Paul L. Caron

Saturday, October 4, 2008

Gov. Palin Releases Opinion Letter Justifying Not Reporting Per Diem Expense Reimbursements as Income

[Updated and moved to the top]:  After releasing her 2006 and 2007 tax returns and financial disclosure form, Gov. Palin has released this opinion letter from Washington D.C. tax lawyer Roger M. Olsen stating that she was entitled to rely on Alaska's determination that her per diem expense reimbursements do not constitute income to her:

Unless employees have reason to know that the W-2 is incorrect, the IRS expects employees to rely on the employer's W-2 as prepared & filed with the IRS, as Governor Palin did.  The income tax aspects of fringe benefits are complex and highly technical, and not subject to second-guessing by laymen. The State of Alaska is confident that its position is correct.  Its employees were entitled to rely on that determination, So was Governor Palin.

Finally, under State law, the spouse of the Governor (or other family members on occasion) is entitled to payment of travel costs by the state when conducting official State business. I find no reason or rule of law that would lead me to a different conclusion as to his receipt of such State payments. Such payments for family members traveling on state business would not properly be included as taxable income on Governor Palin's federal tax returns. 

Both conclusions seem problematic.  If an employer mistakingly fails to include an item of income from an employee's W-2, does that really relieve en employee of her obligation to report the income on her tax return? How does Mr. Olsen's conclusion regarding the reimbursement for expenses of the Governor's spouse and children square with § 274(m)(3)?  Undoubtedly the most amazing (brazen?) aspect of Mr. Olsen's opinion letter is that he cites absolutely no law in the four pages to support his conclusions -- no code or regulation sections, cases, or rulings.

Another discrepancy is the $196,531.50 income as Governor reported on her financial disclosure form (with the notation "[a]s reported to filer by State of Alaska"), compared to the $107,987 wages, tips, other compensation and $122,401.43 Medicare wages and tips reported by the state of Alaska on the W-2 attached to her tax return.

(Mr. Olsen has a tax LL.M. from George Washington and is a former Assistant Attorney General of the Department of Justice's Tax Division under President Reagan.)

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» Palin tax returns, tax questions from Don't Mess With Taxes
Republican vice presidential candidate Sarah Palin released her 2006 and 2007 tax returns on Friday, but the documents immediately raised several questions. For the 2007 tax year, the Alaska governor and her husband, Todd, reported a tax bill of $24,73... [Read More]

Tracked on Oct 4, 2008 9:43:47 PM

» Palin Tax Returns Returned from The Wandering Donkey
Well, Sarah Palin released her tax returns on Friday afternoon, certainly due, to some extent, to Sullivan's ever vigilant insistence. As someone who has largely done their own taxes for his own lifetime, I can still hardly sit in judgement [Read More]

Tracked on Oct 4, 2008 10:03:54 PM


You can also find an interesting discussion of Todd's (yes, and Sarah's too) tax adventures on Jack Bogdanski's blog (law professor at Lewis and Clark Law School, aka Northwestern School of Law at Lewis and Clark College):

Looks like they both have "some 'splainin' to do Lucy!"

Posted by: Mick Finn | Oct 6, 2008 4:25:16 PM

As a practicing tax attorney, I see no reason why an opinion letter written to a client should contain any reference to the code, regs, rulings or case law on which the opinion is based.

I would, however, expect the writer to back up the letter with a file memorandum documenting such authorities. I would not normally send the client a copy of that memo unless the client requested it.

If I were the typical non-tax lawyer candidate running for VP, I would probably not think twice about publishing this kind of letter. What's most "brazen" here is the blogger's description of the letter as "brazen".

Posted by: jedijd | Oct 6, 2008 1:34:19 PM

Speaking as someone who was audited and fined in 1987 for a 1984 tax return which allegedly under-reported tip income (upwardly "correcting" my income about $800 - relying on restaurant gross receipts and my hours worked)(thanks, Ronnie!), I couldn't be happier.

Posted by: Mick | Oct 6, 2008 12:03:22 PM

What does the 374(m)(3) reference do? I don't see its relevance at all.

Has the Bush family, and before them the Clinton family, included the value of spousal travel in their taxable income?

Posted by: Thomas | Oct 6, 2008 6:23:18 AM

I'm a complete newbie here, sorry if you've already gone over this, but McCain's taxes omit all gambling, even though he seems to have quite a thing for craps and casino lobbyists. Is it true that you always have to declare winnings and then claim losses, even if losses exceed winnings?

Posted by: James | Oct 5, 2008 2:05:39 PM

If a state government cant get a W2 right what hope does a private company have?

Posted by: John | Oct 5, 2008 8:01:25 AM

Just because it is a "political letter" that states the attorney's "current opinion" that is meant for the general public doesn't mean it shouldn't have ANY citation to authority. Maybe not PLRs, or Rev Procs, but how about just a cite or 2 to the Internal Revenue Code, and maybe even the regs.

And if it is really just a "letter for/to the masses" why is it 4 PAGES LONG (SINGLE SPACED)? Why couldn't a paragraph or 1 page letter suffice?

And for Russ from OR: I hope your accountant, a former IRS agent and CPA, has boned up on the return preparer penalties and the regs--especially if he is willing to render you pre-return advice without making sure he has the proper amount of authority to support it. And yeah, I know that's how it works in the real world. But in the real world there also is a huge deficit, a tax gap, and politicians that don't like to raise taxes. Going after return preparers for penalties raises revenue--whether it is the return preparer penalties or the revenue from clients the return preparer rolls over on.


Posted by: Adjunct Law Prof | Oct 4, 2008 12:23:02 PM

I'm not a CPA nor an attorney. My only authority regarding what is and isn't reportable per diem is based on being an active duty military family for 20 years and having a lot of experience with per diems, travel expenses, etc.

I think it's a grey area and I would likely cede the issue on Palin's personal per diem payments when she slept in her own home in Wasilla as opposed to a hotel in Anchorage - assuming of course that her job as governor REQUIRED her to be in Anchorage - which is certainly subjective enough.

HOWEVER, just because the State of AK doesn't tax money given to the Gov for family travel - that it's a specific exemption for the GOVERNOR - does not mean it's not taxable by federal standards. If the State of AK wants to accept responsibility here - fine, whatever and pay the tax. (I hope they plan on coming up with all the taxes (and penalities) they haven't paid since this little nugget existed in their own statutes). But either way she owes taxes on money rec'd for travelling family members. My husband travels for business (on behalf of the US gov't) all the time. So now I can join him and we can deduct it from our taxes?? Just a few days ago my husband mentioned he may have to travel to a military base in Hawaii in a few months. Can anyone say tax free vacation??? Whoo Hoo! (Hey us little people are entitled to family support too doggone it!)

By this logic, just because my husband's military pension isn't taxable in NJ, we shouldn't report it on our federal tax return.

Posted by: Linda | Oct 4, 2008 10:56:40 AM

No one seems to be suggesting that the gov. did anything wrong (al la willful conduct) or had some intent to evade paying federal income taxes. If it is income, the gov. would just need to pay the tax and possibly penalties and interest. No biggy. People make these mistakes all of the time. It happens (quite frequently). That said, what about the other "discrepancy" cited in the post? Unreported income in an amount that is near 50 percent of the reported income, assuming this is was unreported income, would seem to pose a much more serious and potentially criminal problem for the gov. Anyone look into this issue?

Posted by: annonymous | Oct 4, 2008 9:40:41 AM

There is an old saw among tax lawyers that "if it ain't on a W-2 or 1099, it ain't income." (Before all of you wannabe tax experts out there hyperventilate, this obviously excludes property transactions and was created in reference to these employer/employee (or other service provider) type issues.)

By the way, TaxProf, the mistaken omission point that you raise is a red herring. The letter is clearly referring to an item that required a determination - not a situation where a digit was omitted or other similar transcription error occurred.

Old Tax Lawyer

Posted by: fda | Oct 4, 2008 8:52:41 AM

Hmm, I don't see any cases or statutes cited in this blog post either. It seems like a tie, two lawyers pontificating at each other.

Come on guys, cite an authority for the proposition that a taxpayer can be hit with penalites for relying on a W-2 with respect to a complex and controverted issue.

Posted by: y81 | Oct 4, 2008 7:46:21 AM

Of course it is a political letter. But so what? I ask my accountant, a former IRS agent and CPA, for opinions all the time. I follow his advice. Both of us take notes. If I act on the advice, and no one cares, he probably won't give me an opinion letter reitirating what we discussed. But since she is NOW being questioned on it, he of course will write an opinion letter supporting it. And it would be dated NOW. If my accountant told me how to do it, and I report it that way, am I really going to go through the 60,000 pages of code to make sure he was right, especially if the State of Alaska reported it the same way? No, I would leave it alone. Now, if the accountant was wrong, we'll see, but Palin would have, and should have, followed his advice.

Posted by: Russ from oregon | Oct 4, 2008 7:33:25 AM

@Shag, It's not a question of whether the per diem payments are allowed or not. There is no question than an employer can provide various fringe benefits to employees. Nope, the only quesiton is whether those fringe benefits are taxable to the employee as part of his or her compensation for services. Some fringe benefits are taxable income, some are not. So the Mass. state legislators may well be paid (and paid well) for travel unconnected with state business. Whether that is "lawful" is a question of Mass. law. But the tax issue is different. Those might be perfectly lawful, acceptable, customary payments. That does not make them excludable from income.

Posted by: Bryan Camp | Oct 4, 2008 7:15:07 AM

Shag beat me too it about the press release nature of the letter. For god's sake, not even the IRS Pubs have the kind of citation you guys are looking for, much less a letter meant for the general public.

I would think that the definition of taxable income is a lot more strict then the definition used by the USOGE for Federal public financial disclosure. Health care for a family of 6(7?) in Alaska would cost? And yet, it would be excluded from taxable income.

No matter what happens with the family travel issue, she's got a hell of a reasonable cause defense.

Anyone going to mention the §183 issue?

Posted by: TTC | Oct 4, 2008 6:45:44 AM

Since Olsen's cover letter to Gov. Palin and opinion addressed to "To Whom It May Concern" are each dated September 30, 2008, it seems clear that the "opinion" is political in nature. Did anyone check into the records of the State of Alaska to see if the issue might have been addressed or challenged in the appropriate state department? Perhaps there are so many such per diem payments available for Alaska employees, it is considered a "routine" perk.

Here in Massachusetts, state legislators outside of Boston have long been entitled to a per diem even when not engaged in official business at the State House in Boston and without proof of actual expenditures incurred intended to be covered by the per diem. Nice work if you can get it.

Posted by: Shag from Brookline | Oct 4, 2008 4:06:19 AM

This is a very interesting question which arises here and I hope someone here can provide the answer:

If it is true that one is not liable for an employee to rely on an employers determination of whether certain income is taxable or should be included in the W-2 or not, who is liable then? If the IRS deems this incorrect, will they go after the employee or employer? And what if the employer is a government entity or even more so, a State?

Posted by: John T | Oct 4, 2008 1:04:09 AM

You would think that, before releasing the letter, they would check it for grammar errors and typos. Even Microsoft Word's grammar check function would have caught some of the numerous errors in the document.

Posted by: andy | Oct 3, 2008 6:51:42 PM

Wow. I bet we all would love to be able to write opinion letters without 1 citation to authority. No Code, no regs, no case law, to rev rul, no rev proc, no plr, no treatise, no nothing.

Not one? No, no, not one.

Anyone see the section 6694 penalty in Mr. Olsen's future? Probably not as he did not prepare the returns--just ex post facto justified them. Hey OPR, anyone out there see this?


Posted by: Adjunct Law Prof | Oct 3, 2008 5:00:39 PM