MauledAgain

If March roars in like a lion, which it did here, surely tax season debuts each year with the usual scavenger hunt for deductions. This year is no different. What is particularly annoying is that with the tax law so complicated, no one benefits when erroneous information further complicates taxpayer attempts to comply and tax return preparer attempts to be of service to their client. I confess to being easily annoyed when bad tax advice makes the rounds. The latest entry, or should I say re-entry, into the find-a-deduction sweepstakes is the "personal grooming expense deduction."

The February 2006 issue of "Costco Connection" has a tax-savings article in which the author, Howard Scott, in a paragraph headed "Seek out other expenses" writes: "Do you incur personal grooming expenses because image is important?" [To get to the page, after clicking on the URL, click on "Smart Tax Tips" at the bottom left, and then click on "15 Tax Talk" on the right-hand side.] My thanks to Greg Stewart of Spokane, Washington, for bringing this to the attention of the ABA-TAX listserve's subscribers.

There is no such deduction. There is a long list of cases denying deductions for personal grooming, no matter the connection it might have to the conduct of a trade or business. For example, in Thomas v. Comr., T.C. Memo 1981-348, the Tax Court wrote: "Whether or not petitioner was required as a condition to her employment to be neatly coiffed, the expenses she incurred for this purpose are inherently personal in nature and cannot be considered as business expenses."

Technically, Scott has done nothing more than to ask a question. But considering that it follows a list of other questions, all focusing on deductions that would be available if the answer is yes, the inference is that a "yes" to the question would trigger a deduction. The inference surely is intended, considering the litany of items covered by the list of questions. After all, if the intent simply is to get taxpayers thinking about anything, why not ask questions such as "Do you have a pet dog?" or "Did you go to the movies?" Answering "yes" to these questions would not generate a valid tax deduction.

Is it fair to suggest that the question claims a personal grooming expense deduction exists? In light of other advice in the article. yes. Scott explains that even if a taxpayer has an accountant, the taxpayer knows his or her business better than the accountant does. In most cases, that's true. Scott then writes that the accountant might be "conservative." Perhaps. I'm sure he means conservative in the cautious and not political sense. Being conservative, Scott concludes, "often translates into a reluctance to implement new stratagies." So does this mean claiming a deduction for personal grooming expenses is simply a new strategy? I don't think so. Claiming impermissible deductions is a strategy almost as old as the income tax law. Refraining from doing so is not my definition of conservative. It's my definition of sensible, law-abiding, and prudent.

It may appear that I'm "picking on" Howard Scott. That's not what I'm trying to do. I didn't seek him out. He put his article into the public spotlight, and many taxpayers have read or will read it. All I want to do is to alert people to two simple things. First, there is no deduction for personal grooming expenses. Second, beware of what you read about taxes and rely only on advice from people whose tax-advice-giving reputations you can and do trust. Before relying on advice from Scott, I'd want to know more about him.

One place to start is the Costco article. Someone pointed out an error in the article which I did not notice when I looked for the reference to personal grooming expenses. In another paragraph, discussing the benefits of hiring one's children, Scott uses $4,850 as the amount below which the children can use a standard deduction to shelter income from taxation. For 2005, however, the amount is $5,000. It's too late, however, to hire one's children for 2005. That year is past. So in giving advice for 2006, the amount to use would be $5,150.

Standing alone, the use of the wrong amount would generally be nothing more than an error. All tax practitioners make errors, though most are caught before damage is done. When an article contains an error, advice to push one's "conservative" accountant into new stratagies, and a suggestion that personal grooming expenses are deductible, red flags begin to flutter. The odds that the suggestion of a personal grooming expense deduction is the consequence of an editor's change unreviewed by the author fade to zero under these circumstances.

Following up on someone else's research, I looked around, and here is what has been found. The Costco article describes Scott as a "longtime writer and tax preparer specializing in small businesses" and explains he "has published more than 1,700 magazine articles and three books." Among those 1,700 articles must be the one appearing in Pizza Today and the two-paragraph "Avoiding an Audit" advice in Remodeling Online. According to this report, Scott not only is a free-lance writer and tax consultant, he also is a beekeeper.

Why have I invested my time in this story? Because umpteen million Costco customers will read the article. Tax practitioners are bracing themselves for clients arriving with a copy of the Costco article, along with grooming expense receipts, ready to argue that Costco's expert says that a deduction is available. No sooner had someone wondered aloud if people would take Scott's advice to heart than someone else answered affirmatively. A client arrived with a copy of the Costco article and announced she should be allowed to deduct the cost of her pedicures. Why? She often wears sandals and her toes need to look nice. The client's job? She sells carpets. Turned out the client was sufficiently informed about taxes and after a few minutes, let on that she was rattling her tax practitioner's cage. Most clients are not so savvy. Several years ago, another subscriber reported, clients asked about the "$5,000 vacation deduction." I wonder where that idea originated. Wherever it did, like the new ones that are popping up, they need to be discredited before innocent taxpayers get into trouble relying on them.

But for every client with some understanding of basic tax law, there are a dozen who grab onto the idea of a tax-savings deduction with the grip of a drowning person reaching for the life preserver. Add in the vanishing breed of people who do their own returns, some of whom surely will take the grooming expense question's intended inference to its logical conclusion, and there's real reason to worry about the impact of bad tax advice in an age when bad advice can circle the globe in minutes.

Speaking of circling the globe, there is a place where personal grooming expenses can be deducted. Where? In Australia, as explained on H&R Block's Tax Tips for Australian taxpayers. The Australian deduction, by the way, is permitted if it is "incidental" and "relevant to the taxpayer's occupation." So, want a deduction for personal grooming deductions that enhance your image? Move to Australia.

And here's hoping no one gets stung by claiming a deduction for personal grooming expenses.

During the 2005 tax filing season, the California Franchise Tax Board (FTB) administered a pilot program for a project called ReadyReturn. A group of taxpayers was invited to join the pilot program. Under the pilot program, the FTB prepared the taxpayer's return, and then gave the taxpayer the opportunity to verify the information, make any necessary changes, and sign and submit the return. According to the FTB report, approximately 50,000 taxpayers were invited to join the pilot program, of whom nearly 9,400 filed the return prepared by the FTB (5,600 by e-file and 3,800 using traditional paper). The ReadyReturn site provides slightly higher numbers: 11,620 participants (5,610 by e-file and 6,010 by paper).

The FTB prepares the taxpayer's return by "using wage and withholding information that is already reported to the state by employers." Accordingly, the taxpayers invited to participate were those "who file the most simple returns."

FTB surveys of the participants revealed that almost all of them considered ReadyReturn easy to understand, almost all of them concluded they saved time using ReadyReturn, and more than 90% also concluded it was more convenient than how they filed the previous year. Roughly 80% reported that ReadyReturn made them "feel less anxious about filing their tax returns." The survey also discovered that 99% of the participants were “Very Satisfied” or “Satisfied” with ReadyReturn, roughly 97% would use it again, and about 90% thought ReadyReturn was a service that the government should provide. Only 5% indicated they believed their personal information was not secure with ReadyReturn. Many of the taxpayers invited to participate who chose not to do so turned down the opportunity because they had already filed their return, though others expressed doubt about the security of using the Internet, were not comfortable receiving a pre-filled-in return, or preferred a non-government e-filing company. The FTB reported that ReadyReturns were less likely to fall out of processing because of errors, that ReadyReturn users were less likely to receive error notices, and that ReadyReturn introduced "thousands" of paper filers to e-filing, with more than half of the ReadyReturn participants who used e-filing having used paper filing for the previous year.

Based on these results, the FTB requested that the program be fully implemented. However, it would be limited to taxpayers who are single, have no dependents, claim the standard deduction, and have income derived solely from wages.

The project, however, is not without its critics. For example, the National Taxpayers Union (NTU) produced an issue brief, California's ReadyReturn Program: Fool's Gold in the Golden State, in which it pointed out numerous concerns. First, the NTU wondered why the FTB should "get into the tax return preparation business," considering that there are more than adequate numbers of tax return preparers available. Second, the FTB provides a free e-file service, which should mitigate concerns about private industry charging taxpayers for that service. Third, there is no guarantee that the FTB would make fewer computational mistakes than other preparers. Fourth, the FTB is unlikely to "scour the tax code for ways to reduce the filer's prepared tax liability." Fifth, changes in the taxpayer's status could change eligibility, posing the risk that taxpayers would not understand the need to switch to a private preparer. Sixth, there is a cost in generating FTB-prepared returns that end up in the trash because the taxpayer became ineligible to participate or otherwise chose to pass up the chance. Seventh, ReadyReturn makes it less likely that taxpayers will understand how much of their income is being withheld or otherwise paid in taxes because they will not look at the return or have a preparer explain it. Eighth, some taxpayers may see ReadyReturn as a new approach to increasing tax collections. Ninth, the service would not be free because its costs are borne by taxpayers generally. Ninth, ReadyReturn could lead to FTB offering bookkeeping services or estimated tax computation advice, and, at the very least, would justify requests by the FTB for more employees and more funding. Concerns from other critics echo these arguments.

The California State Senate Republican caucus has prepared a briefing report on ReadyReturn that devotes far more space to objections than to the advantages touted by its supporters. The Howard Jarvis Taxpayers Association released a commentary in which it called ReadyReturn a "prime example of California's long line of information technology boondoggles," claimed that "[i]n addition to the conflict of interest in having the tax collector also serve as the tax preparer, the program presents a myriad of accountability problems, and suggested "ReadyReturn should be returned to sender with a cancellation notice."

The project also has its supporters. Joe Bankman, a member of the law faculty at Stanford, explains in "Simple Filing for Average Citizens: The California ReadyReturn" that ReadyReturn offers a solution to the trials and tribulations of fling tax returns. He rejects the arguments made by its critics, and rues the effectiveness of those lobbying on behalf of the tax return preparation industry. He concludes with a call for consideration of a similar program at the federal level. A lobbyists for the California Tax Reform Association explained that ReadyReturn was good for taxpayer privacy because taxpayers would "know what kind of information is there. It's simple and straightforward and demystifies the process of filing taxes."

Five months ago, I concluded that ReadyReturn wasn't ready for prime time. In my analysis I weighed the arguments in favor of its use against the arguments that it is not the answer to the problems it purports to ameliorate. Recently, as the FTB's request for full implementation came under attack in the California legislative process, the debate resurfaced. New arguments have been advanced, principally to paint ReadyReturn as a program to save low-income taxpayers from fee-paying and sometimes predatory tax return preparers. After considering these new arguments, my conclusion remains unchanged.

ReadyReturn has been hailed as a "move in the right direction" to deal with increasingly complex provisions that directly affect taxpayers least likely to have the ability to handle them, such as the additional wrinkles added to the earned income tax credit (EITC) by the legislation providing tax incentives for recovery from Hurricanes Katrina, Rita, and Wilma. The concern is that even more low-income taxpayers will be driven to use fee-charging preparers because volunteer preparers cannot compete with the likes of H&R Block. Aside from the fact that California's ReadyReturn cannot do anything for people in the Gulf Coast region filing 2005 federal income tax returns, justifying the implementation of government-prepared tax returns by pointing to government-generated complexity is a bootstrap argument. All that would be accomplished is to make more and more low-income taxpayers wards of the state when it comes to tax compliance. The notion that these taxpayers will review the return "proposed" by a government is impractical. Low-income taxpayers would either accept the government proposal, even if it was incorrect, or go to a fee-charging preparer for help in deciding whether to accept it.

ReadyReturn has been defended because the only "realistic alternative to ReadyReturn is commercial tax return preparation services, which have a vested interest in complexity." Yet ReadyReturn would cement the complexity, because by sheltering taxpayers from its impact, it removes an incentive for taxpayers to press for genuine simplification. What better way to guarantee complexity than to make taxpayers think it doesn't exist because taxpaying has allegedly been "demystified" by letting the government decide what the taxpayer should pay? Simplicity in the form of marching in lockstep to government-dictated tax returns is a dangerously misleading attribute of ReadyReturn, and the theoretical proposition that taxpayers can reject the government's proposed return flies in the face of reality. Low-income taxpayers already are at the mercy of the government, and ought not think they are being befriended by an entity that by law is not set up to be the low-income taxpayer advocate. Consider, for example, the difficulties faced by low-income individuals when dealing with government-controlled child support and custody matters. Incidentally, almost every tax return preparer with whom I communicate abhors the complexity that has turned the tax law into an impenetrable mess. The suggestion, as has been made, that tax return preparers might have been involved in creating the absurd complexities of the hurricane relief EITC, ignores the fact that most complexity arises either from special interests seeking to hide a narrowly focused tax benefit or from theoretical solutions proposed by folks with little or no practical experience in dealing with taxes. Tax return preparers are busy enough and coping with more tax nonsense than they wish than to have encouraged the addition of more mazes into the tax law.

Ready return has been described as a good idea being plowed under by the tax return preparation lobby. That lobby is perceived as inimical to a free market, and as joining forces to conspire against the public. Yet, all things considered, tax return preparers and tax return preparation software don't carry prices that smack of monopolistic or conspiratorial
behavior. Consumer choice when it comes to finding a tax return preparer is orders of magnitude broader than when it comes, for example, to choosing a computer operating system. There is genuine competition among preparers and tax return software developers. The problem with applying market analysis is that it presupposes the government should be a player in the market. How, then, can a government protect the market when it's playing in it? Unless there is a reason for the government to monopolize a market (e.g., national defense), it ought to stay out of it.

ReadyReturn has been characterized as a move toward simplicity on the premise that a government employee has a vested interest in simplicity because it means less work. I disagree. I translate a desire for less work into a temptation to cut corners. And we know whose corner will be cut when that happens. Most government employees have a sense of "protect the revenue" built into their mind set by their training. The folks programming the computer aren't working in algorithms to determine if the taxpayer is claiming the correct number of dependents. Although the FTB request for full implementation would not include taxpayers with dependents, legislators who support the project want to expand it so that it does. All that the FTB could do is to list the dependents claimed on the previous year's return, because it does not have access to information about support, living in the abode, etc. But I wonder if its need for that information would open the door to government collection of even more information about every aspect of the taxpayer's life that affects taxes. Trust me, most things in life affect tax liability.

ReadyReturn has also been characterized as a program that would eliminate the business incentive of tax return preparers to understate tax liability in order to generate refunds, especially if being compensated with a percentage of the refund. Tax return preparer misconduct is not a situation running out of control; in contrast, at least one study has found that a "clear majority" comply with the highest tax return preparation ethical standards. That is not surprising, because there are in place sufficient incentives for tax return preparers to be honest. Penalties, prison, professional disbarment, and similar adverse consequences face the unscrupulous preparer. The problem is that the government has a miserable track record enforcing existing penalties against unethical preparers. Perhaps the FTB could stop trying to play tax return preparer and funnel some resources into helping law enforcement police the tax return preparation industry. Making the government the tax return preparer for low-income, and eventually middle-income taxpayers, on account of the misdeeds of the small number of preparers who act illegally is overkill. One question not asked by the FTB was, "Who do you trust more, the revenue department or your tax return preparer?" Somewhere in here I have visions of people being treated by government doctors, having their tax returns prepared by government employees, having their music censored by government bureaucrats, having their hair length set by government barbers, and so on. The words, "I'm from the government and I'm here to help you, uh, take over your life, because, after all, there are some not very nice people out there doing bad things preparing tax returns,." ought to send chills down the spine of every citizen. ReadyReturn increases dependency on government. That simply is dangerous.

Ready Return has been defended as protection against tax return preparers who advance refunds to low-income taxpayers at a very high rate of interest. Isn't usury illegal? Ought it not be? Ought not our government schools teach people not to borrow money at a high rate of interest and to report such transactions to the appropriate law-enforcement agencies? And if we are to worry about protecting taxpayers as consumers, why should revenue departments be presumed any better at protecting their customers (taxpayers) than are businesses in the private sector subject to all sorts of constraints and requirements designed to ensure consumer protection? It is rather ironic that ReadyReturn would be defended as protection against high-interest loans when governments think nothing of paying zero interest on overwithheld taxes that are refunded months after they've been collected. Casting government tax return preparation as the taxpayer's friend in setting appropriate interest rates makes little sense.

ReadyReturn has been hailed as a remedy for the difficulties faced by taxpayers when the preparer is "long-gone when the IRS asks for more information" or disallows a credit or deduction fraudulently obtained by an unscrupulous tax return preparer, because ReadyReturn provides the low-income taxpayer with more information with which to evaluate the analysis of their returns. Yet aren't these taxpayers perceived as needing the assistance of a ReadyReturn program because they cannot read, cannot deal with numbers, and cannot understand taxes? How are they going to do anything with the information supposedly provided by the FTB? How could the FTB possibly have more information than the taxpayer has? Users of ReadyReturn are put in the position of having a tax return prepared by the government that is presumed to be correct, and the burden of fixing an error is shifted to the taxpayer.

ReadyReturn has been described as a cost-savings rejection of "outsourcing" tax return preparation to the private sector, because it takes overhead and profit out of the cost of return preparation. The notion that there are no overhead costs to government programs makes no sense to me. Surely, ReadyReturn and the staff running it use electricity, water, and health plan benefits.

ReadyReturn removes third-party protection from taxpayer-revenue department relationships. Will one branch of the FTB audit the work of another branch? Isn't there a conflict of interest when the auditor is preparing the return to be audited? Absolutely. Has not a lesson been learned from Enron about the importance of independence? Apparently not.

ReadyReturn masks the problem. As I concluded in my October commentary on ReadyReturn, the solution to complexity is genuine simplification. To achieve that goal, complexity must be revealed for the economic and social drag that it is. The legislative addiction to special interests, of which complexity is a major symptom, requires withdrawal. Withdrawal needs to be discomforting. Enablers of complexity need to be identified, and should not be permitted to cushion the consequences of addiction that lull its victims into a false sense of security. Low-income taxpayers have no incentive to learn why the tax law has become such an agony to taxpayers unless they experience some of that agony. Sheltering low-income taxpayers, and eventually the middle class taxpayers the FTB and ReadyReturn proponents want to bring into the project, dampens criticism of the tax system, weakens the tax reform movement, and trims the number of citizens considering the tax law to be a problem.

Yet the advocates of ReadyReturn have a noble purpose. I think they genuinely want to help low-income taxpayers. I think some of them, at least, genuinely think that ReadyReturn is the answer. They mean well, and they have done society a service by bringing much needed attention to the dangers posed to society by tax complexity and to the aggravations afflicting taxpayers when they try to comply with those laws. Yet when reading reports that the taxpayers using ReadyReturn are happy, I wonder how much of that happiness is blissful ignorance? An informed and educated citizenry is essential to a democracy, and so long as the tax law is as it is, keeping citizens insulated from the reality merely guarantees perpetuation of the mess.
The urge to protect low-income taxpayers is not unlike the urge to protect one's child from falling off the bicycle while learning to ride. In the long run, the child must be allowed to fall.

I, too, deplore the increase in the need for paid preparers. The answer, though, is to make independent tax return preparation services available to all taxpayers who cannot afford those services, at least until the true need for tax preparation assistance is removed.

After arguing on a listserve that "The goal of helping low-income taxpayers can be achieved in less risky, more informative, and more effective ways," I was challenged to elaborate, and that if I've "got something better to offer," I should show my hand. Fair enough.

If there is going to be the expenditure of government funds to assist low-income taxpayers comply with the tax law, I'd rather see government pay the bill, thus keeping the third-party intermediary in the picture and thus keeping government honest and unconflicted. My experience with most (not all) state revenue department officials (and some IRS employees) is that they do not have the training or mind-set to prepare tax returns for low-income and middle class taxpayers as an advocate of the taxpayer. Paying the bill for independent preparers to do the job would keep the spotlight on the national disgrace (and threat to economic survival) that the tax law has become over the past three decades.

Therefore, the money and resources being expended by the State of California to program, design, implement, and operate ReadyReturn should be used to finance a "tax return preparation credit" to be claimed by low-income taxpayers (however defined) who pay tax return preparers to prepare their return (and perhaps by those who prepare their own returns though that raises a gross income issue). In this manner, the tax return is prepared by someone or some entity outside of government, which makes it less risky because it puts a second set (or maybe even the only set) of knowledgeable eyes on the return (assuming the low-income taxpayer isn't knowledgeable and assuming, as I do, that the government employees
programming, designing, implementing, and operating the program are insufficiently knowledgeable about the specific tax situation of each taxpayer to know what is best for the taxpayer and in at least some instances are not up to speed on the law). This approach is more informative because it lets low-income taxpayers remain aware of the complexity imposed on them by state legislatures and revenue departments (and if implemented at the federal level, by the Congress and the IRS). This approach is more effective because it would generate fewer situations in which the taxpayer return shows a tax liability higher than (or refundable credit lower than) what an independent tax return preparer would generate. The credit could be disallowed to taxpayers who use a state-funded volunteer tax return preparation service, such as VITA programs that do state returns.

Francine Lipman of Chapman University School of Law considered the tax return preparation credit in her article, "The Working Poor are Paying for Government Benefits: Fixing the Hole in the Anti-Poverty Purse." She rejected the idea because she concluded it "would encourage rather than discourage the use of paid tax preparers with more even benefits being shifted away from working poor families and their communities to paid tax preparers." So stated, that seems true, but from a different perspective the question is whether the FTB should use tax revenue to pay its employees to prepare returns or transfer those dollars to low-income taxpayers so that they can hire independent tax return preparers to prepare their returns. So viewed, the credit removes the conflict of interest, preserves taxpayer choice in selecting a preparer, and decreases the risk that the FTB prepared return would be accepted blindly by taxpayers.

I have as much faith in things working out well for individual taxpayers under any sort of "we'll take over, thank you, sit back and relax" government-run program as I do in things working out for the folks trying to make sense of the Medicare mess. In both instances people theoretically can get third-party assistance, but if they cannot afford it, they don't get it. That's why I prefer the credit. If it means more tax return preparers get more business, that's simply another symptom of the tax complexity mess. The solution is to fix the problem, and not put a leaky band-aid on a symptom.

During the past two months I have described some of the issues arising from a careful reading of the definition of qualifying child enacted by the Working Families Tax Relief Act of 2004. The original post, reflecting a step-sibling hypothetical I had crafted for my basic tax class, was followed by a discussion of other problems identified by the National Association of Enrolled Agents and an elaboration of one particular NAEA hypothetical with respect to which I backtracked and conceded that even where I had tried to define away the problem there indeed was one.

Frank Degen of the NAEA has alerted me to the fact that in the Treasury Department's "Blue Book" for the proposed 2007 federal budget, there is a proposal to deal with the qualifying child definition problem. After setting forth existing law, and then pretty much using the existing hypotheticals to explain why corrective action is required, the Blue Book describes the specific changes under consideration:

The proposal clarifies the definition of a qualifying child and who is eligible to claim these children.

Definition of Qualifying Child. The proposal would stipulate that a taxpayer is not a qualifying child of another individual if the taxpayer is older than that individual. However, an individual could be a qualifying child of a younger sibling if that individual is permanently and totally disabled. In addition, an individual who is married and files a joint return (unless that return is filed only as a claim for a refund) would not be considered a qualifying child for the child-related tax benefits, including the child tax credit.

Eligibility of Taxpayer for Child-Related Tax Benefits. If a parent resides with his or her child for over half the year, only the parent would be eligible to claim the child as a qualifying child. However, the parent could waive the child-related tax benefits to another member of the household who has higher AGI and is otherwise eligible for the child tax benefits. In addition, dependent filers would not be eligible for child-related tax benefits.

The proposal would be effective for tax years beginning after December 31, 2006.

Four quick comments:

1. I haven't yet examined the proposal to determine if it resolves all of the problems.

2. I note that the changes are more than clarifying, because they add some wrinkles that don't exist in the law as enacted by the Working Families Tax Relief Act of 2004.

3. The proposed effective date pretty much makes the legislation non-binding for taxable years before 2007. Where does that leave people who are struggling to figure out the correct answer? They can treat the legislation as guidance on existing law. Perhaps they can be favored with an IRS ruling or announcement that interprets existing law in a manner consistent with the proposed legislation.

4. Perhaps the proposal will be enacted. Perhaps it will not. Perhaps it will be enacted in altered form, making reliance on it (see #3 above) somewhat of a gamble.

In early October, I shared an extensive analysis of why academic blogging will change academic, including legal, scholarship. The debate over the role of blogging in the professional life of an academic continues unabated. The debate over the role of blogging in the professional life of a law professor is getting at least as much attention. It's time to look again at the situation.

What inspires this review is a National Law Journal article carrying a title that solidifies my October 2005 prediction: "Blogging law profs assault ivory tower," and which came to my attention on Paul Caron's TaxProf Blog. The article's sub-title, "Is it scholarship, or a cyber chit-chat?" sums up the discussion rather nicely, if not starkly. From my vantage point, it appears that the so-called traditionalists are beginning to sense the threat to their way of academic life that blogs, and technology generally, pose. Understandably, they seem concerned that the foundations of the think/write/publish routine to which they are accustomed and with which they are comfortable are beginning to crumble. The irony is that the approach held so dear by traditionalists probably isn't old enough to qualify as a tradition.

Here's a blast from one side of the debate: "They have nothing to do with scholarship," according to a professor at the University of Texas School of Law. Thank you, Prof. Litvak. I'm certain you have never examined the posts on this blog. I'll admit that some of my writing on MauledAgain isn't legal scholarship and I don't pretend that it is. On the other hand, I have shared thorough analyses of specific tax law issues. Although these posts don't drown in footnotes, or their equivalent, there are sufficient links to sources of law and other commentary to inform the reader who needs additional material. Of course, your definition of "legal scholarship" probably requires approval by second-year and third-year law students who know less about tax than they know about the other areas of the law even though they purport to select for publication the most appropriate articles addressing those areas. What most of those students do is to look up authors' law schools in the U.S. News and World Report rankings, and proceed accordingly.

Here's another blast from the same commentator: "Blogging has the presumption that you write something thoughtful, important and valuable. I don't think the medium allows that." What nonsense. When I write one of my deeply analytical blog posts, I go through the same process I follow when I write one of my Tax Management, Inc. portfolios, one of my books, or one of my law journal articles. I begin by thinking. The medium, Prof. Litvak, has nothing to do with that. Well, wait. If by "the medium" you mean the internet, it has a lot to do with that. I find and learn about issues much more quickly than in the days when print advance sheets wandered onto my desk days or weeks after the event. I find and learn about transactions and events that did not come to my attention in pre-digital days. So "the medium" gives me more about which I can think. Then I analyze. Once again, I go through the same process. My brain cells function in the same way. If there is a difference, it's that I have almost instantaneous access to what others are thinking, ideas that would not see, and do not see, the light of day in the world of student-edited, paper format reviews that often are too late to be of use. Sometimes I seek feedback, and learn far more from listserv discussion than I would chatting with the one or two members of my faculty who have expertise in my area of the law. Then I write. The difference is that when I'm ready to publish, I publish. I don't go begging to second-year and third-year law students who have little if anything to add to the analysis, and whose focus on the technical insanities of the Blue Book or whatever citation format directive is in vogue adds weeks if not months to the process without adding anything to the message. In other words, at least some of what I (and others) write on our blogs indeed is thoughtful, important, and valuable.

I suppose it's an awful feeling watch the world rush by. Is it helplessness? Is it fear? Is it clutching the last remnants of the pre-digital world hoping that somehow the tide can be turned back? What is it that causes the "traditionalists" to resist change? As I mentioned in my October 2005 post, I understand the plight of the untenured faculty member whose professional future lies in the hands of tenure committees and faculties dominated by traditionalists. But I don't understand the tenured folks who cling to what they did ten, twenty, or thirty years ago with the same tenacity that they grip their chalk and scribble on their blackboards, blissfully ignoring anything that has happened in law school pedagogy since 1985.

Some of it, I think, is a conviction that learning, and adapting to, the new world of law school publishing (and teaching) is beyond one's ability. More nonsense. When given the opportunity, my educational technology mentor (Henry H. Perritt, Jr., now of Chicago-Kent College of Law) was exceptional in leading the self-doubting but adventuresome faculty member into the twenty-first century. I've had similar opportunities, and although I'm not as accomplished as Hank, I've had some success. So, for me, there's no doubt that lack of ability has nothing to do with "traditionalists" who fear, resent, oppose, and avoid scholarship by blogging. Perhaps it has something to do with a perception of inability, not with the technology, but with surviving in a publishing world where the competitive balance has shifted.

Even some law professor bloggers are critical. A member of the Chapman University School of Law faculty claims that blogging does not lend itself to intellectualism because "It's not very thoughtful." Why? Does thoughtfulness exist only for things that proceed at a snail's pace? One of my late colleagues was well-known for spending enormous amounts of time carefully crafting answers to student e-mails. I challenge anyone to demonstrate that because he sent an e-mail in reply that he lacked thoughtfulness. There are times I spend hours researching and writing a blog post. If that is thoughtlessness, how does the end result contain so much well-reasoned analysis?

Perhaps it's a matter of recognizing the thoughtlessness of some blogging. But why then paint all bloggers with the same broad brush? Isn't that totally inconsistent with the widely accepted view in the law professorate that one should not stereotype others? After all, just because some law review articles are horrendous, and they are, does not mean all law review articles are terrible.

Fortunately, I'm not alone when it comes to advocating the long-needed change in legal scholarship. Professor Ann Althouse of the University of Wisconsin Law School "calls law review articles 'bloated and pompous' and 'a dinosaur of a writing model.'" She makes her point well. She argues that law review publishing not only is slow, but its tendency to cram dozens of footnotes onto every page makes the material difficult to read. Part of the problem with the footnotes is the culture of circular citation, which highlights the narrow arena in which law reviews play. Author A cites author B, who cites author C, who cites author D, who cites author A. Douglas Berman, who teaches law at Ohio State, calls the process "incestuous."

Not surprisingly, the best comments come from a practitioner. After all, these are the people who are making law every day, touching the lives of clients, dealing with reality, facing deadlines, and getting things done. Stanley Bernstein, a senior partner with a securities litigation firm in New York, said, "I don't need a think tank, I need advocacy." Despite having been a law review editor while in law school, Bernstein explained that he rarely uses law review articles. His explanation is a condemnation supreme: "By the time you need to use them, they are generally a year or two out of date."

The tide is indeed turning. According to the National Law Journal article, "[a]t least four federal circuit court opinions and more than 10 federal district court opinions also have cited Prof. Berman's blog. The latest count of law professor blogs, surely understated, is close to 200. I know it's understated because the newest blogs at Villanova haven't yet been catalogued by the counting sites.

Admittedly, some of the blog-bashers are no less harsh in their critiques of the traditional system. But when they advocate things such as peer-reviewed journals, they are doing nothing more than suggesting a jump from the sinking ship of law publishing to the similarly endangered publishing vessels of other disciplines. Where is the creativity? Where are the new ideas to match new technologies? Why not a system by which law professors read, review, rate, and goodness, perhaps even rank, law blogs? Why not a peer-review system of awarding tags of "good," "very good," "excellent," and "superb" to law blogs, perhaps classifying them by their purpose (such as new information, analysis, political opinion, etc.)? Why not? It's an idea whose time has probably come. And if law professors don't get together and assume responsibility for this sort of valuable law blog vetting, others will. Can you imagine the outcry over the U.S. News and World Report law blog rankings? If that is to be avoided, the American Association of Law Schools and the American Bar Association Section of Legal Education had best get the ball rolling now, and it had best roll at a speed far surpassing that at which traditional law publishing moves. Time, folks, is of the essence.

Reader James Butler has brought to my attention a story about two women, each of whom is donating a kidney to the other's husband. They are not donating to their own husbands because of blood type mismatches.

The two women connected through the Paired Donation Consortium, which facilitates matching between living donors. So far, the Consortium has registered 80 pairs of donors and recipients, leading to 12 kidney swaps already in place.

James, who is a tax lawyer, reacted to the story as tax lawyers do. He immediately saw the tax issues. He wrote:

It would seem each women is "donating" a kidney to the
other's husband in exchange for a like donation. While the IRS may never dare raise the issue, could this create taxable income to each couple? They aren't gifts since something is expected in return. There isn't a like kind exchange since this isn't a business or investment type activity. Selling a kidney is illegal but swapping them seems ok.

Is it taxable? If it is taxable, would it be income to the wife or the husband? The husband gets something of value in exchange for something given up by the wife. Maybe they are constructive gifts to the husbands followed by an exchange?

I think James gets an A for describing the black letter law. The exchange is not a gift because they each get something in return. Each has a basis of zero in the exchanged kidney. Each has an amount realized equal to the fair market value of a kidney. The like-kind nonrecognition rules do not apply because it's not a trade, business, or investment activity. No other non-recognition provisions are relevant. There's no exclusion applicable to the transaction. The lack of cash is not an obstacle to the taxation of bartered exchanges. Though James didn't mention it, IRS rulings with respect to the sale of blood and blood products suggest that the income would be ordinary income and perhaps personal services compensation income. There's no charitable contribution deduction because no charity receives the kidneys. The substance over form doctrine treats the exchange as a swap of kidneys between the two women, each then making a gift to her husband. My guess is that there are medical expenses, which ought to be deductible to the extent they exceed the 7.5 percent adjusted gross income floor.

That's the easy part. The tough question is whether the IRS would require taxation. What a heartless (ouch) approach to take. The IRS does have a track record in this area. So, too, does the Justice Department.

The first case is that of United States v. Garber, 607 F.2d 92 (5th Cir. 1979). Dorothy Garber learned, after the birth of her third child, that her blood contained a rare antibody useful in producing blood group typing serum. At the time she was one of only two or three people in the entire world with the antibody. A manufacturer of diagnostic reagents, Dade Reagents, persuaded her to sell to them blood plasma. The process involved withdrawing a pint of her blood, putting it through plasmapheresis to extract plasma by centrifuge, and returning the red blood cells to her body. Each appointment lasted from 90 to 150 minutes, generated a pint of plasma from two pints of blood, required injection of an incompatible blood type to increase the antibodies, caused pain and discomfort, and posed the risk of blood clots and hepatitis. Garber was paid on a sliding scale reflecting the strength of the plasma obtained in the particular appointment.

Eventually, other reagent manufacturers lured her away from Dade Reagents by offering higher prices for her plasma. She began selling both to Associated Biologicals and to Biomedical Industries. Both paid money for each extraction, and Biomedical also provided a salary, a leased automobile, and a bonus. At one point Garber was doing six extractions a month.

Although she reported the salary, Garber did not report the other payments as income, even though she received a Form 1099 from Biomedical. She did not receive such forms from Associated Biologicals. Consequently, she was INDICTED for willfully and knowingly attempting to evade a portion of her income tax liability by filing false and fraudulent income tax returns. She was convicted with respect to one of the years in issue, and sentenced to 18 months in prison, all but 60 days of which was suspended, placed on probation, and fined $5,000 in addition to her civil liabilities and penalties.

On appeal, the Fifth Circuit held that the trial court's refusal to admit the expert testimony of a CPA retained by Garber, after permitting the government's witness, an IRS agent, to testify that the transactions generated unreported income, was reversible error and remanded the case. The appellate court noted that besides the disagreement over the characterization of the transactions as performance of services or sale of products, there was disagreement in the latter instance over the valuation of the plasma. The court then made a total mess of its explanation by confusing basis and value and making some rather bizarre assertions:

The cost of Garber's blood plasma, containing its rare antibody, cannot be mathematically computed by aggregating the market cost of its components such as salt and water. That would be equivalent to calculating the basis in a master artist's portrait by costing the canvas and paints. No evidence of any original cost exists in the case of Garber's unusual natural body fluid.

In such a situation it may well be that its value should be deemed equal to the price a willing buyer would pay a willing seller on the open market. [citations omitted] If this were the proper basis, the exchange would be a wash resulting in no tax consequences.

Sorry, but the basis in a master artist's portrait IS the cost of the canvas and paints. Moreover, setting basis equal to value makes no sense in the absence of taxation. Nor does setting value equal to the price at which something would exchange on the open market establish basis. And they wonder why I continue to insist that basic federal income taxation should be a required course. We're talking some very core concepts.

The concurring judge, though agreeing that the trial court's evidentiary decision was reversible error, stated, sensibly:

Because I conclude that the transactions under investigation constituted services and the income derived therefrom taxable under 61(a)(1), I should have preferred that the court say so in positive terms. The question would thus cease to be a novel one for those considering it in the future.

The dissent, in which three other judges joined, concluded that there was gross income, pointed out that Garber had spent for personal purposes the portion of her fees that the payor had put into a savings account earmarked for tax payments, had not been told by the IRS that the payments were not income, and had not sought professional advice. The dissent agreed, though, with the concurring judge that the majority opinion did not provide appropriate guidance on the legal question of whether the payments were gross income. It pointed out, accurately, that if the payments were not gross income, the case should be reversed and the indictment dismissed, but that by remanding the case, the majority implied that the payments were gross income.

The good news: After the remand, the government dropped the prosecution. There's no record of whether Garber paid the unreported tax.

A year later, the Tax Court addressed the deductibility of various expenses by another plasma donor, Margaret Cramer Green. Green v. Commissioner, 754 T.C. 1229 (1980). In this case, Green was paid by Serologicals, Inc. for generating plasma through plasmapheresis. Green reported the amounts she received as gross income, offset by claimed business expense deductions. The court's analysis is most interesting, especially in light of the Garber opinions issued a year earlier:

Both parties to this case base their respective arguments upon the implied assumptions that petitioner realized income upon receiving payment for her plasma and that this income should be characterized as ordinary. Although these assumptions may seem obvious, since this case presents some novel legal questions, we feel compelled to lay a firmer foundation for our conclusions herein.

Clearly, petitioner realized income. Section 61 states that "gross income means all income from whatever source derived.4 Such sweeping language must be broadly interpreted to fulfill the intent of Congress to implement a comprehensive income tax. [citations omitted] Congress intended "to use the full measure of its taxing power." [citations omitted] Fulfilling this intent, the well-settled test for income is that enunciated in Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955), which looks for "undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion." The Fifth Circuit, to which appeal in this case would go, has followed this test as a search for lasting economic gain realized primarily by the taxpayer personally, [citations omitted] See also the Fifth Circuit's general discussions of this and other matters as they specifically relate to blood plasma sales in United States v. Garber, 607 F.2d 92 (5th Cir. 1979), revg. and remanding, on rehearing en banc, 589 F.2d 843 (1979), a criminal fraud case. All of these gains are taxable, unless specifically excluded. [citations omitted] Petitioner received the payments for her plasma directly, without any conditions subsequent which might require repayment of the funds or might control her use of the funds. The payments were not subject to any exclusion from income. [footnote omitted] The payments were gross income to petitioner under section 61.

Next, we must determine the character of the income realized by petitioner for her plasma. This income was not capital gain. Capital gain involves the sale or exchange of a capital asset. Section 1222(1) and (3). If petitioner's activity is viewed as the sale of property held for sale to customers in the ordinary course of business, petitioner's blood plasma, the property held for sale, is not a capital asset. Sec. 1221(1). On the other hand, if her activity is viewed as a service, her blood plasma is an integral part of that service and is not part of a sale or exchange. [citations omitted] Therefore, regardless of how the activity is viewed, it is not the sale or exchange of a capital asset and the income realized therefrom is not capital gain.

Nevertheless, the identification of the activity as either the sale of a product or the performance of a service is important in determining gross income and the deductibility of certain items in the calculation of adjusted gross income and taxable income, which is the general issue before us. Under the facts of this case, we find that petitioner's activity was the sale of a tangible product. From petitioner, who did little more than release the valuable fluid from her body, the plasma was withdrawn in a complex process by the equipment of the lab. Petitioner performed no substantial service. She was paid for the item extracted by the lab. Except for the unusual nature of the product involved, the contact between petitioner and the lab was the usual sale of a product by a manufacturer to a distributor or of raw materials by a producer to a processor. A tangible product changed hands at a price, paid by the pint.

The rarity of petitioner's blood made the processing and packaging of her blood plasma a profitable undertaking, just as it is profitable for other entrepreneurs to purchase hen's eggs, bee's honey, cow's milk, or sheep's wool for processing and distribution. Although we recognize the traditional sanctity of the human body, we can find no reason to legally distinguish the sale of these raw products of nature from the sale of petitioner's blood plasma. Even human hair, if of sufficient length and quality, may be sold for the production of hairpieces. The main thrust of the relationship between petitioner and the lab was the sale of a tangible raw material to be processed and eventually resold by the lab.

So is there any difference between the extraction of plasma and the extraction of a kidney? In both instances, the taxpayer "performed no substantial service."

Not only do these cases affirm what James Butler and I think is the black letter law result, they suggest, at least to me, that the IRS probably would require reporting of the gross income by the kidney-swapping women. Are the cases different? If one tries to distinguish Garber and Green by characterizing them as motivated by economic gain, one can treat each kidney-yielding woman as motivated by economic gain, namely a kidney for her husband. If one tries to distinguish the kidney-swapping women by portraying them as altruistic and generous despite the kidney being received in turn, one can note that Garber and Green endured discomfort, pain, and risk in order to help all those unidentified individuals who benefit from medical science's use of the rare plasma.

If the IRS does so proceed, the outcry might be overwhelming. In that case, Congress can amend the Code if it so chooses, to provide an exclusion. The IRS should not arbitrarily add an exclusion to the tax law simply because it might be a good idea.

It is doubtful that the kidney-swapping women would be permitted to claim trade or business deductions. Unlike Garber and Green, who had been undergoing plasma extraction for years on a continual basis, the kidney-swapping women were engaged in a one-time transaction. It is highly unlikely the one-time transaction would rise to the level of a trade or business.

I wonder if the kidney-swapping women have consulted their tax advisors. If they did, I wonder what the tax advisors told them. I am most curious. If you were their tax advisor, what would you tell them?

When a story comes at me from three directions, in three different forms, it tends to get my attention. In this case, it happened to be a story that resonated with one of my very many favorite topics.

Within the space of hours, three things crossed my path.

1. An email from a colleague pointing the faculty to this story about student emails.

2. A print copy of the same story left on my desk by another colleague.

3. A TaxProf Blog post on the same story, with links to six other faculty blogs mentioning or commenting on the story.

It's one of those stories that I think takes the extreme and tries to paint it as the norm. The story collected some examples of what justifiably could be called outrageous, obnoxious, or simply unthinking emails sent by students to their professors. There's the student who cut class and requested the professor's class notes. There's the student dissatisfied with a grade who sends an unkind email. There's the future leader of America who notified her teacher that she was late for class because she was dealing with the consequences of heavy drinking at a "wild weekend party." There are emails from a student asking advice on buying school supplies, from a student explaining he would be cutting class so that he could play with his son, from students criticizing other students or faculty's attention to those perceived as undeserving of it, and more.

The article, however, jumps from the question of inappropriate content and tone to the claim that "At colleges and universities nationwide, e-mail has made professors much more approachable. But many say it has made them too accessible, erasing boundaries that traditionally kept students at a healthy distance." Mention is made of the demand, expressed directly or indirectly, for instantaneous response. The article suggests that the concept of students as consumers has left students feeling entitled to make demands and demonstrate rudeness. Faculty, concerned with student evaluations that increasingly are used in making retention, tenure, and compensation decisions, hesitate to reprimand students clearly in need of some admonition.

There are faculty who feel pressured to be available for student email responses on a 24/7 basis. Yet there are faculty who deal with some student emails simply by failing to respond. According to the article, a faculty member of the Harvard Graduate School of Education suggests that these sorts of email indicate students "no longer deferred to their professors, perhaps because they realized that professors' expertise could rapidly become outdated," and that the notion faculty were "infallible sources of deep knowledge," which may have underpinned student deference, has weakened.

Layered on top of these concerns is a general consensus that students are oblivious to the consequences of putting something in an email. Inappropriate emails can tag a student as unprofessional, immature, irresponsible, or even dangerous. When it comes time to seek recommendations, the negative impressions left by an email may still be lingering in the minds of the faculty.

Wow.

The article raises more than a few issues, but it also puts the situation in a misleading light. Nowhere, for example, does the article provide or refer to empirical evidence indicating whether these "it's all about me" emails constitute 2 percent, 20 percent, or 75 percent of student emails to faculty. Nowhere, for example, does the article focus on whether, as I and others speculate, the majority of these emails come from immature, inexperienced, and clueless undergraduates rather than from graduates. Nowhere does the article use one of my favorite techniques for analyzing the impact of technology, which is to disconnect the technology from the content and determine if the latter is a phenomenon created by the former or simply an existing characteristic repackaged in the new technology.

My experience, and that of other law faculty with whom I've spoken, with whom I've communicated, or whose comments I've read, is essentially uniform. The overwhelming majority, perhaps almost all of our student emails, are polite, appropriate in terms of content, and deferential. For me, the emails fall into three major categories. There are the emails in which a student apologizes for having to miss or having missed class, asking for nothing and almost certainly intended to prevent me from getting the idea that the absence suggests a deeper problem. There are emails dealing with what I call the "administrative management" of the course, with questions and information about enrollment, "clickers," seating chart photos, and other details that are numerous early in the semester. There are emails in which students ask substantive questions, some requesting clarification and others pushing the discussion beyond what class time permitted us to explore. Other emails include requests for recommendations, advice about getting jobs in tax or estate practice, and similar exchanges well within typical student-faculty communication boundaries.

Of course, my colleagues and I could be in for a surprise. Perhaps what is happening today in undergraduate school will be transpiring several years from now in law school, medical school, and other graduate programs. We won't know for a while. But before concluding that rude or inappropriateness in emails is a monopoly held by college students, consider something a teacher friend mentioned to me last night. Emails from the parents of K-6 students sometimes manifest a disrespect that is no less unsettling than the rudeness displayed by students in their emails. Perhaps that tells us something about why youngsters aren't learning manners: perhaps they are being taught, overtly or by example, how to be expert in acting badly.

It is important to remember that email does not cause disrespect. I remain unconvinced that non-anonymous email somehow lures people into turning wicked on their recipients. I understand how email tends to be written at speeds that defy application of the rules of spelling, grammar, and pronunciation. I understand that email, when not carefully written, can lose something in tone. I do not think that email somehow turns otherwise polite students into seekers of a professor's class notes.

I started teaching before there were emails. In the days before email, there were rude students. There was the student who walked into my office at 5:30 the afternoon before an exam, with dozens of pages of questions reaching back to the beginning of the semester and that would take several hours to answer. I turned him away. Email had nothing to do with his lack of judgment, his failure to heed my warnings about the need to assimilate throughout the semester, and his obvious disregard of my advice to avoid studying during the evening before the exam because at that point sleep is far more important to improved accomplishment. Email had nothing to do with the student who rudely made clear she deserved special treatment to accommodate the classes she missed because she was working in a family member's political campaign. Email had nothing to do with the student who arrived late for a class, tried to make an announcement as a representative of a student organization, and then turned to leave the room after having done so (though stopped by my inquiry, "You're in this class, aren't you? So why aren't you staying?" —- he stayed.)

Blaming email for student rudeness, immaturity, inability to exercise discretion over email content, or selfishness is like blaming guns for homicides, dollar bills for tax fraud, and trash for littered highways. Somewhere along the line, post-modern culture needs to reshape itself and pull the notion of individual responsibility back from the island to which it has been exiled.

It also is important to recognize the improvements that email has brought to education. When my students have a question at 2 in the morning, they can send it to me. My students know they won't get an instantaneous response. I tell them that. They're sensible enough to understand why. In the days before email, the student either would try to remember the question or would write it down. They would come to my office, and puzzle over their handwriting, or try to remember the question. It was inefficient. Now it's much more efficient.

In the days before email, the days before the exam were characterized by lines of students outside my office door waiting to ask questions. Sometimes I used an appointment arrangement but that didn't stop unscheduled students from dropping in. I would answer a question for student A, and twenty minutes later student B would ask the same question. I would repeat the answer. By the time student F asked the question I knew I needed a new approach. That conclusion was reinforced by the incidents of students in the hall overhearing the discussion and asking to join in, but who then needed to be brought up to speed. So I tried the group review session. That failed. Not only did it become increasingly difficult to find a suitable time and a room, it also frustrated students who wanted their questions answered first so they could leave and resume studying. See? More proof that "it's all about me" originated other than in the technology. What the technology has done is to permit a student to email a question, which I answer. I then post the question and answer to the discussion board section of the Blackboard Classroom for the course. Now all other students can read the question, and, if interested, the answer. There is no need for a student to ask the question of me again. Often, another student will spin another question off the one that is posted. The system is fairer, because it gives everyone in the class an equal opportunity to learn from the posted question and answer.

Email has also proved useful when supervising directed research projects. The number of visits to my office has dropped significantly. The student can email drafts, I can mark them up and add comments, and I can email the edited draft back to the student. Office visits are appropriate when the analysis or discussion is too complex or voluminous for email.

Only once have I seen a rude email, and it was from a student to another professor; I was copied. An Associate Dean who was copied on the email responded so brilliantly I was ready to stand up and bow. This episode causes me to wonder if students are rude because they get away with it. As several faculty in the article mentioned, they set down ground rules for the use of email. One has gone so far as to require a thank you, something I think the student should have learned LONG before arriving in college. Nonetheless, it is an unfortunate obligation of university faculty to do remedial work on account of the failings of those previously charged with the stewardship of our nation's children.

What I don't understand in the article is the notion that email makes faculty too accessible. Faculty can control the degree to which they are accessible. In many instances, the long-standing complaint was that faculty were NOT accessible. If the impact of email on the attempts by some faculty to insulate themselves from students is to drag hermit faculty out of their research labs and away from their research projects, I applaud that consequence. Faculty are paid to teach. Research institutions exist for those who wish to research without what they see as the "inconvenience" of interacting with novice students.

Nor do I understand the claim that student email goes "too far" when it involves comments such as "I think you're covering the material too fast, or I don't think we're using the reading as much as we could in class, or I think it would be helpful if you would summarize what we've covered at the end of class in case we missed anything." Perhaps the professor is going too fast. I've been known to slip into doing that. If a student thinks the readings aren't being used sufficiently, the email provides an opportunity for the faculty member to explain why the readings are intended for pre-class consumption and preparation. A student who wants an end-of-class summary has provided the faculty member with the opportunity to explain why a student learns more when a student does the work than when the student is handed something that has sharpened the mind of the professor. In other words, the student has demonstrated he or she needs to realize that a person does not lose weight and get into shape by watching someone else ride the bicycle.

I'm glad the article drew people's attention to the topic. I hope that my elaboration has put the matter into a more realistic perspective.

One of the principal hallmarks of dealing with the tax law is the continual struggle to keep up to date. No sooner has Congress amended the law than it amends it again. And again.

Here is an example of how confusion is generated by the inability of the current legislative and political systems to implement a tax law that remains stable so that people can learn what it requires. This example affects almost every divorced taxpayer who has a child. My thanks to Julian Block for suggesting I take a close look at this conundrum.

In 2004, the Working Families Tax Relief Act of 2004 amended the dependency exemption deduction rules. My description of these changes can be found in a previous MauledAgain post. Specifically, when the parents of a child are divorced, separated, or live apart during the last 6 months of the year, and the child is in the custody of one or both of his or her parents for more than half the year, the 2004 legislation provided that the child would be treated as the qualifying child of the noncustodial spouse, even if otherwise the child would be the qualifying child of the custodial spouse, if either of two tests were met. The first test is met if the divorce decree or separation agreement provides that the noncustodial parent is entitled to the dependency exemption deduction. The second test is met if the custodial parent signs a written declaration (Form 8332) in which the custodial parent agrees not to claim the dependency exemption deduction for the child. A "grandfather" provision was maintained that permits the noncustodial parent to treat the child as a qualifying child if the agreement was executed before January 1, 1985, and the noncustodial parent provides at least $600 for the child's support.

After the 2004 legislation was enacted, a glitch was discovered. Actually, several were discovered, but the one that matters in this discussion involved the provision permitting the parents to determine by agreement who takes the dependency exemption deduction. Essentially, the first test had been removed by legislation in 1984, thus the "grandfather" provision, and the 2004 legislation restored it even though it made no sense to restore it.

So when the Congress, or more accurately, Congressional staff, was drafting the Gulf Opportunity Zone Act of 2005, to provide tax relief and recovery incentives for areas afflicted by the Hurricanes Katrina, Rita, and Wilma, it once again amended section 152. In effect, it removed the first test. The change was made applicable as though it had been included in the 2004 legislation. Therefore, as it now stands, if the parents of a child are divorced, separated, or live apart during the last 6 months of the year, and the child is in the custody of one or both of his or her parents for more than half the year, the child is treated as the qualifying child of the noncustodial spouse, even if otherwise the child would be the qualifying child of the custodial spouse, if the custodial parent signs a written declaration (Form 8332) in which the custodial parent agrees not to claim the dependency exemption deduction for the child. The "grandfather" provision for pre-1985 agreements remains.

But all of that isn't the most confusing part of the explanation. It gets better. Or worse.

In order to have forms and instructions ready for the January-April filing season, the IRS must prepare those forms and instructions late in the preceding year. The hope is that by December of a particular year it is possible to state the rules that apply to that year. So, in December of 2005, the IRS prepared all sorts of forms and instructions, including the instructions to Form 1040. In those instructions, the IRS set forth the changes as made in the 2004 legislation. Why? Because that is what section 152 provided when the IRS revised the instructions. The instructions were revised because the 2004 legislation went into effect as of January 1, 2005, and thus the instructions for filing 2004 Forms 1040 reflected what had become old law.

But unfortunately, what the IRS drafters thought had become the new law for 2005 was itself turned into old law (or perhaps turned into "never quite was given a chance to be the law" law) when Congress passed, and the President signed, the Gulf Opportunity Zone Act of 2005. When did this happen? On December 21, 2005. By then, the instructions had been drafted. What fun to draft something that is correct, and then watch it become obsolete (and erroneous) days after its appearance.

What does this mean? It means that the instructions to Form 1040 concerning which divorced or separated parent can claim the dependency exemption deduction for the child are wrong. How many people know that? Will the IRS mail revision notes to persons who requested paper versions of the form? Will the IRS change the pdf file available on its web site? Will the typical taxpayer dealing with this issue be able to figure it out and get it right? Will tax return preparers catch on? The answers to those questions are probably not and maybe. How many resources of the IRS will be diverted from other tasks to dealing with correcting the mistakes that surely are going to be made? How many dollars? How many staff hours? The answer to those questions is that I have no clue. Perhaps the mistakes will go undetected and uncorrected.

How did this happen? I think it's easy to figure this out. The hurricanes hit in late August and in September. Why did it take so long for Congress to pass what was, by tax law standards, a relatively short bill? Why were things allowed to sit until the end of the year? Why do many people leave things go until the last minute? Why do many people not realize if they delay, others are put into a time squeeze? Or, as in this case, make decisions that are, from the perspective of hindsight, erroneous?

The underlying question is why our educational institutions and school systems do not teach time management skills. Of course, whether it would have made a difference if these sorts of courses had been required of people who are now in the Congress is another question I'd prefer not to answer. It's too depressing.

So, word of warning. The IRS instructions to Form 1040 with respect to the claiming of the dependency exemption deduction by divorced and separated parents are wrong. They were correct when written. They're now out of date. Spread the word. And the explanation.

Frank Degen, who signed the NAEA letter to which I referred in last Wednesday's posting has written me share his insights into the hypothetical that I concluded was not a problem.

Recall the hypothetical:

Mom, dad, Alice (14), and Joe (22) live in the family house. Mom and dad file a joint return with an AGI of $400,000. Since Alice is a qualifying child of mom and dad, they could claim her as a dependent but would receive no tax benefit as their personal exemptions are phased out and the child tax credit would not be available to them. Joe is not a full-time student and his only income is a W-2 with $15,000 in wages. Under §152, Alice is a qualifying child of Joe, so he claims her as a dependent and thus gets the child tax credit and yes, even the earned income tax credit. Assuming Joe had no tax withheld, he goes from a balance due of $683 to a refund of $3,158.

I had analyzed the facts in this manner

I agree that Alice is the qualifying child of Mom and Dad. She is their child. She has the same principal place of abode as they do. She is under 19. She does not provide more than half of her own support. Alice also appears to be the qualifying child of Joe. She is his sibling. She has the same principal place of abode as he does. She is under 19. She does not provide more than half of her own support. But in this instance the Code provides a rule to break the impasse. Under section 152(c)(4)(A), an individual who may be claimed as a qualifying child by two or more taxpayers is treated as the qualifying child of the individual's parent if one of the taxpayers claiming the individual as a qualifying child is the individual's parent. The fact that the amount of the exemption for the parents is zero because their AGI is high enough to trigger total phase-out of the exemption amount does not change the definition of qualifying child.

Frank Degen explains that the NAEA considers phrase "and is claimed" in section 152(c)(4)(A) as precluding the parents from entering the tie-breaking competition. Literally, this would make sense. The parents, not needing a dependency exemption the amount for which has been phased down to zero, do not enter Alice on their return. Thus, as Frank concludes, the son is the only person claiming Alice and there is no tie to break under the tie-breaking rules.

What happens if the statute is interpreted in this manner? First, taxpayers in the situation that Alice's parents and brother find themselves are left to work out a suitable tax-favorable arrangement. Only one "claims" the child in question and the others fail to "claim" the child. Perhaps Congress intended this flexibility. Under this interpretation, the only time that the tie-breaker would be triggered is when two or more taxpayers both claim the dependency exemption, prompting the IRS, which most likely would notice the double dipping, to apply the tie-breaker. Is the tie-breaker intended only as a remedial tool for the IRS to use when multiple taxpayers with "claims" to the child fail to settle on one claimant? Althoug figuring out what Congress intends is more a guessing skill than an analytical one, it's safe to suggest that Congress intended for the tie-breaking rule to apply as soon as multiple taxpayers became eligible to claim the child.

Interpreting the "and is claimed" language so that it gives the taxpayers a planning option is inconsistent with how Congress treats failure to claim the dependency exemption when doing so opens up a personal exemption for the dependent. Persons for whom another taxpayer can claim a dependency exemption are not permitted to claim their own personal exemption. Technically, they have a personal exemption but its amount is zero. Taxpayers whose adjusted gross income is sufficiently high to trigger a phase-down of the dependency exemption amount to zero have nothing to lose by omitting the dependent from their tax return. The statute, however, eliminates the dependent's personal exemption even if the eligible taxpayer neglects the dependency exemption.

But it's not so simple. In several other provisions, Congress bases eligibility on whether a dependency exemption has in fact been taken rather than looking to see if one could have been taken. For example, the Hope and Lifetime Learning credits are disallowed to a person if a dependency deduction with respect to that person "is allowed to" another taxpayer. Thus, the other taxpayer can forego the dependency exemption and leave open the credit door for the person in question, which is something that the taxpayer would want to do if the dependency exemption was phased down to zero or close to zero.

Why the difference? No one has any idea. In fact, some have argued that the credit should be disallowed to the person if the other taxpayer is eligible to take the dependency deduction even if the other taxpayer fails to do so. But the language of the credit provision undercuts that argument.

Thus, although it makes no sense in terms of policy or practical application, there is something to be said for the NAEA's interpretation of the "and is claimed" language. After all, to reach the sensible policy and practical application result, Congress should, and could, have used the phrase "and could otherwise be claimed" in lieu of "and is claimed." Congress did not do so. Thus, to the extent the NAEA is asking for clarification, it is a problem that should be mentioned, even though I'd be reluctant to advise Alice's brother to take the dependency exemption deduction and would insist he make his decision after listening to, or reading, a full explanation of the issue and the risks involved in making a yes or no decision.

Legislation has been proposed to change the rules. In Senate Report 109-051, accompanying a bill that was reported to the Senate in March of 2005 but as to which no other action has been taken, the following language appears:

(4) Special rules for claiming qualifying child.

(A) Rules involving parents.

   (i) In general. A taxpayer other than a parent of an individual may not claim such individual as a qualifying child for any taxable year beginning in a calendar year if--

      (I) a parent is eligible to claim and claims such individual as a qualifying child for any taxable year beginning in such calendar year, or

      (II) the taxpayer has a lower adjusted gross income than any parent who may claim such individual as a qualifying child for any taxable year beginning in such calendar year.

   (ii) More than 1 parent claiming qualifying child. If the parents claiming any qualifying child do not file a joint return together, such child shall be treated as the qualifying child of--

      (I) the parent with whom the child resided for the longest period of time during the taxable year, or

      (II) if the child resides with both parents for the same amount of time during such taxable year, the parent with the highest adjusted gross income.

(B) Rule for 2 or more nonparents claiming qualifying child.

If an individual may be and is claimed as a qualifying child by 2 or more taxpayers, neither of whom is a parent of the individual, for a taxable year beginning in the same calendar year, such individual shall be treated as the qualifying child of the taxpayer with the highest adjusted gross income for such taxable year.

I am not confident that this language would fully resolve the issue. Notice that it uses "eligible to claim and claims" when it ought to use "eligible to claim" to be consistent with the approach taken with respect to the personal exemption amount of persons who can be claimed as dependents by other taxpayers.

It is, though, a wonderful lesson in how the Internal Revenue Code, and tax law generally, becomes more complicated as each year passes. And this is with respect to a fairly simple concept and rule, as tax law concepts and rules go. Imagine what it's like parsing the subchapter K partnership regulations.

Every once in a while something crosses my path through the tax thicket that not only gets my attention but motivates me to share it. This time, it's a book by Julian Block. The book's title says a lot, but it doesn't say it all: "MARRIAGE AND DIVORCE: Savvy Ways For Persons Marrying, Married Or Divorcing To Trim Their Taxes - And They’re Legal." It might sound like another box of tax gimmicks, but it's not.

Julian Block is someone whose name should be recognized by those who read items about taxes in the New York Times, the Wall Street Journal, Business Week, Money, and the U.S. News and World Report, or who notice his nationally syndicated column, The Tax Advisor. And for those more interested in the visual, he shows up on a variety of television news programs. He has the usual list of credentials attached to folks who try to interpret tax law for the ordinary citizen. I'd say he's a lot like me except I haven't made it into all those publications and my television appearances have been slim in number. And Julian has another credential in the "I wonder what it was like category": he was a special agent for the Internal Revenue Service. My students surely remember that early in the basic tax course, while describing the audit process, I tell them that if someone shows up and identifies himself as a special agent, stop, and get an attorney. Once upon a time, Julian was one of those folks whose arrival, or more precisely, whose introduction, would raise blood pressure and accelerate heartbeats. Next best thing to being a rock star, I suppose.

So along comes a book with chapter titles like this one: “Having An Affair Can Be Taxing” sound like one of my in-class quips that gets the students' attention. Using the question and answer format, Julian shares the questions he wants clients to ask. Almost in time for Valentine's Day is this one: “Does the IRS
require a woman to pay taxes on engagement gifts if she breaks the engagement?” That'll keep some of them reading! Julian explains why December weddings often are more expensive than if postponed into January, and it has little to do with the cost of the reception hall. The marriage penalty and marriage bonus, two topics to which my students pay especially close attention, do not go unexplored. I must complain, however, that the chapter, "Unearthing Hubby's Hidden Assets" is too forgiving of the wives who are no less adept at hiding wealth. But the stories in it surely will prove to be better than any television reality show.

I haven't read the book. Yet. The reviews in Money and the New York Times suggest it would be make sense to do so as quickly as possible. Because tax season is upon us, I'm mentioning the book sooner rather than later. The book is of interest, of course, to just about everyone over the age of 18. I suggest picking it up as a gift for that newly-engaged couple who probably forgot to add it to their registry of desired gifts. Contact Julian at 3 Washington Sq., #1-G, Larchmont, NY 10538. Tell him MauledAgain sent you.

Edit: Julian contacted me today to invite persons interested in the book to email him: julianblock@yahoo.com which will bring it to your mailbox more quickly.

A report issued in January by the Treasury Department's Office of Tax Analysis has some interesting information relevant to the on-going debate about the alleged revenue-generating effects of special low tax rates for capital gains. The argument made by advocates of these low rates is that decreases in the rate will encourage taxpayers to sell capital assets that they are unwilling to sell when rates are higher, and that this "unlocking" effect would cause tax revenues to increase. See, for example, this report, which claims that capital gains revenues possibly would increase to as much as $77 billion pe year if the capital gains rates were cut.

Well, the capital gains rates were cut. What happened?

According to the Treasury report, total realized capital gains in 2000 were $655,285,000,000. In 2001 it dropped to $349,441,000,000. In 2002, it dropped further, to $268,615,000,000. And in 2003 it increased slightly, to $323,306,000,000.

Tax revenue, however, simply dropped over the same period, from $127,297,000,000 in 2000, to $65,668,000,000 in 2001, to $49,122,000 in 2002, and $45,108,000,000 in 2003. Adjusted for inflation, which was suggested by and computed by Mike McIntyre, in 2003 dollars the amounts are $142,048,000,000, $71,054,000,000, $51,508,000,000, and $45,108,000,000, respectively, making the decline even sharper than demonstrated by the raw dollar amounts. The effective rate, which had been dropping slowly from 2000 (19.8%) through 2002 (18.8%), fell to 14% in 2003.

There's a big difference between $77 billion on the one hand, and $49 billion or $45 billion on the other. It appears that once a large group of taxpayers did a one-time disposition of some capital assets, the one-time spike in revenue disappeared. At that point, revenue decreased because the rates had been decreased.

Gains as a percentage of gross domestic product fell from 6.56% in 2000, to 3.45% in 2001, fell again in 2002 to 2.57%, and increased slightly in 2003 to 2.95%. For all the talk about how important special low tax rates for capital gains are for the economy, considering the relatively insignificant portion of GDP represented by capital gains, one must wonder whose economy is replete with capital gains. And for all the talk about how special low tax rates for capital gains "unlock" capital assets and generate increased sales, the data puts that claim in a questionable status.

It would be interesting to see what would have happened had adjusted basis been indexed for inflation, and the same rate applied to capital gains as are applied to the wages of laborers. Of course, much of the required data does not exist, and no one knows what people would have done had the tax rules been different. It would be conjecture. But the failed promise of ever-increasing tax revenues from special low capital gains tax rates was pretty much conjecture. It was tried. Its advocates had their day. Now it's time to try the indexed basis regular rate approach. Yes, it's conjecture. But could it be any worse in terms of policy or outcome? I doubt it.

The National Association of Enrolled Agents (NAEA) has sent a letter to the Commissioner, asking for clarification of the new provisions affecting dependency exemption deductions. The NAEA raises some interesting questions through hypotheticals. One of these had been posed to me a few weeks ago, so these questions don't come as a surprise.

These are not the first interesting situations to be presented to the world. Two months ago I shared a step-sibling puzzle, after having explained the changes in a prophetically-named posting, Redefining Children (at least in the Tax World).

Here is one hypothetical presented by the NAEA:

Twin nine-year old children of deceased parents, who live with their adult cousin for the entire year and are fully supported and cared for by the cousin, cannot be claimed as dependents by the cousin. Under the new rules, this cousin cannot claim the two children as qualifying relatives because the children meet the definition of a qualifying child with respect to one another. The problem does not exist if there is only one such child living with a cousin, so if each twin were to be taken in by a different cousin, they could be claimed as qualifying relative dependents

Neither twin can be a qualifying child of the adult cousin. Why? Neither twin is a child, descendant, sibling, step-sibling, nephew, niece, or child of a step-sibling of the adult cousin. Thus, neither twin meets the relationship test for qualifying child status, even though the adult cousin meets the other three tests of abode, age, and support for each twin. Each twin has the same principal place of abode as the adult cousin, each meets the age requirements by being under 19, and each has not provided more than one-half of his or her own support.

Can each twin be a qualifying relative of the adult cousin? An individual is a qualifying relative if the individual satisfies four tests as to the taxpayer seeking the dependency exemption: relationship, gross income, support, and non-qualifying child. The relationship test is met because each twin is someone who is not the adult cousin's spouse and who has the same principal place of abode as does the adult cousin. The gross income test presumably is met because the facts of the hypothetical suggest that they have none, being fully supported by the adult cousin. The support test is met because the adult cousin provides more than half, in this instance all, of the support of each twin. What about the non-qualifying child test?

The non-qualifying child test requires that the individual for whom the taxpayer seeks a dependency exemption deduction not be the qualifying child of the taxpayer or of any other taxpayer. It already has been demonstrated that neither twin is the qualifying child of the adult cousin. Is either twin the qualifying child of another taxpayer? According to the statutory language, no. There are no other taxpayers in the picture aside from the adult cousin.

The problem, however, is that the IRS, in its publications, changes the language of the statute. To quote from the NAEA letter to the Commissioner: "In IRS publications this has been translated into language such as the qualifying child of anyone else or the qualifying child of another person." This is a HUGE difference. If the test is that the person not be the qualifying child of anyone else, the twins are not the qualifying relative of the adult cousin because they are qualifying children of each other. Each twin is a sibling of the other, thus satisfying the relationship test for qualifying child. Each twin meets the other three tests (abode, age, support) because each twin has the same principal place of abode as the other twin, each meets the age requirements by being under 19, and each has not provided more than one-half of his or her own support.

In effect, the NAEA letter is asking the Commissioner, "What happened? On what grounds did someone drafting a publication change the word taxpayer to "anyone else or another person"? Not every person is a taxpayer. Not every person who is an "anyone else" is a taxpayer. Under Code section 7701(a)14), a taxpayer is "any person subject to any internal revenue tax." In contrast, section 7701(a)(1) defines "person" as "construed to mean and include an individual, a trust, estate, partnership, association, company, or corporation." Person and taxpayer are two different concepts, and using one term to mean the other is unwise.

Not all the problems, though, are of IRS making. Consider this hypothetical from the NAEA:

Twin nineteen-year old brothers live together in their home and attend school full-time. Their parents are deceased. The brothers do not provide more than half of their own support. Although they have part time jobs and earn about $5,000 annually, their principal support comes from their aunts and uncles who together contribute about $25,000 per brother towards their household and college expenses. The aunts and uncles do not live with the brothers. Each brother meets the definition of a qualifying child with respect to the other. Putting the dependency rules together with this, if each twin is able to claim the other as a dependent, it means that the other one cannot because a dependent cannot have dependents. However, since neither can be claimed, it means they can have dependents. This loop continues endlessly – we now have the qualifying child paradox.

Let's call the brothers A and B. A is the qualifying child of B. Why? A is the brother of B, A has the same principal place of abode as does B, A meets the age test by being a full-time student under 24, and A does not provide more than half of his own support. B is the qualifying child of A. Why? B is the brother of A, B has the same principal place of abode as does A, B meets the age test by being a full-time student under 24, and B does not provide more than half of his own support. However, even though A is the qualifying child of B, A cannot be the dependent of B because B is a qualifying child of A, and thus would be the dependent of A but for the fact that because A is the qualifying child of B, B would be a dependent of A. It is a classic paradox. Though there are many special rules in section 152, none addresses this puzzle.

However, one of the problems described by the NAEA is not a problem. Consider the NAEA's hypothetical:

Mom, dad, Alice (14), and Joe (22) live in the family house. Mom and dad file a joint return with an AGI of $400,000. Since Alice is a qualifying child of mom and dad, they could claim her as a dependent but would receive no tax benefit as their personal exemptions are phased out and the child tax credit would not be available to them. Joe is not a full-time student and his only income is a W-2 with $15,000 in wages. Under §152, Alice is a qualifying child of Joe, so he claims her as a dependent and thus gets the child tax credit and yes, even the earned income tax credit. Assuming Joe had no tax withheld, he goes from a balance due of $683 to a refund of $3,158.

I agree that Alice is the qualifying child of Mom and Dad. She is their child. She has the same principal place of abode as they do. She is under 19. She does not provide more than half of her own support. Alice also appears to be the qualifying child of Joe. She is his sibling. She has the same principal place of abode as he does. She is under 19. She does not provide more than half of her own support. But in this instance the Code provides a rule to break the impasse. Under section 152(c)(4)(A), an individual who may be claimed as a qualifying child by two or more taxpayers is treated as the qualifying child of the individual's parent if one of the taxpayers claiming the individual as a qualifying child is the individual's parent. The fact that the amount of the exemption for the parents is zero because their AGI is high enough to trigger total phase-out of the exemption amount does not change the definition of qualifying child.

Technical amendments to the 2004 legislation that changed the dependency definitions are awaiting action by Congress, but these amendments do not address the problems raised by the NAEA. The ABA Section of Taxation has identified yet another problem for which it suggests additional technical amendments.

There are lessons to be learned from this analysis. As is the case with computer programs, the more complex the provision, the higher the chances for a crash. The faster the writing, the greater the chance of error. The more authors, the higher the number of inconsistencies and paradoxes. The less review and testing, the faster it is rushed to market, the larger the number of snags.

The underlying problem is that the definitions in section 152 are being used for too many purposes. It's not that there ought to be multiple definitions. It's that there should be far fewer purposes. Strip the tax law of the wide array of credits, deductions, special provisions, and other attempts to create a different tax law for each taxpayer, and the complexity is reduced. Rather than an earned income tax credit, why not eliminate income taxes on people with adjusted gross income under the poverty level? Rather than trying to figure out who claims who as a dependent, why not assign each person an exemption amount that the person can choose to use on his or her own return, or transfer or sell to one other person (presumably a taxpayer who could make use of it), similar to the manner in which pollution credits are traded? It surely would be easier than the current approach, which has generated thousands of cases and hundreds of thousands of audit adjustments over the years.

In the meantime, let's hope the IRS responds quickly and sensibly to the NAEA's letter. And I might ask those folks to write some exam questions for my students!