MauledAgain

About a week ago, Senator Joe Lieberman proposed that a special tax should be enacted to pay for the war against terrorism. Lieberman made several arguments. First, he noted that it would make it less likely that military and security costs would continue to hamper domestic spending. Second, he commented that aside from the military and a few civilians involved in the campaigns, no one else is being asked to make sacrifices. Third, he explained that taxpayers would know the purposes to which the tax proceeds would be put.

Lieberman's suggestion is not new. In April 2004, Allan Sloane of Newsweek proposed Six Fixes for the Tax Mess, which I discussed in Fixing the Tax Mess: Reaction to a Journalist's Proposals. Of relevance to Lieberman's idea is this portion of the post:

5. A War Surcharge

Mr. Sloane suggests a 10% temporary war tax to pay for the war on terror, rather than financing it with borrowings from foreign central banks. Families with relatives stationed in Iraq and Afghanistan would be exempt. He points out that "Civilians are supposed to sacrifice during a war. ... Instead of sacrificing, civilians are partying with tax cuts."

An interesting idea. Close to a user fee, which I've always supported. Two quibbles: some people who have received tax cuts aren't partying, but he's right: many people are living their lives as though there is no war. There is. The other quibble is that I'd extend the exemption to all military (definitions already in the Code) because Iraq and Afghanistan are not the only places where the military is fighting the war on terror.

Fifteen months later, I revisited the topic, in Taxes and Sustaining a Civilized Society, where I opined

The nation allegedly is at war. We are allegedly at war with terrorism, or terrorists, or terrorist-sponsoring states, or insurgents, or well, bad people, I suppose. Whether or not one supports none, one, or all of the various military actions undertaken in connection with this war, it is inconceivable to me how one can disagree with the notion that if there is a war the war must be funded because wars cost money. Would opposition to specific military campaigns been stronger, or developed sooner, had taxes been increased to fund the campaign, as good fiscal management demands? Maybe. My guess is that those who supported a campaign, or at least most of them, would have acquiesced, reluctantly or otherwise, to a tax increase. The failure to seek a tax increase, or at least to put the brakes on the tax cutting, probably reflected a policy of trying to make everyone happy even though the long-term cost is far higher than would be the cost of an immediate, and thus smaller, tax increase. I've been told, and I've read, that when the nation went to war in 1941, and even as it was preparing to do so in 1939 and 1940, taxes were increased. I don't know if there was much griping, or how extensive it was, but people knew that war means war. It requires sacrifice. My parents have described what life was like under a rationing program for a long list of items. The nation allegedly is at war. A few individuals and their families, constituting a very tiny percentage of the population, have made and are making sacrifices. The rest of us, it seems, are living lives that somehow don't seem consistent with what life is like during war. Perhaps I am wrong, but for me, war is like pregnancy. Either a woman is pregnant or she isn't. Women cannot be partially pregnant or have limited pregnancies. Concepts of limited war or partial war get used not only to create the sorts of conditions that preclude victory, as happened in Vietnam and Korea and as is beginning to happen in Iraq, but also to deflect the effects of war-waging decisions so that war seems, somehow, more palatable. War, at times, unfortunately, is necessary. War, though, should never be palatable.

Last May, in A Memorial Day Essay on War and Taxation, I made so many points that I'm going to quote myself in its entirety:

Thinking about Memorial Day has me thinking about war, helped along by a steady dose of war movies on some of the cable channels this weekend. More specifically, after seeing a few scenes in which decision makers debate the allocation of scarce resources (e.g., aircraft carriers or battleships?), and knowing the bits and pieces I know about the impact of war on taxation, I began to think about the relationship between war and taxation.

Wars consume resources. Wars divert resources. In other words, wars cost money. Wars destroy lives. A life lost is immeasurable, yet economists, lawyers, and juries put price tags on lives, however lost. It is not good for an economy, or for taxation, for lives to end prematurely.

Wars often are fought about resources. Oh, supposedly the Greeks and Trojans had at it because of a woman's beauty, but I suppose in their culture a woman's beauty (or perhaps a woman) was a resource. Here and there wars are fought because of pride. But most wars are about resources. England and Spain, in the sixteenth and seventeenth century, fought over gold and other valuables from the Western Hemisphere. Wars have been fought over fishing rights, water, and trade routes. In the 1930s, Germany wanted "living space," Japan wanted oil and rubber, and the world ended up with war. The Revolutionary War was fought over control of resources and trafficking in resources, some of it manifesting itself in complaints about taxation. The many wars fought over religion almost always disguise a battle for resources, especially when the souls of people are considered a resource, something that a few folks think they can own and control.

The irony, and stupidity, of war is that it often destroys the very resource over which it is being fought. How many barrels of oil, pounds of rubber, or piles of gold have ended up burned, ruined, or at the bottom of the ocean because of war? How many tax revenue dollars end up in materiel that is destroyed, deliberately exploded, or consigned to the scrap heap?

War, though stupid, tragic, and an indictment of a species that dares call itself "sapiens sapiens," unfortunately is necessary when there is no other recourse and the cost of no war, particularly in lives, is greater. War is the consequence of decisions, decisions that require the utmost care and consideration. One of the most important questions, aside from "should it be done?" and "can it be done?" is "how will it be done?" All three questions are tangled together, for if it cannot or ought not be done, there's no point in asking how, yet seeking the answer to "how will it be done?" might answer the question of "can it be done?" and "should it be done?"

War is such a collective expression of the ultimate essence of life and death that it ought not be undertaken half-heartedly, experimentally, impetuously, or foolishly. War requires commitment, and without it there ought not be war. War requires resources, and without a commitment to expend those resources, it ought not be undertaken.

The last half-century has brought a concept of "limited war," a buzz phrase that I think is more about the commitment side than the implementation side. True, in a world with nuclear weapons, a war fought without their use is in some way "limited," but I doubt that the victims of every other sort of weapon, including those that cause entire cities to burn, find much comfort in the notion of "limited" war. The concept of "limited war" is like the concept of "limited pregnancy," whatever that means.

The resource commitment problem with "limited war" is significant. The notion that a country can fight a war without general sacrifice of resources is mind-boggling. Our nation is at war. War has been declared on our nation, not by some relatively harmless but disturbed individual, but by an organization and movement that presents a genuine threat while changing the rules of war. Yet too many of us continue to think that war is something going on somewhere else, fought by others, and beamed into our homes by all sorts of spontaneous communications technology. But for that technology, the funerals of fallen heroes, and the fact today is a day we are reminded to stop and meditate on these matters, one might not know that a war, a global war, is underway. Televisions can be turned off, few visit the maimed veterans undergoing treatment at military hospitals here and abroad, and life pretty much goes on as it otherwise would.

I wasn't around during the last full-fledged, unlimited global conflict. Yet I've listened to as many tales as were shared with me by those alive at the time as I could find, and I've read and watched a lot. So I've heard and read about rationing, double shifts, postponed plans, substituted products, and sacrifice. Every tax practitioner, and every citizen, should understand that during World War Two income tax rates skyrocketed, wage withholding was introduced, and the entire revenue-expenditure structure was altered. War hung as a cloud over every life, and over every dollar. Is that good? I think so. Why? Because war is so serious and so terminal a course of action that it should not be permitted to recede to the background.

Yet the current global war has not been managed in the same manner. Politicians have chosen to fight without increasing revenue, imposing rationing, or deferring projects and activities. In their defense, they argue that none of these things are necessary, that a nation can have its guns without giving up its butter. I disagree, and I happen to think that politicians are reluctant to do what needs to be done because they are more concerned about maintaining their position in office than in making the tough decisions that war requires. So our national leaders have chosen to put the cost of the current war on our children and grandchildren. Those who decry the huge deficits, triggered in part by war and in part by the almost insane concept of decreasing tax revenues (mostly for the wealthy) during wartime, pretty much focus on the economic impact. They ask if, or suggest that, our grandchildren will be facing income tax rates of 80 percent in order to reduce an unmanageable deficit. I think it will be worse. I think our children and their children and grandchildren will become subservient to our nation's creditors. The sovereignty of the United States of America is far from guaranteed, and is at risk. Were these considerations discussed when those in power decided that war can be done on the cheap?

War cannot be done on the cheap. War is not free. War ought not be purchased on a credit card. War is a national commitment. Hiding the true cost of war in order to influence a nation's willingness to engage in war is wrong. Ultimately, the price to be paid will be dangerously high.

Let us not forget those who have paid the price, with their lives. Some have died. Others have been maimed and their lives will not be what they once were or what they would have been. Many have been psychologically scarred. Some are disillusioned. Bitterness, anger, and resentment percolate among those who fight and those who continue with their lives as though there were no war. It is tragic that some of the deaths and injuries have occurred because of insufficient resources for the appropriate armor and equipment. War should not be managed by the corporate cost-cutter types.

To all those who have served, and who serve, I and every other citizen owe thanks. Here it is. Thank you. Now let us go and do what needs to be done to put meaning into those words. Let us make a collective investment in our appreciation, and provide the full revenue support that is required for whatever it is the nation decides to do.

So it is not surprising to me, or to anyone who understands my taxation philosophy, that I encourage the Congress to consider most seriously the Senator's suggestion.

My revenue-raising preference is for user fees. I understand that in some instances they aren't feasible, or impose too much of a financial burden on individuals who are unable to pay. Yet I like the psychological impact of user fees because it compels the payor to associate the cost with the alleged or actual benefit. It increases the chances of the payor's involvement in genuine participatory democracy if the payor has issues with the user fee. The user fee is much easier to understand, and thus less likely to provide opportunities for politically ground subterfuge.

Even if Lieberman's proposal isn't crafted as a user fee, it provides the opportunity for a similar transparency in decision making. By putting the cost of war and defense into a revenue-raising spotlight, the proposal provides an opportunity to debate benefits and burdens. The reality that war is not free can be brought home to more than just the brave few who return maimed or the relatives and friends of the heroes and heroines who have died.

There is one aspect of the Senator's idea that troubles me. I don't think that all wars and defense activities should be lumped together. Though there are some who make no distinctions among them, whether in support or opposition, many, perhaps most, Americans hold positions that require the recognition of critical distinctions among the campaigns in which the nation's military currently are serving. Putting a "war and defense" tax as an "all or nothing" proposition could be counterproductive. I am sure many join me in wanting to see the cost of transportation security separately stated and not lumped in with the cost of the foray into Iraq, the cost of border security separated from the cost of domestic intelligence efforts, the cost of public facility protection identified separately from the cost of tracking terrorists in Afghanistan, and the cost of training and equipping first responders listed separately from the cost of tracking overseas banking transactions. Support for a tax funding one of those endeavors might be very different from that forthcoming for another of those engagements.

By proposing a war and security tax, or perhaps a series of war and security taxes, Lieberman brings a group of critical issues to the table in a manner that pushes the discussion past the rhetoric and into a reality zone. As I've written, war should not be fought on a credit card with the costs left to future generations. With the tax proposal putting the economic costs into full focus, the wisdom and folly of the nation's many current military engagements can be recognized, and decision making can proceed sensibly and rationally rather than emotionally.

Several weeks ago Joel Majka, a regular reader, sent me a link to an article about the tax consequences of home makeovers. Joel commented that he recalled having seen a post on MauledAgain about the topic. Indeed he did. He may have been referring to Extreme Makeover, Extreme Tax, to Extreme Makeover, Extreme Tax, to Tax Consequences of Home Makeovers: Does the IRS Read MauledAgain?, to two of them, or to all three of them.

The topic resurfaced recently when a tax-teaching colleague at another school inquired about a comment in a newspaper article he had read. The article referred to contestants being told that there was a tax law provision that let them receive the makeover free of income taxes. I responded that the reference probably was to section 280A(g). I neglected, until tonight, to point out the IRS letter on which I commented in Tax Consequences of Home Makeovers: Does the IRS Read MauledAgain?. In that letter, the IRS took the position I had described a year earlier. No matter, the debate over the appropriate income tax treatment continues.

The article referenced by Joel, Dream home brings a big tax hike, primarily addresses the state and local real property tax quandary in which these contest winners find themselves. Their new or remodeled homes are worth much more than their old homes. So their property tax bills soar. The article discussed attempts to have legislation enacted that specifically exempts these specific prize winners from the property tax increases. In one instance, the exemption would apply only if the prize winner or someone in the family living in the home was disabled.

A spokesperson for one producer explained that "contestants are made well aware of the potential tax increase and sign a contract before agreeing to the makeover." The production company, according to the article, "was widely criticized, however, for putting contestants in a precarious situation with the IRS."

Here's my prediction. As increasing numbers of taxpayers receive home makeovers, there will be more of these tax questions. The Dream home brings a big tax hikearticle explains that from "coast to coast" reports are coming in about people having tax and financial difficulties after winning the home makeovers. This trend will continue. These taxpayers will want property tax relief. They will face IRS audits. Who is going to pay for the costs of these proceedings? The answer is obvious. Because America likes reality shows, create a new one. Call it "IRS AUDIT!" and let television production companies select among previous home makeover and other television contest winners for those whose legal bills it will pay if it permits the audit to be televised. Oh, yes, I know the IRS will balk, but perhaps tossing in a voluntary contribution to the Treasury might bring a reversal of IRS policy. Or perhaps those with experience lobbying state legislatures for property tax relief can lobby the Congress for legislation requiring the IRS, with the consent of the "IRS AUDIT!" prize winners, to permit broadcast of the audit. Imagine how educational that will be. Just imagine. Yes, just imagine.

Sometimes I really wonder. There are some questions answers to which continue to be elusive. They invite speculation, discussion, disagreement, and even argument. But they also open a window on human imperfection.

What triggered my most recent bewilderment is a story about a cheater. On Friday morning, while driving to the gym, I heard this KYW news radio story. I heard it again on the way home. So whatever doubts about my hearing that might have entered my mind the first time dissipated.

A young man, perhaps on his own, perhaps at the behest of parents or others, decides to attend law school. The first formal step in the process is to sit for the Law School Admissions Test (LSAT). The test measures a person's aptitude for legal studies. The results are an important factor used by almost all law schools in making admissions decisions. As one might expect, higher scores suggest higher likelihoods of being admitted, and higher scores suggest higher success at the more highly ranked law schools.

This young man took the LSAT twice. According to the story, he failed twice. Technically, one does not pass or fail the LSAT, just as one does not pass or fail an eye color examination. It is possible, though, to attain a score so low that no law school in the country would open its arms in welcome to the test taker. My guess is that the young man earned very low scores.

Now comes the critical point in the story. To me, there are three choices. Choice one is to look in the mirror, look at the test scores, and reach the same conclusion that many of us do when we look in the mirror, look at our batting averages, and stop seeking invitations to spring training. Choice two is to seek assistance, from a tutor or other professional, to learn if the causes of the low scores are inadequacies that can be remedied with additional exercises, practices, and counseling. Choice three is to play the pretend game, in other words, to cheat.

So the young man in question allegedly chose the third option. He tried to buy a copy of the examination. How? He allegedly put envelopes, each containing $100, on the cars of people working for the company that administers the LSAT. Those employees contacted police, the police sent an undercover detective, and the young man handed over $5,000. Rather than getting a copy of the test, he acquired a first-hand experience of being handcuffed.

So now my wondering kicks into high gear. What would the fellow do with the test if he had obtained it? Would he take it to someone who could provide answers? How would he know if the answers were correct? Even if he obtained the correct answers, was he planning on memorizing them? Was he sufficiently confident that the test he received would be the one administered when he next sat for the LSAT?

Suppose he managed to make all of that work, and scored very well the third time he took the test. Does he think law school admissions deans and directors would not notice something strange when the reports show two low scores and then a very high score?

Suppose he gets past that point somehow. Perhaps he explains that he had two bad days and then life returned to normal. Perhaps he says he did poorly and then sought out a tutor. Then what would happen?

He would be admitted to a law school. What happens in law school? Professors ask questions. They administer exams. They assign tasks. What does the young man think he would do? Unlike the LSAT, rarely does someone get two, let alone, three opportunities to sit through the first year of law school. Again the three choices would appear: withdraw, seek assistance, or cheat. Once a cheat always a cheat?

And suppose he gets through law school with grades sufficient to earn the degree? What's next? Oh, no, the bar exam. Would not the same challenges arise that were presented by the LSAT? The two exams are not very dissimilar. After the bar exam, it's time to deliver the goods. Will it be possible to enter a courtroom and fool the judge? Will it require getting someone to ghost write memoranda? When does the charade end? And how many clients suffer on account of it?

At some point, does not the reality out the cheater? Of course. Do cheaters know that? Perhaps they do, deep down inside. Yet most, if not all, seem to think that somehow they will be the ones that beat the odds and succeed in fooling all of the people all of the time. Do cheaters know their long-term chances of success are very, very low? Yes. Then why do they persist? Perhaps because they see the folks who succeed for long periods of time before getting caught and figure that they need only add a few years to the run in order to extract more from life than they ought be taking. But perhaps they also are not getting the message. Perhaps the message isn't being sent. If cheating is tolerated in kindergarten, cheaters will try again in first grade. If it meets with inconsequential reaction when it is discovered, it will reappear again and again. If the "cheating is evil and unacceptable" message is hammered home from the outset, perhaps there would be fewer Enron episodes, fewer indictments of politicians, lower health insurance costs because fraud is eliminated, and much less of a tax gap. You knew I'd work in the tax angle, even if it took eleven paragraphs!

A final thought. It's not mine. It is something I hear often when I discuss cheating with other faculty or with students. "You think cheating in law school and in law is bad, what about cheating in medical school?" I'm told it exists. So who wants to seek care from a physician who cheated on the MCATs, cheated throughout medical school, cheated on the boards, cheated ...? Well, supposedly the screening and detection process in medicine is much better than it is in law. If that is so, that's too bad. After all, not every wanna-be cheating lawyer is, to use the District Attorney's word in this instance, so "stupid" as was this young man as to make detection simple.

As much as I write and read, I continue to marvel at the accomplishments of those productive authors who can produce more books in a year than some generate in a decade or lifetime. Yes, Julian Block kicks off the New Year with his fourth book in twelve months. In February 2006, I reviewed his "MARRIAGE AND DIVORCE: Savvy Ways For Persons Marrying, Married Or Divorcing To Trim Their Taxes - And They’re Legal," in Tax and Relationships: A Book to Read and Give. August brought a review of Julian's "THE HOME SELLER’S GUIDE TO TAX SAVINGS: Simple Ways For Any Seller To Lower Taxes To The Legal Minimum," in A New Book on Taxation of Residence Sales: Don't Leave Home Without It. Julian's 2006 hat trick of books closed with my December review of "TAX TIPS FOR SMALL BUSINESSES: Savvy Ways For Writers, Photographers, Artists And Other Freelancers To Trim Taxes To The Legal Minimum," in A Tax Advice Book for People Who Write and Illustrate Books.

Julian's latest effort shakes us out of our single-minded focus on preparing 2006 tax returns. In "YEAR ROUND TAX SAVINGS," Julian reminds us that it's time to do tax planning for 2007. Many people think tax planning is something done at the end of the year, when the finality of December 31 is on the near horizon. Yet maximizing tax savings often requires that expenses be paid, retirement contributions be made, and other transactions be undertaken early in the year. Julian devotes several chapters to "timing payments of itemized deductions" and "timing receipt of income." Timing also gets important attention in his chapters on investment strategies. He asks if our "withholding is out of whack." If it is, it's best fixed by making adjustments in January or February, and not in November. The chapter entitled "Make Tax Planning a Year-Round Job" echoes the theme of the book.

This is a useful book. As are his earlier volumes, Julian's newest book is appropriate for people not expertised in tax law, but it also is a handy reference for tax practitioners who service individual clients. The anecdotes and stories sprinkled throughout the text are alone worth the read. My favorite is the widow who left cash in an armoire and jewels behind a loose board in a summer home closet. Law professors like myself can find themselves thinking "exam question, exam question" while they add more data to the "We don't need to make up this stuff" mantra.

To order a copy, contact Julian Block at 3 Washington Sq., #1-G, Larchmont, NY 10538 or go his website, julianblocktaxexpert.com. Or, as was the case with the previous books, email Julian at julianblock@yahoo.com.

Even though I do a significant amount of writing, not only on tax and other professional topics but also on family history, I make time to read. Several years ago I accepted an invitation that Paul Caron, of the TaxProf Blog, delivered to tax law professors to write reviews of the books they were reading. At first I wrote up one book at a time. Then I covered a few books in one piece. This time around, having let almost 15 months go by, I ended up with 44, yes, 44, books to review. So the reviews are short. If you're interested in what I read when I'm not writing, take a look at What Tax Profs Are Reading ... Jim Maule. Perhaps my comments will inspire you to pick up one or a few for the next time you want something to read.

I thank Paul for the opportunity to share my literary selections. Of course, a careful reading of my short reviews will reveal that some of my choices are influenced by a friend who has a gift for figuring out before I do what books I will enjoy. It is fortunate that two people who like to spend lots of time reading find moments in which to swap books and book suggestions.

Last Friday, in Health Care Standard Deduction: Solves Uninsured Problem?, I expressed my bewilderment at the prospect of a health care standard deduction that would be available even if no health insurance was purchased. I asked if I was missing something. Indeed I was.

Joe Kristan, who has been sharing Joe Kristan's Tax Updates for more than five years, provided some answers. In his explanation, he points out that according to the White House fact sheet on the plan, the deduction would be available only to those who purchase health care insurance. It is the amount that would be standard. Aside from not having dug up the White House fact sheet, I also made the error of thinking that the word "standard" meant that nothing need be done to get the deduction, in a manner similar to the section 63 standard deduction that is available without proof of any expenditures.

To my question of whether anything prevents someone from using the tax savings from the health care standard deduction for something other than health care premiums, Joe answered in the negative. On this issue he and I have reached the same conclusion. Joe, however, characterizes this possibility as a feature rather than a flaw. It encourages taxpayers to seek low-cost health insurance. That, of course, usually means higher deductibles and co-pays. In my email to Joe thanking him for his response, I asked, "Do you think companies will drag out 'no frills' insurance with very low premiums, very high deductibles and limited coverage to sell to (self-perceived) healthy young folks? Will it become a tax shelter? Then when one of those "almost self-insured" young folks has an accident or develops a health issue, what happens?"

In what Joe calls an oversimplified description of Arnold Kling's thesis, he notes that people tend to use more health care if someone else is paying for it. I wonder if that is true, though it takes us again to the world of tax rules being used to regulate social behavior. Do people use health care because it's there, or because a medical professional urges them to get a particular test or treatment? So, for me, the next question is whether medical professionals will suggest fewer or cheaper (read: less thorough) tests and treatments if the patient carries cheaper health care insurance that provides fewer benefits? Or will tests and treatments be recommended and prescribed because they exist and can assist the medical profession in providing the best possible health care?

As Joe notes, there's no chance of the plan being enacted in the near future. As people continue to dissect the proposal, the likelihood of it ever being enacted probably continues to decrease.

About a month ago, Wesley Autrey made news by saving the life of a teenager who had fallen onto New York City subway tracks. During the next few weeks, Autrey has received a variety of items, nicely set forth by Paul Caron on his TaxProf blog. The list includes cash, scholarships for his daughters, a fully-paid week at Disney World, theater tickets, free New York City public transportation passes, and other items.

As Paul notes, Bryan Camp asked us to consider the tax consequences. Must the value of the items be included in gross income? If so, in whose gross income must they be included?

One respondent took the position that all of the transfers are gifts excluded from gross income. The argument is based on the premise that all gifts are "motivated by the recipient's perceived 'goodness.'" Though the black-letter law defines gifts as transfers arising from "detached and disinterested generosity," this argument rejects that definition, claiming that there is no such thing as "detached and disinterested generosity."

To the extent this approach dismisses "detached and disinterested generosity" as meaningless, I agree. When I teach the basic tax course, I challenge my students to identify situations in which a transfer occurs because of detached and disinterested generosity. Of course, some students are unhappy that I push them to think rather than give them (sorry) a set of rules. The cynic can see in every transfer some quid pro quo or expectation of benefit. Even the so-called gift to a stranger or charity raises the possibility of gain in a theological or moral sense. In my analysis, though there are transfers that must be characterized as gifts, such as a parent's birthday gift to a child, there are many other transfers that probably are not gifts, yet remain unreported as gross income in part because the administrative challenges of enforcing the tax law are overwhelming. Think, says the cynic, of the dinner, flowers, and candy proffered to a blind date. Oh, well, that's going to start some arguments. Lest anyone think I have a vivid imagination (I do, but I don't need to use it in this context), many years ago I was set up on a blind date with a woman who refused to go out until I told her whether I planned to take her to a restaurant of sufficient quality as measured by price. I saved myself several hours of annoyance and ended the conversation. Fine, some students call that interlude a wasted tangent, but I call it a proof that the question is more than a hypothetical with no connection to reality.

The key to the analysis, I think, is the identification of the distinction between gift and reward. That distinction matters because rewards constitute gross income. Regs 1.61-2(a). See Roco
v. Comm'r, 121 T.C. 160. How does one determine if Wesley Autrey has received rewards or gifts?

Rewards are made under two sets of circumstances. In one, a person offers a reward, someone else learns of the reward and successfully does whatever is required for the reward. In the other, a person does a good deed and then learns that he or she qualifies for a reward that previously had been offered. Rewards follow a simple pattern, namely, "$X offered for the return of property or for the return of a missing or kidnapped person." Rewards don't follow a pattern of "$X offered for the return of property or for the return of a missing or kidnapped person provided the person bringing back the property or missing or kidnapped person does so with awareness of this reward."

In Mr. Autrey's case, there was no pre-existing award. Does that matter? If the transferor decides to bestow something on a person who has done a good deed after the good deed has been done, is the transfer a gift because there is no expectation of additional benefits by the transferor?

Does it matter that at least some of the items received by Mr. Autrey have been called rewards? Does it matter that the same items have been called gifts by other sources?

In Mr. Autrey's case, the items have been provided not by the rescued teenager but by strangers. Does that matter? Is it possible that at least some of the transferors might be motivated by public relations and advertising benefits?

The regulations that require inclusion of rewards in gross income do not define reward nor make distinctions between the circumstances under which they are offered and collected. Should the IRS add several pages to the regulations setting forth a complex definition of the term "reward"? If it did so, would I be estopped from complaining about the complexity of the tax law?

As I tell my students, the black-letter law is short and simple. Gifts are excluded from gross income. Transfers from an employer acting in the capacity of employer are not gifts. Rewards are included in gross income. So, as I will ask my students next time around, what do you advise Mr. Autrey when he asks for advice in filling out his 2007 federal income tax return? It's not enough, I tell them, to identify issues (especially in an instance where that's already been done), to set forth the rules (also unnecessary at this point), or to analyze the arguments in favor of each possible conclusion. Ultimately, the tax advisor must exercise judgment and assist the client in making a tax return reporting decision. Perhaps that conundrum is one of the salient features of the chasm between law school theory and practice world decision-making.

What would I do? Not much, at least until I get more information. Were the transferors acting according to long-standing "rewards" policies? Had they made previous transfers to other heroes and heroines? Did they attach conditions, such as appearances by Mr. Autrey in connection with the items? From what I can tell based on the limited information available, it appears that the factors suggesting the items are gifts outweigh, though slightly, the factors suggesting that what he received are rewards. I would also tell him that because it is a close call, getting additional information is essential. Ultimately, the decision is Mr. Autrey's to make, and it would be necessary to explain the risk of audit, the chances of success, and how interest and penalty computations enter into the risk evaluation. Yes, I'd put everything in writing once I was ready to render an opinion based on all the information I could grab.

Oh, and then I'd tell Mr. Autrey that I'm sorry we have an income tax system so indeterminate that a fine man like him must agonize over an issue simply because he did a good deed and triggered feelings of generosity among people grateful for his existence. I'd also tell him that I hope all of these tax gymnastics don't deter tomorrow's heroes and heroines.

Oh, by the way, Mr. Autrey, if you're reading this, it's not tax advice. Why? First, you're not my client. Second, because I don't know all of the facts, and it's possible there are considerations that would change my analysis. As for this posting, it's a hypothetical. Feel free, though, to share it with your tax advisor, so it helps him or her in thinking about the question and formulating advice for you. To Mr. Autrey and his tax advisor: I and the tax world would appreciate whatever you wish to share concerning the conclusions that are reached with respect to the tax issues, and any IRS reaction.

Yes, it was three years ago this date that I posted my first MauledAgain entry. It was a very short TWO WORD comment ("Stay tuned.") logged at 8:20 in the morning.

Imagine. A two-word post from me. It is, and probably will remain forever, my shortest blog entry.

Thanks for reading. It's been fun writing.

More than a few people have asked me to comment on the Bush health care plan. Until more details had emerged it would trigger too much speculation. Now that there is more information available about the proposal, it is possible to make some comments based on more than guesswork. Of course, the predictions that the plan will not advance through the legislative process makes commentary as useful as critiques of the never-released film, but why let that stop me now?

There are so many issues raised by the plan that a full evaluation would require many paragraphs. So I decided to focus on one aspect of the plan that I do not understand. Perhaps in doing so I will encourage those who do understand this particular question to share with me, and thus with readers of MauledAgain, an explanation.

The plan would provide a "standard health deduction" of $15,000, with a smaller deduction of $7,500 for unmarried taxpayers with no dependents. The amount isn't critical to my question. By making the deduction "standard" the plan would not require the taxpayer to purchase health insurance. For taxpayers with employer-provided coverage, the deduction would offset, to a greater or lesser extent, the inclusion in gross income of the amount paid by the employer, an amount excluded from gross income under current law. For these taxpayers, the plan would have one or more of several effects: (1) encourage the employer to drop coverage, (2) leave the taxpayer worse off economically, (3) leave the taxpayer better off economically, (4) provide incentives for the employer to seek less expensive coverage (as if employers aren't already doing that). There are some good examples of the different economic impacts of the plan on the Tax Foundation web site.

But what of those folks without health insurance for whom the plan supposedly is a solution? The tax savings from the deduction might be a few thousand dollars annually, but would that be enough to provide the premiums for health care, which usually are higher, sometimes much higher, for coverage purchased by an individual rather than through an employer group? Wait, that's not my question. That was a rhetorical comment in the form of a question. Here's my question:

What's to prevent a person from using the tax savings from the standard health deduction for something other than health care premiums?

As I read the plan, the answer appears to be: Nothing.

Unless I'm missing something, a person who concludes that health insurance isn't worth it, who has other pressing financial needs, or who is irresponsible, will remain uninsured. Young adults, still convinced of their immortality, remain just as convinced of their invulnerability. Self-insurance, which makes sense for large organizations and wealthy individuals under certain circumstances, makes no sense when it comes to health care. What happens under the Bush plan when an uninsured person shows up in the emergency room? Is the person turned away for being uninsured? If not, isn't a possible incentive to purchase health insurance with the tax savings generated by the standard health deduction wasted?

A similar issue exists under programs that provide cash to impoverished citizens. They are left with the decision of how to spend the money. Milk for the baby? Cigarettes? Shoes for the children? Lottery tickets? One of the primary defects of cash welfare systems is the lack of concomitant education in the making of sensible financial decisions.

Why not a deduction equal to the amount paid for health insurance, capped at $15,000 or $7,500, as the case may be? How burdensome is it for a taxpayer to retain a record of the premium?

OK, I've asked more than one question, but they're all variants of the core concern. I don't understand how the plan encourages purchase of health insurance by all of the people who need to do so. What am I missing?

Last Friday, in New Tax Site, Decimal Decimation, Body Advertising, and Government Goofs, I passed along news about the mess created when a ballot initiative for an 80 cent per pack cigarette tax increase ended up on the ballot as a proposed .80 cent per pack increase. I ended that particular tidbit with the observation that, "Precision matters."

Shortly thereafter, Mark Morin directed my attention to a significant pricing dispute between Verizon and some of its customers. It seems that a Verizon representative, when asked about the cost of out-of-country Internet usage, quoted a price per kilobyte of data transfer at .002 of a cent, but then billed at a rate of $.002 (which is .2 of a cent). It's a hundred-fold difference that caused one customer's expected charge of 71 cents to show up as 71 dollars.

The best part of the Verizon mess is the trail that modern technology permits people to make when they are trying to resolve a problem. First, go to Verizon Bad Math and listen to the mp3. It's nowhere as long as the website indicates, so don't expect a 2-hour talk. To quote Mark, "You will be astonished midway through. The sublime stupidity will take your breath away once the supervisor comes on to the line." Then get the legal history of the dispute at Verizon Math and be sure to follow the links to the descriptions of the milestones along one fellow's interesting adventure trying to straighten out sublime stupidity. Finally, there is a synopsis, with comments and a youtube clip at Verizon Doesn't Know Difference Between Dollars And Cents.

Last week, a student who had done some high school teaching before entering law school told me a story about the challenges of getting students to focus on their studies and do their homework, and the extent to which parents fail to nurture children's intellectual development. One student, in particular, who couldn't do much of anything with math, with lack of effort being one of the significant causes, intended to pursue a career in the medical field. It's a bit worrisome, isn't it, if a pharmacist, nurse, or physician cannot tell the difference between 5 mg and 500 mg, or 10 cc compared with 100 cc. Perhaps math blunders give us the most stunning tales, but it's a problem not limited to math.

Another person commented that decimal placement errors could wreak havoc with tax returns and audits. Could? No, it has. I'll spare you all but one of the stories. Early in my law teaching career, I listened to the adventures of a colleague who struggled to return to the IRS amounts erroneously deposited into his bank account because someone had done something that added several zeroes to his income tax refund. He surely did not develop a good impression of how some people at the IRS did things.

What's happening? A combination of factors are at work. Advances in technology and science have outpaced the capabilities of more and more people. Frustration with this gap encourages youngsters to give up. The learning skills required to grasp and work with concepts, whether in math, science, grammar, foreign language study, law, or any other area, aren't developed to the extent they are necessary, and in some schools aren't developed at all. Parents either lack the ability, the desire, or the determination to assist their children's educational development. Special interest groups, bureaucrats, and government policies turn resources and attention from the tedious tasks that must be accomplished to the quick-and-easy fix that fails to deliver on its promises despite gobbling down huge amounts of money. Recreational diversion chops away at time dedicated to academic pursuits. Wouldn't it be fun to learn that all those students chatting away on cell phones were discussing their math homework? Hah.

In both the Verizon matter and the situation presented by my colleague several decades ago, the error was easily identified. Those responsible for making and fixing the mistake put far more effort into denial and excuse generation than into constructive solutions. Why is it so difficult for so many people to work on fixing a problem once the error has been demonstrated? I think it's one outcome of telling youngsters, no matter what they do, that what they've done is magnificent, in that amazing effort to build up self-esteem. Self-esteem ought not be the mask for self-deception. That's way too dangerous. It's important to explain an error in ways that are not deprecating, but why try to cloak the mistake? Teach children they are infallible and they grow up to be insufferable. Listen again to that Verizon mp3.

Yes, something is seriously wrong. Most people know this or sense this. Politicians milk the issue for votes and appropriations grabs. Fingers are pointed. Blame is cast. And the children continue to suffer. We are beginning to see the impact of educational deficiencies of the past several decades as folks lacking core skills are thrust into positions of greater responsibility. We owe it to our children to maximize their abilities.

And they wonder why I look closely at every invoice that arrives in the mail. I don't trust the professed accuracy. I've been that way for a long time. Sublime stupidity no longer takes my breath away. My concern is that it will take lives away.

Friday's posting on New Tax Site, Decimal Decimation, Body Advertising, and Government Goofs, which was picked up and referenced as "Tax Tidbits" on Paul Caron's , has triggered several interesting sequels. One is so amazing it deserves, and will get, its own post, hopefully Wednesday. The others merit a few paragraphs today.

I mentioned the story about the pregnant woman trying to sell advertising space on her stomach to get Superbowl tickets. I should have known that she would not be the only person trying to get tickets. All sorts of gimmicks, plans, and arrangements are being proposed. What's interesting isn't just the wide range of eyebrow-raising proposals, but the breadth of tax issues involved in them, issues probably not apparent to people who are not tax practitioners.

A Sports Illustrated story lists the top ten "outlandish offers." Yes, the "advertise on my stomach" woman made the list. The others are a woman offering a night with herself, two unrelated men each seeking a "beautiful, hot girl" to occupy the other seat linked to their ticket pairs, a guy "willing to trade his lifetime gold VIP membership at a Wisconsin strip club for two tickets," people offering dental work, driveways, professional fireworks displays, videography services, plumbing, vehicles, and high definition televisions, others offering signed memorabilia, fans wanting to trade 2007 season tickets and Oprah Winfrey show tickets, and people offering time in resort timeshares. Of course, some simply beg, setting themselves up as folks deserving of sympathy best provided through tickets to the Miami extravaganza. The prize went to an amazing proposition, and I agree it's number one: ""My right nut for Superbowl tickets." Followed, of course, by "You don't really want to take it, but I can't miss this game." Perhaps before he makes the trade he might want to read my take on "The Taxation of Kidney Swaps", which also was published, in somewhat more polished form, in the BNA Tax Management Insights & Commentary series, as, yes, "The Taxation of Kidney Swaps."

The shock of discovering that taxes are everywhere will not only annoy or even anger the people trading tickets and trading for tickets, it has compelled the winner of a free trip into space to reject the prize because he lacked the cash with which to pay the taxes. An MSNBC report, "Taxes ... the final frontier for space rides:
IRS brings hype over suborbital ticket giveaways back down to earth," explains how Brian Emmett did not want to go into debt to pay $25,000 of taxes on a "$138,000 galactic joy ride." The report includes discussions of other space-ride contests and the different ways in which sponsors try to soften the tax blow.

After looking at the growing list of "to be blogged" items in my email inbox, I decided it's time to share a few of them at one time.

Item 1: Tax attorney Alvin S. Brown has started a new website called IRS Forum: The Taxpayers Form. He has set up a variety of useful tools. There is a blog, a group of forums, a form for reporting IRS abuse, articles, links, and a tab labeled "misconduct" but there's nothing there yet. The forums include ones devoted to levies, liens, wage garnishment, examination, offer in compromise, appeals, employment tax, penalties, suing the IRS, systemic problems, tax litigation, innocent spouse, installment agreements, non-profit hospitals, other non-profit entities, and one for each state's tax law issues. Some of the forums already have several threads underway, and one has eight. It's a resource worth visiting from time to time. For some, it may become part of their daily routine.

Item 2: A major goof in Arizona promises to bring some interesting litigation. An initiative was offered that would increase cigarette taxes by 80 cents per pack. When the ballot itself was printed, someone who doesn't understand decimals characterized the increases as an ".80 cent" increase. The initiative passed. The state increased the tax by 80 cents per pack. RJ Reynolds complained. The state Attorney General concluded that what counts is the initiative, and not the ballot. Wow. This news came to me from Matt Gardner, Executive Director of the Institute on Taxation and Economic Policy, and there are full details and links to the documents on the Talking Taxes blog. Take a look. Can you imagine someone mistaking .80 for 80 or 80 for .80 when building a bridge, measuring medicine for an IV, or selecting the carats for their fiancee's ring? There are people who wonder why I insist that my students demonstrate precision in their legal analyses. Precision matters.

Item 3: This just in. I'm watching the evening news as I write my blog. My attention is diverted when I hear the newscaster describe a pregnant woman in the Chicago area who's so desperate for Super Bowl tickets that she is offering advertising space on her stomach in exchange for those tickets. I google the story, and get hundreds of hits. This one, for example, sets out the details. Jennifer Gordon put her ad on Craigslist as "My Body for Your Tickets." Wow, that will get attention. She got her idea from observing the many "paunchy" male Bears Fans surrounding her at games, who had written "Go Bears" and similar messages on their chests. As of the time the story went to press she had received 45 offers. So where's this going? If she makes a deal, what are the tax consequences? Do you remember Taxes and the Sale of Baby Wardrobe Advertising Space and its followup More Baby as Billboard Taxation? As law students learn, the difference in the facts (advertising on clothing versus advertising on skin) ought not make a difference. Gordon won't be the first woman putting advertising on her body; I mentioned the GoldenPalace.com transaction in the followup post. Anyway, I'm detecting some gross income here for both parties, with a possible deduction for the advertiser. Could it be self-employment income? I have a feeling I will be returning to this topic.

Item 4: And another news story, which I heard Thursday evening on the radio and Thursday night on the news. According to the Pennsylvania Department of Revenue, it has mailed almost one million erroneous Forms 1099 reporting state income tax refunds and interest payments. Somehow, the figures for taxable year 2005 were used instead of the amounts for 2006. Oops. There's that precision thing again. Taxpayers are advised to trash the Forms 1099 that they have received, but I suggest shredding them. Taxpayers who have filed returns based on the incorrect Forms will need to file amended returns. Isn't it fun when someone else's mistake makes more work for us? Oh, well, that seems to be the story of our lives.

Thanks to Paul Caron's TaxProf Blog posting, I learned that the GAO had issued a report, "TAX COMPLIANCE Multiple Approaches Are Needed to Reduce the Tax Gap." The report concludes that the tax gap "has multiple causes and spans different types of taxes and taxpayers." Accordingly, "Multiple approaches are needed to reduce the tax gap. No single approach is likely to fully and cost-effectively address noncompliance since, for example, it has multiple causes and spans different types of taxes and taxpayers."

Three major approaches are considered:

1. Simplifying or reforming the tax code.

2. Providing the IRS with more enforcement tools.

3. Devoting additional resources to enforcement.

Minor approaches include "periodically measuring noncompliance and its causes, setting tax gap reduction goals, evaluating the results of any initiatives to reduce the tax gap, optimizing the allocation of IRS’s resources, and leveraging technology to enhance IRS’s efficiency."

The report points out that billions of dollars of the tax gap could be avoided if the tax law were simplified or fundamentally reformed. It explains, for example, that the IRS "has estimated that errors in claiming tax credits and deductions for tax year 2001 contributed $32 billion to the tax gap."

Unfortunately, the report then concludes that "these provisions serve purposes Congress has judged to be important and eliminating or consolidating them could be complicated." Even fundamental reform, in which tax preferences are limited and "taxable transactions are transparent to tax administrators," is "difficult to achieve." The report provides an almost irrefutable axiom, that "any tax system could be subject to noncompliance." Finally, it provides another difficult-to-rebut observation: "Withholding and information reporting are particularly powerful tools."

Two things pop into my head.

First, consider the provisions that add complexity to the tax law and thus feed the tax gap. Is it the Congress that judges this array of complex provisions in the Code to serve important purposes? Does the Congress even know they exist? Individual members might be aware of some, but no member comprehends all of them. These provisions exist chiefly because special interest groups arrange for their enactment. If the item is highly visible, it gets some attention, but many simply wander by the side door, unnoticed by most, while the ruckus at the front door over the appropriateness of some soundbitten proposal gets the attention. The most significant question is whether American taxpayers judge the causes of complexity to serve important purposes. Most taxpayers have a few favorites, and a few taxpayers have dozens of favorites. But should attempts to reform the tax law be diverted simply because of some presumed Congressional attachment to what exists? I don't think so. If Congress were so enamored of what it has created, why does it change it every time we blink? The answer is that Congress is enamored of the process by which tax law provisions become the handouts for electoral support. Is this any way to run a country?

Second, consider information reporting and withholding. Well-designed use of these tools could reduce the tax gap tremendously. So why would anyone object to comprehensive reporting and withholding? Perhaps we can ask those who successfully lobbied for instant repeal of a provision imposing withholding duties on payors of interest and dividends. We can examine the tactics. The payors generated what was at the time the largest "write your member of Congress" campaign by telling their payees that withholding was a "new tax." Withholding is not a new tax. Yet the gullible gobbled up the gobbledy-gook. Congress, conscious of elections, replaced withholding with a backup withholding mechanism that is helpful but far from universal and riddled with shortcomings.

Left to instinct, most people would prefer to pay no taxes, and exist as beneficiaries of others. History teaches that most of those who can grab have done so, and that many who could not exerted themselves to find ways to do so. The tax gap is a reflection of some unintentional errors and lots of intentional evasion. Careful intellectual reasoning, though, teaches us that civilization requires taxation, economic principles tell us that taxation should be efficient, common sense tells us it should be simple, and ethical principles tell us that it should be fair. It takes leadership to persuade the civilized world why it makes no sense, in the long-run, to behave in ways that generate tax gaps. Fraudulent behavior by taxpayers contributes to the tax gap. So, too, does the way in which Congress does business. Ought not the Congress take the first step in leading by example? Until the Congress understands that the way it does business encourages the non-filers, the protesters, the illegal tax shelter promoters, and the rest of the noncompliant population to act in ways that undermine the tax law and fuel the rapid growth in the tax gap, talking about closing the tax gap is not much more than rhetoric. Yes, I talk and write about it, but I've not undertaken the responsibility that members of Congress have sought and accepted. If they don't think they can or want to fix the problem, no one will stop them from returning home.

On Thursday, the House of Representatives, by a vote of 264-123, approved H.R. 6, the CLEAN Energy Act of 2007. [If the link doesn't work, redo the search by going to the main Library of Congress legislative search page and look for H.R. 6.] The word CLEAN isn't a word, it's an acronym for "Creating Long-Term Energy Alternatives for the Nation."

The bill, which has been sent to the Senate, makes production of oil, natural gas, and their primary products ineligible for the section 199 domestic production deduction and extends the period for amortization of geological and geophysical expenditures for major oil companies from five to seven years. Buried within the bill is another bill, called the "Royalty Relief for American Consumers Act of 2007," though it doesn't make for a pronounceable acronym. This portion of the bill deals with leases for oil exploration and development on the outer continental shelf. The bill also repeals a long list of royalty relief for the oil and gas industry that was funded with tax revenues.

Some time ago, I criticized how the previous Congress used the tax law to handle energy production and conservation incentives, in How Much Energy Does It Take?. Though in Tax and Other Solutions to the Gasoline Price Reality I criticized proposed windfall profits taxes as ineffective and unwise because they would shift the oil industry's profits from exploration and development to some other purpose, in Tax and Other Solutions to the Gasoline Price Reality, I also supported calls for repeal of the special tax breaks enacted for the oil and gas industry, because, to quote myself, "these companies don't need tax breaks." When pushed on the windfall tax question, I explained in If There Must Be a Windfall Profit Tax, Then ...., that an incentive linked to increased production might be palatable.

It didn't make sense to me then, and it continues to make no sense to me now, that oil and gas companies need tax reductions in order for additional exploration and development of energy sources to be economically attractive. Refusal to support windfall profits taxes is not equivalent to support for additional tax reductions.

So what sort of reaction is the House of Representative's latest action on this issue generating? According to the American Petroleum Institute the repeal of the tax breaks "will discourage new domestic oil production and refinery investments, threaten American jobs, and make it less economic to produce domestic energy resources - thereby increasing our dependence on imported crude oil and gasoline." Wow. So oil companies will slow down or stop exploration because there's no money in such activities without a tax break? If oil prices dropped that low, there wouldn't be an energy crisis. It's tough to buy in to the sorts of arguments made by the American Petroleum Institute when oil companies are awash in profits. What's next? Tax breaks for people making a killing in the stock market? Oh, wait, those exist. Oops.

If that reaction isn't enough to boggle common sense, listen to this opinion from Congressman John Peterson: "For some of us, achieving the promise of energy independence is a very real, and very personal, goal, and so the idea that we'd bring a bill to the floor making it more difficult and expensive to produce oil and natural gas at home - in the middle of winter, no less - just boggles my mind." I suppose one could accept the idea that any tax makes it more difficult and expensive to do anything. That line of reasoning would lead to repeal of all taxes, a result championed by some but ultimately suicidal. Why would or should an oil company cut back its activities because it's netting, after taxes, only $18 for each barrel of oil discovered and extracted rather than $20? Perhaps there are people who prefer not to work because a $100,000 after-tax salary just isn't worth the effort when compared to a $110,000 after-tax salary. There's money to be made in exploring for and developing oil and other energy resources, so if the existing companies want to shut down and go out of business because they're losing a tax break that made no sense to begin with, surely others will step up and take advantage of the opportunity.

My cynical side wonders if the next step, assuming the bill is enacted into law, will be a deliberate slow-down by oil companies to provoke a shortage and retail price hikes. Then we will be hearing how the repeal of these tax breaks are breaking the backs of consumers, causing poor folks to freeze to death, and wreaking havoc on the economy. As a long-term market manipulation strategy, it has appeal. As an ethically appropriate thing to do, it flunks. "We need to raise prices because our very high profits aren't high enough" seems a wee bit greedy, especially when it's raised on behalf of shareholders in oil and other energy companies who themselves encounter special low tax rates on their dividends and capital gains.

# posted by James Edward Maule @ 8:56 AM

TAX CARNIVAL #10 – PUTTING IT TOGETHER, constructed and hosted by Robert D. Flach, also known as the Wandering Tax Pro, is now available for perusal by the tax world. Bob focuses on blog postings that deal with federal individual income taxes and that provide information, tips and advice to American taxpayers as they get ready to prepare their Forms 1040 for 2006. Take a look and follow the links.

An expert on taxation in the People's Republic of China is not a tag that would be attached to my name. Nonetheless, sometimes it is useful to examine how the tax laws of other countries apply to transactions that are just as likely to occur in the United States as in the other nation. In this instance, it's a tax on land appreciation that has my attention.

I learned of this tax thanks to a colleague who is a regular on-line reader of the South China Morning Post. Because that site is a subscriber site, I don't have a useful URL, but the story was picked up elsewhere.

China enacted a land appreciation tax in 1993, but apparently had not been focusing on its collection, in part because the computation is complicated. The National Tax Administration has announced that it would begin full-scale implementation on February 1. The tax applies to land that is held for development and that is not sold out within three years after the developer obtains a sales license. Although the rate of tax can be anywhere between 30 and 60 percent, the provision permits reduction of the taxable amount by the costs of acquiring and developing the land.

The intent of the focused enforcement is to encourage sales, and to prevent land hoarding that would drive up prices and pose the risk of a land valuation collapse. China does not want to experience the sort of economic disadvantages that accompanied a real estate collapse in Japan a few years ago. Property value increases in China during the past few years make the recent "real estate bubble" in the U.S. appear to be a small blip. During the past 18 months, the Shanghai property sub-index had quadrupled. The action comes after a series of interest rate increases and limitations on the ability of foreigners to invest in China property.

Not surprising, the news caused the value of stocks in land development companies to fall. The tax is projected to cut developers' incomes by 1 to 5 percent. It also would disrupt cash flow.

Is there a lesson to be learned? If there is, it appears to be one that can be tucked away. Why? The U.S. no longer is experiencing a rapidly escalating real estate market. There is no need to deter land investment and to encourage rapid development. There is no shortage of developed real estate. But it would be interesting to read and observe reactions to a proposal for a 60 percent tax on appreciation in real estate (or any other investment, for that matter). One wonders, though, whether the use of interest rates as the key tool in steadying the economy will be joined by focused taxes designed to regulate the rate of growth in a particular economic sector.

Food for thought, I suppose.

On Friday, in How Political Blackmail Enhances Tax Law Complexity, I explained my disappointment and disdain at the ploy by certain Senators of holding the minimum wage increase legislation hostage to more tax breaks for small businesses. I noted that I could not find specific information on what those breaks would be.

Aaron Harms provided an explanation:

I think part of the reason you can't find any information about specific tax credits that would be attached to the minimum wage increase is because there aren't any that make sense.

I work with corporate tax credits for a living, and I spent most of this morning's drive to work asking myself, "Even if you wanted to do this, what kind of credit would you come up with? Who would it target?"

You couldn't have a tax credit proportional to how hard the company has shafted their employees, that just wouldn't make sense. The reality is, the majority of tax credits that currently exist encourage companies to pay their employees more than the minimum wage already. A lot of them require that the corporation pay 150% of minimum wage, or 150% of the average wage in that area, or some still require that the company pay a "sustainable" and "liveable" wage to the employee.

A minimum wage increase affects probably about 5% of companies in the country (if that), and those it does are a varied group that it would be extremely difficult to target with a tax credit.

For our clients, who are primarily small to moderately sized businesses, they average paying $9 to their employees, significantly higher than even the new minimum wage, and quite a few are significantly higher than that.

Some of these are manufacturing jobs, sure, but most of them are not. Most of these jobs are grocery store cashiers, warehouse jobs, or similar. Heck, some of my clients pay their warehouse workers more than I get paid for processing their tax credits!

Aaron makes a good point. I had not thought through, as he has, what the possibilities could be. I was thinking that it would be giveaways with little rational justification based on minimum wage increases. Now that I think about it, he's right ... existing credits don't provide a platform.

Another reader pointed out that raising the minimum wage would put pressure on businesses that tried to pass the increases along to customers in the form of higher prices because the large businesses were in a better position to undersell the smaller businesses. That comment arrived shortly after I heard a rumor that one of the "small business" tax breaks being advanced as a price for minimum wage increase advocates to pay for passage of their legislation was an increase in the section 179 expensing limitations. Then it hit me. The so-called breaks for small businesses weren't for small businesses. They are for larger businesses. For example, few small businesses need an increase in section 179 expensing limitations because they don't invest the sort of dollars that the higher limits would permit. They don't have sufficient taxable income to be offset by the section 179 deduction. So, consistent with Aaron Harms' comments, it seems that to whatever extent small businesses would bear the costs of a minimum wage increase, the legislation won't contain tax breaks to assist them. The legislation is being held hostage for tax breaks of value to businesses pulling in nearly half a million dollars a year or more in profit. That's a different world from the one in which an entrepreneur tries to get his or her income out of the five-digit range and into six-digit territory.

I wonder how Congress would behave, and how it would be constituted, if every citizen understood tax law as well as those who truly understand it do. I wonder if it would resemble the outcome when the carnival con artist is exposed for what he is. Then I begin to wonder why basic tax isn't a required high school course. Maybe they don't want people to understand fully what the tax law comprises. Maybe they want people to be stuck thinking that the deceptive explanations fed to them are plausible.

No matter, tax breaks for businesses of any size or type ought to reflect careful analyses of the actual profits and losses of those businesses, determined independently of any particular item that happens to change, such as wage costs. It is inappropriate to claim that all small businesses will experience cost increases because of a minimum wage increase, for reasons such as those shared by Aaron Harms, and it is inappropriate to design tax breaks benefitting very profitable businesses while advertising them as tax breaks for small businesses that in actuality cannot use the tax breaks. The new Congress has proclaimed itself dedicated to doing business differently. Here's its chance. It's a test, and an opportunity to earn a grade. Passing? Failing? Early indications aren't good. But to be fair, grades ought not be assigned until the test is complete. Expect more news.

TaxChartMan, the nickname I've assigned to Andrew Mitchel, has inaugurated the new year with another 30 charts. Like the rain that has sprinkled down in the Philadelphia area the past few days, Andrew's charts arrive in small bursts, in a steady pattern of useful resources. The plants and wildlife, and humans, too, put the rain to good use (though apparently some people would be happier with slippery ice and transportation-clogging snow), and the tax world can put Andrew's collection to similar good use. This time around, quoting Andrew:

Cases and Rulings
1. Avery (Dividend Not Taxable Until Unqualifiedly made Subject to Shareholder's Demands)
2. Cox (Installment Sale Treatment Not Available For 304 Transaction)
3. Helvering v. Horst (Fruit Not Attributed to a Different Tree)
4. Indianapolis Power & Light (Customer Deposits Were Not Advance Payments)
5. Burnet v. Logan (Open Transaction Doctrine (Contingent Payments))
6. MedChem (P.R.), Inc. (Section 936 - Active Conduct of Trade or Business Within a Possession)
7. P.G. Lake, Inc. (No Capital Gain on Sale of Right to Receive Ordinary Income)
8. Taisei Fire (U.S. Agent of Japanese Insurance Companies was an Independent Agent)
9. Rev. Rul. 61-156 (Liquidation - Reincorporation with 45% Common Ownership
10. Rev. Rul. 63-234 (Two Step Exchange Did Not Qualify As B Reorganization (Remote Continuity))
11. Rev. Rul. 64-155 (Outbound Contribution to Capital)
12. Rev. Rul. 67-448 (Reverse Triangular Merger Was, in Substance, a B Reorganization)
13. Rev. Rul 69-630 (Bargain Sale Between Brother-Sister Corporations)
14. Rev. Rul. 2003-96 (Nonapplication of Section 482 to Lease Stripping Transaction)
15. Rev. Rul. 2003-125, Sit. 2 (Check the Box Election As Identifiable Event For Worthless Stock Deduction)
16. Rev. Rul. 2004-3 (Foreign Partner Deemed to Have A Fixed Base in the U.S.)
17. Rev. Rul. 2004-79 (Subsidiary Purchase of Parent Debt)
Other
18. Installment Obligation Received in Forward Triangular Merger [Prop. Reg. 1.453-1(f)(2)(iv), Ex. 1]
19. Check-the-Box Planning to Get 901 Credits and to Avoid 10/50 Basket [Reg. 1.701-2(d), Ex. 3]
20. Dividends Received Deduction for Dividend from Foreign Corporation [Reg. 1.861-3(a)(3)(iii), Ex. 1]
21. Subpart F Income: CFC for Full Year [Reg. 1.951-1(b)(2), Ex. 1]
22. Subpart F Income: CFC for First Part of Year [Reg. 1.951-1(b)(2), Ex. 2]
23. Subpart F Income: CFC for Last Part of Year [Reg. 1.951-1(b)(2), Ex. 3]
24. Hopscotch Rule & PTI Dividend [Reg. 1.951-1(b)(2), Ex. 4]
25. Subpart F Income: CFC for Last Part of Year [Reg. 1.951-1(b)(2), Ex. 5]
26. 12 Month Ownership Test Under US-UK Tax Treaty with Disregarded Entity [PLR 200626009]
27. Section 304 Can Be a One-Way Street
28. Signature Authority Regarding Check-the-Box Elections [Reg. 301.7701-3(c)(2)]
29. Non-Corporate Purchaser: De Facto 338 Election
30. U.S. Corporate Seller of CFC: Buyer Makes Immediate Check-the-Box Election

Andrew also added a section 351(g) flowchart to the collection a few days after the batch of 30 were uploaded. It's a fine chart, and if I covered that provision in detail in my J.D. business entity taxation overview course I'd ask that you not tell them it exists, because I think they learn more by making their own chart than by looking at someone else's production. If for no other reason, take a look because it's a marvelous illustration of how much complexity Congress can shove into one Code subsection. Multiply it by the number of Code subsections, and it's easy to see that the "chart of the tax cosmos" would be immense beyond comprehension.

For those needing cross-references to my previous commentary on Andrew's chart work, look here, here, here, here, here, here, here, here, here, here, here, here, here, here, and here.

Andrew continues to welcome comments on his charts. You can contact him through his web site. For direct access to the charts, you can enter by Topic, by Alpha-numeric order, or by Date uploaded .

On Wednesday, the House voted to raise the minimum wage. The legislation passed by the House does just that. I found the text of the bill at this Library of Congress site, but it may be necessary to go to the main page, search for "minimum wage" and then select the enrolled version of the House bill.

The bill now goes to the Senate. Senate Republicans, though, want to attach tax breaks to the legislation. Senate Democrats might accede to the demand simply to get the minimum wage legislation enacted.

Here's are my questions: why can't the Senate simply vote on the minimum wage increase proposal based on its merits? Why do the Republicans in the Senate hold the legislation hostage for more small business tax breaks?

The Senate Republicans claim that the tax breaks are required in order to assist business owners in finding funds with which to pay the minimum tax increases. I'm not convinced. Many minimum-wage employees work for corporate giants, which have been recording record profits while paying exorbitant salaries to their top-level executives. Surely they can come up with the money to provide a living wage to their employees without needing even more tax breaks. Many small businesses that employ low-wage employees either are not subject to the minimum wage, or are in states that have higher minimum wage amounts in place. Some small business owners pay themselves salaries so high that a small pay cut will go far in raising low-wage employee compensation. Blanketing these considerations is the fact that compensation paid to low-wage employees is deductible, which means that the employer's taxes will be reduced even in the absence of additional tax breaks.

It gets worse. Because of the pay-go rules adopted last week, any tax cuts enacted in favor of "small businesses" will require tax increases to offset the cost of the cuts. So who's going to be targeted for those increases? When the smoke clears, if these folks are successful, the tax law will be even more complicated.

While I was hunting, unsuccessfully, for information on the specific tax breaks and tax hikes that the Senate Republicans, with help from certain Democrats, seek to enact, and reached this paragraph in my essay, I discovered that I'm not the only one critical of the "more tax breaks required for small businesses" ploy. Steven Pearlstein's Minimum Wage, Maximum Myth deserves a close read. He makes some points I overlooked, such as the tendency of businesses to pass minimum wage increases on to their customers and the exaggeration that most new jobs are created by small businesses. His comment that small business owners deserve more IRS audits than more tax breaks because of their position as the largest contributors to the revenue gap surpasses any commentary I could have provided.

What is most troubling is the unwillingness of certain politicians to permit separate up or down votes on each proposal based on the merits. What's so wrong with a vote on the minimum wage followed by a vote on the proposed tax breaks? If the proposed tax breaks are so wonderful, would they not be enacted on their own? I suspect the reality is that the tax break advocates understand that their grab for even more tax reductions won't fly, and that the only way to impose it on the nation is to attach it to legislation that has significant support. Coming from legislators who are quick to condemn and outlaw blackmail, extortion, and con games, it seems rather hypocritical. To those who would reply, "That's how politics works in this country," I reply, "Then it's time for this country to reform politics."

In my commentary on the adverse effects of last-minute end-of-December tax legislation enactment that is effective as of the beginning of the year, On the Way Out, They Grabbed Tax Breaks by the Hundreds, I pointed out that when Congress waits until December to tell us what the tax law is for the previous eleven months, it causes all sorts of planning, logistical, and tax administration problems. One concern was the chaotic state of tax forms and instructions, which the IRS had already prepared and circulated, as it had to do if it was to be on time, but which were rendered obsolete, so to speak, by the typical last-minute antics of a Congress more concerned with elections and power retention than with public service. I explained:

This year, unfortunately, the IRS forms and instructions process is so far along that the IRS has told taxpayers that they will be using forms and instructions that do not reflect the changes. Taxpayers, and tax practitioners, will need to figure out independently how to modify the instructions in order to incorporate the changes. How seamless will this be? The IRS may issue supplemental instructions, but if the manner in which my tax students, among the nation's best and brightest, have assimilated mid-stream changes over the past two decades is any dedication, confusion will run rampant. One interesting example of what the IRS must do involves the sales tax tables for the revived sales tax deduction. The IRS plans to do another mailing to taxpayers to distribute the tables. Will the Congress step up to the plate and provide the IRS with funds to pay for this mailing, or will the IRS be expected to make cuts in some other program area? Does Congress want less taxpayer service? Of course not, because Congress harps on that issue every week. Does Congress want fewer audits? Wouldn't that make a great headline? Has Congress thought about the impact of the inefficient manner in which it does business?

Now comes a useful news release from the National Association of Tax Preparers addressing some of the problems. The title of the news release, Income Tax Form 1040’s Missing Lines for Key Deductions - Here’s How to Claim Them, is enough to demonstrate the aggravation Congress causes for citizens when it cannot do things in a timely manner.

The forms mailed by the IRS do not have any lines for the sales tax deduction, the higher education deduction, and the deduction for teachers' expenses. Fortunately, there is time for people to learn about this glitch and make adjustments, because the IRS cannot begin processing tax returns until February at the earliest. Why? It must reprogram its computer system. Will it have time to test the changes? I doubt it. So it would not be surprising to discover in March or April that hundreds of thousands of tax returns have been processed incorrectly. If Microsoft can't get it right the first, second, or umpteenth time around, can the IRS?

The NATP has a nice, plain English explanation of the instructions provided by the IRS on how taxpayers who file their returns on paper can "jiggle" the forms to make "room" for the missing deductions. Taxpayers using software must get updates from the vendors before preparing their returns. Vendors are working on revisions, and they, too, face the disadvantages of making changes and trying to test them under severe time pressure.

So, hey, thanks, Congress! Do you think perhaps people don't feel so bad they invited a lot of you to go home? And for those remaining and those newly arrived, there's a lesson to be learned. In the long run, it is better to do the job correctly than it is to amass power for power's sake or for the sake of a select few to whom one ends up becoming indebted because of the grab for power.