Tax Fairy signs and wonders. The time is always right for a revival for the Cult of the Tax Fairy, the wonderful mythical being that can make your taxes go away with a wave of her wand, for an entirely reasonable up-front fee. These revivals are often accompanied by signs and wonders, several of which appear in request for a federal injunction filed earlier this month with respect to a solar energy operation. Being alert for these signs and wonders can save would-be Tax Fairy believers from a bad experience when the IRS folds up the revival tent.
The injunction request complaint deals with tax benefits alleged for “solar thermal lenses.” As I understand it, the basic technology is familiar to every little kid who has used a magnifying glass to burn things, but on a bigger scale. The real technical magic lies in the tax breaks.
We’ll discuss the tax breaks are described in the injunction request, which we should remember are the government’s allegations. The defendants may dispute the allegations, which have not been proven in court. The alleged facts do include signs and wonders often seen in Tax Fairy revival tents, though, and may be of instruction to those not wanting to be burned by Tax Fairy false prophets.
Tax benefits as a multiple of the cash paid. Real tax benefits rarely exceed the amount paid out for them. A deduction by definition provides a tax benefit of less than the amount paid — the tax rate times the amount of the expense. A tax credit could in theory provide more than a 100% benefit when combined with a deduction — the Iowa school tuition tax credit can come very close — but even that is a rare creature. By leveraging through borrowings, the up-front payment can be minimized, but real borrowings have to be repaid.
According to the government’s injunction request, the defendants sell solar lenses at a stated price of $3,500. But only $105 is due on the down payment, with $945 due the following year, after the tax fairy has magically provided tax savings from the investors. $3,500 in benefits for $105 would be a sweet deal.
Pretend loans. The remaining $2,450 is supposedly payable over 30-35 years. Most importantly, “the customer is not personally liable for the remaining $2,450. There is no provision for remedy in case a customer defaults, other than ‘repossession’ of the lens…”
This reminds me of cattle shelters of the early 1980s, when a $1,000 cow would be “sold” to Tax Fairy believers for, say, $5,000, or more, with $1,000 down and the rest in super-easy payments. The investors would claim depreciation of the cattle for the state price, but the loan was a wink and a nudge, with no real expectation of repayment. The solar lens shelter described by the injunction complaint would work the same way, promising $3,500 worth of tax benefits for $105 down.
Casual Business operations. You can only deduct business expenses for a real business trying to make money. As described in the injunction request, at least, the don’t seem to be trying too hard. The lenses are described as “solar energy” property to generate a tax benefit, yet:
…neither the lenses, nor any other equipment on the installation, are (or have been) generating electricity, heating or cooling a structure, providing hot water for use in a structure, or providing solar process heat.
47. Defendants’ “lenses” consist of thin sheets of plastic.
48. There are some lenses mounted on towers at the Installation in Millard County.
49. The thin plastic lenses that have been mounted have been exposed to desert conditions. Many are broken and dangling out of their frames. The ground near the Installation is littered with shards of plastic from lenses which have broken and fallen.
50. In this state, the lenses cannot capture or direct sunlight such that it could be used for any purpose that Congress intended to encourage through tax deductions or credits.
51. The vast majority of lenses purportedly sold – if they even exist – have not been mounted. Defendants claim the lenses are in storage.
So many signs and wonders. We’ll just note that there is no deduction for an asset unless it’s “placed in service,” which is not the same thing as “placed in storage.”
Tax benefits are all that make the deal profitable. The injunction request says that the investors will get a small annual payment for the use of the lenses, but that the IRS says doesn’t actually get paid. The promotional material instead focuses on the ability to “zero out” taxes, according to the complaint.
Implausibility. Really, if somebody has a revolutionary technology, what’s more likely: that they would find venture capital to ramp it up and syndicate the tax benefits to large investors, or that they would finance it $105 at a time via multi-level marketing?
The web site for at least one defendant company remains up, so you can check it out for yourself. But when pondering the signs and wonders touted by someone with something to sell, always keep one scientific fact in mind: there is no tax fairy.
Paul Neiffer, Happy Thanksgiving and CRP reporting:
Roger McEowen of the Center for Agricultural Law and Taxation just posted a brief on whether you need to file a Form 8275 with your tax return if you are reporting CRP payments and not paying self-employment tax on the rents received. The Morehouse appeal was finalized last year in favor of the taxpayer. However, the IRS recently issued a non-acquiescence and asserts that it will assess self-employment tax on any CRP payments where the taxpayer is not receiving social security benefits even if they are passive landlord. Even though they did not appeal the Court’s decision, they still disagree with the Court (typical IRS).
Roger does a good job of breaking down the details of the issue and provides guidance on whether you need to file the form or not.
I agree with Roger that the IRS is wrong in imposing self-employment tax on non-farmers. I am more willing to disclose than Roger, and I think preparers should discuss disclosure with clients.
Russ Fox, De Minimis Rule Change Is Better than I First Thought. “Normally when you read something that’s from the IRS, you expect to find ‘gotchas.'”
William Perez, Year-End Tax Planning Tips for Investors
Robert D. Flach, FINE WHINE! “Forced ethics CPE will not reduce tax fraud!”
Alan Cole, Universal Savings Accounts Introduced in Congress (Tax Policy Blog). “The bill, sponsored by Senator Jeff Flake and Representative Dave Brat, would allow Americans age 18 or older to open an account to which they could contribute $5,500 of after-tax money. The money could be invested in bonds and equities, and grow tax free.”
Renu Zaretsky, On Highways and Tax Bases. Today’s TaxVox headline roundup covers efforts to pass an elusive permanent highway funding bill, among other things.
TaxProf, The IRS Scandal, Day 931, Day 932,Day 934, Day 935. Day 934 is probably the best of this holiday weekend’s crop, with discussion of the systematic weakening of inspectors general by the administration. “Last year, 47 of the nation’s 73 federal IGs signed an open letter decrying the Obama administration’s stonewalling of their investigations.”
Robert Wood, Wesley Snipes Sues IRS Over Abusive $17.5M Tax Bill, False Promise Of ‘Fresh Start’. Mr. Snipes has not previously shown good skill with the tax law, and I don’t think he’s starting now.