The Tax Lawyer's Blog

Tax lawyers Robert Wood and Christopher Krachale write in Home Workers: Employee Status Hidden in Plain Sight:

There are many tests for determining who is an employee and who is not. Yet much of it comes down to the common law right to control, in which rules of agency are used to determine employee status. The common law asks whether the person for whom services are performed has the right to control and direct the individual who performs the services, regarding not only the result but also the details and means of accomplishing the result.

Because of the inherent subjectivity of the common law test, the proper categorization of workers as employees or independent contractors has been an irritant for employers for decades. It has become even more so in recent years due to the increase in the numbers of workers who work from their homes. 

Home workers (among others collectively called statutory employees) are automatically considered to be employees without regard to the common law factors:  

Individuals who work at home on materials or goods supplied by an employer that must be returned to the employer or his designate and for which the employer furnishes specifications regarding the work to be done [are employees]. 

Wood and Krachale call for a narrowing of the IRS’s application of the home worker classification:

The IRS’s application of the home worker classification has begun to encompass far more workers than Congress probably intended. Given the growing tendency for independent contractors to work from home (or at least off-site) using telecommuting and Internet technologies, it is possible that many more workers will be classified as statutory employees.

(Hat Tip: Paul Caron)

Related Posts:

• Fed-Ex Drivers are Independent Contractors
• Tax Update – November 2008 – Independent Contractor v. Employee

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We have written extensively about the efforts of states to tax Internet sales by using an economic rather than a physical presence test for nexus. See Related Posts at the end of this post.

Mike Godfrey of TaxNews.com reports that the Tax Foundation submitted a statement in support of a national physical presence test to the House Judiciary Subcommittee on Commercial and Administrative Law, which convened last week to discuss the topic “State Taxation: The Role of Congress in Defining Nexus.”

Here’s an exerpt of the Tax Foundation’s statement:

The Internet has seen an increased amount of commerce, but some seem to view it as a golden goose that can be squeezed without adverse effects on economic growth. It must be understood that the availability of many items in electronic commerce could be hindered if states are permitted to adopt economic nexus standards.

States will reach for as much revenue as they can, if they believe that it can benefit them even at the expense of other states and the nation as a whole. A uniform physical presence standard would restrain these efforts, maintain a level playing field for all types of businesses, and reduce costs and burdens to interstate commerce.

For example, if a New York company sells a product on its website to a California purchaser via servers in Ohio and Colorado, is the transaction everywhere, nowhere, or always somewhere at a given point in time?

A physical presence rule provides a logical answer to where the transaction is located, identical to the answer given for brick-and-mortar businesses: in this case, New York, where the company’s property and payroll are located. Proponents of economic nexus are mostly unanimous in rejecting that choice, but they would substitute only uncertainty about the ultimate answer.

It was not new for states to seek revenues by shifting tax burdens away from the majority of voting residents, such as with changing nexus rules.

Congressional action to adopt a physical presence standard may be the best vehicle for preventing burdens to interstate commerce, because it can be more comprehensive and accountable than judicial action and can also better address issues of transition, retroactivity, and de minimis exemptions.

The two most important statements in the Foundation’s testimony bear repeating:

1. “States will reach for as much revenue as they can”
2. “States [will] seek revenues by shifting tax burdens away from the majority of voting residents.”

Does anyone doubt that these two assertions are true?

The problem will grow as Internet commerce grows and states look for new sources of politically palatable revenue.

Congress must act and pass into a law a clearly defined national physical presence test that will preempt the states from establishing their own self-serving economic presence tests which would restrain interstate commerce and limit the growth of the national economy.

Related Posts:

• Sales and Use Taxes: Internet Sales Cost States Billions
• States Losing Money, Study Finds
• Supreme Court Refuses to Hear “Physical Presence Test” Case: Harbinger of Things to Come?
• E-Commerce Sales Tax Unworkable, Critics Charge
• State Governments are on the Prowl for New Sources of Revenue: Watch Out for New Internet Sales Tax Law

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WebCPA reports that a Houston based CPA tax preparer has been suspended from practice before the IRS for filing false tax returns for his clients:

According to the IRS, Robert A. Loeser of Houston assisted his clients in lowering their tax bills by claiming false business expenses on tax returns he prepared. He allegedly advised his clients to forward funds from their businesses to two corporations that he controlled. The corporations then rebated the funds to his clients. Loeser prepared the clients’ books and business tax returns, expensing and deducting the entire amounts that were paid to the corporations.

The IRS accused Loeser of violating Circular 230 requirements by giving false or misleading information to the Treasury Department and the IRS, and he has settled with them.

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So much for the promise not to raise taxes on the middle-class.

Douglas Holtz-Eaken and Alex Brill have written an Op-Ed for the Wall Street Journal titled Another Obama Tax Hike: The Senate Health-Care Bill Would Raise Effective Marginal Tax Rates on Lower and Middle-Income Singles and Families up to 41%:

[The Senate health care bill raises] to shocking levels the effective marginal tax rates (EMTR) on lower and middle-income singles and families–with the government taking up to 41% of each additional dollar. … 

 

The solid line shows the EMTR based on income tax law prior to the health-care bill (it excludes the impact of the payroll taxes). The dashed line displays the damaging increases in the EMTR assuming the health insurance premium subsidies contained in the Senate health-care bill and insurance cost estimates provided by the Kaiser Family Foundation.

As a family’s income rises above 133% of poverty, Medicaid eligibility will be eliminated but a family that does not receive health insurance from their employer will receive a subsidy to purchase health insurance in the “exchange.” In turn, however, as their efforts yield higher income, subsidies are clawed back or effectively taxed away.

The current law policies show that there are already some lower income families facing EMTRs above those in the middle class. But the barrier to success imposed by health-care reform is even more striking. According to the Congressional Budget Office, about 20 million people would receive a subsidy to purchase insurance through an exchange and thus face a higher EMTR.

If this Congress passes healthcare reform at all it will most likely be the current Senate bill which passed when Democrats held a filibuster-proof majority in the Senate. Now, because of the election of Republican Scott Brown to fill Ted Kennedy’s seat, it’s highly unlikely that a new Senate bill would get the 60 votes needed to prevent a Republican filibuster.

Mr. Obama has said that he will sign the Senate bill, so, if Speaker Pelosi somehow gets the House to adopt it, we will, according to Holtz-Eaken and Brill, have that middle-class tax hike the President has repeatedly promised we wouldn’t have.

See what happens when you support politicians who promise to tax everyone else but you? You get hoisted by your own petard.

Related Posts:

• Senate Healthcare Bill is Also a Big Tax Increase Bill
• Online Tax Poll: Will President Obama Raise Taxes on the Middle Class?
• Obama Will Raise Taxes on the Middle Class, Financial Times Says

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If you own and operate a trade or business and have a history of losses, there is a very good chance the IRS will at some point disallow those losses, especially if you keep poor records.

Although good bookkeeping is important in all cases, it is especially important for taxpayer’s with businesses that have shown a pattern of losses. The IRS website contains this entry about the requirement that taxpayers maintain adequate books and records (emphasis added):

Inadequate Books and Records

IRC § 6001 contains the requirements for taxpayers to maintain and keep records.

Treas. Regs. § 1.6001-1(a) provides that taxpayers must keep permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown in the taxpayer’s returns.

Treas. Regs. § 1.6001-1(e) provides that the books or records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees, and shall be retained so long as the contents thereof may become material in the administration of any internal revenue law.

Treas. Reg. § 1.183-2(b) lists nine factors that examiners must evaluate in determining whether or not a taxpayer’s business activities have been engaged in for profit:

1. Manner in which the taxpayer carried on the activity
2. Expertise of the taxpayer or his or her advisers
3. Time and effort expended by the taxpayer in carrying on the activity
4. Expectation that the assets used in the activity may appreciate in value
5. Success of the taxpayer in carrying on other similar or dissimilar activities
6. Taxpayer’s history of income or loss with respect to the activity
7. Amount of occasional profits, if any, which are earned
8. Financial status of the taxpayer
9. Elements of personal pleasure or recreation

The IRS will more closely scrutinize losses claimed as a result of a taxpayer’s involvement in one or more of the following businesses:

I wouldn’t be surprised to see “blogging’ added to this list sometime soon.

 Related Posts:

• CPA v. Unenrolled Preparer: Tax Code Requires Good Books and Records

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Misunderestimated, stategery, nucular. Bush got pilloried for those malapropisms, and probably deservedly so.

But the great orator, his Holiness the Dali Obama, speaking at a prayer breakfast this morning three times prounounced the word “corpsman” with a hard “p.”  Nary a word from the left. Not a shred of national embarrassment. No diagnoses of dyslexia.

Now, I admit there are words I misprounounce. I have a particularly difficult time with the “h” sound in words like “houston” and “hue”, for example. I even suspect there are words that you mispronounce (”hy-eee-nuss” instead of “hay-nuss” for the word heinous, perhaps?).

But the point here is not that all of us sometimes make verbal faux pas, but rather that some of us get a pass and others don’t.

I admit that this is a relatively minor example of left-wing hypocrisy, but still it is illustrative of the larger dynamic: The left’s consistent attempts to use any means necessary to defame those with whom it disagrees.

Indeed, the modus operandi of left wing radicals (and, I would concede, ideologues and true believers of all stripes) is that the end always justifies the means.

So please, the next time you hear a liberal waxing indignant about something a conservative said or did, remember, it’s not about the word and the deed, but rather the political advantage that can be extracted from them. 

The clearest example I can give you of this phenomenon is when liberal feminists tried to destroy pro-life Supreme Court nominee Clarence Thomas for allegedly trying to seduce an employee of his own age and social status and, then, just seven years later gave pro-choice President Bill Clinton a pass for using his geometrical power advantage to actually seduce a twenty-three year old, wet- behind-the-ears, file clerk.

Politics ain’t bean bag.

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Senator Robert Casey, Jr. (D-PA) asked the Congressional Budget Office (CBO) for its input on ways increase employment by reducing payroll taxes. Here’s part of the CBO’s response:

This letter responds to questions you posed about policy options to increase employment by reducing employers’ payroll taxes for firms that increase their payroll.

CBO anticipated that firms would respond to a payroll tax credit through a combination of four channels:

1. Some firms would react to lower employment costs by reducing the prices they charged in order to sell more goods or services. Higher sales would in turn spur production, which would lead to increases in hours worked and hiring.
2. Some firms would pass the tax savings on to their employees in the form of higher wages or other types of compensation, which in turn would encourage more spending by those employees. 
3. Some firms would retain the tax savings as profits, which would be passed on to shareholders.  
4. Some firms would use slightly more labor during the period when it was temporarily less expensive.

CBO seems to view numbers 1, 2 and 4 as positive outcomes and number 3 as a negative outcome. What’s interesting about that is the CBO didn’t point out (as it did in number 2, where it predicted that some employers would use the tax cut to raise the wages of their current employees) that when employers pass on the tax savings to their shareholders that, too, encourages more spending.

Clearly, though, the goal of the payroll tax credit is to encourage employers to hire additional workers. Consequently, numbers 1 and 4 represent the optimal outcomes of the credit and the ones, I assume, Mr. Casey would like to achieve.

Note, though, that the CBO found that even for those employers who do use the credit to directly increase employment, there would only be a slight increase in employment.

(Hat Tip: Paul Caron)

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Anyone who thinks the Obama administration isn’t serious about closing the tax gap should read this little ditty courtesy of Paul Caron: 

The Internal Revenue Service (IRS) intends to purchase sixty Remington Model 870 Police RAMAC #24587 12 gauge pump-action shotguns for the Criminal Investigation Division. The Remington parkerized shotguns, with fourteen inch barrel, modified choke, Wilson Combat Ghost Ring rear sight and XS4 Contour Bead front sight, Knoxx Reduced Recoil Adjustable Stock, and Speedfeed ribbed black forend, are designated as the only shotguns authorized for IRS duty based on compatibility with IRS existing shotgun inventory, certified armorer and combat training and protocol, maintenance, and parts.

Paul says the IRS is soliciting quotes for the purchase of the shotguns on the federal business opportunities (FedBizOpps) website.

It might be time for me to shut down my Branch Davidian office.

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Acting Commissioner of the New York State Department of Taxation and Finance Jamie Woodward issued a press release today announcing the arrests of eighteen people on tax evasion charges:

The defendants have been charged with evading hundreds of thousands of dollars in state income taxes on millions in earnings by not filing tax returns over multiple years. Those arrested include five attorneys, a doctor, a CPA, an anesthesiologist, an annuity underwriter, an English Professor at Hunter College and a former Monroe County Assistant District Attorney. 

The arrests continue the Tax Department’s statewide enforcement initiative targeting those who evade their tax obligations by not filing their state returns. To date 25 other non-filers have been arrested statewide in connection with this initiative. 

“Tax evasion by non-filers is a major problem that costs the state hundreds of millions in tax revenues each year,” said Acting Commissioner Woodward.  “Non-filers should be aware that the department is determined to investigate and prosecute this misconduct.  Using enhanced technology and beefed-up enforcement resources, we will continue to bring these cases.  We are fortunate to have the cooperation of district attorneys from across the state.  In the past two years the number of income tax prosecutions initiated by the department has increased more than 360 percent.”

New York is hoping that the mass arrests and subsequent press release inspire other tax cheats to come forward voluntarily:

“Those delinquent taxpayers who are not yet under audit or investigation are encouraged to avoid penalties or criminal prosecution by participating in the department’s Voluntary Disclosure and Compliance Program. For more information about these programs, go to the department’s website at www.nystax.gov.  It is hoped that today’s cases will encourage such taxpayers to come forward and satisfy their obligations.”

(Hat Tip: Paul Caron)

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It’s a crazy world we live in.

Denise Lavoie of the Associated Press writes that the Tax Court has ruled that the costs of a sex change operation are tax deductible:

The U.S. Tax Court ruled yesterday that a Massachusetts woman should be allowed to deduct the costs of her sex-change operation, a decision that could have wide implications for transgender people.

“I think what the court is saying is that surgery and hormone therapy for transgender people to alleviate the stress associated with gender identity disorder is legitimate medical care,’’ said Jennifer Levi, a GLAD attorney.

The legal group, Gay & Lesbian Advocates & Defenders, which represented O’Donnabhain, said the ruling could potentially affect thousands of people a year in the U.S. who undergo similar operations.

In its decision yesterday, the tax court said the IRS position was “at best a superficial characterization of the circumstances’’ that is “thoroughly rebutted by the medical evidence.’’

The IRS said the surgery was cosmetic and not medically necessary.

Rhiannon O’Donnabhain, who was born a man, sued the Internal Revenue Service after the agency rejected a $5,000 deduction for approximately $25,000 in medical expenses associated with the sex-change surgery.

I have said before that if the courts broadened the definition of deductible medical expenses to include medical procedures that “relieve stress”, they would open the flood gates to all sorts of frivolous tax deductions. All the taxpayer need do is get a psychiatrist to say that whatever he wants to buy will reduce his stress and he’s good to go. Here’s what I wrote in July of 2008 when this case first became public:

I can see it now. People getting doctor’s letters prescribing everything from buttocks augmentation to gynecomastia (male breast tissue reduction) just to get their tax deductions. 

Most people I know hate something about their physical appearance. It has to be psychologically disturbing to have twelve chins or a 50 inch waistline. So it’s hard for me to see how, if O’Donnabhain wins this case, expenditures made by future taxpayers for surgery that makes them feel better about themselves could be denied deductibility.

Here are some other “medical” expenses I can see taxpayers claiming under the “stress relief” standard of O’Donnabhain:

• Rhinoplasty, because having a huge proboscis makes me anxious
• Penis enlargement, because having a small weenie is depressing ¹
• Breast reduction, because boys never look me in the eye
• Elevated shoes, because it’s very stressful to be “the first to know when it floods and the last to know when it rains”
• Divorce costs because “if I gotta spend another minute with you, I don’t think that I can really survive”
• Exercise equipment, because 9 out of 10 doctors say it relieves stress

But we can’t just look at the speculative consequences of the Tax Court’s ruling to determine its rightness, instead we must determine whether or not it is well-reasoned. So, before we criticize the Court, lets all read the 139 page ² opinion in Rhiannon G. O’Donnabhain v. Commissioner of Internal Revenue.

I don’t think anyone doubts that if you are born a man and want to become a woman, you have some sort of disorder. But is it really the proper medical treatment to allow the disturbed person to change his sexual identity, or is it preferable that he undergo therapy that will allow him to accept his God-given gender? Anorexics want to be skinnier, but no sane person would suggest we staple their stomachs to help them achieve it.

Here’s how the Court dealt with this apparent conundrum:

The evidence demonstrates that hormone therapy and sex reassignment surgery to alter appearance (and, to some degree, function) of GID [Gender Identity Disorder] sufferers in an effort to alleviate the distress and suffering occasioned by GID, and that the procedures have positive results in this regard. Thus, a “reasonable belief” in the procedures’ efficacy is justified.

The Court also said,

Alleviation of suffering falls within the regulatory and caselaw definitions of treatment… and to relieve is to treat according to standard dictionary definitions.

Thus, the O’Donnalbhain standard might be narrowly stated as follows:

The costs of  legitimate medical procedures that are designed to relieve the mental suffering that is associated with a generally accepted mental disorder ³ are tax deductible.

Footnotes:

¹  I am told.

²  Judging from the length of the opinion (most Tax Court rulings are less than 20 pages), it is obvious that the Court was concerned about the “flood gate” problem. Judge Gale, writing for the majority, smartly recognized the potential dangers of the ruling and attempted to narrow it’s application as much as possible. The Court even disallowed – inconsistently, I think – O’Donnabhain’s breast enhancement surgery on the grounds that it’s purpose was merely to improve her appearance. But if O’Donnabhain wants a vagina, wouldn’t he also want a set of female breasts to go along with it? Here, the Court obviously wanted to avoid setting precedent that would allow women to deduct their boob jobs, even though being flat apparently profoundly depresses young girls.

³  Presumably, the costs of medically prescribed procedures designed to relieve the mental suffering of people with purely physical disorders would also be deductible under O’Donnabhain. In other words, the stress itself doesn’t have to be a medically recognized disorder, but rather, merely the consequence of a medically recognized disorder. As I’ve said before, I don’t know of a single medical malady that doesn’t cause the sufferer stress.

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