Taxable Talk

We constantly hear "if you don't succeed at first, try, try again." Of course, if you're a Bozo taxpayer, that should be changed to, "If you fail once, and you fail again, you're probably going to fail a third time."

Take the case of John Green. Mr. Green is in Tax Court for the third time. Back in 1993, he attempted (without success) to escape paying taxes on money he embezzled because he's a Native American. As I've written before, illegal income is just as taxable as legal income. And Native Americans must pay taxes, too. Next, he fought a deficiency on his 2001 tax return claiming it wasn't based on his 2001 return. Well, he never filed a 2001 tax return; the deficiency and the penalties were sustained. Today he reappears: "In this case, he challenges with hydraheaded interpretations of settled law the deficiencies which the Commissioner determined for his 1997, 1999, and 2000 tax years."

I'll start with Mr. Green's arguments:

"Green now admits that his status as a tribal Potawatomi doesn’t relieve him of the obligation to pay income taxes. He does, however, argue that his “treaty-based return position disclosures” (we’ll call them the “disclosure” documents) were tax returns and so triggered the running of the statute of limitations. If that doesn’t work, he argues that the Commissioner is collaterally estopped from raising the issue of whether his disability-retirement pay is taxable. If that fails, he claims that his disability-retirement pay is nontaxable income under sections 104 and 105. If it isn’t, then he claims that the Commissioner should have included the lump-sum payments in his 1998 deficiency, not his 1997 deficiency. And, finally, he argues against the imposition of any penalties for any of the years at issue."

The first issue is whether or not Mr. Green filed returns. The IRS contended that he didn't file anything; however, Mr. Green had certified mail receipts. "Of course, this establishes only that Green filed his “disclosure” documents with the IRS Service Centers, and not that the documents were sufficient as tax returns to begin the running of the statute of limitations."

However, the Court finds that Mr. Green's documents weren't returns, that they weren't signed under the full penalty of perjury (Mr. Green modified the language), and he didn't provide enough data for the IRS to calculate his tax liability. There's a fourth test, but the Court notes, "We are leery of finding ourselves in this titanomachy. And we can scurry away from the dispute till another day. Green submitted self-made documents that did not objectively permit the assessment of his tax liability...Enough--Green wasn’t being honest or reasonable" The Court found that there is no statute of limitations because the returns weren't filed.

Next, Mr. Green uses a collateral estoppel argument. "We’re not biting--the test remains whether the issue was actually litigated and necessary to the judgment. And whether tagged “abandonment” or “concession”, the Commissioner’s decision for the 1993 tax year doesn’t estop him from contesting the exclusion of Green’s disability-retirement pay from his taxable income in this case."

Next, Mr. Green argues that his disability pay is exempt from tax. He argues that sections 104 or 105 exempt his disability pay. You'll have to read the case to see that each of his arguments is demolished by the Court—his disability income is taxable.

Finally, Mr. Green argues that the doctrine of "Constructive Receipt" means that the income is not taxable to him in the years in dispute. Mr. Green was to receive $1 of $93,905 of disability pay; the other $93,904 was sent to pay child support and back taxes. The question the Court had to decide was when does constructive receipt occur?

"That occurred no later than December 16, 1997 in the OPM records--by that time, Green had filed the required paperwork and OPM recognized him as entitled to the money and reinstated him as eligible for future payments. It was Green himself who sent the court-ordered garnishment instructions to OPM, informing the agency that it should withhold part of his retroactive disability-retirement pay to satisfy his child support obligations."

There is one last issue for the Court to decide:

"We therefore hold in this case that the Commissioner is right to allocate $93,304 to Green’s 1997 income. That leaves a bit of a puzzle as to the remaining $1...That suggests there might be another $1 check left over from the lumpsum payment. If such a check had also been sent to Green in January 1998, its taxability would be governed by the general rule that a check is treated as income when received. Kahler v. Commissioner, 18 T.C. 31, 34-35 (1952). But because we have no clear evidence as to when he received that possible $1 payment, we find that Green fails to meet his burden of proof that the $1 should be taxed in 1998, so he is taxable on $93,305 and not just $93,304, in 1997."

So the third time definitely wasn't the charm for Mr. Green. The Court ruled that he owes the taxes and penalties assessed.

Case: Green v. Commissioner, T.C. Memo 2008-130

Governor Arnold Schwarzenegger announced his revised budget today. California is now looking at a $15.2 billion deficit, which the Governator is hoping to close by (a) selling bonds backed by expanding the California Lottery (raising $5 billion), (b) and cutting an additional $12.2 billion in additional spending cuts. If the lottery bonds don't happen Schwarzenegger proposes a "temporary" one cent increase in California's sales tax.

Both Republicans and Democrats in the legislature reacted negatively to the Governator's proposal. Bill Lockyer (D), Treasurer: "[This is a] sizable bet that Californians will double their current level of lottery participation within a few years." He doesn't think it's realistic.

President Pro Tem of the State Senate, Don Perata (D-Oakland) told Reuters: "Democrats are not going to accept this budget...I reject its defeatism."

Mike Villines, Assembly Minority Leader (R-Clovis), told AP: "The idea that we use the lottery to pay down debt is a good one. Tying it to borrowing is, I think, a mistake, and tying it to a tax is a mistake."

With Democrats still proposing to create new taxes to balance the budget and Republicans promising not to approve any new taxes, it still looks to me like the unstoppable force meeting the immovable object. A budget requires a 2/3 approval in both houses of the state legislature, so Democrats and Republicans will eventually have to come to an agreement. Expect the emphasis this year to be on "eventually" as I expect the budget to drag on well past the constitutional deadline for passage of June.

Press Coverage:
Associated Press
Reuters
San Jose Mercury

I feel so behind on so many items. I guess that's normal when you return from a vacation...and you look at your calendar and realize that you're heading out of town again in just a week for your annual continuing education seminar.

Back in April the proprietor of Tax Fool sent me an email right at the end of tax season. I've finally gotten around to looking at his site, and it's another site that debunks tax protester myths. I'm adding it to my links (on the right).

Roni Deutsch also has a tax blog worth reading. I'm linking it, too. I'm removing a link to a blog that hasn't been updated in a long time (and I presume is dead).

And as hard as it is for me to believe, in less than a month the second quarter estimated tax payment is due. Time just keeps on moving....

As California continues looking at a massive budget deficit (somewhere between $8 billion and $20 billion) some in the state legislature are looking to implement a tax on the Adult Entertainment Industry. A 25% tax on film production, strip, er, adult entertainment clubs, and pornographic videos.

Larry Kaplan, head of the California Branch of the Association of Club Executives, said that this proposed legislation would "...devastate the San Fernando Valley...[I]t would take $3.5 billion out of California." Matt Grey, a lobbyist for the Adult Entertainment Film Industry, told Reuters that it's cheaper to fly performers to Bucharest, Romania than to drive them to the Valley.

Meanwhile, Republicans are still promising to block all tax increases so it's likely that this porn tax is doa.

One of my favorite weekly reads is the Leonard Letter. Bill Leonard is one of the elected members of the Board of Equalization. Mr. Leonard notes,

"Late last year an article entitled "Why Is Buying Hot Chocolate So Confusing?"appeared in a tax journal. It was bandied about as an example of how difficult it is for California retailers to comply with the state's sales tax law. I asked the Board of Equalization staff to respond to the article and have now reviewed a 3 ½ page letter attempting to explain when hot chocolate is taxable. That it takes 3 ½ pages to answer what should be a simple yes-or-no question gives you a window into the absurdity that is state tax law."

The letter that Mr. Leonard references is here. The question arises as sales tax was collected on hot chocolate sold at a Starbucks inside a Target store but not inside a Safeway (grocery) store nor in the lobby of the Bank of America building in downtown San Francisco. From the letter:

"Sales and Use Tax Regulation 1602, Food Products, (copy enclosed), provides that generally tax does not apply to sales of food products for human consumption except as provided in Regulation 1503, 1574 and 1603. “Food products” include among other items, coffee, tea, noncarbonated and nonalcoholic beverages, breads, bakery products, pizzas, candy, confectionery, chewing gum and cookies. Generally, tax does not apply to sales of the above items except when they are sold under circumstances as provided in Regulations 1503, 1574 and 1603."

After nearly three pages of legalese the author of the letter notes, "Based on the information presented in the article, it is not clear why sales tax was collected by Starbucks on the sale of the hot chocolate."

And some legislators want to extend sales tax to services. Oh, joy....