Tax Court Judges Need to Have a Sense of Humor

Originally Published on forbes.com on March 4th,2012

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No W-2 is No Excuse
Qunnia S. Hatch v. Commissioner, TC Memo 2012-50

Quinnia Hatch worked for North South Florida Rehab, Inc.  It was apart time job on an as needed basis.  She did filing, data entry and billing.   She earned $4,451.  She thought she was an employee.  North South thought otherwise and sent her Form 1099-MISC.  She did not report the income.  The IRS sent her a notice for additional income tax and self-employment tax.  Interestingly, the IRS appears to have concluded that she was an employee, since the Tax Court noted that they conceded the self employment tax.  Of course, she still has to pay income tax on the income.  The Tax Court considered sanctioning her for instituting the proceeding for purposes of delay, but let her off with a warning.

Interestingly, if you have been treated as an independent contractor and think that you are really an employee, you do have recourse.  You can fileForm 8919.  If the IRS agrees with you, you only have to pay the employee share of FICA/Medicare not the self employment tax.  You still have to pay the income tax.  The filing will make life miserable for your, presumably former, “employer”, so it might turn into a bridge burning exercise. 

Whether someone can be treated as an “independent contractor” can be afairly elaborate analysis.  I have come up with an easy rule of thumb.  If you ask the question, the person is probably an employee.

Show Me The Law
James R. Garber v. Commissioner, TC Memo 2012-47

I recently wrote about Ed and Elaine Brown, whom Ron Paul puts in the same category as Gandhi and Martin Luther King.  They refused to surrender when convicted for not filing and paying income tax, stockpiling food and weapons in their New Hampshire home.  They demanded that someone “show them the law”.  That exercise got them a few addtional decades of federal housing beyond what they had previously earned.  I speculated that they are banking on a pardon from President Ron Paul.

James Garber is coming from a similar school of thought, but as he is just making a pain of himself in Tax Court, he is not running as big a risk:

In his motion, petitioner contends that respondent has not been able to provide him with “any Section of the IRS code which makes the petitioner LIABLE for the tax imposed in Section 1 of the Code” and that “[i]f the respondent can locate any section of the code which makes the petitioner `liable’ or `required’ to file a return, the petitioner will immediately plead guilty thereby saving the court a great deal of time and money.”

The Tax Court lost patience with this stuff a very long time ago:

As we have said of similar arguments on previous occasions, petitioner’s arguments are frivolous and devoid of any basis in the law. We need not refute them with somber reasoning and copious citation of precedent; to do so might suggest that they have some colorable merit.

They could charge him as much as $25,000 for advancing frivolous arguments, but they let him off with $1,000 in addtion to the roughly $2,000 in tax assessments he was appealing.  The thing that gets me about the magical thinking going on in these cases is that if there were a conspiracy capable of convincing most Americans that their was a legal income tax, wouldn’t the group behind the conspiracy have the power to make that the law and be done with it ?  If you are thinking about embarking on the same path that cost Mr. Garber $1,000 and the Browns the rest of their lives in federal prison, there is something you should check out. It is called Here is The Law That Makes the Average American Liable for Income Tax.  They do make one concession:

Over the years and out of literally thousands of tax protestors who have been criminally prosecuted, a very small handful have won acquittals in their criminal trials, by convincing the jury that they were too stupid to understand that they had to pay taxes. But even in these “wins”, such as they were, all those tax protestors remained 100% liable to pay their taxes.

Once again I want to thank fellow forbes contributorJJ MacNab for pointing the site out to me.

You can follow me on twitter @peterreillycpa.

Expedia Gets To Keep Taking Extra in Philadelphia

Originally Published on forbes.com on March 3rd,2012

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A while I go I wrote a piece calledIs Expedia Stealing From Its Customers ? I heard from somebody at Expedia about it.  I was referring to the practice of having a “tax recovery charge” that was greater than the amount of room tax actually paid by Expedia to the hotel operator to be passed on to the locality.  The Expediarepresentative wrote that they always won when the issue was contested in court, but that was not really accurate.  The various cases on the issue do not seem to have an overarching federal constitutional principle involved, so they turn on the precise wording of state statutes and local ordinances and principles of state constitutions.  You probably will not be shocked to learn that the cities are not fighting to have Expedia make refunds to their visitors.  They want the money for the cities.   The City of Brotherly Love recently got bad news from the Commonwealth Court of Pennsylvania.  The Commonwealth Court upheld a lower court decision denying the city a little over a million dollars that it was seeking from Expedia for the years 2001 to 2005.  As with many of these decisions it turned on precise definitions:

Ultimately, the trial court and Board concluded that Expedia did not fall within the definition of “operator,” with the Board specifically holding that Expedia did not “possess the right to rent or lease” hotel rooms, the very provision upon which the City primarily relied in support of its argument that Expedia was an “operator.” The record supports such a conclusion and holding.

If you check the fine print on the Expedia site they explain the whole “tax recovery fee” concept, so it is not stealing.  It is just annoying.

You can follow me on twitter @peterreillycpa.

Corporate Employers Take Principled Stand Against DOMA

Originally Published on forbes.com on February 3rd,2012

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I have written a bit about the great work that Boston based Gay & Lesbian Advocates & Defenders (GLAD) has been doing on marriage equality and other LGBT issues.  I am very pleased to have a guest post from a member of GLAD’s legal staff outlining the reasons that motivate many large corporations to take a principled stand against the so-called Defense of Marriage Act.

“Our principles are not platitudes.”
by Vickie Henry
Senior Staff Attorney
Gay & Lesbian Advocates & Defenders

American businesses may have been caught by surprise by the Defense of Marriage Act (DOMA) – the federal law passed in 1996 that said for all federal purposes, legally married same sex couples are, in fact, not married. The couples can’t file their federal taxes jointly, or receive each other’s Social Security benefits, or inherit from each other tax-free, or do more than 1,000 other things that straight married couples can do.

But as more states adopted marriage equality – right now couples can marry in Massachusetts, Connecticut, Iowa, New Hampshire, Vermont, New York and the District of Columbia* – more businesses had to learn what this outrageous law meant for them as employers. And as the amicus brief that businesses such as Xerox, BNY Mellon, Aetna, and filed in Gill v. Office Personnel Management shows, they don’t like it.

Gill is one of two federal lawsuits challenging the constitutionality of DOMA filed by Gay & Lesbian Advocates & Defenders (GLAD), the New England-based legal organization working to end discrimination based on sexual orientation, gender identity/expression and HIV status, on behalf of a group of married same-sex couples and gay widowers from Massachusetts that have been denied federal benefits because of the law. First Circuit Court Judge Joseph Tauro ruled in favor of the plaintiffs back in 2010, a decision that was appealed by Congress’ Bipartisan Legal Advisory Group (BLAG). Appellate arguments are scheduled for April 4 in Boston

The business brief was filed with the appeals court in support of the plaintiffs.

As the companies state in the brief, “Federal law provides to the working family many benefits and protections relating to healthcare, protected leave, and retirement. These protections provide security and support to an employee grappling with sickness, disability, childcare, family crisis, or retirement, allowing the employee to devote more focus and attention to his work.” In other words, federal law enables good employers to be good employers

But DOMA messes that up: “DOMA conscripts amici to become the face of its discrimination,” they write.”As employers, we must administer employment-related health plans, retirement plans, family leave, and COBRA. We must impute the value of spousal healthcare benefits to our employees’ detriment. We must intrude on their privacy by investigating the gender of their spouses, and then treat one employee less favorably, or at minimum differently, when each is as lawfully-married as the other. We must do all of this in states that prohibit workplace discrimination on the basis of sexual orientation and demand equal treatment of all married individuals. This conscription has harmful consequences.”

Their brief does not make a constitutional argument about DOMA, but focuses on the practical burdens that DOMA places on businesses. Still, I am very heartened (in this Occupy Wall Street moment in time) to find that these businesses’ core motivation for standing up against DOMA is principled.

“Our mission statements are not simply plaques in the lobby. Statements of principle are our agenda for success: born of corporate experience, tested in laboratory, factory, and office, attuned to competition. Our principles reflect, in the truest sense, our business judgment. By force of law, DOMA would rescind that judgment, and direct that we renounce these principles, or betray them.”

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*WashingtonState and Maryland recently passed marriage equality laws that will likely be subject to voter referenda in November.

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You can follow me on twitter  @peterreillycpa.

Contraception Exception and Mansions for Televangelists - Retired IRS Officer Connects the Dots

Originally Published on forbes.com on March 2nd,2012

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Robert Baty recently appeared here in a guest post on the constituionality of the clergy housing allowance.  He is back to discuss how the thinking behind the desire for conscience excecptions to Obamacare provisions compares to that behind the clergy housing allowance.

An Analogy: Healthcare for all and Housing for “ministers”!
By Robert Baty
March 1, 2012

ObamaCare and its latest manifestation regarding insurance and reproductive options have been topics of considerable discussion in recent days.  I have been attracted to that debate because of the analogy I see between it and the “sleeper” issues addressed by Senator Grassley’s recent commission investigating, in part, the income tax free ministerial housing allowance and the proceeding Freedom From Religion Foundation lawsuit challenging the constitutionality of the income tax free ministerial housing allowance.

Here’s the proposed, basic analogy:

> The opponents of ObamaCare have latched on
> to a certain administrative provision allegedly
> offensive to some.  The opponents want to
> expand the exemption for churches and their
> “integrated auxiliaries” to include, depending
> on who you talk to, just about any organization
> or business owned or operated by someone
> that invokes “religious conscience.

> The income tax free ministerial housing allowance
> that has been around for almost 100 years, was
> originally a nominal benefit for a few individuals,
> but has since been expanded to include million
> dollar benefits to tele-evangelists, their media
> production crew, corporate executives,
> “basketball ministers” and similar employees at
> private schools such as Pepperdine University.

> If the opponents of ObamaCare are allowed to
> prevail on this issue, the Government will again
> be placed, arguably, in the position of
> unconstitutionally “ entangling” itself in matters
> of religion and allowing administrators to
> quibble over whether or not certain businesses
> and organizations are “religious” enough to
> be given the option currently allowed only
> to churches and their “integrated auxiliaries”.

> The Government should have stopped with
> the allowance of a nominal benefit for “ministers”
> who live in a residence provided by their
> employer on the grounds of the employer (in
> effect codifying the application of IRC 119 to
> “ministers” so situated).

> The Government is justified in proposing that
> the healthcare exemption regarding conscience be limited
> to churches and their “integrated auxiliaries”.

There are reasons why certain businesses and other organizations have been established independent of the religious organizations (e.g., churches) to which their owners/operators might be members.

While the reasons may be as diverse as the organizations and individuals who operate them, the distinction should be recognized by the Government.  The benefits afforded to the religious organizations (e.g., churches), in this case, may be denied to the other activities of members of the religious groups in order to prevent the Government from unconstitutionally “entangling” itself in the miserable task of evaluating the “religiosity” of non-church organizations, businesses, and individuals.

Freedom of Religion is not absolute!

There may be some middle ground that is ultimately legislated or litigated, but I propose the current effort to simply expand the exemption for churches and their “integrated auxiliaries” to just about any organization or business that has someone willing to invoke “religious conscience” is misguided from a legal standpoint.

We’ve seen how such a course has played out with reference to the incometax free ministerial housing allowance and we don’t need to start down a similar road with reference to the current health care debate over reproductive options and insurance under ObamaCare.

The Government is constitutionally justified in drawing the line at churches and their “integrated auxiliaries”.

Another possible analogy also comes to mind that might be worthy of notice; some of most vocal apologists for doing little or nothing with reference to the income tax free ministerial housing allowance might look and sound like some of the most vocal apologists for expanding the health care exemption to any organization, business or individual who utters the magic words “religious conscience”.

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I really admire Mr. Baty for continuing his fight against clergy tax abuse into retirement.  I hope he remains a regular visitor here.

You can follow me on twitter @peterreillycpa.

Convict Not Banking on Yellow Ribbon - Homestead Exemption Maybe

Originally Published on forbes.com on March 1st,2012

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Tie A Yellow Ribbon Round the Old Oak Tree

An attorney general opinion from Louisiana brought that song to mind.  It is running through my head right now, but perhaps you were not listening to the radio much in 1973:

Louisiana has a limited homestead exemption for real estate taxes.  The question for the AG was whether someone who was going to be away from his home for a really long time could continue to qualify.  The subject of the question was going to be a guest, if not an honored guest, of the State of Louisiana for 10 years.  Apparently he did not choose to transfer the old homestead to his significant other and bank on a yellow ribbon being there in a decade.  If I had been the official who sent the question up to the AG, I think I would have been a little disappointed with the AG’s answer:

In conclusion, the determination as to whether a property owner’shomestead exemption should be removed while he is incarcerated for ten years must be made in light of all the facts and circumstances. As we opined in Atty. Gen. Op. No. 96-99, the length of time an owner is away from his homestead is but one factor to be considered when determining whether a homestead is occupied for purposes of La. Const. art. VII, § 20(A)(2). 

We trust this adequately responds to your request. However, if our office can be of further assistance, please do not hesitate to contact us.

Yours very truly, 

JAMES D. “BUDDY” CALDWELL

I have to sympathize with both “Buddy” and the local official.  The local official was probably hoping for a bright line test one year, two years, twenty years, whatever.  Instead the answer is that the length of the sentence is just one factor.  On the other hand, I often have to give answers like that to staff and clients.  “How many hours can somebody work for you before you have to treat them as employee ?” is a  question I have been asked and I ended up answering it like “Buddy” answered the how long a sentence question.  The client was frustrated and made up her own answer. I have since developed a new answer to any variation on the employee/independent contractorquestion – If you ask the question, the person is probably an employee.

The Yellow Ribbon

The yellow ribbon ended up becoming ubiquitous during the Iranian hostage crisis.  I always thought of it as just tracing back to the song about the returning convict, but it actually has a longer history, which should have occurred to me given that John Ford’s Cavalry Trilogyconsists of three of my favorite movies.  Here is the older yellow ribbon song:

You will have to go to youtube for any of the versions from the movie as they have disabled embedding for them.  I hate when that happens.

Should Jeremy Lin's College Coach Get a Tax Break for Being a Congregationalist ?

Originally Published on forbes.com on February 22nd,2012

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Is that title a stupid question or what ?  It seems though that if there is no Jeremy Lin connection to your story nowadays nobody is interested.  To go directly to the question,  I could not discern from his biography whatTommy Amaker’s religion is.  Also Harvard, despite its roots as a seminary for Congregational ministers,is no longer an integral part of any church, so the taxability ofCoach Amaker’s compensation in no way hinges on his religion.  If he were ever to decide that the heart of the Commonwealth (Worcester)is more attractive than Cambridge and went to work for Holy Cross, the taxability of his compensation would not hinge on whether he was a Catholic.  On the third hand, though, if Malibu seemed attractive and he got hired by Pepperdine University, then he might be able to exempt a significant portion of his compensation, the amount designated as a “housing allowance”, provided he is of the right religion.  He would have to be a member in good standing of one of the Churches of Christ.

I have Robert Baty, a retried IRS appeals officer, to thank for pointing me to the existence of “basketball ministers”.  He recently did a guest post, here, in the wake of Phil Driscoll being denied a parsonage exclusion for his second home.  In Mr. Baty’s narrative the “original sin” that creates the travesty of basketball ministers is Revenue Ruling 70-549.

  A “minister of the gospel” (Despite the Christian language, other clergy such as rabbis and imams are covered) gets to exclude the amount of compensation designated as a housing allowance.  A minister, who goes from preaching at a local church to teaching at a seminary that is an integral part of his or her church is entitled to the same treatment.  How does that lead to “basketball ministers” ?

The Churches of Christ recognize no central authority of any type at all, except Jesus and the New Testament.  The extent of  their “hierarchy” is the elders of each autonomous congregation. So it would be difficult to see how a college could be an integral part of the Church.  The work around in the Revenue Ruling is for the board of trustees to have  the trustees be members in good standing of a local congregation, thereby making them subject to the elders.  Great, so a Churches of Christ minister teaching theology at one of these colleges gets the housing allowance.  Unless you think nobody should get the allowance, that is not that big  deal, but there is something else about the Churches of Christ, explained in this article:

Working as a fellowship of autonomous congregations with no central headquarters, the Churches of Christ have often differed in many ways both from each other and from many other Christian denominations. One way the Churches of Christ differ is in their definition of a minister.

“Martin Luther argued from Scripture that there was a ‘priesthood of all believers,’ and not a priesthood of individuals which has been set aside through a special rite or ordination and who rather than laymen could access God’s ear,” said Dr. David Baird, dean of Seaver College and church elder.

“Every believer, and the Churches of Christ would emphasize baptized believer, is a minister,” Baird explained.

So an administrator or faculty member, including the basketball coach, at Pepperdine who has a letter from the elders of a congregation is a minster entitled to a housing exclusion.

Mr. Baty thought this was a bad decision when he was active in the IRS and has carried the fight on.  As he explained to me in a recent e-mail, he believes that the original decsion was the result of political pressure on the IRS:

In 1952 and again in 1964 the Internal Revenue Service issued private letter rulings indicating that employees at such private schools as Pepperdine Universitywere not entitled to exclude their income as ministerial housing allowances because the schools were not “integral agencies” of the church.  The schoolmen involved in those rulings acknowledged that if “integral agency” was the requirement that they did not qualify. 

But that did not end the matter.  The employees wanted the exclusion and continued to work to that end.

Nixon was elected President.  George Bush and Omar Burleson became influential Texas politicians.  Employees at Abilene Christian University got caught improperly claiming the exemption.

Ultimately, George Bush and Omar Burleson were able to compel the Internal Revenue Service to reverse their previous rulings and grant the benefit to the employees at Abilene and other similar institutions based on the Federal Government recognizing such institutions as “integral agencies” of the Churches of Christ.

Revenue Rulings are supposed to reflect the application of the law to specific circumstances.  In this case, it does not.  There is no legal basis for concluding that such private schools as Pepperdine University and Abilene Christian University are “integral agencies” of the Church of Christ.

Internal Revenue Service administrators tried to hold the line, noting in the file that there was nothing administratively they could do under the law.  The Bush-Burleson influence changed that.  Rather than try to seek legislative relief, that may or may not have been successful, Bush and Burleson put the squeeze on the Internal Revenue Service and the Internal Revenue Service administrators were not up to standing their ground; though they tried for a time.

As a result, we have an example where:

> The law has been compromised.
> The Internal Revenue Service has been compromised.
> The Church of Christ has been compromised.
> The private institutions have been compromised.
> The principle of separation of church and state has been compromised.

All so the “basketball minister” and similarly situated employees at Pepperdine University and similar institutions can have their income tax free as ministerial housing.

This should not be, and is just one example of what might be evidence in support of the Freedom From Religion Foundation challenge to the constitutionality of Internal Revenue Code Section 107 (tax free housing for “ministers”).

I hate to throw the baby out with the bath water.  I think the parsonage exclusion could stand constitutional muster, if only barely and its loss would be a hardship on small congregations such as those served by Reverend William Thronton.  There is a compelling logic to the Revenue Ruling 70-549 argument about the Churches of Christ, though, and if that reductio ad absurdum is valid, Section 107 is unconstitutional, since it hinges a tax benefit on membership in a particular type of church.

You can follow me on twitter @peterreillycpa.