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

As 2024 comes to an end, we're continuing our annual tradition of ending the year with 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 2024.

Joining me now is Tax Notes reporter Matthew Pertz. Matthew, welcome to the podcast.

Matthew Pertz: Glad to be here. Thanks for having me.

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

Matthew Pertz: I have the rare home run in stadium funding for a minor league baseball team in Portland, Maine.

David D. Stewart: OK, there's a lot going on there. Tell me what's happening.

Matthew Pertz: As I say, it's the rare home run because the politics around stadium funding have changed so drastically over decades that it's become harder and harder to motivate public funding for these stadiums. The percentage of private versus public funding has dropped significantly over the past 50 years or so. So what they did was the legislature passed a bill to give $2 million, a maximum of $2 million in tax credits, to any minor league baseball team in the state, which is lovely, because they just have one, so we know exactly who they're talking about.

And this all comes in the context of, in minor league baseball there are these mandatory stadium upgrades that are going into effect. Major League Baseball took over the minor leagues and said every stadium's got to have upgraded concourses, upgraded lighting, all these mandatory upgrades to get everyone on the same playing field. And if your old stadium can't afford that, then too bad, we're going to move your team somewhere else.

So what Maine managed to do was to fund $2 million of the $10 million in those stadium upgrades through these tax credits, which is really not a significant amount. That's only about 20 percent of what the team's going to be paying.

David D. Stewart: So are we seeing similar things like this if all these minor league teams have to upgrade? Are we seeing this other places?

Matthew Pertz: You're not seeing them successfully fund these parks. This just happened in North Carolina. The Carolina Mudcats are going to be moving to Wilson, North Carolina. They were in one of the smallest markets in minor league baseball, couldn't afford the upgrades. They're instead going to build a new $75 million stadium 20 miles down the road and appeal to the same market, spend more money, but with the upgraded shiny new stadium.

David D. Stewart: I have to say, I absolutely love minor league baseball teams, mainly for their logos and weird team names.

Matthew Pertz: Right.

David D. Stewart: So Carolina Mudcats, that's a good one. I like them.

Matthew Pertz: That's a good one. They've got a nice big whiskered catfish on the logo. The Portland Sea Dogs, another fun name. And there was plenty of opposition to this move in Portland as well. There was a think tank that put out the opposing case, saying there's only 18 full-time employees here. You've got 250 game-day employees that are making minimum wage. Even your players are only making $1,000 a week in the season, $250 a week outside the season. So the return on investment is not significant on this or really any stadium deal.

David D. Stewart: So return on investment is a big deal. That seems to even be a big problem for major league teams.

Matthew Pertz: They've got to sell their residents on the return on investment, and it's just not there. You're either trying to sell them on more income tax from the employees at the stadium, which generally isn't a huge number, or the sales tax that people are spending in and around the stadium.

And sometimes you get that in full, but most of the time there are these complicated arrangements with development authorities, where a lot of that sales tax money is actually going back to the private entity, more stadium upgrades, facility upgrades, things of that nature.

David D. Stewart: So are we seeing similar moves in other sports? So you've mentioned that they have this upgrade responsibility in minor league baseball. What else are we seeing out there?

Matthew Pertz: Yeah, you're not necessarily seeing leagues mandate it, but stadium upgrades are happening all the time. Your typical pro, or even a collegiate stadium has a lifespan of 30 to 40 years. So they're constantly cycling through and trying to raise more funds for the next upgrade. And the political will, as I said, is kind of shrinking, because you've got richer and richer owners who are less and less popular in their cities because they're not necessarily spending on payroll or on the team. And people are saying, "Why in the world should we pay more sales tax when these guys can pay for it themselves?"

So in Kansas City, they had a referendum earlier this year on extending, not even a new sales tax, on extending a three-eighths-of-a-cent sales tax to pay for a new facility for both the Chiefs and the Royals. And I mean, the marketing campaign was ridiculous. It was, "Keep our Chiefs. We love our Chiefs. Keep our Chiefs in Kansas City. Don't let them move." And it was overwhelmingly rejected. People didn't even want to continue paying the sales tax past like 2031, when it's currently on the books.

David D. Stewart: And that's for a team that's remarkably successful right now.

Matthew Pertz: And that is for, yeah, the most successful team in the NFL, this unimpeachable dynasty that constantly wins 12 games, is constantly in the Super Bowl. And the fans are saying, "Take them." And even at the collegiate level, we've seen colleges going through this huge economic shift with [Name, Image, and Likeness(NIL)], and transfer portal, and all those shifts.

I always love talking about the University of North Carolina, where I'm from. They built the Dean Smith Center. They started in 1980, finished in 1986, $30 million in private funding. OK, now $30 million isn't even your NIL budget for the football team. But they built this with no tax money by selling pretty much lifetime season ticket memberships. And now that the Smith Center is 40 years old, and they need new upgrades, they're actually having a terrible time doing it because those people still have lifetime season tickets in the old building. They don't want to see a new building. And the new price tag, which is going to be well over 10 times that, is not going to get met as easily.

David D. Stewart: So are you going to be planning a trip to see this shiny new stadium that they're working on?

Matthew Pertz: Now I have to go up there and get my hat and support this 20 percent publicly owned stadium in Portland, Maine.

David D. Stewart: All right, Matthew, thank you so much for being here.

Matthew Pertz: Yeah, and thanks for having me.

David D. Stewart: Joining me now is Tax Notes reporter Emily Hollingsworth. Emily, what do you have for me?

Emily Hollingsworth: Hi. Thanks for having me here. So the online sports betting giant DraftKings had earlier in the year announced that it would be implementing a surcharge on states that levy a tax on sportswagering revenue that exceeds 20 percent. However, this, we should say, bet, didn't quite pan out.

David D. Stewart: OK. So what is this? First of all, what is this tax on sports betting? What's happening in the world of state?

Emily Hollingsworth: Yeah, so this is actually a relatively new phenomenon. It was only in 2018 that the U.S. Supreme Court and its Murphy v. NCAA decision had struck down an act in the 1990s. And because of this Murphy v. NCAA decision, it then allowed states to impose taxes on sports betting revenues.

David D. Stewart: OK. We're talking about one of the giants of sports betting here. So tell me about their reaction to this tax.

Emily Hollingsworth: So DraftKings, in a letter to its shareholders in August, had brought up this surcharge that it had planned to implement beginning in January of 2025. And it said the reason for bringing forth this surcharge was because, at the time, there were certain outliers in states that taxed sports betting revenue. Those outlier states were New York and Pennsylvania. Their tax rates were 51 percent and 36 percent, respectively. So — relatively high, but DraftKings wasn't seeing a lot of other states that were following suit with New York and Pennsylvania.

However, the DraftKings letter to its shareholders mentions that just this year, Illinois and Vermont had passed legislation that put their sports betting taxes at or above 20 percent. So DraftKings had expressed concern that, as more states follow suit on this, it could affect DraftKings profit margins. It could also put them at a disadvantage against what they said was the illegal gambling industry, rather, which it notes does not pay taxes on sports betting revenue.

David D. Stewart: Well, I'm glad that as a podcast that doesn't have ads by sports betting, that we can still bring sports betting content to our listeners. So what was the reaction to this announcement about the surcharge?

Emily Hollingsworth: It was fairly negative. We should note that the surcharge would've been passed down to customers in those four states, New York, Pennsylvania, Illinois, and Vermont. And because of this feedback from customers, a DraftKings spokesperson had confirmed to me later that month, in August, that DraftKings would no longer be moving forward with the surcharge.

David D. Stewart: So what is the bigger picture here? What is happening in this world of online gaming and state revenue?

Emily Hollingsworth: So it's interesting. It seems to me that states are having to strike a balance between collecting sports wagering revenue, which has been really lucrative, while also making sure they aren't potentially alienating themselves from these sports wagering companies or casinos. And actually, thanks to my Tax Notes Today State colleague Matthew Pertz, I learned that there's this council called the National Council of Legislators From Gaming States. And it's an organization that comprises of lawmakers that focus on gaming and betting issues.

They actually put forth model legislation at the end of November that would limit the state taxation of what's known as internet gaming to between 15 percent and 25 percent. And to clarify, internet games are online platforms or apps that allow people to wager money. Think of things like online poker or slots. While that's a little bit different than what DraftKings and FanDuel does, it sort of signals to me that there could be a bit more regulation coming down the pipe for sports wagering taxation.

David D. Stewart: All right, well it's going to be something to keep an eye on. Emily, thank you for being here.

Emily Hollingsworth: Thank you, Dave. You bet.

David D. Stewart: Joining me now is Tax Notes senior legal reporter Nathan Richman. Nate, welcome back to the podcast.

Nathan J. Richman: Thanks for having me.

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

Nathan J. Richman: Today I have one of the big online trends in scams, and some potential lessening of the pain for people from a tax perspective.

David D. Stewart: Well, I always like to hear about a scam. So what are our artists doing here?

Nathan J. Richman: What has emerged over the last few years is a scam called "pig butchering." That's derived from a Chinese phrase that refers to either the ability to use the whole of the animal or fattening up the target for the kill. What pig butchering is, is a combination of preexisting scam types meshed together into a patchwork swindle monster that would impress even Victor Frankenstein.

David D. Stewart: Well, this is ranging into the poetic. So what do we have here? What are we doing to fatten the pig up?

Nathan J. Richman: Poetry is a very good place to start because the scam starts with what looks like a standard romance scam. Somebody, either through a dating website, other social media, or just some random text, will make contact with you, and maybe they'll play it off as some sort of mistake or something, anything to get a conversation going, with the intent to build a relationship with you. This is a purely online relationship, though some versions can be romantic, some versions can just be friendly. But unlike a standard romance scam, it's not going to lead to, "My kid needs a surgery. I need to visit," some sort of direct request for money. Instead, they're going to start talking about, "I've been making so much money with this cryptocurrency trading that I've been doing," to try to induce the target to participate.

David D. Stewart: OK, so now we're getting into the realm of cryptocurrency, which is always kind of close to the line on scams. But I definitely have seen these weird text messages that come in, where they just say, "Hello," and try to get you to respond to them. I'm sure everybody is getting these, these days.

Nathan J. Richman: So what happens with the cryptocurrency is, once you're intrigued, they will share their investing advice and platform with you. They will direct you to either a website or an app, and it will look legit. It might even look like it's Coinbase, or Kraken, or some other clearly legit business, but it's not. It's a fake front. And what they get you to do is convert some amount of your assets into cryptocurrency, if it's not already, and send the cryptocurrency to this storefront.

And of course, out the back it goes to wherever they want to send it. But it will start to look like you've actually invested. There will be something in this scam website that looks like you're getting returns. Maybe they'll even let you cash it out a little bit. But keep in mind, the money is already gone. This will lead to the second layer of cuts when the target wants to cash out maybe more substantially, maybe they're just ready. And some new costs will show up. Maybe it's a big tax bill, or regulatory costs to get the money out, or shipping costs, or something. And they will proceed to come up with more costs, more excuses to not send the money until the target can't send anymore, or stops sending more, or calls the police, or something.

David D. Stewart: Well, so this sounds like a lot of elements of scams that I've heard before. Bernie Madoff was sending out people these statements saying how much money they've made with him, when it was all just fake. So where does this end up going? How does this end up for the person that's been scammed?

Nathan J. Richman: Just before I get to that, there's one last element that I don't think Bernie Madoff was doing, and that's the human trafficking, because the people who are on the other end of all those messages are generally victims of organized crime syndicates that have tricked them into traveling for some sort of job, been taken to a compound, and had their travel documents taken away so that they have to continue reading these scripts to scam unsuspecting online victims.

As you asked, what happens to the victims? Now with the 2017 tax law, one of the pay-fors was a restriction on casualty loss deductions, including theft losses. We've discussed that here before. But I talked to a lawyer who said there might be a very important difference for pig butchering victims, compared to general theft loss victims, or romance scam victims. The key is, was this a personal loss? Or was this a loss in a transaction entered into with an aim of profit?

In other words, were you trying to make money and you lost money in a business transaction? Or was this just somebody stole your money? So pardon me, I will slip into code sections very briefly just to explain the difference. The general theft loss restriction, and casualty loss restriction from the TCJA, comes in in section 165(c)(3), whereas there's section 165(c)(2), not affected by those restrictions, and that's just for losses in transactions entered into for profit.

So here the scammer got you to invest in something you thought was real, really trying to make money, so the argument goes, so it shouldn't be subject to the loss denial, pending, who knows what will happen in the 2025 debate.

David D. Stewart: OK, so there is this, at least chance, at some amount of recovery, at least from a tax perspective, for these people. Has there been any word from the government how they might actually respond to this? Or is it just assumed that these taxpayers fall into this rule?

Nathan J. Richman: There has not been much, if any, indication from the government. This has not yet made its way much through the courts yet. I think some of these claims are only started to be presented to the IRS, and if not accepted there, to the Tax Court.

David D. Stewart: Well, I guess the answer from this is never answer any texts, or at least make sure that you know who the person is. Thank you for being here, Nate.

Nathan J. Richman: Thank you for having me.

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

Alexander F. Peter: Hi, how are you?

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

Alexander F. Peter: Yeah, I got a story here from the Austrian Federal Tax Court from this year about Christmas stress.

David D. Stewart: Christmas stress. So what's going on in Austria?

Alexander F. Peter: Yeah, that's bad news for all Christmas shoppers because they have to do their Christmas shopping and pay the tax. They cannot rely on paying tax later, and then get the penalties waived. No, they have to pay it on time and do the Christmas shopping.

David D. Stewart: OK, so tell me about this. How did this come about as a case?

Alexander F. Peter: So they filed their tax return on time, and six weeks later the tax was due. But they didn't pay it six weeks later — they paid it eight weeks later. And that's a bad thing in Austria. And they got charged €67 for that late payment on €3,000 tax liability. And they took it to court.

David D. Stewart: €67 we're talking about here.

Alexander F. Peter: €67 and 56 cents.

David D. Stewart: All right, well that's what makes — that makes it worthwhile to challenge this. So they challenged it, and they argued, "You can't fine us this because Christmas."

Alexander F. Peter: So you cannot rely on getting a waiver for the penalties on the tax liability while you're doing your Christmas shopping. And she said that it was just slightly negligent, because she had to do other things. And the court asked, "What other things?" And that was not clear. They asked whether there was an expiration of rental contracts, year-end work in her husband's office, or was it a stressful situation just due to private circumstances? And she obviously did not substantiate her answer sufficiently for the court.

David D. Stewart: So what did the court have to say about this Christmas stress defense?

Alexander F. Peter: The court said, "Well, I mean, I understand. It's just €15 over basically the de minimis waiver. But still, if you have so much Christmas stress, you work in a lawyer's office, you do the bookkeeping in a lawyer's office, and you're saying you can't pay it online? You don't have online banking in 2024 in a lawyer's office? And you did not say why you can observe your other deadlines, and put in electronic reminders, but for tax liabilities at year-end, when you have so much Christmas stress, that these deadlines obviously can't be observed."

David D. Stewart: Well, I guess this is a good time, as a reminder for everybody, that regardless of what's going on this holiday season, make sure to keep current with your taxes.

Alexander F. Peter: That's absolutely right. I mean, the court didn't find any or didn't grant any mercy. The court said, "If a mere error or simple negligence were to be recognized as a reason for not imposing a late penalty, this would ultimately amount to the insignificance of statutory payment deadlines and the obligation to observe them." And that's why you've got to pay €67.

David D. Stewart: Of course. Alex, thank you so much for being here.

Alexander F. Peter: OK, thank you.

David D. Stewart: Joining me now is Tax Notes legal reporter Kiarra Strocko. Kiarra, what do you have for me?

Kiarra M. Strocko: So today we're diving into a smorgasbord of food-related tax rulings out of the U.K. This year, we didn't just get one food-related ruling, we got three. So the cases range from food bars and oversized marshmallows, to flapjacks.

David D. Stewart: Well, you know I love VAT-definitional questions, so let's dive on into this. Tell me about what you got.

Kiarra M. Strocko: Yeah, so just a little bit about the law. So under U.K. law, most food for human consumption is zero-rated for VAT purposes. So basically, the goods are not subject to VAT at the point of sale, but the business can still claim input VAT for the making or buying of the goods.

However, confectionary is an exception to that rule. So items like chocolate, sweets, biscuits, or any other sweet and prepared food normally eaten with a person's fingers are standard-rated. And the definition actually gets very specific and includes eaten with a person's fingers. So these definitions are very — minute details matter. So standard-rated basically means that they're subject to the U.K.'s 20 percent VAT rate. And the distinction here is crucial for businesses, because the tax treatment affects both the prices paid by consumers and the ability of businesses to recover VAT on their purchases.

David D. Stewart: So this is an area that's produced a lot of interesting cases. I'm thinking of Jaffa cakes, and whether, what state they move into, being stale, determines whether they're a biscuit or a cake. And so there's all kinds of wonderful little nuances to get into. So why don't you tell me about the first case?

Kiarra M. Strocko: Yeah, so do you remember the case I talked about a few years ago involving Innovative Bites? Well, HMRC actually appealed the decision in favor of the company to the upper tribunal. So now we have an update on that. Before we discussed how the lower tribunal basically invalidated HMRC's £470,000 VAT assessment because it concluded that these marshmallows are not considered confectionary.

And the tribunal basically said that these products are sold and purchased for roasting over an open flame. And these marshmallows are strategically placed in grocery store aisles in the barbecue section during the summer. And so that was their reasoning in the case. And so on appeal, the upper tribunal again ruled in favor the company, and basically said that the marshmallows are not confectionary and should be zero-rated.

The tribunal ultimately could not justify interfering with the lower tribunal's findings, just because the lower tribunal is the fact-finding court. So it's interesting to see how these courts approach the issues, especially when here the statute only provides an explanation of some of the items that are confectionary. So one thing to note is that U.K. law doesn't specifically have a definition for confectionary. And so here, the courts look at nature of the product, placement in grocery stores, packaging, marketing from the viewpoint of a typical consumer.

David D. Stewart: So if I'm correct here, it's if they're small marshmallows, they're confectionary, but if they're large marshmallows, they're food?

Kiarra M. Strocko: Yeah, so large marshmallows are a little bit different because I guess they're for s'mores specifically, versus other cakes or other types of desserts. And so they basically just found that, because they're mainly for cooking food items, which is zero-rated, that it falls under that category versus confectionary.

David D. Stewart: Well, I am definitely not going to disagree with their reasoning, just because, cheaper marshmallows. So what is the second case you have?

Kiarra M. Strocko: Yeah, so this case, HMRC finally got a win in this case, and it involves flapjacks. And I guarantee you that you'll be hungry after I talk about this. This case involves protein-based flapjacks that were sold by a British sports nutrition company. They had flavors like peanut butter and chocolate, pecan maple and chocolate, and berries and white chocolate.

David D. Stewart: Before you go on, what exactly is a flapjack in the U.K. sense of the word?

Kiarra M. Strocko: Yeah, so British and American flapjacks are completely different. And I didn't know this until I started on this case. In the U.S., when we think of flapjacks, we think of pancakes. But in the U.K., flapjacks are considered a sweet and chewy oat kind of bar.

David D. Stewart: So like a breakfast bar or something along those lines?

Kiarra M. Strocko: Yeah, a breakfast bar. So not something that — yeah, definitely different than a pancake.

David D. Stewart: Right.

Kiarra M. Strocko: So basically, HMRC claimed that these products fell within the scope of the confectionary exception, so standard-rated, while the company said that its products are considered cakes. And the lower tribunal here found that the products should actually be standard-rated because they should be considered confectionary rather than cakes. And they explained that an ordinary person would not consider flapjacks to be a cake, because when you could think of cake, you typically think of a higher caloric value food item with flour and egg ingredients, served at, let's say, a social event as a treat, while flapjacks sold by this company were marketed towards individuals exercising regularly for a pre- or post-gym snack. And I don't think most people would expect protein powders in place of conventional flour in cakes. So I kind of agree with them on this.

David D. Stewart: Again, I always love the amount of effort that goes into reasoning out what counts as confectionery versus what counts as food.

Kiarra M. Strocko: Yeah, and this next case that I have actually has a unique procedural history, because the upper tribunal had to remit the case to a different lower tribunal to incorporate factors like health and ingredients that weren't looked at the first time around. So they really get into the nitty-gritty of these cases.

David D. Stewart: All right, so what is this third case? What's going on here?

Kiarra M. Strocko: Yeah, so our last case involves the popular food bars, Organix and Nakd. They're pretty popular in the U.K., but also in the U.S. This was another win for HMRC. So here, HMRC refused to repay the company output VAT of about £1 million because it claimed that the bars should be standard-rated as confectionery.

So the grocery store selling the bars ultimately sought repayment of output VAT because it sold the bars to its customers as a standard-rated product, although they considered the bars to be zero-rated, for unspecified reasons in the decision. So here, the lower tribunal looked at the appearance, texture, taste of the bars, and said that it resembles traditional confectionery, so they would be standard-rated. And they had reasoned that these products are marketed as sweet snacks, rather than healthy snacks, and are similar in size to chocolate and candy bars. I didn't know this, because I haven't had them, but they're also soft and chewy like nougat and fudge bars.

Yeah, so this case definitely has a unique procedural history. It went up to the upper tribunal, and then was remitted to a different one for biased reasons, and it came out in favor of HMRC. So it's nice it gives a little more clarity. I think each ruling gives clarity for businesses, just because the definition isn't completely clear in the statute. So these are always great rulings for business purposes.

David D. Stewart: Yeah, we learn a little bit of something every time one of these cases comes out. And I'm thinking that maybe next year for a Christmas celebration in the office, we should have all of the products that sit on that line between confectionery and food, and just sample them, we can all make our own choices.

Kiarra M. Strocko: Yeah, that actually would be really fun. And it will be interesting, yeah, to see what other food-related disputes are brought before the U.K. courts next year. I would like some sort of holiday-related food. But yeah, the outcome of appeals to the upper tribunal or a court of appeal might be in our future for next year, but it's definitely something to keep an eye out for.

David D. Stewart: Well, Kiarra, thank you so much for being here.

Kiarra M. Strocko: Thank you.

David D. Stewart: Before we go, I'd like to thank our producer and engineer Jordan Parrish, audio engineer Peyton Rhodes, Acquisitions and Engagement Editor in Chief Paige Jones, Senior Executive Editor for Commentary Jasper Smith, Associate Acquisitions Editor Alexis Hart, and all the reporters and contributors who make this show possible.

And thank you to all the listeners out there. We couldn't do this without your continued support. Happy holidays, and we wish you a happy and healthy new year.

And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what we have for us?

Paige Jones: Thanks, Dave. Instead of coming attractions this week, we'd like to remind our listeners that the submissions period for the Tax Notes Student Writing Competition is open. This annual award recognizes superior student writing on unsettled questions in tax law or policy. Eligible students must be enrolled in an accredited undergraduate or graduate program during the academic year. Submissions are due by June 30. Visit taxnotes.com/students for more details.

David D. Stewart: That's it for this week. You can follow me online @TaxStew. That's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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