem? Tax guns and ammunition. Smoking a problem? Tax cigarettes. Opioid addiction a problem? Tax opioids. Yet, in the long run, these approaches don’t solve the problem, sometimes make the problem worse, and too often generate unwanted, and perhaps unexpected, adverse collateral consequences.
So what’s the answer? The answer is education. The answer is helping people learn why it is foolish to be obese, to smoke cigarettes, to use and handle guns irresponsibly, to listen to bad advice about drugs of any sort. Our education system is in horrible condition. By that, I mean not only the K-12 systems, but also higher education, trade schools, mass media, social media, preaching, speech delivery, and water cooler gossip. For reasons that fly in the face of the logic of natural selection, humans increasingly rely on misinformation and are decreasingly exposed to guidance, advice, knowledge, and comprehension that can reduce, in some instances significantly, many of the problems that are not going to go away simply because a tax is enacted.
Friday, March 23, 2018
So it was disappointing to discover what happened in Bradley v. Comr., T.C. Summary Op. 2018-13. The taxpayer, an attorney operating as a sole proprietor, provided services as a litigation consultant. He chargedd $250 per hour for his services. During the taxable year in question, he performed 100 hours of pro bono legal research, reviewing evidence, and preparing expert testimony regarding the standard of care owed to plaintiffs for a civil action in the District of Columbia. He did not pay or incur any expenses related to this pro bono activity. On his tax return, the taxpayer deducted $25,000, describing the deduction as “Research on Cases 100 Hrs @ $250 per hr.” The IRS disallowed the deduction.
The Court addressed the deduction by pointing out that “It is well established that section 162 does ‘not permit a business expense deduction based on the value of the taxpayer’s own labor,’ citing several cases. One of the cases also involved an attorney who deducted the value of his time devoted to a pro bono activity, and who failed to convince the Tax Court to overturn the IRS determination that the deduction was prohibited. Similarly, the court rejected the taxpayer’s attempt to claim the value of his pro bono labor as a section 174 research and experimental expenditure deduction, not only because legal research is not within the scope of section 174 but also because the taxpayer did not pay or incur any expenses.
The prohibition against deducting the value of one’s time, whether on account of not having the opportunity to be paid for one’s labor, or on account of providing services to a charity or for a charitable cause, is a topic that gets attention in basic federal income tax courses. It is important not only because it is a principle of widespread application, but also because it illustrates several basic underlying concepts of federal income taxation. So I wonder if the taxpayer did not enroll in the basic tax course, enrolled but somehow didn’t learn this principle, enrolled and learned this principle but forgot it and failed to research the validity of the deduction, or knew very well that the deduction was not permissible but nonetheless claimed it thinking, perhaps, that the IRS would not notice it.
From the scant record in the case, it appears that the taxpayer is not a tax lawyer. I suppose that makes the case a bit less alarming than it otherwise might have been.
Update: Bryan Camp, in his commentary on the case, describes the taxpayer as a "former detective for the Washington D.C. Metropolitan Police Department." The court described the taxpayer as a "litigation consultant" who did "legal research." Often, people trained in a non-legal field, such as engineering, medicine, or criminal justice, obtain law degrees as part of the process of increasing their skills as forensic experts and enhancing their marketing efforts. I have not been able to confirm one way or the other whether the taxpayer attended or did not attend law school, obtained or did not obtain a law degree, or was or was not admitted to the bar.