Sarah Palin's Tax Returns Part II

[Edited to add new information 11pm]

Sarah Palin finally released only two years of her tax returns--2006 and 2007, choosing a Friday as many agencies do when they want the 'document dump' to be as little noticed as possible. Her returns show income of about $166 thousand for 2007, with taxes paid of about $24,000 or 15% of her income and income of almost $128 thousand for 2006, with taxes paid of about $12,000 or 10% of her income.  The returns for 2007 do not include as income either the per diem payments from the State of Alaska or the travel reimbursements for her husband or for her children.  They include deductions in connection with Todd Palin's fishing and snowmobile racing, which are both claimed as businesses.  Charitable contributions were relatively small as a proportion of income--only $2500 in 2007 and $4250 in 2006, going primarily to the Salvation Army and local churches (according  to the New York Times, Financial papers Show Palins' Assets Top $1 Million, NY Times, Oct. 3, 2008).

There is a vetting of the  potential issues lurking in those tax returns in an article by Bryan Camp, a former IRS official and current tax prof:  A Brief Analysis of Governor Palin's Tax Returns for 2006 and 2007, on SSRN.  Jack Bogdanski, a fellow tax prof and blogger, has a series of interesting blog posts on the issues, including Governor Palin, Your Tax Returns Please (Sept. 10, 2008); There's No Debate: Palins Owe Thousands in Back Taxes, Oct. 5, 2008; and Palin Per Diems: State Didn't Follow Its Normal Policies, Oct. 6, 2008.   There's also additional news coverage, blogs and other relevant items.  See, e.g., With Palins' Returns, Tax Profs Move Back Into Spotlight, Law Blog-WSJ.com, Oct. 6, 2008; Financial Papers Show Palins' Assets Top $1 Million, NYTimes, Oct. 3, 2008; ABC News, Palin's Taxes, Oct. 3, 2008;  Palin Bills State for Nights Spent at Home, Washington Post, Sept. 9, 2008; State of Alaska Compensation and Travel Reports of Executive Positions, 2007 and State of Alaska Compensation and Travel Reports of Executive Positions, 2006; State of Alaska, Income Tax Implications of Long-Term Per Diem; Brett Blackledge, State Reviewing Per Diem Payments to Palin, AP, Oct. 7, 2008.

The Palins assert the validity of their tax positions, partially in reliance on an opinion letter from a tax attorney.  See  Roger Olsen opinion letter on validity of Palin tax return positions, Sept. 30, 2008. 

Based on these discussions and my own earlier conclusions about the issues, I'd say the key issues the tax returns release raises are the following:

1. The $60 a day per diem for days she spend in her Wasila home (amounting to about $17,000  for 312 nights during the first 19 months of her governorship, when her duty station was treated as in Juneau) could be income to Palin but may be excludable under Federal tax rules for meals in connection with travel while away from home.  The exclusion is only available, however, IF Juneau is her tax home AND the days in Wasila are required for her to conduct state business necessarily done in Anchorage.  Commuting expenses between her personal home and her place of work would not be deductible, nor would meals and incidental expenses at her tax home.  Interestingly, her 2007 state travel schedule shows expenses for travel, meals and lodging when the Governor travels to Juneau and for travel and meals when the Governor travels to Anchorage/Wasila.  The State of Alaska's internal guidance on determining tax home seems to suggest that it should have treated Wasila/Anchorage rather than Juneau as her tax home: the policy on long-term per diem payments includes the following statement about employees who do not work at their duty station more than 50% of the time.  "[t]he State must first consider whether the employee works the majority of their time at another location, making this location their principle place of business. If they do, this other location becomes their tax home."  The Palins list their Wasila residence as their home on the federal Form 1040.  The Alaska definition of "duty station" is "the city, town or village within 50 miles of where the traveler spends a major portion of their working time, or the place to which the traveler returns upon completion of special assignments.  Alaska Administrative Manual 60.2.  
2. The cash reimbursements for travel for her husband (about $19,000) sometimes accompanying her (e.g., to a national governors convention) and sometimes on his own (e.g., to Edmonton for gathering information on a technology matter) and paid for even though he is not an employee of the state, would ordinarily be included in income, since under section 274(m) spouse travel may not be deducted unless the spouse is an employee with a bona fide business purpose.  There is, however, a provision (explicitly stated not to be subject to the limitation in section 274(m)) that treats a spouse's travel as part of an employee's "working condition fringe" business travel under section 132 if the spouse's or dependent's "presence on the employee's business trip has a bona fide business purpose" and the travel expense is substantiated. Reg 1.132-5(t).  Otherwise, the travel is income to the employee under sections 1.61-21 amd 1.162-2(c).  A governor would likely be expected to be accompanied to many state events by the governor's spouse, so the business purpose is likely to be satisfied for much of Todd Palin's travel expenses.  Some of those expenses, however, may not be appropriately excludible. 
3. The cash reimbursements for travel for her children (about $25,000) on trips accompanying the governor would also ordinarily be included in income. One would expect that there would rarely be a business purpose for the children's travel to justify it under the working condition fringe provision set out in the regulations under section 132 (which applies to spouses and dependents), though there could possibly be some family-oriented state events for which the children's presence would serve a state business purpose. The state's Finance Director has stated that the Governor's children generally do not actually participate in conducting state business, while the Governor's spokeswoman has claimed that the Governor is frequently asked to include her children (and impliedly does so with a state business purpose).  See Washington Post story.  The trips included, for example, the family's attendance at Todd Palin's competition in the Iron Dog snowmobile race:  the state's report on 2007 executive travel for Sarah Palin says "family opened the start of the Iron Dog race".  Was that really state business or family business in the first place?  It seems a stretch to say that the children's travel there had anything to do with state business.  The Governor spoke briefly at the start of the 2008 race--her children were not present with her at that performance.  See videotape on PalinFootage.com
4. Todd Palin's snowmobile racing activities could be a hobby rather than a business, which would mean that the deductions taken in excess of any income from the business were not valid.  Generally, section 183 governs deductions in connection with hobbies that are undertaken for personal enjoyment rather than with a profit motive.  It only permits deductions to the extent of income from the activity.  There are regulations which are taxpayer-friendly, in that they permit an assumption of a business rather than hobby if there are profits in three out of five years.  The Palins claim a loss of almost $10,000 in 2007 (mostly charging a share of the expenses of operating an office for the purported business out of their home), and claimed a small profit in 2006.  Without additional tax returns, it is not possible to verify whether the activity could fall within the 3 of 5 presumption.  But the profit motive seems to be lacking from the usual discussion of Todd Palin's racing, described as a fun activity.  See Greta Van Susteren interview with racing buddy Davis and interviews with Todd Palin, at bottom. *  In those interviews, Todd Palin talks about the Alaska winter "playground" in which snowmobiling takes place, sharing "sports--you know, recreation outside" with his wife, about being appreciative that the Governor's "allowing him to participate in the [Iron Dog] race all these years, " and about the way he got started racing ("I've been driving snow machines all my life...I got all my buddies in the neighborhood and we'd start it, you know, the snow machines. And, just an avid--I just love riding snow machines.").  Not a word there about a money-making business.  If it isn't a business, the hobby rules would limit the  expenses that could be deducted and no loss would be deductible. 
5. Why have the McCain campaign and Sarah Palin released only 2 years' of returns (and only one year of Cindy McCain's returns, limited to the first two pages without schedules)? Obama and Biden have each released 10 years' of returns, which is helpful in terms of identifying money flows and validity of treatment of particular items.  Release of returns serves little purpose if there is not sufficient information to understand how candidates have treated items, such as Todd Palin's claim that his snowmobile racing is a business rather than a hobby.  Failure to release schedules and multiple years of returns means that the tax return release is far short of transparency and means that the candidates--in this case both McCain and Palin--have fallen short of accountability standards that we have come to expect from candidates for our highest offices. 

*Greta Van Susteren interviewed Todd Palin, Part I (Sept. 16, 2008) and Part II (Sept. 17, 2008) and Todd Palin's current racing buddy on Fox News.com right after Palin's speech at the Republican Convention, an excerpt of which is posted below.  It suggests that the racing is a hobby and not a business commitment.  It would be interesting to know if Davis treats the racing as a business on his tax returns.

VAN SUSTEREN: All right. At the risk of getting a lot of motorcycle riders mad at me, I told my husband I'd divorce him if he rode a motorcycle, he bought a motorcycle. Does Governor Palin ever say to her husband, 100 miles an hour on a snow machine, can't you find another hobby?

DAVIS: Not that I know of. I've never heard her say that. I think she's behind Todd 110 percent.

VAN SUSTEREN: And you don't -- I mean, people don't here think -- that's a little -- I mean, it's one thing to ride a snow machine, and I'm - - you know, I've ridden one. I'm from Wisconsin. I've ridden one. But at 100 miles an hour, 2,000 miles all the way to Nome, Alaska, and back, as fast as you possibly can isn't your usual snow machine ride.

DAVIS: No, it's not. It is -- you know, it's the world's toughest, longest snowmobile race. And it's a very unique sport. It's not just about endurance, it's about navigation. It's about snowmobile preparation. It's about making field repairs, making good decisions when you're really tired and dehydrated. So it's a, you know, ultimate test of man and machine for 2,000 miles.