I. Introduction
Tax is not a subject that people typically associate with comic books; however, some of earth’s mightiest heroes have had their very own run-ins with Uncle Sam through his servant the Internal Revenue Service (IRS) agent.
One such example is the classic (at least among tax attorneys) Superman #148, published in October of 1961.[1] Upon reflection, almost 60 years later, there is an update, a refresh, and a second look that the story deserves in order to clear the besmirched name our beloved man of steel.
II. Comic Storyline
One of the stories contained within Superman #148 is “Superman Owes a Billion Dollars,” where Superman does battle with the IRS. A young enterprising IRS agent named Rupert Brand discovers what he believes to be significant tax evasion by Superman. Brand’s suspicion is aroused when he is looking through tax records on his first day on the job and learns that there is no record of Superman ever paying tax. One of the presumptions made in the opening panel of the comic is that “[e]very year Superman earns millions of dollars!” A further stipulation is that Superman donates all of the money received to worthy charities. This is conceded by Brand initially, as well as expressly stated by Superman himself. So, while Superman receives significant income via rewards, he gives it all away. A true moral guidepost for the world!
Back to the story, where Rupert entraps Superman into saving him in order to provide service of process of an IRS audit. Brand deliberately leaps off a building because he knows Superman will save him, which Superman (predictably) does. Brand informs Superman that he is obligated to pay taxes, noting “even the president of the United States pays taxes … so why should you be the only exception?”[2] Superman flies Rupert Brand to his office in the Metropolis bureau of the IRS where Brand computes Superman’s tax liability at one billion dollars (including back taxes). Superman contends that he has given all of the money away to charities, to which Rupert responds, “[w]ell, even if you gave away all the money you earned, you’re not excused! Many millionaires give money to charity, too … yet THEY pay taxes.”[3] Brand then gives Superman until the next day (which is conveniently tax day) to pay the full amount due and owing, or Brand is going to “order the F.B.I. to arrest you!”[4] It is worth pointing out that while this is a lot of money, the highest marginal income tax bracket in 1961 was 91% for anyone earning over $200,000. So, really, that billion dollar tax bill is generated from slightly less than $1.1 billion dollars’ worth of income.
Superman then crisscrosses the globe trying to make the money to pay his tax debt only to conclusively demonstrate why Superman does not have a billion dollar corporation like Tony Stark or Bruce Wayne. Superman unleashes a series of hair-brained schemes to gather valuables in order to pay his bill, only to have a series of unfortunately or foolhardy events occur:
(i) Bizarro turn his collected ivory tusks into ivory soap;
(ii) Superman is unable to turn coal into diamonds due to the gas from a comet that arrived earlier in the book;
(iii) he attempts to grow the world’s largest pearl with scientific growth serum coated coral fed to the largest oyster Aquaman can find for him;
(iv) Superman considers selling the pterodactyl looking creature from the comet mentioned earlier to a private animal collector;
(v) he attempts to take gold from a Spanish “treasure ship” but surrenders it to Atlantis only to have it smelted into a statute of his parents; and
(vi) Superman attempts to sell “radium” to the hospitals, but after securing a large quantity of radium from space, and after learning of the shrinking supply of radium on earth, Superman gives it to the hospitals free of charge.
Ultimately, Superman is able to stash valuables on a deserted island, and when he returns to gather his collected treasures he finds that the pterodactyl space creature has eaten all of his valuable treasures, so Superman “angrily hurls the monster into space.” Superman leaves the island with nothing to show for his efforts, and no way to pay his debt to the IRS.
Appearing timely at the IRS office, Superman attempts to satisfy his debt with a check drawn from the “First National Bank of Krypton.” Brand rejects the check from Krypton as the IRS would have no way to cash a check issue by a bank on a planet that had blown up.
As Rupert is getting ready to savor his victory over the Man of Steel, Brand’s boss enters informing Brand that the Krypton check was a gag he had put Superman up to, and, in true tax geek fashion, he cites a provision of the IRS code to claim that Superman “doesn’t owe us a cent because of Code 1426 B.” The boss claims that Superman can use the dependent deduction to deduct $600 for each dependent, and since the whole world is dependent on the services of Superman, that’s two billion dependents times $600, over a trillion dollars of tax deduction annually for Superman, driving his income to zero, and erasing his tax liability, as well as clearing his name as a tax evader. Or does it?
III. What is income for tax purposes?
The crux of the claim that Superman earns income is the assumption made by Rupert that “each year superman captures countless wanted criminals, collecting a fortune in reward money.” Mr. Brand presumes that Superman has additional wealth based on times when he “digs up buried treasure or squeezes coal into diamonds he earns more untold millions! All that wealth is income!” The question to you Mr. Brand, is it income? All of it?
a. Gross Income is the Starting Point
The starting point for computing tax liability is always the taxpayer’s “gross income.” Section 61 of the internal revenue code (IRC) defines “gross income” broadly to include all income from whatever source derived.[5] This includes compensation (i.e. wages, salary, commissions, etc.) income from investments, discharge of debts without payment, and even inheritances.[6]
Gross income is then offset by adjustments to gross income, typically in the form of deductions allowing the taxpayer to determine their adjusted gross income. From adjusted gross income further application of tax credits and deductions drive the taxpayer to a net taxable income, which is taxed at graduated rates pursuant to §1 across a series of progressive income tax brackets. But here, we are only concerned with gross income and the basic concept of deduction against gross income.
For old Superman, although rewards appear more closely aligned to gifts than traditionally earned wages or salary, the recipient of a reward has typically done something sufficient to earn the reward. In Superman’s case, he has provided lifesaving services thousands of times over, for which he has been compensated via rewards. Thus, payments received by Superman as rewards for his good deeds are likely considered “gross income.”[7] However, while Superman has gross income, that’s not the end of the story. He must determine if there are any deductions against income that will minimize his tax obligation.
b. Charitable Deduction
Superman has apparently earned significant sums of money and has donated this money to charitable purposes. Mr. Brand states that Superman has given “Billions to charity” over the years, and Superman himself has indicated that he has given all of his rewards to charities. Charitable contributions are typically deductions against gross income lowing the total tax burden of a taxpayer; however, this is no escape from taxation in the eyes of our trusty IRS agent. Mr. Brand states, “even though [Superman] gives these billions to charity and he never keeps a cent for himself, the law states NO ONE can claim more than 15% of their income for charity exemptions! So Superman is guilty of income tax evasion.”[8] Tax evasion may be a little excessive here.
Presently, a deduction against gross income is permitted under IRC §170 where a taxpayer makes a charitable contribution to an eligible IRC §501(c)(3) entity. Where a donor contributes cash, such as a reward for solving crimes, the deduction is permissible up to certain limits. Generally speaking, the limitation is 50% of the taxpayer’s adjusted gross income for the year.[9] Any amount over that would be suspended and carried forward to the next year for deduction. So, in the case where, for example, Superman made $100m in reward income, he would be limited to only $50m of deduction under present day rules (and would have presumably be limited to a $15m deduction in 1961).[10] Therefore, today, Superman would have $50m of taxable income, which at the highest marginal tax rate of 37% would leave Supes with an $18.5m tax bill, and nothing to pay it with, since he had contributed it all to charity. Therefore, simply contributing all of the reward income to charitable enterprises would not eliminate Superman’s tax obligation. Or would it?
c. Exclusion of Contributed Rewards Under IRC §74(b)
Superman #148 was written in 1961, if we were to update the story to modern day, the story and tax analysis becomes much shorter. As noted above, the general rule is prizes and awards are taxable income, and contributions to charitable entities are subject to contribution limitations.[11]
However, §74(b), enacted in 1986, provides an exception from gross income for prizes or awards transferred to charity. As we saw in the opening panel, and as confirmed by Superman himself, all rewards collected by Superman are donated to charities. The exemption from gross income under §74(b) states “gross income does not include amounts received as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement” with three conditions that must be satisfied: (i) the recipient was selected without any action on his part to enter the contest or proceeding; (ii) the recipient is not required to render further services as a condition of receiving the award; and (iii) the prize or award is transferred to a qualified charitable organization.[12]
Here, it is pretty clear that Superman would qualify for the income exclusion under §74 through the donation of reward funds to eligible charitable entities. He satisfies all of the conditions precedent: (i) he did not have to act to enter a contest or proceeding; (ii) there is no obligation for him to render further services; and (iii) he is giving the rewards to a charitable organization. Superman’s receipt of reward income should not treated as income pursuant to §74(b), and thus his income is zeroed out for the reward amounts in question, driving his realized income to zero. Once Superman has driven his net taxable income to zero under the rules of §74 Superman is in the clear.
Section 1 of the IRC provides for graduated tax rates across a multitude of tax brackets. Currently, the lowest section 1 tax bracket for an unmarried individual is 12% for income in excess of $9,700 (and 0% for income under that threshold). Superman’s taxable income, as defined in §63, is his gross income minus his applicable deductions (typically either the standard deduction which is $12,200 for unmarried person, or itemized deductions). However, the application of §74(b) has eliminated the need to look at deductions, and rather eliminated all rewards from gross income under §61. Since Superman is single and earns less than $12,200[13] per year, because his standard deduction will drive any amount of gross income less than $12,200 to zero, he does not have a tax filing obligation. As such, Superman needs no dubious loopholes to avoid scrutiny by the IRS, he is tax compliant and does not have a filing obligation. Justice is served.
d. Deduction for Dependents
The applied rationale for avoidance of tax in “Superman Owes Millions” however does not check out. Superman was saved by the personal exemption for dependents, which provided a $600 dollar deduction against gross income per dependent. Because all of earth was deemed to be “dependents” of Superman, superman received slightly over $1.2 Trillion dollars in itemized deduction against his reward income. This rational by the IRS unfortunately does not hold up. After changes made to the IRC pursuant to the Tax Cuts and Jobs Act of 2017 (TCJA), the personal exemption for dependents, as well as the Child Tax Credit have been altered.
Prior to TCJA, taxpayers were entitled to a personal exemption of $4,050 for each of themselves plus their dependents.[14] However, under TCJA, the personal exemption has been eliminated and somewhat replaced by the Child Tax Credit. Under the TCJA, the Child Tax Credit is temporarily increased to $2,000 until 2025 and applicable to dependent qualifying children who have not yet attained the age of 18 during the taxable year. Therefore, in Superman’s case, we will consider both together to determine his possible ability to avoid taxes.
The personal exemption for dependents and the Child Tax Credit are available for “relatives” alone, stretching from children and grandchildren to aunts, uncles, nieces, nephews, and in-laws.[15] Therefore, it’s a stretch to get to “dependent” as the IRS agent does. Additionally, each person who is qualified as a dependent can only be claimed on one tax return. Although the deduction for personal exemptions for a taxpayer, a taxpayer’s spouse, and a taxpayer’s dependents is $0 for tax years 2018 through 2025, no personal exemption is allowed to a taxpayer who may be claimed as a dependent on the return of another.[16] This same rule holds true for child tax credits as well. This rule establishes the limitation on permitting only one deduction per dependent, ensuring that only one exemption is allowed per person. Therefore, Superman’s claim of all of earth as dependents would effectively create errors in all of the other tax returns filed with the IRS.
Thus, if Superman were to take the IRS agent’s offer and claim all of the residents of the world as a dependent, he would have effectively eliminated the ability for all other actual familiar relations to take the deduction for such individuals. Superman would have effectively made tax evaders out of everyone else by claiming their relatives on his tax return, or alternatively confirming Superman’s status as a tax evader due to his improper claim of the entire world as his “dependents.”
Superman should stick to the structure and rationale under §74(b) to ensure that he does not succumb to the kryptonite of taxation in the future, and he should ensure that he continues to enlist the help of competent tax counsel to ensure that he has substantiated the deduction permitted under §74(b) to continue to avoid any tax obligations to the likes of Rupert Brand and the IRS!
[1] Superman Vol. 1, #148 (published October 1961) (more information available at https://dc.fandom.com/wiki/Superman_Vol_1_148).
[2] Superman #148.
[3] Superman #148 (emphasis in original).
[4] Superman #148 (we will not consider the fact that the FBI’s office is not typically the organization that arrests tax evaders, as the IRS has its own criminal enforcement division).
[5] IRC §61(a).
[6] Id.
[7] Treas. Reg. §1.61-2(a)(1); Treas. Reg. §301.7623-4(d)(5) (providing “Tax Treatment of Award”). Campbell v. Comm’r, 658 F.3d 1255 (11th Cir. Sept. 28, 2011), aff’g 134 T.C. 20 (2010) See also §61(a)(1); Treas. Reg. §1.61-1(a).
[8] Superman #148 (emphasis in original).
[9] IRC §170(b).
[10] IRC §170(b)(1); §170(b)(2).
[11] IRC §74 and §170. See also Treas. Reg. §1.74-1(a)(1); House v. Comm’r, T.C. Memo 1996-311.
[12] IRC §74(b)(1), (2), & (3).
[13] $12,000 inflation adjusted annually.
[14] Rev. Proc. 2016-55.
[15] IRC §152(c).
[16] IRC §151(d)(2). See CCA 200236001 (§151(d)(2) operates to mandate a zero personal exemption amount for a dependent even if §151(d)(3) phase-out rule results in zero exemption amount available on another taxpayer’s return).
