MauledAgain

Recently an interesting question was posed to tax practitioners and taxpayers: How long should tax records be retained?

Answering the question requires a definition of tax records. Tax returns are tax records. So, too, are supporting schedules not filed as part of tax returns. Also included are the receipts, contracts, and other documentation that justify the inclusions, exclusions, deduction, and credits reported and claimed on the return.

Many commentators look at statutes of limitations and conclude that once a statute closes, it's acceptable to trash (or shred) the files. I disagree.

My answer to the question is simply "forever." In an age when information can be digitized and preserved, the principal objection that traditionally has been raised, the need for storage space, can be dismissed as insignificant. Yes, there are some issues. Relying on a program like Turbotax to be the archive is dangerous; when I installed my first Windows XP system I discovered that earlier versions of Turbotax could not be loaded and thus there was no way to access the datafiles created by Turbotax. But the print-outs of the returns can be scanned and retained in a format no so proprietary as that used by Turbotax. It would not be surprising to discover that an enterprising entrepreneur will write a utility that permits read-only access to tax returns stored in proprietary format.

Why do I say "forever"?

First, to assume that a statute of limitations has closed is to put too much faith in the IRS taking the same view of the taxpayer's return as does the taxpayer. If the IRS asserts fraud, despite the fact it has the burden of proof, a savvy and prepared taxpayer should have in hand the documentation to refute any IRS allegations.

Second, to trust the IRS to provide a copy of an old return is to put too much faith in the IRS computer systems. The sorry state of IRS technology is well documented.

Third, tax data may be useful in litigation that deals with years for which the tax statute of limitations has closed. Tax data has value for more than simply determination of tax liability.

Fourth, many tax computations use adjusted basis, which in turn reflects transactions entered into during all the years that the taxpayer has owned the property or predecessor property and perhaps years during which the taxpayer's predecessor owned the property. Tossing a stock purchase record or a home improvement invoice once the tax statute of limitations closes for the year in question is foolish. Even if the IRS were totally reliable in producing old tax returns, even if the IRS accepted the taxpayer's denial of fraud, and even if tax data were useless in other litigation, this fourth reason alone compels the retention of tax records.

Strangely, the IRS itself advises taxpayers to dispose of records after specific periods of time, usually three to seven years. I'm not about to rely on IRS advice with respect to this issue. In all fairness, the IRS describes the period for which records MUST be retained, whereas I'm addressing the question of whether it is prudent to dispose of tax records for longer periods. And in all fairness, the IRS advises retaining records with respect to property until three to seven years after the taxpayer disposes of the property.

Considering how much time it would take to sort through each year's tax file, it's faster, safer, and cheaper simply to retain the file. If space is an issue, digitize it. In the long run, it makes the most sense.

Usually I'm dissecting or criticizing the tax law, or questioning the actions of legislators and other decision makers that affect taxation. Sometimes I turn my attention to legal education, or education generally, sharing insights and experience. Today I turn to another of my selected topics, but one that infrequently takes first billing.

When I turned to the business section of Saturday's Philadelphia, it wasn't the headline, Hershey's 'mockolate' move that alarmed me. I had never seen the word mockolate and wasn't certain what it meant. Did it mean jeering those who are tardy? No, it doesn't.

It was the next sentence that startled me: "Would chocolate containing trans fats and sugar substitutes taste as sweet as the real thing?" No sooner was I taken aback by the question than my brain began circulating wake-up signals when my eyes scanned the next sentence: "Hershey Co. and other candy-makers say yes." In an instant I had figured out what mockolate was, and identified a looming disaster for those who appreciate the medicinal and recreational characteristics of chocolate.

Here's the story in a paragraph: The Chocolate Manufacturers Association, membership in which belongs, of course, to large chocolate manufacturing enterprises, has asked the Food and Drug Administration to redefine chocolate. The CMA wants cocoa butter and cocoa solids removed from the definition so that substances made with artificial sweeteners, milk substitutes, hydrogenated vegetable fats and trans fats could be marketed as "chocolate." The motivation for the request is an increase in cocoa prices caused by speculation with respect to future weather patterns.

Let's take this apart. Let's enumerate the glitches in the reasoning.

First, the CMA wants to redefine chocolate so that people can pretend something that is not chocolate is chocolate. Shades of post-modern deconstructionism. "Here, have some broccoli, but pretend it is chocolate." Why is the world so enamored of the pretend game? When will it stop? Perhaps I can petition the NBA to redefine "power forward" and you can see where I will take that one. So what that the net needs to be brought down to six feet so that I can slam dunk?

Second, cocoa is what makes chocolate chocolate. Automobiles remained automobiles even when manufacturers began installing halogen headlights and radial tires. But when we run out of gasoline and return to riding horses, will we redefine automobile so that we can call our horses automobiles? If there's no cocoa, it isn't chocolate.

Third, why in the name of all that is intelligent and good would anyone with a dedication to justice and an appreciation of common sense advocate the insertion into chocolate of trans fats? Has someone been trying to out-do the poisoned pet food fiasco? Trans fats are so bad that some cities have banned their use and sale.

Fourth, why has the world's economy been hijacked by gamblers who, bored with slot machines, poker, roulette, and other games of chance, have invaded the stock and commodities markets to gamble on future prices? Last year, they ran up the cost of oil without increasing its value. Now they're running up the cost of cocoa. Don't they have something better to do, something that would actually add to the world's wealth rather than manipulate it? Perhaps filling potholes, inventing solar automobile energizer packs, or developing cures for cancer? Wait, that sounds like work.

Fifth, even if the price of cocoa is increasing - allegedly for a pound of chocolate made with cocoa that costs $2.30 someone can conjure up the trans fat "mixture" for 70 cents per pound - why not simply raise the price? After all, we get what we pay for, and if we want chocolate it ought to be available. If we prefer "trans fat junk" we can opt to purchase that stuff. But don't call it chocolate. Oh, it also might help to reconsider some of the other costs of manufacturing chocolate, such as the multi-million dollar salaries of the CEOs who labor away, sweating the tough task of figuring out how to dupe people into thinking that some sort of trans fat brew is chocolate.

Fortunately, the ploy has been revealed. Cyble May, of CandyBlog is encouraging people to file protests with the FDA. Gary Guittard, owner of Guittard Chocolate Company opposes the trans fat substitution plans of the megagiant chocolate companies and is organizing opposition to the proposed deception. He has set up Don't Mess With Our Chocolate, and has succeeded in persuading the FDA to extend the period during which it will accept comments.

Apparently this trans fat concoction, which surely is no confection, is available. A Julie Anderson, for whom I cannot find a blog but who reportedly writes on the topic of chocolate, claims that there is a "distinct taste difference" between chocolate and the trans fat stuff. She describes it as "waxy or greasy." Kudos to Julie for subjecting herself to this experience in the interest of keeping us informed about the true nature of the trans fat product. Karalee LaRochelle, who owns Cocoalocoa, reminds us that genuine chocolate has flavenols and antioxidants that don't exist in trans fats. Flavenols and antioxidants are what reduces the risk of strokes and heart problems. Here's what I'm thinking: so not only is the peddling of trans fats bad because they're unhealthy, they also remove the healthy components of chocolate. If chocolate has a health value of +50, the trans fact concoction has a health value of -50. Perhaps the CMA would like to make a big donation to our health care plans to cover the costs of the increased health problems caused by the replacement of flavenols and antioxidants with trans fats? Uh, there's a reason that trans fats are cheap. They're garbage.

Isn't it interesting that as the megagiants keep gobbling up smaller businesses, the quality of service and the quality of product heads downhill? Bigger isn't better, and the business schools of this country need to start teaching this to their students and to their graduates. The insane dash for money, at the expense of all values, is poisoning society no less than the rush to increase profits by selling tainted pet (and, supposedly, human) food puts the species at risk of extinction. My cynical side, the one that sees something more than coincidence in much of the bad side of life, wonders if the plan to infect chocolate with trans fats is wholly unrelated to the decision to fill food with contaminants. Remember the sawdust that was used to put "fiber" in bread?

It isn't too difficult to imagine the CMA or chocolate manufacturers not members of the CMA asking the Congress for a tax credit to subsidize the increased costs of cocoa. There are tax credits for all sorts of activities and expenditures, ranging from energy-related products to the rehabilitation of buildings and the adoption of children. Is the tax law going to be the answer to yet another problem? I hope not.

What adds to the disappointment is this: somewhere there are lawyers investing their talent and education in counseling their clients on how to get permission to use the word chocolate to describe trans-fat mixtures that might superficially look like chocolate the way I might superficially look like a late-in-career middle relief pitcher for a major league baseball team. Did it not occur to anyone that the better, more moral approach would be to market a less expensive product called "Fake Chocolate" and let people decide whether they valued their health and their tastebuds more than they valued money?

The story broke back in January. A Washington radio station, WTOP, using information obtained under a Freedom of Information Act request, gathered information that demonstrated Federal Workers Owe Billions in Unpaid Taxes. According to anitem on Paul Caron's TaxProf blog, on Wednesday Senate Finance Committee Chairman Max Baucus and the ranking Republican, Charles Grassley, write to the President to complain about this news. My concern isn't why it took them three months to get a letter out. After all, they may not have become aware of the news until recently, and drafting a tactful letter takes time. My concern is why nearly half a million federal employees and retirees owe $3 billion in taxes.

Which agency takes the prize for noncompliant employees? Rolling in at 9.4% is the U.S. Commission on Civil Rights. Perhaps it ought to be renamed the U.S. Commission on Civil Obligations and its employees sent to tax compliance classes. Not far behind is the Government Printing Office. Perhaps they ought to be reading the IRS instruction booklets that they print. The Treasury Department comes in near the bottom, at 1.3%. Yes, that's 1.3% too many, but at least the department responsible for tax law administration is near the top in terms of compliance. Even the Tax Court's noncompliance rate is disturbing because 4.9% is simply too high. In terms of total delinquent taxpayers, the Postal Service leads the way with more than 50,000. According to the WTOP report, 71 employees in the Executive Office of the President are delinquent with respect to more than half a million dollars in taxes for 2005 alone.

The WTOP story asserts that the IRS is unable to continue comparing the compliance rates of federal employees with those of the general public because "this year, the IRS is not able to track the compliance rate for the general public." Huh? Why not?

Let's think this through. A substantial portion of the gross income of federal employees comes from salaries. For the retirees, it's their pensions. Most of the remainder would come from investments. Wages and pensions are subject to withholding, and dividends and interest can be made subject to backup withholding if the payees aren't complying with the tax laws. The federal government is the payor of the wages and pensions, and surely can make certain that sufficient taxes are being withheld. Perhaps the underreporting arises from overstated deductions, but the amount in question makes that less likely.

If the IRS knows that these taxes have not been paid, why isn't it collecting those taxes? The IRS claims that it's no easier to collect taxes from federal employees than from other taxpayers. It ought to be easier, though, to slap liens on these delinquent taxpayers and jack up their withholding. Of course, some federal employees, such as those at the IRS, can lose their jobs for not paying taxes. That outcome doesn't bring the cash into the Treasury.

What sort of example are federal employees setting? Is it surprising that taxpayers will try to find ways to avoid taxes so that they're not "left out" of these do-it-yourself tax reduction arrangements? It ought not be difficult for those responsible for running the government to put in place and administer procedures that prevent tax avoidance on income flowing from the federal government. The question is whether they are willing to do so.

Not too long ago, Paul Caron alerted us with this question: Why Isn't Tax on Every State's Bar Exam? Paul was bringing our attention to Seth Chandler's Another Call For Bar Reform on the Conglomerate Blog. I'd like to rephrase the question. Why isn't basic tax a required course in every law school?

Seth points out that bar examiners continue to test on the long-time, traditional first-year subjects and, in some states, on a short list of additional subjects. He explains that in most states, bar applicants are not examined on "(1) administrative law; (2) antitrust; (3) civil rights law (1983, ADA, etc.), (4) environmental law (Clean Air, Clear Water, Endangered Species, CERCLA, OSHA, etc.); (5) Health Law (ERISA, HIPAA, COBRA, Medicare, Medicaid); (6) immigration law; (7) intellectual property law (copyright, patents, trademarks); (8) labor law (NLRA); (9) maritime law" and that "Some states require virtually no knowledge of tax or bankruptcy." I'm happy to report that tax is on the Pennsylvania bar exam, which inspires some students who otherwise would not take the course to take it. Somehow these students, who would not take the course if it were not on the bar exam, and the students who avoid the course for a variety of reasons, principally anxiety, dislike of allegedly boring subject matter, and an unwillingness to take on challenging material, think that they can get through forty or more years of professional law practice ignorant of tax. They somehow think that they can find a practice area in which tax is irrelevant.

Seth predicts the expected bar examiner replies:

(A) These are things lawyers will pick up in practice. (B) We can’t require students emerging from law school to know everything. (C) Once we open the Pandora’s Box there’s no non-arbitrary way to select from amongst the massive set of federal statutes. (D) Statutory law changes too frequently to make it a sensible subject of bar examinations designed for lifetime entry into the profession. (E) Imposing more barriers to entry of the legal profession would raise the cost of legal services or somehow reduce already-low diversity in the profession.

He then expertly takes those excuses apart. His list of client matters that would be overwhelmingly difficult for a law graduate to tackle is well worth reading. Not only is it a long list, but it's a list of common problems likely to cross the desk of many attorneys.

Though I'm in agreement with Seth, I want to push the analysis a bit further. At the end of his essay, Seth relates the comments of a former president of the American Association of Law School, who called Seth's suggestion for reform "the worst idea he'd ever heard." That, to me, is a clue. As the academy drifts unrelentingly into the world of legal philosophy and political jurisprudence, law students are signing up for fewer "bread and butter" courses. The number of students taking courses that deal with the subjects Seth proposes be added to bar exams, with a few exceptions, is dropping. Once upon a time, almost every student enrolled in wills and trusts, business organizations, basic tax, and sales, and many students enrolled in family law, bankruptcy, environmental law, and civil rights courses. International law, which is becoming almost as pervasive as tax, is not on the radar of many students. Now, unless a course is a required course, it isn't uncommon to find that 20, 30, 40 or even 50 percent of the graduates have not enrolled in one or more of the core courses. Aside from evidence, which still pulls in almost as many students as traditionally enrolled, and constitutional law, which is required in most law schools, students are investing their credits elsewhere.

Why?

Many students are very focused on grade point average and class rank, because those matter so much, unfortunately, in their employment search. Students seek positions that will provide the means to pay off huge debt loads. As more than several students have told me, "I can't risk my GPA for a course that presents a high risk of a bad grade." Understand that nowadays a bad grade is anything lower than a B+. At the same time, law school curricula have grown by leaps and bounds, giving students so many choices that "fitting in" the core courses is more difficult. Some of the curriculum growth reflects changes in the legal system, and thus we see courses in international law, immigration law, health law, and technology law. But much of the growth reflects courses that are intellectually interesting and fascinating, though how they connect to what graduates will be doing in practice isn't all that easy to detect.

Very bright students can enroll in just about anything, and adapt well to practice because they are very bright. In some ways, law schools cannot do wrong by their best and brightest. But 90 percent of the students aren't in the top 10 percent, and they need the experience of doing the sort of analysis, interpretation, thinking, and writing that law practice will demand of them. They get some of it, but they don't get enough.

Here's what I think will happen. Over time, employers will become increasingly frustrated by what law graduates are unable to do. Pressed by the business exigencies of law practice, with the bottom line taking center stage, employers will have even less time to train and mentor new associates. Their complaints will find their way to the bar examination committees. Pressure from practitioners to reform the bar examination and adapt it so that it more accurately measures readiness to practice will increase. As the nature and scope of bar examinations begin to resonate with the 21st century, law students will find their way back into the courses that cover the topics of 21st century law practice. One course selection factor that holds its own against grade point average and class rank goals is the status of a course as "on the bar exam."

The change, though, might not be a simple matter of adding more subjects to the bar examination. It may include adaptation of the bar examination questions that are doctrinal in nature to problems that are transactional in nature. If the sorts of situations Seth describes in his essay were transformed into bar examination assignments, bar applicants would need to bring an array of courses dealing with those transactions. Law students looking at sample bar examination questions will be galvanized into restructuring their course selections. Bar review enterprises will have a lot of retooling to do, because these sorts of questions test something more than rule memorization and the application of the dreaded IRAC (issue, rule, application, conclusion) that has so little relevance to law practice.

This process of change, though, will take time. It will generate all sorts of debate. It should trigger scrutiny of bar examination topics and law school curricula by law practitioners. The extent to which the chasm between the academy and law practice deepens and widens, or closes, is tough to predict. I'll try. I think, at first, it will indeed deepen and widen, but once the dangers are appreciated, a new wave of cooperation will bring law schools and practice into a closer alignment. There probably will be positive correlation with the continuing decline in the utility of traditional legal scholarship, as fewer judges turn to law reviews, and with what I predict to be a new measurement of law school rankings that reflects the success of graduates in law practice. That, after all, the essence of law school education. We are in for an interesting and lively journey.

Somewhere, I suppose, it is written that lawyers should be bold. But where is it written that they should do foolish things, be dishonest and ignorant, and break the law? There is a fine but distinct line between bold and imprudent.

Of course, some lawyers do foolish things. Some are dishonest. Some are ignorant. Some break the law. They're the ones that make it so easy for people to criticize lawyers. When those to whom the law has been entrusted disregard it, the glue that holds society together comes undone. When bar applicants behave in dishonest, foolish, ignorant, and illegal ways, it's quite likely that, if admitted to practice, they will become one of those attorneys who gives the profession a bad reputation.

What triggers my present exclamation of offense and astonishment is a story well described by its headline:
EarthLink Subpoenaed for Customer Records When Anonymous Web Posting Reveals Bar Questions. It seems that someone who took the multistate bar examination posted 41 questions on the Internet. The examination contains specific instructions prohibiting examinees from disclosing the questions. The National Conference of Bar Examiners (NCBE), which prepares the multistate bar examination, owns a copyright in the questions. Posting the questions on the internet is foolish and dishonest. Doing so is an act of ignorance, not only about the restrictions but also about the consequences. Simple common sense tells a would-be lawyer that exam questions ought not be disclosed. The copyright law protects the owner of the copywritten material. Violating the copyright illegal; even if it does not violate the criminal law, it breaks the civil law.

The hunt is on to identify the person who posted the questions. Whether the internet service provider has the records is unclear. If it does, it's likely that it will disgorge that information, if not voluntarily, then under court order. The NCBE coyly refuses to disclose if it will seek civil damages if it identifies the poster. The contract into which bar applicants enter provides that unauthorized disclosure can trigger not only civil damages, but criminal charges, revocation of the test scores, rejection from bar admission, and disciplinary action if the matter arises after the person has been admitted to the bar.

The blog on which the questions were posted was taken down shortly after the NCBE contacted the Texas Board of Law Examiners. The blog in question was created by a Texas attorney. How the NCBE tracked the questions to the blog is an illustration of careful investigative techniques, is described in the story, and is well worth reading. The story also explains why the NCBE does not want questions disclosed, and why re-use is essential to maintaining the year-to-year steadiness of the exam.

I do hope that the person is identified. And I fervently wish that the person is excluded from practicing law. Yet I wonder what profession or trade would welcome someone who has demonstrated an inability to follow directions, adhere to contractually binding promises, maintain confidentiality, and comply with law. With any luck, not one with which any of us needs to do business.

A parent is teaching a child to drive. Suppose the parent tells the child to try stopping 90 percent of the times the child encounters a red light or stop sign. Is that acceptable?

A restaurant is serving meals. Suppose it sets as a goal making certain that 90 percent of the meals do not contain food poisoning. Is that acceptable?

An airline is scheduling flights. Suppose it sets as a goal making certain 90 percent of its airplanes do not crash. Is that acceptable?

A telephone company is setting up cellular service. Suppose it tells its engineers to set as a goal having service available 90 percent of the time. Is that acceptable?

A Congressional committee is considering the problems of the tax gap. Suppose the Committee's chair sets as a goal 90 percent compliance. Is that acceptable?

Senator Max Baucus, Chair of the Senate Finance Committee, in his Hearing Statement Regarding the Administration’s Plan for Reducing the Tax Gap, announced:

I am setting a goal of 90 percent voluntary compliance by the year 2017. That is six percentage points higher than today’s rate. This is a realistic goal. It is achievable, within 10 years. When it is reached, collections of taxes legally owed will increase by at least $150 billion each year. It is up to the Treasury Department to develop and present to this Committee a plan that will achieve this 90 percent compliance goal. I invite the Secretary to appear before this Committee in 90 days - on July 18, 2007 - to deliver his plan, complete with benchmarks and timetables.

Why 90 percent? Why not 99.99 percent?

Goals are aspirations. There's no reason that a goal should not be set as high as it ought to be set, with an understanding that falling short of the goal can happen. I understand that it is common to set goals short of where they should be so that performance can be tagged as having "exceeded the goal," but setting a goal too low brings expectations down from a level of excellence to a level of mediocrity that ought not be accepted.

Sometimes a new driver will fail to spot a stop sign. Hopefully, there is no accident. Food poisoning happens. Airplanes crash. Cellular phone service goes down. Yet failure, even almost certain failure, ought not deter drivers from having a goal of stopping at every stop sign, restaurants of keeping food poisoning out of all their meals, airlines from keeping all the planes flying, and cellular phone companies from providing 24/7 service.

Almost of the tax gap is caused by mistakes and deliberate noncompliance. Even with the tax education, tax law simplification, and enforcement enhancements I suggested in my Letter to Senators Baucus and Grassley on the question, taxpayers will make mistakes, and fall short of full compliance, but they won't be making mistakes 10 percent of the time. The goal should be 100 percent compliance, and if the outcome is 98 percent compliance, it can be tolerated. Aim for 90 percent, and it is likely the outcome will barely reach into the 80-percent range.

Professional and amateur sports teams set out to win every game. Few succeed, yet aiming to win some or most of the games is more likely to generate an even worse performance. Students in my courses aim to score 100 percent, yet they know they can earn an A with less than a perfect performance. If they aimed simply to reach 80 or 90 percent, they'd end up with even lower scores and lower grades.

Setting a goal of 90 percent is equivalent to admitting defeat with respect to 10 percent of the taxes that should be collected. Go for it, Senator Baucus. Set the goal at 100 percent, sending a message to all taxpayers that each and every one of us is expected to comply fully with the tax law. Then make that goal attainable by putting in place the education, simplification, and enforcement initiatives I outlined in my letter. The nation deserves and needs no less.

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.