MauledAgain

It was inevitable. As gasoline prices resumed their climb, conversations have once again turned to the "awfulness" of "high" gasoline prices. Toss in discussion of home heating oil price concerns as the oppressive heat and humidity fail to deter homeowners from pondering the not-so-distant change in seasons, and the makings of a good flurry of rumors and panicked cries are beginning to percolate.

This morning, as I was driving home from the gym, burning all of four cups of gasoline, the air personality on a New Jersey station was commenting that even though American gasoline prices were nowhere near those in places such as Europe and Hong Kong, there was something about the sticker shock that he didn't quite grasp. He did a fine analysis of how gasoline prices have risen proportionately to income over the past 30 years. He challenged people to compare their gasoline prices to their incomes, and to ascertain if the percentage has changed significantly.

His take on the question makes sense, but it misses several key points. First, for someone who began purchasing gasoline in the late 80s or early 90s, gasoline prices have risen more quickly than has income. For these people, the relative price of gasoline 30 years ago is history rather than experience. The same can be said for someone who started paying for gasoline a year or two ago. It all depends on the precise point in the price-history curve that the person arrives. Second, for some people, income has not risen as quickly as has gasoline prices. After all, average income increases are inflated by the huge pay inflation at the top of the pay scale. Third, comparing per-gallon gasoline price to income misses one of the chief ingredients of the energy crisis, namely, that most people are driving more miles each year.

I addressed the gasoline question in detail more than a year ago, in May of 2004, when gasoline price increases were being closely covered by the press. That discussion followed an earlier post in which I argued that gasoline taxes needed to be increased to keep pace with inflation and the rising costs of road maintenance, and it was quickly followed by a Memorial Day 2004 post rejecting the notion of toll-free highways for vehicles with higher fuel efficiency. Late last year, in an election-oriented post, I pointed out that politicians don't help Americans analyze the problem because they present inconsistent and inaccurate soundbites with respect to the issue, choosing to say what people want to hear rather than the truth that needs to be told.

Considering how much bad information, emotionally-driven exaggerations, politically-motivated alarms, and frustrated expressions of self-centeredness have infiltrated the newspapers, radio talk shows, and cable networks, it's worth once again looking more closely at the facts. Failure to do so is what lets lawn contractors get away with increasing overall prices by 20% when gasoline prices, constituting 15% of their costs, increase by 25%. Do the math.

Has the passing of 15 months discredited any of my comments from May of 2004? Here are those comments, and today's reflection on them.

I began with the same point I just made:

It's amazing how an increase in gasoline prices can generate so much consternation. Politicians grab onto the issue as though it's the be-all and end-all of life. Accusations fly, bizarre solutions are suggested, and very few take the time to sit down and THINK their way through the situation.

In this respect, nothing has changed. No surprise there. I then proceeded to assert that "There are five major considerations: supply and demand, inflation-adjusted cost, industry patterns and government regulation, taxes, and strategic reserve." and I continue to think that these remain the focus of any analysis.

Turning to the first one, I stated:

Supply and demand is easy. If demand goes up, or supply goes down, or both, prices go up. That's Economics 101, which ought to be taught in high school, and perhaps it is, here and there. Demand is going up at a phenomenal rate, on a global basis, particularly because China is growing and its need for energy is skyrocketing. Total miles driven by Americans has increased at rates far beyond the rate of increase in the population. Supply has been decreased, but will be tweaked up a bit in the near future, for a complex array of economic and political reasons. Although OPEC controls only a small fraction of total world-wide oil, the oil market is a marginal one, which gives OPEC supply decisions a noticeable impact. Although OPEC is perceived as making its supply decisions solely for political purposes, in fact it is influenced by economic conditions in its member nations and by their desire to manage a finite national natural resource in careful ways.

This continues to be the case. The law of supply and demand has not been repealed or amended. All that I will add is that gasoline, heating oil, and other energy products are simply in the vanguard of a long line of commodities that will become relatively scarcer as populations skyrocket, developing nations develop, and environmental and other pressures curtail production; I'm thinking principally of fresh, clean drinking water.

On the second consideration, I noted:

Inflation-adjusted cost is easy. Take a look at gasoline prices in 2004 dollars over the past 85 years and it's obvious that gasoline has been selling for less than its real price for many years. During the 1990s gasoline prices reached record lows in real dollar terms. Consider this gem from a letter to the editor of the Augusta Chronicle in 2001: In 1960 gasoline sold for 30-33 cents a gallon and a full size Ford sold for $2,000-$3,000, and in 2001 the Ford sold for ten times as much. Why Americans think they are entitled to "cheap" gasoline bewilders me. I've spent time in Europe, and despite the "non shock" of seeing "1.30" as the price, once that price in Euros is adjusted for the fact it is a per litre price, it's pretty obvious that the per gallon cost of gasoline in Europe is far more than what's being paid in the U.S. today. Part of the reason is taxes. More on that in a moment.

As with supply and demand, nothing much has changed here. As I pointed out, these sorts of comparisons don't resonate emotionally with people who entered the gasoline market as purchasers at times when the price curve was below the overall average, but the same can be said with respect to any commodity that experiences a significant price fluctuation.

The circumstances with respect to the the third consideration also appear to have held constant. I stated:

Industry patterns and government regulation is more complex. Gasoline prices go up in the summer, because demand increases. But industry isn't always ready to crank up the production, because if there has been a cold and/or longer winter it has to replenish heating oil stocks and thus delay the switch over to increased gasoline production. Short-term prediction for tne next six months show gasoline prices dropping back after the summer. It's a pattern as familiar as the sun rising in the east and setting in the west. There hasn't been a new refinery built in this country for the past 30 years. Why? Unprofitable? Yes, after taking into account the cost of trying to wade through a gauntlet of government regulations. Some of those regulations are necessary, and some are well-intentioned but badly designed. This isn't a problem fixed overnight. The time from beginning a search for new oil fields and gasoline from that field reaching the pump is at least 10 years, perhaps more.

I should add, however, that work has begun on the construction of several new refineries and the expansion of several others. Though refinery capacity does not change crude oil supply, it might alleviate some of the seasonal cycling in gasoline prices. Whether that will ease people's distress is unclear.

The fourth consideration, gasoline taxes, hasn't had much, if any, attention during the current gasoline price surge. I will repeat what I stated so that I can tag an addendum onto my comments:

Taxes in this instance are easy to understand. Yes, the anti-tax politicians (who try to get elected on the "no taxes ever it's all free" delusion that sells to non-thinking voters) are yelling that the reason for the increase in gasoline prices is taxes. Rubbish. Here and there a few states have increased gasoline taxes but during this last gasoline price run-up taxes haven't changed. They should, of course, because a ten cent per gallon gasoline tax enacted in 1970 to pay for road maintenance needs to be more than that to provide the same level of maintenance. These politicians scream that the solution is to reduce gasoline taxes. Well, then who pays for road maintenance? And what does that do to the "there's an energy crisis and something needs to change" message? These politicians are catering to the uneducated emotionally upset folks, some of whom, granted, operate businesses that are adversely affected by gasoline price increases (such as florists and pizzarias that deliver). Sorry, but pass those costs onto the consumer. If anything, taxes should be increased. That's the case in most other nations, where the true cost of consuming a gallon of gasoline, in terms of impact on highway infrastructure, environment, police highway patrols, accidents, and all of the other economic effects of driving is reflected in the gasoline tax. Yes, I'm back to my preference for the user fee model.

When I suggested that gasoline price increases incurred by businesses be passed onto the consumer, I was not suggesting using "gasoline prices have increased" as an excuse to raise prices by more than the prorated portion of the increase. My somewhat overstated example of what at least some lawn contractors are doing may not be the numbers applicable to most who are doing so, but they demonstrate a pattern that often is seen in businesses dealing with supply price increases, namely, establishing consumer price increases higher than the supply price increase. In the ideal free market, customers challenge these increases. I know someone who did (no, not me), and the entrepreneur relented. Unfortunately, most people don't have the skill, time, or willingness to "work the numbers" and determine if they are getting the short end of the deal. After all, I guess that sort of exercise reminds people of doing taxes, and triggers some sort of traumatic response.

The fifth consideration,tapping the strategic petroleum reserve, has also disappeared from the current conversation, so I'll simply state that nothing has happened that changes my conclusion that tapping into it to alleviate gasoline prices is unwise.

If the current gasoline price increases are so horrible, would we not begin to see some changes in lifestyle? Here and there a person is quoted by a news reporter as having cut back driving or combined errands into one trip, but what I've seen on the roads and in life generally suggests that most Americans aren't adversely affected, or don't see the connection between their lifestyle and driving habits and gasoline prices. Fifteen months ago, I pointed out five significant lifestyle or behavioral factors that contribute to higher gasoline prices, principally on the demand side, namely, development sprawl, teen-age autonomy, inefficient public transportation, insufficient telecommuting, and impulse decisions. Read the earlier post for the details. After fifteen months of increasing gasoline prices and record-setting crude oil prices, sprawl continues unabated, as developments continue to pop up "in the middle of nowhere" miles from stores, offices, hospitals, and other necessary facilities. Many teen-agers continue to drive to school rather than ride school busses. Public transportation, long hampered by its inability to move most people quickly from where they are to where they want to go in a straight line, has been saddled with the impact of terrorism and a drop-off in ridership. Until someone invents a cheap, safe, alternative along the lines of a custom carpool system, not much supply efficiency will be realized in this sector. I don't know if telecommuting has increased. If it has, it hasn't been a significant change, because the quantity of vehicles on the local roads during commuting hours has surely not decreased. Have people managed to condense errands into fewer trips and to cut down on the impulse run to the store? I don't know. Traffic volume suggests no, that hasn't happened.

I didn't expect much to change, and predicted that in my May 2004 post:

None of this can or will be changed in the near future. Houses have been built where they are and they're not going to be moved. Jobs are where they are. It would take years to get public transportation back to where it once was, that is, something that was of good use to most Americans. Maybe high schools can compel the use of school busses, or perhaps the driving age can be increased to 18 (for reasons far more important than gasoline consumption), but let's face it: not going to happen. Telecommuting and distance learning probably will increase over the next few decades but not at rates that would alone offset increases in per capita driving mileage. What MIGHT change driving patterns is an increase in gasoline prices (yes, increase) through taxes (yes, taxes) to levels comparable with world prices, reflecting inflation, and sufficient to keep the highway infrastructure in repair (remembering that bad roads cause decline in fuel efficiency).

And I noted that my analysis wouldn't play in the political universe or in the media world of sound bites.

I did some driving this summer. Enough to figure out that at 65 mph the fuel mileage was 10 to 15 percent higher than at 75 or 80 mph. Yes, those speeds were within the applicable speed limits. At one time maximum mileage was said to be at 55 mph, but perhaps it's improved technology or the fifth gear in the transmission that has shifted that higher, at least for the vehicle I was driving. For several reasons, including fuel efficiency but also involving the more relaxing nature of 70 mph as compared to 80 mph, I settled in, where possible, for 70 mph. I could have been killed. I was a roadblock, even when speed limits were at 60 or 65. Yesterday, back home, driving at 62 on a highway with a 55 mph speed limit, the doors were almost blown off the vehicle by the traffic that went by, at speeds easily in the 75 to 90 mph range. I may have passed two or three vehicles, not counting a slow-moving truck. If these folks are upset about gasoline prices, they're surely not showing it by their driving actions. Do they even know that by slowing down to 60 or even 65 mph, still above the speed limit, that they will reduce gasoline consumption by 10 to 15 percent? As an interesting aside, it wasn't just the high-performance sports cars that zoomed by. Minivans, panel trucks, SUVs, sedans, motorcycles, you name it, they got to some checkered flag somewhere before I did. Well, I never saw it. Even though they flashed by, I could see these drivers. Young, old, male, female, every size, shape and color. Everyone is in a hurry (except, of course, when they're in front of me in a line). I'll leave that discussion for some other time. The difference between 65 mph and 75 mph for a 65 mile trip is 8 minutes. For a 16 mile trip, it's 2 minutes. For an 8 mile run, it's 1 minute. Putting aside the increased risk of accident, is that 1 minute or 2 minutes worth the additional $2 for gasoline consumed? Americans seem to be voting with their accelerator pedal and griping with their mouth. So what's louder? The action, or the words?

As I pointed out fifteen months ago, when a crisis really hits, and lines begin forming at the pumps, then a lot of people will start running around, and screaming, and shouting, and asking, "How did this come to be?" and "Why weren't we warned?" And all the folks who yelled "Chicken Little" at the prophets will begin picking up pieces of the sky.

My posting back in May suggesting the courses that undergraduates should take in preparation for law study brought a very interesting response from Carlos Collazo, who makes an excellent point:

I just read your post suggesting to pre-law undergrads to learn a bit of French if they haven't taken any Latin, or even if they have.

I would like to suggest that Spanish may be a more valuable skill to add during the undergrad days. In fact, it is so much more valuable, not only for LSAT performance and law school success, but also for practical success in the real world of law.

Modern Spanish is really contemporary Latin as it is spoken in the Iberian peninsula and Latin America (and elsewhere). The same could be said of French; however, French resembles English considerably in many ways whereas Spanish does not. There are many, many terms that appear in Black's that are instantly understandable for the genuine knower of Spanish.

Not only that, but Spanish will help them succeed professionally to far greater extent than knowledge of French will. Just think how many law offices nowadays have lawyers rushing to learn Spanish that they should have learned many years ago. Future civil litigators, criminal defense attorneys, immigration attorneys all will have increased business through a mastery of
Spanish and not a merely a passing acquaintance.

I replied to Carlos:

You make a very good point. I suppose I was a bit caught up in the fact that having taken many years of Latin, I can read Italian and Spanish without too much agony (though listening, speaking, and writing are not within my skill set).

I was thinking in terms of preparation for law study rather than practice. You are correct, that in practice Spanish is very useful to know because 20 percent or more of the world's population speaks it as their native language.

In our continued correspondence, Carlos and I discussed the value, and importance, of getting children to dig into second (and third) languages at an early age. It's no secret that language is far easier to pick up when young than when the years have passed. So, I suppose if I were to nit-pick, I'd point out that it isn't as an undergraduate that one should take languages, but as an elementary and middle school student. Even though most children of that age haven't locked down their career plans, what's the harm in learning a second or third language? I can think of many advantages. Being multilingual is a plus in most careers. Studying languages is a good intellectual discipline, and will help in studying other subjects. Even as a tourist, the multilingual American contributes to the erosion of the "ugly American" although lack of second language is but just one portion of why folks abroad sometimes bristle when the ill-behaved American tourist shows up.

Carlos and I also agree that there's much to be gained by starting with Latin. Although perceived as a "dead" language, a mastery of Latin sets the stage for picking up Spanish, French, Portuguese, and Romanian, far more easily than if each of those languages were learned independently. There are as many, or more, Latin words, phrases, and sourced language in the law as there are French contributions. And learning a few years of Latin in elementary school provides future science majors with an advantage.

When Carlos suggested that his multilingual skills will serve him well if and when he applies to, and attends, law school, he's unquestionably correct. After all, lawyers are wordsmiths. They work with language. Their practices are becoming increasingly global. Multilingual lawyers are in demand. Even multilingual law students are in demand, as demonstrated by their retention for translation assistance in the Law School's Immigration Law Clinic.

I'll conclude by pointing out that there are other languages that deserve attention, such as Chinese, Japanese, Russian, and Arabic, to name a few without intending to provide an exhaustive list. Those languages may not be as valuable in terms of learning law because they haven't had the influence on the legal lexicon that Latin and French have had, but there is no doubt that in the practice of law, attorneys who can speak and read these languages fluently will be highly valued.

Now I'll go back to preparing fall courses, in which I teach students to speak tax. Yes, it is almost its own language!

My post on Andrew Black's difficulties with tax withholding on his gambling winnings and the maneuvers in which he had to engage in order to avoid withholding brough a note from Jeffrey Ring of Berry, Dunn, McNeil & Parker. He explains that although he does not work in the international tax area, he was sufficiently curious to dig out what is called the Technical Explanation to the United States-Ireland Tax Convention. Yes, technically it is a Convention and not a Treaty, but I use the word treaty because that is what most folks understand and use in their everyday conversation, even many international tax types with whom I've worked and conversed over the years.

Anyhow, Jeffrey pointed me to Article 22 of the treaty. Recall that I had considered Article 17, which applies to income earned "as an entertainer, such as a theatre, motion picture, radio, or television artiste, or a musician, or as a sportsmen" and wondered if gambling was a sport. I noted that Mr. Black would prefer that the income be covered by Article 14, which applies to income earned "in respect of professional services or other activities of an independent character." The reason is that Mr. Black would be better off, tax-wise, if Article 14 applied. Article 22, which I had scanned, applies to "income ... not dealt with in the foregoing Articles" and that income is taxable only in the country in which the person getting it resides.

The Technical Explanation states, "Examples of items of income covered by Article 22 include income from gambling..." Isn't that a surprise? I'll ignore, for a moment, the fact that the word gambling isn't in the treaty itself. It means that the folks interpreting the treaty decided that gambling is not a sport, for otherwise it would be covered by article 17, thus pre-empting article 22. It means that the folks interpreting the treaty decided that gambling was not the result of a person providing professional services or other activities of an independent character, for otherwise it would be covered by article 14, also pre-empting article 22.

Understandably, there are good arguments that gambling is not a sport, but to the extent they rest on the notion that sport requires skill and gambling does not, what little I know about gambling tells me that some gambling, such as playing the slots or the lottery, isn't a matter of skill, but that playing something like poker, which is where Mr. Black excelled, involves a combination of chance and skill. I'll let others ponder if Mr. Black, by playing poker in front of a national cable television audience, is or is not an entertainer. But what of the fact that he earned his winnings by engaging in activities of an independent character? Mr. Black surely is in the trade or business, as an independent contractor, of making money by playing poker. So why, if somehow he is not within article 17, is he not within article 14?

The answer is that the folks interpreting the treaty say so. Without any explanation, they simply dictate that gambling income is not in article 14 or article 17. The parallels between the incomplete Code and the "fill in the rest" regulations is striking. The conclusion that gambling is not a sport and not the activity of an independent contractor not only flies in the face of cases such as Groetzinger, but also reminds us, and I mean us, that just because something says something doesn't mean it means what it says because there always is the possibility that there is something else that says something different.

No wonder people complain that the tax law is complicated. Jeffrey Ring noted that because section 22 applies, there would be no tax, and apparently no withholding obligation on the part of Harrah's. He qualifies his statement by pointing out he isn't an expert in the field, and neither am I. So why, then, did Harrah's try to withhold? An abundance of caution? An in-house rule that simply required withholding absent the showing of an exemption number, as was done by Mr. Black's "backer" from Canada/United Kingdom?

If in fact there was no withholding requirement, then it's unfortunate that Mr. Black had to get annoyed at what should not have been an annoyance. It's even more troubling that he had to engage in some post-fact restructuring to deal with the situation. It's even more unfortunate that the state of the tax law is such that compliance is difficult, even when the people involved are trying to comply.

Perhaps someone who is expert in international taxation can enlighten us. I remain curious. So, too does Jeffrey Ring, and I am sure, other people who read the story (or my blog post).

Every once in a while I get lucky and write something that ends up preceding rather than following a tax-related event. Back in October of 2004, I posted a summary of the then-pending American Jobs Creation Act, and pointed out that one of the provisions was

"10. An exclusion from gross income for winnings paid to nonresident aliens from legal wagers initiated outside the United States in pari-mutuel pools on live horse or dog races in the United States. Why not a similar exclusion for residents? Is this provision designed to get all those aliens holding U.S. debt to return it by gambling in the U.S. and losing most of it? If so, why only horses and dogs? Why not an exclusion on ALL gambling winnings by foreigners in the U.S.? If it has something to do with animals, why just horses and dogs?

Sure enough, along comes a poker player who's more than annoyed about the imposition of taxes on poker winnings. Apparently playing poker isn't as tax-favored as betting on the dogs. R. J. Schoettle of Indiana has passed along a story published in the Irish "Taxes and Tips" and available on the Pokerati site, about Andrew Black, who won $1.75 million coming in fifth place in the recent World Series of Poker. Harrah's, which handled the financial aspects of the tournament, informed Black that it had to withhold 30% for federal income taxes, because there is no Ireland-United States tax treaty provision setting aside the otherwise required tax withholding.

Black, rather unhappy, somehow arranged for his prize to be paid to his "backer," who holds a passport from a country that does have such a tax treaty provision. It's unclear from the story whether the backer is from Canada or the United Kingdom. This permitted Harrah's to pay the prize without withholding any taxes. According to the Harrah's staffer handling the paperwork, a woman named Dixie, she was "fine" with the arrangement, under which he transferred his winnings. She stated, "Whatever ... as long as we can do our paperwork to keep the IRS happy."

Will this make the IRS happy? Sure, if happiness for the IRS is tracking down Mr. Black and informing him that (1) he owes federal income tax on the prize, (2) he may owe gift tax on the transfer to his backer, and (3) there may be state, local, or other national governments interested in taxing Mr. Black's prize. Of course, there are two sides to every story, and perhaps Mr. Black and his backer had additional arrangements in place that would change the nature of the transaction.

I took a look at the tax treaty between Ireland and the United States. Article 17 states:

1. Income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio, or television artiste, or a musician, or as a sportsmen, from his personal activities as such exercised in the other Contracting State, which income would be exempt from tax in that other Contracting State under the provisions of Articles 14 (Independent Personal Services) and 15 (Dependent Personal Services), may be taxed in that other State, except where the amount of the gross receipts derived by such entertainer or sportsman, including expenses reimbursed to his or borne on his behalf, from such activities does not exceed twenty thousand United States dollars ($20,000) or its equivalent in Irish pounds for the taxable year concerned.

Translated, that reads "Income derived by a resident of Ireland as ...a sportsman, from his personal activities as such exercised in the United States, .... may be taxed in the United States, [unless it is less than $20,000 for the year].

Is Mr. Black a sportsman? Is gambling a sport? I don't know. I do know that these are questions about which the IRS and Mr. Black could argue. It matters because Mr. Black would not want the income characterized in such a manner as to come within Article 17.

Mr. Black would want to come within Article 14, by demonstrating that gambling is not a sport, and thus does not move him out of Article 14. But can he come within Article 14?

1. Income derived by a resident or a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that State, unless he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities. If he has such a fixed base, the income may be taxed in the other State but only so much of it as is attributable to that fixed base.

2. The term “professional services” includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants.

Is gambling a professional service similar to those listed in Article 14?

So, unless Mr. Black demonstrates that gambling is a professional service and not a sport, or unless I've missed some other provision in the treaty that would make a difference, it seems that Mr. Black can't get off the hook for what clearly is a tax on his income. Every student coming out of a basic federal income tax class knows that one cannot avoid income tax liability by transferring income to another person after the fact.

Perhaps it will be difficult for the IRS to track down Mr. Black and collect. Perhaps not. But if he returns to the United States to play in another poker tournament, what's he going to do if there is a lien or other garnishment order hovering over any winnings? I can imagine the IRS proceeding against Mr. Black, his failing to appear, and a default judgment being entered against him, followed by the imposition of some sort of lien on future winnings. Of course, I am speculating, and perhaps Mr. Black intends to file a return and pay a tax. But then why object to the withholding?

Why does amaze me is that someone made this story public by reporting it. Why would the conversation between a payor and a payee get distributed, leaked, or announced to the press? I can't imagine why Mr. Black would have made the matter public. This is all very interesting, and I'd welcome any additional information about the story that might make it easier to analyze the tax issues.

I'll close by noting I've been kind, and have avoided the use of terms such as deal, hand, royal, straight, house, kind, or flush. Especially that last one. Next time, ha ha.

It’s not all that surprising that the debate over the alleged simplicity or complexity of the Internal Revenue Code continues. This will be my fifth commentary on the topic, the first four appearing here, here, here, and here. Because Kreig Mitchell’s latest posting revives the question of the law professor’s role in the development of tax practitioners’ perceptions of the Code, I welcome the opportunity to share my philosophy about the appropriate approach to teaching complicated legal topics. I’ll let Joe Kristan respond to the first part of Mr. Mitchell’s post, which addresses the question of whether Code complexity is a necessary consequence of all the things legislators use the Code to tackle. On that point, my view is that legislative action has contributed both to the volume of the Code, which does not itself require complexity, and to complexity, because the design of special provisions masking as general law indeed generates complicated language. I also think that there are complex provisions that can be drafted more clearly without changing the substance.

Mr. Mitchell also agrees that the Code is not perfect. Excellent. We’re making progress. But he also contends that any writing, if subjected to the critical analysis to which the Code is subject, will reveal "numerous inconsistencies and ambiguities" but I disagree. Not only is there much writing that presents few if any complicated glitches, it again is no defense that because something or someone is no worse than anyone else that the world should settle for mediocrity. I compare the Code to what it could be, not to the other material that is as bad or worse. That is a critical point, one that is a significant ingredient in the failure of post-modern culture.

Mr. Mitchell points out that using Code complexity as a device to instill fear in clients and to persuade them to pay additional monies for services that may or may not be professional or of high quality is totally unacceptable. On this point, I completely agree. This sort of “milking fear” happens in other areas of the law, and it happens in other professions. Much of the advertising industry reflects this mentality. Playing on fear is unacceptable. My philosophy, that fear is triggered by the unknown, generates more of my philosophy, namely, that intense education in which the student is immersed in the subject, beyond “main rules and interesting issues,” provides the antidote to fear.

Finally, Mr. Mitchell gets to the point that demands a response. He states:

Also, Mr. Maule also states that he does not see how persons who are not sitting in tax classes learn to fear the code if they have not taken the individual tax courses. I would suggest that reading a blog post entitled “The Tax Code is Simple. Not!” might do the trick -- especially if it was penned by a tax professor.

Mr. Mitchell confuses describing something as complicated with instilling fear of the thing that is complicated. The distinction is critical. It is one with which I deal at the beginning of every semester in which I teach the basic tax course. It arises each time a student arrives in my office or sends an email explaining their “fear” or “anxiety” about the tax course because they perceive themselves as incapable of dealing with such a scary topic.

There is no question that the Code, and the tax law, is complicated. So I’m not going to hide that fact. I’m not going to dumb it down. I’m not going to pretend it is easy. I’m not going to swim in the superficial waters of post-modern culture. The Code, and the tax law, is complicated. So let’s just deal with it.

How does one deal with it? One studies it. One immerses one’s self in it. One gets familiar with it. One works with it, under the guidance and tutelage of someone more experienced. Eventually, one begins teaching one’s self and one’s classmates. The key word in this approach is the word “works.” Getting past fear, any fear, requires work. Conquering fear cannot be purchased at Target or Wal-mart. It cannot be received on a silver platter. It cannot be done by someone else. It requires WORK.

At least with law students, and surely with at least some clients, it’s not a matter of ability. The ability is there. It’s a matter of discipline, of persistence, of dedication, of perseverance, of industry, of effort, of all the things that enter into meeting and overcoming a challenge. That is why I tell students, and others, that the Code and tax law are complex, that the complexity is a challenge, and that the challenge either will be met or will block the student’s progress toward becoming a genuinely fine professional. It’s the student’s choice.

Many students, especially those who approach me at the outset shaking (sometimes literally) with fear and anxiety, end up doing well because they follow my advice. So well at times that they find themselves enchanted with tax law and find their spot in practice as a tax practitioner. Others, relying on last year’s outdated outline, looking for the quick and easy path, and putting higher priorities on other things, scrape by, moaning and griping about "all the work" they are required to do. Some simply avoid my course, choosing a path of least resistance. Sometimes I am tempted to conclude that what is feared is the work that is required. Guess what's waiting in the practice world?

There is no reason to fear the Code, or the tax law. That’s because a good educational exploration of tax law dispels that fear. A good educational exploration requires work by the student. That’s why I explained that my students do not contribute to, nor spread, fear of the Code or fear of the tax law among their clients or among other practitioners. Mr. Mitchell comments that he applauds this fact. I’d prefer that he applaud how this fact comes to be so. It’s the approach to learning tax law, which is intense, challenging, and well worth it. Unfortunately, too many people give up when a challenge appears intimidating or scary. That, however, is not how the species makes progress. Challenges exist to provide opportunities for growth.

So, the complexity of the Code and the tax law can be seen as a challenge to be undertaken and overcome. Or it can be played into a source of fear. I prefer the former. That’s how I teach. Tax law presents a demanding challenge, as do some clients and many partners, and one who teaches tax law accordingly must be demanding.

Anyone who reads my posts about the complexity of tax law ought to walk away, not in fear, but with an understanding that to deal with the challenges tax law poses, a person needs to work, with perseverance and diligence. A person may end up feeling disappointment, frustration, or disgust with respect to the tax law and how it is created, but that is not fear. And those feelings are far better than obsequious resignation to the mess that the Code and tax law present to taxpayers and tax practitioners every day.

Complexity ought not generate fear in a person who is willing to work to get past the complexity. Complexity generates fear in those who do not give themselves the chance to undertake a challenge.

No sooner had I reported on the Congressional proposal to impose an excise tax on "regulated pornographic web sites" in yesterday's posting than I heard on the radio a report that Mike Tyson is considering going into the adult film acting business in order to make money that he needs to pay back taxes. A search of the web yielded stories such as this one, which appear to confirm that Tyson did state he has been having discussions with people in the adult film industry. Nothing, though, specifically referred to his tax problems, though Tyson's statement that "My options are pretty minimal, but I will examine them." in the context of his financial situation and the common knowledge that he has had serious tax problems makes the radio report far from implausible.

So wouldn't it be ironic (and a lot of other things) if the adult film industry cranks up its revenues by adding Mike Tyson to its "stars" list because he needed money to pay taxes? Especially when this news is popping up at the same time some members of Congress are trying to use taxes, among other things, to curb the industry's web presence and reach.

For years, I've had a book in the planning stages. It's called "Celebrities in Tax Trouble" and it would be long, because the list of celebrities who have had tax problems is long. But the list of things on my "to do" list with higher priorities also is long and the book idea simply ferments in the back of my mind, occasionally moving into the forward regions when something triggers it. But this Mike Tyson thing might end up changing the title. I'm not going there. Not now. Not in the near future. Maybe after I retire.

It's just getting weirder and weirder in the tax world. Good thing I'm noticing or I'd fit in too easily.

So a bunch of Senators has decided that the solution to the problem of Internet pornography sites luring children to their pages and products is, yes, a tax.

The full text of Senate Bill 1507 can be found by going to the Thomas Congressional web site. Thanks to Brian Coddington for the permanent link.

Clearly the goal of the bill is worthy. The purpose of the legislation is to "set tighter age verification standards to block minors from entering Internet pornography sites" and to "provide funding and support to law enforcement efforts to combat Internet and pornography-related crimes against children."

The bill imposes age verification requirements. I thought those already existed, but apparently not. Third-parties, such as credit card companies, are prohibited from providing services unless the web site complies with the legislation. That, I think, is something new. The Federal Trade Commission would have authority to regulate these web sites.

Here's the tax part: A new Internal Revenue Code section:

Sec. 4285. Internet display or distribution of pornography.

SEC. 4285. INTERNET DISPLAY OR DISTRIBUTION OF PORNOGRAPHY.

(a) Imposition of Tax- There is imposed on amounts charged by a regulated pornographic Web site for individuals to receive the display or distribution of pornography through the Internet a tax equal to 25 percent of the amounts so charged.

(b) Payment of Tax- The tax imposed by this section shall be paid by the operator of the regulated pornographic Web site receiving payment for the display or distribution taxed under subsection (a).

(c) Definitions- In this section:

(1) PORNOGRAPHY- The term `pornography' has the same meaning as defined in section 2256(2) of title 18, United States Code.

(2) REGULATED PORNOGRAPHIC WEB SITE- The term `regulated pornographic Web site' has the same meaning as defined in section 105 of the Internet Safety and Child Protection Act of 2005.

OK, this one can't be criticized for complexity. It's written in fairly plain English, although it does get away with a cross-reference for what is probably one of the most difficult words to define.

The revenue from the tax would be used to fund enforcement of the act, to fund a tip line, to fund a variety of child protection programs, some administered through the states, to fund research and development into filtering technologies, and to fund education of state agencies dealing with the problem. Any remaining revenue would be used to fund federal agencies, and certain private entities. If any revenue is not needed for these activities, it would be used for deficit reduction.

If it works, this would raise money. According to one of the sponsors, as reported by the Washington Post, the Internet pornography industry nets $12 billion annually.

Here's the problem. Or at least one of them. Most of these web sites are located outside the United States. Does anyone, including the sponsoring Senators, think that they will voluntarily pay this tax? Ha ha. Perhaps the plans are to send the military in to seize assets? What assets? Where?

This is what is called "for show" legislation. Even if it passes, like its predecessors, it will not solve the problem. At least one print version report that I read included a quotation from one Senator to the effect that they didn't think it would be effective but it would send a message. A message? To whom?

What would solve the problem is parental control, education, and discipline of children. That, of course, is asking a lot. Put the computer in the living room or den and look at the screen when the child is using it. That might interfere with the golf game, but, hey, aren't the children worth some attention?

So some members of Congress turn to the only thing that they think works, namely, a tax. To be administered by the Internal Revenue Service. Because it has nothing else to do?

The Internet is global. The problem is global. The solution needs to be global. It requires international agreement. The idea that the United States Congress can unilaterally police the Internet is not only short-sighted and narrow-minded, but a losing proposition.

And if another country imitates this legislation, will there be a credit for a tax paid to that country? Practical application of this theoretical idea is what will generate complicated amendments.

Sometimes tax isn't the answer.

A little more than a month ago I shared a summary of the tax provisions of the ENERGY POLICY TAX INCENTIVES ACT OF 2005, as approved by the Senate Finance Committee in late June. The bill has been through Conference, and has been signed into law.

Rather than listing its tax provisions again, I'll point out the major differences between the Senate Finance version and the bill that was enacted. My point isn't so much to turn myself or any of you into experts on these provisions (though eventually I'll need to scrutinize them more closely as I update Tax Management portfolios) but to illustrate how politics ravages the tax law. But we knew that!

** Congress added a provision, from the House version, that treats natural gas gathering lines as seven-year property for depreciation purposes.

** Congress added another provision, also from the House version, that treats electricity transmission property as fifteen-year property for depreciation purposes.

** Congress, again picking up something in the House bill that was not in the Senate version, removed some restrictions on the use of 60-month amortization for certainatmospheric pollution control facilities.

** Congress again went to the House bill to adopt a provision making the credit for producing fuel from a non-conventional source part of the general business credit.

** Congress yet again adopted a House bill provision loosening the requirements for deduction of nuclear decommissioning costs.

** Congress adopted another House bill provision, this one exempting prepayments for natural gas from the tax-exempt bond qualification arbitrage restrictions.

** Congress adopted yet another House bill provision, expanding the small refiner exception to certain restrictions on the use of percentage depletion.

** Congress added Indian coal to the list of additional energy sources specified in the Senate bill as newly eligible for the renewable electricity production credit.

** Congress rejected the Senate bill provision making clean energy coal bonds tax-exempt.

** Congress also rejected the Senate's proposed credit for investment in clean coke/cogeneration manufacturing facilities property.

** Congress rejected the changes to the enhanced oil recovery credit that were in the Senate bill.

** Congress adopted, from the House bill, a special excse tax rate for diesel fuel blended with water to form a diesel-water
fuel emulsion.

** Congress also adopted, from the House bill, a provision permitting geological and geophysical costs incurred in connection with oil
and gas exploration in the United States to be amortized over two years.

** Congress rejected the Senate bill provision that would have repealed the scheduled phase-out of the credit for electric vehicles.

** Congress rejected the provisions in the Senate bill making changes to the alternative fuels excise tax credit.

** Congress rejected the Senate bill provision creating a business energy-efficient property deduction.

** Congress rejected the Senate bill provision creating a combined heat and power system property energy credit.

** Congress rejected the Senate bill provision expanding the energy credits allowable against the alternative minimum tax.

** Congress rejected the Senate bill provision treatig underground natural gas storage facilities and cushion gas as ten-year property for depreciation purposes.

** Congress rejected the Senate bill provision creating a credit for equipment for processing or sorting materials gathered through recycling, and instead directed the Secretary of the Treasury, in consultation with the Secretary of Energy, to conduct a study to determine and quantify the energy savings achieved through the recycling of glass, paper, plastic, steel, aluminum, and electronic devices, and to identify tax incentives that would encourage recycling of such material.

** Congress rejected the Senate bill provision creating a credit for investment in pollution control equipment.

** Congress rejected the Senate bill provision creating a credit for the replacement of a non-compliant wood stove
with a compliant solid fuel burning stove.

** Congress rejected the Senate bill provision exempting bulk beds from the excise tax on retail sale of heavy trucks and trailers.

** Congress rejected the Senate bill provision establishing an exclusion for certain fuel costs of rural carpoolers.

** Congress rejected the Senate bill provision treating qualified energy management devices as three-year property.

** Congress rejected the Senate bill provision creating an exception from the tax-exempt bond volume cap for certain cooling facilities.

** Congress rejected the Senate bill provision making changes to the excise tax treatment of kerosene and other excise tax provisions affecting fuels.

** Congress adopted changes to the rules for recapture of section 197 amortization with respect to sales of multiple intangibles, in a provision not present in either the House or Senate bill.

Most of the Senate bill provisions that were adopted were modified in minor ways. Those details will not get attention here at this moment.

I may have missed a few things. Take a look at the Conference Report if you'd prefer to dig into the source material.

I close with these concluding remarks from the Conference Report.

Section 4022(b) of the Internal Revenue Service Reform and Restructuring Act of 1998 (the “IRS Reform Act”) requires the Joint Committee on Taxation (in consultation with the
Internal Revenue Service and the Department of the Treasury) to provide a tax complexity analysis. The complexity analysis is required for all legislation reported by the Senate Committee on Finance, the House Committee on Ways and Means, or any committee of conference if the legislation includes a provision that directly or indirectly amends the Internal Revenue Code (the “Code”) and has widespread applicability to individuals or small businesses.

The staff of the Joint Committee on Taxation has determined that a complexity analysis is not required under section 4022(b) of the IRS Reform Act because the bill contains no provisions that have “widespread applicability” to individuals or small businesses.

So if none of these provisions have widespread applicability, how is this bill going to make a difference with how the population uses energy? If almost everyone is unaffected, how does this bill make a difference in terms of energy conservation and development progress?

That was a rhetorical, sarcastic question.

Every once in a while something happens that makes me wonder if I chose the wrong profession.

Sometimes it's an encounter or experience with another profession that triggers thoughts that it would be more fun.

Sometimes it's reading yet another Congressional text emission dumping thousands more words into the tax law.

Sometimes it's dealing with an aggravating situation or person in the course of doing my work.

And sometimes it's stories such as this one from the Daily Business Review. This sentence alone says it all: "A recent survey of 5,000 people by Salary.com found that lawyers ranked 10th on a list of the top "sexiest" jobs." The full salary.com report is here.

But to rub salt in the wound, consider that the "top three 'hot jobs' were firefighter, flight attendant and chief executive officer." I get the first. But the other two? Let's face it...when it comes to CEOs, it's a money and power thing. So much for romance, ha ha. But aren't lawyers more powerful than CEOs? Lawyers can put CEOs in jail.

Yes, money talks. Even though salary.com reports that salary is not an important factor in determining sex appeal, at least one newly admitted Florida lawyer claims he is successful on the dating scene so long as he mentions his income. According to salary.com, "the median salary for lawyers is more than three times that of news reporters, who ranked third on the sexy jobs list." Soundbite masters ahead of lawyers? Hey, lawyers can put journalists in jail, too.

Worse, "Lawyers ranked just below doctors and just above veterinarians." Interesting company we keep.

Yet, according to the story, "News reporters ranked third, in a three-way tie with interior designers and event planners. That seems preposterous enough to invalidate the whole survey."

Just like the surveys that claim personality, kindness, commitment, a sense of humor, and reliability are what people seek in a mate. Right.

That's why I tell people I'm a teacher. They come in eighth, ahead of lawyers. Then I'm asked what I teach, and by belonging to the 8th and 10th positions I drop to 18th. Then toss in writer, which isn't even on the list, and computer programmer, which also absents the list, and it's downhill at breakneck speed.

Even CPAs got some write-in votes. I knew there was a reason I should have accumulated additional weeks of accounting firm work so I could have sat for that exam. Maybe that would make for the winning combination.

Hey, have a good weekend. Just don't lie about your job tonight, hee hee.

All I'll say is this: if you can't pass the bar exam without knowing the questions and answers in advance, you ought not be permitted to practice law, and if you can't pass an academic exam without knowing the questions and answers in advance, you ought not earn a grade that is deserved only by those who can demonstrate they know how to think.

And this: What is alleged in the case, reported by the Legal Intelligencer, has been known to happen in similar ways in law schools. Tsk, tsk. When is integrity going to become a gateway to advancement?

And this: If the allegations are proven, the repercussions will reverberate far and wide. Hopefully we'll get updates.

Joe Kristan of Roth and Company, P.C., weighs in on the Code complexity debate. His post is short and simple. I salute his farm method of accounting example. Take a look.

The recent series of postings concerning the degree to which the Internal Revenue Code is complicted, the last of which is here, has brought a response from Ben Bateman of Amarillo, Texas. Ben's first point:

What's missing in your debate with Mr. Mitchell is agreement on the standard of complexity by which to judge the tax code. You are holding it to some abstract standard of perfection, while I suspect that Mr. Mitchell is comparing it to other statutes. Compared to other statutes, I agree with Mr. Mitchell that title 26 is a model of organization and simplicity, second perhaps only to title 11.

Yet there are standard readability and other word-based objective standards for measuring complexity. I wrote about that some time ago in this post. Much of the Code does not do well under those tests. The Code is not written in plain, simple, straight-forward language. Consider this provision:

For purposes of paragraph (3), an organization described in paragraph (2) shall be deemed to include an organization described in section 501(c)(4), (5), or (6) which would be described in paragraph (2) if it were an organization described in section 501(c)(3).

This is from section 509(a), which deals with tax-exempt entities. Try tossing that at a client affiliated with a tax-exempt organization.

Ben's second point:

For sheer obtuseness, I don't know of any sentence in title 26 that can compare with § 37 of the Texas Probate Code, which packs over 200 words into a single sentence.

Until its repeal, section 341 of the Internal Revenue Code came in at 342 words, 25 parentheticals, 17 commas, 2 dashes, and 1 period. See Steve Willis' Tax Humor page for this and some other doozies. And that's the short list. Ben points out that when spacing, internal subdivision, and margination are taken into account, a provision like section 341 isn't as difficult to read as it would be in the form of one huge batch of text. That's true, but it's no excuse for the Code to fall short of what sapiens sapiens can accomplish.

Ben also notes:

The tax code is complicated in the same way that the dictionary is complicated: There's a lot of information in it. But the information isn't badly organized, and it isn't badly written compared to other statutes.

Another objection I have to the "the Code isn't as bad as the state statutes" argument is that, even though this assertion is true, it reduces things to the lowest common denominator. The fact that many state statutes are just as bad or worse doesn't absolve the Code. It's no claim to fame to be a micrometer above the bottom. Remember that Kreig Mitchell's original point wasn't that the Code was in first place but that it was simple. It's one thing to have NBA-level basketball skills. It's another thing for an adult to stand out when playing basketball with middle school kids. I don't buy the "I'm not as bad as the other person" defense. I want to measure accomplishment against potential. That's how I was raised. And that's how I take on tasks. It's not a matter of rising above others. It's a matter of achieving potential. That's why I detest grading curves that are relative, because they deceive students (and employers and others). And as for organization, I refer again to the failure to put all deductions allowable in computing adjusted gross income in section 62. The Code is decently organized, at best. It isn't as good as it could be. That's the issue. Taxpayers deserve more than "decent job" when what's at stake is not a one-time matter but a permanent Code. For example, are the EITC provisions within "it tells you" to the extent an average taxpayer could understand them? What of the dependency exemption rules? Or the scholarship rules? The list is long. I think sometimes when we work with the Code enough it begins to "make sense"....sort of like closing time at the tavern. True, I teach my students to immerse themselves in the Code so that it loses its mysteriousness and the fear subsides.

Ben then explains:

Many lawyers I know are terrified of tax law because it carries this aura of super-complexity. I'm much more nervous about areas of law in which the relevant statute is badly written or badly organized. Or worse: Even once you understand the statute you don't know the law, because the real law is hidden in the cases or regulations, which are even worse than the statute. In my experience, most law is like IRC § 704(b): An ambiguous statute atop an ocean of impenetrable regulations. But most of the IRC isn't like §704(b). It tells you what it's trying to tell you. It doesn't hide the ball.

I agree there are lawyers terrified of the Code. Why? They haven't bothered to explore it. The familiar is far less like to instill terror than is the unfamiliar. And yes, the regulations are even worse, but why? Because Congress tosses the ball to the IRS. Take a look at section 706(d) and notice how Congress surrendered the completion of the list of cash-basis items to the regulation drafters (who after all these years have yet to step forward with a more complete list). Sure, it can't hide the ball when it hands the ball to the IRS.

Ben concludes with these words:

The tax code could be better, of course. The question is: Better for whom? Lots of different people use it for lots of different purposes. How much simplicity should it have, versus how much precision? How much simpler could anyone really make it? Here's an objective standard of complexity: Is it worth re-writing? In Texas, we just got a new comprehensive statute on business entities to replace an archaic patchwork of statutes dating from the fifties. It took an enormous amount of time to write, and the changeover costs are substantial. But the old statutes were bad enough, and the new one is good enough, to make it worthwhile. If you think that the same is true of the IRC, then maybe you should form a committee and start writing.

Indeed, the Code needs to be rewritten (substantive reforms aside). I'll do it if the Congress asks. Otherwise, any work product would go into the round file. Anecdote: Years ago, when I was in D.C., I drafted a Code provision. The "experts" said something along the lines of, "This is quite good. However, we have a similar provision, nowhere as nicely done, but we need to track it for sake of consistency." That's one of the obstacles to cleaning things up.

In a followup, Ben comments:

I like the IRS approach to presenting tax law, which leaves the actual statute to the professionals while giving the public an array of official publications. It separates ease of access from precision, as the two can never really coexist easily. So if the problem is that the tax law isn't accessible enough for the general public, then the solution lies in that publication system, not in rewriting the tax code.

Yet that's a reason I don't like the current approach. A group of IRS employees explain what they think the Code means, and wherever there is ambiguity it's not uncommon for the IRS to present an explanation favorable to the revenue. Why support a type of guild system under which translators are needed? I know I would not be writing as many (or perhaps as lengthy) portfolios if the Code were written in the language spoken by the people whom it is intended to affect. And the same can be said of many other laws, ranging from parking regulations and zoning ordinances to business licensing and labor laws.

The last thing we need is support for the existing Code mess. I, for one, do not want to be an enabler of the present system or the type of output we currently get. Stuart Levine is correct. The problem is deeper than the Code language. It's the process that generates it that requires fixing. Otherwise, a redrafted Code will soon relapse back into what it is at the moment, because continuation of the current mindset and process will produce more of the same.

Legislators have an obligation to speak and write clearly. Say and write what you mean. Mean what you say and write. Forget soundbites. Avoid duplicity and deceit. Blow away the smoke and break the mirrors.

Kreig Mitchell has posted an interesting and helpful response to my latest entry in our continuing debate about the complexity of the Internal Revenue Code.

He apologizes for any attack that I perceived to have been made on me. Accepted. I think a defense of the Code's simplicity can be made without characterizing or stereotyping the critic. Mr. Mitchell explains what he perceives to be a connection between how tax is taught and the adverse impact on taxpayers of their fear that the IRS can use a complex Code to do to them whatever it wishes.

I'll bite, though I don't see how taxpayers who have never sat in a law school or accounting program tax course can develop their fears from those courses, other than in the rare instance such as the one cited by Mr. Mitchell, in which a client's law student relative feeds that fear. After all, it would be distressing to think that practitioners who have been through those courses would indoctrinate their clients into that sort of thinking. In this respect, Mr. Mitchell and I share common goal, which is to demystify the Code for our respective audiences. We may have different views on how easy it is to accomplish that goal.

Mr. Mitchell explains how a very stressed client was able to use an index to the Code to find the section pertinent to his problem, and then to read that provision to determine that the IRS was wrong in his particular situation. The taxpayer expressed relief at discovering that "yes" was the answer to his question "is that it?" Granted, sometimes an IRS employee takes a position so at odds with a basic rule that a person who has not been through a tax program can figure it out from the Code. Left for another day is how that happens and why it isn't a good thing that IRS employees take positions so clearly erroneous. But I don't think that the fact the Code is straight-forward with respect to certain issues puts a blanket of simplicity on it.

Let me give an example. If the question is what deductions are allowable in computing adjusted gross income, a Code index would send the reader to section 62. That provision purports to list those deductions, and it is a relatively simple provision, and not too difficult to read. Of course, many students think it is the section that allows the deduction in the first place, when in fact it is classifying deductions allowed by other provisions. That may be one of the "arcane" points to which Mr. Mitchell refers, but it is a critical distinction. Yet that's not the problem. The problem is that there are four (at least, the last time I checked) other deductions allowable in computing adjusted gross income that are not in section 62. The allowance, in computing adjusted gross income, of casualty loss deductions to the extent of casualty gains is the best example. Is it good drafting to put this in section 165(h) and not section 62? No. Now although Stuart Levine explains how this might happen, principally because of working under deadlines and stress, it nonetheless is the sort of sloppiness that creates traps for the unwary. If a client was led by a Code index search to section 62 when seeking deductions allowable in computing adjusted gross income and asked "is that it?" the correct response is no. And when a client, thinking logically, is told that there are other deductions "hidden" elsewhere, the client's reasonable response is that it could be less complicated, couldn't it? This is one example of why the Code does not earn an A, or even a B or C, from me when graded for simplicity and organization.

Mr. Mitchell notes that there have been other instances, including his own academic experiences, in which people teaching tax have impressed on their students the fact that the Code is complicated. Well, it is. The breakdown occurs when the tax student, perhaps experimenting at developing clients who "need" the student's help, uses an "alarm the client" technique. My students are taught that their task is to assist clients and to put them at ease. Perhaps that is not a widely presented point.

However, where Mr. Mitchell and I part company, again, is when he states, "So Mr. Maule, you can continue to tell your students and others that the tax code is hopelessly complex. That is your right." But I don't use the adjective "hopelessly" and that makes all the difference. If I thought it was hopeless I'd be doing something else. I teach my students in a manner that lets them understand (1) the Code IS complex, (2) but it CAN be deciphered, and (3) even though there are a few "easy" provisions, (4) doing the deciphering requires a huge amount of effort. After all, most law students will agree that tax is one of the most, if not most, difficult law school subjects. Most law faculty cannot, and will not, teach tax even though they often claim, on employment applications, that they can teach anything else. Why? The superficial response, "it's boring" masks the truth, "It's way too difficult and much too much work."

Serious harm can be done into making someone think a complex thing is simple. Good teaching, though, moves a student into the complex by taking him or her through a series of layers that begins at the straight-forward and moves to the reality of the complex. Not all Code sentences are complicated. But if the complex ones are removed, there isn't much left. And one has to wonder how simple the simple parts are if an IRS employee can't even get that right even though the taxpayer can. As I tell my students, sometimes you get lucky and have a bright, sensible, accomplished client who can do almost as much with some parts of the law as can a lawyer.

I doubt that most taxpayers would have been able to do what Mr. Mitchell's client did. If the Code were as simple as I wish and think it could be, I'm sure many more clients indeed would be so successful.

Andrew Mitchel is back at it. I pointed out in this post of three weeks ago that he had put together a collection of charts depicting a variety of corporate tax cases and the reorganization provisions. Then I noted in a followup that he had added a group of section 367 charts to his Andrew Mitchel LLC - International Tax Services web site. Now he has added charts for another 20 cases and rulings (including Aiken Industries, Elkhorn Coal, First Chicago, Vetco, Inc., Rev. Rul. 2003-51, Rev. Rul. 2003-79, Rev. Rul. 2004-59, Rev. Rul. 2004-77, and Rev. Rul. 2004-83.

The best place to start is with his sitemap. Understand I'm a big fan of visuals, whether charts, graphs, pictures, or animation, as a means of teaching and learning something that is complicated. So I repeat, Andrew's web pages are definitely worth a look by those studying, teaching, or working with the statutes, cases, and rulings that he has illustrated.

My post yesterday challenging the assertion that the Internal Revenue Code is "clear, simple, and well organized" has brought a quick and intense response from the People's Tax Lawyer (Kreig Mitchell) and a nicely reasoned and balanced "middle position" analysis from Stuart Levine.

Mitchell stresses that he is a practitioner. So, too, am I, though no longer on a full-time basis and no longer with taxpayers (aside from a few to whom I dare not say go away). My clients are tax practitioners, directly and indirectly. So when I help a tax practitioner help a client I'm not doing something all that different (if different at all) from what tax practitioners do.

Mitchell writes, "the non-practicing tax professor’s job is to ferret out arcane and obscure rules and fact patterns that may or may not be an issue or even arise in real life. Such a reading of the Code allows the tax professor to test which students deserve the higher mark and which deserve the lower mark." Where Mitchell gets this idea is a question I'd enjoy having answered, because that's not what I do as a tax law professor. There is no time in my courses to ferret out arcane and obscure rules. There's not enough time to deal with the basics. Although occasionally a student complains that I left an exception to an exception for some later day in practice, most appreciate the separation of fundamentals from arcane that characterize the courses that I teach. Granted, some don't quite grasp this until they are in practice and discover that client problems and assignments from partners make my tax courses seem like child's play. My job is to prepare students to learn how to interpret the Code and other tax sources and to learn how to teach themselves as they progress through a career during which there likely will be 20 or more major tax acts changing how they deal with their tax and non-tax clients. Mitchell's assertion reminds me of the students who contend that if they got a question wrong it was because the question addressed an obscure provision. I resist responding that a provision never read is indeed obscure.

Mitchell then attacks academic scholarship:

It also provides academic job security. The process goes something like this. One professor writes an article on some arcane and obscure rule or fact pattern. It is sufficiently long and/or complex so that no one actually reads it. Everyone just assumes that the piece is good and wise and the professor adds another publication notch to his or her belt. Then a second professor writes an article citing the first professor, which adds a publication notch to his or her belt. The process continues until there is a whole mess of writing on an issue that may or may not materialize in real life. Then one or more professors hold themselves out as consultants on the issue -- advising tax planners as to how the issue is important and how they can help their clients avoid it. The process has the trappings of a multi-level marketing scheme. I have not read the particular tax professor’s work, but I think that this is the market for tax translation that the professor mentioned.

Well, as everyone who listens to me or reads my comments on the matter, I'm no fan of typical academic scholarship published in student-edited, and usually untimely, law reviews. I'm somewhat of a misfit in the law school "academy" because my writing, whether articles, book chapters, or books (such as Tax Management Portfolios) focuses on problems that already exist in practice. That's why I keep in contact with practitioners. It lets me find out what's happening in the practice world. Amazingly, and it absolutely amazes me, Mitchell hasn't read any of my writings. Let me be an egomaniac for a moment. How can anyone practice tax and not use Tax Management portfolios, at least now and then? And if anyone is dealing with the income side of tax (in contrast to international or estate and gift), the place to start is with the 8 overview portfolios, all of which have been written by this "particular tax professor." Hmm. That idea of the unread and therefore obscure and arcane provision seems to resurface here. So the accusation that I, or for that matter, any other tax law professor, invents issues that otherwise would not exist and then inject them into the practice world is flat out silly. The few tax law professors who confine their writing to highly theoretical and conceptual explorations are not in a position to so influence practitioners.

Mitchell then contends that

even if these arcane and obscure rules and fact patterns do arise, they have a way of working themselves out. This occurs where the government is not able to recognize the issue; the government recognizes the issue but decides not to pursue it; the government recognizes the issue, pursues it, loses in court, and gives up; or the government recognizes the issue, pursues it, loses in court, and expresses that it will continue to pursue the matter. In the later case it is only a matter of time before the courts or Congress clarifies the issue or the issue becomes a non-issue via one of the previously stated means. In the end, the tax professors are the only ones talking about the issue (typically for many many years).

An issue that affects a taxpayer is not arcane and obscure to that taxpayer. Absent guidance, the taxpayer must choose between safe surrender and risky adventure. Sometimes what little guidance exists comes from things such as Tax Management portfolios. Considering the number of law review articles and Tax Management Portfolios cited by the courts, surely the output of practitioner-focused tax law professors has value. Let me self-promote again. A few years ago, I discovered, thanks to an observant law librarian, that the Department of Justice had cited some of my Tax Management Portfolios in appellate briefs, on more than a few occasions.

Then Mitchell states: "The truth is that a great many tax cases are won on procedural grounds without ever getting to the underlying substantive tax law. Yet very few tax professors write about or even teach tax procedure. The academic world portrays tax procedure as lowly or not worthy of academic study." I must bring this to the attention of the two faculty members who teach a basic and advanced tax procedure course at my school, and, oh, there's one that deals with criminal tax procedure. I devote 2 days at the beginning of the basic tax course taking students through an overview of procedural issues. Every survey result I've seen suggests that J.D. students are getting some exposure to procedure, and LL.M. students are pretty much compelled to take at least one such course. I'd like to see the empirical evidence that supports Mitchell's assertion.

What follows is shocking. He writes, "Rather than teaching the law and skills necessary to do this, tax professors employ their flawed means of reading of the Code to have their students explore the merits of one or two words in the Code." Flawed means? Does Mitchell intend to suggest I (alone or with my colleagues) have turned thousands of students into bumbling tax practitioner fools? Surely such an outcome flies in the face of what my practitioner graduates tell me.

I guess Mitchell doesn't like tax law professors. How else to explain this comment: "But to be fair, reading the Code for arcane and obscure issues and fact patterns is not entirely useless. It does give tax professors something to do, it does allow tax professors to feel like they are contributing something, it does help justify paying tax professors a salary, and in rare cases, it does add to the body of tax knowledge." I wonder what traumatic academic experience brought about such a "paint with a broad brush" attack.

But here is a clue:

This brings back memories of my partnership tax law class. In that class the professor did not simply cover the main rules and point out interesting or novel issues. Instead, the professor went into great detail about very specific fact patterns involving inside and outside basis, tax and cost basis, minimum gain charge back and qualified income offset provisions, and about other minutia. For sure, it was all good information to know. However, the fact patterns presented were very obscure. At the review for the exam one student asked the professor how partnerships could function in the real world given our partnership tax laws and why anyone would set up a partnership given the amount of compliance work that would be required to comply with the partnership tax laws. The tax professor responded by saying that almost no one complies with the law. After graduating and practicing I now know that the professor was partially correct.

First, note the typical desire for "main rules" and "interesting ... issues" in contrast to the nuts and bolts of practice. This is a desire of which most of my students need to be, and are, eventually, disabused. Second, inside and outside basis is a fundamental linchpin of subchapter K. Tossing it off as "minutia" indicates a total lack of appreciation for what partnership taxation is about. Questions from practitioners struggling with real-life, practice world subchapter K issues involving basis, minimum gain chargebacks, and similar issues dominate the ABA-TAX listserv. Why? Because the Code, and yes, the regulations, are not well drafted. So I get to "translate" not only for list participants but for the dozens of practitioners who email me directly. If these are silly arcane issues, why are the practitioners wasting their time with them? Yes, compliance is horrible in this area of tax law. Why? Because people don't take the courses? Because the law (Code, regs) is NOT as simple as Mitchell contends? Because as students practitioners "tuned out" anything past "main rules" and "interesting issues"? Surely, reading the Code through a filtering lens of "main rules" leaves the practitioner with a simple (but erroneous) short and easy text.

Mitchell then states, "In the end, many of the partnership tax issues that were so pertinent in my law school partnership tax class are really non-issues in practice. Even then, I recently read an article by that very same professor complaining about the complexity of our tax code. Go figure." Well, of course, go figure. Yes, I complain about the complexity of the Code. Mitchell claims the Code is clear and simple. (He also claimed not to have read any of my works, but I guess he did.) My partnership tax class focuses on issues that practitioners have presented to me in one way or another. There is a long list of issues I don't cover, because time is scarce and these issues haven't been in the spotlight. Time and again, I cite (anonymously) a practitioner question posed to me on the listserv or directly by email. As law professors in most subjects tell their students, "We don't need to make up this stuff." Time and again former students call or write to express amazement that they are encountering in practice what I predicted they'd encounter (not a grand accomplishment considering in most instances I was relaying information from other practitioners).

When Mitchell writes, "The perspective from the ivory tower is not the only perspective out there," he implies I live in the ivory tower. I don't live in an ivory tower or an ivy-ed tower. That's been one of my hallmark characteristics, and one that, at times, has presented challenges fitting in with the culture of a theoretically-focused non-tax academy. I am surely the last tax law professor on the planet to be accused of being too theoretical, isolated, oblivious to the practice world, or residentially ivy-ed.

Mitchell concludes: "I did not say that the Code was perfect. What I did say is that from my perspective, for all it is to accomplish, the Code is model of clarity and simplicity and it is not too complex." As Stuart Levine points out, compared to most state tax laws the federal Code is high quality. True. And amongst 8-year-olds I'm still a very good basketball player. Analyzing the Code through stadard readability tests, for example, is a far better way to determine its clarity and simplicity. It's been done, and the Code is far from "not too complex." That the Code is not as bad as the regulations, or as some degree of organization, is no high praise.

Mitchell never responded to my specific examples of serious flaws in the drafting and style of the Code. Stuart Levine's post presents a good defense, explaining how the drafting process almost guarantees what we get. Where are the examples of clear, easy to read and understand Code provisions? Where are the readability scores showing the Code as a model of clarity?

Attacking the critic is not a useful response to the criticism. This is especially true when the attack on the critic is groundless. I expect better. My students say I am demanding. I am. I am, because I know that practice will be just as, even more, demanding. It demands something more than a gloss on "main rules" and "interesting issues." It demands a thorough understanding of the details that matter in practice. Arcane or not, if the client has the problem, the issue is real. And if the Code were so simple, why are there so many taxpayers seeking or needing professional tax advice?

I stand by my criticism of Mitchell's assertion that the Code is simple and clear. It's not.

The People's Tax Lawyer has posted a defense of the Internal Revenue Code, concluding that it is "model of clarity and simplicity for all it is to accomplish" and that it "is not too complex." The People's Tax Lawyer concludes, "Our Code is clear, simple, and well organized."

In all fairness, much of the post is a complaint about failings in the organization and other features of Treasury Regulations. There will be no argument from me that this complaint lacks justification. My students often hear and see specific examples of bad drafting practices evident in the regulations. The cross-referencing in the section 704(b) regulations (e.g., "(1) and (2) of (b)(2)(ii) of this section" rather than "the first two prongs of the three-prong test" is one of my favorite examples).

But to characterize the Code as clear and simple suggests familiarity breeds affection. At least for the People's Tax Lawyer. But not for me. True, the Code is decently organized. It is not well written. Ask any basic tax student about the "bears to" language that could be, as it is in some instances, a simple "multiplied by a fraction, the numerator of which...." construct. Consider that sometimes effective dates are in a code section, other times in uncodified amending legislation. Consider that parts of section 167 that still apply have been repealed. Check out the application of section 1245 to ACRS property, which requires digging through "old' versions of the Code with several amending acts in hand. Consider the numerous uses of the "we'll let the IRS finish writing the statute" approach. Consider the enumeration of a certain number of paragraphs in a subsection, suggesting that there are those number of requirements, when in fact several requirements are buried in the introductory language. Take a peek at section 71(b) to see that inconsistency.

Of course, when one turns to substance, the Code gets even more convoluted. What is the definition of a small business corporation? Yes, which one? Or the "Notwithstanding provision x, a z is not a z if a w has been held for t years during the time that the z would have been a z but for this rule" grammatically absurd and incomprehensibly dense tweaks grafted onto what might otherwise be a clear and cogent definition. Or perhaps it would be fun to count the many different ways inflation adjustments are computed and rounded?

Some of my professional writing for Tax Management, Inc., involves the exposition and analysis of the tax law as found in the Code (the rest involves regulations, rulings, cases, etc.). Much of the time I take what is in the Code and rewrite it, in English. Apparently there is a market for this translation, a conclusion I base on the number of tax practitioners (and others) who use the portfolios in which I do this. Of course, I am joined by several or more hundred other authors providing the same service.

If the Code were so clear and simple as the People's Tax Lawyer contends, things such as Tax Management portfolios would not be necessary. Now, it could be that all the rest of us are lacking some special skill or insight, but I guarantee you there are times I read a Code provision, especially one recently enacted or amended, scratch my head (maybe that's why I'm losing my hair), read it again, read it to myself out loud, try to rewrite it, and sometimes begin inventing words to describe the poor quality of the provision.

And eventually along come the technical corrections. I wonder why those are necessary, he asks sarcastically.

Sorry, People's Tax Lawyer, on this one I flat out disagree. Even accepting the substantive mess that it has to reflect, the Code is not as well organized or drafted as it could be. After all, I think my translations are far less convoluted. I'll let the practitioners score that assertion.

I begin my Introduction to Federal Taxation Class, after getting through the "housekeeping" details, with an illustration of the federal and state income tax liabilities of someone who earns roughly what a first-year associate at a medium-sized Philadelphia law firm would earn. My goal is to orient students to thinking in terms of post-tax income. Why? Primarily to provide an overview of how income taxes are computed, but also to awaken students to the idea that a person who earns $x a year cannot spend $x a year without going into debt, digging into savings, or hitting up relatives for gifts. It's a reality check. Every year there are audible reactions from some students.

Last week I received an email from a former student whose experience with taxes in a work world setting had a more profound impact than did the classroom example. He wrote, with redactions intended to shield his identity:

The reason I am writing is that I now more than ever feel the need for the tax code and current tax structure to be overhauled. As you may recall, I am receiving a fellowship for my work this summer from PIFP. Fellows receive a $4500 total fellowship, but the actual pay is so far removed from this figure. There are six gross payment of 750 each that are disbursed to students over the summer. I was shocked to discover that my last net pay was a mere $580, after two FICA taxes, federal withholding tax, [state Q] state tax, AND a $52 Radnor EMS tax (even though I am not working in Radnor, but in [city D in State R], leaving a meager $580. Is it just me or is there something wrong with the system? Just wanted to send my thoughts to you

Let's take this apart.

1. If all he earns for the year is the $4500, he will have no federal income tax liability. Someone appears to be withholding at a rate based on a $27,000 annual salary. It often happens with summer jobs, and can be prevented by indicating no withholding on the W-4 form. Most people miss that option.

2. As a resident of State Q, he is subject to withholding of state Q income tax. As best as I understand that state's income tax, he will have liability even if he earns only $4500 for the year. I don't think there is a "do not withhold it's only a summer job" option for that state.

3. The two FICA taxes are social security and medicare. Unless the wages are exempt, and in this instance they are not, it's bye-bye to 7.65% of the $4500. In a follow-up email, he indicated that if he dies before working 40 qualifying quarters, the money is gone. I think that is correct. That's simply another aspect of the pyramid scheme of the current FICA system.

4. Why is a Radnor tax withheld when he is a resident of another state and working in yet another one? The answer is that because Villanova is writing the fellowship checks for the work done in the other state, the Radnor tax must be withheld. That's a flaw in the ordinance. The EMS (emergency and municipal services) tax ought not apply to someone who is imposing NO burden on the Radnor emergency or municipal services systems.

5. These arre four different taxes, enacted by three different jurisdictions. Changing the Internal Revenue Code would have no effect on the Radnor EMS tax glitch. Nor would it affect the state Q income tax. Reforming the federal income tax would not fix the FICA problem. In fact, of all the problems, the one that is most transitory and easily handled is the federal income tax W-4 withholding option. I suppose somewhere, somehow I didn't even try to get that point across in class (mostly because it is a small bit on a huge structure to which only 42 50-minute sessions are devoted).

So if a law student who takes a federal income tax course has this sort of taxing experience, what's it like for everyone else? Surely not fun. Perhaps unpleasant.

The story begins when the IRS decides to write a history of its criminal enforcement activities. Presumably it was an anniversary project, as it is called "75 Years of IRS Criminal Investigation History" and covers IRS criminal enforcement from 1919 through 1994. Part of it is a republication of a 1936 summary coveringa mere 17 years of enforcement efforts.

It describes individual cases involving celebrities, public figures, politicians gone bad, organized crime syndicate members, and others. Some of the stories are familiar: Al Capone, George Raft, Teapot Dome, Bobby Baker, and hundreds more. There are names, dates, dollar amounts, and enough material to write several movie scripts, or more.

The story gets even more interesting when the IRS, after sending copies of the book to federal depositary libraries (such as the one at Villanova), determined that it ought not to have done so because of personal tax information in the book. It asked the libraries to return the book. Hah, hah. A Freedom of Information Act request to the IRS for the book brings a heavily redacted document. The horses are out of the barn and the IRS has shut the door and stands guard over it.

Steven Aftergood of the Federation of American Scientists' Project on Government Secrecy scanned the book. Michael Ravnitzky, who brought this to my attention, proofread it. You can find it at The Memory Hole web site.

It's well worth the read. I've read parts of it, skimming through and stopping when I saw a recognizable name. I'm sure when I go back and read about the unfamiliar names I'll find more good tales. Anyone teaching or praticing in the criminal tax law area must read this. The rest of us tax folks should. And taxpayers generally might find some interesting beach or mountain lake reading. After all, the American public seems to like reality shows, and what's more real than a tax fraud case? Talk about FEAR FACTOR. OK, if there's not a movie script, surely a Fox reality show. TAX CHEATS. Talk about desperate. Sorry, it's late.

Warren Rojas of Tax Notes, made this connection between my recent posts (here and here) on the word for the streamlined process for authenticating documents internationally and the sentencing of a Hull, Massachusetts, man for bank fraud. The fellow generated false tax and income statements in his wife's name and used those documents to obtain loans. Here's the clincher:

EDELKIND, who filed for bankruptcy in October 1999, used his wife's name on all of the loans. EDELKIND prepared loan applications in his wife's name, listing fictitious employment and income information, backed up by forged tax and payroll records. EDELKIND fabricated a variety of documents, including forged "W-2" Wage and Tax Statements and tax returns. As the loans got larger, the amount of income claimed grew as well. Early in the scheme EDELKIND submitted records showing that his wife had an annual income of roughly $200,000 -- by the end he claimed she earned $1.1 million as Chief Operating Officer of a company called Apostille, Inc.

So even the con artist (who gave an address for Apostille, Inc. that postal authorities said would be in the Atlantic Ocean) knew about this word and I didn't. Proof I don't know everything.

And he used tax forms to do his deeds, too. I knew there was a connection.

Andrew Mitchel is at it again. I pointed out in this post of two weeks ago that he had put together a collection of charts depicting a variety of corporate tax cases and the reorganization provisions. Now he has added a group of section 367 charts to his Andrew Mitchel LLC - International Tax Services web site. Defintely worth a look by those studying, teaching, or using these provisions.