Expatriate Owl

A politically-incorrect perspective that does not necessarily tow the party line, on various matters including but not limited to taxation, academia, government and religion.

Tuesday, February 28, 2006

IRS's PACI Report

As dictated by my personal and professional schedule, this is a period where my posts are a little fewer, and a little further between. I miss doing it, but there are more pressing demands upon my time and effort. This is not a totally negative development, and, quite frankly, some interesting things have been and are now occurring.

In the post of 18 January 2006, the IRS was sent a letter by some concerned liberal clergy, essentially requesting that the Rev. Rod Parsley's church be audited. Well now, the IRS has just released its Project 302 Political Activities Compliance Initiative Final Report, which discusses its PACI audits such as the one the concerned clergy requested be done on Rev. Parsley.

My take on that report is as follows:

1. All audits are initiated through "referrals" or "information items." This essentially means that they are all brought about by either someone with inside information who is snitching on the organization (typically a disgruntled employee or a dumped mistress), or some enemy who, like the aforementioned "concerned clergy," is sicking the IRS on their adversary.

Other types of tax returns are usually audited because they were drawn from the universe of filed returns based upon some sort of selection criteria which vary from year to year and from type of tax return to type of tax return (though there are a fair amount of "referrals" involved). Accordingly the selection criteria for these Political Activity audits of tax-exempt organizations can skew the selection process. This has greater potential for abuse.

2. There are certain supposed safeguards on tax inquiries and audits of religious houses of worship. Internal Revenue Code Section 7611 effectively requires that such inquiries and audits may not go forward without the blessing of "an appropriate high-level Treasury official." In a sense, this may well be a safeguard, but the downside is that the IRS agents out on the front lines, knowing that the inquiry or audit has been cleared by a "high-level Treasury official," might get a bit more zealous to please the HLTO than they would with a normal, ordinary, garden variety audit (if there really is such a thing -- no two of my cases were ever the same when I was with the IRS).

No taxation authority can ever be truly objective, but there are at least some checks and balances within the IRS, without which the abuses of taxpayers would surely be over a hundredfold what they are now. One of these safeguards is a limited degree of autonomy reposed in the group manager of the front-line IRS agent, which allows him or her to weed out cases that would waste the IRS's resources. The involvement of a HLTO can only reduce this autonomy (unless, of course, the group manager and/or the front-line agent is a member of the KMA Club with sufficient seniority to pull his or her pension).

3. The Report recommendations, which somehow coincided with Commissioner Everson's 24 February 2006 public remarks at a private club, are clear indications that more houses of worship and other tax-exempt entities will be scrutinized to ensure that they keep out of the political sphere. This is not necessarily a bad thing, provided that the IRS's own bureaucratic processes are likewise kept free of the taint of partisan politics. But knowing what has been tried before, I wouldn't bet on the IRS being able to rise above politics on all occasions.

4. My post of 9 November 2005 concludes with the following paragraph:

"It is reassuring to know that the IRS is enforcing the provisions of the Internal Revenue Code that prohibit churches from engaging in political activity. Perhaps the IRS will give similar scrutiny to the various Muslim mosques, whose activities of late have grown ever increasingly political."

I restate that paragraph now. If the IRS is going to hold feet to the fire, then let them hold EVERYONE'S feet to the fire by enforcing the law in an evenhanded manner.

Sunday, February 19, 2006

Tale of Two Tax Cases

Some taxpayers' cases should never have gone to court in the first place. And then again, some court cases should be tax litigation, but are not.

Pete and Maureen Speltz, of Rollingstone, Minnesota, got some excellent tax advice. Pete works the very early shift as a machinist, and, to augment Pete's income, Maureen has operated a daycare center in their home for over twenty years. In order to optimize the family finances, Maureen and Pete entered into a written agreement whereby Pete became Maureen's employee and actually performed work at the daycare center, thus qualifying for exclusion from his income of certain medical benefits paid by Maureen (which Maureen was entitled to deduct from the day care center's income).

The IRS challenged the arrangement as a sham. But Pete and Maureen were able to show that all of the Internal Revenue Code's requirements were fulfilled for the favorable tax treatment they sought. The Tax Court ruled against the IRS and allowed the deduction.
As written many years earlier by Judge Learned Hand, "Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes." Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934), aff'd, 293 U.S. 465 (1935).

The Speltz's case should never have gone to the Tax Court. And, not that I know (or particularly care to involve myself with) anything regarding the Speltz's personal lives, but there seems every indication that their marriage is cooperative and supportive if not amorous.

Meanwhile, Jeanette Levine lost her bid for palimony from her lover, Philip Konvitz. Seems that Phil and Jeanette had a continuous 70-year meretricious romantic relationship which began when they were teenagers and which persisted through their respective marriages. Phil, who became very wealthy, shared much of his wealth with Jeanette, giving her cash, jewelry, furs and an $80,000 condominium (which she sold for $131,000 three years later), and paid for the maintenance of her home and automobile. She was on the payroll of one of Phil's companies until the company ran into legal trouble, at which time Phil paid Jeanette $6,000 per month, plus an additional $2,000 per month to Jeanette's daughter (not Phil's daughter).

But Alzheimer's Disease got the better of Phil, and so, after Phil's son Norman and friend Howard Walter became Phil's attorneys-in-fact, they cut off the payments. Jeanette sued Phil (who died on 7 September 2005), Norman and Howard. The court dismissed the case, finding that Phil and Jeanette never actually lived together in the same residence, and therefore, there was no need to even reach the merits (or lack thereof) of her palimony suit. The judicial opinion is not yet (as best I can determine) freely available on the Internet, but the citation is Levine v. Konvitz, N.J. Superior Court, Appellate Division, Docket No. A-6449-03T5, 2006 N.J. Super. LEXIS 25 (February 6, 2006).

I shall leave discussion of the evils of adultery to the sky pilots (and in fact, this week, the world over, Jewish congregations read the Torah portion that includes the Ten Commandments, including the one about not committing adultery). It would seem to me, thought, that Phil's largesse over the years rose to the level of a series of taxable events. The amounts of money he allegedly gave to Jeanette (and, for that matter, Jeanette's daughter) would be subject to the gift tax, which would affect the computation of Phil's Estate Tax bill to the IRS (I shall not now get into the mechanics of computing the Estate Tax and its relationship to the Gift Tax. I am scheduled to teach a graduate course on the very topic this summer, and shall go over all of the particulars at that time.). Phil's Estate Tax Return is due on 7 June 2006, the nine-month anniversary of his death, but Phil's Estate can (and, in all likelihood, will) receive a 6-month extension which is theirs for the asking if they timely request it. Therefore, we can presume that the Executors of Phil's Estate will have until 7 December 2006 to file the Form 706 Estate Tax Return.

And now that Jeanette's contentions are a matter of public record, Phil's Executors (who, in all likelihood, include his son Norman) cannot say that they didn't know about them. And because of Phil's other legal problems, the case is, to say the least, a high profile matter. Which means that the IRS attorneys in Estate & Gift are likely reading about it, and if so, are no doubt thinking about the Estate and Gift Tax consequences of Phil's transactions.

Moreover, Jeanette has alleged that she paid nothing for the condominium Phil gave her, and kept the $131,000 proceeds from its 1986 sale. The deed to Jeanette reflected an $80,000 purchase price, which Jeanette now claims she never paid. Because there is no statute of limitations within which the IRS must assess a tax adjustment due to fraud, maybe Jeanette has attracted the tax man's attention by trying to squeeze Phil for all he was worth.

Most IRS cases settle before ever going to court. Maybe we will never know the details of Phil's Estate's transactions with the IRS (nor of Jeanette's). But it could be that this 60+ year adulterous relationship will yet prove to be a tax matter for the courts.

Wednesday, February 15, 2006

Suing to Increase their Tax

Last week's Budlong v. Graham decision of the U.S. District Court for the Northern District of Georgia has just come to my attention, via a proprietary reporting service to which I have access. I have found no publicly available texts of the decision yet (though I fully expect that some will soon be posted somewhere on the Internet), but it is Civil Action No. 1:05-CV-2910-RWS, and the Court's opinion was released on 6 February 2006.

The Court has ruled unconstitutional the Georgia statute that exempts "Holy Bibles, testaments, and similar books commonly recognized as being Holy Scripture" from Georgia's sales tax or use tax. Apparently, the exemption does not apply to the Bhagavad Gita or Zen or other non-Judaeo-Christian writings recognized by their respective religious faiths as Holy Scripture.

And so, instead of requiring Georgia to grant a similar tax exemption for sales of the Bhagavad Gita, the Court has enjoined Georgia from allowing the exemption on the "Holy Bibles, testaments, and similar books commonly recognized as being Holy Scripture."

It is a long-standing American tradition to level the religious playing field by allowing followers of the minority religion the same legal privileges and relaxations accorded the dominant religion. Even before American independence, the General Assembly of the Colony of New York, on 12 July 1729, specifically allowed persons of the Jewish religion to serve as governmental officials, and to take an oath of office which, while pledging to faithfully and dutifully discharge the duties of the office, omitted the words "upon the true faith of a Christian."

Nowadays, the mixture is a bit more diverse than Protestants, Catholics and Jews. Nevertheless, the logical and real American thing to do would be to expand the sales and use tax exemption to include Bhagavad Gita.

It is not uncommon for a lawsuit to have some sort of plaintiff's (or even a defendant's ) agenda which is not entirely obvious from the text of the judicial opinion. Left to their own devices, taxation agencies will invariably find ways to increase their opportunities to exact revenue from the populace. Why did Bart Graham, the Georgia Commissioner of Revenue, actually oppose the plaintiff's motion to compel him to collect more taxes? When the Georgia Revenue Commissioner, whose job is to collect revenue, resists a motion to require him to collect tax money, that is a sure sign of an agenda lurking in there somewhere.

Moreover, the lead Plaintiff, Thomas Budlong, described in the judicial opinion as "a retired librarian, and the former President of the Georgia Library Association," was the one who moved for relief that would cause librarians throughout Georgia to have to pay more to procure certain classes of library materials. Whythehell is Georgia's ex top bibliotechie trying to INCREASE the costs of running libraries when librarians throughout America are whining that their libraries are in a budget crunch (though many public libraries solve this by increasing taxes)? This, too, is an indicium of an ulterior motive.

At this juncture in time I have yet to see any of the pleading papers behind this judicial opinion. Nevertheless, I can tell you that the hidden agenda is not Bart Graham's. I know this because:

A. The lawyer representing the Plaintiffs is Maggie Garrett, who is employed by the Georgia ACLU as a Staff Attorney.

B. Tom Budlong has a long record of activism within the American Library Association, a far, far left organization which is pro-terrorist and pro-pornography and all the rest of the far left anti-family and anti-American and anti-G-d agenda.

The lawsuit is just one more attempt to chip away at our American freedoms. If the plaintiffs TRULY wanted equality, they would have moved for the court to require the Georgia sales and use tax exemptions to include the Bhagavad Gita.

This is not to say that a tax exemption such as Georgia's is simple to administer. Another "religious" text specifically mentioned in the court's opinion is a tome entitled "Zen and the Art of Motorcycle Maintenance." Now I am not going to rule upon whether this book is or is not really a religious book (but if it is, then it certainly ain't my own religion). This is America, and we have freedom of religion here.

[Some years ago, when I still worked for Uncle Sam, I got into a conversation with some other Jewish employees regarding how we intended to work the compensatory time for our religious observance days off (a standard procedure for religious accommodation of the Federal workforce). Another co-worker in our proximity (who happened to be a practicing Catholic and an avid Yankees fan) interjected, only half jokingly, that he wanted to take time off to see the Yankees game and work comp time for it because Baseball was his religion. I mentioned this little exchange to my Rabbi, who, as basketball fan, very much appreciated the humor. The Rabbi's comment was that he wished more Jewish people would have just half the fervor for learning Torah as they do for the baseball and football and basketball games.]

A tax exemption for religious organizations is relatively simple to enforce if it is based upon limiting the benefit that may inure to private individuals or non-tax-exempt entities, rather than upon the merits of the underlying "religious values." Thus, one claiming the benefit of a real property tax exemption can be scrutinized by the property. If there be a manufacturing plant on premises, and the goods manufactured there are sold in general commerce, then the exemption can be questioned.

Also, a sales tax exemption based upon whether the seller or buyer is an organized religious entity is also open to abuse. Churches can sell objects having some sort of tenuous religious significance. At one point in time my Rabbi was approached with the idea that our synagogue sell kosher wines for religious purposes, so that they can be tax-exempt. His response was that he was not out to undercut the local merchants' businesses.

The problem with Georgia's now invalidated sales and use tax exemption was that it was content-specific. If all books and/or newspapers were tax-exempt (or taxed) then there would be no need to make a religion-specific determination. And, quite frankly, given the nefariousness of the Income Tax and Estate Tax as we known them today, I would prefer to abolish those taxes in favor of a national sales tax, even if religious articles were taxed on the same basis as everything else.

But whatever merits there may or may not be in Georgia's sales tax scheme do not alter the agenda behind the lawsuit by the ALA and the ACLU. Do not confuse Freedom of Religion with freedom from religion!

Friday, February 03, 2006

Estate Tax Facts

Lots of things going on these past 2 weeks (and looks like more on tap for next 2 weeks). One topic of discussion in my personal / professional life has been the Estate Tax.

The Estate Tax as we know it today originated in the early 20th Century, and was enacted at a time when Americans still had a bad taste in their mouths from the excesses of the so-called "Robber Barons." The rationale for the Estate Tax was that the passing from generation to generation of large amounts of accumulated wealth was detrimental to the best interests of the nation. The Estate Tax is, by intention and design, a confiscatory impost.

I have seen the workings of the Estate Tax firsthand in my professional life. Though I am not quite ready to unequivocally say that it should be abolished entirely, that is the direction in which I lean. The one position I can and will take regarding the Estate Tax is that it cannot remain as is without inflicting further damage upon America.

The debate between those who advocate the Estate Tax's repeal and those who advocate its reformation can be a healthy thing, provided that everyone involved stays on the factual track. Unfortunately, some groups and individuals are spinning repeal of the Estate Tax in terms of some sort of sinister benefit to the wealthy. This obfuscates the facts.

The following matters should be recognized in any debate regarding the Estate Tax:

1. Though the Estate Tax was initially crafted to target the wealthy classes, inflation and other economic factors have shifted it so that its primary victims are from the middle class. Escalating prices of real property have made many middle class individuals asset-rich but cash-poor, so when the taxable event of death occurs, it is necessary to convert nonliquid assets such as one's homestead into cash to pay the Estate Tax and other costs of dying.

2. The aforedescribed process has driven many children of farmers out of farming by forcing them off their parents' land. Much of the farmland formerly held by family farmers has been bought up by large corporate agricultural entities. [Query: Does this really fulfill the agenda of some of the idealistic wealth redistributionists who advocate soaking the rich with the Estate Tax?].

3. Similarly, many family businesses other than farming have had to be liquidated or downsized in order to pay the Estate Tax.

4. Moreover, much real estate, farmland or otherwise, has been subdivided, accelerating the process of urban sprawl development. All across America, from the Scripps Ranch in San Diego to most of Long Island, much land has been converted from agricultural to residential or commercial or industrial in order to pay the Estate Tax. And while it is true that certain Internal Revenue Code provisions were drafted to facilitate favorable payment plans to family businesses and farms, they really do not work all that well.

5. The foregoing processes have environmental and ecological ramifications. Long Island, for example, was once a self-sufficient agricultural and aquicultural entity that supplied much of the food to New York City. The proliferation of urban sprawl has expropriated so much farm land that Long Island must now import almost all of its food (via only two bridges directly to the mainland, which further adds to the already heavy truck traffic on Long Island's roads).

6. The pollutants in the water from the urbanization of Long Island have destroyed most of Long Island's fishing industry. As mentioned in my posting of 2 December 2005, the Native American communities on Long Island, no longer able to sustain themselves from working the land and the sea, have now turned to the casino business, with its concomitant corruption of not only their own culture, but of society as a whole.

7. In recent history, the Estate Tax has hovered between one percent (1%) and one and a half percent (1.5%) of the U.S. Treasury's gross tax collections. It is not an efficient source of income, particularly in view of the fact that it is such a sophisticated tax that the IRS requires an elite cadre of employees, including but not limited to Estate Tax Attorneys, to enforce it.

There is no simple or repercussionless solution to the current Estate Tax situation. Call it as you will, but in formulating your position, you cannot ignore the facts.