MauledAgain

Memorial Day is a good time to think about war. It's a day we remember those who died because of war. That's a lot of people to remember. Surely in the hundreds of millions if we remember all of them, military and civilian alike, in all the wars that have been fought.

Some people think that the current war in Iraq is "all about oil." It isn't. It's about several other things, but it's not about oil. After all, there have been countless wars, some unending, in Africa during the past several decades, and there's little, if any, American or other outside involvement. And yet Africa is the most resource-rich continent. If war was simply about resources, Africa would be a conflagration far more terrible than the violence that currently afflicts much of the continent.

Those who think that the war in Iraq is "all about oil" argue that the ultimate goal of the war advocates is to generate low crude oil prices, thus generating the dual effect of cheap gasoline at home and an economic lever to use against OPEC (which, the argument goes, would be forced to lower prices in order to sell its product). Ironically, the war in Iraq has had the opposite effect. Crude oil prices are skyrocketing, in part because of investor fears that the long-term effect of the chaos in Iraq will be its spread into the rest of the region.

But that's only part of it. The reason oil prices are rising is primarily the increased demand from China. Back we go to Economics 101. Demand rises, and prices follow. The same thing is happening with concrete, because China's demand for that product has soared. Unlike oil, which is a limited resource, the ingredients for concrete are vast in quantity, and the snag at the moment is insufficient manufacturing capacity.

Yet there are those who think oil prices can be pushed down if Americans drove more fuel-efficient automobiles. For example, in today's Philadelphia Inquirer, John Grogan claims that demand for gasoline is the cause of the increase in prices and that if we all drove fuel-efficient vehicles the problem would be alleviated, if not solved. Strange, though, that demand increased by a few percentage points over the past year and prices soared by many times that amount. It's China, John. Today gasoline and concrete, tomorrow rice and corn.

Grogan advances four proposals. He's right on with one of them and off the mark with the other three.

He advocates an increase in the gasoline tax. He's right. A gasoline tax is a direct charge on the product, maps to the environmental and resource supply damage that its use causes, and matches consumption with cost. He rightly criticizes Allyson Schwartz, a candidate for Congress, who in a display of idiocy and pandering to those ignorant of economics, proposed LOWERING the state gasoline tax. Duh. Granted, Schwartz seems to have good intent: make gasoline cheap(er). But how about milk, pharmaceuticals, and ice cream while you're at it? Hey, why not make everything as cheap as it was in 1957? First problem: reducing tax revenue means that road will get less maintenances (that's where the gasoline tax revenue goes), and Pennsylvania's roads are in bad shape as it is. Second problem: the tax reduction won't get passed on to the consumer; instead, the producers and retailers will maintain prices and increase profits. Third problem: there's no justification for making gasoline cheaper when in real dollar terms it STILL is CHEAPER than it has been in the past. Schwartz is playing to the crowd, and though that makes good politics, it makes for bad national security, bad national energy policy, and bad just about everything. So on this issue, Grogan scores a point.

Grogan then advocates a higher sales tax on fuel-inefficient vehicles. There already is a federal excise tax on gas guzzlers, though it is riddled with exceptions that form loopholes large enough to drive Hummers through. Some gaz guzzlers (e.g., fire trucks) cannot and should not be subject to higher taxes. Other gas consumption items, which don't qualify as gas guzzlers, would escape. Recreational snowmobiles? Gasoline powered leaf blowers? Before pointing the finger at gas guzzling vehicles, Grogan ought to consider all gasoline consuming equipment and separate the necessary from the unnecessary. On this issue, Grogan scores half a point for making us think about the inefficiencies of the existing gas guzzler tax and doesn't score the other half because he oversimplifies the matter.

Grogan then advocates eliminating highway and bridge tolls for vehicles that get maximum gasoline mileage. Why? Supposedly to encourage purchase of such vehicles. But there's a problem. The problem is that fuel efficiency doesn't measure gasoline usage. Which is worse, a teenager racking up 20,000 miles a year tooling around in a 30 mpg vehicle, or a carpenter driving 10,000 miles a year going from job to job lugging tools and materials in a vehicle that gets 20 mpg? Who's burning up more gasoline, and to what end? Grogan would eliminate tolls for the teenager? Nah, that's not the answer. After all, all vehicles cause wear and tear on highways and bridges, and if they are toll facilities, then the toll should be paid. No points here for Grogan, because he's measuring the wrong thing.

Finally, Grogan advocates using increased gasoline taxes to provide rebates to people purchasing hybrid and other fuel efficient vehicles. First problem: this will drive up demand for products already in short supply, which means their prices will go up, which means net of the rebate the consumer isn't better off and will still find other vehicles cheaper in terms of cost. Second problem: most of these vehicles are small and dangerous, and ought populate the highways only after trains (yes, trains) are put back on the tracks. No one seems to be saying much about the two and three trailer tandem monsters that are clogging the highways and getting involved in a disproportionate share of the accidents. Grogan claims people purchase SUVs and other large vehicles to show up their neighbors. I think otherwise. I think they buy these things because they feel safer. They may or may not be safer, but feelings seem to matter in some of these purchase decisions. I still don't understand why, considering all the marvels of modern technology that lets surgeons transplant hearts, computers to run on microboards, people to live in space, etc etc, that there's still no serious progress in designing things that use (free) solar energy. (Electric vehicles, for example, simply shift oil consumption from gasoline at the pump to crude oil or natural gas at the electric generating power plant.)

Americans could stop driving and return to riding horses. And it wouldn't make a difference. Demand for oil and oil products in China (and eventually in other countries moving into a globalized economy) would continue at levels that would sustain current oil prices. And it wouldn't change a thing in world politics. All of the problems that lead to war would remain. All of the people whose behavior sparks war would remain. Tens or hundreds of millions, maybe billions, would and will still die. Gasoline has nothing to do, really, with whatever it is that causes some people to inflict unwarranted violence and evil on God's creation and others to find the courage to stand up to the bullies to protect freedom and liberty from the encroachment of the totalitarians.

You can interpret that last sentence in as many ways as you wish. It's deliberately ambiguous. It's designed, as much of my classroom teaching is designed, to make you think. For when the ability and right to think is suppressed, then all is lost. So, this Memorial Day, let's think about thinking. We can start by remembering all those who gave gifts that cannot be rejected.

Just a short post today, because I am preparing the basic tax course for the fall semester. Fall? Now? Yes, especially as the book has changed, yet again, the second time in 22 months. Ah, the students will be so pleased to learn that last year's outline won't be of as much use as they thought.

A letter in today's Philadelphia Inquirer [you need to register to access it] from Vincent Benedict of Collegeville, Pa., relates a story that is scary. Reacting to a commentary advocating holding teachers to a higher standard (a goal with which I heartily agree), Mr. Benedict explains that while working as general sales manager for WCBS Radio he interviewed a Penn State grad whose major was math. He asked her "Can you tell me what 15 percent of 200 is?" She responded with a straight face, "Oh, I don't do percentages." Mr. Benedict then told of several other similar situations that left him (and me) appalled. But I'm not surprised. From what I see in my teaching and in my business transactions, a lot of people don't do a lot of things that we'd expect they'd could do and should be doing.

Let's see....

"I majored in math, I want a job that requires math skills, but I don't do percentages."

"I majored in engineering, I want a job that requires engineering skills, but I don't do computations."

"I majored in chemistry, I want a job that requires chemisty analysis skills, but I don't do formulas."

"I majored in law, I want a job that requires legal skills, but I don't do cases."

"I majored in psychology, I want a job that requires psychology skills, but I don't do listening."

"I majored in car repair, I want a job that requires car repair skills, but I don't do oil changes."

"I majored in surgery, I want a job that requires surgery skills, but I don't do ...." Worried yet?

Let's rephrase it:

"I majored in whatever, I want a job that pays but that does not require me to do."

Huh?

"Yes, after all, I'm entitled."

Says who?

"The media. The politicians. Some parents."

Before we blast the teachers, understand the pressure that they face when their students' parents show up and DEMAND high grades so that their children can attend colleges and go through the same process so that ultimately the tuition purchases a degree (rather than the opportunity to learn). The degree as license to be paid, no matter how obtained, is a concept that is beginning to cast a large shadow over the concept of a degree as a certification of academic or educational accomplishment, learning achievement, and skills acquisition. Several years ago, a PARENT of a law student showed up at the law school and hassled one of my colleagues about her child's grade. HER CHILD WAS AN ADULT ENROLLED IN A GRADUATE PROGRAM. Hey, Mom, let your child grow up, and hey, let your child make the effort so that your child can learn what his or her gifts and limitations are. And stop teaching your child that every failure is someone else's fault. Your child isn't perfect. Neither are you. So if your child can't or won't do percentages, fine. That's not a crime. But don't advise, encourage, or compel her to major in math. And don't lead her to expect to be paid as though she does do percentages.

Mr. Benedict closed by pointing out that he pays thousands of dollars a year in school taxes. His unspoken statement is that he doesn't think he, the students, or society are getting their money's worth. We're not. Partly because some teachers aren't qualified, and partly because the ones who are qualified aren't allowed to do their teaching and to be honest with the students. And all of that is infected with a reluctance on the part of society to impose discipline, which is an absolute prerequisite to learning.

I pay attention to Philadelphia tax policy because I live near the city. Though most of my tax teaching and writing involves federal taxes, I have written about state and local taxes so the issues and the technical analyses are matters with which I am familiar.

The city of Philadelphia faces an uncertain, and potentially disastrous, financial future. Hundreds of thousands of residents and jobs have left for other places, city tax revenue has decreased as a result, and demands for city services have increased as those unable to leave look to the city for assistance with the very problems that keep them from leaving. Making the situation worse is the decline in federal funding of programs thrust upon the city (as they are upon all states and localities) by the social engineers in Washington who don't quite have the ability to get to the root of the problem.

When Ed Rendell, now governor of Pennsylvania, was elected mayor of Philadelphia, he pushed through a plan for economic revitalization of the city. A key part of the plan was the REDUCTION of business taxes so that businesses would not only stop leaving the city but return, joined, it was hoped, by new businesses. The plan seemed to work, at least to the extent that it stemmed the flood of departing residents and businesses. Certain areas of the city saw increases in business. Young professionals began moving to popular neighborhoods, causing a demand for residential units that sparked a building and renovation boomlet.

The Rendell plan was designed to reduce taxes over time, with the increased revenue from resurging business and other taxable activity permitting further increases as the years progressed. This process, however, has hit an obstacle. Calls were made for the repeal of already enacted future decreases in the wage tax.

A commission was formed to study the problem. The chair of the commission provided testimony before City Council that conflicted with the report that the commission presented. Confusion, back room deals, posturing, and all the other wonderful attributes of politics clouded the situation.

Yesterday City Council passed a series of bills that would reduce or eliminate taxes. For example, the insanely silly gross receipts tax (which is paid by a business even if it is not making money) would be repealed. The Mayor, John Street, who succeeded Ed Rendell, vows to veto the bills, and it appears that there are insufficient votes to override the veto. The Mayor's position is that the city cannot afford to give up any more revenue. The amount in question is a very small percentage of city revenue.

So what will happen?

More people will leave the city. More businesses will leave the city. Those who can, will, and those who can't, and who need city services, will remain. The city may end up going through a "Detroit experience" before the politicians wake up, or better yet, the people wake up and replace the politicians.

It isn't inconceivable that Philadelphia will try to get the legislature in Harrisburg to permit a "Phoenix experience" by absorbing the surrounding counties (whose financial picture, though not terribly rosy, is nowhere as dire as that of the city). The debate that will rage when that proposal is made will make national headlines. And if it happens, the increased tax burden on suburban residents and businesses will compel another exodus, this one adding to the plight of a Commonwealth that already is sliding in the wrong direction, especially in terms of not being attractive to business.

Philadelphia was once the capital of the nation. It was once a vibrant city. Its economic and social health has suffered. It is now seriously ill. And yet there are some who want to stay on the same course. Why? Because they think it has worked? Maybe for them, and their friends, but surely not for the people.

End of lecture. Now I'll sit back and watch the next episode. And I'm sure I'll have something to say about it.

An AP story that broke out of nearby Chester, Pa., explains a cafeteria worker managed to get the IRS to send her a tax refund of more than $2,000,000 by pretending to be the Hawaiian princess Abigail Kinoiki Kekaulike Kawananakoa. The cafeteria worker, Abigail Roberts, allegedly used the princess' social security number. Though she seems to share a first name with the princess, she was born Charlotte Veronica Kuheana.

The IRS was able to get most of the refund back, by issuing warrants to the bank where it was deposited. The IRS has sued Roberts and her husband to recover the rest of the money.

Let's stop and consider some questions:

1. How did Roberts obtain the social security number of the princess? My guess is "Easily." Too many companies and institutions use social security numbers when they ought not to do so, and very many people don't comprehend that they can refuse to provide a social security number to a private enterprise for identification purposes (in contrast to the requirement of providing it to an employer).

2. Why put $2,000,000 in one bank when FDIC insurance is limited? It's not as though there's only one bank in the country. In another decade that might be a problem, but not at the moment.

It gets better.

This wasn't the first time Roberts duped the IRS into sending her money to which she was not entitled. In 2001 she was acquitted of tax fraud after she tricked the IRS into sending her $34,000 that belonged to a trust for Hawaiian royals. Acquitted? Yes, because the judge ruled that there was insufficient evidence that she had INTENT to commit a crime. Her attorneys said she was afflicted with "irrational insistence upon an identity that is not her own."

OK, then here is another question:

3. Why doesn't the IRS program its computer system to flag all returns that involve the Hawaiian family of which Roberts claims to be a part, and then double check that the return is valid by contacting the alleged filer? After all, if the real princess also files and uses her social security number, won't the computer system pick up on the duplication? Hmmm. Not if the pretender files early. To prevent this problem, the IRS would need to hold refund check mailing until all returns are filed.

4. Isn't there a system in place to check huge refunds? Most taxpayers who get refunds see checks in the range of $100, $500, $1,000, maybe $5,000. Sometimes $10,000. But TWO MILLION DOLLARS? That HAS to make the red flags wave.

5. Interpolation suggests that in 2007 Roberts will go for a refund of $133,000,000. Unless, of course, someone fixes the system. Prevention surely is worth the price when the outcome is so expensive.

Let's face it. The IRS (and we, the taxpayers) got lucky. Most folks pulling this stunt would have spent all the money, hidden it, taken it out of the country, or given it away.

But at least the IRS got on this pretty quickly. My guess is perhaps it WAS triggered by the filing of a tax return by the real princess.

I still think it's easier to collect bridge tolls.

If you're here, great. You may have had to play with the URL, because for some reason www.mauledagain.blogspot.com doesn't work anymore. Use mauledagain.blogspot.com (and don't let the browser's autocomplete feature dupe you back into the www. version!)

Strange that they're no longer aliasing the www. version of the URL.

I'm open to an explanation.

Finally, the hyperlinked United States Tax Court Rules of Practice and Procedure have been updated. They appear on the Jim Maule's Unofficial United States Tax Court Home Page , which also contains biographical and historical information about the Court and its judges.

The Rules were updated last summer. Yes, I have so many projects underway that this update waited for almost a year to get done. Unlike the Rules on the Tax Court's official site, my rendition of the rules permits a user to jump from one rule to another, or better yet, from the index to a rule, by clicking on a hyperlink. For tax practitioners, it's worth the visit.

Why did I do this? For money? No, there's no money exchanging hands. Because I'm bored? No, I'm not bored. Why, then?

Because in the early days of the World Wide Web, a group of us at the now-defunct Villanova Center for Information Law and Policy explored how this emerging technology could be of use to lawyers. Having been an attorney-advisor at the Tax Court, and having created the first index of its rules back in pre-digital days (almost 25 years ago), and aware that the Tax Court at the time had no site, it seemed to be a logical place to start. A public service project, if you will. It caught on, but after the Tax Court's official site opened, hits on my hyperlinked rules page dropped off. Though I've let go of the other projects, this one is too much fun and has too much of a time investment to surrender. This update, for example, took about 20 hours to complete. Much of the HTML is hand-coded, and the existing pages had to be compared with the latest edition of the rules. Updating the index took 4 hours.

So have a look. Use it. It's one of my gifts to the tax world. No deduction, though.

I just noticed that some of the links in my posts don't work and were prefaced with "www.mauledagain.blogspot.com/....." which, of course, is a link to a non-existing page. Apparently without http:// in front of the www. the link doesn't work. I guess browsers are more forgiving, because I rarely, if ever, type http:// before typint the URL.

Anyhow, I fixed the ones that I found, going back a month. If I missed some, I'm sure someone will let me know. I'm assuming that my readers are like my students: eager to find and point out a Maulegoof.

It happens.

If my efforts on my current project proceed as expected, there will be news tomorrow or Monday of interest to the tax community. Stay tuned.

It's graduation day here at Villanova (for the Law School). So I might not get to posting anything substantive later today. "Do they all have jobs?" is probably the first question that comes to the mind of someone outside the academy caught up in the "there's too many lawyers" drumbeat. As far as I know, many of the graduates have jobs lined up, a few are planning to continue their education, and most of the rest will get hired in the "post bar exam" hiring period.

In the meantime, if there's a risk of "Maule withdrawal" (as someone told me was a problem when too much time elapsed between postings on this blog), take a look at a book review I wrote for Paul Caron's "What Tax Professors Are Reading" on his taxprof blog. His sitecounter shows that hits on his blog increased more than 500% yesterday when he posted my book review. I think it's a strange coincidence having nothing to do with me. He calls it the "Maule effect." We'll find out next week, when another book review that I wrote for his blog gets posted.

A miracle.

For years I've advocated a change in partnership tax law that would simplify the Code and prevent taxpayers from unwittingly overlooking a basis election.

The tax legislation that passed the Senate on May 11 contains a provision that makes partnership optional basis adjustments mandatory. It would repeal the provision dealing with the procedures of the election. It would repeal the provision for a special basis adjustment that applies to certain transactions if the optional basis adjustment is not elected. That would moot some very complex regulations interpreting the special basis adjustment.

Nice, but....

Yep, a but. The election would remain for transfers taking place on account of the death of a partner. I'm not sure why they're doing that. The election should be mandatory for death transfers just as it would be for lifetime transfers.

If this passes, it will require a lot of short-term work to redo the course materials, the course slides, problem answers, and the CATLI exercises I offer through TaxJEM, Inc. I'm sure there's more I'll remember momentarily. But in the long run, it will make the course easier for the students and easier to teach.

But I'll wait until I see IF this legislation passes and IF the provision remains in it.
After all, I cannot find the House bill, so I don't know if this provision is in it. If it isn't, there's more chance that it would not survive the Conference at which the House and Senate bills are reconciled.

It's amazing how an increase in gasoline prices can generate so much consternation. Politicians grab onto the issue as though it's the be-all and end-all of life. Accusations fly, bizarre solutions are suggested, and very few take the time to sit down and THINK their way through the situation.

There are five major considerations: supply and demand, inflation-adjusted cost, industry patterns and government regulation, taxes, and strategic reserve.

Supply and demand is easy. If demand goes up, or supply goes down, or both, prices go up. That's Economics 101, which ought to be taught in high school, and perhaps it is, here and there. Demand is going up at a phenomenal rate, on a global basis, particularly because China is growing and its need for energy is skyrocketing. Total miles driven by Americans has increased at rates far beyond the rate of increase in the population. Supply has been decreased, but will be tweaked up a bit in the near future, for a complex array of economic and political reasons. Although OPEC controls only a small fraction of total world-wide oil, the oil market is a marginal one, which gives OPEC supply decisions a noticeable impact. Although OPEC is perceived as making its supply decisions solely for political purposes, in fact it is influenced by economic conditions in its member nations and by their desire to manage a finite national natural resource in careful ways.

Inflation-adjusted cost is easy. Take a look at gasoline prices in 2004 dollars over the past 85 years and it's obvious that gasoline has been selling for less than its real price for many years. During the 1990s gasoline prices reached record lows in real dollar terms. Consider this gem from a letter to the editor of the Augusta Chronicle in 2001: In 1960 gasoline sold for 30-33 cents a gallon and a full size Ford sold for $2,000-$3,000, and in 2001 the Ford sold for ten times as much. Why Americans think they are entitled to "cheap" gasoline bewilders me. I've spent time in Europe, and despite the "non shock" of seeing "1.30" as the price, once that price in Euros is adjusted for the fact it is a per litre price, it's pretty obvious that the per gallon cost of gasoline in Europe is far more than what's being paid in the U.S. today. Part of the reason is taxes. More on that in a moment.

Industry patterns and government regulation is more complex. Gasoline prices go up in the summer, because demand increases. But industry isn't always ready to crank up the production, because if there has been a cold and/or longer winter it has to replenish heating oil stocks and thus delay the switch over to increased gasoline production. Short-term prediction for tne next six months show gasoline prices dropping back after the summer. It's a pattern as familiar as the sun rising in the east and setting in the west. There hasn't been a new refinery built in this country for the past 30 years. Why? Unprofitable? Yes, after taking into account the cost of trying to wade through a gauntlet of government regulations. Some of those regulations are necessary, and some are well-intentioned but badly designed. This isn't a problem fixed overnight. The time from beginning a search for new oil fields and gasoline from that field reaching the pump is at least 10 years, perhaps more.

Taxes in this instance are easy to understand. Yes, the anti-tax politicians (who try to get elected on the "no taxes ever it's all free" delusion that sells to non-thinking voters) are yelling that the reason for the increase in gasoline prices is taxes. Rubbish. Here and there a few states have increased gasoline taxes but during this last gasoline price run-up taxes haven't changed. They should, of course, because a ten cent per gallon gasoline tax enacted in 1970 to pay for road maintenance needs to be more than that to provide the same level of maintenance. These politicians scream that the solution is to reduce gasoline taxes. Well, then who pays for road maintenance? And what does that do to the "there's an energy crisis and something needs to change" message? These politicians are catering to the uneducated emotionally upset folks, some of whom, granted, operate businesses that are adversely affected by gasoline price increases (such as florists and pizzarias that deliver). Sorry, but pass those costs onto the consumer. If anything, taxes should be increased. That's the case in most other nations, where the true cost of consuming a gallon of gasoline, in terms of impact on highway infrastructure, environment, police highway patrols, accidents, and all of the other economic effects of driving is reflected in the gasoline tax. Yes, I'm back to my preference for the user fee model.

Tapping the strategic petroleum reserve is unwise. It isn't gasoline. It's crude oil. Releasing any of it doesn't affect prices. It would affect supply in the same way that spitting into the ocean raises the tides. Even the advocates of dipping into the reserve admit that it would be cosmetic and merely a gesture. Cosmetics and gestures aren't substance. What's needed is substance. I'm not going to get into the back and forth over John Kerry's shifting position on the matter, but it's obvious that talk about the reserve (in contrast to talk about energy use and taxes) is window dressing designed to appeal to emotions rather than logic.

Are increased gasoline prices REALLY cramping Americans' style? According to an article in today's Philadelphia Inquirer, the Automobile Association of America predicts that Americans will travel more this Memorial Day than last year. The National Retail Federation did a survey that predicts the opposite outcome. The higher gasoline prices means that a 500-mile auto vacation will cost $12.50 more than it did last year.

There's been a lot of talk about fuel economy and the prediction of a growing market for hybrid vehicles. But what doesn't get attention is why the per capita miles driven has increased so significantly. For example, in Wisconsin, per capita miles driven increased 75% between 1980 and 1990. By 2004 it's surely 100% or more.

What's going on?

1. Development sprawl. State and local laws, suburban culture, tolerance of greed, and an unspoken desire on the part of many to improve their lives by moving further into the outer suburbs has widened the distance between the places our lives are lived. For example, I know someone who is 5 miles from the nearest grocery store. I remember the corner grocery store where I lived until I was six years of age. Am I really THAT old, ha ha? As a teenager, I walked two blocks to get to a ball field for pick-up games. Today children are driven to their planned soccer games. Granted, some of that is an issue of safety, but that, too, reflects changes in culture that nurtures insecurity.

2. Teen-age autonomy. Visit any high school and the parking lot looks like a car dealership. Look at the school busses, which when filled, transport children under 16. The typical excuse, that teenagers have much to do, overshadows the "uncoolness" of riding a school bus. I have no sympathy, as I rode a school bus throughout high school and didn't get my official drivers' license until I was past the age of 18. That's another topic, and a fun one (because I was driving long before I was 18 and what I was driving would surprise folks, but 'nuf said). The traffic outside the houses of my neighbors with teenage children, even on schoolnights, and as late as midnight and 1 a.m., almost requires a traffic signal.

3. Inefficient public transportation. For most Americans, getting from here to there in a timely manner cannot be accomplished by public transportation, especially if the distance is under 100 miles. Public transportation networks, where they do exist, reflect commuting patterns of the 1950s, not of the 2000s. The typical "live in near suburb, commute to center city" pattern has evolved into "live in far suburb, commute to near suburb" and "live in city, commute to suburb" patterns. Even long-distance travel favors the inefficient automobile. If the trip can be driven in 7 hours or less, it's faster to drive than fly. That was true years ago, long before security screening worsened the situation (I know because I drove from Villanova to Cornell while a colleague flew (because he planned to fly on to another place) and though we left at the same time, I arrived about an hour before he did. I vaguely recall I won a bet. And no, I did not do the speed demon thing, and actually stopped to wait for the passing of a brutally severe thunderstorm.)

4. Insufficient telecommuting. Though progress is being made, there's still a cultural impediment of some sort to massive movement to telecommuting and distance learning. The technology exists. The long-term cost savings are demonstrated. Sometimes I think people just want to get out of the house.

5. Impulse decisions. I try to plan my driving so that I condense my errands into one trip. It's not so much concern for the environment, gasoline prices, or the like, but laziness. Once I'm up, so to speak, I might as well get everything done rather than interrupting myself from my writing projects every time I think of something I need to get or see that requires me to drive.

None of this can or will be changed in the near future. Houses have been built where they are and they're not going to be moved. Jobs are where they are. It would take years to get public transportation back to where it once was, that is, something that was of good use to most Americans. Maybe high schools can compel the use of school busses, or perhaps the driving age can be increased to 18 (for reasons far more important than gasoline consumption), but let's face it: not going to happen. Telecommuting and distance learning probably will increase over the next few decades but not at rates that would alone offset increases in per capita driving mileage. What MIGHT change driving patterns is an increase in gasoline prices (yes, increase) through taxes (yes, taxes) to levels comparable with world prices, reflecting inflation, and sufficient to keep the highway infrastructure in repair (remembering that bad roads cause decline in fuel efficiency).

Notice that this is too big for a sound bite. It just doesn't play in politics. That's too bad. Only when politics turns from emotion, glitter, cosmetics, gestures, and themes to analytical debate and careful consideration of issues does the nation stand a decent chance of getting nearer its potential.

This being the first day that same gender couples can legally marry in Massachusetts, it's time to move past the hypotheticals to the practice problems.

So let's assume Amanda and Luann get married today in Massachusetts, and in March of next year go to X, a tax return preparer, an attorney, a C.P.A. (take your pick) and ask X to prepare their federal and state income tax returns. The numbers are such that Amanda and Luann pay less in tax if they file a joint return than if they file as unmarried individuals (in other words, they're in a "marriage bonus" situation and not a "marriage penalty" situation). What should X do?

Here's what I propose (I know, that's really bad, but I can't help it). X needs to tell Amanda and Luann the following (and follow it up with a written memo to the same effect):

1. They (not X) must decide whether they are going to file as unmarried individuals or as married filing jointly.

2. If they file a joint they may or may not get audited, because it's not clear if the IRS is set up to
identify same-gender joint returns. The form doesn't ask for gender, and the IRS may or may not be asking the Social Security Administration for the gender associated with the social security number on a tax return.

3. If the IRS audits the return, it will reject joint return status, because it will apply the Defense of Marriage Act (DOMA) which limits marriage, for federal purposes, to contracts between persons of opposite gender.

4. There are scholars and practitioners who argue that DOMA violates equal protection, and thus would have no effect on their tax return.

5. At audit, the IRS at best will listen politely to the equal protection argument, but it will have no effect.

6. The nature of the issue is such that perhaps they should file a disclosure with the return, that they are taking a return position for which there is no authority (that is, there is no statute, regulation, case, or revenue ruling which authorizes joint return filing by a same-gender couple). Of course, filing this disclosure raises the chances of being audited to 90-something percent. (I don't say 100 percent because nothing, even tax audits, is guaranteed other than death and taxes).

7. The IRS will impose interest and penalties on the deficiency in tax arising from changing their filing from joint return to unmarried individuals.

8. They can go through the Appeals process. It will cost money and the IRS won't change its decision.

9. Eventually the IRS will issue a notice of deficiency, and they will have three choices: pay and sue for a refund, don't pay and file a petition in the United States Tax Court, or do nothing and have the full force of IRS levy and collections come down upon them.

10. Whichever way they go, other than doing nothing, they will have the costs of litigation to shoulder.

11. If their case is the first, or one of the first, their story will find its way into the press. There are advantages and disadvantages which may influence their decision.

Surely they will ask what the chances are of prevailing on the equal protection argument. Renowned Constitutional Law scholars disagree. This may be a time when a tax professional should call upon a Constitutional Law expert for assistance in counseling the clients as they prepare to make their decision.

Then the tax return preparer, attorney, or C.P.A. must decide whether to prepare the return if Amanda and Luann decided to file a joint return. If X in the example is convinced that they have little or no chance of prevailing, it may be professionally prudent to refrain from participating in the filing of the joint return.

This also is a wonderful example of what tax preparation software cannot do. It can compute the numbers but it cannot make the decision.

As for the state return, I haven't researched Massachusetts law, but I don't recall that joint return status makes a difference in that state. I recall it has flat rates and that joint filing is a sort of convenient "combined" reporting option. There are several provisions that might give an advantage to those filing a joint return (e.g., if one person has $130 of bank interest and the other has $70, the joint return lets the "unused" exemption of one be applied against the excess interest of the other). My conjecture is that Massachusetts will let married couples of any gender combination file joint returns.

If the couple lives in or must file income tax returns with any other state, X faces the same situation as described with respect to the federal return if the state has a DOMA equivalent. Otherwise, advising the clients will be an even more formidable task.

I am sure there will be more to report on this issue, if not before next tax filing season, during the early months of 2005. Stay tuned.

"If you like laws and sausage, you should never watch either being made." So spoke Otto von Bismarck. The problem is that we can live without sausage but we cannot live without law. Something as important as law ought to be made in a way that does not sicken the nation.

Congress surely hasn't figured out this one. Or much else for that matter.

Donald Tobin of Ohio State has posted a summary of the tax legislation pending in the Congress. It compares the Senate and House versions. Because it is a summary, it doesn't contain full descriptions of the provisions, but the titles alone tell us something about how the tax law continues to crumble into an unadministrable, complex, unfair, imbalanced, and dangerous chaotic mixture of disjointed, inconsistent, and inefficient provisions.

Let's look at some of the provisions that will restore and enhance taxpayer confidence in the Congress. These are the ones that are obvious. Others require some technical analysis to find the gift hiding underneath the obfuscation.

** Reduce depreciation period for racetracks from 15 to 7 years. Huh? The notion behind depreciation is that the cost of property is not deducted in the year of acquistion or construction, but over a period that has some relationship to the taxpayer's use of the property. Current depreciation tax law (MACRS) is very generous; it lets taxpayers spread deductions over a period shorter than the economic useful life. Supposedly this generosity spurs economic development. So what's the point with the racetracks? Are they falling down after 7 years? Hardly. They're still standing after 15. Are people holding back from building them because the absence of a tax goodie deters them? No. Are they so important to the economy that their cost should be written off over a period that is a fraction of the period over which hospitals, factories, and other properties are depreciated? Maybe that's why the derby winner's first name is "Smarty" ... the horses have clout in Congress that the rest of us don't have.

** A new tax credit for maintaining railroad tracks. Why? Will those tracks be left unmaintained if there is no credit? Why not a credit for all public transporation and shipping infrastructure?

** A new tax credit for railroad revitalization and security. Same question. Isn't the security of cargo vessels, highway tunnels, and other transportation infrastructure just as important? Are those industries in better financial shape and less "in need" of taxpayer financing? Hardly. Just a month ago one railroad was describing how the boom in its business left it grasping for new employees (oh, wait, we're told that there are no jobs available in this country).

** A special treatment of the previous item for New York City. Dare I offend 8 million people by asking why New York City is more important than Chicago, or Los Angeles (which has a need for public rail infrastructure that may be at the top of the list)?

** The "Oldsmobile provision" almost says it all. Well, not really. This is a provision that gives Oldsmobile dealers two years (instead of six months) to reinvest buy-out amounts received from GM on account of shutting down Oldsmobile manufacture in another business. Businesses go under every day. A few are fortunate and receive proceeds of some sort. They are taxed on any gain unless they re-invest in six months. Why the extra time for Oldsmobile dealers? Why not all terminated businesses? In response to charges that this is another example of the many "pork barrel" provisions hanging on this tax legislation (it IS, after all, an election year and there are votes to be "purchased"), its supporters claim that it's only fair because the business termination wasn't what the Oldsmobile dealers wanted. Well, duh, all the other business owners whose businesses were terminated WANTED that result? C'mon. And remember, a good many Oldsmobile dealers also sell other brands, will continue in business, and yet will qualify for this tax goodie.

** A provision that makes it easier to treat horses as property qualifying for special capital gain / ordinary loss treatment. Smarty Jones is back. I wonder if a human won a race if there would be some tax breaks for the two-legged species?

There are more, but I figure we can only stomach so much. Sausage does that.

So how will they pay for this? That is, how will they offset the revenue losses for the dozens of tax reduction goodies without making the deficit so huge that the nation collapses economically?

By things such as an increase in the tax on investment income of children under age 14. And a tax on the flu vaccine. Gee, that's a nice idea. OK, there are some revenue raising provisions that are designed primarily to end tax abuse. Did they ever wonder that some of the tax abuse would go away if the tax law wasn't such a mess?

YES THEY DID. The bill provides for the appointment of a Blue Ribbon Commission on Tax Reform. Do we want to start holding our breath now, or after you've had a chance to send a comment. I'd very much enjoy hearing from those who can answer the questions I've posed.

The GAO has issued a report revealing that at least 28 high level federal employees take credit for college and other educational degrees that are issued pretty much for money rather than as evidence of learning, academic achievement, and educational accomplishment. The report is not yet posted on the GAO web site but news reports can be found at the web sites ofMSNBC and FoxNews. The consensus is that for each false diploma or degree uncovered there are many more not yet identified.

So-called diploma mills have been around for decades. Every day spam arrives in my email inbox presenting me with the opportunity to acquire a degree in exchange for some specified amount of money. I laugh. I have enough education to understand not only the stupidity of those who respond to such enticements but also the catastrophes waiting to happen when people with these false credentials are treated as having the supposed qualifications. I'm sure that the folks at this web site will explain that they mean no harm, and that they offer fake transcripts and fake degrees for "entertainment purposes" or to replicate legitimate documents, but let's face it, a person who needs to replace legitimate documents can do so by contacting the legitimiate educational institution from which he or she earned the degree.

It's bad enough when someone produces a false degree in order to get a pay hike, in this instance involving teachers. But it's a problem of a much higher degree when a bogus degree is used to obtain or hold an employment position the duties of which include supervision of nuclear weapons safety, as was noted in the GAO report. And to rub salt in the wound, the government (that is, we taxpayers) are paying for some of these fake degrees.

That people have been holding themselves out as other than what they are isn't something new, and that people have been doing so by falsely representing their abilities and education isn't new. People pretending to be doctors and causing the death of unwary patients have been around for years. For a person suffering from deep delusion to pretend he or she is a physician (rather than Napoleon) will happen. But the degree to which this sort of dangerous misrepresentation is spreading throughout the world is startling. One report suggests that at least HALF A MILLION people hold fake degrees.

States are trying to crack down, as reported part way down the page at this web site. But the road ahead is long, steep, and bumpy.

Why do people do this? Aside from those who are mentally impaired (many of whom don't bother to get a fake piece of paper to hang on the wall), there are two groups of people. One group includes those who see the fake credential as admission to a place in life which they otherwise could not reach. Lacking the skills to be a physician, a nuclear weapons supervisor, or some other position, they try to attain the benefits by pretending to have that skill set and creating "proof" that they do. The other group includes those who have the ability to "get there" by taking a genuine, truthful path but whose laziness drags them into the world of pretense.

Many get away with it, and are discovered only when their lack of skills catches up to them. Someone dies. A nuclear weapon is stolen. Some other serious problem surfaces. Or perhaps the GAO goes undercover. So how do these folks manage toget away with their fraud for so long? How do they manage to pull it off from the outset?

The best defense, for employers, is to investigate the employee's credentials. This takes a wee bit of time, and a wee bit of money. Advocates of privacy laws need to back down and permit schools to confirm or deny a person's transcript and degree. People who seek the services of physicians, lawyers, or other professionals can ask questions, do some investigation, and then decide whether to retain the person. Most, if not all, professions have licensing agencies, membership societies, or other organizations that can (or should) confirm the bona fides of a person. Organizations with a wider reach, such as the Better Business Bureau, a Consumer Protection organization, or even the state's Attorney General can provide information. Too much is at risk to take paper at face value.

So why wasn't this done by those responsible for hiring and retaining the government employees with the fake diplomas? Why weren't the fake degrees identified before pay raises were given to the teachers with the fake degrees? It's a bit easier to understand why someone retaining a physician might not be able to figure out the fraud, but employers have an obligation to make certain that their employees have the requisite skills. Or do they?

Part of the problem is the individualistic, self-centered, pretensive characteristics of post-modern culture. Digging into the background of a person claiming to have a specified skill set bothers the privacy advocates. Holding someone to a standard that they're not equipped to reach raises cries of discrimination. Corporate worship of the bottom line encourages the cutting of corners, with too many businesses not caring about the quality of what they sell (ask me about the floor tiles from Taiwan and the printer from Singapore). Pretending that someone is qualified when in fact that person is not qualified is commonplace. It permeates society, other than in those few places where lack of qualification cannot be hidden, such as professional sports. Superficiality and "looking good" takes precedence in a culture that values appearances more than an underlying genuine functionality, achievement, and effectiveness.

There will always be people who misrepresent facts and commit fraud (at least until genetic engineering evolves to the point where those tendencies can be eradicated). What's worse is the willingness of society to wait until people die before taking action against people with fake degrees and the folks that issue them. People refrain from criticizing those who engage in these practices out of fear, I think, of being accused of "offending" someone. Like two-year olds, folks seeking the short-cut and the quick buck will push against society until and unless society pushes back and sets the limits.

All sorts of tax news breaking today. I'm going to postpone discussion of the corporate tax bill passed by the Senate until it reaches Conference. I'm going to postpone discussion of the tax reform hearings before Philadelphia's City Council until it does (or doesn't do) something.

I haven't said much about the relationship between taxes and the internet, and because discussion is starting to heat up again, I want to share some thoughts.

The notion of "taxing the Internet" makes about as much sense as "taxing a highway." Highways are not people or entities and they don't pay taxes. The Internet is not a person (sorry, Bill Gates) and it is not a legal entity. So it doesn't pay taxes and it doesn't file tax returns.

When people mention "taxation of the internet" they mean two things. One is taxation of transactions and activities conducted on or through the internet. The other is taxation of access to the internet. Continuing with the "information superhighway" metaphor, the first is similar to taxing gasoline used by vehicles to drive on a toll road, and the second is similar to the toll charged for access to the toll road.

So much has been written and spoken about taxation and the internet (notice the very careful use of the words in that phrase) that I'm not going to try to provide links. Nor am I going to dissect the specifics of the many proposals, arguments, rebuttals, and commentaries that have been served up to us. I'd rather try to straighten out the context in which the discussion occurs.

The overriding principle that should apply is this: when it comes to taxing transactions and activities conducted on or through the internet, or taxing access to the internet, those transactions, activities and access should be taxed no differently from the way in which transactions and activities conducted through means other than the internet are taxed. This principle, though, is ignored by those who take either extreme position with respect to taxation and the internet.

On the one side is the argument expressed in the title of Dick Armey's Philadelphia Inquirer commentary: "Cyberspace is the last frontie; don't let them tax the internet" [you need to subscribe (which is free) to access the article]. Armey advocates keeping the internet tax-free, though that is a misleading goal. The internet has not been tax-free, is not tax-free, and will not be tax-free. Armey argues chiefly against taxing Internet access, but he doesn't distinguish between that sort of imposition, and taxation of transactions conducted through the Internet. The principal argument that he and other "don't tax the internet" advocates raise is the wisdom of letting Internet technology grow and mature without the hindrance of taxation. If we were to abolish taxes on all who need to grow and mature, there wouldn't be much left to tax.

On the other side are the folks who advocate taxing all internet transactions. Chiefly advanced by some state legislators, who are seeking to increase state tax revenues, the argument is that any connection whatsoever between the transaction and the state entitles the state to subject the transaction to its tax system. The best example is that of on-line sales and the extent to which a state sales or use tax should apply. Suppose consumer A, living in New Jersey, uses the Internet to access the web site of a retailer located in Illinois, looks at products, orders a product, pays using a credit card, and receives the shipment in New Jersey. Does a sales tax apply? The answer is found in the tax treatment of a similar transaction, in which the person's neighbor looks at a print catalog, phones the retailer, and makes the purchase. New Jersey cannot require the retailer to pay a sales tax because the sale does not take place in New Jersey, and New Jersey cannot require the retailer to pay a use tax unless the retailer has a sufficient "nexus" (or set of contacts) with New Jersey to justify imposing the tax. Without getting into all the technical analysis, sending a catalog into New Jersey is not sufficient nexus. Why should the Internet transaction be treated any differently? What New Jersey can impose is a use tax, on the purchaser, but effective administration and enforcement of use taxes seems to escape state legislatures. The hole in tax revenue caused by inefficient use tax enforcement existed long before the Internet came into being, but the Internet brought attention, and the attention brought the state legislatures the temptation to make the retailers do their use tax administration and collection for them.

States are strange in this respect. Because Delaware has no sales tax, and Pennsylvania does, many Pennsylvanians drive to Delaware to purchase items on which they do not pay the Pennsylvania use tax. Delaware merchants use "no sales tax" plugs in their advertising. Unlike the Liquor Control Board, which sends undercover agents to the District of Columbia (where alcohol is much less expensive principally because of lower taxes) to look for vehicles with Pennsylvania license tags outside retail liquor establishments, and who then call ahead to officers "waiting at the border," the use tax division doesn't seem to care. Some states now include a "use tax" line on their income tax returns. How effective that will be remains to be seen.

Between these two extremes, but also advocating positions that are theoretically or practically untenable, are those who suggest taxes on email, taxes on all Internet transactions but not on access, and taxes on all Internet access but not on transactions. Each of these deserves a moment in the spotlight. It's easier to knock something down when it can be seen.

Taxes on email are advanced primarily as a means to end spam. The argument is that spammers send so much email that the taxes would cripple their operations but not affect other users. First problem: similar arguments were made when the income tax was first enacted, with promises that only those with very high incomes would be subject to that tax. One need not be a tax expert to know that where we are today with income taxes isn't what was promised. Once the foot is in the door.... Second problem: most spammers operate outside the jurisdiction of the U.S., so just as they laugh at laws making spam illegal so too they will laugh at the imposition of a tax.

Taxes on all Internet transactions but not on access are advocated by those who think that the door to the internet should be open to as many people as possible, something that is more likely if access taxes are prohibited, but that transactions on the Internet should be taxed. There is a flaw with both parts of this position. If access to the internet should go untaxed in order to maximize availability to everyone, then so too access to cable, telephone, and every other form of communication should be tax-free. If all transactions on the Internet should be taxed, then all transactions not on the Internet should be taxed, a result that is unconstitutional and that does not occur under existing law.

Taxes on Internet access but not on Internet transactions are advocated by those who think that Internet access is no different from access to any other form of communication, but who argue that tax-free Internet transactions will encourage people to access the Internet. The first part of this position makes sense, provided it is applied consistently with existing access taxation. The second part of this position says too much. If repealing (or refusing to enact) sales taxes encourages people to do business in a state (such as can be argued is the effect in Delaware), what happens when all states repeal their sales taxes? The edge held by one state over another in the economic arena disappears. Perhaps that is good. Perhaps it is better to repeal all taxes. "Then what?," he asks rhetorically and sarcastically.

The toughest positions to analyze are those that sit between the extremes but that lack internal consistency. The arguments advanced in a letter to the editor responding to Armey's commentary, also found on the Philadelphia Inquirer web site and requiring the free sign-up demonstrate this problem. First, the writer argues that internet access of any type should be taxed as is telephone and television access. That statement is followed by the suggestion that email and other information access and distribution should not be taxed because there is no tax on postal mail or library use. Aside from taxes that are imposed to provide the library resources, the chief problem with this argument is that it conflicts with the first. A person who uses the Internet only for email and information access nonetheless would be subject, under this writer's vision, to the access tax imposed on the person's DSL, cable or other connection means. If, however, the writer is arguing against a SEPARATE, ADDITIONAL tax on email or information access, then the writer makes perfect sense. Maybe the editor edited the letter.

The writer then argues that "products and services bought and sold via the Internet should be subject to all taxes levied today just as if you went to your local hardware store, bookseller or antique shop." The first problem I have with this argument is that information access and email are services, so I suppose the writer intends that "(other than email and information access and distribution)" be inserted after "products and services bought and sold via the Internet"? The second problem I have is that the writer equates purchasing a product via the Internet with going to the local store, when in fact it is unlike going to the store and instead, most like shopping via a print catalog. The writer would give states the right to require Internet vendors to collect use taxes, even though there are constitutional roadblocks to doing so. The writer's unfamiliarity with these limitations is evident from the next sentence: "A sales tax is a sales tax regardless of where or how you buy the product." That just isn't so. Pennsylvania cannot impose a sales tax on a purchase made in Delaware. The WHERE of the transaction matters. Legislatures deal with this situation by imposing a USE TAX on the Pennsylvanian who makes the purchase in Delaware (but it cannot require the Delaware store to collect that use tax unless that Delaware merchant has some connection with Pennsylvania).

Finally, the writer concludes with a proposition that baffles me: "The people and organization connectivity, information access, educational value, and search engine capabilities of the Internet are the essence of what needs to be available to everyone tax-free. Everything else should be subject to fair taxation." Well, this proposition is inconsistent with arguing that internet access should be taxed as is cable and telephone access. It also extends tax exemption to some of the products and services that the writer argued should be taxed just as if a person went to the local store. The education value tax exemption doesn't leave much that isn't educational, unless, of course, the writer means "educational as I define educational," a definitional snag that would sidetrack the proposition. The meaning of "fair taxation" has been debated for centuries, so I won't criticize the writer on this point because it's peripheral to the main question.

The purpose of taxation should be to raise revenue to cover the cost of legitimate government activities that benefit all citizens. Of course, most governments use taxation to redistribute income and wealth, to encourage or discourage specified behaviors or activities, to reward cronies, and to enhance the power of politicians. Serious debate about the purpose of taxation involves the "meeting costs" perspective the "income and wealth redistribution" perspective, and the "social engineering" perspective. The principle that "activities and access involving the Internet should be taxed no differently from the way in which transactions and activities conducted through means other than the internet are taxed" leaves the resolution of tax policy to a debate that transcends the Internet. Access to the Internet and transaction conducted on or through it are treated no more harshly, or gently, than any other.

If, however, someone wants to argue that the Internet is different, three things must be demonstrated. First, the advocate must be willing to eliminate Internet access and transactions from all taxes so that the slate can be clean for the next step. Second, the next step is to make a persuasive argument that a tax on Internet access and/or transactions can achieve one or more of the three serious tax goals: cost matching, income and wealth redistribution, or social engineering. Third, if such a tax CAN have advance the goal, then it must be shown that advancing or meeting that goal is something that SHOULD be done.

Although taxation with respect to Internet transactions as a means of advancing social engineering goals (e.g., the taxation of spammers) has been suggested, no one has yet demonstrated that it can be done. Suggestions with respect to the taxation of Internet gambling, for example, run into the same problem as does the email tax proposal: the Internet transcends the jurisdiction of any one government (notwithstanding the attempts of some nations to control the language or content of what's on the web or the attempts of some tiny village to restrict the Internet to the boundaries of its culture).

Using taxation with respect to Internet activity to redistribute wealth or income doesn't make sense. If use of the Internet, access to the Internet, or providing access to the Internet generates income for a person, existing income taxes apply. If such use or access generates wealth, existing property, estate, and inheritance taxes apply.

Taxation with respect to Internet access and activity to recover societal costs DOES make sense, IF and only if it can be demonstrated that the Internet imposes on society or government costs that did not exist before it came into being. If a state Attorney General must hire five more attorneys to combat Internet fraud, or if a state gaming commission must hire ten more staffers to deal with internet casino problems, or if a federal agency must hire fifteen more people to protect citizens from phishing schemes, then some sort of tax could be justified. The question would be, what sort of tax? Ideally, the tax should be imposed on the people making it necessary for the government to incur the costs. It cannot and does not happen that way. For example, governments incur costs to provide police protection from, and criminal prosecution of, criminals. Yet there is no special tax on criminals. True, criminals can be required to reimburse the government for costs, but that rarely happens. In terms of benefit, everyone benefits from police and prosecutorial activity, so the tax is imposed on all taxpayers subject to the applicable tax (usually a property tax and often an income tax).

How's the best way to tax those who benefit from government activity to protect users of the Internet? Taxing those who use the Internet. Should the tax be a flat access tax? No, because that WOULD deter people from getting on board the technology train. Should it be a tax based on volume of use? Yes. At what point should it be imposed? By whom should it be imposed? If it is imposed by a state on state residents, how can that be administered? It can't, not without expensive alterations to the Internet structure and imposition of huge administration costs on providers.

The Internet is global. The taxation needs to be global. But how could that be administered when the world's nations have demonstrated that they can't administer anything that well? They've come close with a few treaties. The Internet is seen by some nations and groups as a threat, by others as an opportunity to do good, by others as an opportunity to expand economically, by still others as an opportunity to assist in damaging others, and the list of interest groups with competing interests includes many others.

So, as a practical matter, the best that might be possible is simply this: (1) tax access as is taxed telephone and cable access, (2) tax retail transactions as catalog sales are taxed, imposing use tax collection responsibilities on those with sufficient nexus to the taxing state, (3) eliminate and prohibit "Internet only" taxes, and (4) find another way to deal with spammers, casinos, and other social behavior that is considered unacceptable or inappropriate.

If you haven't heard of the Darwin awards or visited the Darwin Awards Website, you're missing out on some amazing stories of folks who do some daring but stupid things. So stupid that many of them bring their lives to an end, thus inspiring the reason for the name of the award: "The Darwin Awards honor those who improve our gene pool... by removing themselves from it. Of necessity, this honor is bestowed posthumously."

It's time, I think, to set up a similar award for people who do daring but stupid things when doing their taxes. They don't get themselves killed (at least, as far as I know), but they do get into a lot of trouble. They take a chance on saving some money and end up costing themselves much more money and a chunk of their life.

Very recently, the United States Attorney for the District of Connecticut, announced that Rosemarie D. Bria, pleaded guilty today to a one-count Information charging her with making and subscribing a false estate tax return. Bria admitted that she willfully filed an estate tax return from which she purposely omitted assets that she knew should have been included on the return. As a result, the estate's reported tax liability was $137,000 less than should have been reported. Bria faces a possible term of imprisonment of up to three years, a term of supervised release of up to one year and a fine of up to $250,000 when she is sentenced in July.

It's a bit more difficult to understand or to have sympathy for estate tax under-reporting than for income tax under-reporting. The temptation facing someone who is trying to raise a family on a low income is real, and makes sense (at least to me). That's not to say one should succumb. On the other hand, an inheritance is a windfall. No one is entitled to an inheritance. It is only the kindness, care, or love of the decedent that causes the decedent to leave his or her property to someone other than a charity. It is only a combination of fate, medical care, or other factors that keeps the decedent from living to the age of 110, consuming all of his or her property. However much is the after-tax inheritance, it is the equivalent of a gift, a windfall, a surprise. Is $137,000 all that important when the estate is many times that size?

What's troubling is not just that the temptation exists and that it prevailed, but that even in the absence of some other reason to resist, the risk and cost of under-reporting the tax liability by a huge amount didn't deter the admitted fraud. There must be a much more widespread sense that one can "get away" with fraudulent tax filings than I had realized. Despite reductions in resources, the IRS and the Justice Department continue to find ways to identify and prosecute criminal tax fraud. Someone on the ABA-TAX listserv noted that this case might be the first involving estate tax fraud; income tax fraud is what gets primary attention. Because only one estate tax return is filed for a person (whereas many income tax returns are filed for a person over his or her life), most if not all estate tax returns are audited. Even those willing to take chances with income tax returns (few of which are audited) generally shy away from taking chances with estate tax returns.

It's too bad that there wasn't someone who could have advised Ms Bria about the realities of tax filing, tax audits, and tax prosecutions. Maybe it would have saved her a lot of grief. If she listened. Perhaps she would have, perhaps not. Read the Darwin Award stories, and take note of how many of those folks were advised, were warned, or were taught, but who plunged ahead (or down!) without regard to common sense.

No, not me. The law student.

Today's New York Law Journal has an article, Law Schools Steal a Page From Business Schools about changes being made by some law schools in their admissions policies and curricular design that are bringing them closer to the business school model.

Law schools are beginning to give more weight to an applicant's work experience, rather than rely solely on academic performance (grades, LSATs) and a few other characteristics. Dean David Van Zandt of Northwestern University School of Law explains that approximately 70 percent of the school's students have work experience. That is a very high number when compared to the typical law school.

I like the idea. Students who take time off from their studies and explore life outside the academy return with a sense of purpose, an understanding of the context in which they will practice, and an appreciation for why some professors (cough, cough) are as demanding as they are.

Van Zandt noted that students with work experience have a maturity and focus that law students don't have. Indeed. Though it is unquestioned that most law studentsenter law school directly from college, he suggests that they do so because they are afraid to go to work.

From the article:

Stanford Law School Professor Deborah Rhode said law schools, with far fewer entrance requirements than medical or business schools, provided fresh college graduates with the professional "degree of least resistance." Considering applicants' work experience, she said, would "screen out students who are in law school by default."

I would add one more concern, namely, students who enter law school because their parents compel them, or otherwise pressure them, to do so. I've known students who were here because their parents, according to them, "made them." Of course, I don't understand how a 21-year-old can be "forced" to attend law school, perhaps because I come from a family that did not and does not impose career choices on the children. I know that a parent can say, "I'll pay for law school, but not medical school." I don't think that's right, but perhaps the parent knows their child well enough to know that investment in medical school tuition would be a waste. But a child who does not want to go to law school ought not attend, even if it means getting a job. Dean Van Zandt may be correct. Perhaps the child is afraid of getting a job. Or perhaps too lazy, having been accustomed to being handed life on a platter, silver or otherwise.

I've watched students in this situation tune out, cut class, and not even purchase the books for a course. They've graduated, ignored the bar exam, and taken jobs for which even a high school education isn't a prerequisite. I've met parents at graduation who have beamed while telling me, "Finally we have a lawyer in our family" while the graduate grimaces, clearly unhappy and in psychological pain.

Parents, please let your children make informed choices about their education. Please don't send them to us if they don't want to be here. They aren't good students, they aren't happy, and they're not going to do well here or in life. Please don't try to live your life again through your children.

I was blessed with two parents who told me a lot about different careers and occupations. My father surely did not push me to attend law school. When my youngest sister followed me into law school, Dad said, in his typical witty and joking way, "Where did we go wrong?" My mother is to blame, for she said to me, when I was young, in words close to these: "It's not my place to tell you what to be when you grow up. God gave you many talents. Use them. Always have a fallback position. Go into a career that gives you an opportunity to do good and to do well. I'll love you no matter what you choose to do, so long as it's legal." Yeah, I know what she meant. But it's one of my favorite "Mom" stories.

Back to some substantive tax law. It all turns on whether entering a "no purchase required" manufacturer's sweepstakes constitutes wagering.

WHO CARES?

Well, the winner of one of those sweepstakes does. To understand why, let's look at a relatively simple bit of tax law.

A taxpayer is not permitted to deduct "losses from wagering transactions" only to the extent of gains from wagering transactions. Why is there such a rule? Presumably so that the wagering losses aren't "financed" through tax savings generated by deducting those losses. As a matter of public policy, certain activities, including wagering, if not outright prohibited, are subject to special or extra taxes (e.g., "sin taxes" on alcohol, tobacco, gambling, etc.). So denying a deduction, other than to offset wagering income, fits in with such a policy.

The taxpayer in question hit the jackpot in a manufacturer's sweepstakes. The taxpayer happened to have wagering losses from other transactions. Deducting those losses would reduce the tax liability on the sweepstakes winnings. When the taxpayer filed his return, he deducted the wagering losses. When the IRS audited the tax return, the IRS agent sought advice from the IRS National Office.

The IRS National Office issued a Technical Advice Memo (TAM 200417004), in which it concluded that the sweepstakes winnings were not "gains from wagering transactions." The IRS explained that although there is no authority defining "wagering transaction" for purposes of the deduction limitation rule (and it's right, there's nothing in the regulations, no rulings, or cases), the IRS relied on the definition of wagering for purposes of the rule requiring withholding on gambling winnings and a ruling involving excise taxes on certain wagers.

The IRS National Office concluded that the sweepstakes winnings were not gains from wagering transactions (and thus the wagering losses were not deductible) because a transaction cannot be a wager unless there is consideration provided by the person making the wager. Because no purchase was required, no consideration was paid to the manufacturer. The taxpayer's claim that he had paid consideration in the form of postage, the cost of envelopes, and the investment of his time was rejected even though he had mailed almost four dozen self-addressed stamped envelopes in order to obtain "words" to be used on the entry form.

The statute that requires withholding on gambling winnings doesn't define wagering transaction. The regulations issued under that statute don't define wagering transaction, although they refer to wagering transactions as though there's no need for a definition. The statute imposing an excise tax on certain wagers defines the wagers that are taxed through a technique of pre-defined inclusion, namely, the term "wager" means any wager that meets certain conditions. In other words, wagers are separated into those that are taxed and those that are not taxed, but wagers aren't defined. Nor is the term "wagering transaction" even used. The regulations issued under the statute repeat the statutory definition of taxed wagers.

Almost 40 years ago, the IRS issued a Revenue Ruling to address whether the excise tax on wagers applied to "merchandising plans where merchants give tickets or chances for prizes to customers in connection with the sale of merchandise." The IRS concluded that the answer was the classic "it depends" that my "we want an answer" students learn to detest. The IRS explained:

The liability of a merchant for the wagering taxes would depend in each individual case upon the manner in which the merchandising plan is operated. If it is reasonable to infer from the circumstances surrounding the operation of the plan that a customer does not pay more for merchandise in order to obtain such tickets or chances than he would otherwise pay for the merchandise alone, then no "wager" subject to the excise tax would appear to have been placed. Conversely, if a customer does pay more for merchandise in order to obtain a chance on a prize than he would otherwise pay for the merchandise alone, such excess amount would appear to constitute a consideration for the chance and a "wager" subject to the excise tax. Among the circumstances that should be considered are (1) the value of the chance in relation to the price paid for the merchandise, (2) the relative price of the merchandise as compared with the price charged by comparable merchants who do not award prizes in connection with sales of merchandise, (3) the present price of the merchandise as compared with the price charged by the same store before adoption of the plan, and (4) the emphasis that the merchant places on the chance in selling his merchandise. Consideration should also be given to such factors as whether chances are distributed with sales of all merchandise generally and whether they are offered only with sales of a particular kind of merchandise not ordinarily carried in the store.

The taxpayer who won the sweepstakes was permitted to enter without making a purchase, and the purchase price of the manufacturer's product appears not to have been affected by the existence of the sweepstakes (though one has to wonder, where does the manufacturer obtain the money to pay the winner?).

The IRS and the taxpayer agreed, however, that in order for a transaction to be a "wager," three elements must be present: (1) prize, (2) chance, and (3) consideration. Prize and chance exist in a sweepstakes. So the matter comes down to whether investing $35 in an attempt to win is sufficient consideration. There is no question that even a $1 bet or $1 purchase of a lottery ticket is sufficient consideration for the bet or lottery ticket purchase to be a wager. The IRS cited cases to that effect in the TAM being discussed.

So why isn't the $35 consideration? The IRS cites an example in the regulations dealing with withholding of taxes on gambling winnings, in which a person purchases a magazine subscription and is automatically entered into a special drawing. The regulations conclude that the winnings are not gambling winnings. That example, however, isn't the same as the sweepstakes situation because the sweepstakes entrant shelled out $35 solely in return for a chance to win, and not for a magazine or a product.

Next, the IRS distinguishes the $35 as amounts paid for goods and services (envelopes and mail delivery) that the taxpayer received, and that accordingly, they were not paid for the chance to win. The problem with this reasoning is that the taxpayer could not have entered the sweepstakes without paying for envelopes and postage. The IRS position would make more sense had the taxpayer entered the contest via the Internet, but that is a different case because in that situation entry into the sweepstakes would indeed be pretty much "free."

The taxpayer's assertion that the envelopes and postage that he purchased were in turn "spent" in an effort to win the sweepstakes, that he "spent" time and effort, and that consideration need not be provided directly to the operator of the sweepstakes was met with this statement by the IRS: "Although such factors may rise to the level of consideration in some contexts, we do not agree that they do so for section 165(d) purposes." [Section 165(d) is the provision that limits the deduction for losses from wagering transaction to gains from such transactions.]

That's the critical determination, and the IRS simply states, in effect, "well, those are good arguments, but we aren't convinced they apply." WHY NOT?

The IRS attempt to explain is weak. The IRS claims that the taxpayer should be treated in the same manner as the person who entered the sweepstakes by making a purchase of the manufacturer's product, a transaction that the IRS concludes is not a wagering transaction. The IRS agreed that the taxpayer's entry through the alternate form (mailing in entries rather than purchasing the product) was distinguishable, but then concluded that "the distinction highlights the fact that his transaction did not involve consideration and was not, therefore, a wager. To state the obvious, in order to enter the sweepstakes the taxpayer was not required to pay more for Corporation's product than he otherwise would have paid; in fact, he was not required to purchase the product at all." There's no logic in that analysis. The taxpayer DID in fact invest in the sweepstakes, whereas the product purchaser does not. That difference goes to the heart of the required "consideration."

The IRS closes its analysis with this strange statement: "Although, in the aggregate, the taxpayer may have expended a greater than nominal amount on postage and envelopes, he did so with respect to many chances to win. With respect to each chance the costs incurred were relatively insignificant, and they were not paid directly for the chance to win the prize." Why is this a strange statement? Because the $1 paid for a lottery ticket is the purchase of "a" chance to win, and $35 paid for 35 lottery tickets is the same as buying 35 chances to win. Whether it is $1 or $35, a wager is a wager. To dismiss the taxpayer's sweepstakes entry cost as "relatively insignificant" flies in the face of the undeniable conclusion that $1 paid for a lottery ticket is not insignificant.

See what tax lawyers get to do? They get to study every sort of transaction that can be taxed. Which means they get to study everything. No longer do I say "just about everything" because I have in the queue an article about taxes that are imposed on things we'd never have expected. I'll get to that at a later date.

Two final thoughts.

First, I wonder what it was like for a manufacturer to pay a sweepstakes prize to someone who didn't purchase the manufacturer's product (and perhaps never did)? Endorsements anyone?

Second, the desire of taxpayers who hit the big jackpot to avoid the tax bill that comes with it is unlimited in its creativity. Many years ago a taxpayer, who frequently visited race tracks, won a $21,854 twin double. He reported this amount on his tax return as his only gambling winnings. Against this amount, the taxpayer deducted gambling losses of $21,840. In support of his claim, he submitted $23,680 in losing tickets, all allegedly purchased by him or on his behalf within a seven week period. The taxpayer had no other records of either his winnings or his losses. The IRS disallowed the deductions, and off to Tax Court they went (Green v. Commissioner, T.C. Memo 1972-131). The court noted, "Several of the losing tickets submitted unmistakably bear heel marks." Other tickets purchased on the same day and at the same track were relatively clean. The taxpayer, who was the only witness at trial, did not explain what the court called "this circumstance." The court cited to another case (for those interested, Legawiec v. Commissioner, T.C. Memo 1970-295), in which the taxpayer offered as evidence of gambling losses his losing racetrack tickets that he had tossed onto the floor of his car, and which he retrieved months later. That taxpayer, too, lost his case.