Paul L. Caron
Dean




Sunday, October 25, 2009

Sarah Palin as Eleanor Roosevelt

Following up on last week's post, Does Sarah Palin Have a Tax Problem?, which discussed the tax consequences of the charity auction of dinner with Governor Palin for $63,500, Joe Kristan reports that Rev. Rul. 68-503 has a history dating back to Eleanor Roosevelt:

According to a standard treatise, Bittker and Lokken's Federal Taxation of Income, Estates, and Gifts, Mrs. Roosevelt had her own radio show, but she refused to accept payment for it, and the sponsor instead made payments to a charity. The IRS ruled that she did not have to pick up the sponsorship in gross income.

Subsequent rulings have refined the IRS position; it is no longer clear that Mrs. Roosevelt's radio shows would be tax free today. The more recent rulings, including the one I cited in saying that Ms. Palin likely has no gross income, distinguish between revenues that arise only because of the fund-raising event and those that someone would earn anyway, but assigns to charity. Bittker and Lokken explain:

A 1971 ruling states that an individual is not taxed "in a case where the individual does not participate directly or indirectly in the contract pursuant to which his services are made available [by the exempt organization] to the third party and if he has no right to receive, or direct the use or disposition of the amounts so paid." Entertainers performing at a specially scheduled benefit night should ordinarily have little difficulty in satisfying the requirements of these rulings, but they may find it hard to extricate themselves from existing contractual arrangements and shift to an exempt organization income "which would normally be that of the individual artist."

As far as I can tell, nobody says Ms. Palin had already arranged to auction herself as a dinner date, and then assigned the proceeds to charity as a tax dodge. You could argue that a dinner date is not "entertainment" (just ask my old dates), but it seems awfully nit-picky to say that this is fundamentally different from singing at a charity benefit; it's merely a different sort of performance, with an audience of one. ...

I have found nothing in repeated electronic searches of IRS rulings and court cases that directly addresses this situation. There appears to be no case where the IRS has ruled against, or taken to court, a taxpayer who was a dinner-date auction "prize." The IRS has in fact neglected the scourge of charity dinner-dates.

https://taxprof.typepad.com/taxprof_blog/2009/10/sarah-palin-1.html

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Comments

One thing everybody is overlooking (or at least not commenting about) is that the IRS Tax laws and regulations are not fair. Not just NOT fair most of the time, but completely absent of everyman, everyday logic.

That's why nobody really understands them or follows them the same way for similar situations.

I say, trash them all and start over. It sure couldn't be any worse.

Papa Ray
Central (used to be West) Texas

Posted by: Papa Ray | Oct 27, 2009 4:54:54 PM

Sorry to hear about what Rooseveltomics "New [stinkin'] Deal" did to the greatest boxer of all time.

Looks like we are headed back to Roosevelt times...Obama's "New Deal" is hell bent to make certain this happen whether or not the American people want it.

Posted by: Steve | Oct 27, 2009 1:29:55 PM

I wonder how many of the people that commented know anything about law.

Posted by: Al | Oct 26, 2009 10:19:43 PM

Back in the 70s, at the University of Alabama, Linda Lovelace, a porn star, came to campus and her promoters raffled off a date with her. What would have been the tax implications of that, if I had won it?

Posted by: ken in sc | Oct 26, 2009 6:12:11 PM

Joe Louis the Boxer was ruined by being overly charitable. I've copied a really good internet piece below in its entirety. It's unforgivable that the IRS went after Joe for taxes on his giving away purses to soldiers.
http://www.mackinac.org/article.aspx?ID=22

Joe Louis vs. the IRSBy Dr. Burton W. Folsom | July 7, 1997

Joe Louis, March 1949.
Source: The Jimmie Dodd Photograph Collection, Center for American History, The University of Texas at Austin. 1407/a
Exactly sixty years ago, in the early summer of 1937, Michiganians took great pride in the outcome of a fight in Chicago. Joe Louis, the "Brown Bomber from Detroit," captured the heavyweight boxing crown by knocking out James Braddock in eight rounds.

Louis had quick reflexes and a strong punch. Some experts think he was the best heavyweight ever. In the twelve years after he beat the stuffing out of Braddock, Louis defeated 24 challengers, 22 by knockout. His hardest fight, however, was not with Max Schmeling or Rocky Marciano, but with the Internal Revenue Service.

In 1914, the year Joe Louis was born, the income tax had only been in place one year. The top rate was a mere 7 percent, and a high exemption kept most Americans off the tax rolls altogether. Even by 1931, the year Joe Louis began boxing seriously, the income tax was so minimal that only 2 percent of Americans even qualified to pay it.

When he earned over $371,000 in his first two years as a professional boxer, Louis immediately helped family and friends all over the country. For example, he voluntarily paid back to the government welfare payments his stepfather had received during the Great Depression. Later, he supplied a house for an elderly Indian on property he owned. He also bought needed uniforms for a group of black army officers.

Louis wanted private citizens to solve many of the problems that Americans were increasingly turning to government to solve. He opposed many of President Franklin Roosevelt’s New Deal programs and campaigned for Republican candidate Wendell Willkie for president in 1940. Before the election, Louis sent Willkie this telegram: "Win by a knockout. It will mean freedom from the WPA and for American Negro rights." Meanwhile, tax rates from the ever growing government that Louis opposed were heading toward the stratosphere.

One month after the bombing of Pearl Harbor, the generous Louis gave his entire $65,200 fee (about $700,000 in today’s money) from a fight to the Naval Relief Fund. Less than three months later, he gave his $45,882 purse from another fight (about $500,000 today) to the Army Relief Fund. Ever the patriot, he halted his lucrative boxing career and enlisted as a private, earning only $21 a month.

When the war ended, Louis hoped to retire from boxing with savings in the bank and dignity from his career. He lost both. What he overlooked was the enlarged role of government and the taxes he owed to help keep it growing. Under President Roosevelt, the tax base had expanded to where most American families (not the mere 2 percent of a few years before) had to pay income taxes. Worse for Joe Louis was the steep tax levied on high incomes. From 1931, his first year in boxing, to 1937, when he knocked out Braddock, the top marginal tax rate had soared from 24 to 79 percent. Louis found himself owing the government most of his purse money from each of his fights.

During the 1940s, the top marginal rate was hiked to 90 percent, and Joe Louis found himself over $500,000 in debt to the IRS in back taxes. Roosevelt’s new tax laws were complicated and Louis, unlike later successful athletes, had no tax shelters, municipal bonds, or clever accountants. The IRS would not let him deduct the two fight purses he had donated to the army and navy. He couldn’t even deduct $3,000 worth of tickets that he had bought for soldiers to one of those fights. What’s more, the interest payments were compounded each year, ballooning his debt into seven figures during the 1950s.

Louis retired in 1949, undefeated as a champion, but now he had to fight again. "I had to keep working to pay taxes," Louis said, "but the more I worked, the less I had."

In 1950, Louis "announced that I’d decided to come out of retirement and challenge Ezzard Charles for the championship. The reason—taxes." Louis lost the match in a 15-round decision. After the fight, when Louis called his mother, she "begged me to stop now, but she couldn’t understand how much money I owed . . . . The government wanted their money and I had to try to get it to them."

The next year, for a $300,000 purse, the 37-year-old Louis fought Rocky Marciano, but was knocked out in the eighth round. Technically, he owed the whole purse to the IRS, but since he had to pay a 90 percent tax rate on most of his earnings, plus back interest from previous years, he still could not whittle down his debt. Louis’s boxing career was over, and he would never be able to earn the money to satisfy the tax collectors. He died in debt, a broken man. Were he with us today, he might well be one of America’s foremost champions of replacing the current system with a low, flat tax.

Joe Louis would want to be remembered as a champion, a patriot, and a role model for children. He admitted that he overlooked the new tax laws, that he trusted too many friends, and that he spent money unwisely. As we think about his life, we should remember Joe Louis as an expert in the use of physical force to knock out his boxing adversaries, but as a novice when government used political force to knock him out.

Posted by: Link | Oct 26, 2009 4:06:40 PM

I can not imagine anyone wanting a dinner date with Eleanor Roosevelt but easily could with Sarah Palin. As a hint to what that "date" try to see the episode of Orange County Chopper where they presented a bike representing Alaska.

Posted by: Rich | Oct 26, 2009 2:18:35 PM

It's not difficult to distinguish the two, I don't think. Mrs. Roosevelt's services had value at or near the amount contributed to charity (one would suppose). In the Palin example, one would have to value the dinner in the context of "willing buyer, willing seller." Any price paid greater than fair market value ought to be deductible.

Of course, anyone that can afford to give $63K to charity probably gets little tax benefit from his deduciton because itemized deductions are limited. And then there's the pesky AMT.

Posted by: dennism | Oct 26, 2009 2:17:21 PM

So... how would this logic apply to, say, winning the Nobel Prize?

It could be argued (very easily) that Obama was "a case where the individual does not participate directly or indirectly in the contract pursuant to which his services are made available [by the exempt organization] to the third party".

... but for the rest of the clause he falls flat: "... and if he has no right to receive, or direct the use or disposition of the amounts so paid."

He most certainly will direct the charity where it serves his political interest; so is he responsible for the taxes on THAT income?

Posted by: JimmyNashville | Oct 26, 2009 1:52:38 PM

Just say no to comparing Sarah Palin to the ugly commie Eleanor Roosevelt!

Posted by: WestWright | Oct 26, 2009 1:28:06 PM

Just because you have the law on your side, dosn't mean you're still not an enemy of the state.

Posted by: Jon Burrows | Oct 26, 2009 11:44:06 AM