You are fined $50 court costs. My accountant prefers it that way. A good lawyer can make you seriously consider a position that seems absurd at first glance. An Arizona judge whose case showed up in Tax Court yesterday must be a good lawyer.
The case is based on the difference between the tax treatment of business expenses and employee expenses. Business expenses are normally fully deductible. In contrast, expenses incurred by an employee, and not reimbursed by the employer, are only deductible as itemized deductions, and then only to the extent they — when added to other “miscellaneous” deductions — exceed 2% of adjusted gross income. Worse, even if you have enough employee expenses to show up on Schedule A, they are non-deductible in computing alternative minimum tax. That often makes them useless.
Arizona state judge Michael Jones had a clever accountant who saw a potential way around this problem. According to the Tax Court, Judge Jones incurred some out-of-pocket expenses to run his chambers when state budget cuts began to pinch. His tax preparer, a CPA, said that Section 62(a)(2)(C) made these “above the line” business expenses:
(C)Certain expenses of officials
The deductions allowed by section 162 which consist of expenses paid or incurred with respect to services performed by an official as an employee of a State or a political subdivision thereof in a position compensated in whole or in part on a fee basis.
So how did that affect Judge Jones? From Tax Court Judge Holmes (my emphasis, citations omitted):
Maricopa County Superior Court is funded in part by the collection of fees. Individuals must pay the superior court clerk fees for various case filings, petitions, writs, the filing of any documents, and the issuance of any licenses or certificates. The county does not, however, receive fees paid for wedding ceremonies — judges are allowed to collect those directly (although Judge Jones himself did not charge for weddings during the years at issue).
Judge Jones argues that “in a position compensated in whole or in part on a fee basis” means something like “a position funded in whole or in part by fees paid by members of the public for services rendered by judges.” Neither the Code nor the regulations define what “fee basis” means, and the case law is similarly stubborn in its silence.
Judge Holmes ponders the arguments and reaches his decision:
We also have to conclude that the Commissioner’s position is the more reasonable one. An enormous number of government agencies, courts, departments, and boards receive fee income. If Judge Jones’s construction of section 62(a)(2)(C) were correct, all the positions in all these government bodies would be “position[s] compensated in whole or in part on a fee basis.” This would create a caste of employees — those employed as government “officials” — who would be exempt from the rule Congress chose to enact that limits the deductibility of unreimbursed employee expenses. Maybe Congress could do that, but it didn’t do so plainly. Business expenses are also usually thought deductible because they are an ordinary and necessary requirement for producing income. But Judge Jones’s reading of section 62 would uncouple the deductibility of an expense from the income it produces — once a position was funded in part by fees, any employee holding that position would be entitled to unlimited deduction of his unreimbursed business expenses regardless of whether those expenses had anything to do with those fees.
I think Judge Holmes comes to the right conclusion dealing with this obscure provision. If he concluded differently, every public official would be running to their preparers to amend all the open years. Though when it comes to a privileged “caste” of public employees, we’re further down that road than we should be already.
The moral? It’s important to handle business expenses properly. Many taxpayers who own S corporations, for example, pay some business expenses themselves without being reimbursed by the S corporation. Such expenses become “employee” expenses and are routinely lost. By submitting the costs to the employer — their own S corporation — for reimbursement, they become corporation expenses and fully deductible.
Cite: Jones, 146 T.C. No. 3
Accounting Today, Obama Budget Includes Tax Increases and Tax Preparer Regulation. Of course it does.
We need IRS employees to oversee preparers to prevent fraud. IRS Employee Pleads Guilty to $1 Million ID Theft Tax Fraud Scheme (Department of Justice).
Kay Bell, Obama’s final budget is full of big, but unlikely to be fulfilled, tax and spending ideas. It will go over well as his prior budgets.
Paul Neiffer, We Knew It Was Coming!:
In doing various tax classes over the last few years, I almost always stated that it would only be a matter of time before the President would ask for this net investment income tax to be applied to S corporation and partnership income whether passive or material. In the new budget proposal issued by the President, that time has come.
His budget proposes that all income of S corporations and partnerships be subject to the net investment income tax of 3.8%. This would include any gains from selling any assets inside of these entities or selling the stock or partnership interest. This will affect farmers who have large gains in the future.
Somehow I don’t think the momentum is there to expand Obamacare taxes.
Russ Fox, Can a Resident of a Non-Tax Treaty Country (With Respect to Gambling) Get His Withheld Funds Back? “Canadians are allowed to file a Form 1040NR and claim gambling losses up to the amount of wins, and get a refund. New Zealanders are not.”
Peter Reilly, Is Tax Foundation Unfair To Bernie Sanders? Only if it’s unfair to focus on the destruction that would result from his confiscatory taxes, rather than the magical results he promises when he gives you some of your money back through those wonderful and always efficient government programs.
Lany Villalobos, Patrick Tohomas, The Struggle to Obtain Individual Taxpayer Identification Numbers (Procedurally Taxing). The government is doing its best to increase tax burdens on offshore investors, while at the same time making it hard for them to even start complying.
TaxGrrrl, Ask The Taxgirl: The Child Tax Credit
Robert Wood, New Excuse: ‘Fear Of IRS Audit Made Me Cheat On My Taxes’ Huh?
TaxProf, The IRS Scandal, Day 1007. After five years, one of the prominent 501(c)(4) applications slow-walked through the IRS process is finally approved. Nope, no politics here.
Tax Policy Blog, 2015 Outstanding Achievement in State Tax Reform Awards. None awarded to Iowans, unsurprisingly.
Ajay Gupta, Hillary Clinton’s Wall on the Border (Tax Analysts Blog):
Turns out the inevitable Democratic nominee, Hillary Clinton, would also build a great, great wall. Unlike Trump’s wall, hers would not deter foreign individuals lacking proper documentation from coming into the country. Instead, it would dissuade U.S. corporations stuck with domestic charters from leaving. And she would have U.S. investors and workers pay for that wall.
Something about grasping politicians loves a wall.
Career Corner. Which Popular Accounting Hashtag Should You Use? An Explainer (Caleb Newquist, Going Concern).
Jim Maule, Stupid Criminals, Tax Version. “According to several reports, including this one, a woman and her son walked into a Liberty Tax Services office in Toledo, Ohio, pointed what appeared to be a gun over which a towel was draped, demanded money, and made off with $280… It turned out that the “gun” was a curling iron. And it also turned out that the staff recognized the two as customers who had used Liberty’s services a few days earlier.”