ataxingmatter

Tax as News: some articles worth reading

Here are a few links to articles on tax (or in some way related to tax) that are worth a read.

Patrick McGeehan, Big Chains Benefit From City Tax Incentives but Don't Create Jobs, Report Says, NY Times, May 29, 2008 (noting that fast-food restaurants, gas stations and national chain stores have reaped the benefits of Manhattan tax breaks (to the tune of more than $400 million last year and more than the city Housing Authority has in its budget) to displace independent competitors, without creating new jobs).

Mary Williams Walsh, In Stock Plan, Employees See Stacked Deck, NY Times, May 29, 2008 (noting the concerns of US Sugar employees and former employees regarding its treatment of its ESOP program; employees are cashed out on retirement according to an "independent appraisal" that is supposed to ensure they get fair value for a privately held company, but US Sugar, a company that went private under the Mott family, has found a way to use the ESOP that is supposed to benefit employees to its advantage.  It paid employees considerably less than 2 offers it received for the stock over a two year period--the offers were for $293 a share, and many employees received as little as $194 a share under the "independent appraisal" and were not told about the offers for the higher price (nor were they allowed to attend a shareholder meeting, which is normally permitted).  The company rejected the offer of 293 a share in part because it had another appraisal for that purpose valuing the company at more than $1000 per share.  The company also stopped paying dividends on the shares.  The company benefits when retirees are cashed out (especially if they are cashed out at a cheap price) because it concentrates share ownership back in the non-employee owners of the company.  In the US Sugar case, the Mott family, and possibly a private foundation established with Mott family shares because of a need to reduce their percentage ownership of the company, are the beneficiaries.  (See next item for more on the Foundation.) Not surprisingly, some of the employees feel cheated, and they are taking their case to court.  ESOPs are primarily at private companies--95% of the 10,000 ESOP plans.  Makes one wonder if these tax-benefited plans are primarily serving the companies in getting employees to be super-productive and then ripping them off with appraisals that undervalue the stock.....).

Mary Williams Marsh, Ostensibly Independent, a Charity is US Sugar's Swing Vote Shareholder, NY Times, May 29, 2008 (noting the role of a charity in supporting US Sugar, whereas if it sided with the employees (i.e., the ESOP), the two blocks would control the company).

Jeremy Peters, New York to Back Same-Sex Unions from Elsewhere, NY Times, May 29, 2008 (noting Governor Paterson's order to agencies to ensure that Full Faith and Credit is provided under New York law to other state's marriage laws, including all tax and other economic benefits (such as filing a joint tax return) that accrue under state law to married couples.  This is another good move that steps the US towards a decent and egalitarian policy towards committed couples, rather than the biased, religion-based policy that dominates the country today.).

Brian Krebs, New Tax Plan could Jeopardize Small Business Owners' Privacy, Washington Post, May 22, 2008 (noting business concerns about loss of privacy and potential ID theft if a White House proposal for credit card companies to report merchants' income is approved).

Jonathan Weisman, McCain Offers Tax Policies He Once Opposed, Washington Post, April 25, 2008 (chronicling McCain's early statements about the harm of tax cuts directed towards the nation's wealthiest taxpayers and comparing them to McCain's campaign positions favoring the Bush tax cuts).  And you might want to remember what we thought back then--see Jonathan Weisman's 2004 article on "Tax Burden Shifts to the Middle".

Alec MacGillis, Economists Knock Proposed Gas Tax Break, Washington Post, May 1, 2008 (noting that oil companies would get richer, funds for infrastructure repairs would be substantially reduced, and Americans would hardly see the difference at the pump).

(I'll be off in Montreal for the Law and Society meeting through Sunday.  Ataxingmatter will be on a break as well.)

Should charities that charge for services be exempt from state taxes? federal taxes?

Many readers likely noticed the New York Times piece on May 26 by Stephanie Strom titled "Exemptions for Charities Face New Challenges."  Strom notes that "[a]uthorities from the local tax asseessor to members of Congress are increasingly challenging the tax-exempt status of nonprofit institutions--ranging from small group homes to wealthy universities--questioning whether they deserve special treatment.

Charities face problems because of the difficulty in knowing when a charity is a charity.  Here are a few of the key problems.

• Many charities have related profit-making businesses.  If the business income is "unrelated" to the charity's purpose, it is subject to taxation under federal law as unrelated business taxable income (or UBTI, to tax nerds); but if it is related to the charity's mission, it is exempt.  So museums that qualify under federal law can run gift shops that sell items that are reproductions of museum pieces or otherwise related to the educational mission of the museum without having UBTI.  Yet competing for-profit stores sell similar artwork and reproductions, and must pay property tax.  Is the subsidy to the museum appropriate?
• Other charities provide services to targeted constituencies such as day care or medical care for underserved populations.  Sometimes those services are provided at cost, without any profit.  Other times services are provided on a sliding scale, charging those who can afford more a rate that helps to subsidize the service for those who cannot.  Sometimes there is a single price that applies to all service recipients, that is subsidized by government grants intended to help cover the price for the poor.  In that case, those who can afford more may be partially subsidized by the aid intended to benefit the poorer clients.
  • The article explores the case of a day care agency but tax-exempt hospitals have been in the news recently quite a bit. 
  • Provena Hospital in Champaign-Urbana Illinois garnered attention for sending private bill collectors after people who were unable to pay the fees charged.  See this 2004 article.  It turned out that the hospital's billing and services were not much different from a for-profit hospital.  In fact, it wasn't clear what the difference was. The hospital asserted that activities like community clinics, medical research, and unreimbursed preventive health services satisfied its charitable mission requirement.  However, many for-profit hospitals engage in similar activities.   In spite of an administrative law judge's recommendation that the hospital be granted an exemption, the Illinois Department of Revenue revoked the state exemption for the hospital, which required that the entity's "primary purpose" be its charitable mission.  The decision is linked here.  Among other facts noted in the Department's decision were that the Hospital had revenues of $110 million in 2002, but spent only $831,000 carrying out its charitable mission, yet the property tax exemption that year was worth $1.1 million.  Almost all the services were provided through contracts with for-profit parties--ER, pharmacy, laboratory, etc.  As a result of the revocation, the hospital paid about $5 million in property taxes between 2003 and 2006.  See this description at the hospital's website.   In August 2007, however, Sangamon County Circuit Court overturned the revocation, though the Illinois attorney general indicated that the state would appeal the decision.  See BNA Health Law Report, Dec. 6, 2007;  Hospital's brief; Bruce Japsen, Despite Taxes, Provena Hospital Healthy, Chicagotribune.com, Nov. 1, 2007.  In March 2008, Champaign County refunded the property taxes paid to it (only about $47,000 of the total).
• Other charitable institutions--private universities like Harvard and Yale--have enormous endowments that participate in the markets in the same way as other investment vehicles, even though the institutions charge tuition and receive considerable government funding through grants and other mechanisms.  Unlike private foundations, educational institutions face no federal requirements to pay out a certain percentage of their funds each year.   

What's the appropriate role here?  Clearly, any changes to the tax-exempt world would require consideration of transitional issues.  Not for profit hospitals provide much of the health care across the country, and their patients, as well as the third-party for-profit providers that they contract to do much of the work, would face a different situation if property tax exemptions were consistently revoked, or even if the federal exemption were in jeopardy.  Similar stories apply for day care, nursing homes, and many other services. 

The concerns about adequate charitable care remain, however, when these organizations raise most of their funds from revenues for services in the same way as their unsubsidized competitors.  Wouldn't it make more sense for states to provide direct grants to those needing the services, rather than subsidizing one service over another when third-party for-profit providers are providing most of the services in either case?  If only a tiny amount of activity engaged in by a tax-exempt organization is actually providing services for free (or at least below cost by the amount of any state subsidy) to needy individuals, wouldn't the state, and the needy individuals, be better off removing the subsidy and instead creating new programs to provide care at state expense?

Some of the examples are no-brainers.  The New York Times article notes that Mall of America has applied for a propety tax exemption, claiming it provides a public service by drawing tourists and aiding the state economy.  Surely that is off the list of what should receive state subsidies.

And as long as Harvard has that multi-billion dollar endowment, alumni should consider giving to the foundations of much poorer public institutions that serve underrepresented populations at a tiny fraction of the cost of running an institution like Harvard.

Economic Conditions: energy, housing and now, inflation?

In spite of rosy predictions of things looking up from recession fears, the headlines over the last week in the New York Times point to significant worries.  Last week, the Dow, quite volatile over the last six months, slumped again, with a loss of more than 500 points.  See Jeff Somer, Dow Falls 500 Points as Oil Prices Soar, NY Times, May 25, 2008.  Remember not so long ago when we were worried about oil prices topping $50 a barrel?  Friday ended with futures prices at more than $132 a barrel.  Id. Sales of housing stock continued to stagnate.  Michael Grynbaum, Existing Home Sales Fell in April to Another Low, NY Times, May 24, 2008.   And now, there is increasing worry about inflation, as consumers cope with higher costs for imported goods and the price of food increases to reflect the impact of oil prices on fertilizer and transportation.   The Producer Price index is 'growing at its fastest rate in nearly two decades.'  Paul Lim, When the "I" Word Replaces the "R" Word, NY Times, May 25, 2008.   Jobs for high school students have gone missing this summer, unless the students have the right kinds of connections.  Peter Goodman, Toughest Summer Job This Year is Finding One, NY Times, May 25, 2008 (noting a study that suggests this summer's job market for teens is the worst since 1948, with little more than one-third of those trying to get a job likely to find one).

High rollers are still rolling high.  But ordinary Americans are hurting, and worrying, about their futures.  Meanwhile, Congress just passed legislation to continue extra-generous farm subsidy programs for all those corporate owners of farmland in America and their children, at a cost of billions of dollars.  Makes you wonder whether our representatives in Congress have any idea what kind of a world ordinary Americans live in, and the importance of enacting progressive tax measures that keep rates low generally but increase them significantly for those at the very top of the income distribution.  Or are they like that partner in a New York firm, who once looked at me in disbelief when I told him that the $45,000 he was paying a contractor to paint his house was more than the average American had to live on in a year?   "Why, Linda," he said, "don't be silly.  Nobody could live on only $45,000 a year!"

Tax Shelters and Complexity

The NonProfit Tax Prof Blog notes an entry in the Chronicle of Philanthropy, based on recent IRS stats about charitable donations of cars.  As most readers are probably aware, prior to 2005 people could donate cars to charities and get a deduction for the fair market value of the donated vehicle, and there was considerable tax administrator concern that the value of donated vehicles was being manipulated to increase significantly the size of the deduction.  The American Jobs Creation Act of 2004, however included a provision that limits the deduction to the actual sales price that the charity gets on the sale of the auto, if the claimed amount exceeds $500, except in those instances that the charity gives the auto to a needy individual, uses it itself, or renovates and sells the auto.  (The latter two exceptions don't appear reasonable--hard to see why the donor should get a bigger donation for cars that the charity uses or renovates and sells.)   See this IRS link for a news release about the Jobs Act change in the law.  Result?   In 2005 with the new law in effect, there was a 60% decline in automobile donations from 2004, but an 80% decline in the amount of deductions claimed, down from $2.4 billion in 2004  to $470 million in 2005.   (There may still be significant donations of old junkers that aren't even counted because there's no valuable deduction.)

Interested in donating?  Here are a few links:

• Donate Car for Charity  (supports a foundation to aid families);
• Purple Heart (supports veterans);
• 1-800-Charity-Cars (provides appropriate donated cars to needy families, but also auctions cars that are not roadworthy to raise money to repair those that can be);
• IRS Publication 561 (determining the value of donated property).

House Acts on Extenders

The House passed, and a 263-160 vote, a tax extender bill that also includes about $17 billion in energy tax credits and revises the recent change to the tax preparer standard.  See House Approves a $54 billion Tax Package, New York Times, May 22, 2008 and these related documents:

• JCT revenue estimate
• Statement of Administrative Policy
• Download h.R. 6049. tax extenders. House Report. TX80992.pdf

The bill extends the expired research and development tax credit for another year, as well as the expiring Subpart F active financing exception.  I've written about both of these before, and noted that they should not be extended.  I'm not a "free marketarian" who believes that the government should never intervene in markets, but there are some areas where the markets do operate well.  Research & development within companies is one of them.  If companies hope to succeed, they have to conduct the kind of research & development activities that enable them to be good competitors.  The government does not need to subsidize those activities by providing a credit against the tax liability.  Congress should let the R&D credit die, without extending it to the tune of an $8.8 billion revenue reduction for one year more of the extension.

Similarly, there is no justification for the active financing exception.  Subpart F is an anti-deferral measure intended to ensure that companies do not reap untoward tax benefits from operating abroad, especially when they earn passive income that is fungible and easily moved around.  Excepting profits from financing is an unfair subsidy of those insurance and financing activities of foreign subsidiaries of US companies.

The bill does include some worthy provisions, such as expanding the child tax credit for low-income families.

The offsets for the bill are reasonable (but too bad they are mostly being used to pay for items that do not make policy sense).  The House has resurrected the idea of eliminating the indefinite deferral advantage that hedge fund managers claim to achieve by receiving their compensation offshore.  Not surprisingly, the Bush Administration opposes any offsets, and this one in particular.  According to the SAP,

"[T]hese provisions would increase tax burdens, undermine the competitiveness of U.S. workers and businesses, and could have adverse effects on the U.S. economy. "

Now, folks, having the overpaid hedge fund managers lose the deferral benefit that they have sought to achieve by having their funds offshore is not going to "undermine the competitiveness of U.S. workesrs and businesses" or "have adverse effects on the U.S. economy."  Taxes do distort, but not to the degree that the lobbyists for the hedge fund managers would have you believe.  Hedge funds will continue to function just fine with the managers paying a fairer share of taxes.  Citizens for Tax Justice notes that the Administration argument (that the extenders weren't paid for last year and shouldn't be paid for this year) is nonsensical--the extender bill cuts taxes compared to current law and to the baseline used by Congress when it originally enacted the revenue reductions being extended, and thus must be paid for under Congress's own rules.  See Bush Administration Demands that Congress Increase the Deficit with Tax Breaks for Businesses, CTJ, May 23 2008 (noting that this Administration has run large deficits primarily because of two items--the huge tax cuts and the Iraq war costs).

Individual tax breaks include an additional standard deduction of $700 for property taxes--purportedly for only one year, but we have seen that many of these purportedly "temporary" tax provisions are later renewed with the claim that to do otherwise would be to increase taxes.  I suppose everyone in Congress felt pressure to do this in a year when homeowners are feeling the pain of the fall in house prices.  But as these specific categories of deductions are added, it undermines the logic of the standard deduction.

Senate action isn't easy to predict, especially with the White House veto threat.  The Senate wants to do another unpaid-for AMT patch  Once they've done it for several years, they can't see a way not to do it every year.  But it makes little sense to do these one-year patches that hold everyone harmless or even relieve some people from the AMT that have paid it in prior years.  Congress should instead think about a reasonable threshold below which the AMT should not apply and then let the chips fall where they may.  I think a reasonable threshold is $75,000 ($150,000 for couples).  That's a solid majority of U.S. taxpayers who would be protected from the AMT.  The rest should pay it if it applies because of excessive accumulation of preferences.

McCain Tax Returns--Cindy's Partial Release

Cindy McCain has finally released summary information about her 2006 returns (she hasn't yet filed her 2007 returns).  page 1 and page 2.

Like many of those who inherit wealth and thus have considerable amounts of income from capital, Cindy McCain reports considerable income--almost $1 million-- taxed at preferential capital gains rates  She also has about $300,000 of ordinary dividends and tax-exempt interest as well as $4.5 million of Schedule E income, giving her adjusted gross income of more than $6 million.  She provides no information on the source of the bulk of her income--Schedule E is not included in the disclosures.

Cindy McCain is chair of the beer distributor business inherited from her father, which is one of the largest Anhauser Busch distributors in the country.  She claims that she isn't releasing her tax returns in order to protect the privacy of her children.  See the statement on the McCain website.   Her personal wealth is estimated to be in excess of $100 million. Top of the Ticket blog, LA Times, May 23, 2008.

Farm Bill Veto Overriden

So the House and Senate have both voted to override Bush's veto of the Farm (and Everything Else) Bill, H.R. 2419.  There's a small glitch, of course.  Due to a clerical error, the bill that was enrolled and sent to the President and vetoed lacked one of the 15 sections that were approved by both houses--the trade portion of the bill wasn't included.  So the House has now repassed the full bill as originally passed by both houses.  The Senate will likely take that bill up soon, and it may be susceptible to amendment when considered in the Senate.  It will have to be sent to the President, who will likely veto it again and the two houses will again need to override.  But in the meantime, most seem confident that the 14 sections that were sent to the President, vetoed, and veto-overriden are indeed the law of the land.

The farm bill is officially the "Food, Conservation and Energey Act of 2008", with a tax and trade title that is called the "Heartland, Habitat, Harvest and Horticulture Act of 2008" (somebody that was involved in naming the bill must have been a 4-Her).  Here are some relevant links:

• Senate Finance Committee summary of conference agreement for the tax and trade title of the farm bill
• May 13 "very preliminary" estimated revenue effects for the tax and trade title
• statutory language for the tax and trade title
• House Agriculture Committee farm bill homepage
• conference report statutory language for the farm bill (Title III on trade was left out of bill enrolled and sent to the White House)
• Thomas link for farm bill and related documents

What strikes me most about this bill and the tax extender bill passed by the House earlier this week is that Congress does not seem to be operating with any type of long-term vision.  Tax breaks have become the common currency of congressional sessions--like candy at a Mardi Gras parade, thrown out to smoothe the way. 

Regretably, one or two or more tax bills a year has become the norm, and it doesn't take a tax nerd to know that the result is mayhem for the code and even more misinformation for the masses.  The goodies distract attention and keep the public from understanding the overall pattern of giveaways.  At most, the media covers these bills in broad outline; no one really understands how the provisions fit with other tax breaks and direct spending programs that have been passed this year and last or will be passed next year.  The bills are full of gimmicks to make the numbers work out.  Just one example:  in 2005, Congress increased the July -September corporate estimated tax payments in 2012 and 2013 and reduced the December payments; the farm bill further increases the earlier installments of the estimated tax payments in 2012. That accelerates revenues into the 5-year frame used for predicting budget deficits/surpluses. 

Here are a few of the tax changes in this farm bill.   

• A provision permitting larger charitable contribution deductions for land contributed for conservation is extended for another two years.  (Like many provisions, this is primarily beneficial to wealthy landowners; this is a deduction at fair market value--not their cost basis, meaning that the contributor will never pay tax on the appreciation but will nonetheless receive a deduction for the full value.)
• The bill includes a purportedly temporary tax break for timber corporations--taxing their ordinary income inventory at capital gains rates of 15%.  One can imagine the lobbyists for the timber giants fighting for "extension" of this tax cut next year, arguing that they need it to be "competitive", etc..... Note that, on the one hand, Congress is providing a lucrative tax break to wealthy landowners who can afford to make contributions of land to charitable organizations, with the idea of conserving forests and natural habitats, and on the other hand it is encouraging timber companies to cut forests as rapidly as they can so that they can get the unwarranted temporary capital gains rate on their inventory. 
• The bill defines "timber REITs" and allows them to mine their land after they cut the timber on it and still qualify for REIT pass-through treatment on the mining income. 
• The bill authorizes the issuance of $500 million of tax credit bonds that support "qualified forestry" and allows the tax credits to be stripped from the bonds under section 1286 and sold to investors in the same way that coupons are stripped from regular bonds.  Rather than issue bonds for 50% of their allocable amount of the credit bonds, issuers can elect to be treated as having made a tax payment in the preceding year of that amount: they will receive a refund of that "payment" from the government which may not be treated by the government as an offset to any outstanding tax liability.  The payment must be used by the issuer for forestry conservation projects. 
• The bill also creates a tax credit for cellulosic biofuel producers and mandates a "comprehensive" study of biofuels.  (It is not clear whether it requires the study to assess whether there is a net loss or gain in fuel, considering the fuel required to grow, harvest, transport and convert the biofuel.....)

The bill also includes a provision for quasi-basketing of farm losses for individuals who receive farm subsidies.  No more than $300,000 of farm losses can be used against non-farm income, except losses from fire, storms, casualties, disease or drought are excluded from the limitation.  (An earlier draft of the bill capped the usable losses at $200,000.)

There's a lot there, and I suspect there are many representatives and senators voting on these bills without full understanding of the way the provisions work, who benefits, or what the actual costs are. And, quite likely, many Americans don't begin to comprehend the many things we do in the name of improving agriculture.  Add to that the misleading statements by people who should know better, such as Senator Salazar's justification of the high $750,000 adjusted gross income cap for farm subsidy eligibility based on the mis-statement that farmers could have all kinds of expenses, revealing either gross ignorance about the way taxes work (business expenses are already deducted in arriving at AGI) or crass willingness to mislead the people about the way tax legislation benefits the wealthy. 

So I still stand where I stood before--Congress should eliminate most of the farm subsidies, at least repealing support payments for any farm family with an AGI greater than $75,000 the next time around, and it should treat conservation measures comprehensively separately from this boondoggle for timber companies and other agribusinesses.

IRS wins again on Kornman Son of Boss case

The Fifth Circuit affirmed the district court's summary judgment in favor of the IRS in the Kornman son-of-boss shelter case.  Download kornman. Son of Boss Shelter IRS win. 052208.doc . Kornman, a promoter of tax shelters, used the short-sale variant of the partnership tax shelter that sought to generate a large artificial (non-economic) loss by manipulating the partnership rules for inclusion of liabilities in basis.

The basis shelter involved Kornman entering into a short sale (in this case, a selling borrowed T-notes on December 27, in a short sale that would be closed out on December 30).  The brief turnaround period for a short-sale of T notes ensured de minimis risk of large gains or losses.  But Kornman purportedly transferred the short-sale brokerage account to a partnership, claiming a basis equal to the full amount of cash from the short-sale held in the account.  He claimed the cash was transferred to the partnership and disregarded the liability for closing out the short sale.  Then the brokerage account was purportedly sold for $1.8 million, again without the liability being considered so not treated as part of the amount realized.  Thus, Kornman claimed a loss of more than $100 million.

The IRS disputed the treatment of the obligation to close out the short sale, claiming that it was clearly a liability for purposes of the partnership rules, under various revenue rulings that had been issued before the transaction was undertaken.

The court sided with the IRS, noting that otherwise it would be forced to the absurd result of disregarding the liability and permitting a non-economic loss to reduce Kornman's tax liability.  Along the way, it considered the level of deference owed to revenue rulings and concluded that they were not entitled to the same Chevron deference that is given regulations that have undergone notice and comment.  Instead, revenue rulings are entitled to Skidmore deference--meaning that the fact that an agency with expertise has considered the issue is a persuasive factor in upholding agency interpretations.  (Congratulations to law prof Kristin Hickman, whose work on the administrative procedure act and IRS rulemaking was cited by the court.)

Tax Crimes: guilty verdict in Aegis tax shelter case (US v. Vallone)

A federal jury yesterday convicted six attorneys/promoters of sham tax trusts in United States v. Vallone, in what may have been the most broad-reaching illegal tax scam in U.S. history.  See the government's April 8 press release on the tax fraud indictment, here (noting that two CPAs connected with the scheme were indicted separately from the six attorney/managers) and the indictment (from fraudandscam.com) here and superceding indictment here. 

Most tax shelter schemes are limited to 30-40 taxpayers, because the promoters know that having too many taxpayers involved is likely to bring IRS attention.  Apparently that bit of wisdom had bypassed this group of tax scammers--the convicted sextet had marketed sham foreign and domestic trusts to hundreds of U.S. taxpayers using a network of promoters all over the country.  The six were officers and managers of Aegis, an Illinois-based outfit that purported to help wealthy U.S. taxpayers with investments and financial planning, but instead helped wealthy U.S. taxpayers rip off the federal government to the tune of more than $60 million over the ten years the conspiracy went on.  The trusts were used to conceal assets from the government and fraudulently reduce tax liabilities, even though the IRS had provided notice as early as 1997 that such trusts funnelling assets and income offshore did not prevent the income from being taxable in the United States.

The wealthy taxpayers involved in setting up these domestic or foreign trusts to hide their assets and income clearly must have known they were committing illegal tax fraud.  According to the indictment, in some cases, domestic trusts were backdated, to appear as though they had existed earlier.  In many cases, the Aegis defendants set up a domestic trust and then immediately transferred it to the taxpayer/client as new trustee, so the taxpayers knew that they still had control of the assets and income. The convicted group helped taxpayers file false returns, claiming deductions for ordinary expenses of maintaining their homes, which were claimed to be the "world headquarters" of the trusts! 

Foreign trust arrangements were more expensive and were reserved for the wealthiest clients--I suppose they thought it would be harder to trace the assets to Belize than to a U.S trust.  These are another version of the offshore credit card scams--taxpayers moved income around and ultimately located it in a bank account that was accessed by a credit card.  The money was never claimed on the tax return.

The indictment alleged that the defendants used the same methods to conceal their own lucrative fees from promoting the tax scams from the IRS.

Each count of tax fraud carries a maximum penalty of 5 years in prison and a $250,000 fine.  That should be enough to get such firms' potential taxpayer clients' attention, shouldn't it?  One can expect that there will be a number of wealthy clients of these convicted tax criminals who will face their own Waterloo soon.  Those cases should make the mainstream headlines and help counter the public's perception that tax crimes don't get punished.

Farm Bill, Adjusted Gross Income, and Congressional Competence

The House and Senate reached agreement last week on a farm bill.  Regrettably, they continued the ridiculous U.S. subsidies for huge agribusiness enterprises and wealthy "gentlemen" (and ladies) farmers.  Each person and entity (like business trusts) that is actively involved in farming is entitled to huge payments (e.g., $40,000 for certain crops; $65,000 when payments are "counter-cyclical") from the federal government for not growing crops--even when their farmland is used for growing certain other money-making crops and even in some cases if they get duplicate payments (e.g., for not growing crop one and for not growing crop 2 on what would have been double-cropped acreage if they had grown the supported crops).  Each person is eligible for a taxpayer-funded commodity support payment as long as they have non-farm adjusted gross income of half a million or less and farm adjusted gross income of three-quarters of a million or less.  Remember--that's a per-person determination.  So a husband and wife could each qualify to receive payments, based on their own AGI amounts.  (If a couple files a joint return, income is allocated between them for this purpose.)   This is NOT a bill to help small family farmers stay on the farm!

Here are some links of interest:

• conference report
• managers' statement
• House Committee on Agriculture Farm  Bill Homepage
• Senate Agriculture Committee May 15, 2008 release on approval of Farm Bill conference report

I have two comments to make on this.  First, I express my chagrin that Congress provides farm payments to the wealthiest people in the country.  Second, I express my chagrin that some members of Congress apparently don't know what they are doing when they pass such bills--case in point, Ken Salazar of Colorado.

I. The absurdity of commodity payments under the farm bill

These farm payments should be used only for those family farmers who live on the farm and would otherwise be forced off the farm land.  As it is, in many cases we are paying people who are salaried workers (as long as each person doesn't have more then $500,000 income in such salaries, for example) support for not growing crops on their often-inherited farmland on which they don't intend to grow crops anyway.

Let me share an anecdote from my own personal experience with farm support payment recipients. I met a woman in her late sixties who was living with her husband in a very nice senior living facility in Kansas (built mostly with taxpayer dollars, by the way) a couple of years ago.  She bragged to me about being able to get an apartment in the facility, and then she went on to brag about the enormous wealth that she and her siblings had from non-farmed farmland, due entirely to government support payments.  And in the same breath, she complained about migrant laborers getting "welfare" from the government.  This woman had no capacity to understand that she herself was a much larger welfare recipient than the migrant workers she thought were "ripping off" good citizens like herself, or that the rationale for providing support to migrant workers was much stronger than the flimsy excuses used to justify continued corporate welfare to agribusiness and non-farm families like her own.

I find such hypocrisy intolerable.  It's people who apply this kind of double-standard to welfare ("good" corporate welfare and entitlements for the rich versus "bad" welfare entitlements for the poor) who also support the Bush tax cuts that primarily benefit the wealthy while rejecting foreclosure assistance for middle class and poor families who are losing their homes at record rates.

II.  The absurdity of members of Congress who either don't understand AGI or misuse it to justify their votes.

  As noted above, the farm bill includes  high AGI limitations that permit payments to go to persons (remember this is a person-by-person limitation, not a "farm" limitation) that are in the very top of the income distribution in the United States.  The caps beyond which persons or specific entities are not eligible for farm payments are more than $500,000 in nonfarm AGI or more than $750,000 in farm AGI.  (Farm AGI, by the way, is not really just farm income--it includes not only income from crop or livestock production, but also rental of farms for farming, ranching or even for hunting or water rights, gains from dealer sales of farm or ranching equipment (the House unsuccessfully tried to limit it to non-dealer equipment sales) and gains from sales of farmland for development or other commercial or industrial purposes). 

Ken Salazar, a Colorado Democrat, made statements in support of the farm bill that have been the subject of considerable discussion on the TaxProf listserve and on the ABA tax list serve and has been a target of a few good postings in the blogosphere such as Wash Park Prophet (tip of the hat to all of the above). Salazar said that he thought the AGI limits were ok, because a farmer could have lots of farming expenses that would reduce their profits.

Sen. Ken Salazar, a Denver Democrat who supports the bill, disputed the idea that it pays rich farmers. The bill allows payments to farmers with adjusted gross incomes of $750,000 or less.  That number doesn't take into account deductions for the cost of running a farm, Salazar said.  "A farmer with an adjusted gross income of $750,000 might be losing his shirt" after paying for fuel, a new tractor and other expenses, Salazar said.   Anne Mulkern, Plowing Into the Farm Bill, Denver Post, May 14, 2008 (formatting changed). 

Problem is, of course, that AGI already represents PROFITS from farming, since adjusted gross income is defined as gross income MINUS the deduction for farming business expenses --i.e., farming expenses are deductible "above the line" under section 62(a)(1).  So no farmer who has adjusted AGI from "farming" (as defined in the farm bill) who be "losing his shirt".  In fact, any farmer with an AGI of $750,000 from farming would be at least 10 times better off than the vast majority of Americans in the middle (and lower) classes who earn less than $75,000 a year.

Another problem with the Salazar story is the fact that the Denver Post reporter didn't bother to get her facts straight.  Reporters are supposed to serve an important accountability function in a democracy--ask candidates and government officials probing questions, and follow up when those candidates and government officials provide nonsensical answers.  Salazar's justification for the high income limit in the farm bill was pure nonsense, and the Denver Post should correct their failure to provide the correct facts to their readers.