MauledAgain

My post about the windfall to the Treasury from excess employer FICA payments brought a variety of interesting responses and comments.

CPA Elaine Soost wrote:

As usual you hit upon a “real life” issue that is generally overlooked, both from the perspective of the employer and the employee (for whom it is a time value of money issue for having taxes withheld that shouldn't be). However, it is not just applicable to Federal social security taxes. In some cases it happens with state taxes as well, CA in particular.

She also pointed out that when an employer merges with another company, the acquiring company ends up as a "new" employer, and thus wages earned from the acquired employer earlier in the year aren't aggregated with the earnings from the acquiring corporation for purposes of the $94,200 limitation. Additionally, the California state disability insurance premium charged against employees, which is subject to an annual limitation, ends up being treated in the same manner. The process of getting a refund of over-withheld state disability insurance premiums when there has been a merger of employers, at least in California, is cumbersome at best. Supposedly the employees are to seek refunds from the most recent employer, who in turn is supposed to seek a refund from the state. Does anyone involved in writing these laws and setting up the procedures go through a complete "if this then that else something else" analysis that covers all the possibilities? Do they understand the realities of the workplace and the burdens put on employees?

Elaine also asked if there are statistics indicating how many taxpayers file for over-withheld OASDI payments, how much excess OASDI is paid by small business employers in contrast to larger ones, and whether the disproportionality is higher in states where wages are generally higher, such as California, New York, and Hawaii. A quick bit of research turned up some interesting information. According to these summaries, in 1985 there were 870,892 income tax returns on which a total of $600,136,000 in excess social security payments were claimed. In 1990 the numbers had risen to 931,283 returns and $905,327,000 of excess payments. And in 1995, the numbers grew to 1,033,189 returns and $1,081,454,000 in excess payments. Theoretically at least, and surely as a practical matter, for every dollar of FICA over-withheld from an employee there is a dollar of excess FICA paid by an employer. We're talking more than a million taxpayers, and perhaps more considering that many of these returns are joint returns involving two taxpayers with excess social security payments. More important, we're talking in excess of a BILLION dollars.

I could not find anything, at least not on a quick search, breaking things down by size of employer or by state of residence. The latter information might exist in a detailed appendix to an IRS Statistics of Income report. I haven't invested the time seeing if it exists. I have my doubts if there is anything providing a breakout by employer size.

Someone else pointed out that in some states, state employees are not within the social security system but instead pay into a state retirement system. A state employee who has other wage or self-employment income is required to pay FICA or SECA even if their state earnings exceed the $94,200 OASDI limitation. To me, this is an apples and oranges situation. Many employees who pay FICA, and many self-employed individuals who pay SECA, also pay into a retirement system. Payments into the retirement system don't, and ought not, absolve the individual from paying into social security. What exists for these state employees is nothing more than an exemption from social security, both from paying into it and from taking benefits out of it. Are they better off? I don't know. Someone paying into both social security and a retirement system may be better off, but perhaps they are not. It depends, as they say, on the numbers. Speculation is that the exemption was designed to benefit the employees of one particular state, a representative from which was at the time a very powerful member of Congress, but because several other states had identical systems, the exemption ended up applying to their employees. That powerful member of Congress, by the way, ended up resigning in disgrace, for other reasons.

During the same day that these comments were arriving, another email arrived from a totally different source, from someone who, to the best of my knowledge, does not read this blog and is not a tax practitioner. It was one of those emails that the recipient is asked to forward to all their email contacts. The point of the email is that "Our Senators and Congresspersons do not pay into Social Security and, of course, they do not collect from it." Congress has their own plan. Here's how it works: "When they retire, they continue to draw the same pay until they die. Except it may increase from time to time for cost of living adjustments. For example, Senator Byrd and Congressman White and their wives may expect to draw $7,800,000.00 (that's Seven Million, Eight-Hundred Thousand Dollars), with their wives drawing $275,000.00 during the last years of their lives. This is calculated on an average life span for each of those two Dignitaries. * * * * Their cost for this excellent plan is$0.00. NADA....ZILCH...." The email proposes this solution: "Jerk the Golden Fleece Retirement Plan from under the Senators and Congressmen. Put them into the Social Security plan with the rest of us. Then sit back..... and see how fast they would fix it." Interesting concept. Merely bringing a few hundred people into the system moves some petty cash around the federal budget. On the other hand, perhaps if members of Congress faced the same prospects as those relying on Social Security, they would fix it. But are not members of Congress also entitled to a retirement plan? After all, many Americans have retirement plans. And many do not. Some state employees have retirement plans, perhaps not as generous as the Congressional plan, and like members of Congress, are not subject to social security. Uniformity would be helpful. What would be more helpful is a thorough overhaul of how America plans for the retirement years of its citizens. Let me correct that. What would be more helpful is a thorough overhaul of how American citizens plan for their retirement years. It's an issue that extends beyond over-withheld employer FICA payments. Perhaps understanding how poorly they dealt with this aspect of social security, or perhaps how intentionally they made it so, might help us understand why the repairs needed to deal with retirement income security are so difficult to identify and make.

It pays to read the TaxProfBlog because sometimes Paul Caron picks up on news stories with a tax angle that I don't otherwise notice. True, he has a highly trained corps of observers "out there" with their eyes wide open for cool tax news. Oh, yes, I'm one of them. This mutual "share the stories that show tax is everywhere and sometimes is bizarre" arrangement works well.

For example, consider this story that could be made into a movie called "The Attack of the Tax Form Clones." Brian and Jackie Lawson made a arithmetic mistake on their 2003 income tax return. Because of the error, they've been paying $300 a month in back taxes. Wanting to fix the problem, they asked the IRS for a copy of the instructions for the 2003 Form 1040.

The IRS responded. With 24,000 copies. UPS delivered 12 boxes, each containing 2,000 copies of the instruction booklet. For 2005 tax returns. In boxes with errors on the mailing label, but UPS figured out that "Chimacum, D.C." was "Chimacum, Wash."

Then the other shoe dropped. The folks at UPS called the Lawsons to tell them that ANOTHER 12 boxes, each with 2,000 booklets, had arrived at a UPS warehouse. For the Lawsons. Who told UPS not to deliver them.

Whoa. Maybe the IRS figured out its mistake and sent the instructions for the 2003 Form 1040?

Brian Lawson has been unable to get the IRS to return his calls. After all, don't they want these booklets returned? That's 48,000 other taxpayers who will either go without or, to be serviced, will require additional federal money to be spent at the print shop. The newspaper that picked up on the story likewise has struck out trying to contact the IRS.

Brian Lawson also contributed two wonderful quotes. The first: "''We're hoping they'll be more understanding of our error since they made this big error." The second: "We should have had someone else do our taxes."

Now before we jump all over the IRS for this goof, remember, perhaps it isn't as it appears. Perhaps the IRS sent one booklet, and somehow, in transit, it cloned itself. A bunch of times. Perhaps the IRS shipment met up with something being sent by one of those super-secret Area pick-your-number hidden-alien-spaceship Defense Department project offices?

Seriously, I'm sure someone clicked on something in a software program that ought not have been clicked. But considering that the person did not understand the difference between "Wash." and "D.C." (and that only "Washington" precedes "D.C."), it might be something even more goofy. Perhaps something caused the computer to enter a loop that cycled 48,000 times before self-terminating.

Or, perhaps it's still cranking out orders, and by the time you read this the Lawsons will have received a few more calls from UPS about additional packages having arrived at a warehouse addressed to them. In the meantime, the folks over at the fulfillment center in the IRS forms and instructions shipping center must be going batty. "Who are these Lawson people?" "Oh, some tax practitioners with a whole bunch of clients."

Here's my suggestion to the Lawsons: Donate these booklets to local area senior high schools. One for each student. That's 48,000 soon-to-be-eligible-to-vote citizens getting a first-hand look at the niceties of the tax law, Form 1040 style. The teachers will appreciate not having to create a civics project for the year. And who knows? Maybe one or two of the 48,000 students will decide to become a tax practitioner. This is how a mistake can be turned into a good deed.

The debate over the wisdom of making the 2001 and 2003 tax changes permanent is edging closer to center stage. A Heritage Foundation report argues the case for the proposition, claiming that failure to make the cuts permanent would cause "millions of working families ... see their economic prospects dim, their job opportunities diminish, and economic uncertainty rise." Hmmm. Considering the state of the economy, one wonders if permanency had already been enacted. Of course, nothing is said about the misery waiting to befall the non-working investor class if capital gains and dividends were taxes as are other types of income. And nothing is said about extending the rates for another year or two, rather than making them permanent. What fascinates me is the illusion of permanence. No matter what this Congress does, a subsequent Congress can repeal the so-called permanent changes. Nothing in the tax law is permanent. The Treasury and the White House are indicating that making these changes "permanent" is their top legislative priority, but some members of Congress are questioning whether there are sufficient votes in the Senate to make it happen.

In the meantime, according to this report, the President has rejected the Tax Reform Panel's recommendation to tax a portion of employer-provided health benefits. It won't be long, I predict, until the President rejects the proposed cap on mortgage interest deductions, as his finger in the tax wind tells him it won't help his party in the 2006 mid-term elections. What will remain? The proposal to eliminate taxes on capital gains, interest, and most dividends. In other words, if some people had their way, the nation will have a federal wage tax rather than a federal income tax. Something like the woefully embarrassing wage tax levied by local municipalities and school boards in Pennsylvania. In other words, a disgrace. I do hope I am very, very wrong. About the prospects for a federal wage tax.

Almost a year ago, I explained the conundrum in which many law students find themselves come April 15. Classified as independent contractors by their payors, when almost always they truly are employees, the students get whipsawed by the consequences of the misclassification. At the end of December, according to this report, a judge ordered FedEx to pay more than $5 million in back pay to a group of drivers that the judge "found had been improperly classified as independent contractors." Three thoughts entered my brain when I read this. First, employers who do this sort of misclassification are attempting not only to save taxes but to cut corners in other areas. Second, surely the IRS will be visiting, or has been visiting, the tax returns filed by FedEx. Third, other employers ought to look carefully at the FedEx case and the tax cases before taking the advice they pick up from the internet, at a bar association happy hour, or from a supposedly learned colleague or friend.

Another report explains that Howard Stern received 34.4 million shares of Sirius Satellite Radio stock because of the number of new subscribers his move to that provider had triggered. The shares had doubled in value, to $219 million, from the time they had been issued in October and the time they vested in January. Howard Stern has some interesting tax issues. Because it's unclear whether he received stock, or options, or whether the deal qualified under section 409A, or precisely what was involved in his contract, it's pointless to dig into all the possible variations. Suffice it to say that a quote from one of my colleagues pretty much sums it up: "I wouldn't mind having Howard Stern's tax problems." Maule to Sirius Satellite Radio: Interested in broadcasting an audio version of MauledAgain?

A recent discussion among tax law professors caused me to pay closer attention to something that I knew but had left in the shadows of my tax law thinking. Under current law, employees are subject to a 7.65% FICA tax on their wages. Employers are subject to a FICA 7.65% tax on the wages that they pay. FICA, which is an acronym for Federal Insurance Contributions Act, is commonly called social security, and the tax is generally called the social security tax. Self-employed individuals, who have no employer, are subject to a 15.3% tax, though they are permitted to deduct half of the tax for income tax purposes, because employers are permitted to deduct the FICA tax that they pay. The tax imposed on self-employed individuals is SECA, short for Self Employment Contributions Act, but also gets pulled within the more common phrase "social security tax." The social security tax does not apply to all wages, but that's a different question needing no further elaboration at the moment.

Technically, FICA/SECA consists of two portions. One, OASDI, which is an acronym for old age, survivors, and disability insurance, funds the benefits paid to retirees, disabled employees, and survivors of employees who die during or after employment. The other, HI, short for hospitalization insurance, funds what is commonly called Medicare. Of the 7.65% tax rate, 6.2% is for OASDI and 1.45% is for HI. The OASDI portion of the tax is applied to wages that do not exceed an annual limit, which for 226 is $94,200. The HI portion applies to wages no matter the amount. Thus, in 2006, the most OASDI tax that an employee should pay is $5,840.40.

Because there is a limit on the OASDI portion of the tax, an issue arises when a person has two or more employers during the taxable year. If there is only one employer, that employer can keep track of the individual's wages, and stop withholding the OASDI portion once the wages exceed the limit. But if there are two or more employers, they don't know how much the individual earns from the other employers, and there is no practical way, at present, for the multiple employers to coordinate their withholding. Individuals with multiple employers and sufficient wages may find that they have paid OASDI tax exceeding the limit. Under present law, an individual who pays more than the limit, for example, who has an aggregate of more than $5,840.40 withheld as OASDI taxes by all his or her employers, can claim an income tax credit for the excess. Even though the employers did not know how much OASDI tax was withheld by all of the employers, the employee does, and thus is in a position to compute the excess.

The glitch is on the employer side, there is no mechanism in place to determine that an excess has been paid. Thus, it is possible for an individual's multiple employers to pay, collectively, more than the limit. But there is no procedure for any of the employers to seek a refund. In other words, more OASDI tax is being paid simply because the individual has multiple employers. Incidentally, having multiple employers includes not only the situation in which a person simultaneously holds two or more jobs, but also the situation in which a person changes jobs during the year. The second employer not only withholds OASDI without regard to what the first employer did, but also pays the employer portion of OASDI without regard to the fact that the first employer has paid OASDI and perhaps has paid the full amount for the year.

It's difficult to decide whether this glitch is intentional, considering that it does increase the revenue, or simply the result of Congressional oversight. Yet it's not that Congress is unaware that people hold multiple jobs or change jobs. The existence of the mechanism to refund excess employee OASDI establishes that knowledge.

But why are employers denied the opportunity to obtain a refund for the excess employer OASDI? Perhaps, years ago, the logistics were insurmountable. However, today, with digital technology and comprehensive reporting of wage amounts to the IRS and the Social Security Administration, it would not require hundreds of accounting clerks to do the computation. Once the year has closed, and the IRS and SSA have received the wage data for an individual, the determination that the person has earned more than the limit permits a determination of how much excess employer OASDI has been paid. That excess could be refunded, or credited, to the employers in proportion to the amount of OASDI that they paid.

From a policy perspective, so long as the OASDI limit exists, and so long as employees move from job to job, the same notion of portability that is so prominent in compensation taxation considerations should similarly apply to this issue. The portability concept is that employees and employers should not be disadvantaged, in terms of the tax and other consequences of retirement savings, simply because employees change jobs. The same concept should apply to OASDI.

Of course, some argue that the limit on OASDI should be repealed. There are some strong points raised in those arguments. After all, if social security payments continue to be paid without application of a means test, so too OASDI should be imposed without regard to an income limitation. It might cause multimillionaires to pay in as much as they get in return, or more, but until the I in FICA is applied to a full-scale reform of the social security system, eliminating the cap on OASDI is not a silly idea worthy of instant dismissal. That, however, is a different question.

The more immediate question is why employers continue to be saddled with a collective employer OASDI tax higher than the limit. Considering the changes in American workplace practices in the many decades since social security was enacted, the assumptions underlying the present law, that people remain with the same employer for a lifetime and that people have one employer, should be disregarded. That would open the door to sensible reform.

Will it happen? I doubt it. Where are the tax cut advocates on this issue? Perhaps it's not as important to lighten an unjustifiable tax load on small employers as it is to make the inadequate rates on capital gains and dividends permanent. Who, I ask, really is your friend in Washington?

It's not the mouse that will not die. It's the casualty loss deduction real life hypothetical that keeps oscillating between two universes. If this continues, the mouse ablaze tale will end up with more episodes than Star Wars.

Thanks again to Mark Morin, who passed along an Associated press update on the now legend of the Fiery Mouse.

Apparently, the man whose house burned down in New Mexico last Saturday has once again changed his story back to the version that puts the blame, at least in part, on the mouse. But this time there are more details. And this time it is the man and his nephew who have clarified what happened. The homeowner, who admits to having "an awful hate" for mice, explained that a mouse got stuck to one of the glue traps he had set. The mouse, though trapped, was still moving. The homeowner tried to pull the mouse off the trap, but the glue was too strong. So that's why he tossed the mouse, still attached to the trap, into the burning leaf pile. Now, he claims, the mouse fully ablaze, scrambled back into the house through a window. Ninety seconds later, the house was burning.

When asked how a mouse glued to a trap could manage to get back into the house, the homeowner stated that the fire melted the glue. But apparently, I guess, not the mouse. Sounds a bit far-fetched.

But the local fire chief says he thinks it's possible. He says there's no reason for the homeowner to lie, and he has no doubts about the story. The fire chief says that the most recent reported story is the story given by the homeowner to the firefighters when they first arrived at the scene. The homeowner's nephew also claims that his uncle has shared the same story "many times."

It is sad. According to the nephew, all the family photos were lost. All the homeowner's papers are gone. The nephew conceded that his uncle, a World War II vet who has "been through a lot," might be "a little confused."

The fire chief noted that no further investigations are planned, and that the department's official report will include a statement that the burning mouse ran back into the house.

Now, who wants to volunteer to help this fellow with his tax return? Just don't grill the guy during the intake interview.

One of the challenges in teaching law school is to find the appropriate balance between a focus on theory, philosophy, and principles and a focus on practical application and practice world reality. Going too far in one direction produces graduates who enter practice in need of intense mentoring, something far less feasible than it once was because of the "bottom line" pressures in the legal profession, whereas going too far in the other direction brings the "don't be [we're not] a trade school" admonition.

But no such challenge exists on this blog. If something has philosophical or theoretical value, and I'm interested in commenting on it, I do so. Likewise, if something has practical value, and I think it deserves attention, it will get it. The nice thing about blogs is that the artificial, but pragmatically inescapable limitation of 50 minutes at a time, 42 sessions a semester doesn't exist.

So today I want to share a posting made to several tax related listservs by Jim Counts CPA CTFA (james.counts.cpa@earthlink.net), who shared some very practical advice about mailing important documents, such as Tax Court petitions. What he says is relevant to just about any sort of legal filing, tax or otherwise. As long as I've been around, I've not encountered as useful and important an explanation about the difference between certified and registered mail as the one Jim offers. So, with his permission, I share it:

On one of my other listserves I just posted the following. Generally I get asked this a couple of times a year. So I thought I would post it here for those that might be interested.

Those that like Certified say in Tax Court etc it works just as well as Registered. In their mind they just want to prove they mailed the item. For me I do not want to have to spend time in Tax Court or dealing with the IRS to prove that the item was mailed on or by a certain day. I want it to actually get there. So I like registered.

In certified once the PO Clerk accepts the item they put it with all the other mail. When it gets to where it is going if that clerk sees the return receipt then they will get it signed. For registered that PO Clerk will LOG IN THE ITEM and everyone that has control over that item WILL SIGN FOR THAT ITEM until it is given to the one it is addressed to.

So in my opinion if someone signs for something and knows that later if they lose it someone will eventually come asking what did they do with it then I think they are less likely to lose that item and are likely to get the next person to sign saying they received it. I think that means it is less likely to get lost than a certified item. So I think I have just increased my odds that the item will actually make it to where it is addressed. So given that it is less likely that I will have to prove in Tax Court or with the IRS that my item was mailed on or by a certain date. Now I have just saved myself some time.

In the past prior to doing registered I had to spend some time on proving certified mailings. I have as of now I have not had to prove a registered mailing. Would I have to if I had sent all of that stuff certified? Do not know but I think I would have had a few over the years.

So the cost is only about $1.75 (not sure now new rates) more. If I did the mailing taxes saved half of that so I made an investment of the balance that I would not have to prove something mailed. If clients mailed an item and did not follow my recommendation of doing registered and now we need to prove a mailing then I charge them for the time.

Some different rules apply for registered mailings. No windows on the envelope. No tape on the item unless it is paper tape. No labels on the envelope. This is one of the reasons I still have a typewriter. My typewriter has memory for addresses so I can tell it to type my address in the return area. Also for IRS and FTB I have it memorized for mailing of returns.

So that is why registered and not certified.

What particularly impresses me is how Jim takes a long-term view of the problem when making his analysis. Weighing the additional cost of registered mail against the aggravation of proving that a certified item was sent, he considers the value to the client of having things go as smoothly as possible.

In Jim's analysis, concern for the client takes its rightful place. That is a principle I stress in my teaching. I am preparing law students to become professionals who serve their clients and their clients' best interests. In some respects, my focus is on the future clients of my students and not on my students in an isolated educational environment. I'm not alone in this approach. Far from it. But I'm probably far more vocal about it than students expect, something I've concluded after being told by students that they rarely hear the word "client" in most of their classes. That's too bad. Clients are real. Clients bring problems that make the law real. Clients need help that makes it essential that practice reality inform the law school experience. But I've not taken class time to deal with how documents should be mailed. I do discuss why lawyers ought not wait until the 89th day to get a Tax Court petition (due on the 90th day) written and sent. Why the difference? I've assumed, perhaps erroneously, that when students get to their first job, someone will teach them or tell them or show them how it's done. Someone like a paralegal or legal secretary, who provide the glue that keeps the law practice world from falling apart over seemingly mundane things.

But now, all I need to do is to point them to this blog. I can get the message to them without investing class time, and without having to argue about whether dealing with such issues in a classroom brings a "trade school" taint to the tax course.

Note: For what it's worth, I don't require students to fill out tax forms, nor do I fill out forms in class, even though some students complain on student evaluations that my courses are way too theoretical because I don't have them doing tax forms. My courses? Too theoretical? Next thing you know they'll be claiming I'm taciturn and reserved.

At first it appeared that a flaming mouse, trying to escape from being tossed onto a pile of burning leaves, ran back all afire into the house where it had been caught, triggering a fire that caused it to burn down. What a great story to use as the framework for discussing casualty loss deductions and public policy.

Then came news that the mouse was dead when cast into the flames, and wind carried sparks into the house. The casualty loss deduction issues remain, but the story just isn't as interesting or attention-getting.

To the rescue comes Mark Cochran, who teaches tax at St. Mary's University School of Law. He reminds us of a famous torts case, United Novelty Co. v. Daniels, 42 So. 2d 395 (Miss. 1949). Quoting the facts as summarized by the Supreme Court of Mississippi:

Appellees include the members of the family of William Daniels, a minor aged nineteen years, who was fatally burned while cleaning coin-operated machines as an employee of appellant.

The work was being performed in a room eight by ten feet in area, in which there was a gas heater then lighted with an open flame. The cleaning was being done with gasolene. The testimony yields the unique circumstance that the immediate activating cause of a resultant explosion was the escape of a rat from the machine, and its disappointing attempt to seek sanctuary beneath the heater whereat it overexposed itself and its impregnated coat, and returned in haste and flames to its original hideout. Even though such be a fact, it is not a controlling fact, and serves chiefly to ratify the conclusion that the room was permeated with gasolene vapors. Negligence would be predicated of the juxtaposition of the gasolene and the open flame. Under similar circumstances, the particular detonating agency, whether, as here, an animate version of the classic lighted squib, or as in Johnson v. Kosmos Portland Cement Co., 6 Cir., 64 F.2d 193, a bolt of lightning, was incidental except as illustrating the range of foreseeability.

And so into the law, more than a half century ago, entered the flaming rat. Yes, though the court was addressing a torts issue, casualty loss deduction issues lurk under the surface, assuming, of course, that there was no or inadequate insurance coverage for the damage.

These "animal afire" stories reach back centuries. Consider the fifteenth chapter of Judges, verses 4-6:

And Samson went and caught three hundred foxes, and took firebrands, and turned tail to tail, and put a firebrand in the midst between every two tails. And when he had set the brands on fire, he let them go into the standing grain of the Philistines, and burnt up both the shocks and the standing grain, and also the oliveyards. Then the Philistines said, Who hath done this? And they said, Samson, the son-in-law of the Timnite, because he hath taken his wife, and given her to his companion. And the Philistines came up, and burnt her and her father with fire.

Someday, when I have time (ha ha), I might sit down and see how many Bible stories can generate tax issues. For the moment, though, I'm content with warning folks not to let their pets play with matches.

Yesterday, I analyzed the tax issues arising from the survival attempts of a mouse tossed into a pile of burning leaves. Fleeing the flames, the mouse ran back into the house in which the owner had caught it, and somehow set the place ablaze, destroying the residence and all its contents. But now the extinguisher of exaggeration has come to smother the fun.

Drat. It was such a great story. But it turns out that the house fire in New Mexico was NOT caused by a fleeing, flaming mouse. According to a WSB television report, the mouse was killed before it was tossed into the burning leaf pile. The fire apparently was caused by high winds spreading the embers. WSB has initially reported the story along with many other news services, and initiated further investigations after the news had spread world-wide. I guess people were questioning what they thought was an account just a wee bit on the other side of totally bizarre.

According to the most recent report, the homeowner has no insurance. So, despite throwing cold water on the supposed antics of an allegedly blazing mouse, the story keeps the flame of the hypothetical alive. How? The issue of gross negligence remains, continuing to present the question of whether leaf burning at the time violated any local laws, and adding the question of whether it is grossly negligent to burn leaves close enough to a home such that winds could carry burning embers into the structure. The area has been afflicted with unseasonably dry and windy conditions for at least several weeks. We still don't know if a casualty loss deduction is allowable.

So where did the tale of the flaming mouse come from? The local fire department captain explained that the rumor "probably got started because there was 'a little too much excitement' at the time of the fire." A little too much excitement? Sounds like tax class to me, even if the students aren't all fired up.

I feel bad for Paul Caron. Yesterday, in a post nicely titled, "Of Mice and Casualty Loss Deductions," he picked up on my analysis of the story. He stated, "Jim Maule has enlivened my income tax class for years to come by posting a wonderful Associated Press story that ran in newspapers across the country today, Blazing Mouse Torches House." Now, I guess he's back to a less-enlivened pedagogical prospect. OK, I'll keep my eye out for a similarly discussion sparking news item.

And thanks to Mark Morin for the tip.

Classes begin today. I should be fired up. But I have good reason to hesitate, when it comes to fire.

First, the background. The Internal Revenue Code permits a deduction for casualty losses, in excess of certain limits, that are caused by fire, storm, shipwreck, or other casualty. Section 165(a) and (c)(3), to be more precise. Generally, despite the tax law being replete with cases dealing with whether something, such as termite damage or massive Southern pine beetle attacks, constitutes a casualty, fire pretty much is self-defined.

But there is another limitation. It arises from the public policy doctrine, which has been applied by courts to limit all sorts of deductions, not just casualty losses. A fascinating case that nicely explains the law, and life, not only to the taxpayer but to students of tax (and not just those enrolled in a tax course), is Blackman v. Commissioner, 88 T.C. 677 (1987). I cannot do justice to the facts through paraphrase, and because they are set forth by the court in three paragraphs, here they are:

The petitioner's employer transferred him from Baltimore, Maryland, to South Carolina. The petitioner relocated his wife and children to South Carolina. Mrs. Blackman was dissatisfied with South Carolina and returned, with the couple's five children, to Baltimore. During the 1980 Labor Day weekend, the petitioner returned to Baltimore, hoping to persuade his wife to give South Carolina another chance. When he arrived at his Baltimore home, he discovered that another man was living there with his wife. The neighbors told the petitioner that such man had been there on other occasions when the petitioner had been out of town on business.

On September 1, 1980, the petitioner returned to his former home to speak to his wife. However, Mrs. Blackman was having a party; her guests refused to leave despite the petitioner's request that they do so. He returned to the house several times, repeating his request, and emphasizing it by breaking windows. Mrs. Blackman's guests did not leave the house until about 3 a.m., September 2, 1980.

Later, on September 2, 1980, the petitioner again went to his former home. He wanted to ask his wife whether she wanted a divorce. They quarreled, and Mrs. Blackman left the house. After she left, the petitioner gathered some of Mrs. Blackman's clothes, put them on the stove, and set them on fire. The petitioner claims that he then "took pots of water to dowse the fire, put the fire totally out" and left the house. The fire spread, and the fire department was called. When the firefighters arrived, they found some of the clothing still on the stove. The house and its contents were destroyed.

Mr. Blackman was arrested, charged with arson, and sentenced to probation without verdict. The homeowners insurance company refused to pay. And, Mr. Blackman claimed a casualty loss deduction on his tax return. The relevant portions of the court's opinion are worth reading:

* * * * *the Commissioner argues that the petitioner intentionally set the fire which destroyed his home in violation of Maryland's public policy, that allowing the deduction would frustrate that public policy, and that, therefore, under the doctrine of Commissioner v. Heininger, 320 U.S. 467 (1943), and subsequent cases, the petitioner is not entitled to a deduction for the damage caused by his fire. * * * * *

Moreover, it is well settled that the negligence of the taxpayer is not a bar to the allowance of the casualty loss deduction. * * * * * On the other hand, gross negligence on the part of the taxpayer will bar a casualty loss deduction. * * * * * "Needless to say, the taxpayer may not knowingly or willfully sit back and allow himself to be damaged in his property or willfully damage the property himself."

In our judgment, the petitioner's conduct was grossly negligent, or worse. He admitted that he started the fire. He claims that he attempted to extinguish it by putting water on it. Yet, the firemen found clothing still on the stove, and there is no evidence to corroborate the petitioner's claim that he attempted to dowse the flame. The fact is that the fire spread to the entire house, and we have only vague and not very persuasive evidence concerning the petitioner's attempt to extinguish the fire. Once a person starts a fire, he has an obligation to make extraordinary efforts to be sure that the fire is safely extinguished. This petitioner has failed to demonstrate that he made such extraordinary efforts. The house fire was a foreseeable consequence of the setting of the clothes fire, and a consequence made more likely if the petitioner failed to take adequate precautions to prevent it. We hold that the petitioner's conduct was grossly negligent and that his grossly negligent conduct bars him from deducting the loss claimed by him under section 165(a) and (c)(3).

In addition, allowing the petitioner a deduction would severely and immediately frustrate the articulated public policy of Maryland against arson and burning. Maryland's policy is clearly expressed. Article 27, section 11, of the Maryland Annotated Code (Repl. vol. 1982), makes it a felony to burn a residence while perpetrating a crime. * * * * * We are mindful, also, that Maryland has an articulated public policy against domestic violence. We refuse to encourage couples to settle their disputes with fire. We hold that allowing a loss deduction, in this factual setting, would severely and immediately frustrate the articulated public policies of Maryland against arson and burning, and against domestic violence.

So now, having been brought up to speed to the point where a student in a tax course should be when entering the classroom on the day casualty loss deductions are discussed, everyone is ready for the professor's hypothetical. Except it is not a hypothetical. It is a story reported in this morning's Philadelphia Inquirer (free subscription site). The headline is almost priceless: "Blazing Mouse Torches House." When I saw this, I wondered, "What is a blazing mouse?" The story answered the question:

A man in Fort Sumner, New Mexico, caught a mouse inside his house. To dispose of it, he threw it on a pile of leaves that he was burning outside the house. The mouse, on fire, escaped from its hellish environment and ran back into the man's house. And somehow set it on fire. The firefighters, who claimed this was a first for them, determined that the mouse had run to a point underneath a window. Though the story doesn't explain what happened, I'm guessing that there were curtains on the window. The house, and everything in it, was destroyed.

Can this man claim a casualty loss deduction?

More facts are needed. When I point that out to students, they often groan. More facts? Yes. If, for example, the man has homeowners insurance and it fully covers the loss, then there is no casualty loss deduction, because there is no loss. Nothing in the story tells us if there is insurance. Of course, to get an education from this "hypothetical" we need to assume that there is no insurance.

Where does that take us?

Was the man grossly negligent? Was the house fire a "foreseeable consequence" of tossing of a captured mouse into a pile of burning leaves? Would it matter if outdoor leaf burning was illegal? Ah, this question means that there is more information that is required. Some towns have permanent bans on outdoor leaf burning, and others impose temporary bans during droughts or periods of high fire risk. Considering the number of wildfires that pop up in New Mexico, this is more than a theoretical possibility. Is it against public policy to throw living mice into burning leaf policies? Did the man have a chance to extinguish the fire at the window? Did he try? Oh, if it matters, the man was 81 years of age. Maybe that matters. Maybe not.

I'm not going to determine if a casualty loss deduction would be permitted. I don't know. I don't have the necessary facts. Nor do I want to devalue this story's utility as a future examination or semester exercise question.

So this morning, as I head off to class, I'm going to be careful about getting the students fired up about their new courses. They may have a burning interest in the subject matter, but I'd rather they not flame me.

OK, that's enough. I'm running the risk of extinguishing my readership.

One of my colleagues, Steve Chanenson, passed along a link to a story about prisoners and tax fraud. Steve, who teaches, among other courses, corporate and white collar crime and the sentencing workshop, is a member of the Pennsylvania Commission on Sentencing, an editor of the Federal Sentencing Reporter, and involved in other activities related to improvement of the criminal justice system. So Steve's much more tuned in than I am to some of the things going on behind prison walls, and I thank him for pointing me in the direction of this article.

What some prisoners have been doing is easily described, and it doesn't take an LL.M. in Taxation to understand how it works or why it's bad. A prisoner with access to the Internet or a prison library prints out or makes copies of IRS forms. The prisoner, or others in the scheme, prepare fraudulent documents showing fictitious withheld taxes on fictitious income. Using these forms, the prisoners then file tax returns seeking refunds of the supposedly overpaid taxes. That's the basic pattern, though there are many variations. It is not my intent to provide a guidebook on how to imitate these practices, so I'm not going into the details. In most instances, there are confederates on the outside who do the mailing and receive the refund checks, usually taking a percentage of the check as a fee for mailing the forms and cashing the checks.

The blueprint for the scheme passes from prisoner to prisoner, and from prison to prison. It has been described as a "huge" prison enterprise. How they have time for this is something I don't understand. I do understand it's not economically efficient to have prisoners making license plates, but wide open access to the internet, photocopy machines, printers, libraries, and outside contacts seems more the stuff of a resort than of a prison, whether the focus is punitive or remedial.

It's not that the IRS doesn't detect at least some of these fraudulent filings. In 2005, the IRS flagged 18,000 prisoners who filed false refund claims amounting to $68 million. According to Congressional testimony by Nancy Jardini, who heads the IRS criminal investigation unit, tax fraud by prisoners has grown by 700 percent in three years. [I digress: Nancy is a graduate of Villanova's Law School, who cut her tax teeth in my basic tax course. When I explain to my students that there's no way of knowing when they'll come to appreciate having been introduced to tax law even though they plan a career in a very different area, I describe Nancy's journey from law school, through a few years as a criminal defense attorney, additional years as a federal prosecutor, and an appointment as Chief of Criminal Investigation for the IRS. I warn students that the tax world never misses a chance to pull a good attorney into its realm. We here at Villanova are proud of Nancy's accomplishments, including the fact that she is the first woman appointed to head IRS Criminal Investigation in its 85-year history.]

But even though the fraudulent filings are flooding the IRS, and even though the IRS detects a significant number of them, few inmates are prosecuted. Insufficient resources push these cases onto the back burner, and prisoners know it. During a two year period, only one prisoner in Arizona was prosecuted, despite the fact that inmates in that state generated about half of the false returns filed in Arizona, and that most likely happened because the prisoner in question managed to file false returns claiming more than $200,000 in false refunds. The prize goes to an anonymous inmate who also testified in front of a Congressional subcommittee. He filed 700 returns claiming $3.5 million in fraudulent refunds.

In addition to insufficient resources to prosecute these crimes, the IRS and prison officials are hampered by privacy laws that prohibit the IRS from disclosing taxpayer information. Thus, after prison officials alert the IRS to their discovery of a fraudulent return operation in their prisons, turning over seized items such as lists of social security numbers, the IRS cannot coordinate efforts with those officials or even tell those officials if their tips led to a successful outcome.

Finally, a practical concern encourages prosecutors to let the matter slide. The people filing the false returns are already imprisoned, if successfully prosecuted they'll get no more than two dozen months added to their term, many of the witnesses lack credibility, and it's difficult to figure out which prisoners are active members of the plot and which ones are innocent identify theft victims.

The IRS and prison officials cannot fix this problem without help from Congress. The IRS cannot unilaterally ignore privacy laws enacted by the Congress and having the effect of shielding prisoners from prosecution. The IRS cannot print money to fund the additional staffing and support personnel required to save taxpayers the tens of millions, or hundreds of millions, of dollars ending up in prisons where it can be used to finance trade in illegal drugs, other contraband, and illicit activities. Congress has held hearings on the matter. The IRS has proposed changes to the language of privacy statutes that would permit cooperation with prison officials. It remains to be seen if Congress can muster up the courage to invest $10 or $20 million to prevent the payment to prisoners of five or ten times that amount in falsely claimed refunds. I am sure Nancy Jardini and her charges would make good use of those funds to patch up an embarrassing glitch in the federal income tax collection and refund procedure. For a Congress in need of some New Year's Resolutions, I suggest putting this on the list.

Yesterday, Paul Caron published the Top Ten tax stories of 2005 on TaxProf Blog. Actually, it was a top ten and ten runners-up. As challenging as it was to select ten, especially because I sent him so many nominees, it would be even more challenging to publish the Predicted Top Ten Tax Stories of 2006. Although I won't try to do that, I will offer several can't-miss predictions. One is like the free spot in bingo, namely, Congress will let 2006 go by without enacting any sort of meaningful tax reform. Another prediction is that we will hear confirmation that the legislative process, including the process that brings us tax law, is not only inefficient but also corrupt. OK, so that's not a risky prediction either.

Yesterday, lobbyist Jack Abramoff pleaded guilty to a variety of charges. Not only was conspiracy and fraud on the list, he went for the trifecta with tax evasion. Why is it that criminals never learn to stay clean with the tax returns? Perhaps because the attitude that they should be unfettered by civilized rules pervades their life, making the filing of a proper tax return a compulsive impossibility. So does a lobbyist without due regard for the tax law, evidenced by tax evasion, work the halls of Congress in ways that respect the integrity of legislative development? I doubt it. It remains to be seen whether, and to what extent, the corruption affected decisions on tax law changes. According to the linkedCNN report, among Abramoff's longtime associates is Grover Norquist, director of Americans for Tax Reform. It's not my sort of tax reform. Masked behind the calls for lower tax rates are proposals whose impact would make tax law worse. For example, the so-called "National Taxpayer Protection Pledge" includes a promise to "oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates." In other words, the organization refuses to support removing from the tax law badly designed and poorly implemented deductions and credits unless the inappropriate tax savings produced by those deductions and credits is preserved. Norquist's organization supported H.R. 2895, which would extend the multi-layered, unduly complex, policy questionable section 168(k) of the Internal Revenue Code, which added yet more computational nonsense to the depreciation deduction. Even if the goal of encouraging business investment is one that should be addressed through depreciation deductions, it makes no sense to add layers of complexity rather than reform the core provisions of section 168. Just last month, Americans for Tax Reform issued a statement supporting the extension of the special rates for capital gains and selected dividends, one of the most dreadful and complicated elements of the current federal income tax law. Abramoff's guilty plea was accompanied by a promise to come forward with information about his activities. We should watch for future developments very carefully. Why? Consider that CNN was told that "Abramoff may have thousands of e-mails in which he describes influence-peddling and explains what lawmakers were doing in exchange for the money he was putting into their campaign coffers."

Although the specifics of Abramoff's guilty plea, and the information he is expected to provide, may be news, the general tenor of the situation is not. Yesterday, CNN released the results of a poll indicating that roughly half of American adults believe "most members of Congress are corrupt." Wow. Talk about a lack of confidence. People claim I am a cynical critic. Well, perhaps I am, but I am not alone. This is roughly half of the adults in this country thinking that MOST, not some, or a few, but MOST members of Congress are corrupt. CNN notes that the poll "makes it clear that the perception of congressional politicians is largely negative." Maybe the public is too harsh. Maybe my expectations are too high. I doubt it. After all, what am I, or the public, to think when a source close to the Abramoff probe explains that it "involves about two dozen lawmakers and staffers."

Members of Congress, and their staff, are public servants. They have an obligation to serve the public, not themselves. They must be held to the standards applicable to trustees because they are entrusted with the public welfare. In a theological sense, they are stewards, because they must be held to the protection not only of public funds, but the defense of the nation and the guardianship of citizens' rights, including the right to be represented openly and fairly in a democratic process free of the taint of dirty money. Let's not overlook the likelihood that the corruption dollars flowing into private pockets on Capitol Hill, or into campaign funds, were not coming from the poor or the middle class. Those who have been using their wealth improperly, regardless of how they obtained the wealth, have become bolder and more disrespectful of the nation and its citizens as each day passed.

The culture of corruption, of bribery, of putting one's own selfish interests above those of the public one is required to serve will also trigger yet another easy-to-predict Top Ten tax story of 2006. At least one politician, one celebrity, and one lawyer will run afoul of the tax law by failing to file a tax return or by failing to pay income taxes. The year 2005 closed with a case involving an attorney who failed to pay income tax, but escaped being disbarred from practice before the United States District Court because the state law treated failure to pay as insufficient to warrant the disciplinary action that would come from failure to file a return. Nonetheless, the attorney was convicted of a misdemeanor. I tell my students that if they, or a client, are unable to pay income taxes, file the return and ask for a payment arrangement. The IRS and the Department of Justice are not going to pursue criminal charges against someone who acknowledges a tax liability and seeks to pay it, unless the person fraudulently hides his or her assets, fails to disclose the problem, or otherwise acts in a manner inconsistent with a responsible attitude toward the tax debt.

It is a challenge getting across to law students the point that when they enter the profession, and even as law students, they are subject to a higher set of integrity standards than those that apply generally to citizens of the nation. Holding to those standards by being open and honest would do much to curtail the low level of esteem in which attorneys are held. Likewise, members of Congress and state legislatures, many of whom, not surprisingly, are attorneys, would do much to enhance public respect for legislatures if they went about their duties openly and honestly. Getting this point across to politicians is no less frustrating than getting it across to law students. Many hear, but only some listen and abide.

When coupled with the consequences of corporate greed and corruption, accounting misdeeds, lawyer noncompliance, and lobbyist bribery, the exposure of significant legislative malfeasance may trigger more than a momentary backlash. In its wake, I hope, will come a sweeping away of the detritus of special interest legislation, including the tax law provisions that benefit a privileged few at the expense of the unrepresented many. One way or another, though, this mess probably will make for some sort of top ten tax story a year from now.

Officially, tax filing season begins on January 23. That's when the IRS shifts into a higher level of providing taxpayer assistance. For most taxpayers, tax filing cannot begin until after January 31, because Forms W-2 and 1099 need not be sent until that date. For some taxpayers, filing is impossible until much later in the year, because Schedules K-1 from partnerships aren't due until April 15. That design flaw, however, is not the subject of today's post.

This story is all about how a tax law provision can be found in a Defense Department Appropriations bill. Section 5021 of H.R. 2863, which was presented to the President on December 28 for signature, contains the following provision:

SEC. 5021. For purposes of compliance with section 205 of Public Law 109–115, a reduction in taxpayer service shall include, but not be limited to, any reduction in available hours of telephone taxpayer assistance on a daily, weekly and monthly basis below the levels in existence during the month of October 2005.

So what does THIS mean?

Let's go back a few months. When Congress enacted the Transportation-Treasury Appropriations bill, it allotted $11.7 billion to the IRS for fiscal year 2006. This is a $400 million increase over the fiscal year 2005 budget. However, in order to provide more funding for other IRS functions, Congress mandated a DECREASE in the IRS customer service budget of $100 million. This bill directed the IRS to continue improving its telephone hot-line service and to allocate resources necessary to increase the number of phone lines and staff available for the hot-line.

The IRS had announced plans to close 68 of its walk-in assistance centers, intending that its web site and toll-free telephone hot line would provide adequate replacements for the closed locations. By doing this, the IRS would save $50 million. Congress, however, put a stop to these plans, enacting legislation that required the Treasury Department's Inspector General for Tax Administration to study the impact of the proposed closings, with the first report due on April 14, 2006 and the second on October 1, 2006. This legislation prohibited reduction or termination of any taxpayer services by the IRS until 60 days after the reports are submitted, and then only after consultation by the IRS with those affected by any changes.

Faced with this obstacle to dealing with the $100 million cut-back in its customer service budget, the IRS then announced that it would reduce the hours during which its toll-free taxpayer assistance hot-line would operate from 15 hours a day to 12 hours a day. It explained that 93 percent of the calls received by the hot-line come in during the 12 hours from 8 a.m. until 8 p.m. Almost immediately, the president of the National Treasury Employees Union called the planned cutback in telephone assistance "outrageous" and claimed that the reduction would "push" some taxpayers into noncompliance. Another report claims she called it "an outrage." Yet another report claims she called it "an absolute outrage." The NTEU president also characterized the planned cutback as a serious mistake in emphasis and resource allocation by the IRS.

In response, the Congress inserted the quoted language into the Defense Department Appropriations Bill. The purpose was to clarify that the prohibition on cutting back customer service also applies to the toll-free telephone assistance program. An IRS official has stated that the IRS would continue to meet customer demand by providing the same level of service as in previous years, but that it would not hire the 400 seasonal workers it usually hires. This news makes it easier to understand why the NTEU had no loss for words in conveying its anger at the IRS plans.

But let's see if I understand this. The Congress cuts the IRS customer service budget by $100 million. At the same time it tells the IRS not to cut customer service, and when the IRS tries to wiggle around the definition by cutting telephone hot line hours, Congress smacks the IRS wrist. Huh? The ONLY logical message from these actions is that the IRS must find a way to provide the same service for less money. What are the possibilities? Negotiate lower rates for the phone lines from the telephone companies? Hardly. Hire fewer seasonal workers and shift the workload onto existing workers? Perhaps, but then union officials and members will howl. Cut back telephone hours that would have been covered by the seasonal workers? No, that also brought howls from the union, perhaps because it figured that the calls that would have come in during the eliminated hours would come in during the remaining hours, thus increasing the work load for existing workers whose numbers aren't supplemented this year by seasonal hires.

It seems to me that if the Congress has some specific ideas on how to run the IRS and its taxpayer services, it ought to say so. The actions of the Congress remind me of those all-too-familiar folks who are quick to criticize but when pushed for an alternative, stare blankly and mumble, "I don't know." My response is that the admitted lack of knowledge makes the criticism a reflection of nothing more than ignorance.

Did it ever occur to the geniuses who cobbled together this nonsense that the easiest way to reduce the need for customer service by the IRS is to SIMPLIFY THE TAX LAW? Is it remotely possible that nonsense such as the multiple-rate schedule arrangement for umpteen categories of capital gains and certain dividends contributes to taxpayer need for IRS assistance? Or perhaps that the confusing array of mutually inconsistent and definitionally complex provisions encouraging education contribute to taxpayer confusion?

Here's an idea. If Congress doesn't want to spend the money investing in the collection of revenue, then let Congress invest some time. Each member of Congress ought to volunteer to staff the IRS hot-line. The proposed cutbacks, 3 hours a day for the roughly 84 days of the tax filing season, amount to 252 hours. If each member volunteers 5 hours of time, it should provide an average of 10 Senators or Representatives per hour during those 3 hours a day that are so critical. Oh, wait. We want competent advice offered to taxpayers. Scratch that plan.

There's no escaping the fact that it is totally irresponsible of the Congress to demand that the IRS maintain customer service, spend more money on increasing the number of phone lines and staff for its hot line, and yet cut $100 million from the IRS customer service budget. Somewhere, someone is relying on some philosophical theory without having had any experience with practical implementation. So while we wait for reports from the Inspector General for Tax Administration, that cannot hardly be expected to tell us anything we don't already know, the administrators at the IRS must deal with the mess Congress has made. Is it any wonder that so few people care to apply for an IRS administrative position? Is it any wonder that IRS employee morale is something less than wonderful?

New Year. Same old Congress. How happy.

Usually someone remembers my birthday by the time it arrives, although one year everyone conspired to ignore it so that they could engineer a surprise. It worked. And there always are people wishing me Happy New Year, Merry Christmas, Season's Greetings, Happy Father's Day, and Have a Great Thanksgiving. But there's one event for which no one offered any sort of congratulations so I'm going to say it to myself. In public. Here, on this blog.

I will consider today to be the end of the fall semester. I'm not certain when the fall semester ends. Certainly not when classes end, because examinations remain to be taken and graded. Perhaps on the last examination day, even though grades are not due until weeks into the spring semester? For me, because I am finished grading, and immersed in preparation of my spring courses, it suffices to treat today as the end of the fall semester.

So with the fall semester finished, at least as far as I am concerned, that means I have completed twenty-five, yes, 25, years of law school teaching. Or, if it seems more impressive, 50 semesters. I started when Jimmy Carter was serving the last days of his presidential term. I have worked through 191 legislative enactments that amended the Internal Revenue Code. I have taught the basic income tax course, under a variety of names, 28 times. I have taught Partnership Taxation in the Graduate Tax Program 45 times, and in a J.D. Program 12 times. I have taught Introduction to Taxation of Business Entities 13 times. I have taught Decedents' Trusts and Estates 16 times. I have taught some sort of Computers and the Law course 6 times. I have taught a half-dozen other tax courses anywhere from once to 6 times. I have taught Legal Writing and delivered Legal History lectures during law school orientation. The best estimate is that at least 4,000 students have sat in one or more of my courses. It has been a rewarding experience, especially when students who graduated 3, 5, 10 years ago contact me to tell me they finally figured out what it was about, that they've come to appreciate what I was trying to do to their brains, and that it eventually worked.

I'm sure you're wondering, so here's the answer. I had not yet reached the age of 30 when I began teaching law school. That doesn't set me apart, but it's somewhat unusual. I'll continue with my standard, though surprising, reaction of silence when people comment, "Oh, you must have started teaching in your early 20s." Right. The biggest dose of reality is the realization that, with a few exceptions, the law students now in my classes were not alive when I started teaching. That, according to my children (and others), makes me old.

I would be the person most surprised if I teach another 25 years. Theoretically, it could happen. Theoretically, I could be elected President. Theoretically. As a practical matter, since I don't expect to "celebrate" a Gold or Diamond Anniversary of teaching, I figured I'd make the most of this one and pat myself on the back. I'd buy myself a gift but I don't know what to get. :-)

As for professional writing, it is somewhat more likely that I might make it to a Gold Anniversary, depending on which publication counts as the first one. I'll ignore the student writings and start with the 1978 article about the election by nonresident aliens to file joint income tax returns. That puts me at 27 years, with 23 to go. It's possible.

Now let's see if MauledAgain can find its way to a Silver Anniversary of Blogging. Considering how I enjoy writing and talking, it could happen.

Late last evening I learned that MauledAgain has received a DennisKennedy.com 2005 Best of Legal Blogging Award, as the 2005 Best Law Professor Blog. You can read the entire story, but for those impatiently needing to see the specifics, here's the relevant excerpt:

8. Best Law Professor Blog - Jim Maule's Mauled Again

As Professor Maule says, his blog features "more than occasional commentary on tax law, legal education, the First Amendment, religion, and law generally, with sporadic attempts to connect all of this to genealogy, theology, music, model trains, and chocolate chip cookies." His blog also shows that you can write engaging and helpful commentary about the U.S. tax system. Mauled Again is a great read on any topic; I really enjoy the writing. Two other law prof blogs earn an honorable mention from me because I enjoy reading them so much: Paul Caron's TaxProf Blog and Tun Ying's The Yin Blog (among other things, we like some of the same TV shows).

Thanks to Dennis Kennedy and to all the readers and subscribers who make it all worthwhile. To everyone, a happy New Year.

Yes, we're talking way-last-minute here. Unless we're discussing a New Year's gift.

So what DO you get that tax practitioner in your life? Well, if he or she does not have a blog, and has hesitated to enter the tax blogosphere because the technical part is daunting, there is an alternative. [redacted], a former student who graduated ten years ago from Villanova's Graduate Tax Program, has come up with a turnkey solution. The tax practitioner does the writing and [his] solution takes care of the rest of it. Visit him at [redacted], which offers [redacted].

Because I find the technical part so easy, I too often forget how intimidating it is, even to tax folks. And I'm still mulling over the fact that Scott graduated ten years ago. An entire decade? Whew.

And, no, don't ask me how to wrap this sort of gift. I'd probably write a note and then get all sorts of comments about my lack of creativity. :-)

[Note: redactions made 12 Aug 2010 at request of former student]

The Center on Budget and Policy Priorities has issued a report in which it advocates repealing or delaying the scheduled elimination of the itemized deduction phaseout and the personal and dependency deduction phaseout. Although the major point made by the Center, that these eliminations have the effect of cutting the taxes of wealthier taxpayers, the Center's proposal is deficient in five serious respects.

Let's start with a little background.

These two phaseouts were enacted in 1990 as part of a Congressional subterfuge, or deceit, foisted upon the American citizenry. When public officials deceive citizens, problems arise. In this particular instance, Congress wanted to raise taxes without raising tax rates, because it concluded that it could tell Americans that it did not raise taxes by pointing to unchanged tax rates. However, "clever" minds figured out that if deductions, in this case itemized deductions and the deduction for personal and dependency exemptions, were reduced, the effect would be an increase in tax revenues. In other words, Congress "discovered" that it could raise taxes without raising tax rates and thus trumpet a self-serving proclamation that it had not raised taxes. The simple word for this is lying.

The mechanics of these hidden tax increases was not so simple. In fact, it added bucketfuls of complexity to the Code. As a taxpayer's adjusted gross income increases above a specified threshold, an increasing percentage of the particular deduction group is reduced. The word for this nonsense is phaseout. The phaseout of the personal and dependency deduction (called PEP) begins at one set of thresholds, but the phaseout of itemized deductions (called Pease after the foolish member of Congress who let his name be forever attached to this travesty of complexity and deception) begins at another set of thresholds. There are four thresholds for the PEP phaseout, depending on filing status, and there are two thresholds for the Pease phaseout. The mechanics of the phaseout differ. The Pease phaseout, which requires an entire Code section, is based on 3 percent of the amount by which adjusted gross income exceeds the applicable threshold. The PEP phaseout, which somehow fits into a mere Code paragraph is based on 2 percentage points for each whole or multiple $2500 contained within the excess of adjusted gross income over the applicable threshold. No, I'm not making this up. Take a look at section 68 and at section 151(d)(3). The Pease phaseout does not apply to certain "protected" itemized deductions, whereas the PEP phaseout applies to all personal and dependency exemption deductions. The Pease phaseout is cut off once 80 percent of unprotected itemized deductions have been denied to the taxpayer, whereas the PEP phaseout can wipe out all of a taxpayer's personal and dependency deductions.

These phaseouts are excellent examples of how the tax law becomes complex. In this instance, the complexity arises not from the nature of the underlying transaction subjected to taxation but from the unwillingness of members of Congress to be honest with the American citizen. Nor was it accidental complexity. Members of Congress were told that the complexity was required in order to mask the tax increases. Nonetheless, Congress went along with these amendments because their political aspirations were more important to them than were the values of truth, integrity and decency. Understand that not all members of Congress at the time bought into this charade, and also understand that Congress finally decided to eliminate the phaseouts as part of an attempt to simplify the Code.

In the interest of disclosure, I have campaigned against these phaseouts from the start. For example, take a look at my letter to the editor, "Author, Don't Phase Out the Phaseouts, Kill Them," 70 Tax Notes 911 (1996). From July of 1996 through July of 1999, I chaired the Phaseout Tax Elimination Project of the American Bar Association's Section of Taxation Committee on Tax Structure and Simplification. The major accomplishment of that Project was the Report of the ABA Tax Section Committee on Tax Structure and Simplification: Phaseout Tax Elimination Project, issued in July 1997. Almost a year later, the elimination proposal found light of day in H.R. 4053, introduced by Mr. Neal, for himself and Mr. Rangel (June 11, 1998), and eventually found its way into enacted legislation through a path too long and tortured to recount in detail.

Let's turn now to why the report of the Center on Budget and Policy Priorities is flawed. There are five major deficiencies in its reasoning.

First, the hidden tax increase does not fall solely on the "wealthy," unless one's definition of wealthy is anyone earning more than $145,950 a year (or even less for married taxpayers filing separate returns). That may sound like a lot of money, especially to those earning $60,000 a year, but people earning $150,000, $200,000 or even $300,000 are in a totally different economic world than those earning $1,000,000, $10,000,000 or $100,000,000 a year. People earning $150,000 a year, who are trying to support a spouse and raise several children, share with those earning $60,000 a year a need to budget their money carefully, whereas those earning in the millions annually rarely if ever count their pennies and dollars. If $150,000 of annual income makes a person "wealthy," then the term "ultrawealthy" gets tagged onto those earning $500,000 or $1,000,000 a year, leaving us at a loss for words to describe the celebrities, athletes, corporate executives and others who pull down tens of millions of dollars a year.

Second, the PEP and Pease phaseouts exacerbate the marriage penalty. Assume two single individuals, each with adjusted gross income under the applicable phaseouts, decide to marry. Their combined adjusted gross income makes them subject to phaseouts that cause their tax liability to increase disproportionately. Of course, this impact also strengthens the marriage bonus, the tax savings that arises when one spouse earns little or no income compared to the other spouse. In fact, one of the several reasons that the PEP and Pease phaseouts were scheduled for elimination was the attempt to eliminate the marriage penalty. There are other contributing factors to the marriage penalty, such as the adjusted gross income limitation on deduction of active management passive rental losses, which have not yet been "repaired," but that's no reason not to fix the mess that the Congress created in 1990.

Third, the PEP and Pease phaseouts contribute significantly to one of the three major "bubbles" in the effective income tax rate array. A "bubble" is a range of taxable incomes that encounter higher effective tax rates than do incomes higher than taxable incomes in that range. For example, if a person earning $120,000 would incur an additional $4 of tax by earning an additional $10 of income but a person earning $1,000,000 would incur an additional $3 of tax by earning an additional $10 of income, there is a "bubble" in the chart mapping the effective tax rates, because the person with the lower income is being taxed at a higher rate than the person with the higher income. This phenomenon is a feature of a regressive tax. The three bubbles incidentally, are those caused by the earned income tax credit phaseout, the phase-in of social security benefit taxation, and the PEP/Pease deduction phaseout. Features of the tax code that cause bubbles are regressive and need to be repealed. Ironically, the Center on Budget and Policy Priorities report claims that the scheduled elimination of the PEP and Pease phaseouts is regressive, but the flaw in that argument is that the Center on Budget and Policy Priorities report begins its analysis with PEP and Pease phaseouts as status quo, rather than using a baseline that reflects undistorted taxable income computation. The truth of the matter is that the PEP and Pease phaseouts are tax increases on those in the middle of the effective tax rate array and not on those in the upper reaches of income, because those taxpayers encounter lower effective tax rates on marginal income thanks to the "completion" of the phase-out.

Fourth, PEP and Pease add boatloads of complexity to the tax law. Not only are the phaseouts themselves complicated, one requiring a full Code section and the other generating a long and byzantine Code paragraph, the interaction of the phaseouts with other areas of the tax law generate all sorts of issues. For example, application of the tax benefit rule to refunds of state and local taxes, or similar returns of itemized deductions, stymied the IRS and commentators until, finally, a "workable" solution was ascertained. When the Center on Budget and Policy Priorities report claims " In fact, complying with Pease and PEP involves a few simple arithmetic calculations," it honors the tradition of deceptiveness associated with the enactment of the two phaseouts. The complexity is much, much more than "simple arithmetic" and this sort of thinking is what happens when a tax law provision is analyzed in isolation rather than in the context of the entire tax law. In all fairness, there are few people left on the planet who can grasp the entire tax law, let alone analyze one provision in the context of the entire array. Worse, the Center on Budget and Policy Priorities report claims " Moreover, to the extent that the provisions do create complexity, they impose it on those households that are typically best able to cope with it: high-income taxpayers who most often have professionals calculate their taxes or use a software package that would automatically handle the Pease and PEP calculations." This perspective, that complexity is acceptable because there are people who can be paid to cut through the thicket, is thoroughly unacceptable as a matter of public policy, not only on the basis of efficiency and utilitarian choice, but also on the basis of moral integrity.

Fifth, the PEP and Pease phaseouts are the offspring of deceit. Even though the deceit was no secret at the time Congress engaged in it, it is deceit nonetheless. Those who justifiably complain about surreptitious behavior by public officials surely must include the supporters of PEP and Pease phaseouts among those whom they criticize. And unlike some of the secretive and deceptive behavior that is the target of the critics, PEP and Pease do not involve national security. There is no justification at all for PEP and Pease other than the desire of Congress to raise taxes in a manner that permitted it to claim that the untouched section 1 tax rates meant that it had not raised taxes even though it had raised taxes.

Here's the solution. If Congress chooses to impose progressively higher taxes on persons with progressively higher incomes, do so in the tax rate schedules. Using phaseouts injects regressivity ("bubbles") into the effective tax rate array. A truly progressive tax requires that the rates be in the progressive tax rate array. Once this is understood, it is easy to see why the phaseout elimination proposal found support among members of Congress who genuinely support progressive tax rate structures.

It may well have been that in 1990 a majority of the members of Congress figured they could fool most of the people most of the time when it comes to gaming the tax code, but unfortunately there are a few of us around who have seen through the deception from the start. Here's hoping that this short commentary will add to the list of those who understand what's going on. As for the Center on Budget and Policy Priorities report, my guess is that it reflects good intentions framed in a bona fide misunderstanding of what the Pease and PEP phaseouts do. The Center on Budget and Policy Priorities report appears to support progressivity, and hopefully the Center will re-think its position rather than continue to be sucked into the whirlpool of clever deceit that causes the super-duper-ultra-pick-a-big-word-wealthy to get away with lower effective marginal tax rates than do those with far less income than those on the top of the income array. It would be a shame if the Center on Budget and Policy Priorities continued to be duped, especially now that the PEP and Pease phaseout scam has been exposed and is on its way to a well-deserved but unfortunately slow-in-coming death.

As the New Year approaches, and people start thinking about resolutions, I have an idea for all those who contribute to the tax gap. Resolve to stop contributing. Being a contributor is fine when the beneficiary is a charity, or some other worthy cause. Being a contributor to the tax gap is like being a contributor to pollution, crime, or a New Year's Party mess. It's not something of which anyone should be proud.

Last month the Bureau of Economic Analysis (BEA) issued its annual report on the tax gap. Yes, this is another one of those posts that has been waiting in line to get some attention. To be fair (to myself), although it carries a November date it actually was made available in early December and came to my attention just a little more than a week ago.

The tax gap, for those unfamiliar with the term, is the difference between income that is reported to the IRS and income that should have been reported to the IRS. The BEA uses economic data from other sources, such as payroll information provided to state and federal agencies, to determine how much income of a particular sort was derived by taxpayers. It then uses IRS data to determine how much of that income was reported.

The tax gap for calendar year 2003, the latest year for which sufficient statistical information is currently available, is $1.0417 trillion. Yes, more than $1 trillion. Compute the tax on that amount, pay it to the Treasury, and re-determine the budget deficit. Of course, if the tax on $1 trillion is paid to the Treasury and not on consumer purchases and business investments, the economy might shrink and reduce the amount of income earned by those who are reporting properly to the IRS. On the other hand, perhaps much of the tax on the $1 trillion that hasn't been paid to the Treasury instead has been sunk into off-shore investments or otherwise removed from the economy. The reality most likely is some combination of the two extremes I've just described.

It's interesting to ponder the BEA's breakdown of the gap. According to the report, the largest gap, $407.7 billion, is non-farm sole proprietorships. The second largest gap, $346.9 billion, is wages, followed by $145.7 billion of interest and dividends, and $102.9 billion of taxable pensions and annuities. The rest is distributed among farm income ($20.3 billion), taxable unemployment compensation ($9.8 billion), and taxable social security benefits ($8.4 billion). The surprise is the gap for wage income. What ever happened to withholding, and could it be that the high compliance rate for wages is no longer valid? I'm not surprised that huge amounts of sole proprietor income or even interest and dividend income goes unreported.

One must wonder what motivates noncompliance. Perhaps some psychologists will conduct surveys to determine if it simply greed, or a growing rebellion in which people are "voting with their feet" by appropriating unto themselves their own special tax break that they cannot get through the Congress because they lack the clout of the lobbyists who have managed to reduce the tax on capital gains to extremely low levels. How much of the noncompliance is simple ignorance, stupidity, carelessness, or confusion? How much of the gap arises from people trying to hide information about the activities generating the income?

Some people may not realize they are contributing to the tax gap, because they are making good faith efforts to comply with an absurdly and unjustifiably complex income tax system. Others know full well what they are doing when they engage in "pay cash, pay less" schemes, launder money, or simply fail to file. I suppose this reflects our culture, for surely it resembles what one finds on our highways: drivers who try to comply and succeed, drivers who are ignorant, stupid, careless and confused, and drivers who think they are so much more important than or better than everyone else that they flaunt whatever rules get in the way of their own self-centered approach to life.

A fun calculation is to determine how much tax has not been paid on the tax gaps for 2002, 2001, 2000, and earlier years, add interest and penalties, and imagine what happens if Treasury had the ability to collect the total amount due. The shock to the world economy might be staggering. We'll never know, because Treasury lacks the ability to collect even a minute fraction of this amount. Why? Because Congress has not implemented a system that ensures all taxpayers pay their fair shares.

Until Congress does two things, the tax gap will continue to grow, and the ultimate outcome might be far worse than the impact of quadrupled prices for oil and gas, shortages of concrete, or devastating hurricanes. Congress must reform the income tax system so that it is easy to understand, inviting of compliance, and difficult to evade. Congress must also put in place safeguards that prevent noncompliance and punish tax evaders. Ideally, a well-designed system that prevents tax evasion will reduce the number of tax evaders and thus reduce the need for prosecution of tax evaders. Law enforcement could then redirect more resources to the prevention of, and prosecution of, other crimes.

Oh, yes, the tax gap as a percentage of what should have been reported? 14.4 percent. That means one of every seven taxable income dollars in the economy during 2003 went unreported and untaxed. I'll venture a guess that when the 2004 analysis is reported next year, the gap will be at least 15 percent.

One last way to think about the tax gap. Of every dollar in taxes that a compliant taxpayer sends to the Treasury, approximately 15 cents is to cover the taxes not paid by someone who is deliberately or accidentally not paying tax. At what point will the outcry of disapproval motivate Congress to act, and act sensibly?

One reason I don't get through the backlog of planned posts is because new items are added to the list faster than I can get through it. For example, this morning I open the Philadelphia Inquirer and see headline that reads: "Nuptials and noisemakers: More couples are exchanging vows on New Year's Eve, the better to entertain their guests." This is news? For years, when I teach law students about how the tax law is structured to provide marriage penalties and marriage bonuses, I point out that it has not been unknown for people facing marriage penalties to postpone their weddings beyond December 31, and perhaps indefinitely, and for people facing marriage bonuses to accelerate their weddings. Just as a child born on December 31 is worth, in the tax economy, a full year's worth of dependency exemption in contrast to the child born on the following day, so, too, a marriage on December 31 counts the same as a marriage on January 1 of the same year when it comes to the marriage penalty and marriage bonus.

There is nothing in the article about taxes. It's all about entertainment, and things such as "welcome baskets in their hotel rooms, multiple parties, tours of the city, and post-wedding brunches." If the right location is chosen, guests can be treated to a fine view of the midnight fireworks, the New Year's Day Mummers Parade, and an elimination of worries about not having a date for New Year's Eve. The New Year's Eve wedding business, according to the establishments hosting them, is booming. Topping it off is this sentiment, "And the symbolism of starting a new life together in the new year is sooo romantic."

I suppose that folks in a position to handle the additional cost, reflecting markups as high as 20 percent, might not be too concerned about marriage penalties and marriage bonuses. Love, I guess, is so blind. Ha. So few people talk with their tax advisors BEFORE doing things like getting married, starting businesses, buying out shareholders, or engaging in transactions accompanied by serious tax planning issues.

The article, by the way, doesn't mention if the folks who are booking New Year's Eve wedding dates at what no longer are open public admission celebration venues are tax practitioners. Nor does it mention if these are weddings between people one of whom is in a much higher income bracket than is the other, thus accelerating the potential marriage bonus and demonstrating good tax planning. I wonder how many of these couples face marriage penalties, and will get a rude shock a few months later when they discover that the withholding and estimated tax payments done at unmarried rates are very inadequate for joint returns. Oh, who cares? Love conquers all, right?

The kicker is this quote from one of the grooms mentioned in the story: "I'll never forget my anniversary." The best anniversary remembrance story in a tax context I ever heard was from a fellow who married on April 15. That, he explained, was a date that had been etched in his mind for years. He is NOT a tax practitioner and never had been. He's a very successful business entrepreneur. And he says he never forgot his wedding anniversary. His wife agreed.

Hint to all wedding planners: become friends with a tax type. It may be worth it in the long run. And you'll discover that tax types can make good friends, once you get past the stereotype. And then you can give back all these New Year's Eve party locations to the general public. And if you still need a holiday for a wedding, as if the wedding itself is insufficient reason to celebrate, I suggest that if Valentine's Day is too cliched and too booked, try Thanksgiving or Labor Day (pun intended). And steer clear of Independence Day (pun also intended and I'll duck for cover on this one, ha ha).