More on Palin’s tax returns (Updated)

Update: From Tuesday’s Wall Street Journal, under the headline Reimbursements Raise Tax Issues for Palin:

Several tax experts said they believe Republican vice-presidential nominee Sarah Palin is required to pay federal taxes on $25,000 in reimbursements from the state of Alaska for her children’s travel expenses.

A partner in a New York law firm tells the Journal he thinks not reporting the Palin kids’ travel reimbursements as taxable income is “a slam dunk problem” for the governor. But another accountant points out that the Palins used H&R Block, and that the state’s W2 form didn’t include the travel money as taxable income.

“These people [the Palins] are not tax lawyers. They went to H&R Block,” he said.

Here’s the original post:

From David Hulen in Anchorage —

People continue chewing over Palin’s tax returns and federal financial disclosure released on Friday. Among those doing the heaviest chewing: TaxProf blog. The Tax Profs see trouble.

Under a post, Tax Profs Agree: Gov. Palin’s Tax Returns Are Wrong, a couple tax law professors write that the Palins appear to have underpaid taxes. And they’re not buying a letter issued by the campaign last week from Roger Olsen, a Washington, D.C., tax attorney, who defends the Palins’ returns, including handling of per diem payments to Alaska’s first family.

Writes John Bogdanski, professor of law at Lewis & Clark: “There is no serious debate (at least, none that has been brought to our attention) about the fact that at least the amounts paid for the children’s travel — $24,728.83 in 2007, according to the Washington Post — are taxable. The campaign’s tax lawyer has got at least that much of the law, and perhaps more, wrong.”

In a later update, Bogdanski unearths the State of Alaska’s posted policy on long-term per diem. He thinks the state failed to follow its own rules when it didn’t include diem payments last year as taxable income for the governor.

This document is a potential blockbuster. It establishes two important facts:

(1) The state has long acknowledged that it had a duty to determine whether Palin’s “tax home” was really Anchorage and Wasilla, a conclusion which would have required that her per diems be reported as taxable income.

(2) The state knew that when an employee is planning to spend a majority of her time on state business in the Anchorage area for a four-year period, Anchorage is the employee’s “tax home,” and per diems for time spent in the “tax home” are taxable income.

So why didn’t Alaska officials follow the state’s official policies and report Palin’s per diems as taxable income on her W-2? Only they can answer that.

Another tax prof, Bryan Camp, from Texas Tech, finds other issues:

1. The Palins did not report as income some $17,000 that Governor Palin’s employer (the State of Alaska) paid her as an “allowance” for her travel. Can they do that? Yes, most likely.
2. The Palins did not report as income some $43,000 that the State of Alaska paid the Governor as an “allowance” for her husband and children’s travel. Can they do that? No, most likely not.
3. The Palins deducted $9,000 on their 2007 return, claiming it was a loss from Mr. Palin’s snow machine racing activity. Can they do that? Most likely not, but more info could make the deduction o.k. If any of the above issues goes against the Palins they then risk getting hit with the section 6662 penalty for “negligence or disregard of rules or regulations.”
4. Can the Palins avoid the section 6662 negligence penalty by claiming that they reasonably relied either (a) on the W-2’s sent to them by their employer, which did not reflect either the $17,000 or the $43,000, or (b) on their tax return preparer H&R Block, or (c) on Mr. Olsen’s opinion letter dated September 30, 2008? The three reliance defenses are unlikely to succeed, but more info may make the (b) defense a good one.
5. Does Mr. Olsen have any exposure to sanctions by the IRS because of his letter? I believe Mr. Olsen’s letter probably violates 31 C.F.R. section 10.35. If so, he would be exposed to possible sanctions from the IRS Office of Professional Responsibility.

A McCain campaign spokesman, Brian Jones, defended the campaign to the Wall Street Journal’s Law Blog: “We have letters from tax experts on this. The State of Alaska conferred with the Internal Revenue Service, and this is the decision that they came to.”

David Hulen
Anchorage Daily News


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