Wednesday, July 30, 2008

Why Not Pay Off Debt? 

Senator Barack Obama has suggested that if NATO contributes more troops to the war in Afghanistan, the United States would incur a reduction in military spending that could be used "in making sure we're providing tax cuts to middle class families who are struggling with higher gas prices that will have an impact on our economy." But if these savings came to fruition, is that the best use? I don't think so.

First, our national defense is in a weakened condition because of the huge amount of resources expended in the Iraq war. Supplies are being exhausted, future projects have been shelved or postponed, and there are those who argue that military readiness is impaired. Would it not make more sense to use these hypothetical savings to restore the self-defense capability that has been harmed by the Iraq war?

Second, our national debt is spiraling out of control, to the point where national bankruptcy will make the current flood of personal bankruptcies and foreclosures appear to be trivial and petty. The increase in the national debt weakens the dollar, and the weakened dollar is a factor in the recent increase in oil and gasoline prices. Would it not make even more sense to pay down the national debt, causing the dollar to strengthen overseas?

The suggestion that by cutting some spending it is possible to cut government revenue is not unlike an argument by a family burdened with credit card debt that because they have chopped a vacation from their budget that it makes sense to work less and bring home less income. It's that sort of thinking that contributed to the current economic disaster, and it makes no sense for a government to adopt the same sort of flawed financial reasoning.

Reducing taxes so that people can continue to purchase gasoline as they did in 2007 or 2006 makes little sense, considering that oil is in short supply and society needs to be encouraged to find feasible alternatives to the vehicle that runs solely on gasoline. Perhaps the hypothetical savings could be used by the military to find alternatives to oil-powered ships, vehicles, and planes, and those technological developments could filter into the private sector. High gasoline prices have focused attention on a long-term problem, and reducing those prices does nothing to solve the long-term problem. A candidate running on the theme of change should not hesitate to make a change by abandoning vote-getting promises resting on short-term band-aids and adopting a long-term perspective the necessity and benefits of which are shared with the public in an exercise of effective communication.

Monday, July 28, 2008

Restricting Bridge Tolls to Bridge Care 

Back in March, in Soccer Franchise Socks It to Bridge User, I questioned why bridge tolls were being used to fund a professional soccer franchise rather than to maintain and repair bridges under the care of the Delaware River Port Authority (DRPA). A week later, in Bridge Motorists Easy Mark for Inflated User Fees, I criticized the failure of the governors of Pennsylvania and New Jersey to veto the inappropriate use of bridge toll revenues by the DRPA, a power that each governor has and can exercise independently. New Jersey's governor explained his decision by announcing an expectation that when it came time for the DRPA to pump money into unrelated projects in New Jersey, his refusal to veto the use of bridge tolls for unrelated Pennsylvania projects would compel the Pennsylvania governor to refuse to veto the New Jersey project expenditures.

In the first posting, I noted that the DRPA had announced it would be seeking increases in bridge tolls in order to pay for required maintenance. In the second posting, I noted that motorists had no effective control over membership in the DRPA and that the entire structure was unsuitable for the collection and use of user fees. I suggested that the DRPA charter be amended so that it could spend bridge tolls only on bridge maintenance and repair, and not on handouts to "Lincoln Financial Field, the Kimmel Center, the New Jersey Aquarium, and dozens of other projects that surely are not bridges."

Late last week, the DRPA held two days of public hearings on its toll increase proposal. It also is trying to raise the fares for the PATCO rail line that connects New Jersey and Philadelphia through the Benjamin Franklin Bridge. At both hearings, motorists and others showed up and blasted the DRPA for its mismanagement of revenues.According to More anger aimed at DRPA hikes the $350 to $375 million outlay -- depending on who's doing the math -- to construction projects having nothing to do with crossing the Delaware does not sit well with the more than 100 people who showed up at the second hearing to protest the DRPA's plans. According to Commuters decry DRPA bridge toll and train fare hikes, speakers at the first hearing were no less irate. They noted that they had no confidence in the DRPA's budgeting ability, that there was no accountability by the DRPA to the public, and that the DRPA had a history of bad spending habits.

The DRPA plans to eliminate the commuter discount and to cut back on the senior citizen discount. The DRPA's attempt to make the $350 million misdirected funds seem irrelevant to the proposed toll increases makes no sense, because it constitutes roughly one-third of the $1 billion that the DRPA claims is required to repair and maintain the bridges.

Members of the DRPA promised that the revenues from the toll increases would be used for the bridges and not for other projects. That misses the point. The toll increases could be reduced by 1/3 had the DRPA not funneled its revenue into other projects. Approximately $35 million remains in DRPA funds earmarked for other projects, and there was no explanation of why this money could not be returned to bridge repairs, permitting an additional 3% reduction in the proposed toll increases.

One speaker told the DRPA, ""As much as you say you get it, you obviously don't get it. If I earmark money for a new Cadillac and my roof starts leaking, I defer the car and fix the roof." It is comforting to see someone understand the point I made back in March. It would be even more comforting to see the two governors replace the DRPA members with people who understand the concept of civic trust and fiduciary duty while proposing to their respective legislatures changes in the DRPA charter that would restrict its activities and spending to Delaware River bridges and the PATCO system.

Friday, July 25, 2008

A Torrent of Tax Charts 

The supply of weather-related analogies to describe Andrew Mitchel's tax chart production is beginning to run dry. How ironic, considering that in the spirit of the season, I've reached for a reference to the way hurricane rains come down. One thing I can share is that Andrew's tax chart endeavors bear no resemblance to a stationary front. He's ever on the move.

This time, he has generated 53 new charts, bringing the total to 600. In Roman numerals, that's DC. That's just too extenuated a connection to have earned a place in the post title. Oh, well, on to the list:
1. Cadbury Schweppes(Freedom of Establishment and U.K. CFC Legislation)
2. Hazeltine (Busted 351 Exchange)
3. Indofood International Finance Ltd. (Hypothetical Beneficial Owner Under Indonesia-Netherlands DTA)
4. Marks & Spencer (U.K. Group Relief for Non-U.K. Losses)
5. Prévost Car, Inc. ("Beneficial Owner" Under Canada-Netherlands Tax Treaty)
6. Vitale (Partner in Limited Partnership Engaged in U.S. Trade or Business)
7. Vodafone 2 (Freedom of Establishment & U.K. CFC Legislation)
8. Weikel (351 Exchange Followed by B Reorganization)
9. Rev. Rul. 55-143 (Nonresident Alien With Funds in Bank Safe-Deposit Box At Time Of Death)
10. Rev. Rul. 69-413 (Parent of Acquiror Not A Party to A Purported F Reorganization)
11. Rev. Rul. 73-442 (DISC Single Class of Stock Requirement)
12. Rev. Rul. 73-605 (Consolidated Tax Liability-Member Payments)
13. Rev. Rul. 77-479 (Recapitalization Prior to IPO)
14. Rev. Rul. 78-281 (Non-Functional Currency Borrowing & Purchase)
15. Rev. Rul. 78-397 (Forward Triangular Merger: Circular Flow of Cash)
16. Rev. Rul. 79-150 (Conversion of Brazilian "S.A." to "Limitada")
17. Rev. Rul. 79-289 (D & F Reorganization with Liabilities Exceeding Basis)
18. Rev. Rul. 80-239 (301 Distribution Thru Conduit Entity)
19. Rev. Rul. 81-132 (Transferor Ownership Not Attributed in 351 Exchange for Treaty Purposes)
20. Rev. Rul. 81-247, Sit. 1 (COBE - Merger With a Drop of All Assets)
21. Rev. Rul. 81-247, Sit. 2 (COBE - Merger With a Drop of Some Assets)
22. Rev. Rul. 83-156 (351 Followed by 721)
23. Rev. Rul. 84-44 (Forward Triangular Merger Not Part of 351 Exchange)
24. Rev. Rul. 84-104 (Consolidation Treated As Merger In Reverse Triangular Merger)
25. Rev. Rul. 84-111, Sit. 1 (Partnership Conversion to Corporation: Assets Down & Stock Up)
26. Rev. Rul. 84-111, Sit. 2 (Partnership Conversion to Corporation: Assets Up & Assets Down)
27. Rev. Rul. 84-111, Sit. 3 (Partnership Conversion to Corporation: Partnership Interests Down)
28. Rev. Rul. 87-110 (368 Reorganization of 50% Partner Terminates Partnership)
29. Rev. Rul. 88-48 ("Sub-All" In C Reorganization With 50% of Assets Sold)
30. Rev. Rul. 92-85 Sit. 1 (FDAP Withholding on 304 Transaction)
31. Rev. Rul. 92-85 Sit. 2 (FDAP Withholding on 304 Transaction)
32. Notice 94-93 (Domestic Inversion With Disproportionate Shares Issued)
33. Rev. Rul. 96-29 Sit. 1 (F Reorganization Followed By IPO)
34. Rev. Rul. 96-29 Sit. 2 (Forward Triangular Merger Followed By F Reorganization)
35. Notice 2003-22 (Offshore Deferred Compensation Arrangement (Listed Transaction))
36. Rev. Rul. 2008-15, Sit. 1 (Section 4371 Excise Tax on Outbound Ins. & Fgn-to-Fgn Reins.)
37. Rev. Rul. 2008-15, Sit. 2 (Section 4371 Excise Tax on Outbound Reins. & Fgn-to-Fgn Reins.)
38. Rev. Rul. 2008-15, Sit. 3 (Section 4371 Excise Tax on Outbound Ins. & Fgn-to-Fgn Reins.)
39. Rev. Rul. 2008-15, Sit. 4 (Section 4371 Excise Tax on Outbound Ins. & Fgn-to-Fgn Reins.)
40. Rev. Rul. 2008-18, Sit. 1 (S Election In F Reorg With QSub)
41. Rev. Rul. 2008-18, Sit. 2 (S Election In F Reorg With QSub)
42. Section 304 Anti-Abuse Rule [Temp. Reg. 1.304-4T(a), Ex.]
43. Killer Forward Triangular Merger [Temp Reg. 1.367(b)-14T(b)(4), Ex.]
44. Two Party Like-Kind Exchange: Partial Boot [Reg. 1.1031(b)-1(b), Example 1] 45. Two Party Like-Kind Exchange: Assumption of Liabilities [Reg. 1.1031(d)-2, Example 2]
46. Ultimate Beneficial Owners Under Derivative Benefits Test [PLR 200201025]
47. Ultimately Owned Under Derivative Benefits Test [PLR 200409025]
48. Outbound 332 Liquidation With 80% Domestic Subsidiary Corporation [PLR 200448013]
49. PFIC Look-Thru For Gain on 25% Owned Subsidiary [PLR 200604020]
50. Outbound Forward Triangular Merger With Subsidiaries
51. Swiss Treaty - LOB: Active Trade or Business Test [Switz.-U.S. Income Tax Treaty MOU Para. 4, Ex. I]
52. U.S. Partnership vs. Foreign Partnership (CFC vs. Non-CFC)
The charts can be accessed by topic or chronologically.

For those needing cross-references to my previous commentary on Andrew's chart work, look here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, and here.

Wednesday, July 23, 2008

Why Bother Having Prerequisites? 

Once again, I was startled to learn something that a student shared on a course evaluation. According to this student, it is "unreasonable" for me to expect students to remember what they had learned in previous courses. Whoa! That is so shocking I cannot fathom where or how the student came to that conclusion.

Perhaps it should not have surprised me. In Partnership Taxation, there are numerous times when the material requires us to "look back" at concepts studied in Taxation of Property Dispositions, which is a prerequisite for Partnership Taxation. Yet far more often than not, students looked bewildered when I asked them to recall the process of dealing with nonrecognition, depreciation recapture, installment sales, gain realized, or other subjects from the previous course. Until now, I had thought it was for some reason other than what appears to be the case.

It appears that some students consider what is learned in a course something to be returned on an examination and then purged from the brain. The goal for these students, it appears, is to earn a string of grades that permits the hanging of a degree on an office wall. Excuse me, but I had considered the goal to be an immersion into and a mastering of tax law and tax thinking processes so that one could be an effective tax practitioner. That means carrying into practice, and implicitly, into subsequent courses, what is learned in the program. The point of earning a master’s degree, whether an LL.M. or M.T., is to demonstrate a mastery of the subject. Oh, how I wish for that three-hour, oral examination before a panel of faculty used in other disciplines to be incorporated into J.D. and graduate tax programs.

It’s not that I expect students to remember Revenue Rulings citations, or the intricacies of how mortgages are treated in like-kind exchanges. I’m encountering students who continue to confuse amount realized with gain realized. I’m finding that some students don’t understand that the disposition of an installment note can trigger gain even if the disposition is by gift. I’m discovering that some students don’t grasp that there is no depreciation recapture with respect to real property subject to straight-line MACRS. It’s not that these things aren’t being taught. They are. I’ve checked. The person teaching the course was a student in several of mine. He was an excellent student, he knows how I teach, and he brings the same effort and goals to the classroom. He simply has no way of preventing the "brain dump" in which some students seem to engage after the exam. Goodness, I’ve had students tell me, in response to my advice that they go back and review their notes on depreciation recapture, or nonrecognition, or whatever, that they deleted or tossed out their notes. On the other hand, some former students with more than a few years of practice tell me they still have their notes and outlines from my courses, so perhaps there is hope that the "brain clearing and note trashing" approach is confined and eliminated before it becomes a trend.

Monday, July 21, 2008

Helping Students with Tax Problem Solving Processes: The Spurned Checklist 

Though I usually expect students to learn tax problem processes by following how a problem is solved in class, noting the sequence of the analysis and identifying the relevant and necessary information, there are some instances in which I provide the process to the students in the form of a checklist, or what could better be called a step-by-step process list. In the basic tax course, for example, I do this with the overall process of computing the tax liability of a minor child. In Partnership Taxation, I do this for sales of partnership interests, partnership operating distributions, partnership liquidating distributions, and for some others.

The partnership checklists are long, in some instances requiring 15 major steps, some of which have as many as 6 sub-steps. Sequence is essential. Doing something out of order makes things a mess. For example, the taxable year must be brought up to date before other steps are analyzed. Yet students continue to jump to the first issue they see, which usually is the section 751 analysis, and they end up missing parts of the analysis and in some instances reaching erroneous conclusions. What is lacking is what I call academic discipline. The checklist must take precedence over the impulse that strikes the student when reading the problem.

One of the most serious difficulties I have noticed over the years is the application of the wrong checklist. Students sometimes use the sale checklist when the transaction is a distribution, and vice versa. The first step in the checklist, incidentally, is "What is it? Is it a sale? Is it a distribution?" I repeatedly try to hammer home the importance of using the appropriate checklist. Every semester 10 to 20 percent of the students use the wrong checklist. It kills their grade. For a few years, in the early part of this decade, the percentage of students using the wrong checklist declines. "Progress!" I thought to myself. I thought too soon. Three semesters ago, the percentage of students using the wrong checklist increased. But that isn’t the worst part.

Much to my surprise, last fall I noticed a few students who didn’t even bother to use any checklist. Then, this past spring, it became an epidemic. "Checklist? We don’t need no stinkin’ checklist!" What was written can best be described as disorganized snippets of disconnected repetition of rules or facts, smatterings of analysis relevant or not relevant to the question, and huge omissions from the sequences that should have been followed. The lack of academic discipline evidenced by these answers is overwhelming. Are these the same students who complain that they haven’t been told what the answers are? I do not know. Are these the same students who report investing one or two hours a week in a course for which my strongly recommended out-of-classroom study time is four to eight hours per week? I do not know. What I do know is that these are not the students earning A, B+, and B grades. If they were to earn the same grade in their other courses that they earn by totally disregarding my advice and instructions with respect to the use of checklists that I give them, they would not graduate. That would be good, because no client is well served by a practitioner who uses the wrong checklist or, worse, doesn’t use one at all and overlooks most of what needs attention.

Friday, July 18, 2008

Tax Rules and Tax Problem Solving Processes 

One of those epiphany moments happened to me when I read a complaint on a course evaluation filled out by a student in the Graduate Tax Program. The gripe was one I have seen on some other evaluations. The student simply claims, "He doesn’t tell us what he wants the answer to be."

The epiphany is the realization of how deeply entrenched in rule memorization our students have become. They think that a tax practitioner, and some J.D. students think that a lawyer, demonstrates proficiency by reciting rules. The occasional token deference to application to facts might show up when one of these students confronts one of my assigned problems or examination question.

Somehow the students are not getting the message that the key to successful tax practice, or legal practice, is adapting a problem solving, or problem prevention, process to a set of facts. Because there are so many possible fact combinations that clients can bring to the practitioner, a process is far more valuable than a set of rules, and in many instances knowing the rules with nothing more is quite inadequate. If mere knowledge of rules were sufficient, computers could be programmed to replace practitioners.

When I try to determine how our students end up with a fixation on rules, my attention turns to high school, and even more significantly, to undergraduate education. Consider an example. In the K-5 grades, students begin learning arithmetic by learning some "rules." They learn that two plus three equals five. In a good school system, they learn why that is so. Students memorize multiplication tables, but with good teachers, they learn that there is a system, or process, underlying those tables, and the memorization slowly transforms into comprehension. When it is time to tackle the computation of 7,598,394 added to 9,430,484, it is time for a process, and not the memorization of a rule that gives the answer. Likewise, when asked to multiply 498 by 984, a memorized multiplication table, standing alone, isn’t worth anything. Students who study and learn the process of adding or multiplying do well. So what happens to turn good students into Graduate Tax Program participants who want the answer provided so that it can be repeated back to the instructor?

What happens, I think, is that some high school teachers and many, many undergraduate faculty reward the regurgitation of information. The "google" effect, the notion that all answers exist "on the internet," compounds the problem. It is easier to test what a student knows rather than whether a student can think. Often, the testing of a student’s ability to think is wrapped in the testing of a student’s expression of his or her feelings about an event, a book, or a work of art.

The more troubling aspect of this student demand for a slate of question answers provided before the question is asked, for lists of rules, and for grading based on the ability to "give back" the rules is that by the time they reach my classes they should have been broken of this bad academic habit. Understandably, some students might reject the message and yet succeed in passing courses until they reach mine. But I don’t think that explains the substantial proportion of students who have not yet grasped the idea that it is through process that one solves and prevents tax problems.

Perhaps an example from Partnership Taxation explains what is so disturbing. As complex as they are, the rules with respect to the sharing of liabilities boil down to two basic precepts. For recourse debt, a partner’s share is the portion that the partner would bear if everyone pursued their legal rights with respect to the debt. For nonrecourse debt, a three-step analysis is applied. I could ask, on an examination, for a repetition of those rules. That, however, is a waste of time. It only tells me that the student can copy information from his or her notes onto an examination paper. Rather, sometimes I present them with the following true-false question, or a variation: "Because limited partners have limited liability, they never share in recourse liabilities." The answer is false. I also ask why, because a guesser has a 50% chance of being correct. Why? Because a limited partner could guarantee a recourse debt. Alternatively, a limited partner may be obligated to contribute additional capital when called upon to do so under the terms of the partnership agreement. What is the most frequent response? True. The reason? Because limited partners are liable only up to the amount of their original contribution. That is nonsense, but I see it so frequently, in almost the same language each time, that I am convinced there is some old outline or other "study guide" floating around with this incorrect assertion. The better students think about the proposition and apply the rules to possible facts. The not-so-good students “look up” the answer, and in this instance, fall flat on their faces. Now, of course, they can read this post and repeat the answer back to me, assuming I ask the question again. But has these students learned to think for themselves? Or for their clients?

Wednesday, July 16, 2008

America's Top 25 Heritage Sites and Me 

American Heritage Magazine, a subscription to which came to me as a gift from my younger sister the lawyer, recently published the results of a reader poll for America's Top 25 Heritage sites. I decided to match up my travel decisions with those results, to see how closely my interest in historical events and places aligned with the American Heritage Magazine list. This quick enterprise also provides me with hints for future travel.

I have visited, at least once and in several instances more than once, these places:

1. Smithsonian Institution Museums, Washington, DC
2. Gettysburg National Military Park, Gettysburg, PA
3. Statue of Liberty National Monument and Ellis Island, New York, NY
5. U.S. Capitol, Washington, DC
6. Independence Hall and Liberty Bell Center, Philadelphia, PA
7. Colonial Williamsburg, Williamsburg, VA
8. The White House, Washington, DC
9. Yellowstone National Park, WY
10. Arlington National Cemetery and Arlington House, The Robert E. Lee National Memorial, Arlington, VA
11. Historic Jamestowne and Jamestown Settlement, VA
12. Mt. Rushmore and Wounded Knee Battlefield, MT
13. USS Constitution, Boston, MA
14. George Washington's Mount Vernon Estate and Gardens and George Washington's Grist Mill and Distillery, Mount Vernon,VA
15. Bunker Hill Monument and Battle of Bunker Hill Museum, Charlestown, MA
17. Ford's Theatre National Historic Site, Washington, DC
18. Shenandoah National Park and Manassas National Battlefield Park, Manassas, VA
19. The Alamo at the San Antonio Missions National Historic Park, San Antonio, TX
20. Little Bighorn Battlefield National Monument, Crow Agency, MT
21. Valley Forge, Washington's Crossing, PA
23. Niagara Falls, Fort Niagara, NY
25. Old State House and Faneuil Hall, Boston, MA

I have not visited these sites:

4. USS Arizona and USS Missouri Memorials, Pearl Harbor, HI
16. Appomattox Court House National Historical Park, Appomattox, VA
22. The Wright Brothers National Memorial, Manteo, NC
24. Antietam and Monocacy Battlefields, Frederick, MD

It helps that at one time or another in my life I have lived in, near, or within a day's trip ride of most of the sites I've visited. There are interesting stories about most of the visits. Some occurred when I was but a child, thanks to my parents' interest in history and their willingness to teach their children about these places. Others occurred more recently, two within the past several months, thanks to a friend who also is willing to teach and share knowledge and who was surprised to learn that I had not been to those places.

Surely a "Top 50" list will appear because there are sites that many will claim should be on the list. For example, Promontory, UT probably would make the Top 50 list, along with Fallen Timbers, Ticonderoga, Yorktown, Sutter's Mill, and other places where important events in our nation's history took place. When that list appears, I'll figure out if I maintain that .840 batting average.

Monday, July 14, 2008

If Lunch is Free, Are Taxes Waived? 

Recently, I finished reading David Cay Johnston's "Free Lunch," a powerful expose of how a small group of mostly wealthy individuals and, in some instances, their corporate enterprises, have milked the nation for their own gain. It took me some time to read the book because I could handle only one or two chapters at a time. It would have been far more pleasant had I found a book that persuaded me that my carping about how Congress does business was off the mark. Instead, I discovered even more reasons to understand my distaste for the modern American political process and the greed of those hardly in need.

Johnston answers a question that touches the core of what this nation should be about. How can it be, that in a nation as economically successful as ours has been, so many people are jobless, facing foreclosure and bankruptcy, lacking quality health care, and struggling to make ends meet? The answer lies in wealth and income distribution, which in recent years has tilted increasingly in favor of a very few at the expense of the great many.

Centuries ago, nobility enriched themselves through the use of serfs, slaves, and indentured servants. These workers put more into the economy than they withdrew, permitting the wealthy to accumulate more than they contributed. Though present-day America, and most other places, does not countenance outright slavery and servitude in a physical sense, Johnston demonstrates how, and this is my articulation, not his, economic slavery runs rampant.

It's worse than corporate executives pulling down compensation that is hundreds and thousands of times what the rank-and-file earn, despite the impossibility of an executive contributing hundreds or thousands of times more genuine value than does an ordinary worker. It's worse than the obvious biases in the tax system that favor the wealthy at the expense of the middle class, and, to a lesser extent, the working poor.

What has been transpiring behind closed doors, in corporate boardrooms and during high-end restaurant meals, in politicians' offices and on junkets to here and there is infuriating. Early in the book, Johnston describes how lobbyists persuade governments, or more accurately, legislators and agency bureaucrats, to tilt the marketplace in favor of their clients. The so-called free market isn't free, not only because government is reluctant to enact and enforce laws that protect the market, but also because government interferes with the market in ways that benefit a select few.

Some of the abuse is wrapped up in federal, state, and local tax systems. There are taxes imposed on the public that fund business enterprises that profit one or two or a few owners. There are taxes that go uncollected because enforcement is ignored, though excuse after excuse is paraded forth when and if the discrepancies are noted publicly.

Johnston does more than provide a list of abuses, abuses that range from subsidies for elite golf courses to fraudulent stock options, from corrupted deregulation to the sale of taxpayer-financed public assets like turnpikes and sewer plants to manipulation of the electricity market, and from government-assisted oligopolies to lying about the cost of the Medicare prescription drug legislation. Johnston presents these machinations not as would a lawyer using technical language and obscure references, but through stories. Where he can, he reveals what was happening behind the headlines unbeknownst to all but the few who were directing the efforts and the few who had no choice but to go along for the ride. One does not need to be a lawyer, an accountant, an actuary, or a private investigator to learn from Johnston's account of what went wrong. This book not only is an interesting read, a powerful indictment, and an understandable explanation, it also should be required reading during this election year.

Johnston's book was published late last year, which suggests it went to print no later than last fall. When the book appeared, the subprime mortgage crisis had yet to crescendo into the catastrophe it has become, gasoline prices were yet to explode upwards, and the other economic problems of recent months had yet to surface. Johnston, though, provides the explanation for how the economy has become such a mess. It's a wonder that the charade lasted this long. Unless the underlying causes of current economic woes are identified, understood, and eliminated, all of the stimulus payments, gasoline tax holidays, and other superficial distractions will do nothing to prevent America from back-sliding into a medieval system of economic nobles and economic serfs, or worse. One supposes that medieval serfs knew that they were being mistreated and understood why. One wonders whether most Americans understand why their economic situations are so shaky at best. The sad news is that it will take much more than reform of the federal tax system to fix things. The worst news is that much of what is proposed as reform is more of the charade.

Friday, July 11, 2008

Tax Without Nuance 

It is said that teachers learn from students and that the students do not have a monopoly on the learning that takes place in a course. My experience corroborates that observation. One avenue of learning, for me, is the student evaluation form. Specifically, the comments sometimes cause me to recoil in horror.

A student in last semester's Graduate Tax Program Partnership Taxation course, in an effort to persuade those reading the evaluations that I am a terrible teacher, noted that one of my teaching flaws was the dedication of class time to "nuances." I suppose that this student thinks that tax without nuance should be the focus of graduate tax program education.

The disadvantage to anonymous student evaluations is that there is no way to engage this student in a dialogue that would assist him or her in restructuring his or her view of taxation so that in practice the student doesn't trip over the inattention to detail that dovetails with a lack of appreciation for the role of nuance in taxation. This anonymity is designed to protect students, though the fact no one sees the evaluations until grades are submitted and distributed makes any sort of disadvantage to identification quite unlikely. Somewhere, there is a student soon to be practitioner with LL.M. or M.T. who sneers at the value of nuance in taxation.

Nuance is the essence of taxation. Perhaps there could be taxation without nuance, but I teach to prepare students for the realities of what they must handle, and with limited time, exploration of some ideal world must be relegated to the Tax Policy course. For example, there is a difference between inventory items and substantially appreciated inventory items. The former are in play when a partnership interest is sold, whereas the latter is relevant when there are distributions. It's a distinction that trips up the inattentive. I focus on this difference in class, and often find a place for it on the exam. It is not alone, of course, but it is one of the simpler nuances to use as an illustration. Failure to respect this sort of nuance is the doorway to malpractice.

Perhaps there is some expectation that teachers will "dumb down" the tax law to some short sound-bite-like generalities that can be returned as such in a memorization demonstration. However and wherever that expectation is developed, it is the obligation of the tax teacher to destroy it. It is an expectation to be dashed. It's harsh, but necessary. It is disappointing to me that someone can reach a course as advanced as Partnership Taxation in a Graduate Tax Program and still be under the impression that those who omit or gloss over nuances are somehow better teachers than those who give nuance in tax its due.

What have I learned? I've learned that students can arrive in my courses with unrealistic expectations. And I have learned that I must add yet another one to the list of misimpressions that I specifically identify and target for destruction during the course. The clients of these present and future tax practitioners deserve no less.

Wednesday, July 09, 2008

$4.50 or $45,000,000? You Do the Tax Return! 

In What is the Value of the Charitable Deduction for the Human Body?, David Brennan asks a good question. The standard answer is that one looks to the amount at which a willing buyer and a willing seller would exchange the item. Is there a market for human bodies? Apparently so, even though trafficking in them is illegal. Read this book review but be careful when, where, and with whom you do so. According to this analysis, try $45,000,000.

I can't resist making this observation. If the same concepts that generated the notion of component depreciation were applied, the human body would be worth the sum of the value of each of its ingredients. According to this computation, we're talking $4.50.

Monday, July 07, 2008

Coordinating Income Tax Return Due Dates 

Several days ago, in IR-2008-84, the IRS announced it was changing the due date for extensions of time to file returns from October 15 to September 15 for partnerships, S corporations, trusts, and estates. The reasoning makes sense as a way to deal with a practical return filing problem, but the solution only goes so far. I am going to focus on partnerships just to make it a bit easier to explain the problem.

Under existing rules, a partnership that obtains an extension of time to file its return must file by October 15. That is the date on which it must supply Forms K-1 to its partners. But those partners, presumably having obtained their own extensions of time to file because they did not have the tax information from the partnership, also must file on October 15. In all likelihood, the partnership has mailed the Forms K-1 and the partner doesn't get them until October 16, 17, 18, or later.

Under the revised rules, the partnership must file and send the Forms K-1 by September 15. That should allow sufficient time for the partners to file by October 15. Or does it?

Suppose the partnership is a partner in another partnership that is a partner in a third partnership. It isn't difficult to imagine that the partnership won't get its return filed by September 15 because the third partnership's Form K-1 for its partner (the second partnership) doesn't get to the second partnership until, say, September 19, and then the second partnership gets the Form K-1 to the first partnership by, say, September 23. So now the first partnership gets the Form K-1 to its partners by, say, September 27. One of its partners is, yes, an S corporation. So the S corporation files, and gets the Form K-1 to its shareholders by October 1. One of the shareholders is a trust. It now files, and gets its information to its beneficiary by October 5…

The problem simply is that when there is a "chain" of pass-through entities, the theory breaks down when it meets practice. Surely if the chain isn't too long, the IRS change does solve the problem. But if the chain is long, or there are excessive delays in getting Forms to partners, shareholders, and beneficiaries, or if the preparers cannot do the returns the same day the Forms K-1 arrive, the problem continues.

Do I have an answer? No. So long as the pass-through concept exists, the problem exists. One could prohibit long chains, but there are serious constitutional and policy problems with that approach. One could come up with some sort of super-extension system, but the tax is due on April 15, so the taxpayer, to avoid interest and penalties, must play it safe and overpay. And all of this assumes that all the entities have the same calendar taxable year.

Is it any wonder when the "make tax returns due on the person's birthday" proposal resurfaces now and then, that I grimace? I described that nonsense in Tick Tock... Countdown to April 15, so I won't delve into it here.

All in all, the IRS deserves kudos for trying to solve the problem and coming up with something that deals with most of the situations afflicted by it. Now I must go and change my Partnership Taxation class notes, illustrations, slide sets, and problem answers.

Sunday, July 06, 2008

Virtual Fireworks? What's Next? Virtual Oil? 

On Friday, in When Is a Shortage Not a Shortage?, I noted the decline in fireworks importation because of a shortage of shipping ports in China. I suggested that depending on one country for a product or service wrapped up in American life could be antithetical to independence.

Thanks to my younger sister, I now have discovered how we will cope when there are no more fireworks available for importation. We'll go virtual. How quickly can you click a mouse? No, not the animal.

So what's next? Virtual oil? Virtual gasoline? Perhaps we can pay virtual taxes with virtual dollars. The possibilities are, well, virtual.

Friday, July 04, 2008

When Is a Shortage Not a Shortage? 

It's one thing after another, isn't it? A few weeks ago, in If Only It Were Prices Getting Depressed , I noted that hops and barley malt could be added to the growing list of items for which shortages are popping up. Now comes news, reported, for example in Fireworks Shortage Could Dampen July 4th that there is insufficient fireworks for pyrotechnicians to do all that they had planned to do for this evening's Independence Day celebrations. No town having an event will go without fireworks, but the word I don't see but that comes to mind is rationing.

Technically, the shortage is not a shortage of fireworks. It's a shortage of ports in China through which they can be shipped to other countries, such as ours. It seems that the fireworks industry in China, which makes almost all of the world's fireworks, had a few not-so-small problems. First, a warehouse holding fireworks awaiting export simply exploded. Second, officials discovered shippers trying to send out containers filled with fireworks but labeled as something else, probably much more benign. Third, because of the Olympics, the government closed several ports to shipment of fireworks.

There's no backup. If this problem isn't cleared up soon, say bye-bye to fireworks at baseball games, county fairs, and perhaps next year's Independence Day celebrations. If that's not sufficiently alarming, think of the essential goods we use but no longer manufacture. What happens if China invades Taiwan, the United Nations imposes a trade sanctions, and/or the United States and other nations take military action? What ultimately did in Japan during World War Two was its inability to maintain imports of oil and other essential goods. Come to think of it, that was a factor in Japan's decision to go to war in the 1930s and to attack the United States in 1941.

So fireworks are not essential. We could live, inconveniently, without them. Can we say the same of everything else we need and import? If the next world war is an economic battle fought in part in cyberspace, could it already have started?

All those morose thoughts aside, Happy Fourth of July.

Wednesday, July 02, 2008

So What Are YOU Doing With Your Stimulus Payment? 

In Can a Tax Rebate Band-Aid Stop the Economic Bleeding?, I argued that the tax rebate, now with the fancy name of stimulus payment, wasn't going to do much of anything to fix the economic mess. I did confess, in Tax Rebate Program Gets More Expensive, that:
To be fair, I should give this "stimulus" concept credit where credit is due. It has stimulated some of my blog posts that otherwise would not have existed.
So here we go, it's another post about that stimulus payment.

The question this time is simply what are taxpayers doing with their rebate, excuse me, stimulus payments? Forget about statistics. Take a look at How I Spent My Stimulus. I like the one that refers to the stimulation of Italy's economy. I wonder if the politicians who created the economic stimulus program are checking out that page. Better yet, I wonder if someone is doing a poll that asks, "Does the rebate stimulate you to vote for the incumbent?"

The question next time is one I've already asked. What happens when the flow of stimulus payment checks comes to a close? Is it back to debt financing?

Newer Posts Older Posts

This page is powered by Blogger. Isn't yours?