Year-End Collection: Tax Oddities Of 2022

Tax Notes reporters recap some of the weirdest stories they encountered in 2022, from the tax troubles of reality stars to a fight over a rather large tax bill for Christmas trees.

This transcript has been edited for length and clarity.

David D. Stewart: Happy holidays from Tax Notes. I’m David Stewart, editor in chief of Tax Notes Today International.

Well, 2022 was a year of things slowly getting back to normal. And as it comes to a close, we’re doing our part by continuing our annual tradition of presenting a few short stories that may be a little odd or otherwise don’t work as a full episode. As our gift to you this holiday season, here’s our year-end collection 2022.

Joining me now is Tax Notes legal reporter Nathan Richman. Hi, Nate.

Nathan Richman: Thanks for having me.

David D. Stewart: What do you have for me?

Nathan Richman: I have some reality TV show stars. Do you want to hear about them?

David D. Stewart: Probably not, but go ahead.

Nathan Richman: What do you know about Chrisley Knows Best?

David D. Stewart: Oh, very little. But what I do know was I used to see commercials for this show. And I thought, watching the commercials, it was a parody of a bad reality TV show that they were advertising. I thought, “This is so completely unwatchable. There is no way this is an actual reality show and they’re actually making fun of the genre.”

It was only years later I found out that it was a legitimate — to the extent that any reality show is legitimate — reality show.

Nathan Richman: Well, I’m going to take your word for that, because I fortunately did not know anything about these people other than they’re tax cheats.

Even before their show came on, the first batch of charges came from them going around to a bunch of Atlanta area banks and defrauding them for just a piddling sum of about $30 million. Then that income was never declared.

During part of the run of their reality show, they didn’t file income taxes, even though at the time Todd Chrisley was on the radio saying, “Hey, I pay a million dollars in taxes.” Kind of helps if you actually file those returns. So they got indicted in 2019 along with their accountant.

David D. Stewart: Now, how does someone end up on the radio claiming to have paid a lot of taxes?

Nathan Richman: I’m not exactly sure, but I do know that the day before Todd and Julie Chrisley got indicted, they decided to take to Instagram to preemptively declare their innocence.

David D. Stewart: That’s always a good sign.

Nathan Richman: Yes. So in June, at the end of a three-week trial, they were convicted on all counts. And then, just a few weeks ago in November, they were sentenced. Todd got 12 years and Julie got seven years.

Shortly before the trial concluded, USA Network renewed two of their series — apparently these things multiply like rabbits — and greenlit another one. But now, the Justice Department appears to have ordered its own 12-season program, Chrisley Knows Prison.

David D. Stewart: Well, I’m hoping not to see commercials for that, but definitely sounds like a bit of a wild story. Nate, thank you for bringing it.

Nathan Richman: Thank you for having me.

David D. Stewart: Joining me now is Tax Notes reporter Emily Hollingsworth. Emily, welcome.

Emily Hollingsworth: Thank you. Glad to be here.

David D. Stewart: So what do you have for me?

Emily Hollingsworth: I have a state that wants to get on the cryptocurrency bandwagon.

David D. Stewart: All right. Well, tell me about it.

Emily Hollingsworth: Back in September, the Colorado Department of Revenue officially launched a portal that allows people to pay their state taxes using cryptocurrency. This program includes all state taxes, everything from individual income taxes to sales and use taxes, even marijuana taxes. In addition, the department is using this third-party vendor, the PayPal Cryptocurrencies Hub, which sort of converts the crypto payment into U.S. dollars.

David D. Stewart: I can’t see how any of this could go wrong. But given that cryptocurrency hasn’t been the most stable of investment vehicles lately, what are they going to do about fluctuations?

Emily Hollingsworth: See, that’s a good question. I spoke with the Department of Revenue spokesperson, Dan Carr, and he said that they’re addressing that concern by using this vendor, PayPal Cryptocurrencies Hub. Basically, that vendor converts the value of cryptocurrency into U.S. dollars and will also assume liabilities. So that’s a way that the Department of Revenue is addressing some of those concerns.

David D. Stewart: So is Colorado alone in this?

Emily Hollingsworth: Interestingly enough, Colorado isn’t the first state to have started an option like this. Ohio, back in 2018, allowed businesses to pay taxes via cryptocurrency. However, in 2019, the state treasurer ended up rescinding the program. It had to do with some sort of contract that they had where the contract for the system that they were using should have been awarded through a competitive bidding process, and that was found after an internal review. From what I understand, that program hasn’t been reinstated in Ohio since.

David D. Stewart: All right. Well, the blockchain, what can’t it do? Emily, thank you for being here.

Emily Hollingsworth: Thank you.

David D. Stewart: Joining me now is Tax Notes legal reporter Kiarra Strocko. Kiarra, welcome back to the podcast.

Kiarra Strocko: Thanks for having me on the podcast, Dave.

David D. Stewart: So what do you have for me?

Kiarra Strocko: I have a case about s’mores and tax, so what a perfect time to be discussing this case. When I think of s’mores and sweets, the holiday season definitely comes to mind.

David D. Stewart: Absolutely. So how are s’mores involved in tax?

Kiarra Strocko: Basically, this case involves Innovative Bites. They’re the exclusive U.K. distributor of Twinkies, Mega Marshmallows, and other iconic American snacks. I did some digging and it looks like they’re also the exclusive distributor of Sour Patch, Red Vines, Pez, Warheads, and Tootsie Rolls.

The issue on appeal for this case was whether Mega Marshmallows should be zero-rated for VAT purposes under U.K. law. Just as the name suggests, the marshmallows are larger than your regular-sized marshmallows. And under U.K. law, generally supplies of food for human consumption are zero-rated, with the exclusion being confectionary. Just to clarify, regular marshmallows are considered confectionary because they’re not generally used for cooking. They are eaten as is.

HM Revenue & Customs hit the company with a £470,000 VAT bill because they believe that the oversized marshmallow should be standard-rated as confectionary. Contrary to that classification, Innovative Bites said that the oversized marshmallows should be considered food. And although there isn’t a set definition of what “confectionary” is, U.K. law says that it includes chocolates, sweets, or biscuits.

David D. Stewart: Now you’re using the terms zero-rate and standard-rate. What are the differences?

Kiarra Strocko: Yeah. So for zero-rated goods, the government doesn’t tax its sale, but allows credits for the VAT paid on inputs. For standard-rated goods, it’s 20 percent.

David D. Stewart: All right, so how did the court resolve this issue?

Kiarra Strocko: The lower court actually sided with the company on this one and said that the oversized marshmallows should not be standard-rated as confectionary. They looked at this from the viewpoint of a typical customer and gave the term confectionary its ordinary meaning. They looked at the weight of the product, where it’s placed in supermarkets, and the packaging and marketing of the product. What they were looking at is, are they intended for roasting over an open flame rather than as a consumption as a snack? The marshmallows also were in the barbecue section of supermarket aisles in the summer, and that’s when their sales were booming.

David D. Stewart: This sort of issue sounds familiar. There’ve been a lot of these cases defining food versus other categories, right?

Kiarra Strocko: Yeah. So zero-rating various items poses a challenge because there may be minute details that differ between these various products. In a lot of cases, this must be litigated in court. There have been disputes in the past about whether Pringles should be considered crisps and whether Jaffa Cakes are considered cakes or biscuits. I love how down to the detail these decisions get, so it’ll be interesting to see what other disputes are brought to court in the coming years.

David D. Stewart: Now, oftentimes when we’re dealing with U.K. versus U.S. stories, we find that some words have slightly different definitions. So how do they define a s’more?

Kiarra Strocko: Yeah, so they say that it is a traditional American nighttime campfire treat consisting of a roasted marshmallow and a layer of chocolate between two digestive biscuits. Fun fact, this case taught me what digestive biscuits are.

David D. Stewart: OK, digestive biscuits. Now I would normally expect a graham cracker, but OK. So what sort of arguments did they make?

Kiarra Strocko: Yeah, so HMRC’s argument was that the snack could be eaten from the bag like a regular marshmallow or a snack on the go. They also said that there was an emerging trend for oversized chocolates and sweets. However, Innovative Bites’ argument mainly surrounded the packaging of the marshmallows. And on the back of the packaging, there were instructions for using the marshmallows to create a s’more and a description of the s’more itself.

David D. Stewart: Well, I’m glad we were able to get to the bottom of what I think is one of the most momentous decisions of the last 10 years.

Kiarra Strocko: Thanks for having me, Dave.

David D. Stewart: Joining me now is Tax Notes legal reporter Alex Peter. Alex, welcome to the podcast.

Alexander Peter: Thank you, David. Thanks for having me.

David D. Stewart: What do you have for me?

Alexander Peter: I have something about taxation of Christmas trees.

David D. Stewart: Well, that seems like it’s very seasonally appropriate. Tell me about it.

Alexander Peter: Yeah, there’s a judgment on real estate transfer tax and a land deal with Christmas trees on it, and whether this is potentially fully subject to that real estate transfer tax.

David D. Stewart: All right, so where are these Christmas trees?

Alexander Peter: The Christmas trees are in the northern part of Germany on a piece of land that the plaintiff bought for €350,000. And the trees are worth around €90,000. The local tax office said, “Well, the trees cannot be excluded from the real estate transfer tax base,” and assessed a whopping €22,000, 6.5 percent on it.

David D. Stewart: That’s a lot of money for Christmas trees.

Alexander Peter: A lot of money. And therefore, the plaintiff said, “I bought basically only the dirt. Only the dirt can be subject to that real estate transfer tax and not the fir trees on it, because the trees will be removed and will serve as Christmas trees in people’s homes and therefore are not permanent part of the land and not subject to that tax.”

David D. Stewart: All right. So this went to court, and how did the court resolve this issue?

Alexander Peter: Yeah, this is actually the second instance. It’s the highest tax court of Germany who confirmed here the lower tax court’s decision, and that real estate transfer tax is closely tied to civil law. The court said the trees are not subject to that transfer tax because they’re not a permanent part of the land.

So for example, if there were a car that happened to be on the property, that is also not a permanent part of the land and would not transfer with the land, and therefore also not subject to real estate transfer tax. That also applies to these Christmas trees, the court said.

David D. Stewart: All right. Well, that is a very merry outcome of this case. Are there any other implications from this decision?

Alexander Peter: Yeah. The court went into a lot of detail how also civil courts treat property. The court, for example, recalculated what is land in the civil legal sense. “It is a spatially delimited part of the earth’s surface that is entered into the inventory of a land register page under a special number regardless of the type of use.”

David D. Stewart: That seems very precise.

Alexander Peter: Yes. With German precision, defined what real property is. Then the court said, “Well, does it matter that these trees become an integral part of the property?” The court said, “Yes. Standing trees, seeds become an integral part.” But the question is, what is the intent? “Even if they’re an integral part of the properties, we want to celebrate Christmas. And for that purpose, these trees need to be cut. And therefore, they’re only there for a temporary period of time and not permanently.”

David D. Stewart: Well, this sounds like a very good outcome for the taxpayer, not so great an outcome for the trees themselves.

Alexander Peter: That is absolutely true. I mean, the court basically also discussed the question whether what happens if the tree survives as a viable organism and regrows according to a plan of the forester, despite being cut off. But the court said, “We don’t have to decide that.” Probably because the parties unanimously stipulated that after the Christmas trees would be cut down, the root balls would be shredded with a milling machine, and then mulched. So certainly the trees will not survive, that’s for sure.

David D. Stewart: Well, all right. Well, Alex, thank you for bringing this to me. And let’s all hope that we all get a $22,000 gift this Christmas.

Alexander Peter: That’s right. Thank you.