If You Take a Walk, I'll Tax Your Feet

|

I know virtually nothing of tax law, so I don't know whether this small business owner's legal analysis of her situation is correct. Then again, if the law really is what the IRS claims it is, that would just be another reason to hate the IRS.

NEXT: Hooked Worms

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. The impression I get is that it doesn’t MATTER what the law actually is, unless you can afford years of your life and tens of thousands of $$ in legal fees to fight your way through the administrative law system. The IRS has power to seize your property with civil action, without ever having to meet any burden of proof. To get your stuff back, you have to play by their rules; and the game isn’t over until they say it’s over. So unless you’re a millionaire, the law is whatever the filthy fucking IRS pigs say it is.

  2. I know a gentleman who claims that as long as someone else’s name (not a spouse or child) is on the assets that it makes it much more difficult for the IRS to sieze. i.e. one person gets nailed for taxes, when the irs goes to seize the car, house, etc. the other person then says, no you can’t take my property. A sort of perverse collectivism.

  3. If she had a back issue for two years that went unsold, the fair market value of that book the first year was zero, yet the IRS is trying to count it as a taxable asset twice. If you want to consider it as a depreciable asset, eventually the asset is depreciated to zero. Every business has fully depreciated assets that they can eventually sell off, even as scrap, and get taxed on the income from the scrap sale.

  4. I’ve always wondered about the benefits of being two people, at least on paper.

    If I add another persona, say for instance “Juan Miguel Sanchez”, and get a SSN, driver’s license, bank accounts and all that jazz, I’d qualify for twice the basic personal exemption and be able to shelter half my assets under another name.

    I’d probably start out overseas, buy a black market passport or something and get a work visa. Hire myself as my personal assistant or live-in domestic help. Could probably play the game for years, since the IRS never really sees you and your employer together.

  5. List the “dead inventory” as equipment, like shelf dividers. Depreciate the $8K over time and it will have zero accounting value. There is a recognized accounting (taxable) category for the gain upon disposal of fully-depreciated assets, should she actually sell one the “valueless” comics.

    To answer the issue of fraud, she has no intention or expectation of selling this stuff. Hang some disclaimer that back issues are not for sale to appease the judge, and ignore it if necessary.

    Please forward a copy of Iron Man #1 in exchange for my back-alley accounting services. I promise to report it…

  6. Thor Power Tool Co. vs. United States

    That was the tax case decision that currently rules the land and led to all those remaindered books back in the 70s and 80s.

  7. I note that the store owner has said:

    Now, the law clearly states that if a business makes less than a million dollars a year in gross receipts, they DO NOT have to recognize inventory.

    I think that’s true — see IRS Revenue Procedure 2001-10.

    (Briefly, there is “cash accounting,” which is basically balancing your checkbook, and “accrual accounting,” which requires you to depreciate capital gains and stuff like that. Accountants agree that accrual accounting, which is more complex, gives a better picture of business performance. Generally speaking, the IRS requires large businesses to use accrual accounting to calculate their taxes but permits many small businesses to use cash accounting to calculate their taxes. Rev. Proc. 2001-10 broadly permits businesses with gross receipts of less than $1mm/year to use cash accounting.)

    Which means that any store that makes less than a million dollars does not have to take a physical inventory of their store’s product at the end of the fiscal year.

    This is problematic. Having “gross receipts” of less than $1mm a year is different from “making” less than $1mm a year. You can have a million bucks coming into the register every year — that would be a little better than $80K/month — even if you aren’t making a million bucks a year after expenses.

    So perhaps she was mistaken about whether she qualified for the exemption.

  8. I seriously doubt that any comic book store in the country has $1 million in gross receipts.

  9. I think she’s a little confused. The IRS doesn’t tax inventory, it adds (or subtracts) the difference between the value of inventory at the beginning of the year and the value at the end of the year, to (or from) your income. I presume that she claimed the purchase of this stock as a business expense when she first bought it, and so it’s considered potential income until she either sells it or destroys it. There is no “inventory tax” however; if your inventory were to be exactly the same at the end of the year as at the beginning it would not affect your tax bill at all, and likewise if your inventory goes down you realize a tax savings. I’m sure the arbitrary value the IRS gave her inventory is wrong, but to overcome that all she has to do is count up her inventory herself; it’s hard work, and might take a whole week, but that’s what all businesses do every year.

    As far as I know every business no matter how small has to keep track of inventory, I don’t know what she’s talking about there.

    All this is not to say that I think the IRS is justified in taking ANY money from ANYONE ….

  10. I think the inventory she’s refering to is probably bins of old back issue comics that aren’t collectors items with a sign that says “$1 each” next to them or something. It’s probably several thousand issues that someone might want someday. The idea of having them around is so that people will come in to browse for old comics, then by something else – plus it’s just the sort of thing comic fans would expect at a comic store.

  11. I seriously doubt that any comic book store in the country has $1 million in gross receipts.

    I have no idea what comic stores have in terms of gross receipts, but it strikes me that tehre must be a few that do that well in sales, what with TPBs, manga, T-shirts, toys, videos and all the other stuff that goes along with comics these days, including mail and Internet sales.

    As a floor, I doubt that anyone could run a comic book store that did less than, say, $250K in sales yearly unless they were getting free rent.

  12. calculating business income involves hard accounting problems.

    Hard compared to what? I wouldn’t think that one becomes an IRS auditor/accountant by being too smart for diff eq’s. Because of the pride involved in the transaction between ourselves and the IRS, I think we tend to expect mistake-free performance from people who would not succeed in the private sector, some percentage of which are probably working that job for that exact reason. It underscores the importance of oversight, something the IRS is reluctant to embrace probably because it would bring to light the coercive and intimidating practices in which they engage to get more than what they are due. IRS agents get cash awards for slamming individuals and business with huge tax bills, and their bread and butter are the people who can’t afford to defend themselves.

  13. (i.e., “hot shit” at the IRS == coffee boy at CSFB)

  14. I wrote:

    … calculating business income involves hard accounting problems.

    rst responded:

    Hard compared to what? I wouldn’t think that one becomes an IRS auditor/accountant by being too smart for diff eq’s.

    Not hard in the sense of “there is a single correct answer but you need higher mathematics to figure it out” but hard in the sense of “alternative answers each have pluses and minuses and reasonable people could differ.”

    Quick example: For a trucking company, trucks are assets, the cost of which can be deducted from income over time as the truck depreciates, and fuel is an expense, which can be deducted from income immediately. How do you account for truck tires? This is a subject that trucking companies have gone back and forth with the IRS on for 60-odd years. Questions involving accounting for complex financial derivative products can be much harder.

    A fair number of the people in the Washington home office are highly credentialed people who work at the IRS for a few years to buff up their resumes and then go back to the private sector. Right or wrong, there is a lot of intellectual firepower over there. Don’t kid yourself.

  15. I can’t tell you what Paige’s annual gross receipts are, just that they are well under 1mil a year.

    As for comics back-issues… they are mostly worthless, and take up space. But comics fans expect stores to have an inventory of a few thousand books to dig through in the hopes of finding that one missing “gem” from their collection. But most of the books she has in stock? She would be hard-pressed to give them away. But not only does the IRS want to tax her on those books, they want to tax her every single year on those same books???

    So if she happens to have bought twenty copies of Lameman #27 thinking she could sell them, but nobody wants them, they go into backstock. Chances are good that they won’t sell. In December, she puts them in the 10 cent bin. They still don’t sell. She’s out the $1 each for cost, and now the IRS wants to tax her for them at the end of the year? And if she doesn’t destroy them, she’ll be taxed on them every year? How does that make any sense?

    In any case, if this tax law is correct, and it seems to be from reading about the Thor case ( http://www.sfwa.org/bulletin/articles/thor.htm ), then no used bookshop or comic shop in the country can possibly function. That decision was 1979, has it not affected shops simply because there haven’t been enough audited, or has something changed that makes the IRS willing to go after her now? It seems to me that if this law is applied across the board, retail simply cannot function.

    I don’t know the answer. I do know that tax law is too stupid to believe, and that it’s currently driving a good friend of mine insane.

  16. The lady’s whining. Must be a liberal.

  17. if this law is applied across the board, retail simply cannot function.

    Smaller restaurants routinely switch off their registers for periods of time (lunch rushes, for instance) because the law as it is applied makes it nearly impossible for businesses to function.

    alternative answers each have pluses and minuses and reasonable people could differ

    I will grant that there are most likely “six sigma” individuals at the IRS for short periods of time, but given my own experience with them I still hold that the net effect of IRS operations is “amateur night”…those few people do little to alter the IRS’ inability to correctly interpret its own tax code or even promptly and efficiently assist people with matters for which the IRS is more then willing to promptly and persistently harass them.

    I have never had a personal dispute with the IRS, but on behalf of clients I have had to clarify things with them. Simple things. Repeatedly.

  18. Laura Gjovaag writes:

    I can’t tell you what Paige’s annual gross receipts are, just that they are well under 1mil a year.

    If so, it would seem that she is correct that she can do cash accounting (which could make the rest of this post moot).

    But not only does the IRS want to tax her on those [unsold] books, they want to tax her every single year on those same books???

    I don’t think the issue is taxing the books every year. I think the issue is that if she is using accrual accounting, then she can’t take a tax deduction for books she buys until she sells them or otherwise disposes of them.

    Here is the reason:

    Suppose I buy 100 widgets at $1 in year 1, and sell 50 of them for $2 in year 1 and 50 for $2 in year 2.

    On a cash basis, my income is $0 in year 1 ($100 sales, $100 costs) and $100 in year 2 ($100 sales, $0 costs).

    On an accrual basis, my income is $50 in year 1 — $100 in sales less $50 in costs for the widgets sold, taking no deduction for the widgets left in inventory — and $50 in year 2.

    If I am using cash rather than accrual accounting, I am deferring tax on $50 in income for one year, which saves me money and costs the IRS money. If we are talking about a big company holding inventory for a long time, that could be real money. If we are talking about a small business, it’s probably small change, and so those businesses are permitted to use cash accounting for calculating their taxes if they want to avoid the costs of doing accrual accounting.

    That having been said, IIRC, you can’t pick and choose: you have to do your taxes on one basis or the other. Maybe that’s the problem here.

  19. “costs the IRS money”

    Yer funny.

  20. Thanks for posting this. I was just getting ready to try and bring this to the attention of Hit and Run readers.

  21. Well I’ll help Jesse with the tax side. The IRS uses standards, and measures tax returns by their deviation from that standard. To develop standards, they perform TCMP: Taxpayer Compliance Measurement Program audits; complete, end to end, determinations of income and expense, to define the standard. This looks like a TCMP.

    When she bought the business, she bought long lived assets as well as inventory. Since inventory turns rather quickly, its cost is recovered through tax deduction much quicker than the long lived assets. So I suspect an issue regarding allocation of original purchase price between inventory and other assets.

    She still has to “recognize” inventory. Depending upon levels, that inventory can either be currently deducted, or ending inventory must be deducted the next year, or other operatiing expenses must be attributed to ending inventory and deducted next year.

    She definitely needs a better CPA, one who has a little experience with tax audits. Sorry, I’m busy.

    What this does show is that we have a tax system that even the collectors don’t understand. If we can’t figure out our taxes, we have to pay people to figure them out. She’s paying a CPA and an attorney. This is a dead-weight loss. If the IRS instead collected an easy to compute tax that was less than the costs of what she pays in both tax and tax preparation and audit, we’d all be ahead. (Of course not as far ahead as we’d be with no taxes! There’s no government, like no government.)

  22. I’m no expert, but if what she’s saying is true — that in order to avoid the tax, she would have to get rid of her entire inventory — then why couldn’t she “sell” her entire inventory at the end of the year to some overzealous comic book collector for a nominal price, like $10, and then buy it back after the first of the year? The inventory wouldn’t actually have to move an inch, but since she wouldn’t have ownership of it at the time the tax was imposed, she’d only have to pay tax on the $10, but that would actually be a huge loss — according to the IRS! — so it would have to result in a write-off. (Unless it has become illegal to “lose” money in business.) She might even get an additional write-off if she claims that she’s losing money by “storing” the inventory for the buyer who hasn’t come to pick up all the comic books he/she bought. Just an idea.

  23. “why couldn’t she “sell” her entire inventory at the end of the year to some overzealous comic book collector for a nominal price, like $10, and then buy it back after the first of the year?”

    Presumably you mean she would sell her inventory in exchange for $10 AND an option to repruchase at a bargain price. That contract would be valuable and taxable.

  24. Let me add that the suppressed premise in the IRS’ actions is that this lady has hidden income from untaxed, unreported sales from an easy to traffic, impossible to track, inventory. When they could not find any, they went to the next level. (Note: This is what I THINK the IRS THINKS, not a statement of fact or a charge.)

    I further stipulate that this is no “random” audit, but part of the feds’ ongoing roto-rootering of any and all cash intensive businesses.

  25. My dad once gave me some advice. If I ever found myself at the margins of tax code interpretation for big $, I ought to deliberately take additional actions at the margins of the tax code for small $. In an adversarial audit, the small potatoes can be exchanged (preferably by a tax attorney) to the autitor to meet their quota and demonstrate success to management, while protecting the real tax minimizing maneuver.

    As feisty and anti-government as I am, I recognize that fighting the IRS for pride is a sucker’s game. The goal is to mimimize cost, and that includes time and effort spent in defense. The tax code – the most important wargame ever devised. Your opponent writes the rules.

  26. Like I said, I’m no expert, but she’s claiming that the inventory is dead and valueless, anyway, so the option to repurchase — for $10 — couldn’t hold much value, could it? I don’t really see why she’d have to sell it with the option to repurchase. Why couldn’t she “actually” sell it, to a friend or someone she trusted, and then “actually” buy it back? I’m not trying to be argumentative; just trying to get an understanding of the situation.

  27. What this does show is that we have a tax system that even the collectors don’t understand. If we can’t figure out our taxes, we have to pay people to figure them out.

    Fundamentally, this problem arose because (i) we tax income in the US and (ii) calculating business income involves hard accounting problems. The IRS makes rules to resolve various categories of recurring accounting problems, not because the IRS wants to engender complexity. (A problem, of course, is that while the rules make compliance easier in many cases in that they explain up front how the IRS will resolve certain kinds of accounting disputes, the rules sometimes have their own ambiguities and internal contradictions. That’s not an intentional result; it’s just what happens when rules are made by not-omniscient beings.)

    A moral of the story is that we can’t just wish away the IRS by arguing for a 10% flat tax on income or something like that. That won’t solve the problem.

    Nathan Bradley writes:

    Like I said, I’m no expert, but she’s claiming that the inventory is dead and valueless, anyway, so the option to repurchase — for $10 — couldn’t hold much value, could it?

    If that were true, then she would just trash them, yes?

  28. She’s claiming the inventory she paid $8,000 for is dead and valueless. Her actions have proven otherwise.
    The “sale” you describe looks more like a repo: a sale with an agreement to repurchase. This is considered a financing, not a real sale.
    Remember that our government does not work for a living. It passes statutes, and then points to those statutes as a reason to take your money. Don’t you think they’ve thought this through?

  29. Why couldn’t she “actually” sell it, to a friend or someone she trusted, and then “actually” buy it back?

    What you are describing sounds like a sham transaction, hence a fraudulent one that will land you in jail if you use it to try to game the IRS. I wouldn’t want to be the attorney defending her if she took your advice.

  30. I think it’s a side effect of the worst tax law change ever, sometime around 1970, that book publishers have to actually sell their books in inventory in order to realize a loss on them, rather that keeping them in a warehous against the odd chance sombody might order one from time to time, but evaluated at zero until it’s sold (and then it’s income). The IRS wanted the money sooner. So all the book publishers got rid of all their books, and you could no longer order a book printed 30 years earlier and get it. As people pointed out at the time, but the IRS preferred money. Which they didn’t get, since the publishers sold the books to remainder sellers instead.

    So the hard-nosed position is that if it’s in inventory, it doesn’t have value zero, and your profits are higher therefore than you compute when you say they have value zero. They may well have value zero though, is the problem.

    Estimated taxes are another horrible idea; you can’t do it reasonably but the IRS just wants the same money it eventually gets, sooner. The advantage to the IRS does not even continue: it’s a one-time blip, which happened in the 1940s.

  31. The IRS would probably give her a hard time about selling out “for a nominal price.” They have an absurd concept of “fair market value,” against which they judge asset sales. When you sell for far more than fair market value, you reap a juicy, taxable profit. When you sell for much less than fair market value, you raise red flags with them as a potential tax evader. The IRS uses a variation on this logic to ding people for transferring assets to friends and family as gifts or for “nominal” sale price. (I remember reading about a southwestern artist who made headlines by burning his artwork because he couldn’t give it to his grandchildren without saddling them with a huge tax obligation, due to the art’s “fair market value,” which was inflated by the artist’s fame. If he had been a “no-name” artist, his gifts of artwork to relatives would have been virtually untaxable.)

    The IRS also uses another variant of the “fair market value” thinking to wring every last drop of revenue from employee stock option exercise. Perhaps you read the horror stories of dot-com employees being beggared by the IRS because they exercised options when their company’s stock was trading at stratospheric levels, only to be left with less than nothing when the price of the stock went underwater in the aftermath of the dot-com implosion. I say less than nothing because they were still expected to pay a big tax bill. The IRS, you see, bases its tax computation on the “fair market value” of such stock on the day the options are exercised, not the difference between your option price and any eventual sale price. I actually had an IRS agent tell me that the reason for this policy was precisely to avoid the kind of situation that would be analogous to selling valuable assets at fire-sale prices in order to avoid taxation. So it is clear that the IRS is keenly aware of such maneuvers, and does everything possible to prevent taxpayers from using them.

    The fact that the results of the “fair market value” theory are usually both unfair and quite damaging to taxpayers, is irrelevant. The relevant thing is that the government get the maximum cut, off the top, and upfront.

    A truly simplified tax code may be a partial solution to this abominable situation, but that will only keep the wolf from the door for so long. Unless we actually restrict the scope of government activity, and along with that, the scope of government expenditure, the wolf will always come back.

  32. I think the IRS’s reasoning makes sense. She repeatedly claims that the inventory has no value, then turns around and claims that disposing of them would drive her out of business. Obviously, even if the comic books have no individual intrinsic value, her back issue collection as a whole has significant value as an advertising tool or as goodwill. Unlike the publisher’s problem that Ron Hardin brought up, where the assets can sit for years and never make you a dime and is therefore truly dead, these assets produce money, albeit indirectly, daily. It seems to me that arguing that they’re valueless is never going to fly.

  33. I submitted this to the blog where Paige described her tax problems:

    Paige, you are taking this evil system we live under WAY too seriously. Living in California, where evil and excessive government is a way of life, I have learned a nice mechanism to protect one’s self. You have to cost the pigs more then they can ever hope to gain. Now my Italian friends back in Detroit might propose to cost this twit his life, or at least put a horse’s head in his bed, but there is no need to be that extreme. First fire every one of your CPA, auditor, inventory and tax advisors. Do it now, Paige. They are not your friends. They only want to prolong your agony as long as possible because the longer you suffer, the more they make. I know they seem nice and concerned and conciliatory but I have been in Enrolled-Agent hell myself, and I assure you, these hangers-on are bigger pigs then the IRS. Simple, quick and clean. That is your solution. Things went very well for me once I fired my CPA and Enrolled Agent and filled out the paperwork for a Federal trial in San Francisco. Of course, you do NOT check the box for the simplified administrative trail. No way Paige, you want the Full Monty, the big enchilada, the whole magilla. Explain that since this case involves legal precedent extending to the Magna Charta, you expect the trial to last three or four months. Just for your part, not the governments. It was the week before trial that they got a new auditor from Oakland to review my stuff. She had eyes that would make your blood run cold and I would hate to be her kids, but she was intelligent, fair and polite. She found some discrepancies but I still had no income so I did not have to pay. And see Paige, now everybody is happy– the auditor found some mistakes, the IRS did not have to spend half a million dollars on a federal trial and I don’t get raped. Oh yes, Paige, no lawyers either– EVER. That’s the very important because you should know– lawyers work for the system, not for you. When you use the system against itself the lawyers will only betray you. I am sure you can run the trial yourself. Remember law is just two things– getting paperwork and turning it in. So the day before your trial download 3 or 400 pages of stuff from the internet. The Magna Charta, sure, but also anything having to do with the tax laws. You will present that into evidence the first day. Be sure to send a copy of it to the federal lawyers. They will love it. As you enter the stuff into evidence (you have to go first since you are the plaintiff) be sure to SLOWLY read it out loud in open court. Every twenty minutes or so say: “Your honor, I request a summary judgment in my favor or a dismissal in the interest of justice”. If the trial goes to the second day without you winning, then just download another 500 pages of stuff from the internet and start submitting that. Since all this stuff has to be reviewed and poured over and decided on, you now get to punish the IRS rather then just play the chump. I’m sure the judge will see it your way and the IRS knows that so they will save face by offering a deal that costs about 300 dollars or so. Don’t be foolish. Take the deal. Have a merry Christmas and remember, you don’t have IRS problems, you have third party preparer problems. Firing them and representing yourself puts you 90% towards your victory. Make it clear you will PAY NOTHING TO NOBODY. When they truly see you would prefer federal prison to a life of absurdity then you will get the 300 dollar deal.

  34. You rock, Rako! Good advice, especially about the lawyers (that carries over to the divorce realm, too, BTW).

    From a friend who will remain nameless to protect the guilty: He had the IRS hold his hearing up in the New England area, where he was living for a while. They transfered all his paperwork and crap to the office up there – this took many months. He then told him about how he actually lived down South again and, of course, needed to have the hearing there. This went back and forth and delayed things for more than a year.

    This is a guy who doesn’t show fear to a crowd like the IRS either, so that is partially why he “gets away” with stuff (without being railroaded, that is).

    Anyone else with tips about how to mess with these IRS bastards??

    Anyone, anyone, Ferris?

  35. Excuse me for using a heretical locution, oh grand imam.

    You might want to read what the real Franklin had to say about taxation sometime.

  36. UPDATE: Corner Comics has capitulated to the IRS. Also, there’s a good chance that owner Paige Gifford was in the right on this one. Details can be found on my weblog for The Comics Journal.

  37. EMAIL: master-x@canada.com
    IP: 82.146.43.155
    URL: http://www.americanpaydayloans.net
    DATE: 02/28/2004 09:06:29
    During the Samuel Johnson days they had big men enjoying small talk; today we have small men enjoying big talk.

Please to post comments

Comments are closed.