Friday, December 31, 2004

Making the New Year Happy 

It's the end of the year, but unlike most media outlets, this blogger isn't going to do a recap. Imagine. "The Year in Taxes." or "Highlights of MauledAgain 2004." Nah, no point in making it tough for people to stay awake tonight.

I was going to create an index to the blog, mostly for my own use, but also as a convenience to readers. But it didn't get done. I might get to it, but other responsibilities take precedence. Things like teaching. And writing. And blogging. Plus some posts seem to have disappeared so I want to figure that out before I create an index or table of contents.

What's a nice way to bring the year to a close, blog-wise, and to usher in a hew year? Simple. To extend a grand "YES!" to the folks on the ABA-TAX listserv whose responses to yet another "dilemma" resonated with what I would have said and that maintain the hope that the good practitioners will resist being driven out by the bad practitioners. Yes, that is something that makes me happy.

A client applies for a loan. The bank wants proof of income. Best place to look? Prior year tax returns. The bank loan officer asks the tax practitioner to write a letter verifying the client's income sources but asking that the client's business loss deductions not be mentioned.


The practitioner responded with a letter that recited the practitioner's status as return preparer for n years and that referred to attached copies of the client's tax return.

The loan officer reacted angrily. He didn't want the tax returns in the file because they disclosed business losses that would prevent loan approval. When the client called the practitioner and begged for the requested letter (the one that failed to mention the losses), the practitioner refused and suggested that the loan officer was having ethical difficulties. The practitioner offered the client a referral to another bank. The client calls the loan officer, tells the loan officer the practitioner thinks the officer is unethical, and the loan officer calls the practitioner and screams at the practitioner's employees.

So the practitioner asks, "Am I being an ultra-conservative prude or is this practice of hiding business losses on a loan application common practice?"

Though I didn't respond, I would have asked, "So for whom does the loan officer work? Why is the loan officer anxious to process a loan that the bank's guidelines say should not be made? Doesn't that put the bank's shareholders and depositors at a higher risk? What's really going on? And, I would have done the same thing. I would not have become complicit in what is destined to be a big mess."

Respondents pointed out that it wasn't just a matter of ethics. Among their comments: Perhaps Sarbanes-Oxley applies. Other criminal statutes might apply, such as bank fraud. Consider the high likelihood of conspiracy charges because there are two or more persons involved. On the civil side, there is a risk of personal liability alleging failure to disclose material facts knowing that the facts are material. Malpractice carriers would deny coverage. Maybe it is the client, and not the loan officer, trying to get such a letter, but nonetheless, the practitioner did the right thing. Losing a CPA or other license because of an unethical or illegal act to help one client ends up violating the practitioner's obligation to be responsible for all of the clients.

One practitioner said, "Personally, I'd rather be known as a person of integrity that is beyond reproach rather than one with questionable ethical motives. I really don't care if a client leaves because I was "too" honest...I know I'll sleep really well at night." Apparently he isn't going to cave to the fear that the bad practitioner will take the clients. (The practitioner who faced the issue expressed a lack of concern about losing the particular client, who apparently is a bit or more of a "challenge" to represent.) Does "let the bad practitioner have the bad clients" become a slogan? If the IRS would pound on the bad practitioners and bad clients, having them hooked together would make it easier for the IRS to accomplish its goal.

Several respondents said to the practitioner, "You've done exactly the right thing." One described having had similar requests and having handled it the same way. Most loan officers seem to get it, but a few apparently don't. Well, as I've written previously, every profession and occupation has its bad apples and it isn't just the tax practitioner who must deal with the challenges presented by others in the same profession who think they're above the rules or too special to comply.

One respondent added, "Your integrity and your livelihood are worth more than any client." Excellent point. After all, even if the bad practitioners are likely to take the clients who aren't hearing what they want to hear, catering to those clients (or to their loan officers) is just as likely, in the long run, to take away the practitioner's livelihood, and a whole lot more, such as integrity, respect, and perhaps even one's family and friends.

I continue to insist that the problem is rooted in how this nation raises its children. Too often, when a child acts improperly, there is too much concern about avoiding "hurting the child's feelings" and too much parental resistance to other authorities (chiefly school teachers) reprimanding the child. When a child grows up thinking he or she is always right, that it is someone else's fault, that teachers and other authority figures are the enemy or at least obstacles to getting the rest of the world to cater to the child, that child ends up as an adult who doesn't hesitate to break the rules to get an advantage.

And they will continue until they are called out on it, they will persist if they get away with it, and they will stop, as bullies stop, when the hammer comes down. After all, in some ways, these folks are bullies in a non-physical sort of way.

Well, with all of that, Happy New Year. To paraphrase and old and worn-out joke, I'll return to this blog next year.

Wednesday, December 29, 2004

Does Tax Compliance Create Value? 

Digging through my email files, I came upon some ABA-TAX listserv discussions that I had set aside for further exploration. The topic touches on the larger question of tax compliance that impacts the "cleverness" discussion of a few days ago. It is yet another situation in which the concern over another tax practitioner gaining clients at the expense of the compliant practitioner poses a dilemma for those trying to survive in a tax practice world in which values are shifting in dangerous ways.

The question this time involves the tax treatment of frequent flyer miles earned by one taxpayer but transferred to someone else. Even though frequent flier miles have been around for more than a few years, the IRS has not issued any formal administrative issuances with respect to their tax treatment. Two years ago, in Announcement 2002-18, the IRS noted the lack of guidance and took the position that it would "not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel." Note the rather backhanded way in which the IRS blesses the disregarding of frequent flyer miles by the person who "earned" them. Of course, the IRS has promised that if and when it does issue additional guidance, it will not be applied retroactively.

The IRS position on this specific question makes sense. In some situations, a frequent flyer mileage allowance is like a rebate. Rather than discounting the fare, the airline issues allowances that encourage additional trips with the airline. In these situations, it's almost a "buy 12, get 1 free" arrangement. And no one has ever seriously asserted that the purchase of a bakers' dozen of eggs for the price of a dozen generates gross income. Rebates, the IRS ruled several decades ago, are simply purchase price adjustments. In other situations, a vendor or provider of services other than air transportation will award mileage allowances under an arrangement with an airline. A person pays $400 for a hotel room and earns, say, 50 frequent flyer miles. Isn't this in substance the same as charging the person $350 and letting the person spend the $50 savings on airfare? From the IRS perspective, it is. One could argue otherwise, but the IRS hasn't, to date, pushed the point.

The tough question arises when the frequent flyer miles are transferred to another person. Does the other person have gross income? It depends. Surely if the allowances are transferred as a gift, the donee has no gross income. Unless the transfer exceeds $11,000 (or $22,000 in the case of a married couple splitting gifts), the donor has no gift tax concerns. Suppose, however, that the person making the transfer does so to compensate someone else for services rendered. Unquestionably there is compensation gross income, unless the transfer fits within a gross income exclusion. Only two are realistic candidates. One, de minimis, would apply if the value of the transferred miles was so small as to make accounting for it unreasonable. A certificate for 100 miles? Perhaps that would be excluded. But that's not what usually happens. The other exclusion, working condition fringe, applies if the recipient would be permitted to deduct the cost of the airfare if the recipient had to pay for it out of his or her own pocket. So if an employer requires employees to pay for their business travel with their own funds, then when an employer decides to transfer frequent flyer miles earned by the business to employees for use in business trips, the receipt of the mile allowances by the employee should be excluded (and, of course, there would be no deduction). The thinking behind the exclusion is that inclusion of the amount in gross income would be offset by the deduction (even though, technically, the complexities of the income tax law prevent such a perfect match in most situations).

If, however, the employer transfers the mile allowances to an employee for the employee's personal use, finding an exclusion is impossible. The employee is wealthier, that wealth is clearly realized, and thus the employee has gross income. In the same Announcement, the IRS added "This relief [namely, not asserting understatement of income tax] does not apply to travel or other promotional benefits that are converted to cash, to compensation that is paid in the form of travel or other promotional benefits, or in other circumstances where these benefits are used for tax avoidance purposes." So in this hypothetical, there is an answer, at least in the form of an IRS announcement that takes us to the same place that a logical analysis of the tax law takes us.

When someone question how to set a value for the mile allowances transferred to employees for personal use (so that it could be included on the W-2 issued by the employer to the employee), someone else asked if it was a matter "worth worrying about" because the "dollars are small, [t]he risk of detection on audit is small" and it is "immaterial," adding, "Am I playing too fast and loose with the rules? I just don't see how I am adding value to my clients by getting bogged down in issues like this" and asking, "Could you argue that this was a gift?"

It was heartening to read the responses. The person posing the original question disagreed on the materiality point, explaining that 5,000,000 miles were involved. Someone else pointed out that there are independent sources of market value, so valuation can be accomplished. Responses also noted that audit detection risk should not be a factor and that ignoring the mile allowance transfer for tax purposes would be playing fast and loose with the rules. I loved the logic in this comment: "If it's immaterial, it doesn't matter, so if it doesn't matter then do it according to the regulations." A rather nice way of pusing immateriality as a determinative factor aside even if the situation was immaterial (which it isn't).

Understand that the person who initially responded to the valuation question wasn't advocating omitting the transaction from gross income but playing devil's advocate to see how serious a matter the issue is. The question apparently came from the client. It is easy to see, however, why it is so tempting to impress, satisfy, and retain tax-disliking clients by tossing aside something that probably would go undetected because, as was pointed out by the correspondent described in the earlier "cleverness" post, the IRS simply is unable to police the tax world.

As for "is it a gift?" the answer is no, not if the recipient is an employee who has no other relationship with the employer (because the tax law prohibits classifying employer to employee transfers as gifts, with a regulatory exception designed to deal with transactions between family members one of whom is an employee of the other). Cleverness would arrive on the scene when and if someone attempted to characterize the relationship between the employer and employee as one "like" the family member exception in the regulations, another instance of trying to make something appear to be what it isn't.

One last comment. Even if a tax issue requires "getting bogged down" (and I don't think this one is a bogger.... trust me, there are many many tax issues far more complicated, far more difficult to analyze, and far more difficult to handle logistically than this one), the compliant tax practitioner is adding a lot of value to the client by doing the right thing. Imagine what happens if the advice is to ignore the mile allowance transfer and the client DOES get audited. Ooops? With a compliant tax practitioner, the client gets proper tax advice, a compliant tax return, and a quality job. Understandably, some clients don't value those things and prefer dollar savings at all costs. And that brings us back to the followup discussion on cleverness, in which the challenges of catering to a clientele with inappropriate tax values can threaten the professional survival of the compliant tax practitioner.

A Cheaper Way to Play? 

My recent series of postings on the use of taxpayer money to pay for the ballparks used by wealthy club owners and their highly compensated athlete employees (e.g, here, here, here, here, and here) inspired Tom McMahon to point me to one of his late October blog postings in which he makes an interesting suggestion. Wouldn't it be cheaper, he asks, for the city to buy the team, considering the team's value is less than the cost of the stadium? A look at his numbers suggests to me that for a 50% increase in the outlay, D.C. could end up with the entire revenue stream from the operation. It makes economic sense from the perspective of a private investor. But there are two problems. First, should a government be in the business of running a sports team? Second, does anyone think that baseball owners would open their exclusive money-making club to a government or a similar consortium of citizens? Forget the Green Bay NFL example because that situation arose in pre-television days and there's no way it will ever happen again in the NFL, or any other league. No, baseball owners know they have a good thing with the deals they strike with politicians, to get taxpayers to fund their game, and they're not letting governments or citizen groups cut in on the action.

Oh, and reading the Trivia section of Tom's blog is a must. I like it, a lot, especially because much of what's there is new to my already crammed with trivia brain. So I'm going to venture a guess that many of you will also enjoy it.

Me? Opinionated? 

In his most recent column, Bruce Bartlett, affiliated with the National Center for Policy Analysis, highlights four tax blogs in an article about specialized blogging.
In The Blogger Take on the Issues, Bruce writes
Other tax professor bloggers are James Maule of Villanova University and Daniel Shaviro of New York University. They tend to talk more about current tax policy issues from an academic point of view. What I like about both of them is that they are highly opinionated. Neither pulls any punches in saying what they think is stupid about recent or proposed tax legislation. I don’t always agree with them, but they always make me think.
Imagine that. Highly opinionated. Me??? :-)

Tuesday, December 28, 2004

More on that Hawaii Vacation 

Paul Caron noted my Hawaii vacation item after enduring what he calls his worst snowstorm in 15 years. Check out his post and the pictures.

Well, Paul has upped the motivation for folks in his area and other places that tend to get swamped with the white stuff (or, worse, ice) to find a way to deduct a vacation in Hawaii or some other warm place. No offense to the folks who enjoy snow and winter sports, because they'll get their chance in the heat and humidity of August when they decide shareholder meetings ought to be in some frigid Southern Hemisphere deep freeze location.

A practitioner emailed me and posed the conundrum that afflicts those giving tax advice. He pointed out that if someone took my approach and counselled the client to not claim the deduction, the client would most likely go and find some other tax advisor who says what the client wants to hear. In other words, the bad practitioners will drive out the good. So, does that mean the practitioner is compelled to give bad advice to stay in business? Perhaps. Unless there are clients who prefer doing the right thing. Are there enough of them to keep the good practitioners in business? Will most of the good practitioners imitate the bad so as to maintain income?

The same practitioner also pointed out that the problem would be eliminated, or at least severely curtailed, if the IRS would enforce the tax law and in effect, put the bad practitioners out of business. The IRS would love to do so, but it needs money, which Congress won't provide because too many members of Congress think it is awful that the IRS would consider requiring people to obey the tax law.

When I was a child I often heard the comment that "one bad apple spoils the entire barrel of apples" and it surely is true, both literally and figuratively. I've had it happen recently with oranges, so it appears no fruit and no profession is safe. Values are dropping to the lowest common denominator, just as standards have fallen during the past few decades, as a consequence of an inability to accept that sometimes there is a right and a wrong and sometimes there is an accomplishment and a failure.

When will it stop? If one person is willing to do something that is wrong, is the only prevention of it spreading to the rest of that person's profession? Yes, some government agency like an IRS can step in (if funded) but how effective is that when "everyone is doing it" becomes true because it is believed?

Ultimately it is the citizenry that must respond. Taking inappropriate positions on tax returns, even if it has the effect of increasing some other person's tax, apparently sits well with so many people that good practitioners risk losing clients because bad practitioners stand ready to help with those inappropriate positions. Anyone who doubts the cumulative effect need only ponder what would happen if the more than $2 trillion of accumulated unpaid taxes (not including interest and penalties) were collected. Think about the possible tax cuts and deficit elimination, both of which could be accomplished.

"I'm entitled to deduct a vacation because everyone else is doing it" (which isn't true) may become a mantra that evolves into "I'm entitled to go straight from the left turn lane." If that becomes an "everyone is doing it" pattern, the outcome will be as deadly in a literal sense as deducting vacations is in a figurative sense.

I replied to the practitioner that it's easy for me to preach "do the right thing" when I'm not the one facing economic deprivation as a cost of doing the right thing. Yes, I've turned down offers and work because of principle, but I've been lucky. So I do not envy those who face the conundrum. I do hope that America steps up and backs the good practitioners and shuts down the bad ones. Soon.

Monday, December 27, 2004

A Milestone 

I didn't notice this when it happened, partly because email from SiteMeter isn't getting through, but total visits to MauledAgain reached 10,000 sometime last week.

On Dec 14, total visits for the day topped 150, and October remains the month with the highest total (over 2,100 visits), with a drop-off in November and December to 1,800.

I've given up trying to track all the web sites that link to this blog, though it was fun to find a link on a Japanese site despite my inability to read what the site was saying about MauledAgain. At one time there was a website that permitted "share" trading in blogs, but I cannot find that site now. MauledAgain stock was worth about a penny. Hence, a penny for my thoughts.

Thanks to all of you who return time and again to read my explications, opinions, stories, and rants. SiteMeter doesn't track who had visited the most times, so no contest, no prize, no identification.

Cleverness? Trying to Deduct the Hawaii Vacation 

I've been questioned at different times about my use of the word "clever" or "cleverness" to describe the plans, or the designers of plans, that stretch application of the tax law beyond its intended boundaries. This is not a question of statutory interpretation, which raises a different issue in terms of the extent to which a court should "read into" a statute terms that Congress has presumably omitted through carelessness or oversight. In contrast, this is a question of how far one can go in massaging the facts to make something appear other than what it is.

On of my favorite examples, as my students know, is the attempt to treat a loan as recourse for purposes of the bank making the loan but as nonrecourse for tax purposes. Usually this requires masking guarantees or other provisions that make a loan that is nonrecourse on its face (as it appears to the IRS) recourse in application (as it is for the bank). My disapproval of such tactics is totally undisguised.

A question raised a few days ago concerning the deductibility of a corporate shareholder meeting in Hawaii, and an email from a correspondent asking me to be more expansive in defining the limits of "acceptable cleverness," made for a happy blogging match. Let's begin with two fairly simple tax law principles, and then demonstrate that mere knowledge of those principles is insufficient (both for successful tax practice and for earning an A on a tax exam), because it's the application that matters.

Principle 1. There is no tax deduction for personal vacations.

Principle 2. There is a tax deduction for the ordinary and necessary expenses of carrying on a trade or business, subject to a vast array of limitations that don't need to get in the way of the present issue.

A family wants to vacation in Hawaii. No deduction. Thus, if the vacation costs $5,000, the family needs roughly $7,000 in pre-tax income to fund the vacation (using a rough 30% marginal rate just to keep the numbers manageable).

Across the street, a major shareholder in a Fortune 500 corporation, who is contemplating making additional stock purchases in the company, decides to attend the annual shareholders' meeting, which happens to be in a warm place in February. The person flies to the warm place on a Monday afternoon, enjoys the evening, spends Tuesday in the meeting, enjoys Tuesday evening, spends Wednesday morning meeting with corporate officers, and flies home that afternoon. Although the person's cost of attending a theater show presumably isn't deductible, the bulk of the expenses are deductible (subject to a variety of limits). The purpose of the trip was the business meeting, and the time spent on personal "enjoyment" of the warmth was incidental to the trip's purpose.

On the next block lives a family that owns a small business that conducts operations in the local area. The shareholders are members of the family. The corporation decides to hold its shareholders' meeting in Hawaii. Isn't this similar to the preceding example? The cleverness is the attempt to show that it is. The cleverness says, "Both are shareholder meetings, both involve discussions of corporate business, both involve travel to a distant place that happens to be warm, and both allow time for personal enjoyment of the warmth." The cleverness detective, though, responds, "it is not ordinary and necessary to go to Hawaii to hold the shareholders' meeting of a Minnesota company doing business in Minnesota."

Cleverness responds, "But the Fortune 500 company went to a warm place." The detective responds, "The reality is that the Fortune 500 company either has its headquarters there, conducts substantial amounts of business there, has shareholders most of whom live near there, or has a business need to have its shareholders see its operations in that area even if those operations are only a small part of the business."

See, the upshot of the matter is that someone involved with a small business (its accountant, its lawyer, or one or more of its owners) grabs a resemblance to a Fortune 500 situation as a contrivance to turn a non-deductible family vacation into a deductible business expense, which it is not. If deductible, the $5,000 vacation requires only $5,000 of pre-tax income. If successful, it puts this family into a position that cannot be attained by families lacking family businesses.

Left out of this core discussion is the difficulty of demonstrating that the travel and accommodation expenses of family members not involved in the busines can fit within the deduction. Difficulty is the wrong word. Impossibility is the appropriate term.

If the small business had Hawaii connections, such as conducting business there or perhaps having exclusive supply contracts with a pineapple or sugar cane grower in Hawaii, then it would be possible to construct an argument supporting the deduction, at least with respect to the travel and other expenses of the shareholders. But such a situation would be rare.

One person suggested that although he doubted that the family vacation in Hawaii masquerading as a business trip would meet the ordinary and necessary test, one could still take the deduction and then "fight the IRS, if necessary" if the deduction was ever questioned on audit. Sorry, but I don't subscribe to that philosophy. That approach would be appropriate if it were even a colorable claim, such as the existence of suppliers in Hawaii with exclusivity contracts with the company. There is a difference between "run the red light carefully if taking pregnant wife to hospital and argue if stopped" and "run all red lights and argue if stopped." The first situation presents plausible excuses and defenses, and the second doesn't.

It is this "grab the advantage that isn't deserved if the chances of being caught are low" mentality that contributes to the erosion of American civilization. I daresay it is an element in the vision of America that some (though not all) foreigners have of us that contributes to the disdain that some have toward us. That's not to say we have a monopoly on corruption (and surely this sort of "deduct personal vacation by pretending it is business" scheme is) but that we are so hypocritical about it.

Another person tried to be more sophisticated than "take the deduction and fight later" approach. He would not advise the meeting in Hawaii, but if a client did so without consulting him and got audited, he developed a plan of defense. First, he would argue that it was "ordinary" because other small corporation shareholders who do the same thing. Although I've seen no empirical data, I'll assume, for purposes of argument, that there are other small corporation shareholders who hold their annual meetings in warm places in winter. Without that data, this argument goes nowhere. But in some sense the analysis begs the question. "Ordinary" in the phrase "ordinary and necessary" means something more than "lots of people do it." It requires that for the type of business in question, the practice is common. Even so, the stumbling point is "necessary" and the same proponent asserted that he would "argue that [the shareholders] needed to go to Hawaii to get away from the hub bub of the business itself so an efficient meeting could be held and that the related R & R would help the owners be more relaxed, focused, and productive once they returned." He added, " Would a therapist's recommendation to this fact help?" Sorry, but even if it is necessary to get away from the office, a meeting place ten or fifty miles away will serve the purpose. And there are tons of cases holding that vacations generally, even though providing restorative and other psychological benefits, are not ordinary and necessary trade or business expenses, but fall within the provision specifically prohibiting deductions for "personal" expenses. The argument is valiant, but when the client who holds the meeting in Hawaii without having consulted the tax advisor is audited and seeks advice the more noble thing to do is to advise concession.

Friday, December 24, 2004

The Quiz Expands, in Several Ways 

So how are we doing on that state sales tax table quiz from the other day?

None of the choices have been selected. Instead, additional choices have been proposed.

G. The sales tax rate in Washington isn't 8.4%, but 6.5%, with the other 2.1% reflecting local sales taxes that are added to the table amounts, plus the Washington state sales tax isn't imposed on groceries, so that's why the table amount for Washington is lower than the table amount for Idaho. (thanks to former student and current Grad Tax Program colleague Ryan Bornstein):

H. The difference is attributable soley to the fact Washington does not tax food and Idaho does. (thanks to Lew Wiener of Corte Madera, California)

I. The difference is attributable to the .5% difference between the Washington rate of 6.5% and the Idaho rate of 6% (thanks to Ed Melia of Sacramento, California).

J. The larger Idaho deduction reflects the large amount of potatoes grown in the state and the fact you can make Mr. Potato heads out of them, something to which Congress can relate. (Thanks to Victoria Delfino of Portland, Maine)

K. Perhaps Washington exempts food from sales tax and Idaho does not and perhaps Idaho taxes services and Washington does not. (Thankst o Prof. Bryan T. Camp
of Lubbock, Texas)

L. Even though the state rate is 6.5% and the local rate as much as 2.1%, the entire 8.4% is built into the tables, and even if it is not, the Washington 6.5% rate exceeds the Idaho 6% rate. (Thanks to Greg Stewart of Spokane, Washington).

Even more confused? Well, welcome to one of the disadvantages of the restored sales tax deduction. At least I'm on record, many times (here, here, here, and here), as having opposed its return to the tax law.

It doesn't end with this Washington-Idaho puzzle. Ryan Bornstein also pointed out a quirk with respect to the tables for our state of Pennsylvania. Because Pennsylvania's state sales tax rate (6%) is roughly double the state income tax rate, and because the state income tax is imposed on essentially gross income, one might imagine that if, on average, people spent more than half of their income on items subject to the state sales tax the sales tax deduction, in lieu of the state income tax deduction, would be the better option for Pennsylvanians. Apparently Pennsylvanians spend a tiny fraction of their income on items subject to the state sales tax. Ryan did an analysis for a client. He took the figure from the IRS sales tax deduction table for Pennsylvania, added in a $2,400 sales tax paid by the client on a new vehicle, and ended up with a total that was less than the client's state income tax.

So, as Ryan points out, the only alternative is to return to the practice some people followed back in the previous period when the sales tax was deductible: save all receipts and add up the sales taxes. This practice gathered some discussion time on the ABA-TAX listserv, and it doesn't have many advocates, perhaps because it is not customary to increase one's fees when the client walks in with the proverbial "shoebox" or "bag" of receipts. It was interesting to see memories of this practice serve as a "years in tax practice" divisor: some people remember having done this, and for others, it's the resuscitation of a dinosaur.

One nice side-effect to this discussion was the addition to my memory banks (or perhaps the re-awakening of some of them) of the names used for residents of some states. Note that I referred to Pennsylvanians. Someone had referred to sales taxes paid by "Idahoians" which prompted someone else to research the question and to discover that the term is "Idahoan." A person living in Michigan is a Michigander. The same person quetions if a female resident of that state is a Michigeese. Strange none of the colleges in that state use Geese or Ganders as the team nickname. The closest is Ducks, and they're back out in, yep, Oregon (a neighbor of our attention-getting states of Washington and Idaho). For those with nothing better to do today, or whenever, the information came from this site. Thanks to Prof. Sam Donaldson of Seattle, Washington, who reluctantly had to return to the grading of the exams. That's why we need to go look up for ourselves the term used to describe residents of Maine. It's not Mainelanders.....

Perhaps this is all very boring. After all, I have a friend who says this blog is boring, a natural consequence of her view that tax is boring. How can something that comes at us from every direction at every moment be boring? Annoying, yes. Frustrating, yes. Confounded, yes. Confusing, yes. And think of the utility of knowing residents of Michigan are Michiganders and that residents of Idaho are Idahoans. Great conversation starter and/or pick-up line for your next social event. With that in mind, happy holidays all.

Wednesday, December 22, 2004

Sales Tax Quiz Time 

One of the folks on the ABA-TAX listserv has alerted us to what may be a mystery, though, as with most mysteries, some digging around should tell us what happened.

Recall that the recent tax legislation re-instated the deduction for state sales taxes, though in lieu of rather than in addition to state income taxes. The legislation provides that a taxpayer has a choice between adding up sales taxes paid during the year or using tables issued by the IRS to which sales taxes paid on large purchases, such as automobiles, can be added. The issuance of sales tax tables by the IRS is not a new concept, because sales tax tables were issued when the former sales tax deduction was in the Internal Revenue Code.

The sales tax rate in Washington state is 8.4% and the tax is imposed on goods and certain services. The sales tax rate in Idaho is 6% and the tax is not imposed on services. So one would assume that when comparing the results in the table for a person living in Idaho and an identically situated person living in Washington, the deduction for the person in Washington would be higher.


For someone with income of $50,000 and five people in the household, the table provides a $1,058 deduction for the Idaho taxpayer and a $913 deduction for the Washington taxpayer.

So, multiple choice test time. Excuse me for this, but we're on semester break, exams are graded, and I'm on testing withdrawal ha ha. With thanks to Greg Stewart of Spokane, Washington for bringing us the news and sharing the first five choices, to Amber Yates of La Grande, Oregon for the sixth, and to Ed Melia of Sacramento, California for the seventh. Here goes:

A. Folks in Idaho buy more "taxable" items than folks in WA.

B. It is a gross mathematical error by somebody at the IRS.

C. It reflects a conspiracy and has to do with the fact that Idaho is a "red" state and Washington is a "blue" state, though only three counties in Washington are blue.

D. It reflects a decision by the Administration to reward residents of Idaho because not a single one of them voted for Kerry.

E. The IRS employee who created the tables for the IRS lives in Idaho.

F. The IRS pulled out the old tables, not in use for many years, and did not adjust the tables for inflation and did not check to ses if there has been a change in the Washington or Idaho sales tax laws (or both) (and I don't know if there has been).

G. Something has changed with respect to local sales taxes.

I don't know the answer. Seriously, I can rule out A, C, D, and G. That leaves B and F, both of which fall into the general category of "Oh, no, we did it again."

Bonus question: so what is Turbotax plugging into its software?

They Blinked, and Presto, No Third Strike? 

The headline to this New York Times story says it all: Baseball Deal Back as Washington Council Blinks. Council surely did. So once again a bunch of wealthy folks found a way to get not-so-wealthy folks to pay for the wealthy folks' hobby.

What happened?

The official line is that the demand for private financing was abandoned because major league baseball agreed to reduce the penalties imposed on D.C. (read, its taxpayers) if the stadium wasn't built in time. There's no way the stadium could be built by the scheduled due date, so the risk of penalties was high.

The official line makes no sense. The District negotiates for relief from penalties that would be imposed because it didn't GIVE to private industry, namely, major league baseball, a stadium within the time set by baseball when it forced the agreement on the District's mayor. Doesn't major league baseball understand that one doesn't look a gift horse in the mouth?

So major league baseball gives up what it ought not have had in the first place, namely, penalties for late delivery of an extorted gift, so that the District's Council relents on its demand for private financing. Of course, the plans for the private financing were anything but private.

Part of the deal is that D.C. will issue bonds to pay for the stadium. Cute. Who pays off the bonds? Taxpayers.

On top of this, anorther story, this one in the Washington Post, predicts that the stadium will cost the D.C. taxpayers $540 million rather than $440 million. They call that "price overrun" and they're not a problem when someone else is paying. At least not for the wealthy baseball owners who are getting themselves another freebie.

The same story reports that nothing is set in concrete because three newly elected members of Council, all opposed to the deal, are sworn in a few weeks from now. The vote, by the way, was 7-6 so it's not unlikely that the new Council will want to undo the embarrassing turnaround by present Council. Present Council has attempted to install procedural roadblocks to a future Council's undoing of the deal. However, it is fairly well settled law that a legislative session cannot bind a future legislative session. Those who think this is over, and there are a few, but only a few, who do, ought consider the likelihood that this will end up in court. Perhaps even the Supremes will get to play with this one.

The deal remains a bad deal, for many reasons, such as those described in this story. The bottom line is that baseball is getting a stadium without paying for it.

Somebody sold out. That's all there is to it. Voters have long memories, especially when the cost overruns will be making the news as campaigns crank up for the next set of elections in D.C. Suckered in by the "baseball is good for you, the public" and the "baseball is a public trust and America shares in its success" propaganda issuing from an enterprise that can't keep its game honest and its athletes clean, D.C. politicians, or at least 7 of them, caved in. To what? Cogent arguments? Ha ha ha.

As someone pointed out, the big question remains unanswered. Why can't baseball pay for the stadium? No one has given an answer. Claiming that baseball is good for D.C. does not answer the question. Why should the taxpayers of D.C., many of whom live in poverty or in near-poverty conditions, be tagged (pun unintended) for the needs of the rich who have baseball teams as their playthings?

If, as baseball contends, it is more than private enterprise because it is a public institution and an integral part of the American fabric, then I say this to baseball: "Fine. Then give us back a public Commissioner and stop with the 'owner as Commissioner' debacle. I know someone (not me) who would excel in the position. He actually is sympathetic to the continued existence of the sport. Unlike most Americans."

Or, better yet, if the public pays for your game, the public gets to keep some, most, or all of the profits from your game. How's that for sharing?

Pass this one around. Maybe it will come to the attention of someone in baseball who is willing to answer my challenge. That would be fun. For me. Not for major league baseball.

Tuesday, December 21, 2004

Student Pre-Exam Questions 

At the end of every semester, when examinations loom like stormclouds over the heads of the students, there is a surge in questions presented to the faculty. Some questions reflect careful thinking by the student that takes the student to analyses beyond the scope of what was covered in the course. Other questions are as mundane, and troubling, as the not uncommon "can you repeat what you said two months ago about topic D?"

The surge of questions before the examination presents several problems. One is educational. In the courses I teach (and in most others), waiting until the end of the semester to cement a concept from early in the semester is counterproductive, because learning the concepts encountered in the middle or end of the semester requires a cemented understanding of the concepts addressed in the beginning. Another is logistical. Usually there are 150 to 240 students in the two or three courses that I teach in a semester. When even 20 percent of them decide to visit my office, there can be lines, or students jumping into the middle of existing conversations, requiring "re-starts" of the discussion. I could find myself answering the same question repeatedly.

The arrival of digital communications technology, especially e-mail and the discussion board forums on the Blackboard classroom (a digital resource available through web browsers) has changed the landscape. Recently, in a discussion about handling student questions, I had an opportunity to share the reasons I welcome the use of digital technology to manage student pre-exam questions. Keep in mind that I have implemented other course features to discourage the "wait until the end and cram" mentality that, to the dismay of professional educators, continues to dominate legal education. Also note that the issue triggering the discussion, namely, at what point in time does or should a professor stop answering questions, isn't addressed by my pro-technology piece, which I republish here:
The reasons I think email is relatively efficent and office visits
relatively inefficient.

1. In the office visit, too many students (including a few who came by this semester) page through their outlines looking for places where they marked up questions they wanted to ask. Email permits them to send the question when it arises.

2. In the office, too many students look at their notes to themselves and struggle to remember what it was, exactly, that they planned to ask. Email permits them to send the question when it is in their head.

3. In the office, too many students struggle to get back "into" the topic. Email permits them to send the question when they are immersed in the context of the topic.

4. In the office, students repeat questions asked by other students. Email permits me to copy and paste the question, and my answer, to the Blackboard classroom. End of repetition.

5. In the office, students come by when I am with another student, who invites them in, requiring a re-start of the discussion, which though not as bad as a full repetition, is inefficient. Email permits me to avoid re-starts.

6. In the office, a student gets one-on-one advice that causes other students to have the perception that the student visiting the office is getting an academic advantage. Email (or discussion board conversation) permits me to open the exchange to all students, thus negating any academic advantage, real or perceived.

7. In the office, student presence can conflict with phone calls and emails, and has at times caused me to go an entire day without getting lunch. Email is asynchronous and I can respond when it is convenient, though I rarely let an email sit for more than an hour or two, other than in the evening and overnight.

8. In the office, I reply "on the fly" and might not use the same metaphors or structure when a question is repeated. Email compels me to think about what I am saying, to organize it well, and to reach back to previous semesters if I have on hand an earlier response to a similar question that "works."

9. In the office, a 10-minute visit by each student consumes many full-time days. Many students need 30 minutes, an hour, or more to work through their "lists". Email permits compression of the time to an efficient "no repeat" manageable number of hours.

10. In the office, my answers go into vapor unless I write them down. Email memorializes my answers and gives me material to incorporate into the next semester's notes, slides, etc, where appropriate and useful.

The difference between "pre email" and "email world" has been stark. Student learning has benefitted from the email/discussion board virtual community and extension of the classroom. With 100 to 250 students each semester, and as many as 340 students a year, email has freed up time that I can devote to constructing powerpoint slides, CATLI exercises, CPS system questions, semester exercises, etc.

This is one of those instances in which the technology has made a huge difference, and for the better.
Though not all of my colleagues in the law teaching world agree with me, most agree with some or all of the points I make. My students might be tempted to interpret this "defense of digital communication" as a dis-invitation to make office visits, but that's not the intent. There are times when office visits are more effective in helping a student deal with a concept with which the student is struggling. For example, it's easier to map out a flowchart or grid while the student watches than to create some step-by-step powerpoint slide that shows the same thing and to send it via email. But office visits are most useful to students during the semester, in contrast to the afternoon before the exam, and are more likely to generate a "share insights with class" discussion board posting than is the visit late in the game just before the examination. Thus, by encouraging "during semester" office visits, I contribute to my goal of demolishing the inefficient "wait and cram" philosophy. After all, if several students want office visits during the semester, scheduling is much easier than it is when three people show up at 4:30 in the afternoon the day before the examination. The good news in all of this is that it works. There is much more feedback available to the entire class, students are working during the semester at levels higher than those attained in pre-digital versions of the course, and their work is more purposeful.

The nice thing about the discussion was that it inspired me to sit down and think about what I've been doing, and this is the first time I've compiled a full analysis of my reasoning. Perhaps it will be of interest or use to you.

Monday, December 20, 2004

Booing the Third-Strike Argument 

One advantage that real-time blogging (and similar instantaneous communication such as chat and text messaging) has over traditional print press is that it is faster.

In today's Washington Post, Tony Kornheiser rips into the curbside parking fee "private" financing plan proposed as a means of solving the problems that will keep baseball from returning to D.C. He also takes a shot against the "tall building" fee. His disbelief is more than matched by his sarcasm, wit, and annoyance. And he's an advocate of baseball's return, no less.

Of course, two days ago, in this post, I provided my own MauledAgain version of mockery, pointing out the silliness in using "private" as an adjective to describe funding that comes from the public. Two days ago.

Of course, my reader base is much smaller than Tony Kornheiser's. But at least they're 48 hours ahead.

Incidentally, a survey, described here, shows that 56 percent of D.C. residents support the private financing requirement, and 53 percent hold to that position even if it means no baseball in D.C. On the other hand, 40 percent want baseball at any cost, even if it means total public financing. There are a lot of unhappy folks in D.C. Blame is cast at the mayor, the head of Council, and major league baseball, and some people are annoyed or angry with all three. What a mess.

Saturday, December 18, 2004

Arguing That Third Strike 

A few days ago (in this post) I shared the widely held thinking that the recent D.C. Council decision to require that half the financing of the proposed baseball stadium in the District come from private sources was for intents and purposes a third strike on major league baseball's attempt to relocate the former Montreal Expos to that city. Major league baseball immediately suspended almost all of its activities in connection with the planned move.

In baseball, the third strike means you're out. True, players and managers argue, but never has a third strike been changed. There's no instant replay in baseball for ball and strike calls. But, no, in the world of politics, anything can happen.

It's simply amazing. The wizards are at it again. Yes, in Washington, but no, not the basketball team. The folks who are desparately trying to get around the requirement that half of the money used to build a basebal stadium come from private sources. I say "get around." The proponents of these plans claim that the monies will come from private sources.

My idea of private sources is that investors take their money and purchase shares or units in an enterprise that holds an interest in the stadium. I'm beginning to get the impression that the powers-that-be behind the plan to bring baseball to Washington don't want private ownership of the stadium. Why? Why not?

According to this this Washington Post story, the following proposals are floating around, though apparently none have yet been formally introduced.

1. Impose parking fees on parking spots on public streets near the stadium. THIS is PRIVATE funding? Oh, wait, if you take money from private citizens, whether through taxes, fees, or parking charges, it's ... YES, MAGIC.... PRIVATE financing. That sort of logic tells us that taxpayer-supported government investment in private industry such as baseball is entirely private financing. Alice in Wonderland, we need you here for a moment.

2. Sell building rights to property owners near the stadium so that they can build taller buildings. This isn't private financing. It's government financing raised by selling a public asset (view). It doesn't create private investors in the enterprise. Hence, it is NOT private financing.

3. Lease space in the stadium at ground level for stores that face out onto the street. Again, this would NOT be private financing. The lease payments are no different than the payments paid to rent a seat (called a ticket fee).... of course rental of seats, concession space, and other areas ultimately sucks money out of the private economy, but that's not private financing.

And in the case of the first and third ideas, the money would be generated over a long period of time. The second might generate money early on, but also might generate it over a long period of tme. This means someone needs to borrow. Who? Why, the DC government. It is NOT private financing to have a government borrow money, and then repay it through taxes or fees. Under the first proposal, a private company would put up some (not all) of the required private financing, and then get it back by collecting the parking fees. So does it become private financing if a private company puts up the money and then collects D.C. income tax to get back its loan? NO. No. No. No. It would be cheaper for the District to borrow the money than to enter into the proposed deal.

PRIVATE INVESTMENT and PRIVATE FUNDING require investment by private citizens who acquire an ownership interest or a lending interest for their payment. Otherwise, if ownership goes to the government, then the private citizens aren't getting anything directly for their payment, and the payment is a tax, fee, or some other charge, but NOT an investment and NOT private funding.

Other private financing offers have been made, but only one was reviewed, and it was rejected. From what I can tell of its description in the story, it appears to be a classic private investment in which the investors eventually get back their investment plus a return, with some reliance on tax breaks for real estate investment.

The problem, of course, arises because the mayor of Washington, D.C., entered into an agreement with major league baseball, only to have D.C. Council reject the terms. Major league baseball is upset, but, hey, if you deal with a political entity under these circumstances, it behooves you to get everything settled at the outset. Any student of government knows that the mayor's signature isn't, nor should be, enough. Major league baseball wants an agreement that the citizens of the District, through their elected representatives, don't want. That, Mr. Commissioner, is democracy (something that is quite alien to the operations style of major league baseball).

The head of D.C. Council is dangling the possibility of re-opening the legislation if appropriate private financing is forthcoming. I suspect she is wating for major league baseball to say, "Look, we're awash in money. Our players make good money. Wait, many of them make great money and some make outrageous amounts of money. Our owners do well. So we will fork over half the cost of the stadium in return for half ownership. We think that makes more sense than trying to find a way to put the cost of our business on the backs of D.C. residents, visitors, and workers." Am I naive or what?

Every which way we turn, we find people with money trying to get other people to do their work, pay for their hobbies, and bear their burdens. I suppose that's how they got started. It's time to say enough, and hopefully the D.C. Council won't fall for one of these "let's call it private while we take it from the public" deals. Masquerade time is over.

Update on Electronic Filing 

A VITA volunteer let me know that at the site where he worked last tax season clients had the option of filing electronically. The set-up was "pretty primitive" with only one desktop connected to the Internet, and so there was some shuttling of returns via floppies from other desktops to the one that was connected. In response to my followup question, he replied that he did not remember the name of the software or whether it was from the IRS or a commercial vendor, but it did permit filing California returns.

And speaking of California, another practitioner lets us know that the state requires electronic filing from preparers who do more than 100 returns.

Friday, December 17, 2004

To E-File or Not to E-File: That is The Question 

And I have suggestions, not answers. Isn't that a surprise!

A practitioner on a tax listserv reported that a member of her firm had been asked to do a survey about the IRS. One of the questions was "Would you advise clients to e-file if the IRS charged $25 to process a paper return?" I suppose it would called a "tree utilization and recycling system resource depletion user fee"?

The same practitioner wondered why not a reward for people who e-file? I guess the answer is that it would cost the Treasury rather than feed the Treasury.

Another practitioner informed us that he plans to charge clients a processing fee if they want the return in paper format. Something on the order of $10 or $20. An alternative is to raise fees and provide an e-filing discount. It's easier for a practitioner to raise fees and provide a discount than it is for the IRS to raise taxes and grant a rebate for e-filers. This practioner also informed us that he's not the first to do this or to think about implementing such an approach.

A few practitioners noted that they had not heard of the proposal. That's because it's not a proposal. Yet. The reason for the survey probably is to float the trial balloon and see what sorts of reactions it gets. If that's the case, then points to the IRS for asking around before jumping in with a change in the rules.

Another practitioner noted that he discourages e-filing because the returns are not encrypted. He shared reports that the IRS would begin using encryption during the upcoming filing season. I've used Turbotax for years, and it was my impression that the return was encrypted. Perhaps the practitioner in question is talking about other software. At least one state, California, and surely others, have not followed the IRS lead and do not have plans to accept encrypted returns.

Another problem, as pointed out by yet another practitioner, is the impact of such a "paper filing fee" on lower income individuals who might not have computers. Even with access to a public computer, who would want to do their return on the public library's computer system? Not me. Some lower income people do not have tax liability but file to get their earned income credit and the refund it generates. Many such folks use VITA programs, but I don't think VITA programs are filing electronically. Those programs are IRS-sponsored so presumably the IRS would provide VITA programs with some means to do so?

Still another practitoner recounted a visit from an IRS employee to ascertain why the firm's electronic filing rate was so low and to encourage more electronic filing. The firm does what the client wants, and doesn't encourage or discourage it, even though in this practitioner's opinion electronic filing is less convenient than paper filing. I wonder about that, because I certainly don't miss the long-abandoned routine of photocopying the return, going to the post office, filling out return receipt and certified mail forms, standing in line, etc etc etc

The same practitioner asked if others had similar visits. One replied that they had had two visits, but simply for purposes of making sure the electronic filing system was functioning properly from a technical perspective. He added that once past the learning curve, they found digital filing to be more advantageous than not. He pointed out that it eliminates clerical errors, flagged blank lines that need to be filled in, saves time, and reduces paper and printing costs.

The last comment, at least at this point, came from a practitioner in Michigan who let us know that Michigan requires electronic filing if a preparer completes more than 100 returns. That sort of rule, though, doesn't impact lower income individuals who prepare their own return or have it prepared by someone who does a few returns.

There are some issues here that need to be addressed. Electronic filing provides is greatest advantage if it is universal. It cannot be universal unless all taxpayers have access to electronic filing. Whether using Turbotax or similar software that provides the service, paying a practitioner, or going to what one person suggested would be IRS-operated public electronic return filing stations, some taxpayers would be required to do what others have been doing and would need to learn how to prepare a return electronically. For those who cannot or do not wish to learn, programs such as VITA would need to step up, which means that the training of VITA volunteers would likewise need to be stepped up.

There also exists the question of archiving. In the digital world, what guarantee is there that the return will be accessible in the future? Fortunately, my previous year editions of Turbo Tax run on my almost-expired Windows 98 computer, including those that originally ran under Windows 95, and, goodness, MS-DOS!! Will these programs run on the XP computer that sits alongside the Windows 98 box (or the XP computer that will replace it)? I'll find out during the next month or two. In the meantime, because digital backup may mean nothing, I have consistently printed out the return and the supporting schedules. But at least it's one copy and not two.

Why the concern? Though some people don't hold onto their tax returns for more than say, 3 or 7 years, relying on the statute of limitations, I recommend holding onto all returns, if for no reason other than to maintain records of basis and to guard against the strange day when the IRS claims a return from some years ago was not filed, which would open the statute of limitations, and which can be rebutted quite easily by providing a copy of the return. And what if a lender asks for copies of tax returns for the past three years? If not already in print format, they need to be printed. Will the XP computer run TurboTax for 2000? I think so.

What may end up happening is that the returns will be "printed to disk" in something like a PDF format. PDF, I am assured by those in the computer industry closer to the action, will endure for decades. So perhaps I will be spending some time (when? ha ha) printing all my returns to PDF and making a CD that holds the entire batch. Come to think of it, I may have invented a new business. I'll need to check in with my technotax practitioner friends. And I just invented a new word. What a creative day. Speaking of which, time to get back to revising the thousands of html files used in the TaxJEM CATLI exercises. Tedious is the word there. And I didn't invent that one.

Sometimes a Legal Education is VERY Expensive 

A law.com story from the AP reports that a California lawyer was convicted of credit card fraud and related charges, using the proceeds to pay his way through Loyola Law School. Trial's over, and this is the first I've heard of this tale, which is surprising because I'm sure the arrest, indictment, and initial proceedings received press attention.

Which Loyola Law School, folks? There's more than one, and it's bad enough that a law school's name is associated with this story let alone several. I'm guessing Loyola Los Angeles.

Here's the kicker. The lawyer and his two friends lifted 1.2 million dollars. Even allowing for a 3-way even split, that's $400,000. Even allowing for the payment of income taxes, which is quite a generous assumption, there's still at least $250,000 remaining. Law school, including living expenses, is a three-year full-time experience that costs about $100,000, including living expenses. So what happened to the rest of the money?

Well, he won't get to use it. The crimes of which he was convicted subject him to as many as 175 years of prison time. And it's a good guess he won't be a member of the California bar much longer.

His two friends, by the way, pled guilty. Maybe the lawyer member of the trio figured his legal education would buy him enlightment on how to avoid conviction. What a long-term expensive education.

Wednesday, December 15, 2004

Taxes Strike Out Baseball in D.C. 

It has been awhile since I discussed the planned move of the former Montreal Expos to Washington, D.C. In my previous visit to the topic, I expounded why I thought public financing of a stadium for a baseball team was inappropriate. I won't repeat the arguments but I want to elaborate on the news this morning that the D.C. Council added a "50% private financing" rider to the stadium legislation that many, like this columnist, think will kill the move of the former Expos to D.C.

I have a colleague who has been following this story very closely for its entire duration. He sends me all sorts of news about the situation in D.C., so I suppose I can claim to be well read and perhaps well informed on the issue. Understand that my colleague mourns the day (uh, two days, really) when the Senators left D.C., though the first day was the sadder one, because the second Senators team wasn't the "real" team. I think my opposition to public financing of the stadium puzzles him, because like him, I am a baseball fan, though not at the level he has attained. (He can recite the Baseball Encyclopedia, while simultaneously pointing out errors therein. Scary.)

Last night, D.C. Council approved the "50% private financing" amendment by a 7-6 vote. Or 10-3, depending on which story I read. No matter, the mayor now has until June to find the private financing. If it is not found and certified by the city's chief financial officer, the stadium doesn't get built. At least not by the District.

In another month, Council membership changes as those elected in November are sworn into office. These folks ran on a "no taxes for a stadium" platform, so the chances of D.C. Council accepting a stadium completely funded by taxes or other public sources are none to nil. Though revoking the provision within the next week has been dangled as a possibility if major league baseball makes concessions, later news today suggests that just isn't going to happen. Hence the conclusion by many that the former Expos aren't going to D.C. (Where they are going is a different question and I confess I don't have a clue.)

It's ironic, because under the public financing plan, the money came from the private sector, in the form of taxes. So the debate isn't the source of the money, it's a question of whether people in the private sector step up voluntarily or have the money extracted by governmental exaction. All those business entrepreneurs telling us that imposing a tax to build the stadium was a good idea because it would boost the District's economy, revitalize a neighborhood, create jobs, whatever, now have a chance to show that they really believe what they said. In other words, do they believe it when it is their money and not money extracted from others that is put at risk?

This story is a wonderful tax policy hypothetical. Except it's real, not theoretical. As a teaching device, it gets students' interest because it involves sports and D.C. politics. What a volatile mix. It's fun to watch the sports diehards (of whom I'm one) put their desire for a professional sports team up against their distaste for new or higher taxes. For me, it's an easy resolution. I don't want someone else to pay for my hobbies and interests any more than I'd support taxes for the support of knitting centers, no matter what benefits knitting centers would bring. (I refer to knitting because it's apparently a "hot" "hobby" at the moment.....at the last faculty meeting at least two professors were knitting away, perhaps because knitting is stress reducing (so I'm told), and what better place to knit than a faculty meeting?).

Yes, baseball, like knitting, is a good thing. If people want baseball, or knitting, they can invest in it, make purchases of it (tickets, yarn), and support it. If enough people do so, it is viable. If people abandon it, then it fades away. It is not the government's right or duty to shore up a failed private enterprise unless the enterprise is crucial to national defense or survival of the nation. There are all sort of other enterprises into which the government can sink dollars, if it has them, that are far more important and valuable, and that in many instances cannot be undertaken by the private sector alone or at all. I'm thinking of things like vaccines for SARS, securing of the borders and ports, and licensing of broadcast frequencies. Those enterprises also create jobs, boost local economies and revitalize neighborhoods, but more importantly they serve all of us and not just we few (and dwindling) baseball fans.

Making the situation even more repugnant is the economic condition of those asking for assistance. In addition to serving a narrow special interest, professional baseball is awash in money. It is an industry that can afford to pay huge salaries to its employees, whose counterparts in another professional support complain that it's tough to raise a family on several million a year. Gee, would that the rest of us struggle with such a problem. If baseball needs the former Expos to be somewhere rather than disbanded, then baseball needs to solve its own problems, including turning to its overpaid employees and asking them to contribute to the preservation of the team.

Rich people ought not beg (for money). Nor should they be permitted to control, influence, or manipulate politicians into taking from the "don't have as muches" and giving to the "already have more than enoughs." Enough people in D.C. were thinking along the same lines last November, and sent a similar message which a majority of the current Council heard. That's the way democracy should work, and isn't it amazing that for D.C., a place with a history of all sorts of problems, would be the city that sets an example for saying "enough is enough"?

The Tax Notes Article on Tax Blogging 

Warren Rojas, who wrote the article about tax blogging that I mentioned in Monday's posting has given the bloggers mentioned in the article permission to post the artivle provided the credit line is included. So for those of you without access to Tax Notes and eager to read the article, here it is.
Copyright 2004 Tax Analysts. Reprinted with permission.
105 Tax Notes 1498 (Dec. 13, 2004)

Tax Bloggers Use Internet to Widen Tax Policy Appeal

By Warren Rojas -- warrenr@tax.org

Looking to expand tax policy talk beyond the pages of law reviews or academic tomes, a group of tax enthusiasts is infiltrating the "blogosphere" -- an Internet world dominated by armchair journalists with opinions on just about everything -- to vet contemporary tax topics.

Part diary, part discussion, Web logs -- "blogs" for short -- have given ordinary Web surfers a chance to add their two cents to Internet discourse. Although blogs can run the gamut from tracking entertainment gossip to dissecting the latest Supreme Court decisions, mainstream media and even the political parties are beginning to notice them. Both Democrats and Republicans invited bloggers to cover their conventions this year.

Tax professors and practitioners from across the country are betting the buzz will help draw average citizens into tax policy discussions -- a hope that saw the establishment of four tax blogs in 2004 alone.

Atop the Cyber Soapbox

Victor Fleischer, a UCLA law professor, and Jeffrey Kahn, a Santa Clara University law professor, made a case for tax blogging in their 2003 working paper "A Taxing Blog: The Uneasy Case for Blogging Taxation," Tax Notes, Sept. 15, 2003, p. 1441. The primer also served as the manifesto for their short-lived blog, A Taxing Blog (http://taxpolicy.blogspot.com/), a
discussion forum Kahn said helped keep readers and commentators on alert.

"It really forced me to kind of keep track of what's going on and think about some of the positions that were floating out there . . . which is easy to kind of fall behind when you're kind of stuck behind the ivy walls," Kahn said.

Fleischer said he wanted to court tax professors and policymakers with the site, while Kahn said he liked to mine traditional news outlets for content rather than delve into specific code sections.

"Tax is discussed, basically every day, whether people know it or not. So we generally had enough material just going through the newspaper," Kahn said.

They said they had no choice but to shelve the blog after seven months when the time commitment became overwhelming. "Academics don't recognize this as scholarship yet," Fleischer said. "So as an untenured professor, I need to worry about what's going into my tenure file."

James Edward Maule, a Villanova University tax law professor, credited his dean with helping to start the Mauled Again site (http://mauledagain.blogspot.com/). Maule said that although some colleagues appear to shun unconventional teaching techniques and new media outlets, he and the dean recognized that tax blogging's near- instantaneous ability to network makes it an invaluable alternative to traditional scholarship.

"With the blog, I can react very quickly and put it out there. People can see it and react, you get comments, you learn from it," he said. "It's sort of like letting people watch the scientist work in the lab."

Maule's musings have attracted an audience that he says ranges from former students to ordinary taxpayers looking to get a better grasp on complex tax rules.

"I'm writing for people that want to understand what's behind the scenes with tax law," Maule told Tax Analysts, adding that he works to boil down every tax topic as if he were explaining it to a family member.

Paul L. Caron, a University of Cincinnati tax law professor, remains the undisputed champion of tax blogging. His TaxProf Blog (
) has attracted about 1,500 people per day since April 15.

Caron told Tax Analysts that his blog, which blends reference tools with announcements about developing tax issues and upcoming conferences, has helped fulfill a boyhood dream of covering the Red Sox for The Boston Globe -- a mission he says he now applies to mapping the tax landscape. Caron claims the blog also reiterates earlier research themes wherein he warned colleagues about the disconnect between tax and other legal scholars.

"Tax is an area where . . . there's a lot that tax professors can learn from tax lawyers, and vice versa," he said, adding that he hopes any of the almost three dozen other law-related blogs he is developing will see similar success.

Arkansas CPA Kerry M. Kerstetter has been contributing to cyberspace since late 2000 under the guise of the Tax Guru (http://www.taxguru.net/), a pseudonym created for the news and troubleshooting wire he started to help people cope with the headaches that arise from the tax code.

"I work with the IRS and real-life clients every day and see how it fits," Kerstetter said.

Joe Kristan, an Iowa CPA and Roth and Co. shareholder, has built his Tax Update (http://www.rothcpa.com/taxupdates.php/) readership by tracking down offbeat tax stories and offering pertinent tax lessons.

"Ultimately my audience is me. So I'm just trying to keep it interesting," he told Tax Analysts. Kristan said that apart from keeping him plugged into the tax world, the blog is also a low-cost marketing tool for the firm.

"Nobody else is doing it . . [so] it makes us stand out a little bit," Kristan said.

Prof. Clarissa C. Potter (http://actax.blogspot.com/) of Georgetown
University Law Center believes the tax blogosphere is already in danger of being snuffed out.

"I'm not sure that tax really supports very many blogs. It's something that a lot of people have an interest in . . . but you can't make very many interesting casual observations about tax," she said. "It's high-intensity, very detail-oriented, or it's extremely casual, in which case one or two people can do a really good job of sort of covering it."

Caron said that he decided to limit personal opinions in his own posts and that by adhering to a more unbiased mission, he hopes to make his site a permanent fixture.

"Jim Maule has a certain sort of voice, and [New York University tax law professor Daniel N.] Shaviro (http://danshaviro.blogspot.com/) has a certain voice . . . but those folks aren't trying to be the tax blog of record, if you will," Caron said. "And that's what we're trying to be."

While most tax bloggers appear to share resources and freely redirect readers from one site to another, their varied audiences and personalities have helped them open doors to different parts of the tax world.

Dropping Knowledge

Fleischer said one of the highlights of his brief blogging career involved helping an unnamed congressman draft his reelection tax themes. Although the exchange wasn't quite an effort to redesign the tax code, Fleischer said he did get a chance to discuss broader reform issues.

Kahn said replies from the public were always appreciated, but he was especially pleased when feedback arrived from Treasury or Capitol Hill.

"It was never like 'You saved the day,' or 'We'll get it fixed.' But comments, at least a few times, of, you know, 'That's a good thing. I'll mention it to somebody,'" Kahn said. "So I always felt like something was getting done."

Kahn said he was not as fond of messages that came in from the tax protester crowd after he dismissed the movement as a frivolous enterprise. "Most of the e-mails I got were more interested in actual discussion. These were personal attacks," he said.

Kristan said that because of the blog's hometown scope, national attention has been harder to come by. He said that for now he takes comfort in knowing that the local director of revenue and finance tracks the Roth site, because it could provide Kristan with an in at City Hall.

According to Caron, congressional staffers often send breaking news items, including new statutory language and reports from the Joint Committee on Taxation, directly to the site. He suggested that by posting tax-centric articles and studies from the social science research network alongside general-interest blurbs on topics like the income tax consequences of the Oprah Winfrey car giveaway, the site has also helped advance many tax stories that might otherwise go unnoticed by the media.

"I think it has generated discussion and interest elsewhere," Caron said.

Kerstetter couldn't recall any legislative triumphs his blog might have assisted, but said he had managed to attract the attention of IRS auditors he once worked with. The IRS agents weigh in occasionally, but Kerstetter told Tax Analysts he doubts they would ever let their true opinions be known -- something many tax bloggers would like to see.

Rounding Up Recruits

"It would be just tremendous if an IRS agent were to do an anonymous blog and just sort of give an idea of what life looks like from the inside," Kristan said.

Kristan still hopes that former policymakers such as Pamela F. Olson, former Treasury assistant secretary for tax policy, or B. John Williams Jr., former IRS chief counsel, will share their perspectives.

Kerstetter pressed for Treasury to host a comment board or blog allowing practitioners to provide feedback on complicated regulations or difficult tax topics. Kerstetter pointed to the release of the new Schedule M-3 instructions as a good test case for the forum. "There'll be a lot of discussion and feedback on that," he said. "But you don't really see it unless you request the paperwork."

Potter said that although more congressional tax gossip would be appreciated, she'd prefer to see a tax lobbyist join the blogosphere. She said, however, that the inside-Washington set would be reluctant to broadcast their dealings.

"People don't do it [lobbying] just because they love it. They do it to make money," she said. "And all that information . . . that's dollars."

Maule suggested more joint blogs, reasoning that multiple viewpoints help provide more insight and alleviate the time constraints on the blog authors. He also encouraged the tax law community to use blogs to reenergize universities' law reviews.

Maule said he thinks blogs will evolve. "You'll be able to see scholarship evolve in different forms," he said.

Kahn agreed, saying he'd like to see Duke law professor Lawrence A. Zelenak, Yale law professor Michael J. Graetz, and University of Chicago law professor David A. Weisbach add their voices to the growing blogosphere.

"These are just people that I like to read, and I'd be interested to see their daily thoughts," Kahn said.

Warren Rojas
Tax Notes investigative reporter
703-533-4603 Work

Monday, December 13, 2004

Donate the Car? A Scheme That Crashed 

Several years ago, shortly after I began hearing radio ads soliciting the donation of automobiles to charitable organizations, I listened in some bewilderment and surprise when the announcer stated that "you could set the amount of the donation by telling the charity what you think the vehicle is worth." Immediately the possibilities for abuse flooded into my brain. Had I heard incorrectly? No, I heard the same message in other solicitations, not simply for the first charity but for others.

The issue found its 30 seconds of fame in the basic tax class, because it presented such a glaring example of how not to value property for purposes of the charitable contribution deduction. Value isn't what the donor thinks it is. Value is the amount determined by application of principles that determine what a willing buyer and willing seller would agree is the transfer price. I predicted that there would be adverse reaction by the IRS or even the Congress if these arrangements continued.

The arrangements continued. Before too long, charities were offering to tow away wrecks, for which donors could set a value. Donors were setting values by using automobile valuation guides, taking prices applicable to vehicles in good working order, and selecting the highest amount, the one reserved for vehicles in mint condition.

Earlier this year, legislation emerged in Congress to curtail the abuse. It was enacted as part of the American Jobs Creation Act. Simply put, it requires that if a vehicle (including automobiles, boats, and airplanes) is donated to a charity which sells it without any significant intervening use or material improvement by the charity, the deduction cannot exceed the gross proceeds received from the sale of the vehicle. In other words, the market is setting the value. Without getting into what constitutes significant intervening use (think of a charity using the vehicle to deliver meals to shut-ins) or material improvement, suffice it to say that in that instance an appraisal will be required. An exception exists if the one of the charity's programs is to sell vehicles to needy individuals at below-market prices.

The deduction is not allowed unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgement by the charity. The acknowledgement must contain the name and TIN of the taxpayer, and the vehicle VIN. If the charity sells the vehicle, the acknowledgement must contain a certification that the vehicle was sold in an arm's length transaction between unrelated parties, and it must disclose the gross proceeds. Otherwise it must contain certifications concerning significant intervening use or material improvement. A penalty applies if the charity files a false acknowledgement or fails to provide one at all.

This provision has suddenly popped up on practitioners' radar screens. A practitioner asked what happens if a taxpayer obtains an appraisal for a vehicle, donates it, and then learns that the charity sold it for less than the amount for which it was appraised. Barring one of the exceptions (such as sale to low-income individual under program making vehicles available at below-market prices), the taxpayer's deduction is limited to the sale price. Ouch.

Another practitioner described an existing situation which demonstrated that the first practitioner's question wasn't a theoretical exploration of the new law. Though describing a transaction that already happened and thus is not within the effective date of the new law (donations after December 31, 2004), the story is fascinating (though I've changed the numbers slightly). A taxpayer donated a vehicle to a charity, and obtained an appraisal for $15,000, higher than the $12,000 in the valuation guide because the vehicle was in great condition. The charity sold the vehicle for $2,000. Under existing law the problem is that the sale price suggests a bad valuation. Under the new law, the client-taxpayer is, to put it nicely, stuck.

Yes, it would be better to sell the vehicle and donate the cash. If charities continue to act in this manner, they may find themselves with a decreasing number of donations. It also is possible to require the charity to commit to selling the vehicle in the usual market place at arms' length. Other practitioners wondered if there were more facts not known to the client. To whom was the vehicle sold? Why was it sold for a fraction of its value? Is it possible that an employee of the charity purchased the vehicle at a huge discount? I have the impression that the charity was not one with a mission of selling vehicles to lower income individuals at below-market cost. Yet another practitioner mused that it would not be surprising to discover a donor suing the charity on the grounds that the charity acted in a manner that disadvantaged the donor and reduced the donor's tax deduction.

Several weeks ago a friend and adjunct in our Graduate Tax Program predicted that the new law would present problems because many charities have the practice of collecting quantities of vehicles and then whole-lotting them to auction houses. The auction houses remit to the charities a fraction of the auction price, retaining substantial amounts for their auction services. If the auction house is treated as the charity's agent, then the gross sales proceeds would be the gross sales proceeds received by the auction house. As I understand it, though, the charities sell the vehicles wholesale to the auction houses and the auction houses are not the agents. A practitioner who also raised these concerns also pointed out that the charity would need to allocate the amount received from the auction house among the many vehicles sold in the lot and auctioned by the auction house.

Unless the IRS issues regulations permitting the charity to treat the auction price as the gross proceeds from the sale, the new law will disadvantage the donor and bring an end to the practice of vehicle donations. Perhaps that is what is intended?

At least one practitioner thinks so. He suggests that the goal of the Congress was to shut down the vehicle donation programs because most of the money did NOT go to charities, and because many taxpayers were perceived, at least, to overstate value. He noted that charities knew this legislation had been introduced, had tried to stop it, and had failed, succeeding only in persuading the Conference to push the effective date from the June 30, 2004 date in the Senate version to the December 31, 2004 date in the enacted legislation.

This entire episode reminds me of the approach used by teachers and other persons of authority when one or a few of their charges violates a rule or abuses a privilege. Everyone is punished. The lesson, I suppose, is peer pressure. Encouraging students to tell a classmate who is on the edge of a violation, "Don't do that, it will affect all of us adversely," works in some instances. On the party circuit, though, the "I just saved taxes by valuing my junker at $10,000" doesn't bring a "that's not good for society" rejoinder but a request for information on how to jump on the bandwagon.

Personally, I'm not unhappy to see the demise of a practice that generated tax deductions for money going to auction houses, junkyards, and jobbers shipping automobiles to other countries. Someone who wants to benefit a charity can sell the car and donate the proceeds. That will limit the tax deduction to what the charity actually gets.

It also would be nice to see charities suing the promoters who designed this scheme, but I doubt this will come to pass. At least my instincts those few years ago were right. Would that they be so accurate with other things.

Press for the Blog 

MauledAgain was spotlighted, and its author quoted, in Warren Rojas' Tax Notes article of this date (13 December 2004), "Tax Bloggers Use Internet To Widen Tax Policy Appeal" (p 1498 -1500). I don't have a URL yet.

One of the things I said was explained by Warren as follows: "...he works to boil down every tax topic as if he were explaining it to a family member."

Within moments of sharing the news that MauledAgain was again in the spotlight, along comes this reply from a member of the family, a lawyer who "does not do tax":

"So, what's this, we family members constitute the moron litmus test?????????????"

Very funny. Proof that the art of sarcasm is genetic.

And, no, it's not a moron litmus test. It's a matter of explaining things in English, stripped of the tax gobbledygook and cleared of the smoke and mirrors.

Too bad you didn't take my advice and become a tax lawyer. Ha ha.

Misers, Tax Deductions, the Economy and Children 

What? No chocolate chip cookies in this mix? No.

A friend and reader of the blog passed along this link to a Slate column advocating unlimited income tax deductions for individual retirement account contributions. Though the purpose of the various limitations on IRA deductions is to prevent the wealthy from taking disproportionate advantage of the deduction, perhaps on the theory that the wealthy would be investing their discretionary income in any event, the writer of the Slate piece, Steven E. Landsburg, makes the point that saving, no matter who does it, is good for the economy and good for society.

Landsburg rests his argument on the premise that misers do the world a favor. I wish Landsburg had written this column 40 years ago, because it would have been even more useful then, but I'll take what I can get, and that's having this column now.

Without revealing the entire plot, I highlight several points that Landsburg makes that put my brain into gear:

-- The most "generous" person is the miser -- one "who could deplete the world's resources but chooses not to."

-- "The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide."

-- "If you earn a dollar and refuse to spend a dollar, the rest of the world is one dollar richer—because you produced a dollar's worth of goods and didn't consume them."

-- If the unspent dollar goes into the bank, it reduces interest rates to the benefit of borrowers (but, I counter, that works to the detriment of other savers).

-- If the unspent dollar is put in the mattress, it drives down prices.

Landsburg reminds us that Ebenezer Scrooge lent his unused dollars at interest but that his "less conventional namesake Scrooge McDuck" stashed the unused dollars in a vault. I really do like the intersection of cartoons, taxes, and the economy. Go read the full column to get the total effect.

Landsburg then points out that if saving and philanthropy accomplish the same thing, both should be favored by the tax system. I don't think most English literature majors would agree with Landsburg that "the primary moral of A Christmas Carol is that there should be no limit on IRA contributions."

A tax deduction for savings is almost, though not quite, the same thing as a tax on consumption. A tax on consumption, though, is regressive unless structured in some way that frees those most needful of philanthropy (the poor) from the tax. If that happens, the consumption tax becomes regressive as to those not poor and yet lacking in discretionary dollars to save. If those folks decide to forego some consumption in order to save, doesn't that hurt the economy by driving down demand? No, the saved dollars will be loaned to those who need to borrow, and they will in turn drive demand back up. Well, that's a bit too simplistic an explanation in a globalized economy, in a marketplace where debt is used as leverage, and in a world where natural and human-caused catastrophes destroy wealth, sometimes faster than people can create it.

Well, I'll need to keep Landsburg's column handy for another purpose. I'll share its URL with parents who need to counter the ever increasingly sophisticated pleas of their children for expendable dollars, children who add to "I need it" the not-so-subtle-tug-at-the-emotions argument "But if you let me spend this money it will help the economy."

Sunday, December 12, 2004

Social Security Means Test? 

My recent posting about the latest chapter in social security reform brought a question about how the means test I suggested would be implemented. How and where would the lines be drawn?

Most means tests analyze a person's financial condition, and most have evolved to a sophisticated level that examines previous transfers, attempts to hide assets, and the like. Some means tests require that a person demonstrate an inability to generate additional (or sufficient) resources from other sources.

For social security, the "can you get a job?" requirement found in most social welfare programs makes no sense. At some point in life (62? 65? 70?) the decision to retire is reasonable and ought not be challenged. So long as there is a disability element, I favor higher retirement ages because I think older people have much to offer that younger workers can't provide. Wisdom comes to mind. This has nothing to do with the fact I am getting older, because I don't bring much in the way of wisdom to the table.

There exist means tests for Medicare. It ought not be difficult to adapt those tests to social security. Over the years, the Medicare means tests have been refined, and need more refinement, to prevent the "pretend to be poor" schemes that some people delight in pursuing and selling to clients.

Would a means test, though, encourage people to squander their resources, pass up saving for retirement, and make bad investments? Yes, if the Social Security program offered more to a retiree than a retiree could provide for himself or herself through a prudent "save some of the income and don't spend all of it" lifestyle.

Thus, any social security reform with a means test needs to be accompanied by incentives for retirement savings. Those exist in the current tax law, but are complicated, unduly restricted, and to some extent ineffective. After all, there are tens of millions of working Americans with little or no retirement savings, and many workers are not covered by retirement plans.

Tax incentives for saving, with perhaps an exclusion from taxation for certain amounts of retirement withdrawals, would be part of the picture. Another would be an incentive that rewarded social security recipients who did save and invest, were hit with an Enron-type problem, and were left adrift, in contrast to those who didn't bother saving even though they had the means. This might require some interest financial analyses of a person's lifetime earnings, but much of that information already exists and is held by the Social Security Administration. This element of the plan would reflect the notion of "helping those who help themselves."

Some might argue that distinguishing between the "deserving needy" and the "undeserving needy" is wrong. Perhaps the fact that it is done with respect to many existing social assistance programs doesn't make a difference. Some who so argue claim, with solid support, that from a theological or moral perspective one does not differentiate among those in need. Doing so involves making a judgment, and there is an argument for refraining from making judgment. Yet that argument falls short because taken to its logical extent, that is, removing all judgment making from life, would probably lead to the physical extinction of the species within a decade. Judgment in the sense of "are you truly in need or trying to con the system?" is different from judgment in the sense of "you are evil and a pox upon your house." One can judge without being judgmental. That is what lawyers, judges, public servants, and well, all of us, are supposed to learn. It's not easy but it can, and should, be done.

After all, FICA is insurance. Any insurance company makes judgments about the validity of a claim, about the cause of the catastrophe, and about the value of the loss. This is done without casting judgmental aspersions on the claimant.

On a related note, shortly after the President stated that he rejected the idea of raising social security taxes, which brought my question of whether that meant not raising the salary cap, a spokesperson for the Administration stated that raising the salary cap was an open question. Well, that's not something I oppose. In fact, it makes senses. However, it takes us back to semantics. If a tax rate is not increased but a tax base is widened, can one truly say taxes are not being raised? NO. The tax rate is not being raised. That's all. And if the base is increased, taxes are increased even if the rate is not being raised. Adminstration apologists would respond that it was an off-the-cuff response to a question, was intended to mean "no increase in rates" and that I ought not be so critical. Okay. I'll cut the man some slack but suggest he get a little more facile with the words.

But I'm not so sure I'm willing to offer my help if he wants someone to teach him how to talk about taxes. It might be a bit stressful.

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