MauledAgain

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

Copyright 2004 Tax Analysts. Reprinted with permission.

105 Tax Notes 1498 (Dec. 13, 2004)

Tax Bloggers Use Internet to Widen Tax Policy Appeal

By Warren Rojas -- warrenr@tax.org

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

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

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

Atop the Cyber Soapbox

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dropping Knowledge

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

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

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

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

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

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

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

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

Rounding Up Recruits

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

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

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

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

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

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

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

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

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

Warren Rojas
Tax Notes investigative reporter
703-533-4603 Work
wrojas@tax.org

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"We will not raise payroll taxes to solve this problem."

That's what the President said this morning in response to a question as he took questions from reporters after meeting with advisors with respect to Social Security reform. Up to that point, the President had emphasized the need to publicize the scope of the problem (something like $11 trillion of unfunded liability), had spoken favorably of opitonal participant investment alternatives, and had emphasized that he "would not prejudge any solution."

Well, he prejudged the "raising payroll taxes" solution. Does that mean he will oppose removing the cap on the retirement portion of the payroll tax as it was years ago removed for the medicare portion? Or is he simply advocating no increase in the tax RATE?

Well, if raising taxes is precluded, what's left?

1. Decreasing the absolute dollar amount of benefits.

2. Changing the benefit cost-of-living increase from one based on wage increase percentages to one based on the consumer price index.

3. Postponing retirement age.

4. Decreasing benefits for those who retire before a selected age, such as 70 or 72.

5. Trying to find a way to increase the rate of return earned by the investments made by the program's trustees with the excess funds generated by taxes exceeding payouts, for the short period of time during which those excess funds will continue to exist before being used to deal with the shortfall that will arise when payouts exceed taxes (which is expected to happen in about 10 years or so).

Each of these choices has disadvantages and the first four will deeply antagonize current beneficiaries and those nearing retirement. The fifth is appealing, but unrealistic. It had its origins in the 1990s when stock market return rates eclipsed safer investments such as certificates of deposit and, of course, government bonds (the rates on which pretty much indicated the rate of return earned by the investment of the excess social security funds, as the government pretty much borrowed from social security to solve its cash flow and deficit problems). But the bubble of the 1990s is over, it was transitory, illusionary, and misleading, and getting similar returns involves what all high returns require: acceptance of risk. Once that is understood, the fifth choice will find itself no less opposed than the first four.

There is a sixth choice. Maybe this is where things will go. I call it "LET'S PUT THE I BACK IN FICA." That's right, social security is an insurance program. That's what the I in the acronym FICA represents. Most Americans do not know this. They've been sold the "entitlement" theory on social security just as they have been sold the entitlement theory on everything else (such as "interstates are free, so end the tolls on the turnpike" idea I discussed yesterday). Once the program is accepted as the insurance program it was intended to be, that is, a program designed to assist retirees whose pensions were lost in the Great Depression, then it is easy to fix things. A needs test is imposed, which would remove from the social security benefits rolls those folks whose pension and other income is more than sufficient to meet their needs.

The "it's my money" perspective, sold for decades by politicians as a means of gaining elective office, is incorrect. Taxes paid into social security are no more the payor's money than are insurance premiums paid to the insurance company. Other than life insurance, which is designed as an investment, people don't want to collect from their insurance company (at least not in the absence of fraud). Social security has not been managed as an investment, and thus the comparison to life insurance is inappropriate. Social security has been managed as one big PONZI scheme. If you or I did that, we'd be committing a crime. As with all Ponzi schemes, push has come to shove. Party's over.

It's not going to be easy to sell the correct fix. Those for whom social security was a windfall (because they didn't need it) will be perceived as "lucky" by those who will be denied the opportunity for the same sort of windfall. The destruction of the "it's my money" argument, resting on the proposition that for all but those who die shortly after starting to receive benefits the amount received exceeds the amount paid in, won't sit well with the entitlement crowd. The advertising motto "I want it, I deserve it" reflects a philosophy that permeates post-modern culture, and sells us short because it leaves out "I earned it."

Ironic that social security could become the force that destroys post-modern culture and perhaps the nation that, at least in part, has embraced it. The theories crash on the rocks of reality. So, difficult as it will be to sell the correct fix, failure to do so poses risks far beyond those presented by dishing out some honest and tough talk from the high halls of federal government.

In yesterday's post aboutturnpike tolls, I described the turnpike as I-76. Former student, Graduate Tax Program adjunct, and friend Ryan Bornstein was on it in minutes. After joining in singing the praises of E-Z Pass, he noted that the Turnpike is I-276 (east-west) and I-476 (Northeast Extension). I-76 is the Schuylkill Expressway. A few years ago, they redesignated the numbers. I-76 had been the Turnpike from the Ohio border to the Expressway Interchange and then it followed the Expressway, leaving the rest of the turnpike as I-276 (from Valley Forge to the New Jersey border). When the "Blue Route" was designated I-476 they extended that designation through the Northeast Extension (which had been Route 9).

Wow, it's almost like the amendment of the tax law. So I should have gotten it right. I drive those roads often enough.

Ryan's email inspired me to reflect why I wasn't "up" on the route numbers the way I am with tax code sections. Simple. I deal with local route numbers the way some folks deal with tax law: forget the numbers. Locals call the Schuylkill Expressway by that name, or just Expressway (or some others, the only one of which I can print is Surekill Crawlway). The Blue Route is so-called as it has been so designated on the planning books since before my late father was born (and the Green, Yellow, and Red Route alternatives didn't make it). Some people even call Lancaster Pike "the Pike" (which is very confusing even to locals who aren't very local, because in my hometown 10 minutes away "the Pike" is West Chester Pike).

It gets tough for the visitors who listen to traffic reports that talk about places such as the Blue Route, or things like backups near the Conshohocken Curve. I had a taste of this some years ago when I went to visit my sister and brother-in-law in North Quincy, just south of Boston, and heard traffic reports about a backup near the tank. WHAT TANK? My brother-in-law explained, "That tank," as he pointed out the window of their condominium to an artfully painted storage tank. "Everyone knows the tank." Well, I do now. And, of course, I didn't know how to get around the backup at the tank. Now, with GPS, well, that's another topic. Someday.

So I suppose that the same energy that compels me to require students to cite Code sections ought to encourage me to remember route numbers, especially when giving directions to out-of-towners. As for the traffic reporters, who have 30 seconds in which to provide 3 minutes of information, how else to describe the Conshohocken Curve? Oh, for those interested, its a place on the Expressway where the road curves almost 90 degrees in a short distance. It has a mile marker, but I have no idea what it is, and most folks aren't aware of mile markers in urban areas.

Leave it to two tax lawyers to get all numbered up about routes. Anyone want to guess where I-676 is? (And, hey, notice that the interstates near Philadelphia have "76" in the number, as in 1776, as in Declaration of Independence? Almost as good as tax trivia!)

I've devoted several postings to the "mistake" involving the insertion into the appropriations bill of language permitting staff of the appropriations committees to examine tax return information without privacy safeguards. First, I described what happened, then I described how it became a major problem, and finally I described the post-mortem analysis of the problem. The bill finally has been signed, after the Congress passed a resolution negating the inserted language.

So?

Does that mean this is the last posting on the subject?

No.

The particular incident probably won't be the subject of any more in-depth discussion. But the incident, first described as a "mistake" and then as a problem, isn't a mistake and isn't a problem. IT IS A SYMPTOM.

The problem remains.

The problem is how Congress conducts its business. The incident was a symptom.

A problem is not solved by alleviating the symptom. Treating a symptom without treating the problem not only makes additional incidents likely, it can let the problem grow until the symptoms are worse and ultimately untreatable.

But, in the ways of Washington, now that the "problem" has been fixed, oops, I mean, now that the symptom has been alleviated, there's little spotlight value in the issue. So the talk of "the system is broken" will fade into the soundbite archives, until the next time.

One of these days the next time could be the last time. And I don't mean in terms of "problem solved." I mean in terms of problem so bad that its ultimate impact is catastrophic.

Congress, do your duty. Fix it. Now.

As if Congress will listen to me. Hah.

In his Philadelphia Inquirer column this morning [free subscription site], Jeff Brown gives some advice on the timing of retirement, and then notes that his examples omit other factors, such as working while pulling down social security benefits and taxes. He notes: "It seems like a raw deal, but Social Security benefits are subject to tax if....." He describes the "if" clause well enough and sensibly suggests consulting a "good tax guide."

I am pleased Jeff used the verb "seems" because it does SEEM to be a raw deal. But it isn't, at least for those other than the unfortunate folks who die before getting any benefits or who die shortly after starting to receive benefits (assuming that they leave no survivors who get something).

Here's why. For the typical social security beneficiry, benefits exceed what the person has contributed. The amounts contributed by the employer were not taxed when the employer paid the employer's share of the social security tax. Earnings were not taxed. To the extent someone receives more than he or she has paid in, the person has gross income that is taxed just as the portion of a pension that represents what the person has not paid into the pension plan is taxed.

The current tax law computation for social security is inaccurate, in contrast to the pension computation, which is pretty precise. But even with the drawbacks of the "rough estimate" approach of section 86, and aside for the few folks who don't have survivors and who get little or nothing from social security because they die "too soon," the taxation of social security is NOT a raw deal.

Yesterday, John Grogan's Philadelphia Inquirer column [subscription site, free] addressed the fallout from the Pennsylvania Turnpike toll collectors' strike. The Turnpike Commission switched to a flat fee toll, and for a few hours on the day before Thanksgiving, waived all tolls. Otherwise the traffic tie-ups would have been paralyzing.

In yesterday's column, Grogan shared reader reaction to a previous column in which he suggested that making E-Z Pass mandatory for all Turnpike users would let traffic flow more smoothly and permit the Turnpike commission to pay workers to do other things. Several toll collectors wrote to defend their jobs as necessary for them to make ends meet. Other readers feared the privacy intrusion of E-Z Pass, convinced that the "government" would be tracking their every move. Other readers praised E-Z Pass. Had I written to Grogan, I would have shared the same sentiment. I've shared my positive E-Z Pass experiences in an earlier post.

The comments that got my attention were the ones that advocated repeal of the tolls. These readers, who consider the turnpike inferior to the "free" interstates (though how anyone can consider I-80 superior to the turnpike baffles me), think that tolls are a roadblock in a competitive world market. Do they really think that Pennsylvania's economic woes are attributable to the turnpike tolls? One of these readers at least suggested raising the revenue by increasing gasoline taxes or one-time registration fees. Another reader claimed that tolls aren't necessary because they are used to fund "excess appointments made by the party in power." Another reader suggested that making the turnpike toll-free and firing the toll collectors would be cheaper. Cheaper? Goodness, I guess those turnpike snow plows and salt trucks don't cost anything.

In a recent posting, I shared some information about the "per mile charge" technology now under consideration in places like California, Oregon, and the UK. I explained why it has advantages with respect to gasoline taxes, and I shared some of the questions that its use would present. Now that one-time registration fees have been mentioned, I need to explain that a one-time registration fee is inequitable because it is not tied to use, and use is the best correlation marker for impact of driving on a road's need for maintenance.

Of course, underlying the argument that the turnpike should be "turned over to the Feds" is the notion that it would become a "free" Interstate. Of course, the Turnpike is already an interstate highway (I-76). And interstates aren't free. They're financed with taxes that aren't as visible as user fees. That's why I like user fees. The user encounters an "in your face" charge that ought to raise the "do I want to do this?" question that isn't as obvious when filling up the tank and paying a gasoline tax.

But until the "per mile technology" is polished and ready for prime time, I do like the "make E-Z Pass" mandatory idea. It's efficient, it's sensible, and even without it the "government" can track people's movement, so it really doesn't pose any meaningful threat to privacy. But it won't happen, of course. Most of my ideas never do. That's why my blog is free, as I just explained.

A subscriber to the tax law professors list passed on a question from an anonymous blogger:

Lawprof John Jones writes a daily blog. Lately, he's been putting out a on-line tip jar, administered by Paypal, that collects small donations. To his surprise, readers have been donating money, for a total this year in the neighborhood of $1000. Must/Should Lawprof Jones report the $1000 as income? No explicit quid pro quo is offered, although Prof. Jones does send the donors an email saying thanks. He does not, for example, plug the donor's law firm or otherwise offer the donor some kind of advertising. Separately, Jones sells advertising on his site, the proceeds of which he duly reports as income (I hope). I would imagine that some donors give because they enjoy reading the blog and want to continue to enjoy it in the future. Some might hope for increased access to the author or perhaps to increase the likelihood that the author will read their own blogs or offer some free legal advice. But this is speculation.

LawProf John Jones is a fictional character, and I am guessing that the blogger who asked the question is not a law professor nor a lawyer.

The tax question, for me, and for everyone who has contributed a response as of this moment, is "there is gross income." Need a citation? Try the Olk case, which held that tips are gross income. Tips are not gifts. There was a bit of discussion about the deductibility of the blogger's expenses (whatever they may be). The consensus is that blogging would fall under the hobby loss provisions of section 183, limiting the expense deductions to gross income and triggering the 2% limit on miscellaneous itemized deductions. One person pointed out that the deductions could be trade or business expenses if the blogger was making a living by blogging, but I doubt that someone could prove, factually, that one can make a living by blogging.

Of course, when I read the question I thought, "A tip jar? Why did I not think of that?" And I answered myself, "Because I don't think like that." I'm not into blogging for the money, even if there were any. So rest easy. No tips requested, no user fees, no taxes. Yes, some things in life are free.

Thanks to Paul Caron and his TaxProf blog for pointing out the Washington Post [free registration site] story about the emergence of economic theory as the principal rationale for anticipated Administration plans for tax law changes. I am particularly fascinated by the discussion with respect to the income tax deduction allowed to employers for employer-provided health care insurance. The rumor mill suggests that this deduction is one of those that the Administration will suggest repealing in order to pay for additional tax savings benefitting those who save rather than spend. Generally, those who save rather than spend are of two types: those who have run out of things to buy and invest the remainder of their income, and those who sacrifice and do without so that they adhere to the discipline of setting aside something for the future even though there are pressing present needs and wants.

To justify repeal of the deduction, the Administration is introducing us to economists who argue that the deduction favors employees of companies that pay for health care, and that the deduction encourages payment of premiums for health care insurance covering expenses for routine care rather than only catastrophic problems. The chair of the White House Council of Economic Advisors refers to "standard economic theory," "textbook economic theory" and "scholarly literature in economics" when advocating this and other changes.

People who know me know what I think of theory: it is useful as an incentive to creativity, so that people are encouraged to try things. If it works, fine. If it doesn't, hopefully no one has been killed or maimed. The difficulty is that some theories, such as those affecting tax and the economy, are a wee bit trickier to test than is, for example, the theory that traffic circles are safer than four-way-stop-sign intersections. The latter can be tested by fooling with one intersection. Tax law doesn't permit disallowing the deduction for a few random companies, and the closest one comes to a tax laboratory is the experience of a state with a comparable tax system that tries out someone's idea.

Let's think about the theoretical arguments raised in favor of repealing the employer deduction for providing health insurance to employees. Does it favor employees of companies that pay health insurance premiums? Yes, it does. The deduction reduces the net cost to the employer of the health insurance premium. To offset this advantage, however, the tax law contains deductions for individuals who are not covered by employer health care insurance. One question thus becomes one of determining, through empirical analysis, whether the savings achieved by the employer who pays for health insurance premiums passes those along to the employees in the form of higher salaries or other benefits. Another question requires empirical analysis of salary and other benefits earned by employees of companies paying for health insurance and employees of companies not paying for health insurance. Has any such study been conducted? Are its results being publicized to support the claims made by the advocates of repeal and the advocates of retention?

Does the deduction encourage the payment of higher premiums? It depends on what sort of theory one applies. The theory that is advanced answers in the affirmative. But another theory says that employers seek to reduce costs. That theory, by the way, has been proven. A deduction saves an employer a fraction of the cost. Thus, if the premium is $100, the employer continues to seek identical coverage for $90. Why? Because even with a deduction, the net cost of the $90 premium is less than the net cost of the $100 premium. The "employers spend more because of the deduction" theory makes sense if the government were fully reimbursing the employer, directly or through an unlimited and refundable tax credit, because then, and only then, would the employer (at least in theory) conclude that price is no object because someone else is paying.

The theory advanced in support of repeal suggests that deductions for the cost of routine medical care are somehow less beneficial to the economy than deductions for the cost of catastrophic illness. The Economic Report of the President states:

If automobile insurance were structured like the typical health policy, it would cover annual maintenance, tire replacement, and possibly even car washes....health insurance markets can be improved . . . [to] focus on large expenditures that are truly the result of unforeseen circumstance [and] to provide a more standardized tax treatment of all health care markets.

What nonsense.

Automobile insurance covers theft and collision. If automobile insurance were structured like health insurance it would pay for the cost of the annual safety inspection, medical examinations for drivers similar to those given to airline pilots, and anti-theft devices. Well, guess what? Although automobile insurance companies don't pay for the annual safety inspection (perhaps because the cost is so low it can be considered comparable to a co-pay or deductible), automobile insurance companies invest in the development of safe vehicles, road improvements and hazard removal, anti-theft device research and development, and a wide array of programs designed to reduce the frequency and severity of automobile accidents. Of course they don't pay for car washes, and health insurance companies don't pay for nail clippers. Likewise, automobile insurance companies don't pay for auto maintenance, such as changing engine oil and transmission fluid, because automobile insurance companies don't pay for the replacement of engines or transmissions that fail because of lack of care. In other words, the comparison made by these theoreticians sounds nice and makes a nice sound bite but it is so flawed that I wonder where they learned to develop analogies. Surely not in one of my law courses, where the ability to make good analogies enhances teaching and learning and bad analogies do so much damage that one quickly learns the difference and avoids the latter.

From the perspective of doing what is best for the economy and for people, the ideal approach is to minimize the need for, and the cost of, medical care. The best way of doing this is to consider that "an ounce of prevention is worth a pound of cure" and to understand that the dollars expended on annual physicals are cheaper dollars than those spent on surgery. If health insurance pays for some or all of the cost of preventive care, people are more likely to get that care than they are if they must pay the entire cost. This isn't theory, it's been empirically demonstrated. Of course there are people who don't get preventive care even when it is covered by insurance, but their reasons for avoiding the doctor visit aren't economic and require some other incentive.

Any argument or theory that considers payment for preventive care to be less deserving of subsidy than payment for catastrophic injury is an argument or theory destined to saddle the economy with even more health care costs. Discouraging preventive care will increase health care costs because health problems will be discovered at later stages, when cures are more expensive, care is more expensive, and adverse impact on life is more expensive.

This, too, is empirically clear. Repeal of the deduction would cause employers operating on the margin to terminate health care coverage for employees, unless the subject of collective bargaining. And in that case, the next round of negotiations would be even more combative than they've become recently as employers try to balance health care cost allocation.

Perhaps the theoreticians believe that people will seek preventive care simply because it makes sense to do so no matter who is paying. That's true. People will seek preventive care but some won't get it because they won't have the economic resources. Unlike those who would simply dip into the "leftover" income that otherwise would be invested, these folks would need to cut back on something. Perhaps they would cut back on the dollars spent for DVDs and X-box cartridges for the children. Perhaps they would cut back on food for the children.

Critics of the crtics claim that the critics tend to dismiss the intellectual merit of the Administration economic policies, and that the criticism ignores how well the economy is doing. The health care segment of the economy is not doing well, and anyone who sees intellectual merit in the horrendously flawed analogy between health care insurance and automobile insurance is....well, I'll let readers of this blog finish the sentence.

And someday, when all is done, an autopsy will follow.

According to a report released this morning, the person who inserted into the appropriations bill the now infamous and highly spotlighted provision giving staff of the appropriations committees the right to see tax returns without being subject to the privacy restrictions that apply to members and staff of the revenue committees has stepped forward and identified himself. Richard Efford, who has been on the staff of the House Appropriations Committee for almost two decades, explained what happened.

Efford is the senior staff member of the House Appropriations subcommittee with oversight responsibility for the IRS budget. Congress has appropriated more than $1 billion for IRS computer system upgrades. Efford claimed that his responsibility included the need to inspect the IRS use of its upgraded computer systems, and that to do so he had to visit IRS facilities to see how computer systems were being used and whether there was a need for continued increases in funding of tax collection efforts.

But when Efford tried to visit IRS facilities, the IRS objected. IRS officials explained to Efford that if a taxpayer's return information was on a computer monitor when he was in the room there would be a violation of privacy safeguards. The officials suggested that Efford get authorization from one of the revenue committees that has regulated access.

Efford explained that he thought there was no reason for a member of Appropriations Committee staff to "have to go beg" a revenue committee for permission to visit a facility where taxpayer returns were visible. When Efford told his story to other members of the staff, from both parties, one replied that he had encountered the same IRS objections.

Efford's solution? He wrote an amendment that would give him and the other staffers the same IRS inspection rights as the staffers on the revenue committees. Except that it left out the privacy protection provisions. That proposal went nowhere because of the risk that the chair of the Ways and Means Committee would react adversely to intrusions into his areas of responsibility.

Efford then turned to the IRS and asked for a statutory amendment that would resolve the objections that the IRS had to visits by Appropriations Committee staffers. The IRS changed "one or two words" in the language that Efford had drafted. The IRS did not add any privacy protection provisions.

Efford then inserted the language into the appropriations bill. It gave the chairs of the appropriations committees the power to designate committee staff who could "access ... Internal Revenue Service facilities and any tax returns or return information contained therein."

No one noticed the insertion because members and staff were busy negotiating and drafting other parts of the appropriations bill, one of the few pieces of legislation to challenge tax legislation for the "humongous" award, as it contains more than 3,000 pages. When asked about the provision, Efford and other staffers simply said that it was good because the IRS provided it. Apparently nothing was said about the fact it was Efford's language that had been run past the IRS with almost no changes.

Because of lack of sleep brought about by the need to work until the wee hours of the morning, no one noticed any problems. They thought it would be covered by standard language in the bill that states "the Internal Revenue Service shall institute and enforce policies and procedures that will safeguard the confidentiality of taxpayer information."

Yet at least one staffer saw a problem and sent an e-mail suggesting that a clarification made sense because otherwise someone would read the provision as letting staffers go look at other people's returns just "for grins." So they put into a separate report an explanation that the provision was intened to "streamline oversight" of the IRS.

Efford did not inform any member of Congress before he put the provision into the bill. He told Representative Istook, to whom he reported, about the provision, but after it was too late to change anything. Efford explained that the staffers saw the provision as "housekeeping" that would help members of Congress but that did not need to be brought to their attention. Efford also claimed to be "dumbfounded" by the controversy.

The story has several salient features that deserve highlighting and that corroborate accusations that the legislative process in the Congress is a mess.

1. What is so wrong with a staff member of the Appropriations Committee having to ask for permission from the Ways and Means committee chair to inspect IRS facilities? The point of asking permission is to bring the staff member within the privacy provisions. Why is asking permission such a problem? Concern that it would be denied for a good reason? Even more proof that asking permission makes sense. Concern that it would be denied for a wrong reason? At that point the member of the Appropriations staff could approach the chair of the Committee and let the matter be decided as it ought, in a dialogue between the elected representatives chairing the respective committees. Could it be that the problem is one of ego or convenience? Certainly. It is inconvenient to ask permission, but we learn as children (or should learn) that when it is necessary to ask for permission we do so, and we give the person being asked sufficient time to consider the request so that the response is timely. In an e-mail world, it really isn't inconvenient to ask permission. What it comes down to is ego, and that is a huge problem in the operations of Congress and much of the rest of the government. Concern over "saving face" or protecting ego too often ends up trumping doing the right thing. I speak from experience when I make the assertion that personality intrudes way too much into the decision making processes in the government. Public servants are supposed to serve the public.

2. The wickedly bad habit of leaving things go until the last minute, a trait shared by too many people inside and outside of government, generates mistakes, carelessness, and bad judgment fueled by stress, time shortages, and lack of sleep. The need for an Appropriations bill isn't a surprise. Legitimate emergencies happen, and those who need to deal with them do the best that they can even if there is a time shortage, a ton of stress, and sleep deprivation. The blame here lies with the Congress. Perhaps because a majority of the members of Congress are lawyers they bring with them the bad procrastination habit that law students demonstrate and that I find the most challenging to break. The "cram at the end" syndrome, encouraged by faculty who don't shift grade-contributing work into and throughout the semester, fails to teach the lesson that procrastination is bad far more often than it lucks out as a good choice. Cramming at the end fails to teach the lesson because most examinations aren't designed to exact a grade price from the procrastinators. Toss in the manipulators, those who delay the process in the hope that the time shortage late in the year will get others to cave in to the demands of the manipulators, and it's easy to see why something everyone knew needed to be done suddenly needs to be done yesterday. So by the time they get to the Congress, the procrastinators, joined by the manipulators, overwhelm the few members that want to approach government the way successful business entrepreneurs approach business, and turn the legislative process into an inefficient, and in this instance, dangerous process.

3. The Congress, not the staff, is responsible for its legislation. The Congress is so involved in so many things, an effect of 60 years of expansion of federal roles in more and more areas of life, that members cannot keep track of everything that is moving through the legislative pipeline. Most members of Congress do not read most of the legislation on which they vote. Only the high profile stuff gets some attention, and even then, it's a few provisions and not the entire package. Members of Congress have been known to write to the Treasury Department for copies of tax legislation. In this sort of environment, who's managing the legislation? Again, unless it is a high profile provision, it usually falls to the staff of the committee responsible for the bill. Who safeguards the bill from the staff? Apparently, the staff. That's a system that opens the door to the sort of fiasco that happened with the tax return access provision under discussion. There's a reason that lobbyists not only try to buttonhole members of Congress but develop relationships with members of the staff. The lobbyists know that there's hope in trying to get a staff member to tweak the language of a provision to which a member of the Congress has agreed in general principle. The devil is in the details, and the details are under the supervision of the staff.

At least some members of Congress are aware of the problem. Whether they can get this in front of the public and bring about pressure to have the system repaired remains to be seen. Senator Kent Conrad, a Democrat has stated, "Something really seriously bad is going to happen if we let this continue." Sen. John McCain, a Republican has added, "This process is broken."

Indeed it is. Perhaps now all the folks who thought I was hyperbolizing when I predicted this (and worse) would happen can begin to understand the reality. There is a huge chasm between the theory of the Civics classes that once populated every high school and the practices in the halls of government. Chasms of that sort invite disruption and unrest.

So let's hope Congress fixes this, takes a bipartisan approach, and does a better job than it did with the campaign funding issue.

A story in the Chronicle of Higher Education, Weakened Role of Science Advisers Creates 'Crisis' From White House to Capitol Hill, Report Says [subscription site] begins with this lead paragraph:

The process through which Congress and the executive branch receive scientific advice to make critical decisions is in a "state of crisis" that could result in poorly designed programs and costly mistakes, according to a report released on Thursday by the Federation of American Scientists.

All one needs to do is substitute the word "tax" for "scientific" and the phrase "just about everyone who understands the tax legislative and administrative processes" for "a report released Thursday by the Federation of American Scientists." It would read as follows:

The process through which Congress and the executive branch receive tax advice to make critical decisions is in a "state of crisis" that could result in poorly designed programs and costly mistakes, according to just about everyone who understands the tax legislative and administrative processes.

Inquiries from foundations willing to fund a study to prove this proposition are welcome.

Here we go. According to this report, White House officials attending a Richmond, Va., meeting of Congressional Republican leaders setting the agenda for the next Congress are floating the "national sales tax" idea. Perhaps it's like any trial balloon, see if anyone pays attention before getting too deep into the project.

But here's the weird part. The report states: "President Bush and House Speaker Dennis Hastert have both said the idea of a national sales tax deserves a serious look. For many, the idea of a world without the Internal Revenue Service is very seductive."

Who said, "For many, the idea of a world without the Internal Revenue Service is very seductive." I would like to contact that person and ask the following question:

Can you identify a state sales tax that is imposed without the authority, regulation, and administration of a government tax/revenue agency or department (no matter its name)?

The answer, I already know, is "Uh, well, um, ...." That's because a national sales tax would still be generating REVENUE, and it would be INTERNAL, so the agency administering or servicing it at the federal level would be...ta da... the INTERNAL REVENUE SERVICE. Oh, they could come up with some other name, but a federal tax agency is a federal tax agency, and you can't have a national sales tax without one.

So, listen, advocates of a tax that has disadvantages and flaws worthy of discussion in the future if this thing actually gets off the starting blocks, try advocating your project by selling its strengths. Don't mislead people into thinking that the IRS (whether or not renamed) would disappear.

Perhaps the person intended to say "For many, the idea of a world without the Internal Revenue CODEis very seductive." Well, where would the statutes enacting the national sales tax go? Duh, where ALL the taxes go: the Internal Revenue Code. So, nah, even if they meant "Code" and not "Service" they still wouldn't get it.

Right, that is.

Gee, I'm picky, aren't I? No wonder my students think I'm demanding. Yes, I'm demanding accuracy and honesty. After all, life, clients, good science, common sense, they're all demanding. We, the citizens, deserve accuracy and honesty. Ask for it.

Tyler Cowen's musings on the scholarly content of blogging are definitely deserving of the two minutes it takes to read through them. It is the best compilation I've seen to date of the reasons law blogs can, and in certain instances, ought to be treated as legal scholarship. The days of the student-controlled, student-edited, untimely, narrowly circulated, limited production, paper academic law journals hopefully are limited. And if blogging contributes to their demise, I will shed no tears.

Tyler Cowen also makes some good points about how to read a blog, especially the benefits of treating a blog holistically rather than as a collection of separate postings. Readers of MauledAgain surely recognize that recurring themes illuminate my postings, even though I try to juggle about two dozen topics in a typically Maule pattern of multi-tasking (or is it multi-threading?). Someday I'll collect the posts on a selected topic, stitch them together, and publish it in what hopefully will be a digital journal that is timely, reaches tens of thousands of tax practitioners and others, and benefits from the comments readers of the blog have shared.

Someone on a tax listserv asked for help finding a quotation from a court opinion about the challenges of partnership taxation. It was one of those "I remember having seen it but can't find it" situations. Another subscriber came through. It's worth sharing.

From Foxman v. Comr., 41 TC 535,551 (1964), Judge Raum, one of the most brilliant Tax Court judges and tax lawyers I've met, wrote in footnote 9 (long before I met him and long before tax was in my brain) the following paen to partnership taxation, the statutory provisions for which are in subchapter K of the Internal Revenue Code:

The distressingly complex and confusing nature of the provisions of subchapter K present a formidable obstacle to the comprehension of these provisions without the expenditure of a disproportionate amount of time and effort even by one who is sophisticated in tax matters with many years of experience in the tax field.

That was 40 years ago. I wonder what Judge Raum would write if he were alive and writing today. During those 40 years subchapter K has almost doubled in size and quintupled in complexity. In 1964 there was no substantial economic effect rule (nor its regulations) (section 704(b)], a much simpler and optional contributed property allocation rule (section 704(c)), no disguised sale rule (section 707(a)(2)), no rules for the characterization of gain on the disposition by the partnership of contributed property (section 724), no exception to the exception to the exception to the liquidating distribution sorting rules (section 736(b)(3)), no "marketable securities as cash" rule (section 731(c)), no mixing bowl transaction prohibition rules (sections 704(c)(1)(B), 737), and no large partnership rules (sections 771 et seq). I probably forgot something. And of course, the regulations have quintupled in size and whatevered in complexity, in part because of the additions to the statute, and in part because of IRS attempts to deal with issues Congress hasn't addressed (yet), such as the anti-abuse regulations and the check-the-box regulations.

No wonder even LL.M. (Taxation) and M.T. students in the Graduate Tax Program consider Partnership Taxation to be the most challenging course, and one that some fear and that for others generates intensive anxiety. And the J.D. students who have the courage to enroll in Introduction to the Taxation of Business Entities? They rate it the most difficult course in the J.D. curriculum.

Most difficult. To take as a student? How about to teach? My offer to swap either course for Property, Contracts, Family Law, etc., etc., remains unaccepted. That's no surprise. To be fair, I wouldn't swap for Constitutional Law, because I happen to think that course is most challenging, because it is so different from the structured arrangement of tax. Slippery slopes are dangerous, whether on skis, in a car, or in a Con Law classroom (on either side of the podium). One never knows what's at the bottom.

This from a reader on the per-mile road user fees being proposed as replacements for state gasoline taxes:

Great post on user fees:
[referring to previous post]

While generally sympathetic to user fees, I am concerned about the
impact on less wealthy persons. My concern is not that user fees are
regressive per se, but rather that less wealthy persons will bear the
burden of user fees because of other, structural, reasons including
distance traveled. As an example, my employer lives 2 miles from the
office. I live 20 miles from the office. I would have to pay 10 times
the user fee that he does, yet I do not make anywhere near 10 times the
income that he does. Indeed, he makes about 5 times my income!

What is the solution to this problem? I cannot move any closer because
I simply cannot afford housing near my job site (or any location in
between). This is also true of my 3 similarly-paid co-workers. I
suppose I could get a new job, but that's not feasible. It's not that I
*want* to drive on the roads - I'm about to purchase a road bike to
ride to and from work on the nights that I don't have law school - but
rather that I cannot afford to live close to where I work and thus have
to drive to get there! This problem seems to be a large hurdle to
implementing user fees. Why should I have to pay for the roads when
there is practically nothing I can do to avoid using them? Perhaps
there is some way to distinguish driving to work and driving for other
tasks?

Your thoughts are appreciated.

My reply:

Thanks for your comments.

The gasoline tax generates the same discrepancy.... with the variable being fuel efficiency. If you and your boss get the same MPG you are paying five times the gasoline tax than he is. If he can afford a newer, more efficient vehicle then you may be paying 8, 12 , 20 times the gasoline tax than he is. Of course, if your vehicle is more fuel efficient, you pay disproportionately less gasoline tax. Studies show, though, that the lower the income, the older and less fuel efficient the vehicle. So as a general proposition it could well be that the per-mile user fee, though regressive, is less regressive than the gasoline tax. Of course, there will be individual cases where it plays out differently, but the comparison is best made in toto rather than by singling out the exceptions.

One other variable: your boss may use his car for other activities more than you use yours. He may need to drive more miles going to some place in the other direction. You may be closer to the stores than he is, or closer to you gym. How it plays out in an individual situation doesn't necessarily tell us how it plays out in toto.

I guess it was a good reply, for this shortly followed:

Yes, of course, the variable of fuel efficiency! I completely missed that step. I am now sold.

This could be an idea that catches on. I'll keep you posted.

So what does it mean when a person who favors GPS-based highway per-mile taxes (user fees?) is appointed as Director of the Department of Motor Vehicles in the country's most car-dependent and perhaps car-loving state? Well, if the appointing governor hasn't yet backed the idea, which is the case, it means that even if the idea isn't a certainty, there is a good possibility that it could become reality if the legislature and the governor can be persuaded of its advantages. And yet already the disadvantages are being hung out for viewing.

Similar proposals have been made in the United Kingdom and in Oregon. Read on, because this is an idea that could get hot quickly, in a lot of places.

How does it work?

It simply involves a GPS tracking device in every vehicle. The miles that are driven are reported to a state agency, and a tax, or fee, is imposed for each mile driven. The existing state gasoline tax would be repealed.

Advantages? It provides a steadier revenue stream than the gasoline tax, proceeds from which are expected to decline as drivers invest in fuel-efficient and alternative fuel vehicles. The technology can distinguish among the types of roads used, so it's possible to charge higher per-mile rates for more congested highways, thus giving drivers an economic incentive to use alternative routes. Rates could vary by time, thus providing economic incentives to travel at off-peak hours, though my during my California driving back in 2003 I found it difficult to identify "off-peak" times. I'm told 3 in the morning in some areas is "off-peak." It charges energy-efficient and alternative fuels vehicles an amount that reflects the burden they impose on roads, something not happening under the gasoline tax.

Disadvantages? It removes the "gasoline tax avoided" benefit enjoyed by those now using alternative fuels vehicles. It doesn't distinguish among types of vehicles, and differences in road damage that they cause, although arguably that could be adjusted by setting the per-mile rate at different amounts depending on the weight of the vehicle (and if you think that's not a difference, think again: a large truck does the same damage to a highway as does 10,000 cars). Within days of implementation, the market for devices thwarting the tracking system would be booming (just imagine the new flurry of spam in our email inboxes: "AVOID CALIFORNIA ROAD TAX WITH GIZMO FROM NIGERIAN BANK DEPOSIT BOX HEIR" or something like that). The tracking system would provide details on the location of, and routes taken by, every vehicle in the system, something that worries privacy advocates.

What happens when a person drives into California with an out-of-state vehicle? They no longer would be taxed for their road use when they fill up at the pump. Would California tax California vehicles when they are driven out of state? The technology would permit that to occur. Would the legislature do that in order to offset revenue losses caused by nonresident tourists no longer paying a gasoline tax?

One variant of the system has the tracking device send information to the gasoline pump or other fuel dispenser, which adds the tax to the product cost, thus eliminating the need for the information to be sent to a state agency. But, digital data is digital data. It exists, and surely the government would have access if it wanted to have access.

It's technology makes it possible. And technology scares many people. That which is not understood is far more likely to generate fear than that which is understood. Because so few people truly understand what GPS can and cannot do, all sorts of evil and horrible scenarios can come to mind. Of course, what constitutes evil and horrible depends on who's imagining the possibilities.

EZ-Pass has been in use for several years, and it tracks the passing of vehicles through toll booths. In theory, the system can be used to calculate average speed, and absent a rest stop, the 40-minute 80-mile run could be detected, and speeding tickets issued. So far, that hasn't happened and EZ-Pass officials claim there is no such intent.

Personally, I don't care that my vehicle would be tracked. I don't go anywhere that would interest anyone. I don't do 80-mile runs in 40-minutes. Being tracked could be just as advantageous (proving I wasn't somewhere at a specific time) as disadvantageous (proving where I was at a given time). But I understand that some people are very nervous, just as they are about traffic cameras, pedestrian cameras, security cameras, and all the other "big brother is watching you" stuff that exists and that is on the drawing board. Did I mention implanted RFIDs? (Those are radio frequency identification devices, which can be used to track people and not just vehicles).

But I like the idea of charging a user fee (to use the correct term) that shifts the costs to those using the resource. Will implementation be challenging? Yes. So, too, will be the legislative drafting. Exceptions? Probably the same vehicles that presently get gasoline tax exceptions. What's the point, after all, of the state charging itself for fire engine use of the highways? I'll argue with myself: The true cost of operating the fire engine or other state vehicle includes the road damage it causes and road maintenance it requires (think snow plowing), and thus the per-mile user fee should be charged to state vehicles so that their costs can be in turn shifted to those who should pay (such as folks charged for false fire alarm calls).

Such a fee is regressive. It is imposed without regard to income. The short answer is that the gasoline tax is regressive. So replacing the gasoline tax with a per-mile user fee doesn't make things worse. But would it provide a chance to make things better? Perhaps, but is this the place to take that chance? In theory, folks with lower income purchase cheaper (and lighter) cars, and thus would benefit if the per-mile user fee also included a weight factor. This is an interesting contrast to the clean air problem that surfaced when officials realized that lower income people often purchased used vehicles that lacked proper emissions controls, and that they would face remediation costs not borne by those purchasing newer models. Imposing clean air fees on polluting vehicles fell disproportionately on the poor, making it an even more regressive fee.

Keep in mind that rejecting all fees and taxes that are regressive is counter-sensical. Anything purchased by or paid by a person with less income will consume more of that person's income than will the same item purchased by a person with higher income. The fact that a person with lower income pays more of the income for food, clothing, per-mile user fees or gasoline taxes, and similar items doesn't make the price of those items per se wrong. There are other, better ways, to fix the income deficiency problem.

Thanks to Declan McCullagh of Politech for passing along this story.

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.