MauledAgain

The recent changes made by the Congress to establish a uniform definition of "child" for federal income tax purposes included a revision of the statutory provisions defining dependent for purposes of the dependency exemption deduction. I outlined these changes in my "Redefining Children" posting about a month ago.

A closer scrutiny of the new statutory language, encouraged by a question from a perceptive student in the basic tax course I teach, raised an interesting question. Did Congress inadvertently, or intentionally, change the substantive dependency exemption rules when it was ostensibly conforming the language to reflect the new uniform definition of child?

About the same time that the question was posed to me, a similar question popped up on one of the listservs to which I subscribe. The consensus response was "probably not." I think that's right, but in some situations the facts may be such that the outcome differs.

The problem arises for college and graduate students (and in theory, preparatory school students) who live at or near the school rather than with their parents or other support-providing taxpayer. I will refer to the parents as the support-providing taxpayers since in most cases it is the parents who provide the support. The problem exists when the child has more gross income than the exemption amount, which for 2004 is $3,100.

Under the old law as applied to 2004, parents who provided more than one-half of the support of a child were entitled to claim a dependency exemption for the child if the child's gross income was less than $3,100 OR, if the child had gross income of $3,100 or more, had not yet attained age 19, but if the child had attained the age of 19 the dependency exemption was available if the child was a full-time student who had not yet attained the age of 24. So a 19-to-24-year-old child who went off to school, whose parents provided more than one-half of the support, and who earned $3,100 or more would generate a dependency exemption deduction for the parents.

Under the new law, the parents are entitled to a dependency exemption deduction for a qualifying child. A qualifying child is a child who does four things:

(1) the child must satisfy a relationship test, and in the situations being discussed that’s not an issue, because the child by definition satisfies the relationship test.

(2) The child must have the same principal place of abode as the taxpayer for more than half the year, and we will return to this in a moment.

(3) The child must meet age requirements, which in the situations being discussed are unchanged.

(4) The child must not provide more than half of his or her own support for the calendar year in which the parents’ taxable year begins, and again, in the situations being discussed, this is not an issue, for if the parents are providing more than one-half of the child’s support the child, logically, is not providing more than one-half of his or her own support.

If the child does not have the same place of abode, the child can qualify as a dependent by being a qualified relative, but to do so the child’s gross income must be less than $3,100, and there are no age exceptions to that requirement. Thus, if the child has $3,100 or more of gross income, the parents lose the dependency exemption deduction unless the child meets the “principal place of abode” requirement.

So it’s that “same principal place of abode as the taxpayer” requirement that can be an issue. THAT REQUIREMENT DID NOT EXIST UNDER THE LAW AS IN EFFECT BEFORE THE WORKING FAMILY TAX RELIEF ACT OF 2004 CHANGED THE LAW.

Thus, the question is, “Does a college or graduate student who lives at or near school for the roughly 8 to 9 months of the school year “have the same principal place of abode” as the parents?

What is the principal place of abode? It’s not the domicile, though domicile is a factor in making the determination. So held the Tax Court in Prendergast v. Commissioner, 57 T.C. 475 (1972), and in other cases as well.

Abode requirements exist in other areas of the tax law. For example, a taxpayer cannot claim head of household status unless there is at least one qualified person for whom the taxpayer’s home is a household which constitutes the principal place of abode and of which the qualified person is a member. A similar test applies to unrelated persons who are claimed as dependents by virtue of being members of the taxpayer’s household. Being a member of a household requires occupancy. IRS regulations with respect to the head of household filing status track legislative history and provide that temporary absences for a variety of reasons, including education, are not considered when analyzing occupancy.

In legislative history for the head of household filing status abode requirement, the Congress stated,

As a general rule, for the taxpayer's household to be the dependent's principal place of abode, the dependent must physically occupy the household during the entire taxable year in question.

The Congress then described the temporary absence exceptions. This language though, suggests (1) the child can have an abode at the parents’ home without occupancy, and (2) lack of occupancy by a college student does not automatically fix the parents’ home as the child’s abode.

Thus, though the question of abode is a question wrapped into the question of occupancy, the question of “what is the abode?” remains critical because occupancy does not guarantee abode, and lack of occupancy may or may not prevent abode at the parents’ home.

The same legislative history contains this “clarification”:

Section 12(c) [an earlier version of the head of household filing status] is intended to apply only where the taxpayer and such other members of the household live together in such household during the entire taxable year (except for temporary absences due to special circumstances). The fact that a child may be at college during the college term does not prevent the home of the taxpayer from also constituting the principal place of abode of the child. However, such home will not be considered as the principal place of abode where the child establishes a separate habitation and only returns for periodic visits. Similarly, such home will not be considered as constituting the principal place of abode of a dependent of the taxpayer who is supported by the taxpayer for a substantial part of the year in lodgings other than those occupied by the taxpayer even though such person may at various periods live in the household, unless the residence of the dependent in other lodgings is not permanent and is due to necessity such as illness.

Thus, it is possible for a college or graduate student to establish an abode separate from that of the parents. And if the child does so, the parent loses the dependency exemption deduction under the new law even though under the old law the dependency exemption deduction would have remained intact.

Did Congress intend this result? Or is it an oversight, a consequence of reshuffling paragraphs and subparagraphs without thinking through the impact? Ask any computer programmer what happens when a few dozen lines of code are altered without full analysis of the interaction with the rest of the program. It isn’t pretty.

Perhaps Congress did intend the result. I say that even though at least one member of Congress has been quoted as saying that the “temporarily at college” exception solves the problem. I don’t think that it does. It solves the problem only insofar as the child WOULD have had an abode at the parents’ home but for the temporary absence. It does not solve the problem insofar as the child has moved his or her abode from the parents’ home.

How does a child move the abode? Certainly if domicile is shifted to the child’s school residence a very strong argument can be made that abode has shifted. Even if domicile hasn’t shifted, abode can shift. Suppose a child registers to vote in the locality where the child lives during the school year. Assume the child also changes his or her address for purposes of official and unofficial school correspondence, for utility bills at the rented apartment, etc. An extremely strong argument can be made that the child’s abode is at the school residence. Under the new law, the parents say goodbye to the dependency exemption deduction.

Why would Congress care and intend to change the outcome? Here’s a thought. Think back to the recent election. Reportedly, tens of thousands of college students, natives of states such as Connecticut and New York, registered to vote in states like Pennsylvania. Why? Well, their votes weren’t “needed” in Connecticut and New York because the outcomes were pretty well easy to predict. But at the time of these voter registrations, the outcome in Pennsylvania (and to a lesser extent, in New Jersey) was, at least to some, a close call.

Changing voter registration generally requires showing permanent residency established in the state. Were the students successful? Yes, they registered. Many of them also discovered that they no longer qualified for student financial aid from their “home” state assistance programs because they had moved their abodes to other states. And they also discovered that they did not qualify for “in-state” reduced tuition at Pennsylvania state schools because they had not been established in Pennsylvania for a sufficient period. What an expensive cost to voter registration. And, for many, all in vain.

So could it be that a Republican-controlled Congress has added salt to the wound? Could it be that the parents of these students (or at least the parents who provide more than half the support of children with gross income of $3,100 or more) will discover in March or April that they have lost a dependency exemption deduction? Of course, some of the students registered Republican, and some of the students who registered Democrat have Republican parents, but I’d venture an unempirical guess that most of the students and their parents are Democrats. Perhaps the Republicans are willing to zap a “few of their own” to put it to Democrats.

Perhaps I’m just seeing another conspiracy, a grand arrangement far beyond the simple imaginations of some Code drafters who accidentally changed the rules. Perhaps I’m turning an innocent mistake into a political hot potato. That never happens, does it? He asks that sarcastically, and to understand why, read this previous posting and this followup posting. Then decide if there’s even a shred of plausibility in my suggestions.

Well, yes, indeed, as I noted in my Thanksgiving oration, Congress does provide so much grist for the MauledAgain blog mill.

Several days ago I shared some thoughts on the mess created when a provision was slipped into the appropriations bill permitting the Chairs of the House and Senate Appropriations Committees and their assistants to view tax returns without the privacy restrictions that apply to tax return examination by the House Ways and Means and Senate Finance Committees.

I noted that blame had been put on Representative Ernest Istook, and that perhaps he was being falsely accused. Istook took the cue, and denied having anything to do with the provision, though he knew enough to assert that the IRS had drafted the provision at the request of Appropriations Committee staff. The most the IRS can do is to generate proposed statutory language. It has no authority, or ability, legal or practical, to insert something into pending legislation. The IRS makes a convenient target, but to blame it for something it cannot do is more than too clever.

Late this afternoon, according to this report, the Congress has turned the issue into a hot potato. Recall that the provision was inserted into the appropriations bill, which needed to be signed into law by the President in order for the government to continue operating (because without the legislation it has no authority to spend money). Recall that House and Senate leaders promised to remove the offending provision, to do so quickly, and to get the appropriations bill to the President quickly.

Well, the Minority Leader of the House, Democrat Nancy Pelosi, decided that the Democrats would not permit the provision to be removed from the bill unless Republicans agreed to comply with the House rule that requires a three-day wait between the time a bill is reported out of Committee and the time the House votes on it. Republicans point out that when Democrats controlled the House they, too, honored the 3-day rule in the breach. Pushing legislation through the Congress without time to study it has been a mainstay of both parties for many years. Why?

The why is that Congress, like many people, lets things wait until the last minute. Exam in the course? Study the night before. Brief due tomorrow? Ask an associate to research it at 4 p.m. the previous day. School project due tomorrow? Ask mom for help at 9 p.m. And, of course, the more someone chooses or is compelled to accommodate the procrastinators, the more the procrastinators are enabled. People who know me are aware that I operate under a different mindset. I pretend that something unplanned will pop up at the last minute (and often it does). I require my students to do graded exercises throughout the semester. I not-so-quietly prod people to get on with it while there is time for measured study and analysis. Sometimes I succeed and sometimes I don't.

But I don't think that in this instance the "rush job" mentality of the Congress is the reason for the so-called "mistake." I explained that in my previous posting on the matter. If Pelosi held up the remedy in order to extract information on how this happened, it would be a worthwhile maneuver. But that's not the point. Maybe compliance with the three-day rule, a noble goal in and of itself, would have revealed the surreptitious appearance of the provision, but perhaps it would not have done so. Why not identify the culprit? Oh, wait, it's the IRS. Uh-huh. Some one or more persons in the legislative branch of the government, and not the executive branch IRS, did the insertion. On a computer. Who? Why?

It appears that members of the House and Senate Appropriations committees wanted the right to visit IRS facilities. So the bill contained language giving them that right, but it also included the language “any tax returns or return information contained therein” after the term "facilities." Nice. Some Republicans claim that it was merely "sloppy drafting" by the IRS and congressional staff, echoing and expanding Istook's claim. Sloppy indeed. Oops, my pen slipped and in went this extra language. They claim that they were trying to deal with committee members entering offices where tax return information is available. Well “any tax returns or return information contained therein” is NOT the way to get to that result. And one wonders why the Code is such a mess.

Why the desire for this right to visit IRS facilities? We're told it's because members of the Appropriations committee and aides to the subcommittees of the Appropriations Committee don't like having to ask the House Ways and Means, Senate Finance, or Joint Tax Committees for permission to visit IRS facilities that have tax returns or tax return information available. Well, excuse me. Isn't there a reason that tax issues, and the IRS, are within the purview of a specific committee? Those committees, as I noted in the previous posting, operate under a set of rules protecting privacy and imposing civil and even criminal sanctions when the privacy is violated. But those provisions weren't included in the language giving members of the Appropriations Committees the right to visit IRS facilities.

The AIDES don't like asking permission? Excuse me again, but aren't the aides hired servants of the people? Oh, wait, I'm special. Enough already with the Washington egos. I left decades ago, as mine was too small.

It also was reported that much of the drafting on the spending bill was done by aides who had not slept for days. Do I believe that? Yes. That's another aspect of the "last minute" chaos of how the Congress operates. Congress has also been known to stop its clocks so it could meet deadlines. Do that on a law school exam and it's bye, bye (I hope). "Let's pretend it's still 11:59." OK. Let's pretend it's still 1971 and we don't need to file tax returns for 1972 through 2000 and infinity.

So the Congress lets its aides work without sleep. This is compassionate what? This is the same Congress that would be fighting for the media spotlight to criticize any employer who required an employee to so function. Would a member of Congress want surgery from a resident who hadn't slept for days? Or to fly on an airplane piloted by a captain who hadn't slept for days? But, sure, go ahead, let the drafting of legislation be done by sleepless zombies. Nice. Very nice.

So, the bill can't go forward because the Democrats won't let the Republicans fix the "mistake" and the Republicans won't send the bill to the White House as it is because they'd be painting even bigger bulls-eyes on their political backs. So the government shuts down? Oh, no. A handful of Representatives and Senators still in town, perhaps the ones waiting to go home after the evening traffic snarls, passed a bill letting federal agencies spend money until December 8. So that keeps this entire issue on the front burner, because Congress will return to Washington and will need to deal with the mess. In the spotlight.

Oh, happy Thanksgiving.

I doubt I will be posting tomorrow, so here's an advance oration.

I am thankful that I was born with a brain that understands tax and a few other things (though the ability to slam dunk in the NBA or hit a major league curve ball would have been nice).

I am thankful that I had two parents who challenged me to use well my talents, to be truthful, and to think beyond myself, and that I had many teachers who pushed me as I now push my students to reach for more than mere acquisition of knowledge.

I am thankful for a Congress without which I'd have half as much stuff about which to blog and far less about which to complain.

I am thankful for the folks on the ABA-TAX and taxprof listserves, who keep my tax brain working and who provide raw material for examination questions and semester exercises, for which my students may or may not be thankful.

I am thankful that the Congress passed an extension to the Internet Tax Moratorium Act so that there is time for careful planning to deal with the problem without 50-plus jurisdictions doing a bunch of uncoordinated things.

I am thankful that the Pennsylvania legislature killed the tax breaks for the (impoverished?) Comcast Corporation because it gives me hope that when it comes to taxation common sense and equity have a chance.

I am thankful that my mother said to me, when I was young (true story), "I don't believe that parents should tell their children what to be when they grow up. Make your choices after thinking about it. I just want you to do well, it can be anything, but make sure it's legal."

I am thankful that I was introduced to clickers (or student response pads to use the technical term) and to the people who pioneered their use in law courses and who let me know they exist, because clicker use has invigorated the students in my courses and has added some new fun to teaching.

I am thankful for all the researchers who continue to share the results of their research that demonstrates chocolate is, indeed, medicinal.

I am thankful that trees have leaves that end up falling and blowing onto my property, again and again and again, because by raking them, again and again and again, I can get exercise that counteracts the caloric effects of the aforementioned medicine.

I am thankful that blogs were invented, because now I have one (though I wish they had existed when I was a child because, oh, never mind, the thought alone is scary but it would have been fun, I guarantee it).

I am thankful that I am healthy, that I have two wonderful children (even though BOTH of them are now announced a desire to attend law school), that I have family and friends who put up with me, and that I have not a mere job but a professional position with opportunity.

I am thankful that people come and visit this blog and read my postings.

Have a Happy Thanksgiving.

Just in time for Thanksgiving, a news story from Reuters that doesn't seem to have yet swept the print and web media, tells us in a marvelous headline: Chocolate ingredient can help cure persistent coughs.

It has been demonstrated that theobromine, which is found in chocolate (or more specifically, in cocoa), was almost a third more effective in stopping persistent coughs than is codeine. Codeine currently is the best cough medicine.

Taking codeine sounds like taking a drug. Taking chocolate doesn't. So on Thanksgiving, be thankful for chocolate.

Well, the Congress has itself in a fine mess of hot water this time around. Readers of this blog know that I'm no fan of how Congress does business nor of most of what it generates.

According to reports proliferating throughout web and print press (CNN, New York Times, Tax Analysts, and Tax Guru, to name a few), the spending legislation that Congress passed on Saturday contains a provision that permits the chair of the Senate Appropriations Committee and the chair of the House Appropriations Committee and their assistants access to income tax returns unrestricted by privacy protection. Members of the Senate Finance and House Ways and Means Committees, which have primary responsibility for drafting tax legislation, have limited access to tax returns, so that they can evaluate IRS and other assertions that existing law is being abused or fails to accomplish legislative intent, but their access is subject to serious civil and criminal penalties if they disclose or misuse the information. The provision slipped into the spending bill lacks those restraints.

After people reading the text of the spending bill raised questions about the provision, spokespersons for House and Senate leaders said that the provision was a "mistake" and an "error." They promised to remove it, and the Senate quickly passed a resolution stating that the provision "shall have no effect." The House is scheduled to take up the resolution on Wednesday, and House leaders promise it will pass. Until it does, the spending bill will not be sent to the White House for the President's signature.

Congressional aides claim that the provision was inserted at the request of Representative Ernest Istook, Jr., who chairs the transportation subcommittee of the House Appropriations Committee. Istook is no stranger to controversy, as this 1995 chronology of the "Istook Amendment" demonstrates. The bit about subcommittee staff admitted to the falsification of documents surely hasn't inspired me to rethink my disdain for how Congress operates.

The two chairs of the Appropriations Committees claim that they were unaware that the provision had been inserted into the legislation. Senator Kent Conrad of North Dakota fumed that the incident reflected a bigger problem, that is, the pattern of Congress having mere hours to review legislation that runs on for hundreds (or in this case, 3300) pages. (And people think I am wordy, ha ha). Yet Senator Stevens reacted negatively to Conrad's complaint, claiming that the incident was a unique event in his "more than 30 years" on the committee.

What's going on here?

Is it just a matter of the typical chaos and confusion? I've been on the Hill while legislation was being drafted. It's only a tad less frenetic than the pit at a commodities exchange. It is easy to see how mistakes can be made. But even if this incident is simply a consequence of how Congress does business, it is a sharp reminder that, as Senator Conrad reminds us, Congress doesn't do a good job handing the way it does business. If a business did business the way Congress does business, the business would soon be out of business.

Was it a mistake? Some members of Congress think not. They think it was deliberate. I think they're right. That's not to say I disbelieve the chairs of the two Appropriations Committees. I think that because of how Congress does business, someone very easily could have slipped the provision into the legislation without either one of them knowing it.

If "mistake" means "something that should not have been done" then, yes, this was a mistake. Accidents are mistakes. But if "mistake" means "it wasn't deliberate" then this incident was NOT a mistake. It's one thing to have something fall out of the legislative text. Or to have a page disappear (which almost always generates truly incoherent language). Or to have a typographical reversal of two numbers, or to use the wrong punctuation. Or to let an earlier version of a proposed statutory section supplant its replacement. But it's a totally different thing for a tax-related provision, an administrative provision, a provision having nothing to do with appropriations, to appear whole-cloth in a spending bill. One minute, not there, the next minute it's there.

How can this happen?

Why would something be inserted because Representative Istook wants it? Who's he? Oh, a subcommittee chair? With what, pre-emptive rights to single-handedly rewrite legislation outside a public hearing process? Perhaps he is being falsely accused of requesting the provision's insertion. Perhaps it was some other member of Congress.

Could it have been done by congressional staff without the knowledge of ANY member of Congress? Perhaps. Aside from the abdication of responsibility demonstrated by members of Congress if it were possible for legislation to be the subject of tampering without their knowledge, it amazes me that any person belonging to a congressional staff would take it upon himself or herself (or themselves?) to alter legislation. But after reading about the admissions of document falsification in the 1995 chronology of the Istook amendment, I suppose I ought not be amazed. Disappointed? Yes. Disgusted? Yes. Surprised? I should know better.

The staff should be drafting what Congress wants. I understand that the Congress does not and will not (and perhaps cannot) write the precise words. But if Congress requests a provision to do A and B, then the staff ought not insert something that does A, something that does B, and something that does C. Nor should any member of Congress, behind closed doors, instruct the staff to do so.

If a business executive or any other person asks a secretary to prepare a letter, it is conceivable that the secretary, trusted and experienced, could be left with the task of selecting precise language or inserting boilerplate. It is also the responsibility of the person signing the letter to read it, and woe to the secretary that inserts something not requested and not appropriate (sorry for the bad pun) for the message that the letter writer wishes to send. Procedures would be in place to prevent wilful and deliberate modification of the letter. Mistakes could happen, because typographical errors can be made, and words can be misspelled (even to the point of embarrassment). And, goodness, letters have been known to be put into envelopes addressed to persons other than the intended recipient. But if the secretary changes the letter, or inserts something when requested by some other person without authority to change the letter, all sorts of values are ill served. There is no justice, no fairness, no integrity, and no valor in such a surreptitious endeavor.

And there is no justice, no fairness, no integrity, and no valor in deliberate alteration of legislative material. There is no justice, no fairness, no integrity, and no valor in a Congressional process that lacks safeguards against such behavior. And there is no justice, no fairness, no integrity, and no valor in a Congress that won't change the way it does business.

The good news is that this incident was detected, and thwarted. The bad news is that the persons responsible may go unidentified, or if unidentified, unpunished. The even worse news is that there is no guarantee that it won't happen again. And that's just flat out outrageous.

My posting the other day on Getting It Right brought this insightful response from none other than my sister. The one who is a teacher, not the one who is an attorney (and who sometimes teaches as an adjunct).

After quoting this from the post,

Anonymous auditors were sent to 44 sites, pretended to be taxpayers, and presented various fact patterns to the volunteers. Ultimately 35 returns were prepared. How many were properly prepared? None. That's right, NONE.

she asks:

Could it be possible that the anonymous auditors were either:

a.) wrong in their results (who double-checked their findings?) Given the difficulty of completing a tax return described in the rest of the article, how can one believe that even the auditors were accurate?

or

b.) "setting up" the volunteers with scenarios that were rare or poorly presented to the volunteer? I wonder what a typical tax return that is brought to a volunteer would entail - what degree of complexitity or simplicity would a volunteer normally receive from a taxpayer? If the auditors "fact patterns" were significantly unlike those the volunteers generally prepare, than a zero success rate is not surprising.

Then again, it may be interesting to compare the accuracy rate of tax preparation by Joe Taxpayer with the most recent national statistics from high school No Child Left Behind test results. What Math and Comprehension skills are required of high school students? How are they performing on those tests? What is the Math and Reading level of the IRS tax booklet and forms?

Maybe President Bush should consider an amendment to the No Child Left Behind legislation that funds tax preparation classes in the nation's high schools. Students who earn an A can qualify for a 10% reduction in their taxes their first four years out of college, to help offset those huge college tuition loans.

Then again, if the anonymous auditors are hired to assess student's performance in the course, no students will be properly prepared and all will fail the class. (...which may then entail more government funding of the tax course, with even more stringent No Child Left Behind requirements that would require the auditors and the teachers to be fired for failure to perform.with replacement by IRS employees...who will then be too busy and too tired to properly audit the nation's tax returns.which would then cause our Senators and Representatives to step up to the task to ensure there's enough money for their salaries.which may finally result in a simplification of tax law.)

Anyone reading this can tell she's my sister! But she raises some good questions.

I do not know for sure but I think that the test scenarios taken to the VITA centers by the anonymous auditors posing as clients were reviewed by several or more reviewers. The more people that examine the return, the less likely there will be a mistake. I am very confident that the auditors used scenarios identical or similar to those encountered by the VITA volunteers when helping taxpayers. I glean that from the report that was issued.

I like the idea of teaching tax (and some other useful skills) in high school. I've made that suggestion to my classes throughout my teaching career. The idea of giving people tax reductions if they do well in such a course interests me. The question is whether it would interest anyone else. After all, a well-structured tax course for high school students would necessarily involve discussion of tax policy (and politics), which might be something some folks would prefer high school students not hear or see (he says sarcastically).

Perhaps members of Congress would volunteer to teach those courses. In the fall semester. So that they could be VITA volunteers in the spring. So that they can experience what they've imposed on their constituents.

What do you think?

In his Philadelphia Inquirer column on Sunday, Andy Cassel speculates about the future of federal tax law, and concludes that I am probably right in my prediction earlier this month that when the day is done, the tax law will be more, not less, complicated. In the column Andy points out that the complication arises from two major sources, namely, successful special interest lobbying and the attempt to create a fair and efficient tax system in a complex world. Andy wrote the column after visiting one of my Introduction to Federal Taxation classes, and his well-written account of the adventure will bring chuckles to those who read it. Andy's use of the word "arcane" to describe tax law fits well.

It was that word "arcane" that popped into my head several times today as I pondered three disconnected bits of news that came my way. A moment of stepping back led me to the realization that all three had something in common, and it's a big something. All three reflect adverse fallout from the complexity of tax law.

1. The U.S. Treasury Inspector General for Tax Administration, specifically in the person of the Acting Deputy Inspector General for Audit, released a memorandum prepared for the Commissioner of the Wage and Investment Division of the IRS. The title of the memo requires a deep breath: Final Audit Report - Improvements Are Needed to Ensure Tax Returns Are Prepared Correctly at Internal Revenue Service Volunteer Income Tax Assistance Sites (Audit # 200440039).

What's this about? Years ago the IRS set up the Volunteer Income Tax Assistance (VITA) program, through which volunteers assist taxpayers needing help doing their tax returns. Volunteers can be tax practitioners, but most aren't. Years ago I advised the VITA program at The Dickinson (now Penn State) School of Law, and here at Villanova, though not a formal advisor, I sometimes have the opportunity to answer a volunteer's question. In both programs law students serve as volunteers, getting the dual benefit of helping someone in need and learning through first-hand experience what the practice world is (for example, real-life clients). VITA volunteers undergo training sessions at the start of the tax filing season. I've taught such sessions. If you think I'm frustrated trying to teach basic tax in a 3-credit course (while other, less challenging and less voluminous, subjects are assigned more than 3 credits), then you'll understand the insanity of trying to train volunteers for tax return preparation in a few hours (rather than the 33 clock hours available in the basic tax course). Andy Cassel noted that I speak quickly. He's right. I've just shared one major reason.

The VITA program has grown. In 2003, almost 850,000 taxpayers received assistance, on returns generating almost a billion dollars of refunds. There are almost 4,000 VITA sites in the country. The report notes that the volunteers' desire to help was evident, and that volunteers demonstrated helpfulness, courtesy, and professionalism.

The Inspector General's report was the outcome of a study undertaken to determine the quality of assistance provided by VITA programs. Anonymous auditors were sent to 44 sites, pretended to be taxpayers, and presented various fact patterns to the volunteers. Ultimately 35 returns were prepared. How many were properly prepared? None. That's right, NONE. A quick note that no VITA site in Pennsylvania was audited so they missed their opportunity to let the Villanova law student volunteers show their talent. The errors on the 35 returns would have generated more than $26,000 of incorrect refunds and would have deprived 7 taxpayers of approximately $4,500 of refunds. What comes to mind are the MONEY magazine tests, in which several dozen tax practitioners are asked to prepare a return, and there are as many different results as there are practitioners in the study. When something is so complicated that no one can get it right, it's time to change the rules.

True, as the report describes in detail, some of the errors were caused by volunteer failure to do certain things. Interestingly, these are things I try to encourage my students to learn, even though they don't get as much emphasis in law school curricula as they need to get. Volunteers failed to ask the right questions, failed to pick up on red flags, failed to ask followup questions that cement or put in doubt previous answers, and failed to verify facts. Some volunteers did not use checklists provided by the IRS. Volunteers also did some other things that are alarming, such as changing the facts given by the taxpayer so that the taxpayer's tax situation was better than it would be under the actual facts.

2. On the ABA-TAX listserv, tax practitioners are discussing how they will cope with retroactive amendments in the recent tax legislation that permits taxpayers to amend earlier year returns. One of the amendments in question is a "technical" amendment, that is, an amendment fixing a mistake in the original legislation two or more years ago.

The problem is that the returns were prepared using commerical tax preparation software, and the companies selling the software generally do not revise the software for a specific year after the return filing season ends. In the absence of revised software, pratitioners must redo the returns manually. Talk about a time travel adventure! What a daunting prospect.

One practitioner noted that it is expensive to update tax preparation software, and that the companies selling the software aren't being paid by subscribers to do updates to prior year programs. That's quite true. It means that the cost of fixing an error by Congress shifts either to the software company or to the tax practitioner, and, ultimately, to the taxpayer. Imagine. The return, as filed, follows the law, including the error, and the taxpayer pays a return preparation charge. Then Congress gets around to fixing the mistake, and the taxpayer must pay AGAIN to have the return redone. And, if it has to be redone manually, it's going to be more expensive. In this respect, Congress is following the same pattern that businesses have pioneered: shift the cost of fixing the mistakes of the business to the consumer, as the consumer wastes time on hold to a help line, wastes time downloading "upgrades," spends money to hire a lawyer to get things done, etc., etc. Two practitioners reported that on two different software companies that had updated the software for use in filing amended returns, and in one case the practitioner already had the upgrade, tried it, and it worked. Kudos to these companies that are doing the right thing.

This problem would be much less of an issue if the tax law were less complicated. The more components of a machine, the more that can go wrong. Similarly, the more Code sections, the more that can be wrong. One reason is that time pressures imposed by the current legislative process prevent careful, thoughtful analysis of the provision before it is enacted. Another reason is that some of the drafting is being done outside of the tax offices on the Hill, and, having seen some tax legislation drafted by those not so expertised, it's a wonder the tax law doesn't have even more errors than it does.

3. I received an email today from someone I don't know, and who didn't tell me how he "found" me. No matter, the person wanted to know if the IRS can be sued when it gives bad advice to a taxpayer. In this instance the taxpayer made transactional decisions based on bad advice given by an IRS employee. The IRS employee to whom the person spoke totally overlooked the impact of the alternative minimum tax.

I don't give legal advice, but I pointed the person in the direction of some cases. The courts continue to hold that the IRS is not responsible. Today is not the day to analyze those cases. Today is the day to point out, it's bad enough that the rules are so complicated that the players can't get it right, but it's horrible when even the referees don't understand it. The IRS has been trying to improve the quality of its taxpayer advice. The problem is that the rules change even as its employees are beginning to understand them. My students had that experience this semester with the impact of the change in the personal and dependency exemption rules; because they're going to be lawyers I made them read the amending act and get a little closer to the tax-law-manufacturing-facility. I doubt the experience will make the "top ten fun things about basic tax class" list.

So there we have it. In one day, three examples of the adverse consequences of complexity. Something must be done. I understand why tax law has become complex, and I also understand what must be done to simplify it. What must be done is, I am told, politically impossible, as I was reminded constantly during a discussion with a friend who is a former student, who teaches in Villanova's Graduate Tax Program, and who is a sharp, superb tax attorney. Maybe he's more of a realist or maybe he enjoys bantering with me. Both, probably.

What must be done? Enough with the "I'm special"/"My little group is special" approach. And enough with the "how can I wiggle around the spirit of the law" tactic. (which is another variant of the "I'm special" approach). Whether someone gets legislation allowing 1999 green Cadillacs to go straight from the right turn only lane, or whether someone claims they did not break the law because they departed from the right turn only lane by turning their wheel to the right for a short distance before veering back to go straight, that person is trying to get an edge on other people. A tax law cannot be fair and efficient, let alone simple, if some taxpayers prefer climbing on the backs of their fellow citizens to get an unwarranted edge rather than contributing to a societal well-being that will provide even more of a benefit to those taxpayers. (Oh, I don't own and have never owned a green 1999 Cadillac and I don't know anyone who does.)

Maybe my friend is right. Maybe, in the long run, self-interest trumps the benefits of civilization. Sad. When short-term gain precludes long-term advantage, all that results is a loss. I like my friend, but let's prove him wrong. It has to start with each citizen, for Congress will not act unless its members sense that their positions of power are being threatened. Make your voice known, not to me, but to your elected representative. Maybe the "value" in the next election can be tax fairness, efficiency, and simplicity. For without revenue, there won't be much left in the way of value to be protected.

I think I may have discovered why it is so difficult for me (and some of my colleagues who share the same goal) to persuade law students that they really do need to invest an average of 3 hours of pre-class preparation and post-class assimilation time for each hour in class. My philosophy on this question, and the rationale for what I tell students needs to be done, was the subject of a column I wrote for the law school weekly newsletter in an attempt to invite students into the pedagogical side of legal education that they rarely get to see.

The discovery, of course, isn't anything more than information described in a Chronicle of Higher Education article about the latest results from the annual National Survey of Student Engagement. The site is a subscription site, so you may not be able to reach the article.

Among the items reported, only 11% of college students report investing more than 25 hours each week preparing for class. College faculty consider 25 weekly hours to be the minimum required for success in college. FORTY-FOUR PERCENT of the students reported spending 10 or fewer hours each week studying. Surprise? Not for me.

Now the amazing part. Roughly 40% of students report they earn mostly A grades, and 41% report report they earn mostly B grades. I suppose the other 19% are the average students earning the traditionally average C grade (or worse). Other information suggests that these numbers are not overstated or understated. And it fits the claim of the echo boomers on a Sixty Minutes report a few weeks ago: "We are all above average." Amazing.

So?

So how much credibility is there to the claim by college faculty that 25 hours each week is necessary for success if 81% of college students, most of whom study less than 25 hours each week and almost half of whom study less than 10 hours a week, are successful, at least in terms of grades? Where's the disconnect?

The disconnect exists because of two very deep flaws in the college evaluative process. The first is the use of curves, rather than absolute standards, for measuring accomplishment. The prevailing mentality on college campuses (and at most, if not all law schools) is that someone must receive an A, even if no one has done A work. I do not subscribe to that philosophy. After all, if I and my height-challenged, jump-restricted friends play basketball, should one of us claim the slam dunk award even though none of us can get to the rim? It's so easy to see the absurdity of such a pretense when the subject is apparent, but yet it seems so difficult to see the absurdity of labelling the best student's work as an A even if it fails to measure well against an absolute standard or against the work of students in previous years.

The second flaw is the reluctance to measure and evaluate across a wide and deep range. This might be the result of an inability to generate tests that differentiate among various levels of accomplishment. After all, a one-question True/False examination will generate only two grades. A 30-question examination, with questions designed to be of different levels of difficulty, will generate multiple grades (whether an array of letters in the A to F range, or an array of numbers in a 70 - 99 range). It also could be the case that the questions on college examinations are too easy (a product of trying to ensure that everyone does well, or a product of bad examination design skills on the part of faculty), or that the questions do not have correct or incorrect answers ("what do you feel about...." or "describe your experiences...." come to mind as interesting questions that do little to evaluate a person's future prospects of living and working in the world beyond academia).

So, however the problem comes to exist, it yields college graduates who arrive in law school (and other graduate schools?) with expectations of similar low-hour investments in their academic pursuits. True, a few students are natural geniuses who in fact do accomplish much in much less time. But most students cannot learn by holding a book to their foreheads. When I, or my colleagues, explain our study time expectations, it is not surprising that the unexpressed reaction passing through the students' minds is "Ha, we did well in college with ten or fifteen hours a week, and you want FORTY-FIVE? ha ha ha." Fortunately, many students do make the adjustment, with or without complaining. But unfortunately, some do not, and more unfortunately, the law school grading systems do not identify these students as often as they need to be identified.

Thus, when it comes time to take the bar examination, which to some extent (though not entirely) is measured against an absolute standard, students who have made it through law school without suffering the effects of insufficent study time, fail. My discussion of this phenomenon the other day meshes nicely with the implications of the report about the latest National Survey of Student Engagement results.

One last point. That survey also did an assessment of what is called deep learning, namely, intense self-reflection, integration of knowledge with skills and practical application, and activities demanding higher levels of mental activity than rote memorization. Students scoring higher on this assessment generally were the ones who invested not only more time in class preparation, but also more time working on campus and participating in co-curricular activities. Once again, energy beats inertia (which is good, because otherwise inertia would bring, the physicists tell us, a more rapid degeneration of the universe).

The message? To college students and faculty, get to work. Fix those examination, grade against absolute standards, open the books, read, prepare, and get immersed into the subject matter. Academic study is not a television show to be turned on for 50 minutes and then abandoned. Academic study is an experience to be lived, breathed, pondered, and embraced. Good luck to all of us, and to all whose lives depend on us doing our best and reaching for the highest levels as we continually prepare to bring our talents to the world.

Back in June, I posted some thoughts on Money: The Root of All Evil?, among which was a story about the uproar over the refusal of McDonalds to pay life insurance benefits to an employee killed when an emotionally ill driver plowed his car into the restaurant. Those who read the post or saw the story elsewhere may recall that although McDonalds had the advantage of being legally correct, I questioned the wisdom of trying to skimp on what surely is petty cash to McDonalds. And I questioned the sense of having an employee benefits plan that, in effect, punishes employees who are in the probationary test period of a promotion. After all, the promotion suggests that the employee is someone who is doing good (or doing well).

It has now been reported that McDonalds has settled the suit, though the terms have not been announced. The victim's son reported a settlement equal to 62% of, or $15,000 less than, the amount sought in the litigation. This most recent newspaper report also discloses that after the previous story appeared, in which it was revealed that a fund set up by McDonalds to accept contributions by the public to help the victims' families had not yet been distributed, McDonalds added $50,000 to the $25,000 balance and then sent checks to the families.

In his column today about the ensuing boycott, John Grogan, whose reporting gave the situation much needed publicity, declared the boycott over. Grogan's column describes the scope and intensity of the adverse reaction triggered by McDonalds' position in the case, and it's worth taking the time to read his column. That's the only way to get a sense of how angry people have been.

Yes, it's nice that the matter is settled. But I must wonder why it took McDonalds more than a minute to write a check for $40,000 even though it was not legally required to do so. Worry about precedent? C'mon, how many employees die during the brief probationary period of a promotion. Worry about changing the policy? The actuarial present value cost of keeping promoted employees under benefits coverage is miniscule. Worry about negative public reaction? Apparently not. I guess McDonalds was willing to risk the hundreds of thousands of dollars of business losses so that it could hold fast to its legal rights.

I wish I knew how this had played out in the boardroom. Were the business folks adamant about protecting the bottom line? Were the lawyers giving advice that encouraged the resistance to paying the $40,000 benefit? Does the $15,000 that McDonalds saved (without taking into account lost sales) cover the attorneys' fees or the prorated salary of in-house counsel?

In my teaching, I take every opportunity that presents itself to encourage students to contrast the difference between the typical (and almost useless) question found on many (but not my) law school exams -- "who can sue whom for what and why?" -- with the more realistic law practice question -- "should there be litigation and why or why not?" -- that is intended to get students to consider the human and indirect economic costs of litigation. Something about winning the battle and losing the war comes to mind. In the wills and estates area, the concept arises frequently, because there are times when one can exercise a right at the expense of tearing apart a friendship or family connection.

Because I don't know how this played out, I don't know if it was a manifestation of a symptom of legal education failure, or business school education failure, a combination of the two, or some other factor (such as a stubborn employee out of sync with the common sense of handling these sorts of situations). No one knows how far up the chain of corporate command the issue went. Nonetheless, the case provides a wonderful object lesson for those who try to humanize the law or business subject that they are teaching. That's what I try to do, and though I have no evidence that I have succeeded or failed, I will continue my efforts.

A report this morning describes the Florida Supreme Court's plans to make it more difficult for applicants to pass the state bar exam by raising the minimum passing score. Other states are considering similar changes.

Why?

The Florida argument is that the existing minimum passing score does not ensure minimal competence on the part of Florida lawyers. The author of this morning's report questions whether bar examination are an "adequate measure of attorney competence." He suggests that the actual motive is protection of existing lawyers' income streams by curtailing challenges from new attorneys.

The author of the report attacks the Florida plan by pointing out that the failure rate in Florida has more than doubled since 1994, and that no studies have been undertaken to examine correlations between bar examination scores and malpractice claims. He contends that many bar examinations are "badly flawed," in part because essay questions cover too many topics, often focus on esoteric points of law, and sometimes are wrong. He argues that the bar examiners should not expect of new applicants what most licensed practitioners could not do, which is to pass a competency test covering a dozen and a half or more subjects, without "substantial preparation." He points out that bar exam grading, using the same multistate portion of the exams, generates failure rates that vary by more than 50 percent in 46 states and by more than 100 percent in 27 states.

The author of the report alleges that "most law schools have modified curricula, strengthened clinical programs, reduced class sizes and student-faculty ratios, and placed greater emphasis on writing skills" and that most law deans would characterize current legal education as having a higher quality than legal education of yesteryear. He continues, "Law schools across the country can demonstrate many ways in which the training of law students is increasingly tied to practice -- through supervised internships, the effective use of practicing attorneys and judges as adjunct professors and the enhanced use of clinical programs and simulation courses."

The author of the report states without reservation: "Legal education prepares students for the practice of law; it is the bar examinations that are out of touch."

I agree with the author's concerns, but I disagree with the premises and the analysis underlying his identification of the problem as fully the result of flawed bar examinations. Yes, there is a problem when pass/fail percentages on the same multistate examination differ so much from state to state. Yes, a state can decide that only applicants answering at least n questions correctly on the multistate portion can be admitted (assuming they do sufficiently well on the rest of the examination), while another state can set the minimum at n + m. In a federal republic, one state can decide that competence requires something more than another state does. This happens not only in law, but in all sorts of other licensed professions and activities.

Would it make sense to impose a national standard of competence on the multistate portion of the bar exam? One can make a good argument to do so. But one can also ask, "What is the point of measuring something by a national standard when bar admissions are state-by-state?" Practicing law in some states is more challenging than practicing in other states because the complexity of state law varies from state to state. Why should State A be required to accept as competent someone who is so characterized by State B if State B has a lower expectation of what attorneys should be capable of doing? Although one can imagine states negotiating some common passing level (of x correct questions), reality tells us that they would end up reduced to the lowest common denominator. Whenever that happens, and it happens so much in post-modern society that it has become a hallmark of early 21st century American culture, everyone, including the pretensively qualified individual, suffers.

I agree that bar examinations need to do something other than test memorization skills, the ability to handle multiple choice questions deftly, and the talent for applying the useless IRAC approach (issue, rules, application, conclusion) to essay questions. Some state bar examiners have already introduced other ways of testing skills, by shifting from law-school-imitative devices to practice world simulations. Applicants in these states are given case files, replicating the information that a junior associate would be handed in practice, and asked to work through the matter.

Are the suggestions to make bar admission more difficult driven by profit concerns rather than a genuine concern for protection of the public? On this question the author of the report raises a point that I am unable to rebut. He very well may be right. If he is, it makes the rest of the analysis academic.

The author's concern that bar passing rates are already dropping, even before the raising of the required "correct answer number," may not be, though, a reflection of a guild limiting its membership, but an indication that measured against absolute standards, law school graduates are less capable of doing what the bar examination requires. Why? Most law schools now grade on a relative basis rather than against a standard. Course content has been reduced, the number of required pages of reading has shrunk, grade inflation runs rampant, and few law students are permitted to flunk out.

It is when the author states without reservation that legal education prepares students for the practice of law that I must disagree. I wish that were the case. I think legal education SHOULD prepare students for the practice of law. Most academics, however, resist the notion of creating "trade schools," and insist that they are teaching students to "think like lawyers" (one, but only one, of the skills needed for legal practice). Some academics and schools support clinics and externships, but unfortunately those experiences are limited and too many students do not get the opportunity. There are drafting courses, some of which are very useful and some of which are so theoretical that they would cause practitioners to cringe. Adjuncts who teach specialty course or litigation courses generally bring practice world experience into the classroom, but sometimes adjuncts try to emulate full-time faculty because their ultimate objective is to become a full-time member of a law faculty.

Why do I think that it is incorrect to state without reservation that legal education is preparing students for the practice of law? First, more and more practitioners are expressing and demonstrating a reluctance to hire graduates because they don't want to invest the resources required to train the person. They prefer to hire laterals, thus taking advantage of someone else's investment in the employee. That is why taking a judicial clerkship, for example, is a wise move for a law graduate, but unfortunately there are not as many judicial clerkships available as there are law graduates. Second, I continue to hear from students that I am the first, and from graduates, the only, member of the faculty outside of a clinic or the legal profession course to use the word "client." That doesn't mean no one else is discussing the client or that the situation is the same at other law schools, but that law students can work their way through law school in a client vacuum. Third, although clinics and externships have increased in number, so, too, have the courses that cover subjects not examined on the bar exam, not present in the consciousness of practitioners, and useful only in indirect ways to a student's ability to practice law. Fourth, I have been told, by law faculty, that law faculty are not training practitioners but people who use the law, such as lobbyists, academics, and public policy wonks. Teaching with those goals changes what the graduate takes into the bar exam. Fifth, the existence of bar review courses and the content that they provide, though perhaps proving the author's point that the bar examinations are testing a different set of legal information, demonstrates, at least to me, that law graduates are doing more than review, and are catching up on topics not visited in law school, perhaps for reasons related to my third point.

States have eliminated the preceptorship programs that at one time were integral parts of bar admission. A law graduate would go under the tutelage of an experienced attorney for a period of time. It makes sense, and where traces of those programs exist, such as judicial clerkships or the rare instance of a one-on-one relationship between a small town practitioner and a promising law graduate, they prove the value of such programs.

These programs don't exist because they cost too much. Law, unfortunately, has become a business, and that has tarnished its professional stature. I leave for another day an exploration of that phenomenon, but suffice it to say that one of the many disadvantages to the painting of law with a business brush is the lack of pervasive preceptorship and similar mentoring. Yes, a few lawyers are trying to create mentoring programs, but they're swimming upstream.

The practice of law requires much more than what bar examinations test. Some requirements, such as good character, are handled through other means, such as investigations, and because the author of the report focuses on the competence issue rather than the character issue, I leave for another day the discussion of whether the bar's character screening process is sufficient and efficient.

The only way to know if someone can do something well is to give the person a chance. When the thing in question affects other people, the chance needs to be given under supervised conditions. It is time for a two-stage bar examination process. The first would be a fundamental competency examination that tested many subjects, because, unlike the author, I think that the woven fabric of law is more than a series of isolated topics or subjects, and that a good practitioner knows that a client's problem is one that almost always slices across numerous areas of the law, especially the "forgotten" or "undesired" ones. How many times does a practitioner miss a negotiable instruments issue because he or she didn't take a course in law school and wasn't tested on the matter in the bar exam? Thus, unlike the author, I would test several dozen subjects, not simply a few. The second stage would be a thorough "dumped into a simulated practice situation" experience undertaken after two or three years of preceptored or mentored tutelage. This will require far more investment of time and money than state bars currently invest in the bar admission process. But in the long run, it is better to do the culling this way than to wait until a lawyer needs to be removed after having done damage to clients' lives.

As for the correlation with malpractice, I simply note that too much malpractice is on account of things other than competence. As my mother still reminds me, intelligence isn't everything. Laziness, substance abuse, greed, carelessness, inadequate language skills, and all sorts of other bad traits are responsible for at least as much, if not more, malpractice, than is simple lack of knowledge of black letter law. That is why bar examinations simply testing memorized black letter law and certain test-taking techniques are insufficient. But I do agree with the author that studies are needed. I would like to see an analysis of malpractice cases. What was the malpractice? What caused the malpractice? What courses did the attorney take? How rigorous were the tests faced by the attorney? Were the types of skills required to avoid the malpractice (time management, responsibility, legal knowledge, comprehension of law) available to the attorney while in law school? The results of such a study would be most interesting.

However, if bar examinations were turned into what I want them to be, far fewer applicants would pass, because legal education would be even further afield, except for those students fortunate to be in clinics or other practice world courses. That is why I have proposed that law schools offer sufficient clinics so that all students have the opportunity, and are required, to enroll in a clinic. Well, at least the faculty teaching in clinics like my idea. So do some others. The downside? It costs money. That makes deans frown, though many of them are doing all sorts of creative fundraising to get closer to the goal. Perhaps the practicing bar can step in and fund clinics at law schools so that not only are the disadvantaged provided with legal services they otherwise would not get, but law students can get an education that forces them beyond the bounds of institutions built of walls covered with ivy.

Sometimes it is easy to understand why people think the tax law is a disgrace. Sometimes it is easy to understand why people hold the IRS in disdain. Sometimes it is easy to understand why people think that the law is not developed on a level playing field.

All of these concerns come together in a tax case that went to trial on Monday. The issue and its resolution could directly affect many taxpayers, and indirectly all taxpayers. So it's worth a look.

The question involves the charitable contribution deduction. Most people know that there is a deduction for contributions to charities. But that simple rule is transformed by numerous exceptions and definitions into a complex topic worthy of a one-credit course. In the basic federal tax course that I teach, time constraints compel me to restrict the students' official examination of the deduction to a somewhat superficial description. Yet even with that superficial description, one can get a hold of the tax case that started on Monday.

There are two major aspects of the charitable contribution deduction. The first is that there must be a charitable contribution. The second is that the amount must be computed by working through reductions, limitations, and other computation fun. It is the first aspect that concerns us.

For there to be a charitable contribution there must be a gift to a qualified organization. Again, it is the first part of this rule ("gift") and not the second that concerns us. Most qualified organizations are easy to identify, and in the case that started on Monday, that is not an issue. I'll call qualified organizations "charities" even though that word is technically wrong and a wee bit too narrow. It works for purposes of this discussion.

When asked "what is a gift?" law students, particularly those in tax, realize that a concept that they take for granted becomes a challenge to define when set against the outer boundaries of its meaning. A gift is the opposite of a "quid pro quo" (which is Latin for something for something else, and we'll leave to another day why Latin phrases continue to populate legal language, and it's not just so that lawyers can sound educated).

So, if a taxpayer transfers $30,000 to an automobile dealer and receives a car worth $30,000, that is not a gift. It is a quid pro quo, and as a practical matter is classified as a sale by the dealer and a purchase by the taxpayer. A quid pro quo can exist even if one side or both sides of the exchange consist of services. There is no gift when a person pays $500 to a tree surgeon to remove a dead tree.

The determination of whether there is a gift is important not just for the charitable contribution deduction, but for the recipient's ability to exclude the amount from gross income as a gift. If it's not a gift, but is compensation for services or payment for property, the recipient is looking at income (or potential income because the sale of property might trigger a loss) which almost always ends up being taxed.

So it helps to think about the difficulty in determining what is a gift. Let's consider some hypotheticals involving the gift exclusion. Then we'll get back to the gift part of charitable contribution.

The question gets tougher at the edges. Is there a gift is a person takes another person to dinner? It depends. Is it mom taking her daughter out for the daughter's birthday? That has to be a gift, right? Well, what about the fact that mom may be looking for the daughter's devotion, or attention, or continued assistance with trips to the doctor? Isn't there some sort of quid pro quo? What if it's a business entrepreneur taking a potential customer to dinner? Does the customer have gross income, or can the value of the meal be excluded as a gift? Is the entreprenuer being generous or is the entrepreneur paying for the potential customer's time and ears? There's even a better question, what if someone takes a person on a date and pays for dinner, but I'll leave that one alone. I know better than to go down that road at the moment.

Is it possible to give to a charity without getting anything in return? In one sense, no. The giver gets a sense of accomplishment, a feeling of good will, perhaps some intangible theological or moral "reward." Those "returns" though, are ignored as a practical matter. After all, taken to this extreme there wouldn't be anything at all qualifying as a gift to a charity.

On the other end of the spectrum it is easy. A person donates $150 to a public television fund raising campaign and gets a video of a high-brow drama series worth $40. The "gift" is $110, not $150. There are all sorts of practical reporting problems in this area, but over the years Congress has enacted provisions putting the burden on the charity to value what it provides to the donor. You've probably seen the consequence in the fine print at the bottom of the "thank you" letter that you've received from the charity.

In the middle are some interesting situations. The IRS has addressed a few of them, and I'll give one example. A homeowner donates $100 to the local volunteer fire company (which almost always is a qualified organization). If there is a fire, the fire company will show up. Quid pro quo? Isn't it something like buying insurance? Yes and no. First, the homeowner DOES NOT WANT anything, and surely does not want the fire company to show up. Second, the fire company would show up regardless of whether the person donated, unlike colonial days in Philadelphia when the fire fighters would look for the company's seal on the exterior wall next to the door.

Hang on, we're getting to the case. Another hypothetical will help. A person pays $30,000 to the University of Their State as tuition for their child's education. The university is a qualified organization. Is it a gift? No, of course not. The $30,000 is paying for $30,000 of education. Yes, I know that sometimes it's tempting to treat the education as worth a dime, but that's not how the tax law looks at it. If the person deducted the $30,000 and then on audit offered a cancelled check as proof, the IRS would not be amused. The word "penalties" comes to mind, and in some instances so too would the word "fraud." (As for the disappearance of cancelled checks under the new banking law, well, eventually I'll need to change that part of the hypothetical, but not today.)

Time for a related story in the nature of an amusing aside that demonstrates what can happen to people who game the system. The IRS audited a person whose charitable contributions were very high considering his income. On audit, he produced checks written to his church. Puzzled, the IRS contacted the pastor of the church (with the taxpayer's approval, I think). The pastor explained that he knew the fellow, that the fellow was in regular attendance, and was an active member. Asked about the extent to which the fellow's devotion would inspire him to give such a large portion of his very modest income to the church, the pastor explained that the fellow approached him several years earlier and suggested that there was a risk in leaving the Sunday collection laying around and that he could help by writing the church a check for the cash that was in the collection basket. That, folks, is a quid pro quo. As in you do fraud, you get penalized.

So, if we can't deduct the tuition check, can we deduct a check for religion school? Of course not. Well, not so fast.

Some years ago, the IRS challenged members of the Church of Scientology, who were claiming deductions for "auditing, training and other qualified religious services." The IRS took the position that the payments for auditing and training were no different than payments for tuition made to a religious school for education. The battle (and that's the right term though Scientologists refer to it as a "war") between the IRS and Scientology was long and nasty. Eventually, the IRS and Scientology reached an agreement, which they tried to keep secret but it leaked out. The fact that the IRS suddenly stopped challenging the deductions and revoked a written ruling that had prohibited deudctions for contributions to Scientology for auditing, training and other qualified religious services pretty much told the story.

The Scientologists argued that these payments were no different from payments made by a person when lighting a votive candle to pray for something or to give thanks for something. The IRS has never challenged the deduction of such a payment. Why? Perhaps the world doesn't think that the person is getting something sufficient to be a quid or quo in the quid pro quo. The person may be getting (or thinking they're getting) some psychic, spiritual, or theological benefit, but that doesn't count. Suppose the person lights the candle and asks for help in getting a job. Suddenly, a miracle. They get a job. Does that prove there was a quid pro quo? I doubt it.

All of this is made more complicated by the fact that pew rents are deductible, even though the quid pro quo is more apparent. So, too, are payments to a synagogue to ensure a seat for High Holyday services. So, too, is the extra $50 that someone drops into the collection basket because a sermon resonated and resolved a problem that someone might otherwise have had to handle by paying a nondeductible $50 (or more) to a counsellor or lawyer.

Now to the case. Taxpayers by the name of Sklar contend that 55% of the tuition they pay for their children at Jewish day schools is deductible because 55% of the children's time is spent in religion classes getting religious training. Though there is some question about the percentage, we can ignore it, because the important issue exists whether the percentage is 55%, 40%, 80% or 10%.

The IRS challenged the deductions claimed by the Sklars on their 1994 return, and issued a notice of deficiency in taxes. The Sklars filed a petition in Tax Court to overturn the deficiency notice, and lost. They appealed. They lost, in 2002, which is how long it took for this case to work its way through the justice system. In response to the Sklars' argument that members of Scientology were getting deductions for something that members of other religions weren't getting, the court of appeals, though raking the IRS over the coals for its attempt at secrecy and though suggesting that the deduction for Scientology members was probably unconstitutional, nonetheless affirmed the Tax Court conclusion that the Sklars had not proven that the education their children were getting in Jewish day schools was sufficiently similar to the kinds of training courses that the Scientology members took. A concurring judge wrote: "Why is Scientology training different from all other religious training? We should decline the invitation to answer that question. The sole issue before us is whether the Sklars' claimed deduction is valid, not whether members of the Church of Scientology have become the IRS's chosen people."

The IRS also challenged the deduction taken by the Sklars on their 1995 return, and that is the case that opened on Monday. The story is getting a lot of press coverage, such as this story. Though one can almost certainly predict the outcome of the case, it case is getting more and more attention. What will be the long-term impact, if people in other denominations conclude, as have the Sklars, that they are the subject of discrimination?

The Court of Appeals suggested that the appropriate course of action is not to approve for the Sklars a payment that is not deductible, but for someone to challenge the allowance of a deduction for members of Scientology. The problem is that no one has standing to do so. The Court of Appeals would reject such a lawsuit, so it puts taxpayers into a bind. Taxpayers are always in a bind when they want to challenge a position taken by the IRS in favor of another taxpayer.

More than two years ago, I posted a message to a listserv on the question. Here is part of what I said:

Certainly payment of tuition to a church school involves a quid pro quo. Is Scientology "training" like a church school? Or is it more like listening to a sermon and then, because it was so good (and one learned a lot), putting (more) money into the collection basket? Does the fact it is one-on-one matter? Is it the linkage, namely, you don't get the benefit unless you pay? (Is that in fact the case?) Yet, linkage might not be the key. In some denominations, one cannot participate in certain activities unless one is a member in good standing, an element of which is tithing or otherwise paying "dues" to the religious institution. Deductible? Yes.

The challenge with the line-drawing is that, as I understand the argument made by Scientology, it is being done by people with a particular perspective that happens to be very different from the Scientology perspective. In other words, applying "mainline" or "traditional" views (I don't like those words but I struggle to find a word that conveys the meaning here) to Scientology brings about a conclusion that auditing and training are like one-on-one counselling and church school for hire, whereas under Scientology "theology" (if I can use that word loosely), they are more like the votive candle donation, the marriage donation, the "it was nice of the minister to chat with me and calm me down" donation, the "pay your dues in order to participate" rule in some denominations.

Who's to judge? Is the IRS to get into the business of evaluating the theological parameters of donations? If the question is anything but clear (church school tuition, purchase of items in church gift shop or at church fair, payment for food at church dinner), is the IRS not justified in treating it as a donation for an intangible theological or religious benefit? After all, taking quid pro quo to the extreme, there are all sorts of donations to churches that would fail because the person is trying to get "something" (even if it is eternal after-life, a divine intervention, a miracle, etc).

So if the IRS is going to steer clear from such issues, I'm not persuaded that it has swung so much wider around the Scientology situation than it has around others, at least not to the point where one can draw a line that separates the two. Perhaps someone on the list can enlighten me (us) more about the specifics of these items involved in the settlement [between the IRS and Scientology].

There is no easy answer, short of repealing the charitable contribution deduction. The opposite approach, permitting a deduction for all payments to charities (or even to religious organizations) opens the door to blatant abuse. Every potentially reasonable solution that comes to mind involves even more complexity. Does it make sense for the IRS and the Courts to be examining the circumstances of each and every payment made to a religious organization? That's what happens now, theoretically (though most payments escape scrutiny because the IRS lacks the necessary resources).

So I leave this to you to ponder.

Paul Caron, he of the TaxProfBlog claims that there is a "Maule effect" that increases the number of visits when he publishes one of my "what tax professors are reading" book reviews. (Which reminds me, I have some more to write, but anyhow.....)

I still find it difficult to believe, even after Paul showed me some "proof." But perhaps he is right.

Remember back in July when I disclosed that my cousins in England had explained the rules of cricket to me? My comment that I could make learning income tax law easier for my students if I started with an explanation of cricket made it into the Wall Street Journal.

And that was the end of that, so it seemed. Until today.

A headline ("After 150 years, clubs find cricket a hit again") splashed on the front page of the Local News section of the Philadelphia Inquirer leads into a story that explains how cricket is returning to Philadelphia area country clubs, including those that despite the word "Cricket" in their name, had become a haven for tennis and golf.

This has happened within the last six months. A professional league has been formed. Are tax lawyers, tired of golf and tennis which just don't challenge the brain as does cricket, and who are not rare among membership lists at country clubs, reading my blog or the Wall Street Journal quote and turning to cricket as a stimulating alternative?

Nothing in the article mentions tax lawyers or other tax professionals. But surely they'd be drawn to something as alluring with its complexity as is tax. So many more opportunities to argue about something or to find nuances in the rules to be turned and twisted into an advantage. Plus they get to do some hitting. Good therapy?

But I don't think my blog or the Wall Street Journal quote had much to do with it. After all, that professional league hasn't come knocking on my door with a $3,000,000 annual contract to manage a cricket team. When and if they do, I'll let you know.

He ran for office. His political principles included the conclusion that none of us are obligated to pay federal income taxes. He said he didn't pay federal income taxes.

He lost the election. By a huge margin (more than 178,000 votes). He gathered about 1 percent of the vote (fewer than 4,000 votes).

Unlike some tax protestor advocates, who encourage people to ignore their tax paying duties while filing their own returns because they don't really believe what they're preaching, this fellow apparently told the truth. At least the IRS and the Department of Justice believed him.

And that's why, shortly after the election that he lost, Arthur L. Farnsworth, Libertarian Party candidate for the House of Representatives in the 8th District of Pennsylvania (Bucks County, parts of Montgomery and Philadelphia Counties) and treasurer of the Pennsylvania Libertarian Party, was arrested.

According to this story, he was put in jail. The government expressed concern that because he allegedly moved his assets overseas he would jump bail. The defense argued that he has no criminal record and has never missed a court date. See, this wasn't his first run-in with the IRS. Two years ago, IRS agents confiscated his computers and business records.

Politicians like to talk. So when Farnsworth started lecturing the judge, the judge's seeming sympathy for him faded away. Telling the judge that he has no jurisdiction when in fact he does won't sit well with his honor. The judge's comment to the public defender appointed to defend Farnsworth was rather telling: "He's all yours. Have fun."

Why a public defender? Farnsworth said he had no money to hire an attorney.

Oops. Farnsworth, who according to his election biography, is an electrical engineer, a consultant, and involved in sales, surely has income. Maybe he spent it trying to get elected?

The indictment alleges that from 1998 through 2000 he had more than $221,000 of income that he failed to report, he failed to file returns, he failed to pay his taxes, and he concealed and attempted to conceal his income. I guess it will be tough for him to deny failure to file his returns when he made that a key ingredient of his campaign.

For an indictment to come down at this point means that the investigation was underway at least a few months ago. Perhaps as long ago as when the IRS seized his computers and business records. Getting on the campaign trail and proudly proclaiming failure to file tax returns may have made political sense for someone who thought that citizens would flock to him by the tens of thousands. Not only did he turn off people who pay their taxes, unhappily or joyfully, he also turned the IRS spotlight onto himself.

So he probably was telling the truth when he claimed he wasn't filing income tax returns. But if he did conceal income, then his claim to the status of "honest politician" just went out the window. And it evaporates if he's not being up front when he cries poverty.

It does seem silly, doesn't it, for a tax protestor to run for office on the claim of failing to pay taxes. I'm not sure what the logical conclusion would be. Is it "I don't pay taxes but you do"? Is it "I know you don't want to pay taxes, so vote for me and no one will pay taxes"? Maybe that's libertarian in some strange "no government free for all" sense?

He did get almost 4,000 votes. That's more than I ever gathered in the few write-in efforts in which I've participated. Don't ask.

Let's hope bank robbers run for office on a platform of making locks illegal, drug dealers seek election on a platform of drug law repeal, and spam merchants throw their hats in the ring on promises of anti-spam regulation repeal. This may turn out to be a very inexpensive way to track down criminals. With elections behind us, perhaps reality TV will need to step in and offer some sort of prize for "most amazing crime story" as told by perpetrators. Considering the success of police stings, there might be something worth pursuing.

An interesting story about how Taxes dissolve Maine town suggests that the hypothetical notion of a government running out of (or short of) tax revenue deserves fuller consideration. In this instance a town, faced with a dwindling population and tax base, voted to dissolve and become, in effect, a ward of the state. The state takes over the local government functions, and, theoretically at least, spreads the financial cost over a state-wide tax base.

I haven't checked, but surely something in the Maine Constitution or in its statutes allows a town to dissolve. I do not know if similar provisions exist in every state.

But I am willing to guess that a state cannot simply "dissolve" and turn over its functions to the federal government. But I could be wrong. It seems to be a silly idea, and yet the prospect of insufficient tax revenue to continue operations isn't silly. Some local governments have come very close, in some instances needing state or federal guarantees to raise loans.

This is something I don't remember having ever seen. I've seen towns decay into uninhabited ruin, such as the ghost towns of the west, but in those instances the lack of tax revenue is matched by a cessation of a demand for local government services.

Do I think it is wise to dissolve a town? Generally, no, even if there is no choice. Sometimes two very small towns can merge, thus dissolving one or the other or both, but that's not what concerns me. I'm concerned about the loss of local control and the intervention of a larger, more impersonal and distant government.

There are all sorts of reasons to minimize what's handled outside of the neighborhood and town. Yet I am sure that there are those who will say that FEMA is better at handling widespread emergency needs (think blizzard in the border states) than are many local governments.

It's not that I'm concerned that a state or federal government can't get snow plowing or trash pick-up accomplished. Those are fairly impersonal tasks. It's
things like getting a building permit, where the difference between being on a first-name basis with the town clerk and not being able to reach by phone a state or federal bureaucrat is significant.

I am sure there are those who would enjoy total federal control and management of all government functions, with an abolition of all state and local governments, despite the Constitutional impediments to doing so. It makes it much easier to "govern" and to control things. The mind-set in capitals is that the central government is wiser than are the provinces. As has been the case with every empire, from Rome to the Soviet Union, that is rarely the reality.

The story is an interesting example of what happens when the need for services and the cost thereof exceeds the tax-paying capacity of the government. It HAS happened to some localities and has almost happened to others. Perhaps it has almost happened to states. Will it happen to the federal government? And if it does, then what?

In my post yesterday about the Congressional agenda for future tax relief, I noted that it wasn't clear to me what was meant by that term.

A regular reader who is also a former student and an adjunct professor in our Graduate Tax Program suggests that what is intended is making permanent the tax cuts enacted in 2001. Thus, the estate tax would be repealed, at least until such time as a Congress intent on its return re-enacts it.

I agree. I'm sure that this is one of the things on the agenda. But I am sure there is more. At his press conference this morning, the President emphasized that he intended to simplify the tax law: "We must reform our complicated and outdated tax code."

The President also stated, in response to a question about his overall legislative agenda:

And part of that comprehensive agenda is tax simplification.

The -- first of all, a principle would be revenue neutral. If I'm going to -- if there was a need to raise taxes, I'd say, let's have a tax bill that raises taxes, as opposed to let's simpl[if]y the tax code and sneak a tax increase on the people. It's just not my style. I don't believe we need to raise taxes. I've said that to the American people. And so the simplification would be the goal.

Now, secondly, that obviously, that it rewards risk and doesn't -- it doesn't have unnecessary penalties in it. But the main thing is that it would be viewed as fair, that it would be a fair system, that it wouldn't be complicated, that there's a -- kind of that loopholes wouldn't be there for special interests, that the code itself be viewed and deemed as a very fair way to encourage people to invest and save and achieve certain fiscal objectives in our country, as well.

One of the interesting debates will be, of course, in the course of simplification, will there be incentives in the code: charitable giving, of course, and mortgage deductions are very important. As governor of Texas, when I -- some time I think I was asked about simplification, I always noted how important it was for certain incentives to be built into the tax code, and that will be an interesting part of the debate.

So does that mean the President would not sign another special interest giveaway tax bill such as the American Jobs Creation Act? Does he really intend to oppose any more special breaks for specific individuals or entities or small groups of them? Is he ready to stand up to legislators on both sides of the aisle and oppose their special interest group tax legislation ritual? As I said yesterday, it's already messy and it will get interesting.

The President's statement also suggests that simplification, as he sees it, probably would not repeal the charitable contribution deduction or the home mortgage interest deduction. This is probably his way of saying that he understands the political reality implicit in an attempt to repeal a tax break that benefits a wide cross-section of taxpayers rather than a small group. An interesting question is "what else falls into that category?" IRAs? MSAs? Education credits? The section 135 bond interest exclusion?

It also will be interesting to see what happens to the tax breaks that are not repealed. Both the charitable contribution deduction and the home mortgage interst deduction are complicated. These are not reflected in one sentence provisions that allow a deduction. They are loaded with definitions and limitations. Many of these limitations, particularly in the charitable contribution deduction area, are attempts to shut down taxpayer abuse.

See, what makes simplification a conundrum is the "I'm special" mentality of taxpayers who seek not only the enactment of special interest tax breaks but who twist and abuse provisions that people of common sense would not characterize as intended to permit what the "I'm special" person wants to do. Thwarting the "I'm special" person requires definitions, limitations, and other provisions that add to complexity. The President's expressed desire to eliminate loopholes conflicts with his expressed desire for simplicity. Of course, a balance can be struck between the two concepts, but compromises generally leave everyone unhappy and looking for the next opportunity to strike back. It would be easier if everyone behaved "appropriately," especially when dealing with matters where "appropriately" is not something over which reasonable people can differ.

Would a different type of tax make it easier to achieve simplicity while fending off the "I'm special" folks? The types of taxes and revenue generators that hold out that promise tend to lack fairness. Inserting fairness into a tax can generate complexity, not only to prevent regressivity but also to cut down the efforts of the "I'm special" people to redefine fairness as that which ratifies their specialness.

I predict a lot of discussion, a lot of noise, studies, arguments, and much fodder for the talking heads of the 24-hour news channels. Taxes involve money, and discussions about money, especially when it involves how much one pays and how much someone else is or isn't paying, can find an audience (i.e., ratings). Will the Congress find a way to get together and fix the problem? My prediction is no, it will make it more complicated. When the day is done, there will be more credits, more anti-abuse rules, more definitions, more limitations, and more phased-in, phased-out provisions. The impact of the looming financial problem (deficits, Social Security, and Medicare topping the list) will contribute to the collapse of the system.

I could be wrong. I hope I am wrong. I'd be more than happy to post a blog that says "I WAS WRONG" after the Congress cleans up the tax law. Cleaning up the tax law, by the way, isn't a matter of making existing provisions permanent. Cleaning up the tax law means this: cutting down exclusions to the point where gross income is income, eliminating all deductions other that trade or business and income-generating activity deductions, providing for an inflation-adjusted poverty level exemption, scaling tax rates on a progressive basis that applies bracket boundaries at meaningful levels ($100,000, $250,000, $1,000,000, and $10,000,000 for example), limiting credits to genuine "paid on account" credits, eliminating all filing status categories except "taxpayer," and permitting individuals to transfer "unused exemption amounts" to other taxpayers. This approach removes the need to insert "don't tax the poor" phase-out provisions in inclusion provisions and the need to insert "let's add a tax to the rich" phase-out provisions in deduction and exclusion provisions. It means determining income net of production expenses in a manenr that truly measures income, exempting those who are poor from paying an income tax, and creating a progressivity that doesn't treat people with income of $300,000 as in the same tax bracket as those with income in the millions.

I know I didn't say anything about Social Security, the taxes for which fall more heavily on the lower income groups. I'll save that for another time. That, too, needs a lot of fixing. It may require a credit mechanism for the income tax. That might be about as close to merging the two as the system will permit.

So... don't throw away any of your income tax books. Even the old ones. What goes around comes around and perhaps they will be of value in the upcoming debate.

Prof. Beau Baez of Liberty University School of Law reacted to my snack food tax posting with a collection of interesting insights and anecdotes:

The state & local tax world has been dealing with definitions in this area for years, at least in states where candy is taxed but food is exempt from the sales tax. For years New York took the prize with the marshmallow distinction. Little marshmallows are used in cooking thus they are not taxed, but large marshmallows are candy (presumably used in making smores). After years of embarrassment New York finally exempted all marshmallows from the candy tax. My new New York favorite is the Oreo cookie. The regular Oreo cookie is untaxed food while the Oreo cookie with double-stuff filling is candy.

What I have always found intriguing about these distinctions is the intellectual capital that goes into the process. I can just imagine the discussions and memos at the New York tax authorities.

To: Candy Tax Policy Group.
From: Commissioner of Revenue
Re: New Oreo Cookie with Chocolate Covering.

Please investigate the tax implications of this new product from Nabisco. While it contains a large amount of non-taxable food there may be enough taxable chocolate to deem the entire product taxable. Please promulgate regulations in the New York State Register by December.

Then of course is the general lack of administrability by the grocery stores. When testers have gone into stores in the past to verify that the correct items are being taxed it has been found that stores generally overtax customers, with no effective way of getting refunds from the state. In addition, stores have not always guessed correctly and some items have gone untaxed. The state though, on a
net basis of all items sold in a store, has come out ahead. Presumably this relieves the store from poor guesses as to the taxability of wheaties with chocolate chips. Take care.

I wonder if sampling the new chocolate-covered oreo is a prerequisite for determining its classification. If so, and if the state pays, is it a taxable fringe benefit? Working condition fringe? De minimis? Oh, by the way, the eating of little marshmallows as snacks, no cooking required, is not that uncommon. Thanks to Beau for sharing these marvelous examples of culinary taxation.