Hamill: When your own math (and column) betrays you

One thing I have always been good at is doing math in my head. I often make up examples as I go when I teach classes.

I have made mistakes. But when you do 100 examples in your head and get it right, the audience tends to show some grace for your later error.

Not too long ago, I was presenting on a whiteboard and multiplied two numbers together and wrote down an answer.

After some time, a participant said, 49 times 8 is 392. Yes, I said, it is. But you have 395, he said. No, I said, I have 392.

He encouraged me to turn around. There I saw that I did have 395. A number ending in a 5 makes no sense when you multiply 49 times 8.

I could not accept that I had written 395 until I was forced to turn and look at my own work.

As Chico Marx said, “Who are you going to believe, me or your own eyes?” I hoped everyone would just believe me. They didn’t.

I always hope people will read my column. Apparently, my hopes were realized on March 1.

By noon on March 2, I had received six emails telling me that my column was wrong. Each claimed I said that New Mexico allows the federal senior and other deductions.

As I read the first one, I thought, I would not have said that. As I read the second one, I thought, I do not think I would have said that.

By the third one, I thought, did I really say that? I’d like to just say, who are you going to believe, me or your own eyes?

At least six of you chose your own eyes. So, I must admit that the tail end of my column resembled a Marx Brothers script.

As Groucho Marx said, “A child of 5 could understand this. Send someone to fetch a child of 5.”

Only one paragraph was wrong — the one that said the senior, car, tips and overtime deductions carry to the New Mexico return. The sun was in my eyes.

Again, to Groucho, “Learn from the mistakes of others. You can never live long enough to make them all yourself.”

Now, in the remaining space available, let me address the possibility of tariff refunds following the recent “Learning Resources” Supreme Court decision.

Companies that paid tariffs under the government’s original position continue to push for refunds.

The tariff payments would have been deducted by these companies as ordinary business expenses in the year(s) paid.

If a company receives any refund of prior tariff payments, there is a tax question as to how to classify the payment received.

Regular corporations get no favorable tax treatment for capital gain income. These taxpayers typically are indifferent to how income is classified.

Pass-through businesses, such as proprietorships, partnerships and S corporations, would typically prefer capital gain classification.

Unfortunately, without regard to the type of taxpayer, any business that receives a refund of prior tariff payments will have to report ordinary business income.

The best authority for this answer is a 1952 Supreme Court decision called “Arrowsmith.” This is often called the “relation back” doctrine.

The Arrowsmith decision determines the character of a payment that is tied to an earlier transaction based on how the earlier transaction was reported.

The case dealt with a return of funds received in an earlier liquidating distribution from a corporation.

The first payment received from the liquidation was properly reported as a capital gain by the taxpayer.

The taxpayer argued that the later payment was an ordinary deduction. The court disagreed, holding that the payment was tied to the earlier distribution.

The court said that the later payment had to be reported consistently with the first payment, so that a capital loss was reported.

Four dissents argued that there was no capital transaction in the later year, so that the payment must be reported as an ordinary deduction.

Any tariff refund would be ordinary income from the majority view or the dissent from Arrowsmith.

If tied back to the initial payment, the refund is ordinary. If the dissent is followed, there is no capital transaction in the refund year to justify reporting capital gain.

Jim Hamill is the director of tax practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.