MauledAgain

Everyone knows I'm fond of tax charts, and if there's any doubt, check my most recent review of Andrew Mitchel's contributions. Other forms of graphical representation of tax also appeal to me, if they're well done.

Paul Caron, of the TaxProf blog, has brought to my attention the Tax Map, created by Chaim Kirby, a law student who has a programming and computer expertise background. What he has created is proof that tax law is, in its own strange way, a thing of art. To quite him:

The Tax Map is a graph of the United States Tax Code, represented as a network. In the network each node represents a section of the tax code, while each edge represents a reference from one section to another. * * * As anyone who has ever attempted to do their taxes will tell you, the tax code is a mass of rules and exceptions that seem to require an advanced degree in n-space topology to digest. I wondered how that complexity would bear out if one were to look at the mere structure of the tax code, stripped naked of its rules and semantics. Thus was born The Tax Map.

Mr. Kirby proceeds to describe the attributes of fractal geometry, chaos, and white noise. He concludes that there is no "discernable pattern" and that the map reminds him of "spider webs woven by spiders on drugs." Yes, they do experiments like that in chemistry departments, which may be why law studies often find themselves tagged as boring. Drugs and tax law make for a bad combination. Go take a look. If you find it sufficiently mesmerizing, you can get a poster. Now THAT would be a conversation piece.

Several years ago Shari H. Motro and Deborah Schenk put together another sort of tax map, called, yes, The Income Tax Map. It's more in the nature of a flowchart. It is very useful in putting tax analysis into the appropriate sequence and seeing how the pieces fit in an applied rather than conceptual framework. It, too, is something I recommend, though my advice to law students is that they should design their own because they will learn much more by designing their own than by looking at the result of someone else's efforts. The latter undertaking makes sense when it's time to evaluate one's own tax mapping efforts.

Almost two years ago, in Check-the-Box Regulations: Simplification Isn't Simple, I reported on the Littriello case, in which the District Court held that the "check the box" regulations were valid. In that analysis, I explained how two lines of thought had developed, one taking the position that the IRS lacked authority to issue regulations that arguably overruled the Supreme Court, and another taking the opposite position. Three months later, I updated my commentary, in A Return to the "Check the Box" Regulations, explaining that the court agreed to reconsider the case after the taxpayer brought to its attention a recent law review article supporting the position that the regulations were invalid. The court concluded that the regulations did not overrule the Supreme Court, and that they were valid.

I predicted, "as I pointed out in my initial posting on Littriello, the possibility of appeal cannot be discounted, and this most recent development does not appear to remove or even significantly reduce the possibility, whatever it may be, of an appeal." For once, I was correct. The case was appealed.

Near the end of my second commentary, I advised, "Stay tuned, though I doubt there will be any surprising developments even if an appeal is taken." I'm on a roll, because the Sixth Circuit has affirmed the district court. Thanks to Paul Caron of TaxProf blog for bringing the appellate decision to my attention.

The appellate opinion is worth reading. Not only does it contain a concise history of the entity classification regulations, it takes apart the taxpayer's arguments. It rejects Littriello's attempt to bring his case within subsequently proposed regulations that would prevent a person in Littriello's position from having the liability Littriello has. I wonder if those regulations have not been made final because the IRS is waiting for the Littriello case to end, but that makes me wonder why the IRS even would issue the proposed regulations until Littriello exhausted his judicial remedies. And I wonder why the IRS doesn't cut Littriello a break, bringing him within the proposed relief. Perhaps the IRS has tendered some sort of settlement offer, short of concession; total concession isn't very uncommon because the IRS habitually tries to get "something" out of a case that has proceeded to this point. Why Littriello would refuse settlement and hold out for an extremely improbable appellate reversal, if in fact a settlement was offered, is something I don't understand. Perhaps eventually we'll learn more of the negotiating postures of the parties.

Will Littriello request review by the Supreme Court? I'll go out on a limb and respond, "Perhaps." Will the Supreme Court take the case if Littriello does seek its review? No.

In my last two posts, Some Aspects of Tax Law Aren't Complicated and Noncompliant Tax Attorneys Are Dangerous to the Tax System, I lamented the impact on the tax and legal systems, and on society generally, of tax noncompliance by attorneys, particularly tax attorneys. Now comes news of a case of two attorneys wrongfully charged with failure to report income, who have received payment from the Justice Department in settlement of their Federal Tort Claims Act litigation. The good news is that these two attorneys complied with the tax law. The bad news is that other attorneys erroneously took one of them to trial.

The long story is told in Texas Lawyers Fought the IRS and Won. It deserves a full reading, and my summary surely is inadequate to convey the full flavor of the fiasco. Alan Brown, a highly visible criminal defense attorney, and his wife Jean, a family lawyer practicing alone, were indicted for filing false income tax returns. The story begins when a person who had been employed by Alan Brown to do his firm's bookkeeping told an IRS agent that the firm was under-reporting taxable income because the amount in the cash receipts book exceeded what had been reported. Based on that information, the IRS agent obtained a search warrant for the Brown residence and Alan Brown's law office. The IRS picked through trash and talked with every business in the town. The IRS seized client files, which had a serious adverse impact on the attorneys' practices.

When Alan Brown went to trial, he was acquitted by the jury. The government then dropped charges against Jean Brown. What happened?

It turns out that the former employee turned informant had little credibility. Her boyfriend was in federal prison, and the employee laundered money through Alan Brown's law office. She approached the IRS thinking that she would get her boyfriend's 18-year sentence reduced.

When the IRS agent applied for the search warrant, he did not disclose any of this information. The IRS agent also knew or should have known, according to the trial judge in Alan Brown's case, that the cash that was not included in gross income was not gross income. Even though the agent knew or should have known this, he said nothing to the magistrate who issued the search warrant. Nonetheless, prosecutors took the case to the grand jury, obtained indictments, and proceeded with Alan Brown's trial.

After the acquittal and dismissal, the Browns sued for the estimated $1.5 million of profits lost on account of the indictment and trial. They settled for $1.34 million. After paying legal expenses of more than $1 million, the Browns will have nothing left, and haven't recouped their lost profits.

In their complaint, the Browns claimed that IRS agents had authorized a warrantless search of their property, that probable cause did not exist, that law enforcement officers used false or misleading evidence to obtain the search warrant and indictment, and that the prosecution was malicious. Except for one attorney, no one representing the prosecutors or the IRS will talk. That attorney described the settlement as a device to end the litigation and not a conclusion with respect to what IRS agents and federal prosecutors did or did not do. The attorneys representing the Browns suggest that he was targeted because he had defended news-making clients such as a former member of Congress, a professional boxer, and a country music star.

What must be understood is that the settlement paid to the Browns is funded with tax dollars paid by the taxpayers of this nation. The IRS agents and federal prosecutors responsible for the mess aren't paying a dime. Perhaps they have been dismissed from their jobs, perhaps not. We don't know.

What we do know is that there are some basic principles of tax law that every federal prosecutor pursuing a tax case ought to know. In this instance, even if the employee turned informant had been ignorant rather than devious, someone should have and could have done some forensic tax analysis and figured out that there was no unreported gross income. Perhaps they knew, and the allegation that they pursued Brown maliciously is true. Perhaps they weren't malicious but simply tax ignorant. Either way, it reflects poorly on the IRS agents and federal prosecutors involved in the case.

I cannot imagine the IRS agents involved in the case did not understand the basic tax law principle applicable to the situation. I can imagine that the federal prosecutors skipped tax when they were in law school, or perhaps enrolled in the course and forgot everything after they took the exam, because it is not uncommon for law students to use the "I don't need to know tax" excuse when they try to justify their detour around what many say is one of the most challenging courses in the curriculum, either by ignoring the course or looking for an easy version of it.

What I want to know is when will the taxpayers of this nation be reimbursed for the $1.34 million that they have paid on account of someone else's errors? Whether those errors arose from malicious intent or from ignorance doesn't matter. What matters is understanding the need for a renewed commitment that links competence and integrity with responsibility and power.

No sooner had I commented on the indictment of an attorney for failure to file federal income tax returns, in Some Aspects of Tax Law Aren't Complicated that Paul Caron alerted us to another lawyer’s conviction for failure to file, in A Tough Day in Tax Court: Lawyer Loses Two Failure to File Tax Return Cases -- His Client's and His Own.

In Harp v. Commissioner, T.C. Memo. 2007-83, the Tax Court considered a motion for summary judgement by the IRS. Harp, the taxpayer, is an attorney, admitted not only in Louisiana but also to practice before the Tax Court. He failed to file federal income tax returns for the years in issue,1995 through 2000. During the IRS examination, the taxpayer filed returns showing all zeroes, and attached to the returns documents entitled "Asseveration of Claimed Gross Income" and "Statement and Asseveration of Exclusion of Remuneration from Gross Income." The returns and attachments contained arguments typically raised by tax protesters. The IRS reconstructed the taxpayer’s returns using the bank depositsmethod, and issued a notice of deficiency asserting not only tax liabilities but also additions to tax and penalties. The taxpayer did not file a petition with the Tax Court. The IRS proceeded to assess the tax, the additions to tax, and the penalties, and issued a notice of balance and demand for payment, followed by a final notice of intent to levy. The taxpayer then filed two requests for a collection due process hearing, claiming violation of his right to confront and cross-examine witnesses. The IRS appeals officer assigned to the case wrote to the taxpayer and explained that his arguments have been rejected by the courts as frivolous or groundless. At the hearing, the taxpayer made the same protest arguments raised earlier, but did not provide any financial information or collection alternatives. The IRS then issued a notice of determination concerning collection action(s) sustaining the proposed collection. In response, the taxpayer filed a petition with the Tax Court, arguing that the appeals officer "cherry picked" documentation and that the assessments violated his due process rights.

The Tax Court followed precedent and concluded that when no petition is filed in response to a notice of deficiency the validity of the tax is not at issue and the Court will review the notice of determination for abuse of discretion. The Court refused to consider the taxpayer’s challenges to the notice of deficiency for this reason, and concluded that as typical protestor arguments they were frivolous and groundless. It dismissed the taxpayer’s objections to the appeals officer’s actions as "without merit." The Court imposed a $5,000 penalty on the taxpayer because he filed the petition in response to the collection determination primarily for delay and because his position was frivolous or groundless. The Court took into consideration the fact that the taxpayer is an attorney, and is admitted to practice before the Court.

The Court noted that the taxpayer had represented other taxpayers in Olmos v. Commissioner, T.C. Memo. 2007-82, and in Heers v. Commissioner, T.C. Memo. 2007-10. In Olmos, the taxpayer failed to file a tax return for 2001. In representing Olmos, Harp offered no evidence in support of the taxpayer but simply objected to all but one of the IRS exhibits. The Court overruled the objections, upheld the IRS determination of tax liability except for a $72 interest income item, and imposed the additions to tax proposed by the IRS. In Heers, the taxpayer failed to file a tax return for 2000. In representing Heers, Harp offered no evidence in support of the taxpayer but objected to three of the IRS exhibits. The Court overruled the objections, upheld the IRS determination of tax liability, and imposed the additions to tax proposed by the IRS.

The Court’s decision in Heers was delivered in January, and its decisions in Olmos and Harp were delivered on the same day, April 9. In baseball, three strikes and the batter is out. It would not be surprising to learn that the Tax Court has initiated proceedings to bar Mr. Harp from practicing before it, or to learn that Louisiana does the same.

In Some Aspects of Tax Law Aren't Complicated, I wrote, “So it is particularly embarrassing when someone not filing a required tax return is an attorney.” Today I must write, "Something is very seriously wrong when tax attorneys fail to file tax returns. It is more than embarrassing. It is dangerous."

If the students in the basic tax course that I teach learn only one thing, it should be that they are under obligation to file federal income tax returns. Even if they don't learn how to prepare their own tax returns, an outcome quite understandable considering how complicated federal income tax law has become, they should learn to find a competent tax professional to prepare the returns for them.

The students in the course also learn that failure to file income tax returns is high on the list of reasons for which attorneys are disbarred or otherwise subjected to discipline. In many instances, the failure to file is also a symptom of other difficulties, and in other instances it stands alone.

Despite the not uncommon occurrence of lawyer being indicted for failure to file tax returns, each time such a situation comes to my attention the bewilderment reawakens. Why? By now every attorney should be aware of the filing requirement, should be aware of what happens to those who don't comply, and should take steps to ensure he or she doesn't go down the same unwise path. I confess that the first thing I do is to determine if the lawyer in question is a former student. Were that to happen, the bewilderment would be infused with frustration and disappointment.

News of the most recent information (equivalent to an indictment) reached my ears from a friend. Shortly thereafter I located the text of the information. The information is short. The defendants are accused of receiving gross income and not filing required tax returns.

Perhaps at trial the defendants will prove that they had no gross income, or that they filed returns which were misplaced by the IRS. I doubt it.

Attorneys, despite all the jokes, are entrusted with the care of the nation's law and legal system. Without those laws and without the legal system, anarchy and ruin would prevail. So it is particularly embarrassing when someone not filing a required tax return is an attorney.

Rightly or wrongly, law schools take pride in teaching law. Can law schools teach values? Should law schools be doing the work that should be underway long before their students arrive? Should law schools and bar examiners become more involved in screening bar applicants? Are those institutions capable of identifying those who will take a wrong turn? I don't know. I doubt it's that simple. It surely isn't as simple as understanding the basic precept that lawyers are obligated to file federal income tax returns.

A few months ago, in Just A Chance, That's All, I commented on the attempt by Mel Thompson to sit for the Connecticut bar examination and the litigation he commenced when he was denied the opportunity. I noted that Mr. Thompson "took the route he took, not because he did not qualify for admission to an accredited law school, but because he faced financial obstacles" and asked, "Should his past financial struggles relegate him to a lifetime of being an over-educated paralegal?"

Recently I received an email from Mr. Thompson. He reports the his case was dismissed, on ripeness grounds. It was, and some of the claims were dismissed on account of standing and abstention. Mr. Thompson intends, as I understand it, to make a formal application for review of his unaccredited legal education, receive the expected rejection, and then renew his lawsuit. The irony, according to Mr. Thompson, is that the rejection will occur because the Connecticut Bar Examining Committee will not approve unaccredited education. He explained the financial obstacles that drove him to a less expensive, though unaccredited, law school. According to Mr. Thompson, some of his financial difficulties arose from an insurance company's refusal to pay to his mother the proceeds from an insurance policy on his mother's mother. His explanation includes an assertion that the first lawyer retained by his mother missed deadlines, thus preventing the next lawyer from pursuing Connecticut Unfair Trade Practices Act remedies against the insurance company. The case settled, but by the time the lawyers were paid and the expenses of the grandmother's estate were paid, not much remained. So Mr. Thompson undertook support of his mother in addition to his wife and child. And became even more motivated to enter the profession. He wouldn't be the first person to decide on a law career after having had a good or bad first-hand experience with lawyers.

I note, though, that when I go to the webpage of the Connecticut Bar Examining Committee cited by the court as stating "correspondence and internet law school work will NOT be approved," that language no longer is on the page. The court cites the page as having last been visited on March 29, so at some point during the last week the language in question has been removed. Nothing on the page or in the source code provides a revision date, but I'm guessing that the language was removed because it may have provided difficulties for the Bar Examining Committee on appeal. Of course, if the language was there when Mr. Thompson undertook to receive approval to sit for the bar examination, it ought not matter on appeal that the language was removed after the fact. A careful reading of the opinion provides a basis for speculating why the language was removed from the website.

Even though it is fun to engage in an intellectual slugfest, this situation is one in which it makes more sense to settle the matter in a practical way. Let Mr. Thompson sit for the bar examination. If he fails, then at least he knows he had the chance and didn't measure up. If he passes, then he knows his education, his study habits, and his experience made it possible for him to demonstrate an ability to practice law in Connecticut not demonstrated by the roughly 25 percent of Connecticut bar examinees who attended accredited or approved law schools and yet don't pass the examination. What's the harm in taking that approach? It's not as though Mr. Thompson is an applicant who has had no legal education, with respect to whom at least an argument can be made that the existing rules save the person from wasting their time and money in a futile effort. For Mr. Thompson, the attempt to pass the bar is not a futile effort. True, he's not a shoe-in but few are, but he's also not predestined to fail.

I expect we will hear more as this story develops. Stay tuned.

It's time for a followup to yesterday's post on Tax and Music: Sometimes the Combination is Frightful. A reader sent along a link to the SIRIUS Beats the Tax-Time Blues Contest. Entrants write the lyrics, and those penned by the winner will be sung by blues artist Shemekia Copeland. I don't think she raps. I'm tempted to put my literary skills to the test. Or perhaps I'll wait until it's time to write the lyrics for the Teaching Taxation Tango contest.

Yes, it's getting scary. Be afraid. Be very afraid.

I am interested in tax. I am interested in music. So why am I bewildered by the appeal of the TurboTax Tax Rap Contest?

Perhaps it's because the entries I've seen are so bad? As of this moment there are 370 entries. It's possible to watch all of them by going to YouTube and using the arrow buttons to move from one page of entries to another. There doesn't appear to be a full list of entries. Instead, each time a person clicks on the link, an entry pops up at random.

I cannot imagine being a judge for this sort of contest. Vanilla Ice gets to pick the winner. He deserves to be the judge. He gets to listen to 370 entries. Hopefully they make him listen to all 370 in one sitting.

Am I going to enter the contest? No. I'll wait for the Gregorian Tax Chant contest. There are some melodies from the Requiem that would be fitting.

Once again, someone's failure to apply scheduling skills has put a taxpayer at a disadvantage. Ronald S. Raczkowski has lost his opportunity to make his case in Tax Court because his petition was not timely filed. In Raczkowski v. Comr., the Tax Court has held that a petition sent by UPS Ground and recorded electronically to the UPS database on the day after petition filing deadline was not timely filed, compelling dismissal of the case. If the dispute is to be adjudicated, Raczkowski must pay the taxes proposed in the deficiency notice and sue for a refund in district court. The advantage of proceeding in the Tax Court, which permits the taxpayer to make a case without advancing the amount in dispute, has been lost.

The rule is simple. Petitions must be filed by the 90th day after the IRS issues the notice of deficiency. A petition that is timely mailed is considered timely filed. So the petition need not be at the Tax Court by the 90th day if it has been mailed by the 90th day. Petitions sent through a private delivery service are treated as timely filed if they are put in the hands of the private delivery service by the 90th day. The IRS has designated delivery company services that qualify as private delivery services, but UPS Ground is not on the list.

This is not the first such case. It isn't the tenth, or the hundredth, or even the thousandth. For year, the Tax Court has been awash in cases involving the timeliness of petition filing. There is no reason that timeliness ought to be an issue. Here's what baffles me. The 90-day deadline is not a surprise pulled on the taxpayer on day 88. When the notice of deficiency is received, it clearly explains that the petition must be filed by the 90th day (or the 150th if the taxpayer is outside the country). So why not simply calendar the petition for day 80? The petition is a fairly straight-forward document, using boilerplate language for the standard provisions that recite the procedural facts, and that sets forth the explanations for the taxpayer's position. Filing the petition does not require discovery, lining up witnesses, or drafting a pre-trial stipulation.

I suppose the last-minute crisis mentality afflicting so many petition filings is nothing more than a reflection of human nature or modern culture. Raczkowski was a pro se taxpayer, but attorneys have not been absent from the long list of case managers who failed to meet the deadline. The inability to plan ahead and to allow a cushion for the unanticipated snag begins at an early age. Leaving things go to the last minute is nothing but a recipe for trouble. Some law students seem to think that it is more important to learn how to argue for a deadline extension than it is to learn how to meet deadlines. Some law faculty think that rewarding a good excuse is more beneficial than teaching the lesson of consequences for tardiness.

Life teaches all of us that unplanned distractions occur when they are least expected. Some people take a lifetime to learn the lesson. Others figure out early in life that it's best to plan ahead and to allow for uncontrollable delays and interruptions. Why wait until the night before the exam to cram? The exam isn't a pop quiz. Why wait until the 90th day to begin the process of shipping a petition to the Tax Court? Every time someone misses a deadline and is let off the hook, that person learns to disrespect deadlines just a little bit more.

One of the most common reasons for attorney incompetence is letting a statute of limitations expire without taking the appropriate procedural action. Sometimes the consequences are tragic. The Tax Court has no choice but to dismiss the petition, because it has no discretion to change the rules. The same constraints limit the ability of courts to ignore noncompliance with a statute of limitations. It seems that in recent years law faculty and law school administrators are becoming less generous in brushing aside missed deadlines. Someday we may be fortunate, and discover that all incoming law students, and thus future lawyers, arrive with a deep dedication to being on time. That would tell us, of course, that their K-12 and undergraduate classmates also experienced the sort of education that instilled in them the need to be no less careful with deadlines as with walking one's child across the street. Considering the huge economic disadvantages that deadline noncompliance generates, life would be much better for everyone if last-minute craziness abated, taking with it the speeding commuter late for work, the surgeon who closes up in a rush, and the Congress that doesn't get fiscal year budgets approved in time. And I think my librarian friends would be thrilled if they no longer were confronted with overdue books and the need to impose fines.

Thanks to Paul Caron and his TaxProf blog for the link to the case.

Andy Cassel has written his last column for the Philadelphia Inquirer. He is steering his career into a related, but different, path.

It's so fitting that Andy's last column focused on "Teaching Economics to the Young," a topic that has interested me over the years. I looked at the problem of inadequate economics high school curricula in Economically Depressing? almost two years ago, and made consistent references to the need for reform in posts such as FTC Report on "Shocking" Gasoline Prices Not a Shock and Gasoline Prices. Surely if taxpayers understood economics, their reaction to events and decisions would reflect more analysis and less emotion.

Though Andy's job title was columnist and his profession journalism, to me he was, and remains, a teacher. What he tried to do in his columns was not unlike what I try to do when I teach. I pointed this out to him in one of our conversations. He knows and understands a lot about economics, and I know an understand a lot about taxation. Each of us has the same goal, namely, take our knowledge, understanding, and experience, and package and present it to those with less knowledge, understanding, and experience, in ways that encourage them not only to learn more but also to think deeply about the subject matter. Each of us has struggled with the tension between oversimplifying material to the point of uselessness and burying novices with too much material.

The differences between our teaching environments favored Andy. He didn't get to grade exams, and I guarantee he's not weeping about it. In my teaching career, perhaps 4,000 students have made their way through my classrooms. Andy's columns were read by ten or twenty or fifty times as many people in one day. Oh, well, I get to use Powerpoint slides and student response pads ("clickers") so I get to say I have more chances to use electronic toys when I teach. :-)

Many of us will miss Andy Cassel's columns. We will go through withdrawal. In his new position, Andy will continue to teach, though most of us will not get to witness it. I'm not ready, though, to confine Andy to the list of "former columnists." I have a feeling that the joys of teaching will continue percolating within him, and before too long we will see his signature to something, be it column, blog, digital forum, or book, in which he continues to educate us about business and economics.

All the best, Andy, and thanks.

Ring up some accolades for a creative idea. The folks at Refunds for Good have been busy connecting their attempt to make taxpayers aware of the telephone excise tax refund with their support for several charitable causes.

As I noted in Ignorant About Tax? It Might Be Dangerous to Life and Law Practice, the IRS reports that only 40 percent of taxpayers eligible for the telephone excise tax refund are claiming it. Previously, I have explained that although Computing Telephone Excise Tax Will Keep Some of Us Busy, for most of us, including myself, when we get around to Adding Up The Telephone Tax Refund, we will discover that the easiest approach will be to claim the standard refund by filling in the appropriate line on the tax return.

At Refunds for Good, there are explanations of the excise tax, why it was enacted, and why a portion is being refunded. I get the impression that the thinking behind the project is this: the refund is a windfall, people weren't expecting it, a majority of people aren't claiming it, so let's motivate people to claim the refund and then, because they weren't expecting it, encourage them to donate the refund to one of the charities. Because there's no way to tell the IRS "just send my refund to charity A," the donation needs to be made through the web site.

Ironically, at the same time many people are overlooking the refund to which they are entitled, others are designing schemes to generate excessive refunds. In its 2007 Dirty Dozen Tax Scams, the IRS ranks telephone excise tax refund abuses number one. Ouch. The IRS intends to investigate and "take prompt action against taxpayers who claim improper refund amounts and against the return preparers who help them."

Would it make sense to take the excise tax refunds that go unclaimed and contribute them to charity? The snag is that there's no workable way to identify the charities that would be the recipients. If all charities participated, each might end up with a very small amount. Distributing the refunds in proportion to the charity's other donations would favor the larger charities, and those might not be in as much need of help as are smaller charities.

Visit the web site of Refunds for Good. Decide what you want to do or not do. Don't be surprised if similar sites begin popping up. Personally, I'd like to see a longer line-up of charitable organizations, but I still prefer the ultimate decision on what to do with the refund being made by taxpayers and not by the government. Refunds for Good provides a limited, but creative, opportunity that very well may be just the first step in a new approach to charitable giving.

About a month ago, in Selling Off Government Revenue Streams: Good Idea or Bad?, I considered the many factors that need to be taken into account in deciding whether a public asset, such as a turnpike, should be sold to private entrepreneurs in order to generate an accelerated payment representing the value of future revenue streams. I concluded that it was not a good idea, but suggested that the issue should be openly debated and not left to back-room process so common in legislative operations.

There is good news and bad news on this continuing story. The good news? According to this Philadelphia Inquirer story, polls by AAA, which opposes the idea, have found "little support" for the proposals to lease or sell state-owned toll roads in Pennsylvania and New Jersey. A survey of letters and email delivered to legislators and comments shared on internet forums "all indicate significant public skepticism" about the proposals. One poll suggested a roughly 70 percent to 20 percent split, with the majority of those polled disapproving the plans. In another poll, 40 percent strongly opposed selling the roads and 13 percent strongly supported such a move. What's so good about this news? Principally, the issue is being set in front of voters and the polls have encouraged them to think about it.

The bad news? There are several items in this category.

The same polls proposed a variety of ways to fund transportation services. The only one to get more than 20 percent positive response was "none of the above." Among "the above" were leasing the roads, which fewer than 15 percent supported, increasing gasoline taxes, also getting a less than 15 percent positive rating, raising other taxes, which fewer than 10 percent favored, and charging tolls on existing and new roads or establishing a tax based on miles driven, which fewer than 20 percent supported. My question to the citizenry is this: how should highways and other transportation projects be funded?

Another disturbing development is that the "expressions of interest" provided by businesses interested in leasing the Pennsylvania Turnpike have been kept secret. The reason provided by the Department of Transportation is that there is "possible proprietary information" in the materials that have been submitted. How can public decisions be made if the information is kept hidden? Are not the voters entitled to know what makes a think tank think it can operate the highways? Are not they entitled to know what life on the toll roads will be like if they are operated by New York investment banks, Philadelphia law firms, construction companies, international developers, or even former employers of the governors of the two states? Here's my question: ought not law firms stick to law practice? Wait, here's another one. Ought not investment banks stick to investment banking? The "get rich quick" aspect of the proposal, attracting all sorts of enterprises with no expertise in road operation, should be a red flag to the public. If it's that good of a deal, ought not the roads be owned by the citizens? Just as they are at the moment. Why change things? Why sell the golden goose?

This matter ought to be put to a referendum at the next election. It ought not be left to the wheelings and dealings of politicians, lobbyists, and highway operator wannabes.

Somehow I missed Joe Kristan's response to my response to his response to my posting, Health Care Standard Deduction: Solves Uninsured Problem?. OK, to get this in the right sequence, that was my original post. Joe replied in DR. MAULE AND THE BUSH HEALTH CARE PLAN, I responded in Yes, I Missed Something in Analyzing the Proposed Health Care Standard Deduction, and Joe came back with IN THIS CORNER, THE VILLANOVA MAULER.

In his last post, Joe confirmed some of what I had figured without being as certain as I usually am. He also filled in some additional information to clear up some loose ends in the discussion.

Joe closed with this comment, "I don't know whether I've satisfied Dr. Maule, but at least I hope I haven't made him angry." Yes, Joe, you filled in my knowledge gaps nicely. No, I'm not angry at all. I do hope my long-delayed response didn't come across as dissatisfaction. Hardly. I could claim it was the busy tax season but I'm not doing very many returns; I've been buried in some writing projects when I'm not teaching.

Perhaps this commentary should be titled "Dividing Tax Hairs." A recent case from the Tax Court, Goode-Parker v. Comr., T.C. Summary Opinion 2007-40 (13 March 2007)), illustrates why tax law sometimes makes people blink and throw up their hands in disgust.

A bit of background. Although one might think the United States Tax Court has jurisdiction to hear any dispute involving federal taxes, that is not so. One dispute that the Tax Court cannot decide, generally speaking, is a disagreement over collection. Thus, if a taxpayer reports a $5,000 income tax liability on the tax return and the IRS asserts it should be $8,000, the IRS will assert that there is a "deficiency" in the taxpayer's taxes, and issue a notice to that effect. The taxpayer has the choice of paying the $3,000, claiming a refund, and suing in federal district court for the refund after the IRS denies it, or simply going to the Tax Court for resolution of the correct tax liability without paying any tax until after, if at all, the IRS prevails in the Tax Court. In contrast, if the taxpayer properly computes a tax liability, for example, of $12,000, but doesn't pay it, then the IRS initiates collection procedures and the Tax Court doesn't get involved.

In Goode-Parker, a married couple, both of whom were lawyers, filed a joint return. The husband prepared the return, properly computing $18,650 in income tax and $9,796 in self-employment tax. He neglected to add the two tax amounts together. Thereafter, the couple separated. When the IRS sought to collect the tax, the wife claimed innocent spouse relief, and filed a petition in the Tax Court.

For the Tax Court to have jurisdiction to review a claim for innocent spouse relief, there must be a deficiency in the return. The IRS argued that there was no deficiency because the proper amount of the taxes had been reported on the return, though not all of the taxes had been paid. The wife, however, claimed that there was a math error on the return and math errors can give rise to deficiencies.

The Tax Court concluded it did not have jurisdiction. It explained that a deficiency exists if the tax shown on the return is incorrect. The Court decided that the tax was shown on the return even though it was not aggregated onto line 51 as "total tax." The Court agreed with the IRS that a tax is shown on the return if it is reported in any place on the return, even if no grand total is computed. The court dismissed the wife's argument that there was a math error by examining the facts in the light of the language of section 6213(g). That provision lists various math errors, the one closest to the case being "an error in addition, subtraction, multiplication or division shown on any return." The court characterized the error made by the husband as a failure to add rather than a mistake in the addition. According to the Tax Court:

... there is a distinction between a “mathematical error” and omitting a step that requires math. A “mathematical error” occurs when someone multiplies when he should have divided or when his computation produces an erroneous result. Id. In this case, Mr. Parker didn’t botch the addition, he just skipped a step that required addition, and under Huffman that is not the same thing. .... This admittedly very subtle point means that Ms. Goode-Parker’s liability is neither an understatement nor a deficiency, because her return showed all the tax imposed.

What a fine line that is! Failure to perform a mathematical calculation is not a math error. It's an error, but not a math error. In contrast, doing a mathematical computation but mistakenly determining an outcome in a mathematical function is a mathematical error. I wonder what school children can do with this. "But, teacher, I didn't make a math error, I simply forgot to do the multiplication assignment you gave me. So my grade should not be as low as Bobby's, because Bobby multiplied 8 times 7 and wrote down 33." I surely hope no teacher buys that sort of argument. At best, it helps teachers and parents identify budding lawyers.

Of course, the underlying issue is why the Congress has determined not to give the Tax Court jurisdiction over a case such as this one. The answer is easy. The dispute in the case does not require analysis of substantive tax provisions, it does not require determination of whether a gross income exclusion or inclusion provision applies or whether the taxpayer qualifies for a deduction or credit. The dispute is simply who must pay the properly computed tax liability. That is more in the nature of debtor-creditor law than tax law as such. Rather than letting the Tax Court get bogged down with issues that the federal district courts can handle, the Congress chose to steer the talents of the Tax Court judges to matters of substantive tax law. There are some exceptions, but those ought not be permitted to obscure the basic paradigm.

Several days ago I received a letter from Senator Max Baucus, chairman of the Senate Finance Committee, and Senator Charles E. Grassley, ranking member of that committee, in which they asked for "suggestions on ways to improve compliance with our tax laws, including specific recommendations to reduce the tax gap." The letter was sent to the tax professors who joined in a letter to Senator Baucus last summer, requesting that he stop blocking the appointment of Eric Solomon to the position of Assistant Secretary for Tax Policy. Baucus had been blocking the nomination because he wanted Treasury to produce a specific plan for closing the tax gap. I was one of almost 100 tax professors who signed the letter. Eric has since then been approved for the position.

The letter that I and my many colleagues received has been posted by Paul Caron on his TaxProf Blog. Take a look at the letter.

The tax gap is a serious problem. Having reached several hundred billion dollars a year, the cumulative unpaid tax liabilities probably would wipe out a huge chunk of the federal debt. No, it would not wipe it out, and the tax gap ought not be an excuse for unwise tax and spending policies that contribute to the federal deficit, but there's something seriously wrong with the nation's collective sense of civic duty when compliance rates on certain types of income fail to reach 60 or 70 percent.

The tax gap has been the subject of several posts on MauledAgain. In January, I pointed out that Closing the Tax Gap Requires Congressional Introspection. In March of 2006, I wondered what would be important in Closing the Federal Tax Gap. In December of 2005, I noted that theTax Gap [Is] Becoming a Tax Chasm. Earlier, in April of 2005, I asked, The Tax Gap: BIG. Wonder Why?.

The tax gap, for some reason, never recedes into the background. In every one of the 31 sections of basic federal income tax that I have taught during the past 28 years of law teaching, I have made it a point to turn my students' attention to its existence and causes. Perhaps if they understand how noncompliance impacts them personally, and will impact them during their careers, they may join in the chorus demanding that action be taken to eliminate the tax gap.

When I drafted my response to Senators Baucus and Grassley, I chose to ignore, for the moment, specific proposals and focus instead on developing a unified strategy for improving compliance. Putting specific proposals on the table as the first step invites the sort of process that causes things to bog down or become absurdly complicated. Instead, it is essential that an overarching plan, reflecting a coherent philosophy, be established as the framework on which specific proposals could be attached, with the plan and philosophy setting the boundaries that keep the specifics from becoming unduly complex or misguided. Another reason I ignored specific proposals was to keep my letter short. If my letter, and those that I expect other tax professors to write, are effective, the opportunity to focus on specific proposals surely will be presented.

I close with the text of the letter that I sent in response to the invitation to provide ideas for improving tax compliance:

March 21, 2007

The Honorable Max Baucus
Chairman
Committee on Finance
United State Senate
Washington, DC 20510-6200

The Honorable Charles E. Grassley
Ranking Member
Committee on Finance
United State Senate
Washington, DC 20510-6200

Dear Senators Baucus and Grassley:

Thank you for the invitation to suggest approaches for improving tax compliance. The tax gap is a concern that demands attention from the Congress.

There is no one “magic bullet” to solve the problem. Instead, I advocate a six-pronged strategy for improving compliance. Those six prongs are tax education in high schools, tax simplification, increased reporting, expansion of withholding, funding an improved tax audit process, and strengthening the ability of the Department of Justice to prosecute tax crime.

Making tax education a part of high school curricula throughout the nation would go a long way in reducing noncompliance. A significant portion of noncompliance is inadvertent, the result of taxpayers’ inability to understand the nature of the federal tax system and to recognize the flaws in the many inappropriate “tax savings” schemes offered to them by unscrupulous promoters of noncompliant tax reduction plans. The tax education I suggest is not a technical tax return preparation course, but one that blends an understanding of the rationale for taxation and the basic features of the tax system with advice on how to maximize compliance and minimize the aggravations that arise from noncompliance. Educating citizens before or as they enter the taxpaying world is much more efficient and effective than trying to remove their misperceptions after the fact during tax audits and tax litigation.

Tax simplification is essential if rates of noncompliance are to be reduced. There is a direct correlation between noncompliance and complexity. As the tax law becomes more complicated, the ability of taxpayers to comply decreases. Even tax professionals who have every wish to keep their clients’ planning and return filing within the bounds of excellent compliance struggle with the rapidity of change, the dearth of guidance on many issues, and the numerous questions arising from the interaction of multiple provisions. The opportunities for tax simplification are easy to identify, and have been addressed by many commentators during the past decade. At this stage of analysis, the specifics do not matter as much as establishing a commitment to simplification as part of the effort to improve tax compliance.

Increased reporting is essential to improving tax compliance. Although the tax law is theoretically a “self-compliance” system, as a practical matter were it not for reporting compliance would be even lower than it is. The story of the many dependents who “disappeared” when social security numbers had to be provided has become apocryphal, but it teaches an important lesson. Presently, the principal area of reporting deficiencies involves transactions in which cash is paid by a person not required under current law to report the payment, particularly with respect to payments to self-employed entrepreneurs. Although imposing a reporting requirement on taxpayers currently not subject to such a requirement would be burdensome, it may be the only highly effective means of curtailing noncompliance in this area. Reducing the $600 reporting threshold to $250 or $300 would also bring within the tax system many transactions that under current law go unnoticed.

An expansion in the reach of withholding also is essential to improving tax compliance. Not surprisingly, studies show that when tax is withheld, the incentive to file a tax return that reports the income on which the tax was withheld increases significantly. Despite reporting of interest and dividends, compliance with respect to those items remains lower than compliance with respect to wages, for the simple reason that withholding on interest and dividends is not required in the manner it is for wages. Although payors of interest and dividends oppose withholding because of allegedly substantial compliance costs, changes in technology since the failed effort to impose interest and dividend withholding several decades ago make it a much more feasible arrangement. The truly difficult issue is whether withholding requirements should be imposed on the many transactions that escape taxation because they are smaller in amount and facilitated in cash. If imposing a reporting requirement on payments by individuals to self-employed entrepreneurs would be controversial and burdensome, a concomitant withholding requirement would be even more so. Effective alternatives do not appear to exist.

Funding an improved tax audit process would go a long way toward bringing tax returns into better compliance with the tax law. So few audits are conducted that too many taxpayers are willing to play the “audit lottery.” Though audit rates have increased slightly in recent years, they remain at dangerously low levels. Whether the audit rate is 0.8% or an “improved” 1.3%, an overwhelmingly vast number of tax returns go unexamined. Comprehensive audits of every tax return is impossible, but if the audit rate reached four or five percent, taxpayers would notice. The IRS is unable to conduct sufficient audits because it lacks resources. Congress would send a strong message by acting in a manner consistent with the special status of the IRS, namely, an agency in which every dollar invested generates multiples of dollars in return. Though it may be politically expedient to “bash” the IRS, it takes serious courage to support and adequately fund the only agency that stands in defense of tax revenue.

Finally, strengthening the ability of the Department of Justice to prosecute tax crime not only deters other taxpayers from acting in similar ways but also blocks the ability of tax fraud marketeers from continuing their efforts. Those who encourage taxpayers to ignore the tax law should be punished even more harshly than those who commit tax fraud on their own tax returns. A taxpayer who files a fraudulent return damages the revenue to the extent of the unreported tax liability. A person who entices dozens or hundreds of taxpayers into noncompliant filing damages the revenue by amounts that are orders of magnitude greater than the negative impact of the taxpayer who files a fraudulent return. Strengthening the efforts of the Department of Justice to prosecute tax crime requires not only funding but also laws with increased penalties and broader definitions of aiding and abetting tax fraud.

These six prongs of a concerted effort to increase tax compliance are harmonious. In other words, as more success is obtained with the first two prongs of tax education and tax simplification, the need for the other prongs will diminish. The same can be said of the impact of success with the third and fourth prongs on the last two. Similarly, as tax simplification grows, tax reporting will become less burdensome because it, too, will become less complex.

Although the six prongs are harmonious, the first two are the most important. The tax system has evolved into a morass that exceeds the abilities of most taxpayers, and many tax professionals, to understand and comply. If the tendency of taxpayers to think that they must “cut corners” in some way when filing tax returns continues to increase because they sense that the complexity affects them more adversely than it affects others, the tax gap will grow accordingly. Sooner rather than later, the system will collapse. The tax gap concern that you are addressing will pale in comparison to the challenges that would then face not only your Committee but the entire nation. In other words, what you do now is of utmost importance.

An opportunity to discuss my suggestions in greater detail would be welcome if you choose to seek additional explanations. In the interest of brevity I have refrained from writing a treatise. There is much more that could be said when the time is appropriate.

Thank you for requesting my ideas. I am happy to have shared them.

Sincerely yours,

James Edward Maule

I will let you know if I receive a response.

Ever since I started digging into family history, I've known that a disproportionately high number of Thomas Maule's descendants were lawyers, teachers, clergy, and writers. There must be a gene for this, but I don't think they've discovered it yet.

The other day, while continuing with a substantial updating project, I discovered some interesting news.

If I ever become a law school dean, I won't be the first descendant of Thomas Maule to do so. Frank E Holman beat me to it. He is my father's seventh cousin. And if I become a Rhodes Scholar, I won't be the first descendant of Thomas Maule to do so. He did that, too. And if I become president of the American Bar Association, I won't be the first descendant of Thomas Maule to do so. Yes, he did that, too. See his Wikipedia entry and his History Link entry.

But there's another gene whose influence pops up occasionally, namely, interest and expertise in the hard sciences. Holman's nephew, Joseph Wiley Ferrebee, who happens to be my eighth cousin, did "pioneering research on bone marrow transplantation [that] led to the first human transplant." His obituary provides more details. And there's the Nobel Prize winner, Theodore William Richards, grandson of Sarah Ann Maule and second cousin of my great-grandfather. I'll write about him later.

The more genealogy I research, the more some things begin to make sense. It does appear, though, that I'm the first descendant of Thomas Maule to be a tax law professor. If tax is a place where law and science intersect, I suppose I'm a suitable fit.

The last time I posted about Andrew Mitchel's new tax charts, I titled my comments "It's Raining Charts". This latest chart update posting is titled In honor of the wonderful weather experienced by those of us on the East Coast this past weekend. It was, to borrow a word invented by a local meteoroligist, a slizzard. Don't google it unless you want to find the word's use in a totally different incarnation.

There's nothing cold, windy, icy, or slippery about Andrew's newest batch of tax charts:

1. De Amodio (U.S. Rental Properties Were A U.S. Trade or Business but not a Permanent Establishment)
2. Bollinger (Corporation as Agent of Its Owner)
3. Boulez (Payments for Personal Services or for Royalties?)
4. Donroy (Foreign Limited Partner In U.S. Limited Partnership - Permanent Establishment)
5. Garlock Inc. (Shift of Formal Voting Power to Avoid CFC Status)
6. Housden (Resident Alien Required to Withhold U.S. Tax on Alimony and Interest)
7. Johnson (No Basis Aggregation For Section 301 Distribution)
8. Lewenhaupt (Swedish Count Engaged in U.S. Real Estate Business)
9. Linen Thread Co. (Two U.S. Sales Did Not Create U.S. Trade or Business)
10. Moline Properties (Corporation With A Single Shareholder is a Separate Taxable Entity)
11. Morgan (Liquidation - Reincorporation -- Meaningless Gesture)
12. National Carbide (Subsidiaries Were Not Agents of the Parent)
13. Pinchot (U.K. Citizen Engaged in U.S. Real Estate Business)
14. Sante Fe Drilling Co. (Accrual of Australian Income Taxes for Calendar Year Taxpayer)
15. Unger (Foreign Limited Partner in U.S. Partnership had U.S. Permanent Establishment)
16. Rev. Rul. 84-160 (Section 351 Exchange of One USRPI for Another USRPI)
17. Notice 2005-90 (Foreign Tax Credits Not Disallowed In Certain Back-to-Back Licensing Arrangements)
18. Rev. Rul. 2007-8, Situation 1 (351 Exchange / D Reorg Overlap with Liabilities Exceeding Basis)
19. Rev. Rul. 2007-8, Situation 2 (351 Exchange / C Reorg Overlap with Liabilities Exceeding Basis)
20. Guarantee of Bank Debt Does Not Create A Financing Arrangement [Reg. 1.881-3(e), Ex. 1]
21. Back-to-Back Loan Treated as Financing Arrangement [Reg. 1.881-3(e), Ex. 2]
22. Bank Financing Through Intermediate Entity [Reg. 1.881-3(e), Ex. 3]
23. Related Persons Treated As Single Intermediate Entity [Reg. 1.881-3(e), Ex. 4]
24. Related Persons Treated As Single Intermediate Entity [Reg. 1.881-3(e), Ex. 5]
25. Limitation on Benefits: Example of the Need for the Ownership/Base Erosion Test

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, 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 .

It was the headline that caught my eye. CNN announced Americans don't know jack about taxes and followed up with this teaser: "Most taxpayers are clueless about changes to the tax code, according to a new survey, but is that a bad thing?"

The news is no surprise. In more than a few previous posts (such as The Snipes Tax Trial: A Circus in the Making?, How Small is Tax Small?, So Explain Again What It Is That Taxes Are to Provide?, Getting It Right: Questions and a Proposal , Taxes and the State of the Union, and The "Stealth Tax" ), I have advocated teaching tax to high school students because no matter what they plan to do with their future surely they should know some basics so that they can follow public debate on serious issues and become more comfortable or even adept with their own tax planning and compliance.

So the survey results reported by CNN article might surprise some, but they're what I would expect. Three-quarters of the respondents tagged Sunday, April 15, 2007, as tax filing day, whereas it is April 17 this year because April 15 is a Sunday and April 16 is a holiday in Washington, D.C. The IRS reports that only 40 percent or so of taxpayers eligible for the telephone excise tax refund are claiming it. Two-thirds did not know the value of the child tax credit, and fewer than half were familiar with the alternative minimum tax.

The article explains why this tax ignorance can be disadvantageous to taxpayers. Though the article suggests that those who rely on tax software might find their ignorance to be bliss, a general sense of the tax law permits tax software users to spot results that are way out of line. It happens. Many years ago, when computers meant mainframes and not desktops or laptops, I was reviewing a tax return prepared by a computer system operated by a commercial return preparation company (no, not H&R Block), and noted it had calculated a refund of close to $10,000,000 for a taxpayer with just a fraction of that income.

The cause of the ignorance is a combination of three things. One is the lack of tax education in most, or nearly all, K-12 schools. Another is the reluctance of citizens to education themselves about taxation, explaining the disproportionately low enrollments in college tax courses and the reluctance of many law students to sign up for the basic tax course. The third is the complexity, courtesy of the Congress and its lobbyist friends, seasoned with constant changes that prevent even those who want to learn and understand tax from getting enough time to let things sink into their brains.

What might be a surprise is the number of law graduates who don't know very much about taxes. Though some law schools require the course, recognizing how it permeates law practice, many law schools do not. Consequently, when faced with a choice between a rigorous and demanding tax course and an array of less challenging courses, more and more students are taking what they see as the easier path to a higher GPA. Several years later come the phone calls. "I'm a graduate but I didn't take tax and I have a question and I was wondering if you could answer it." Sometimes I'm tempted to make the price for my assistance a visit by the caller to the school to explain the consequences of avoiding the road that is becoming less and less travelled. That one-hour review of tax during bar review turns out not to be the solution.

Oh, well, I'm going to try to find the good news. Here's the best I can do: I doubt that state and federal taxes, unlike many other subjects, is a topic on which school students in other countries would out-perform American students on a standardized test. Seriously, that should be classified as good news only by those who think that American superiority in knowledge about the NFL makes us a nation of in-shape athletes.

My suggestion last week in Law Grads: Time to Start Reading Lots of Tax and Law Books, to the effect that practitioners make lists of courses whose appearance on law school transcripts would have positive or negative effects on the practitioner's eagerness to hire the applicant did not go unnoticed. Whether the comments will give impetus to some sort of national survey of practitioners remains to be seen. Getting comments from fewer than 1/100 of 1% of practitioners isn't necessarily going to persuade the ABA Section on Legal Education to pursue such an inquiry.

One comment in particular, which came from a member of a law firm hiring committee, was telling. Courses in "Law and Whatever" tend to generate suspicion that the students, to use my words, "looked for a law school experience lacking in rigor or were ineptly advised to focus on concerns of little relevance to law practice." In contrast, courses in "Something or Other for Lawyers" cause the practitioner to be, again using my words, "confident that the time you invested in academic pursuits have equipped you for a career in which you identify, prevent, and solve problems through legal research, skillful analysis, and proficient writing."

Today's law students usually think that the only important items on a transcript are cumulative average and class rank. They don't seem to understand that most practitioners look behind those numbers, just as law school admissions committees look behind undergraduate GPAs to examine the identity of the school, the student's major, and the number and type of courses in which the student was enrolled. Why are law students given so little advice, or perhaps even bad advice, on this point? The simple answer is that it is a career-killer for placement office personnel to encourage enrollment in some courses and discourage enrollment in others. Law faculty tend to have egos more fragile than people outside the legal world might expect.

As more and more courses are added to law school curricula that fall into the category less favored by practitioners, enrollments in the other type of course will fall. Already law schools are noticing decreasing enrollment in the so-called "bread and butter" courses, the ones that are tested on most bar examinations and that permeate law practice. Some schools are beginning to notice a correlation between bar passage rates and the courses in which unsuccessful candidates were enrolled. Because bar passage rates are a component of those U.S. News and World Report rankings, they are getting attention. Despite a proliferation of "how to pass the bar" programs and courses, ultimately law schools will discover that the best recipe for success is to return to their primary mission, which is the education of successful practitioners.

I've intentionally omitted the names and descriptions of courses that have been nominated for either category. At this stage of the discussion, there's no need to do so. Perhaps I've provided a blog idea for an interested practitioner.

From time to time students ask me to suggest tax topics that they can discuss in a directed research or seminar paper. Whether they are in the J.D. Program or Graduate Tax Program, I remind them that although I point out possible topics as we cover material in the class, I do not keep a comprehensive list. I recommend that students, who are adept at maintaining outline banks and class notes collections, begin a "possible tax paper topic list" but my idea falls on deaf ears.

As I prepared to comment on a recent case involving the meaning of temporary absence for purposes of the earned income tax credit (EITC), I thought to myself that the issue would make for at least one good paper topic. I wonder if I will remember this when several months or years from now a student asks for a topic idea. For the moment, students who read MauledAgain will get the added bonus of finding a paper topic in today's post.

The case in question is Rowe v. Commissioner, 128 T.C. No. 3 (22 Feb. 2007). It was a fully stipulated case, with both sides agreeing on the facts. It involved a taxpayer whose claimed earned income credit was denied by the IRS on the ground that, because she was in jail for more than half of the year, she failed to meet the requirement that she and her dependents share the same abode for more than half of the year.

The taxpayer lived with her children from the beginning of the year until June 5, 2002. On that date she was arrested, charged with murder, and held in jail. In 2003, she was convicted of murder and sentenced to life imprisonment. After she was arrested, the children's father moved in with the children, in the home of his mother, and cared for them.

The relevant law is deceptively simple. Four requirements must be satisfied for the taxpayer to be eligible for the EITC. In this case, the parties agreed that three of them - age, identification, and relationship - had been met. The issue was whether the taxpayer and her children shared the same principal place of abode for more than half of the taxable year.

At first glance, one might think that because the taxpayer moved from, or was moved from, the home she shared with her children before June 30, that she failed to meet the requirement. However, as is so typical of tax law, the simple is not so simple.

The first problem is that section 32, which provides for the EITC, does not define "same principal place of abode" or describe what constitutes sharing the same principal place of abode for more than half of the taxable year. It doesn't even provide a cross-reference. Instead, taxpayers, tax practitioners, and the court must dig into the legislative history, where the Congress - or more precisely, its staff -- pointed out that the phrase and requirement ought to be interpreted in the same manner as an identical phrase in the code provision dealing with eligibility to use the head of household filing status and its rates.

The legislative history also put a gloss on the statute similar to that found in other instances where a "sharing the abode" requirement exists. Specifically, it pointed out that temporary absences, such as those for purposes of education or for reasons of illness, ought not be treated as time when the taxpayer or the other relevant parties are not sharing the abode. Nothing is mentioned about absences on account of imprisonment.

The regulations interpreting the abode requirement for purposes of head of household filing status state that temporary absences, generally out of necessity, do not count as failure to live in the abode. The regulations give several examples, namely, illness, education, business, vacation, military service, and custody agreement. Imprisonment is not mentioned. The regulations provide that a taxpayer can have the same abode despite a temporary absence if it is reasonable to assume that the taxpayer will return to the household and the taxpayer continues to maintain the household while absent.

The majority in Rowe pointed out that the list of examples in the regulations is not exclusive. Instead, the list is "only a guide" for distinguishing temporary from permanent absences. The majority concluded that imprisonment after arrest but before conviction is nonpermanent and necessitous. The court concluded that a person in jail after arrest and before conviction "intends to return home" in the same manner as does a person who is away from home because of illness or military service. The court noted that the IRS had advised, in a Service Center Advice, that detention in a juvenile facility is a temporary absence that counts as time lived at home for EITC purposes.

The majority then addressed the question of whether it was reasonable to assume that the taxpayer would return home. The majority analyzed a case from 1957, Hein v. Commissioner, in which the Tax Court held that a person confined in a mental health facility for six years was absent temporarily because both she and her sister, who lived in the abode, intended that the person would return home, even though it was unlikely that she would recover her health and leave the facility. The court in Hein emphasized that there were no indications that the person had chosen a new permanent habitation. Applying this analysis to the taxpayer in Rowe, the court concluded that there were no indications she intended to choose a new home, had not yet been convicted, and referred to her mother-in-law's home as her home. The court declined to analyze factors such as the taxpayer's likelihood of making bail or of being convicted. The court noted that as a practical matter, because income earned by inmates while imprisoned does not qualify for the EITC, the holding would apply to narrow instances such as the Rowe case, where a person was in jail for a portion of the year but had qualifying income earned during the other part of the year.

Of the 16 judges participating in the decision, 4 agreed with the majority opinion. Another 5 concurred in the result. Six judges dissented.

The first concurring opinion preferred to resolve the matter in the taxpayer's favor on very narrow grounds. Specifically, the opinion pointed out that in Revenue Ruling 66-28 the IRS concluded that an absence from the household was temporary due to special circumstances without regard to whether it was reasonable to assume that the person would return. In a 2002 case the Tax Court had prohibited the IRS from arguing against the principle set forth in the Revenue Ruling. The IRS did not cite the ruling in Rowe, but the concurring opinion concluded that because the IRS position was so much at variance with its position in the ruling and the IRS had not cited or distinguished it the taxpayer ought to have the benefit of its conclusion. The IRS did not address the ruling because the Rowe case was submitted without briefs.

In effect, the ruling was an elaboration of the IRS' acquiescence in the Hein decision. The concurring opinion brushed aside the dissent's point that the ruling dealt with the dependency exemption deduction and not head of household filing status on the basis that the two provisions are identical in this respect. It also noted that the ruling had been cited favorably in the legislative history.

The second concurring opinion was written "to emphasize the very limited nature" of the decision. Specifically, "where a taxpayer is involuntarily removed from her principal place of abode and has not manifested any intent to change that abode, her absence shall be considered temporary" for EITC purposes. This opinion pointed out that the criticisms leveled by the dissent against the majority opinion in Rowe apply equally to Hein, and yet the IRS acquiesced in Hein, issued a revenue ruling following its reasoning which the Congress has cited favorably, and gave similar advice in the matter involving the juvenile facility detention. In other words, the IRS and the Congress "seemingly agree" with the result in Hein.

The dissent objected to the holding because the majority and the concurring opinions did not apply the reasonable expectation of return test and looked simply at whether there was a lack of evidence manifesting an intent by the taxpayer to change her place of abode. The dissent preferred to analyze the likelihood of the taxpayer's return and concluded that under the circumstances it was unlikely to occur. The taxpayer, having failed to present evidence that she intended to return, did not meet her burden of so proving. The dissent also devalued the applicability of Revenue Ruling 66-28 because it applied to the dependency exemption deduction rather than head of household filing status.

There are two ways of viewing this case. One is that it addresses a relatively unusual situation, affecting few taxpayers, and thus has limited applicability. The other is to use the case as an illustration of how tax law becomes complicated and convoluted. Why did Congress not deal with the issue in the text of section 32? Why is incarceration not mentioned one way or other in the regulations? Why did the IRS issue a Revenue Ruling that, in all fairness to the dissent, does "by stealth" effectively overrule a portion of a regulation? Why was the case submitted without briefs? Why has the Congress not provided for a uniform definition of the term "temporary" as it applies to occupation of an abode or maintenance of a household?

Those many people who think tax law is simply a matter of numbers would learn much by reading the Rowe opinions. There is nothing in them to deter those with alleged fear of mathematics. They are replete, however, with legal analysis, of the sort demanding sharp logical thinking. That the judges could divide over the result is a consequence of the murky precedents available to them.

I doubt the case will be appealed. I wonder if it will cause Chief Counsel to open a regulations project that settles the entire "temporary absence" issue for purposes of all the provisions that incorporate it. I do not doubt that the case will inspire a law review article or a student paper.