Friday, November 10, 2023

Allegations That Justice Thomas Failed To Report $267,000 Of Loan Forgiveness As Income Misstate Tax Law

Director Wray’s Opening Statement to the Senate Committee on Homeland Security and Governmental Affairs FBI. “As the world’s largest state-sponsor of terrorism, the Iranians, for instance, have directly, or by hiring criminals, mounted assassination attempts against dissidents and high-ranking current and former U.S. government officials, including right here on American soil.”

Following up on Thursday's post, Jack Bogdanski (Lewis & Clark), Allegations That Justice Thomas Failed To Report $267,000 Of Loan Forgiveness As Income Misstate Tax Law:  Adam Chodorow (Arizona State; Google Scholar), Clarence Thomas’ Forgiven RV Loan Isn’t Just an Ethics Issue:

Thomas 2Did Justice Thomas fail to pay a hefty tax bill? Or has he simply failed (again) to comply with his ethical obligations to disclose gifts?

One of the trials of teaching tax law is the need to write a new exam every semester. But sometimes the real world sends you an exam question. In this case, that question comes courtesy of Supreme Court Justice Clarence Thomas and his fancy RV. Or, more precisely, from the loan he received from his friend Anthony Welters to purchase the luxury vehicle. According to the New York Times, Thomas borrowed around $267,000 in 1999. At some point, after Thomas had made some interest payments and perhaps paid down some principal, Welters canceled the debt, according to a new Senate Finance Committee report. (A lawyer for Thomas denied the report, saying that the justice and his wife “made all payments to Mr. Welters on a regular basis until the terms of the agreement were satisfied in full.”) Relying on the report, a number of folks, including members of the committee, have pointed out that the alleged debt forgiveness creates something called cancellation of debt income, and they are wondering whether Thomas reported this income and paid tax on it. If he did, he’s in the clear. But if he didn’t, the question arises: Is Thomas, whose ethical standards and disclosures have come into question following a series of reports on gifts and travel from his various well-heeled friends, also a tax dodger? In this case, the tax and ethical questions are intricately intertwined. ...

Historically, including canceled debt in income was a hard sell. Most people who have their debt canceled are in difficult financial straits and have typically lost money. It seems mean-spirited to tax them on phantom income when they’ve already spent (and typically lost) the loan proceeds. Debt relief in those cases simply acknowledges the sad reality that they can’t pay back the loans. Thomas’ situation is a little different. He still has the RV. And although he may not earn as much as he’d like, he’s not fallen on hard times. Regardless, canceled debt is now includible in income except in rare circumstances that do not appear to be present here.

One of the things I teach my students is that not everything is as it initially appears. When Welters canceled the debt, it certainly looks as if the amount forgiven should be considered cancellation of debt income and subject to tax. But Welters and Thomas are friends. Just as Welters could have made a gift to Thomas at the start, canceling the debt can be considered an after-the-fact gift. Gifts are excluded from income, so there is no tax consequence for Thomas (though Welters might need to file a gift tax return).