Recovering from the Federal Government for Injuries Sustained from Dinosaur Attacks While Camping

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September 16, 2019

The Jurassic World short Battle at Big Rock tells the story of campers who are attacked by an allosaurus at Big Rock National Park in California. Since the attack happened in a National Park, could the family recover from the Federal Government under the Federal Tort Claims Act?

The issue on whether the family could recover depends on if the National Parks Service knew there were dinosaurs in the National Park. An argument for recovery can be made based on cases with campers attacked by bears.

In one case, a camper who was attacked by a bear at night in his sleeping bag could recover where the park ranger told the camper there was no danger of bear attacks, even though there had been a bear attack a few days before. As such, there was a danger of attack and the park ranger failed to warn the camper. Claypool v. United States, 98 F. Supp. 702 (D. Cal. 1951).

In another case, a bear injured a camper while the camper slept in his car with his window rolled down and his arm on the sill. In that case, there were not any acts of negligence by the government for a case under the Federal Tort Claims Act, because the bear that attacked was not known for violence unless provoked. Ashley v. United States, 215 F. Supp. 39 (D. Neb. 1963), aff’d, 326 F.2d 499 (8th Cir. 1964).

In a case in Yellowstone Park, a camper was given specific warnings about bear attacks, nevertheless, was attacked by a bear in his tent. The bear had placed its paw on the camper’s chest while he slept, which ended in a mauling after the camper woke up startled. The attack was in the most populated part of the campgrounds that included the fire station, gas station, store, ranger’s office, and lighted restrooms. The court found the attack was completely unforeseeable, thus there was no negligence on the park staff, because they had duty to warn of an unforeseeable attack. Rubenstein v. United States, 338 F. Supp. 654 (N.D. Cal. 1972), aff’d, 488 F.2d 1071 (9th Cir. 1973).

What does this mean for our family of campers? The issue for them is foreseeability. The campers themselves were surprised to see dinosaurs in the national park, which implied that dinosaurs were not known to be in that part of California. As such, if the National Park service did not know about the presence of dinosaurs, they had no duty to warn about an unforeseeable attack. Alternatively, if the park rangers knew about dinosaurs and did not warn the campers about the risk of encountering a dinosaur, the campers could recover under the Federal Tort Claims Act, because the rangers were negligent in not warning about dinosaurs.

Based on the end credits of the short, an aggressive dinosaur remediation plan would need to be enacted by the Federal and State Governments to protect human life.

Riding the Liability Train at Smugglers Run in Galaxy’s Edge

By

Josh Gilliland

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September 10, 2019

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Smugglers Run in Galaxy’s Edge at Disneyland is a dream come true for any fan of Star Wars. It is a wicket good time, regardless if the first time you saw the Millennium Falcon was at a drive-in theater, VHS tape, DVD, Blu Ray, or Streaming. We live in an age of wonder where entering Galaxy’s Edge is like walking into a Star Wars movie.

It is also a great lesson in to break all sorts of laws.

The ride’s story is as follows: Hondo Ohnaka (from Clone Wars and Rebels) has formed Ohnaka Transport Solutions, which is based the Black Spire on Batuu, which is operating the Millennium Falcon on loan from Chewbacca. The “job” from Ohnaka Transport Solutions is to intercept a First Order train shipment of Coaxium on Corellia. Let’s jump to lightspeed over the legal issues with such an endeavor.

Are We Space Pirates or Privateers?

Traveling through space to “appropriate” hyper-fuel from the First Order sounds a lot like piracy. The law defines piracy as, “Any illegal acts of violence, detention or any act of depredation, committed for private ends by the crew or the passengers of a private ship or a private aircraft, and directed.” 1958 U.S.T. LEXIS 31, Article 15, section 1 (The Convention of the High Seas).

The Millennium Falcon is a private aircraft that was used to shoot down First Order Tie Fighters in order to shoot at a train for the goal of capturing its cargo. That meets the textbook definition of piracy. However, such a reading of the law ignores the fact the First Order was a political movement that destroyed the Republic with Starkiller Base. That is not the basis for forming a government, to say nothing about the consent of the governed. The First Order at its core is a terrorist group that was successful in committing genocide of Hosnian Prime. They are nothing but war criminals that murder civilians by the billions.

From a certain point of view, Ohnaka Transport Solutions could be viewed as employing privateers with the Millennium Falcon. The early definition of a “privateer” is a vessel owned by one or by a society of private individuals, armed and equipped at his or their expense, for the purpose of carrying on a maritime war, by the authority of one of the belligerent parties. Bouvier, 1853, PRIVATEER, war. It is worth noting that privateers are now banned under the Hague Convention VII of 1907, the Convention Relating to the Conversion of Merchant Ships into War.

In our case, Chewbacca is a member of the Resistance, the presumptive legal owner of the Falcon (there is a chance it could belong to Leia, but certainly not Kylo Ren after killing Han Solo, because murdering a parent would cut off his inheritance). Chewbacca loaned the Falcon with the express purpose of a military operation against the First Order. The First Order’s destruction of the capital of the New Republic was the first shot in a war over freedom verse tyranny. This makes anything for the First Order’s war effort a legitimate military target. As such, the Falcon being sent on a mission to harm the war effort of the First Order would make Ohnaka Transport Solutions engaged in privateering.

There are some imperfections to the argument; given there is no longer a government for the New Republic. However, given every nation does have a right to self-defense, no one has to bow down to the First Order.

Train Wrecking

The only way to steal the Coaxium on the train carrying the fuel was to shoot the train, causing one of the cars to derail. This is the black letter law definition of “train wrecking.” California Penal Code § 218 defines the law as follows:

Every person who unlawfully throws out a switch, removes a rail, or places any obstruction on any railroad with the intention of derailing any passenger, freight or other train, car or engine, or who unlawfully places any dynamite or other explosive material or any other obstruction upon or near the track of any railroad with the intention of blowing up or derailing any such train, car or engine, or who unlawfully sets fire to any railroad bridge or trestle, over which any such train, car or engine must pass with the intention of wrecking such train, car or engine, is guilty of a felony, and shall be punished by imprisonment in the state prison for life without possibility of parole.

Flying the Falcon behind the train, shooting at train cars, and harpooning the Coaxium, is the use of explosives to blow up the train, causing a derailment. Flight crews could be charged and convicted of train wrecking, if this was an ordinary crime not committed as a war time measure against the First Order.

Smuggling

Since the name of the ride is Smugglers Run, it is illegal to smuggle goods into or out of the United States. See, 18 U.S.C.S. §§ 554 and 545. The relevant issue for the independent contractors employed by Ohnaka Transport Solutions, is the Falcon is being used to transport hyper-fuel. Ironically there is not much in trying to conceal the fuel in the heist, because it is an armed attack on a First Order train. That aside, the ride Smugglers Run does live up to the legal definition of smuggling.

Thoughts on Smugglers Run

Smugglers Run sets a new gold standard for amusement park rides. The line experience takes attendees through passageways that look like the halls of Hoth or Yavin IV. The attention to detail is mindblowing. Highly recommend visiting Galaxy’s Edge, preferably with friends and family.

Can You Have Werewolf Traps in Your Front Yard?

By

Josh Gilliland

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September 3, 2019

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What We Do in the Shadows is wicked fun if you have an offbeat sense of humor and enjoy comedy-horror shows. In “Werewolf Feud,” S1, E3, the vampire Lasslo Cravensworth placed werewolf traps in the front yard of the vampire house after he has discovered a werewolf has been urinating on the front lawn. Would these traps be legal?

This raises a sticky issue: is a werewolf an animal or human being?

Rules if Werewolves are Human

When it comes to human beings, nonlethal physical force can be used to prevent larceny or criminal mischief with respect to property other than premises. N.Y. Penal Law § 35.25. A trespass is committed when someone knowingly enters or remains unlawfully in or upon premises. N.Y. Penal Law § 140.05 A person commits criminal trespass in the third degree when they knowingly enter fenced real property. N.Y. Penal Law § 140.10.

The law does not favor traps set out for children. In cases where a property owner has set out traps to deter children for trespassing, a child trespasser could only recover damages if “a dangerous condition was maintained upon the premises with the intention of inflicting injury on anyone trespassing thereon or with what is the equivalent of intention, reckless and wanton disregard of the consequences.” Brzostowski v. Coca-Cola Bottling Co., 226 N.Y.S.2d 464, 469-70 (App. Div. 1962)

Rules if Werewolves are Animals

New York law on cruelty to animals applies to anyone who intentionally causes serious physical injury to a companion animal with justifiable purpose. N.Y. Agric. & Mkts. Law § 353-a(1). However, the law does not prohibit dispatching rabid animals or ones that are a threat to human safety or other animals. N.Y. Agric. & Mkts. Law § 353-a(2).

There Wolf Lies the Problem

Those suffering the curse of the werewolf are both human and animal potentially at the same time. If those who turn into wolves have no control or intellect, they would appear to be more of an animal. However, if they retain intellect while in their wolf form, they could be more human than animal. Given the fact combat with a werewolf was settled with a squeaky toy, someone who is a werewolf has diminished capacity at best.

If a werewolf is a “companion animal,” then Lasslo could face cruelty to animal charges for his trap in the front yard. However, given the threat that werewolves pose, they would not be classified as a companion animal. However, Lasslo is not someone who has a permit or is acting under color of law to remove werewolves with traps.

A werewolf is certainly not a child, but Lasslo’s traps clearly were intended on inflicting injury on anyone trespassing on the front lawn. Given the harm caused by the traps, a werewolf suing for injuries likely would prevail, if a judge would give both a werewolf and vampire a day in court.

Holy Courtroom Conundrums Batman

By

Jordon Huppert

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August 29, 2019

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During the average night for the Caped Crusader, when he’s not fighting super villains, stopping world ending crises, or hanging out with a starfish in a jar, he spends his time stopping crimes around Gotham City. In almost all of the iterations of Batman, we see him working alone or with the GCPD to stop various muggings, robberies, and terrorist acts by (relatively) normal citizens. But after the Bat ropes them to a lamp post and Commissioner Gordon arrests them, what happens then? Assuming that the Gotham legal system works similarly to our legal system (and there is ample evidence that it does), then the next step after the arrest would be the criminal charge brought by the District Attorney, then the Defense investigation, then the plea bargaining or trial. But where does Batman fit into all that legal stuff?

Can Batman be called as a witness?

Sure, why not? In order to prove their case the DA will likely have to call Batman as a witness to testify that the Defendant was indeed robbing the store, snatching the purse, or what have you. Since all the cops usually see is a suspect tied to a tree, connecting that guy to the crime can get a bit sticky without the testimony of the Caped Crusader to fill in the blanks. Take the trial of King Tut/Professor McElroy from Batman vs. Two Face for example. (As an aside, there is so much wrong with this trial scene it almost deserves its own post to go over, but we’ll stick to Batman’s part here.)

At the trial Assistant District Attorney Harvey Dent calls Batman to testify about how he solved the caper of the stolen biplane and to help prove that Professor McElroy is responsible for the crimes of his alter ego King Tut (since they are your classic Hollywood split personality). Batman takes the witness stand in full costume to testify and, although he tries to help explain that the Professor personality has no idea what the Tut personality is doing, Harvey twists his words and the Jury convicts poor Professor McElroy. All everyday run of the mill stuff for the Gotham City Courtroom I’m sure.

However, Harvey has made the classic prosecutor blunder and forgotten about the US Constitution. Cue Robin: “Golly Batman of course (punches his palm), it’s the Sixth Amendment1 which guarantees (among other things) the right to face all the witnesses against you.” This means more than just getting the opportunity to see the person for the first time on the witness stand. Combined with the Prosecution’s burden of disclosure it means the Defense has a right to know all the witnesses that the Government will call and to see all the evidence that the Government will offer in advance of trial so that they can properly prepare to cross examine those witnesses. The Prosecutor isn’t allowed any surprises. (There’s a really good scene in My Cousin Vinny that covers this surprisingly accurately. If you haven’t seen it go watch it, it’s a fantastic legal movie.)

So, before trial Harvey Dent would have had to disclose his witness list to Professor McElroy’s attorney, including that he would call Batman. However, since Batman isn’t a real person, Dent would need to turn over Batman’s real name, which runs into an issue. Harvey doesn’t know Batman’s real name. Luckily for all of us, the Constitution doesn’t care. Since McElroy has a right to face his accuser and since he has a right to be able to put on a defense, he has a right to Batman’s true identity if Batman is going to testify and if Bats wants on the stand he’s got to do it without the mask, placing him in a Courtroom Conundrum. Think about it this way, what qualifies Batman to talk about split personalities to begin with? Does he have a doctorate? From where? Has he performed research in the field prior to positing that if you pummel King Tut on the head he switches personalities? These are all questions that the Defense gets to investigate so they can question the veracity of Batman’s conclusions (seriously, go watch My Cousin Vinny). The defense also gets to dig into Batman’s history for anything that gives him a bias in the case or any ways to impeach his testimony. So, if Batman wants to testify he’s got to do it as Billionaire Bruce Wayne. Funny to think of how much money Joker and the dastardly fiends of Gotham’s underground were going to pay Two-Face when all they needed was one moderately competent public defender. Makes you think.

So, how does the GCPD rely on Batman to do their job for them… I mean… help them do their job? In theory, the Bat could be a confidential reliable informant (or CRI). For a long time police have relied on informants to provide tips or to help them investigate crimes. One very common example of how police use CRIs is what’s called a controlled drug buy. It goes something like this: the CRI tells the officer that s/he knows about a drug dealer and can buy drugs from them. The police set the CRI up with a set amount of money, search them to make sure they don’t have any illicit substances, and send them off to the drug dealer’s place to make a purchase. The officers watch the CRI as much as possible to make sure that they limit as many variables as they can, and once the CRI gets back the police search them again, take the drugs and use the CRI’s information to get a warrant from a judge for a search of the drug dealer. Now, if the police can’t actually observe the drug transaction itself then they’re relying on circumstantial evidence and the statements of the CRI to make their case.

As you might imagine, this comes with some problems for all parties. Without editorializing (at least trying really hard no to editorialize): for the Government, they want to protect their CRI from reprisals should their identity be made known and perhaps disguise or minimize the potential problems with their source, and for the Defendant dealing with information from a source you don’t get to know can cause all kinds of issues, including those described above like base of knowledge and reputation. Courts have tried to balance these two competing interests and have largely allowed the use of CRIs with few restrictions[1] (ok, I editorialized a little there). Among the requirements are that the Government must inform the defense of a CRI’s basis of knowledge (i.e. how do they know what they say they know) and information on their reliability (i.e. do we know anything like that they have prior convictions, are they providing information in exchange for some consideration, have they provided reliable information in the past, etc.). However, Courts have made it extremely difficult for the Defendant to compel the Government to turn over the actual identity of the CRI.

There’s nothing in real life that quite matches up with Batman, but doing our best to apply the rules associated with CRIs to the Caped Crusader it doesn’t look good. The requirements that the Government provide some basic information to Defendants means that the police officers need to know whether Batman has any prior convictions or other information which might reflect on his credibility (which while the Batman of ’66 probably doesn’t, other versions of Bruce/Batman have a bit rougher history and relationship with law enforcement and might have convictions or at least warrants) and to disclose the basis of Batman’s knowledge, which is typically a bit more complicated than I knocked on someone’s door and asked them to sell me drugs, and is often not something the police themselves understand. To boil it down, in order to run a CRI the officer has to know who that person is. There’s a very fine line between allowing the police to keep a source a secret and the police using an unknown vigilante (yes, I know the ’66 Batman was once deputized but let’s overlook that for now) to do their work for them. Imagine a Judge ordering the District Attorney to disclose their source and the DA says “It’s Batman your honor”, it wouldn’t work out well there would probably be some laughter in the Courtroom. Of course, the DA always has the option to dismiss the case rather than disclose the name of the CRI but that’s just embarrassing (I editorialized a little there too).

The other issue with the GCPD using batman as a CRI is that it makes him a state-actor, subject to all the constitutional limits that brings with it. Imagine if people could sue Batman for unreasonable force, or if Batman had to take time out of an investigation to get a warrant before he searches the Joker’s hideout: that’s how you lose a Robin (sorry, is that too soon?). Batman is able to do what he does because he can operate outside of the law and in a lot of ways Batman exists to do just that, act outside the normal rules and do things the police can’t. While that makes for good comic books, it doesn’t work well in real life.

1 The Sixth Amendment reads “In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the state and district wherein the crime shall have been committed, which district shall have been previously ascertained by law, and to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him; to have compulsory process for obtaining witnesses in his favor, and to have the assistance of counsel for his defense.” https://www.law.cornell.edu/constitution/sixth_amendment

[1] In Oregon we have these rules written into a statute, ORS 133.545 (6): … If an affidavit is based in whole or in part on hearsay, the affiant shall set forth facts bearing on any unnamed informant’s reliability and shall disclose, as far as possible, the means by which the information was obtained.

The Collector’s Collection – The Tax Collector’s Take

By

Jed Bodger

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August 22, 2019

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The Collector appears in Avengers: Infinity War and plays a pivotal role, as he held the Reality Stone (technically the Aether, one of the six Infinity Stones to be precise), which Thanos was able to take from him in order to further his ends of completing the infinity gauntlet. In Avengers: Endgame, we see that the scene where Thanos is torturing the Collector turns out to have been completely fabricated by Thanos, using one of the Reality Stone to manipulate reality to test his adopted daughter Gamora, demonstrating the power of the stone, clearly a crown jewel of the Collector’s massive collection. The fate of the Collector is still to be determined in the MCU, but the issues of taxation and his collection will plague him going forward. Let’s explore.

The Collector is a minor character from comic lore. With the given name Taneleer Tivan, the Collector is the head of the Tivan Group, and renowned as the keeper of the largest collection of interstellar fauna, relics and species in the galaxy (a.k.a. the Collector’s Museum), operating from the Knowhere port installation.[i] As a collector of memorabilia myself (shout out to the Star Wars and GI Joe 3 and ¾ inch collectors in the room) tax plays a role in the Collector’s life, whether he realizes it or not.

In Guardians of the Galaxy, we learn that the Collector both buys and sells his collectibles (for the right price of course). This is clear when he and Rocket have an exchange where Rocket is attempting to negotiate a price for the Orb (which Peter Quill had recovered from a tomb on Morag), an ancient artifact that housed the Power Stone. After the Collector asked Rocket how he wished to be paid for the Orb, Rocket tells him, “what do you think fancy pants? UNITS!!!”[ii] So, it’s safe to assume that the Collector is buying artifacts for his collection. However, to get the money to buy his treasures, it’s likely that he is selling artifacts as well. And given his swarthy character, it is also safe to assume that everything in the Collectors collection is for sale … for a price.

The activities of collectors are taxed somewhat differently than the activities of regular businesses. There is a characterization requirement for his activities; a limitation on deductible losses incurred; and a different tax rate for gains realized by the sale of collectibles.

Dealer, Investor, or Collector – There can be Only One!

From a tax perspective, there must be a determination of whether the Collector is a dealer, investor, or a collector. From a basic definitional perspective, a dealer is someone in the trade or business of buying and selling collectibles. An investor is someone who buys and sells with the view toward gains but is not in business as such. A collector is someone who collects as a hobby with no profit motive. There is no clear statutory definition or bright-line test of what it means to be a dealer, an investor, or a collector, and to make things more confusing, an individual may fall into multiple categories.[iii]

The definitional determination above is important for the determination of losses that can be generated to offset income.[iv] These definitional components are determined by elimination as the Internal Revenue Code (IRC) provides that all activities of the taxpayer other than those for which deductions are allowable under §162 (expenses of carrying on a trade or business) or §212 (expenses incurred for the production or collection of income or the management, conservation, or maintenance of property held for the production of income) are not considered “businesses” and therefore are deemed to create the definition of “hobbies.”[v] Dealers are considered to be operating a business, and therefore gains will be ordinary income, and losses will be treated as any other business loss pursuant to IRC §162. This means that their net income will be taxed at ordinary income rates under graduated tax rates for the dealer.

Investors are people who deal in the same type of property, albeit at a less frequent scale. Because of this, investing expenses can be deducted and gains and losses treated as capital transactions.[vi] However, losses from the sale are not investing expenses, and are not available to offset ordinary income. If an investor engages in some sales transactions and reports these as a dealer, she might be subject to the hobby loss rules, which could limit the usability of the losses.

For both dealers and traders, the Tax Court has identified factors for consideration in determining whether the pieces sold were part of the taxpayer’s inventory (i.e., property considered stock in trade and held primarily for sale to customers in the ordinary course of a trade or business pursuant to §1221(a)(1)): (1) The frequency and regularity of sales; (2) the substantiality of sales; (3) the length of time the property was held; (4) the nature and extent of petitioner’s business and the extent to which petitioner segregated the paintings from business inventory; (5) the purpose for which petitioner acquired and held the property before sale; (6) the extent of petitioner’s sales efforts by advertising or otherwise; (7) the time and effort petitioner devoted to the sales; and (8) how the sales proceeds were used.[vii] Where a dealer or trader satisfies these definitional requirements, the income generated by sales of collectibles are considered ordinary income taxed at ordinary income tax rates, and the costs of acquiring collectibles or other costs associated with the operation of the business are considered ordinary deductible costs.[viii]

Collectors simply acquire and hold their wares with a possible sale an undefined time in the future. The activities of a collector are not considered to be in the furtherance of a trade or business, and therefore the activities are classified as “hobbies” for federal tax purposes.[ix] Given the Collector’s impressing array of goods, it is probably fair to consider him, no pun intended, as a collector. (For these purposes we will rely on the Collector’s name, and classify him has a collector – a savvy tax attorney may argue that he is a dealer in order to allow a greater amount of deduction against income, but for these purposes, he will be classified as a “collector”).

The real impact of being defined as a “collector” is that the ordinary business deduction rules are eliminated and the tax rate on which income generated is taxed is similarly changed.

Hobby Loss Limitation

The Hobby Loss limitation works generally by limiting the ability to deduct expenses associated with the hobby/collection from the proceeds generated from the hobby or other income. This is because the Internal Revenue Service (IRS) has determined that such “hobbies” are engaged in primarily with a motive towards enjoyment, not profit. Without a profit motive, the IRS deems such losses to be disallowed.[x] The effect of IRC §183 is to limit the deduction of expenses incurred in connection with these hobbies to the gain realized from the hobby activity.[xi]

Here’s a quick example. If the Collector spent $100 on cleaning and servicing his collection (feeding the animals, watering the plants, etc.) and then sold an artifact for $80, the Collector would have $80 of income, $100 of expense. However, he would only be able to use $80 of the expense to offset the $80 of income, leaving him $20 of limited or suspended loss (i.e. no benefit). Here, the collector would have only $80 of allowable “hobby loss” as a miscellaneous itemized deduction. If he had been a dealer, he would have had a net operating loss of $20 that he could carry forward to offset income in subsequent years.[xii]

However, this hobby loss is further limited due to the suspension of miscellaneous itemized deductions in the years 2018 through 2025 under the Tax Cuts and Jobs Act (TCJA).[xiii] This means that deductions for hobby loss expenses under §183 are not allowed in those years.[xiv] So, the Collector’s tax situation gets even worse from 2018 through 2025, as any expenses that he incurs are not deductible, even against gains from his sales. To further the example above, where expenses fully offset income to produce no tax impact, now, the Collector will have $80 of taxable income that he will pay taxes on, and his expenses of $100 are simply lost and are not available to offset any gains from sales.[xv]

The Collector’s inability of to deduct even a portion of the hobby loss expense while recognizing all the hobby income into his adjusted gross income calculation to determine his tax liability makes establishing a profit motive for hobby activities almost a necessity. The determination of whether an activity is engaged in for profit is almost entirely subjective as it is based on the facts and circumstances of each individual instance; however, a statutory safe harbor is provided under §183(d) that, if met, causes a presumption that the activity is a for-profit endeavor. The safe harbor provision requires the generation of a profit in at least three of the preceding five years, and if met, treats the activity as engaged in for-profit and shifts the burden of proof otherwise to the IRS.[xvi]

If we move forward on the assumption that the Collector does not qualify as a dealer, or a trader, or under the safe harbor provision outlined above, the total amount of his gains from sales of his collectibles are taxed, albeit at a different rate than ordinary income.

Tax Rate for Gains on Sales

The gains from the sale of collectibles owned by collectors held for more than one year are taxed at a 28% capital gains rate, regardless of the individual’s other income or adjusted gross income (AGI).

Collectibles in the hands of a dealer or trader are considered stock in trade capital assets, with the income taxed at ordinary income rates, up to 37% for individuals.[xvii] Collectibles in the hands of a collector are considered non-inventory capital assets. Capital assets held for greater than one year are typically subject to a reduced rate of taxation for gains or losses on the sale of such, commonly referred to as long term capital gains or long term capital losses, taxed at a maximum rate of 20%. [IRC §1(h).] When collectibles are held for greater than one year, they receive disparate treatment from standard capital assets. Gain or loss from the sale or exchange of a collectible not considered inventory in the hand of a dealer or trader is subject to tax at 28%.[xviii]

Statutorily, a “collectible” is defined in as any work of art, rug or antique, metal or gem, stamp or coin, alcoholic beverage, or any other tangible personal property specified by the Secretary for this purpose.[xix]

Based on the above, the Collector’s collection will likely all be considered collectibles. Thus, any gain on sale of collectibles will be taxed at 28% (assuming held for greater than one year). So, if we expand the example from above, prior to the enactment of TCJA, the Collector had $0 of taxable income ($100 of expense against $80 of income leaves $0 net income and $20 of lost expense). However, under TCJA, the Collector will have a tax bill, in addition to his expenses associated with his collection activities. Remember, under TCJA, all hobby losses are eliminated as miscellaneous itemized deductions are no longer available to individuals. Therefore, the Collector has $100 of disallowed expense and $80 of income. That $80 of income will be taxed at 28%, meaning the collector will have tax due of $22.40. The collector will have spent $122.40 ($100 expense plus $22.40 in tax) to generate $58.60 ($80 of income minus $22.40 of tax) in net after-tax income.

No wonder he lives in a deserted world, it is the only place he can afford. Obviously, some better tax planning would help him out. The Collector needs to figure out how to generate a profit motive to be treated as a dealer and reach out for competent tax planning advice!

[i] First Appearance, Avengers 28 (May 1966).

[ii] Guardians of the Galaxy (2014).

[iii] Williford v. Comm’r, T.C. Memo 1992-450 (1992).

[iv] IRC §183.

[v] IRC § 183.

[vi] IRC §212.

[vii] Williford v. Comm’r, T.C. Memo 1992-450 (1992).

[viii] IRC §61 (income inclusion); §162 and §212 (deductible costs of carrying on a trade or business).

[ix] IRC §183; Treas. Reg. §1.183-2(b).

[x] IRC §183(c) & (d).

[xi] IRC §183(a); §183(b)(2).

[xii] IRC §172 (net operating loss carryforward limited to 80% of subsequent year taxable income).

[xiii] Tax Cuts and Jobs Act (TCJA), P.L. 115-97) (enacted 12/22/2017).

[xiv] IRC §67(g) (added by TCJA).

[xv] There is a safe harbor provision allowing deduction under §183(d) where an activity generating a profit in at least three of the prior five years ending with the tax year in question will be deemed “for profit” and not subject to the hobby loss rules.

[xvi] IRC §183(d).

[xvii] IRC §1221(a)(1); §1(a)-(d).

[xviii] IRC §1(h)(4) and §1(h)(5).

[xix] IRC §1(h)(5)(A) (reference to §408(m)) (emphasis added – this gives the IRS broad leeway to treat anything you collect as a “collectible”).

No Escaping the Law in King Kong Escapes

By

Josh Gilliland

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August 13, 2019

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In the 1967 Toho Classic King Kong Escapes, the nefarious Dr. Who (not to be confused with the beloved BBC Doctor Who) captured King Kong with a helicopter gas attack in order to use Kong to dig out Element X at the North Pole to make weapons of mass destruction for an unnamed hostile country. Could a state-funded paramilitary group kidnap a giant great ape for manual labor over 7,500 away from his natural habitat?

The answer…NO.

International and Domestic Law Protecting Great Apes

While international treaties do not specifically include King Kong, the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) was enacted to protect endangered species “against over-exploitation through international trade.” See CITES, Mar. 3, 1973, 27 U.S.T. 1087, T.I.A.S. No. 8249, Preamble. CITES protects over 45 different species of apes, new-world monkeys, and old-world monkeys, however, King Kong’s mega-primate species is not listed in CITES (because he is of course fictional). Given the age of Kong, he would be a very “old-world” ape. While Kong’s exact species is not listed in CITES, that is due to the fact his existence was unconfirmed, due to him being the only one of his kind on a remote tropical island.

Nations can enforce CITES to prohibit the trade of endangered species by creating penalties for those who trade or are in possession of endangered species or confiscation of protected specimens. CITES, Article XIII, (1)(a) and (1)(b).

By way of comparison, in the United States a species can be determined endangered by any of the following factors:

(A) The present or threatened destruction, modification, or curtailment of its habitat or range;

(B) Overutilization for commercial, recreational, scientific, or educational purposes;

(C) Disease or predation;

(D) The inadequacy of existing regulatory mechanisms; or

(E) Other natural or manmade factors affecting its continued existence.

16 U.S.C.S. § 1533.

In Kong’s case, the lack of existing regulations could place his life in danger, specifically, do not kidnap the giant ape for manual labor.

Congress recognized the danger to primates with the Great Ape Conservation Act of 2000, which included live capture as one of the threats to chimpanzees, gorillas, bonobos, orangutan, and gibbons. GREAT APE CONSERVATION ACT OF 2000, 114 Stat. 1789, 1790. The Great Ape Conservation Act provides an application process for funds to support the conservation of great apes. Id. *1791. Applicants can include the any group with the expertise required for the conservation of great apes. Id. *1791(1)(C).

King Kong would be recognized as an endangered species, under CITES, because using a one-of-a-kind giant ape to dig out a radioactive element would be the very definition of protecting an animal against “over-exploitation.” Moreover, Kong could be found endangered under U.S. law because literally kidnapping an animal for menial labor is overutilization for a commercial purpose, specifically producing weapons of mass destruction. Given that there are no existing regulations on using giant apes for mining in the Arctic Circle, the an exception can be made to protect Kong’s life. Given the authority under CITES, affected nations such as Japan, and possibly the United States or Canada, would be within their rights to confiscate King Kong from Dr. Who in order to return Kong back to his natural habitat.

No Monkeying Around with King Kong

Kong’s adventures took him from escaping Dr. Who at the North Pole and swimming to Japan. Yes. Kong swam the roughly 2,135 miles from the Arctic Circle to Tokyo. After a battle with Mechani-Kong, King Kong sank Dr. Who’s command ship with his bare hands, and then swam home to Mondo Island. While “Mondo Island” is fictional, assume it is near Fiji, which would be over 4,500 miles away from Japan.

That is a long swim.

Commander Carl Nelson of the United Nations submarine Explorer could have applied for a grant pursuant to the Great Ape Conservation Act, which could have provided means other than swimming to return King Kong to Mondo Island. While floating King Kong by balloon towed by helicopters is not recommended, a large raft would have provided safer means that could have avoided risk of drowning. Federal funds could have been available to ensure King Kong’s safe return home.

While it is a moot point, Dr. Who’s organization violated the spirit of international law protecting great apes, if not the letter itself, depending on Kong’s genetic make-up. Moreover, the entire secret Arctic base to dig for Element X poised the practical issue that the actual North Pole is ICE. There is no land to mine. This means Dr. Who’s base could have been in one of the arctic nations with land in the Arctic Zone, such as Canada, the United States (specifically the state of Alaska), or the Soviet Union. None of these countries would take kindly to mining operations by a hostile entity within their territories. If in the United States, at a minimum, Dr. Who failed to comply with the permit requirements in Alaska for mining. See, Alaska Stat. § 27.21.060 regarding surface coal mining. Since Dr. Who’s operation had hostile intent, any of the countries would have been within their right of self-defense to use military force to stop Dr. Who.

Superman’s Real Kryptonite – The Tax Man!

By

Jed Bodger

-

August 7, 2019

0

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).