MauledAgain

Spring semester classes began last Thursday. The Introduction to the Taxation of Business Entities course in the J.D. Program already has met twice, and Partnership Taxation in the Graduate Tax Program meets this evening for the first time. Long before I walk into the first class in any course, I have been investing significant amounts of time preparing for the course. For fall semester courses, the preparation usually begins in April or May, is suspended during most of the summer, and resumes in August. For spring semester courses, the preparation usually begins in late October or November, is suspended during part of December, and resumes in early January. Some people, including law students, think that there's nothing much for the professor to do but to pick up the book assigned to the course and last year's notes, walk into the classroom, and begin talking. Though that might happen in some courses, it ought not happen, and it surely doesn't happen in my courses. I've been meaning, for several years, to dedicate a posting to an explanation of the process that I use to prepare a course that I have previously taught. Hopefully, it's informative to people inside the law school community as well as to those who are on the outside looking in.

For illustrative purposes, I will go through the tasks undertaken to prepare Introduction to the Taxation of Business Entities for the Spring 2009 semester. The publishers of the book that I use produced a new edition in the late summer of 2008, so that made the list of tasks longer than it otherwise would have been.

1. I went through my class notes from the Spring of 2008, looking for notations that I had made in the margins, corrections that were necessary when I discovered something wasn't right, modifications I suggested to myself when I found a better way to make a point, and warnings that I gave myself that indicated some revision was required because that particular topic or point didn't flow as smoothly as it ought to have. Wherever necessary, I made changes to the class notes document.

2. I then did the same thing with the Course Outline and Assignments document that circulates to the students. Here, I am looking for typographical errors, notations suggesting increases or decreases in time allotted to a topic, items that were assigned that can be eliminated, or suggestions to myself for items that should be added. Where necessary, I made changes to the Course Outline and Assignments document.

3. I then did the same thing with the Powerpoint slides for the course. Not only are there typographical errors, there are programming errors. Far too often, even after checking the slide, something ends up not appearing in the correct sequence, or something doesn't show up on the classroom projector the way it did on the office desktop. It's not unusual for me to notice something that can be improved in terms of presentation, arrangement, or sequencing. Where necessary, I made changes to the slides.

4. Then I turned to the materials that I provide to students to supplement what is in the assigned book and in the currently available Code and Regulations student edition volume. These materials are in html format. I update the references to the semester and year, and I update the links from the materials back to the table of contents and the Course Outline and Assignments sheet. I review the materials to see if any of them should be removed, that is, if the experience from the previous semester or semesters suggests that including a particular item is more disadvantageous than advantageous.

5. Then I determined if there was any new legislation affecting the course. The answer is derived from a combination of saving things in a file during the period of time since I last taught the course, looking at the text of legislation passed during that time, and culling my memory to dig up whatever entered it but that did not make it into the file in which changes were stored. For the legislative changes, I then decide if students need to see the text of the change, and where they did, I created a new item for the supplemental materials by copying the text into my html editor, editing the text, and setting it up so that it takes its place in those materials. I modify the table of contents. I add the item as an assignment in the Course Outline and Assignments document, which also is in html format. I modify my class notes to reflect the change. Where appropriate, I made changes and additions to the Powerpoint slides to show the impact of the legislative changes. I determined which problems required either fact modification or new answers and solutions, worked those out, made changes to my class notes, and then made changes to the relevant Powerpoint slides.

6. I then went through a similar process with respect to regulations, cases, rulings, and other materials that emerged since the last time I taught the course. These developments also required removing some materials and adding some materials, making changes to class notes, the Powerpoint slides, the table of contents to the materials, and the Course Outline and Assignment document.

7. Then I went to the IRS web site and downloaded the 2008 version of Forms 1065, 1120, and 1120S and the Schedules K-1 for Forms 1065 and 1120S. Actually, I went to the IRS web site at least four times before those forms showed up. Then I changed the year reference to those forms in the table of contents to the supplemental materials.

8. Next it was time to update the questions used with the student response pads ("clickers"). As the previous semester progressed, I made notes to myself about better wording of the questions and improved choices. I noted instances where additional questions would be helpful. I identified a few questions as candidates for the scrap heap. I noted instances where more choices were required. Accordingly, after importing the spring 2008 version of the .cps file into a new .cps file, I then went through the file and edited existing questions, deleted a few questions, and added some questions.

9. The next step was to go through the Table of Contents to update the references to the semester and year, to make certain the year references for IRS forms were updated, to modify the edition and copyright information, and to make certain new items were included and that references to deleted items were removed.

10. I turned to the Course Information Document, which contains several pages of administrative and similar information that in my early days of teaching was shared during the first day of class. Class time is valuable, so I provide this information through the Blackboard classroom. Aside from updating the links to the other course documents, a variety of other things had to be reviewed and in some instances updated.

11. The instructions provided to students for using the clickers was next in line. Because einstruction had changed its registration process since the spring 2008 semester, I revised this document.

12. It was time to review the Course Outline and Assignments document. I updated references to the semester and year. I went through the document, changing the days and dates to those corresponding to the spring 2009 semester. I double checked the addition and removal of items in the supplemental materials. I updated the links to the table of contents and Course Information Document, as well as the html code for the copyright.

13. There was a new edition of the book used for the course. I prepared a page correlation sheet, going through the old edition and the new edition page by page, looking for changes. They could be as noticeable as the addition or removal of a case, or as subtle as the change in a single dollar amount or taxable year reference in a subset of a problem. Depending on the change, I determined if I needed to remove any items from my supplemental materials. I did, because the new edition "caught up" with developments that had required me to add items, in this case proposed regulations, to the supplemental materials. This time, unlike other instances, the changes did not require me to add something to the supplemental materials. Occasionally a new edition will remove a case, ruling, or other item that I consider essential for the course. Because of the changes from one edition to the next, specific items in the book appeared on different pages. So I took a copy of the Course Outline and Assignment document, printed it out, and changed every instance where a page number appeared. They appeared in assignments and they appeared as problem identifiers. I returned to the html editor and made those changes. Then I returned to the class notes and changed the corresponding page numbers, as well as any notations referring to items deleted from the supplemental materials to reflect that change, along with any facts or computational solutions to problems that had been changed. Next up, the Powerpoint slides, which contain numerous page references to the book. Those were changed, as were the presentations and solutions to any problems for which the facts had changed, in those cases where the problem was presented on the slide or its solution mapped out on the slide. The clicker questions, many of which reference a problem from the book, also required the opening of each batch of questions in order to change the page references.

14. Not yet quite finished, it was time to archive the files for the spring 2008 version of the course, moving them off the desktop to make room for the fall 2009 course changes to be developed in April and May. Usually this step and the following ones are handled about a week before the semester begins.

15. The files for the spring 2009 version of the course were copied to the external hard drive. I only can imagine what would happen if the internal hard drive in the desktop crashed.

16. I copied the files for the spring 2009 version of the course to my allotted space on the network drive so that I could access them from the classroom.

17. I copied the files for the spring 2009 version of the course to my laptop, which I take into the classroom.

18. I requested the Audio-Visual Department to make certain that a projector, a screen, and a network connection were available and functioning in the classroom in which I would be teaching the course. They're very good about this, having already anticipated my request. Later, I would meet with them in the classroom to check out the facilities because I had not taught in that particular classroom for almost a decade.

19. I requested the Department of Academic Computing to create a Blackboard course for Introduction to Taxation of Business Entities Spring 2009, and to move whatever preferences and settings could be moved from the spring 2008 course.

20. The next task was to open the clicker software, and connect the new .cps file for the spring 2009 version of the course with the einstruction website so that student clickers could be registered and linked to the answers they provided to the database when questions were posed to the class. That provides a registration number, which then is inserted into the clicker instructions made available to students. Why wait this long? The course cannot be created more than two weeks before the class begins, because there is a time limitation on how long the course remains open at the website.

21. Then it was time to configure the Blackboard classroom created for the course. Though usually most of the settings are preserved when the previous version of the course is copied, the change in the version of Blackboard being used prevented some of those from being saved.

22. Then it was time to upload the Powerpoint slides, the supplemental materials, the table of contents, the Course Outline and Assignment document, the Course Information Document, and the student clicker instructions to the Blackboard classroom. Each Powerpoint file is uploaded individually, and because of a transition in the version of Blackboard being used, required re-creating an identification label and access settings for each file. The other documents are bundled together in a .zip file, and then uploaded, which permits the Course Outline and Assignment document and table of contents to have links to the items in the supplemental materials, for each of those materials to have links back to the Course Outline and Assignment document and table of contents, and for those two documents and the Course Information Document to have links to each other. After this has been completed, I created the discussion forums that are used on Blackboard, namely, one for semester exercises, one for substantive discussions, and one for course administration matters.

23. A time-consuming task awaited. Load up the printer with paper and to crank out what I need in the classroom. Class notes, Powerpoint slides, clicker questions, new or revised supplemental materials, the table of contents, Course Outline and Assignment document, and the Course Information Document find their way into hard copy format. The slides are then annotated with references to the clicker questions that are designed for use with that topic.

24. While that process was underway, I took a walk to the Registrar's Office and obtained blank seating charts for the classroom in which I would be teaching the course.

25. A day before the first day of class, I visited the University's registration system and obtained a list of the students who were enrolled in the course. This would be the first of at least three visits, as students add and drop the course through the drop-add period.

26. On the first day of class, I sat down with a calendar and planned the timing of the semester exercises in the courses that I am teaching. Without planning ahead, I could end up with students doing 3 exercises during the last week of the semester, or with myself having several exercises to grade and to prepare on the same day. Attention must be given to spacing the exercises correctly, avoiding first-week-of-class exercises, refraining from scheduling due dates that correspond with days that the school is not in session, etc. etc. It definitely was a bit easier than it was last August, because fitting in 25 exercises for 3 classes is much more challenging than fitting in 15 for 2 classes. Those numbers reflect the fact that there are only 5 exercises in the Graduate Tax course, because it meets only once a week and not three times a week.

27. As the drop-add period comes to a close, I will reconcile the official class list with the seating chart, and with the list of students self-enrolled in the Blackboard classroom, and with the list of students who have registered clickers. All sorts of combinations are possible. There usually are students on the seating chart but not on the class list, because something went wrong with their registration. Sometimes students think they have dropped a course but have not done so, and thus they show up on the class list but not on the seating chart. Students who drop the course after self-enrolling in the Blackboard classroom cannot remove themselves from Blackboard. Clicker registration rarely matches any of the other lists. After doing this reconciliation, I send emails to any student who is not on all four lists. When that is cleared up, I then create a seating chart with digital photos, which are obtained from the official class list. I use Powerpoint to do this, through a process that I have passed along to the one of the fellows in the Department of Academic Computing. Someday, I hope, it will be fully automated.

When people who are not teachers learn that I have five, or as was the case last semester, eight hours in the classroom, they usually compare that with a 40-hour work week and wonder what I'm doing to justify calling law professorship a full-time job. What they overlook is the four or five hours that I invest for every hour that I am in the classroom, four or five hours invested in preparing the course, preparing and grading semester exercises, preparing the examination, and grading the examination. That's a fairly constant time allocation. What varies significantly, depending in part on the number of students in a course and the extent to which they communicate with me, is the time invested in answering questions that are posed by email or in person. Some of these hours are invested during the semester, and others are invested before or after the semester. It's a very risky thing to try to teach a course by showing up on the first day of class.

Well, that's how I get ready for a course. There are law faculty who follow a similar pattern. There are others who do not. Someone who does not use Powerpoint slides, clicker questions, or problems requiring preparation and solution, and who does not provide supplemental materials, can omit a good chunk of what I do as I prepare. If they also omit semester exercises, there's even less to do. I do what I have decided needs to be done for my teaching to be effective. I doubt I'd be comfortable trying to get by on less. And without my checklist, which is a shorthand version of the 27 steps I've described in this post, I'd be lost. So, when someone asks what I am doing when I'm not in the classroom, I explain that in addition to writing and dealing with committee and other administrative matters, I'm working through my course preparation checklist. I'm usually getting ready for next semester while the current semester is underway. In a few years there will come a semester when I won't be getting ready for a next semester. I will ditch those checklists and I will be …. yes, listless.

About a year ago, in When All Else Fails, Throw Tax Money At It, I criticized the manner in which the federal government was handling the conversion of broadcast television from analog signals to digital signals. Congress, which in 2005 mandated that the switch occur in 2009, allotted $1.5 billion to the National Telecommunications and Information Administration (NTIA) to provide $40 coupons that would be distributed to people who requested them. The coupons can be used for, and only for, paying some or all of the cost of a converter box for analog televisions. After computing that there was enoguh money for 33.5 million coupons, I then asked, "Who gets them."

I answered the question as follows:

CNN reports that "The giveaway basically works under the honor system." Does that make you feel as wonderfully confident as I do that the people who need the converter boxes and who lack the resources to acquire one are the people who will get the coupons? Surely the con artists, the identity thieves, the credit card imposters, the greedy, and the troublemakers will sit this one out. What controls are in place to prevent the well-intentioned, confused, and yet affluent citizen who notices the giveaway from requesting, and getting, two coupons? Apparently, none.

The only distribution arrangement that appears to be in place is a reservation of 22 million coupons to anyone who asks for one or two. In theory, those who enacted and administer the program expect the requests to come from people who, despite having televisions connected to cable or satellite systems, also own analog televisions not connected to those systems, or who own only analog televisions without any cable or satellite connection. In practice, I predict that some coupons will be requested by people who understand that when the cable or satellite system goes down, over-the-air broadcast might be the only communication connection to the outside world, and that for analog televisions, the converter box will be necessary. Of the 33.5 coupons, 11.5 are set aside for people who do not have cable or satellite television. Even if people requesting coupons are asked about their television situation, what's to prevent them from saying what they need to say to get the coupons? And even if the honor system works perfectly, industry information suggests that there are 2.8 million more households without cable or satellite system connections than there are coupons reserved for those households.

The Government Accountability Office has criticized the NTIA, claiming that there is no comprehensive plan in place for the transition to digital television. Of the $1.5 billion set aside by Congress to finance the transition, only $5 million was earmarked for programs that explain to the public what is involved in the changeover. One survey indicates that slightly more than half of Americans do not know that the shift from analog to digital is underway. Now the government, through the FCC, is considering a regulation that will require broadcasters to donate air time to educate the public about the new technology.

* * * * *

When all is said and done, some of the taxes paid by taxpayers will be given to people regardless of genuine need, so that technological changes benefitting wireless providers can be implemented through government planning that is far from comprehensive or sensible. The government is implementing a system financed by taxpayers and designed to help not-so-poor wireless providers, with no controls to prevent $40 coupons from enriching those not in need, with no guarantees that the planned auctions will reimburse the taxpayers.

Unfortunately, the criticisms levelled by the GAO and by yours truly have not turned out to be groundless. The NTIA has no more money for coupons. Since January 4, it has been putting people who request coupons on a waiting list. There now are more than a million people on that list. Barring more funding, the only way these folks can get a coupon is expiration of a previously-issued coupon. Of course, people can purchase converter boxes without coupons, but it will cost them an additional $40. That's assuming converter boxes are available.

Last week, as described in this story, the Consumer Union urged that the changeover from analog to digital be postponed. Why? Because the program for the change "has been underfunded and poorly implemented." What a surprise! Just as predicted.

President-Elect Obama has joined in the call for a delay in the implementation of the analog-to-digital transition. According to this report, the incoming Administration cites as the principal reason for its recommendation is that the Commerce Department, of which the NTIA is a part, has run out of money for the coupons. The incoming Administration also expressed concerns that not enough has been done to assist people in making the transition. The Chair of the House Committee on Energy and Commerce admitted that the transition is not going well.

Of course, there is opposition to a delay. The current administration opposes it because government and the broadcasting industry have "invested so much in preparing for this date" and a delay "would create uncertainty, frustration and confusion among consumers." And the current mess isn't causing uncertainty, frustration, and confusion for people? The current administration instead is seeking another $250 million to fund more coupons. Yet at least one Republican member of the Congress opposes more funding, claiming that more coupons will be issued as unredeemed ones expire. But how does anyone know how many coupons will end up unredeemed? Also opposing the delay is the Consumer Electronics Association, which notes that the change is designed to make more radio frequencies available to first responders, who ought not be kept waiting any longer. The National Association of Broadcasters declined comment on the delay but also noted that the shortage of coupons can be remedied without a delay.

At this point, my question isn't so much addressed to solving the problem as it is to learning a lesson for next time, whatever challenge that next time may bring. Consider the facts. Congress enacted the legislation mandating the changeover back in 2005. In 2005, everyone who paid attention knew or should have known that there would be a change in 2009, and everyone who understands transactional planning knew or should have known that there things requiring attention long before January 2009. Not only were most people not paying attention, the folks who should have been getting everyone's attention didn't start to do so until 2008. The cultural mindset of leaving things until the last minute once again has demonstrated its shortcomings. Yet it continues to dominate the way this country operates, the way businesses conduct activities, the way students run up against deadlines, the way professionals are late for appointments, the way things aren't ready when they are supposed to be ready. It's no wonder that organizations and activities infused with the mindset of readiness and preparation do not get the attention or admiration that instead is given to the procrastinators.

Congress allocated enough money to provide 33.5 million coupons. That's just a fraction of the households in this country, and as I pointed out in my earlier post, anyone who thinks about the issue for more than a soundbite moment would understand that everyone needs a backup over-the-air television reception system because cable simply isn't as reliable as the cable companies claim. It's cheaper to buy a converter box, especially when outfitted with a $40 government coupon, than it is to purchase a digital television. So should it be any surprise that people gobbled up the coupons? Do we know how many coupons were sent to people who easily can afford a converter box and how many were sent to people whose financial situation prevents them from purchasing one? The NTIA distributed the coupons without asking, and without being required to ask, and probably without being permitted to ask, questions concerning the financial condition of the coupon recipient.

In my earlier post, I concluded with this observation: "The only good news is that the coupon distribution is not tied to the tax system, was not enacted in the form of a tax credit, is not implemented by the IRS, and is not reflected on federal income tax returns. I wonder how that happened." Now I am beginning to suspect that someone will sell to the Congress the idea that the converter box purchase problem should be solved with a $40 tax credit available only to individuals with some sort of modified adjusted gross income under some particular dollar amount. Talk about making a bad situation worse.

A little more than four years ago, in The Joys of IRC Section 86, I explained the convoluted manner in which Congress has specified that taxpayers determine how much, if any, of their social security benefits are subject to federal income taxation. I noted that Congress passed on the simple, appropriate, and valid approach of including in gross income the excess of what a person receives over what the person paid into the system. I described the origins of the provision requiring taxpayers to include in gross income the lesser of 50% of social security benefits or 50% of the excess of their modified adjusted gross income over a specified base amount. Next, I explained how Congress added an "85% layer" onto the "50% layer," causing totally unjustified complexity and abominable statutory language. I pointed out how this arrangement creates a bubble effect, which essentially means that someone receiving social security can be taxed at a higher marginal rate than the nominal marginal rate if they earn additional income because their gross income increases not only by the additional income but also by the additional social security treated as gross income because their modified adjusted gross income has increased and thus exceeds the base amount and the adjusted base amount by even more dollars.

Now, thanks to a comment by an anonymous reader, I've become aware of yet another quirk in section 86. It involves state income tax refunds. Generally, a state income tax refund is included in gross income if in the year the refunded tax was paid, a deduction for that tax was claimed and generated a tax benefit. The problem is that the state income tax refund, by being included in gross income, causes the taxpayer's modified adjusted gross income to increase, which in turn increases the amount of social security included in gross income. Yet, in the year that the state income tax was paid and deducted, the taxpayer's modified adjusted gross income was not decreased, because the state income tax deduction is an itemized deduction. So what exists is a double counting, not unlike the bubble effect. Not only is gross income increased by the amount of the state income tax refund, it is also increased by an additional portion of social security. An example demonstrates this bizarre phenomenon.

Suppose that in 2007 a married couple had $5,000 of state and local income tax withheld from their pension. They properly deduct the state income tax on their 2007 federal income tax return, but when they complete their 2007 state and local income tax returns they determine that they are entitled to refunds of $2,000. The refunds are paid to them in 2008. Because they itemized deductions in 2007, the $2,000 of state and local income taxes deducted in 2007 reduced their taxable income, thus generating a tax benefit. Accordingly, the $2,000 must be included in gross income for 2008. Assume that the $2,000 reduction in taxable income caused by the deduction of $2,000 of state and local income taxes destined for refund caused the couple's 2007 federal income tax liability to decrease by $300 because they were in the 15% bracket.

Assume that in 2008, the married couple has $40,000 of pension income, $10,000 of social security benefits, and no other income. Under the statute, their base amount is $32,000, and their adjusted base amount is $44,000. Their total gross income, before computing social security gross income, is $42,000 ($40,000 pension income plus $2,000 state and local income tax refund). Their adjusted gross income, and their modified adjusted gross income, is $42,000 because they have no deductions allowable in computing adjusted gross income. Fifty percent of their social security benefits is $5,000. This $5,000 is added to their $42,000 modified adjusted gross income and the $47,000 result is reduced by their $32,000 base amount, generating a section 86(b)(1) excess of $15,000. Because 50% of the social security benefits, that is, $5,000, is less than 50% of the $15,000 excess, that is, $7,500, the tentative amount to be included in gross income is $5,000.

Turning next to the second level of analysis, The $47,000 sum of the $42,000 modified adjusted gross income plus the $5,000 representing 50% of social security benefits exeeds the adjusted base amount of $44,000 by $3,000. Eighty-five percent of this $3,000 excess is $2,550. Next, an incremental amount is computed. It is the lesser of the $5,000 amount tentatively computed as social security gross income and $6,000, which is 50% of the $12,000 difference between the base amount and the adjusted base amount. This $5,000 incremental amount is added to the $2,550, generating an adjusted tentative amount to be included in gross income of $7,550. This is, in turn, compared to 85% of social security benefits, that is, $8,500. The lesser of the two amouns, $7,550, is included in the married couple's gross income. Accordingly, their actual gross income for 2008 is $49,550 ($40,000 pension income, $2,000 state and local income tax refund, and $7,550 social security gross income).

Does this make sense? Let's now assume that with careful, though pragmatically very difficult tax planning, the married couple had caused the state and local income taxes that were withheld from their pensions to be $3,000. Their 2007 federal income tax liability would have been $300 more than it was, because their state and local income tax deduction would have been $3,000 rather than $5,000. What happens in 2008?

In 2008, the married couple still has $40,000 of pension income, $10,000 of social security benefits, and no other income. Under the statute, their base amount is $32,000, and their adjusted base amount is $44,000. Their total gross income, before computing social security gross income, is $40,000 ($40,000 pension income). Their adjusted gross income, and their modified adjusted gross income, is $40,000 because they have no deductions allowable in computing adjusted gross income. Fifty percent of their social security benefits is $5,000. This $5,000 is added to their $40,000 modified adjusted gross income and the $45,000 result is reduced by their $32,000 base amount, generating a section 86(b)(1) excess of $13,000. Because 50% of the social security benefits, that is, $5,000, is less than 50% of the $13,000 excess, that is, $6,500, the tentative amount to be included in gross income is $5,000.

Turning next to the second level of analysis, The $45,000 sum of the $40,000 modified adjusted gross income plus the $5,000 representing 50% of social security benefits exeeds the adjusted base amount of $44,000 by $1,000. Eighty-five percent of this $1,000 excess is $850. Next, an incremental amount is computed. It is the lesser of the $5,000 amount tentatively computed as social security gross income and $6,000, which is 50% of the $12,000 difference between the base amount and the adjusted base amount. This $5,000 incremental amount is added to the $850, generating an adjusted tentative amount to be included in gross income of $5,850. This is, in turn, compared to 85% of social security benefits, that is, $8,500. The lesser of the two amouns, $5,850, is included in the married couple's gross income. Accordingly, their actual gross income for 2008 is $45,850 ($40,000 pension income and $5,850 social security gross income).

So without the state income tax refund, the married couple's 2008 gross income is $45,850, a whopping $3,700 less than the $49,550 that it would be if there were a $2,000 state and local income tax refund. Put another way, the inclusion of a $2,000 state and local income tax refund in gross income causes gross income to increase not by $2,000, but by $3,700. The "extra" $1,700 arises from the $1,700 increase in social security gross income. Note that $1,700 is 85% of $2,000. Ignoring the impact, if any, of the change in adjusted gross income on the couple's itemized deductions, the couple's taxable income increases by $3,700, causing their federal income tax liability to increase, assuming they are again in the 15% bracket, by $555. In other words, the $300 tax benefit generated by the state and local income tax deduction in 2007 requires the couple to pay not an additional $300 in 2008, but an additional $555. As I asked in The Joys of IRC Section 86 with respect to the section 86 bubble effect, "How can that be justified under any philosophical, moral, or theological canon?"

It is true that the tax benefit rule itself is flawed, because even if 2008 gross income increased by only $2,000 on account of the inclusion in gross income of the state and local income tax refund, the married couple's 2008 federal income tax liability could have increased by more than $300 if they were in a higher tax bracket. Yet if they were in a lower bracket, their tax would increase by less than $300, or perhaps not at all. The flaw can work both against and in favor of taxpayers. On the other hand, the glitch in section 86 works against the taxpayer and only against the taxpayer.

So what we have here is yet another reason to jettison the abomination that is section 86. None of the arguments in its favor make sense. The Social Security Administration knows how much a person has paid into the system, as is evident from the annual statement that it sends to each person who has paid into the system at one time or another. The Social Security Administration knows how much it pays to each recipient, and thus easily can compute the amount, if any, of each payment, that represents amounts exceeding what the person has paid into the system. The excuse that this cannot be done is as weak as the excuse that a carry-over basis rule at death won't work because basis is not known, even though were the decedent to have gifted the property shortly before death a carry-over basis rule would have applied. One must be wary of bad rules that are justified on false claims of inability. Section 86 is such a rule. It is long past time for its demise.

Something that I read the other day in an article summarizing possible tax cuts under the Obama economic stimulus plan reminded me of how difficult it is to keep pace with the tax law as enacted, let alone project what the future tax rules might be. One of the provisions tagged for possible changes is section 179, though the article does not cite it, perhaps because of space limitations or perhaps because of concerns that the sight of a Code cite would encourage too many readers to close down the web page before finishing the article. Footnote to law students, lawyers, and accountants: please note that both "sight" and "cite" were used in the same sentence, correctly and without confusion, and please try to avoid switching one for the other.

According to the article, "Obama would increase the amount of expenses small businesses can write off to $250,000 in 2009 and 2010, up from $125,000 currently." This sentence refers to the deduction allowed by section 179, under which a limited amount of otherwise capitalized expenditures are permitted to be subtracted in computing taxable income in the year of the expenditure rather than over some period of time determined under the depreciation deduction provisions. The advantage to the section 179 deduction is that it reduces tax liabilities in the year of the expenditure by much more than would the depreciation deduction, thus, in theory, increasing the cash flow of the business making the expenditure. This increased cash flow, it is argued, permits the business to increase its consumption, thus stimulating the economy. What concerns me at the moment is not so much the theory as the ever-changing limit that applies to section 179.

Section 179 has a long history. Originally, it was enacted to spare business taxpayers the cost and aggravation of computing depreciation deductions for expenditures so small in amount that the time invested in doing the computations simply wasn't worth it. By 1983, the limit was a whopping $5,000. Under section 202(a) of the Economic Recovery Tax Act of 1981, the limit was scheduled to increase to $7,500 for 1984 and 1985, and to $10,000 for 1986 and thereafter. Section 13 of the Deficit Reduction Act of 1984 altered these changes before they went into effect, locking the limit in at $5,000 for 1983 through 1987, increasing it to $7,500 for 1988 and 1989, and delaying the increase to $10,000 until 1990 and thereafter.

Those scheduled increases went into effect as planned. Thereafter, section 13116(a) of the Omnibus Budget Reconciliation Act of 1993 increased the limit to $17,500 effective for 1993 and thereafter. The Small Business Job Protection Act of 1996, specifically section 1111(a), increased the limit to $18,000 for 1997, $18,500 for 1998, $19,000 for 1999, $20,000 for 2000, $24,000 for 2001 and 2002, and $25,000 for 2003 and thereafter. However, before the planned 2003 limit went into effect, section 202 of the Jobs and Growth Tax Relief Reconciliation Act of 2003 increased the limit to $100,000 for 2003 through 2006, and also provided that this amount would be increased to reflect inflation. Accordingly, the limit was raised to $102,000 for 2004 (Rev. Proc. 2003-85, 2003-2 C.B. 1184), to $105,000 for 2005 (Rev. Proc. 2004-71, 2004-2 C.B. 950), and to $108,000 for 2006 (Rev. Proc. 2005-70, 2005-2 C.B. 979).

A year after the limit was temporarily increased to $100,000, section 201 of the American Jobs Creation Act of 2004 extended the $100,000 limit through 2007. Two years later, section 101 of the Tax Increase Prevention and Reconciliation Act of 2005 further extended the $100,000 limit, as adjusted for inflation, through 2009. Section 8212 of the Small Business and Work Opportunity Tax Act of 2007 extended the limit through 2010, and also increased the limit to $125,000 for 2007 through 2011. But Congress wasn't finished. Section 102 of the Economic Stimulus Act of 2008 increased the limit to $250,000 for 2008, without any adjustments for inflation.

At the moment, this is where things stand. The limit is $250,000 for 2008, for 2009 it will revert to $133,000 ($125,000 adjusted for inflation), for 2010 it will be $125,000 adjusted for inflation, and then in 2011 it will be $25,000, without any inflation adjustment. Confused? Welcome to tax world. If there's an advantage to this ever-changing set of rules, it's that students cannot use outlines from earlier semesters and the same question can be used for testing purposes without last year's answer being correct!

Thus, the sentence in the article that states, "Obama would increase the amount of expenses small businesses can write off to $250,000 in 2009 and 2010, up from $125,000 currently." is technically incorrect, because absent any legislative changes the limit for 2009 would not be "$125,000 currently" but $133,000. The limit for 2010 would be some amount probably in the vicinity of $135,000 but currently incalculable because the requisite inflation adjustment factors are not yet known. It is understandable that considering the constantly shifting section 179 limit, someone looking at the statute would think that the 2009 limit would be $125,000.

Why the reversion in 2011? The legislation that increased the limit did so for limited periods of time rather than permanently because of budget considerations. It's easier to sell a tax cut if it does not impose a permanent revenue loss. Of course, as the history of this one provision indicates, the likelihood of the limit being $25,000 in 2011 is slim. It almost surely will be something much higher than that.

It has been said that a tax law professor could teach tax law using only one Code provision. Section 179 certainly is a candidate for such an experiment. It provides not only an excursion into tax policy but also a brutally realistic exposition of how one determines "what the law is." From the tax policy angle, one can debate whether these limit increases do much of anything for the economy, and one can have fun deciding if the titles of the enacting statutes accomplished what the Congress grandly proclaimed that they would. On the technical side, it demonstrates why a tax practitioner, and tax students, need to read more than the statute to determine what the law provides. In this instance, revenue procedures become very important. When I am going over a problem in class and students ask, for example, "Where did you get $105,000?" I knew that they had not read the assignment. When students rely on secondary information, they leave themselves helpless to keep up-to-date. For example, the revenue procedure to be issued at the end of 2009 will be the source for the inflation-adjusted limit for 2010, barring further legislative tinkering.

There are few, if any, businesses or professions that could survive with this sort of fiddling. Multiply section 179 by the hundreds of Code provisions that are tweaked or overhauled every year or two. Would a professional sport survive if the rules were changed two, three, or four times a year, or during the season? Would a manufacturer stay afloat if production line standards were altered three and four times a day? The learning process requires time to "digest" material and processes, and if the changes occur at a rate faster than the learning process, learning does not occur. Performance slips, critical and fatal errors are made, and societies crumble. Yes, that sound very dire, but studies prove that tax compliance declines as tax law change frequency increases.

A sharp-eyed reader will note that my entire discourse is technically flawed. Each time I referred to a year in the phrase "for [year]" I should have been writing "for taxable years beginning in [year]." Why did I not do that? Because I am trying to keep my sentences comprehensible. For the points I am trying to make, that technical expression of the effective dates isn't all that important. There are enough words in my sentences without my trying to be technically precise when it doesn't matter that much.

So what will happen? The section 179 limit for 2009 will almost certainly be something other than $133,000. In the fall of 2009, I will have yet another opportunity to give my students an example of how the Congress can obsolete a revenue procedure, or a provision in a revenue procedure, by enacting retroactive legislation. I will continue to have the opportunity to show my students that for tax and other lawyers what matters is not so much the answer, but how one arrives at the answer. I could have written today's post simply by listing the years and the limits for each year in a short and tidy table. That would provide information. What I did write provides understanding. Information is cheap, and floods our senses. Understanding is valuable and much more difficult to obtain. It is much easier to cope with rule changes when the rules are understood than when the rules simply are known.

Through all of this, I omitted any discussion of the reduction of the limitation, and yet another section 179 amount that is used in determining that reduction. It, too, has been changed numerous times. That is information not essential to the point I wish people to understand. I also omitted the many reductions and increases to the limit under discussion that are made for expenditures for sport utility vehicles, expenditures by enterprise zone businesses, expenditures by renewal community businesses, expenditures for qualified New York Liberty Zone property, expenditures for qualified Gulf Opportunity Zone property, expenditures for qualified disaster assistance property, and expenditures for qualified recovery assistance property. Please don't feel deprived. Even the students in the basic federal income tax course do not get to visit these places.

On Friday, reports such as this Philadelphia Inquirer story brought the news that the National Commission on Surface Transportation Infrastructure Financing (NCSTIF) has recommended a 50% increase in the federal gasoline tax to provide funding for road construction and repair. The increase is required simply to keep pace with previous year fuel tax revenues, because declining gasoline use has reduced revenues. Gasoline use is declining because motorists are cutting back on their driving and because the vehicles that are being used are more fuel efficient. Compounding the problem is the fixed rate nature of the tax, unadjusted for inflation and not increased since 1994. Further compounding the problem is the anticipated increase in fuel-efficient vehicle use in coming years.

The NCSTIF views the increase as a temporary measure. It envisions a different long-term revenue mechanism. Much to my delight, the commission's long-term solution is a mileage-based fee system. I first explored this concept in Tax Meets Technology on the Road, examined the concept further in Mileage-Based Road Fees, Again, and early this year took an even closer look in Mileage-Based Road Fees, Yet Again. A few months ago, as reported in Introducing Mileage-Based Road Fees to the Pennsylvania Legislature, I wrote to Dwight Evans, Chairman of the Pennsylvania House Appropriations Committee, pointing out to him the existence of these fee concept and suggesting that it provided a way out of the road maintenance funding challenges facing the state. I've yet to receive a response.

The NCSTIF is the second commission to make a recommendation. About a year ago, the National Surface Transportation and Revenue Study Commission (NSTRSC) also recommended and increase. The latter group's recommended increase of 40 cents dwarfs the 10-cent increase contemplated by the NCSTIF. With an annual road funding gap of $105 billion expected to increase to $134 billion in less than 10 years, it seems unwise to provide only one-fourth of what is required.

The primary obstacle to the short-term fix, and perhaps to the more permanent mileage-based fee solution, is the crazy world of politics. Some claim that one of the reasons the Democratic Party lost control of the House and Senate in the 1994 elections was the gasoline tax increase enacted that year. The world of politics is a strange one. The same citizens who rail against gasoline tax increases also explode in anger when interstate bridges collapse. One of the members of the NCSTIF, a vice-president of a libertarian think tank no less, put it nicely when he said, "We can either let the roads go to hell, or we can pay more." In some instances, taxes, or more specifically, fees, could be the road to heaven, or at least to transportation paradise. Let the bridges fall down and the roads crumble into pot-hole-ridden tracks, and the delivery of food, medicine, and clothing breaks down, to say nothing of the ability of people to reach their ultimate destinations. Comparatively few people, few stores, and few factories are adjacent to airports and railroad stations.

Some have suggested that the increase be marketed as a cost of preventing more serious climate change. It could be called, they offer, a carbon tax. Others note that it could be advertised as a cost of reducing dependence on foreign oil, which has both economic and global security overtones. I wonder, though, whether that would make the impact at the pump any more palatable.

Someone needs to educate America about the connection between road fees and road condition. Reportedly, the president-elect has "expressed concern" about increasing the federal gasoline tax given the state of the economy. However, as I stressed in Leaders as Teachers: Fixing the Financial Fiasco, "the key will be getting people to admit that thoug a measure is not popular, it is necessary and needs to be undertaken….It's time for the nation to go to school." We're going to find out, very soon, how good a faculty the new faces in Washington will be.

On New Year's Eve I heard a commercial on the local news radio station for something called "Fix Housing First," and so I went to its web site to learn more about the proposition that the first thing Congress needs to do is to create a tax credit for home purchases and a permanent low mortgage interest rate. Indeed, the web site does advocate those two proposals. It is difficult to determine if the folks behind the web site are asking simply that housing relief be part of a stimulus package, which is what the tag line in the upper right corner of the web page explains, or pushing for the primary focus to be on these two housing market ideas, which is what the explanation near the bottom of the web page suggests.

According to the explanation of why housing matters, the web site presents an interesting prediction. The first step, it argues, is to "Stop the fall in home values and prevent future foreclosures." That will lead, so the argument goes, to "Restore consumer confidence," which in turn supposedly would "Create jobs." That step would then "Lift our entire economy." Wow, isn't it amazing how the success or failure of the entire economy depends solely or chiefly on the industry whose advocates are making the argument? The Fix Housing First web site is presented by the Fix Housing First Coalition, which describes itself as "a diverse group of housing stakeholders – including homeowner and community groups, home builders and manufacturers – dedicated to addressing the root cause of our economic troubles." Last week we were being told that rescue of the automobile manufacturing industry was the critical path to economic salvation. Several months ago we were told that pouring hundreds of billions of dollars into bad loans was the solution, though shortly thereafter the Treasury implied that the path to economic robustness was making money available to banks so that they could purchase other banks. It was only half in jest that in Cutting Up the Economic Distress Remediation Pie I advocated a $50 billion bailout of yours truly as the key to economic recovery, while I addressed the assertion that double taxation of corporate income was to blame. It seems to me that underneath each seemingly well-crafted "me/us first" argument is nothing more than greed combined with an inflated sense of self-importance.

If the advocates of Fix Housing First want a return to the housing market of 2006, they're asking for nothing more than a continuation of the current mess. The housing market collapse was and is a symptom of the problem. Dealing with symptoms is meaningless if the underlying issues are not addressed. The housing market collapsed because people committed themselves to mortgage payments that they were unable to make. A combination of living beyond one's means and banking on a delusional belief in eternal housing price increases doomed that market. The two proposals advocated by Fix Housing First are nothing more than a repeat of the "have a house even though you cannot afford it" mantra that fueled the housing bubble. Let's not repeat that mistake.

Surely it is a problem that many Americans cannot afford housing. They cannot afford housing for three reasons. First, some of them do not have jobs. Second, some of them have jobs, but those jobs provide pay that is inadequate for housing acquisition. Third, housing prices remain high relative to wages because of land shortages in the areas where people prefer to live. The solution to the first two causes is job creation. The solution to the third cause is job dispersal.

Job creation is a function of two variables. One is the existence of work that needs to be done. The other is the availability of resources to pay to have that work done. There is no question that much work needs to be done in this country. Infrastructure needs repair and expansion. Buildings need to be retrofitted for efficient energy use. Diseases need to be cured. Sick people need care. Lawns need to be mowed. Snow needs to be plowed. The challenge is not identifying work to be done, but in finding the money to pay people to do the work. Here is where one asks whether the most efficient allocation of wages is to pay huge salaries to a select few and poverty-level wages to the many. How many jobs could be created if some mechanism existed to discourage salaries exceeding, for example, $1,000,000? What company gets more done, the company with a CEO earning $50,000,000 per year and 1,000 employees each earning $30,000 per year, the company with a CEO earning $1,000,000 per year and 2,630 employees each earning $30,000 per year, or the company with a CEO earning $1,000,000 per year and 2,000 employees each earning $40,000 per year? Before the "free market" advocates step forward to claim that the first type of company must be the most efficient because it dominates the economy, one should note that if these companies were so stupendously getting things done the economy would be in great shape. What the first type of company does well is to make money for its shareholders and highly-paid executives, a goal consistent with unregulated capitalism but not necessarily favorable to the maintenance of a healthy economy.

Creating jobs and increasing the pay of rank-and-file employees, whether in this manner or in some other, increases the number of people who can afford home acquisition. That is how the housing market will rebound. People with jobs have more consumer confidence that those who do not. People with higher paying jobs have more reason to be confident. People who are surrounded by other people with jobs and by people whose pay is increasing tend to be more confident than those who watch their neighbors, friends, and relatives get pink slips so that the executives can continue to collect their salaries.

Job dispersal is a more complicated matter. People gravitate to the geographic areas where jobs are created. Despite predictions that internet and other technology would permit people to live wherever they chose, and despite the fact that a handful of people have been able to make those arrangements, the simple fact is that people continue to migrate into the large cities and the suburbs that are part of metropolitan areas, while small towns shrink into unsustainable existence or disappear from the map. Aside from the national security benefits of job dispersal, the movement of populations from areas where land is abundant to cities where land is exhausted puts upward pressures on housing prices that need not and should not be enabled by existing or proposed tax and economic policies. If tax credits are to be made available for housing purchases, they should be limited to purchases in areas in need of population in-flow. Several such credits already exist in the tax law. If mortgages are to be provided at below-market rates, they should be made available to persons purchasing homes in areas that are in need of housing rehabilitation, such as inner cities and desolate small towns. The idea of giving a tax credit and a permanent low-rate mortgage to a well-compensated individual to purchase a condominium in Manhattan or a second home on Nantucket or in Newport Beach makes no sense whatsoever.

The point is that by creating jobs, consumer confidence increases, and that confidence will rev up activity not only in the housing market, but in the automobile market, the clothing market, the electronics market, and the other markets dealing with the downturn and claiming to be THE market deserving of first-in-line status for tax credits, bailout money, or other special breaks. The interdependency of the market segments within the economy decries the outmoded notion of characterizing or treating one specific industry as THE essential foundation for the economy.

Perhaps in all of this is an answer to rescue the television and entertainment market. Rent a room. Invite a representative from Fix Housing First, a representative from Fix Automobile Manufacturing First, a representative from Fix Banks First, a representative from Fix Bad Loans First, a representative from Fix Oil Drilling First, a representative from Fix Airlines First, and so on. Set up a camera. Put one $100 billion tax credit, one $200 billion bailout check, and one Get-Out-of-Jail-Free card on a table. Set up and turn on a camera. Call the show "Me First." Perhaps viewer disgust at the proceedings would bring some attitudinal changes into the economic culture.

It is impossible for me to tally how many times I have said to my students, in one or another class, "We law professors don't need to make these up. The best hypotheticals and the best problems are found in life." As 2008 comes to a close, it's worth looking at CNN's Fortune Magazine listing of the year's "21 Dumbest Moments in Business 2008". Why 21 and not the typical 10 or Fortune's benchmark 500? I do not know. Perhaps because a person is required to live 21 years before the law permits the person to drink alcohol, an activity in which both the participants in these 21 stories and the people reading them might be tempted to do.

The tag line for the story deserves a salute. "We don't know whether to laugh or cry. Our annual list of the year's most laughable moves proves that, even in moments of crisis, stupidity lives on." Somehow, evolution theory hasn't yet explained how stupidity continues to thrive and multiply.

Many of the 21 stories provided grist for the MauledAgain mill at one point or another during the year. Sometimes they caught my eye because there were tax implications, sometimes because they reflected the environment and attitude that nurtured the current economic mess, and sometimes because they compelled me to think about the inadequacies of the educational systems that trained the folks whose decisions or words fueled these stories. Were it not for the fact these events happened, no one would believe that they did.

As I read through the 21 stories, I asked myself, "If I had to pick the winner, which would it be?" I narrowed the list down to five. Here they are, in no particular order:

* Paulson's 3-page plea for $700B, featuring the prize-winning proposed statutory language barring legislative or judicial review of the Treasury's decision making with respect to the $700 billion made available for economic recovery purposes.

* Bloating up the bailout, describing how Congress packed hundreds of pages of pork barrel spending and tax give-aways into the bailout legislation, causing a Congress that had rejected the idea of a bailout to embrace it as the next best thing to chocolate.

* Mozilo's 'disgusting' reply-all, describing the email erroneously sent by Countrywide's CEO to everyone in the company, tagging the distressed borrower's request for assistance as "unbelievable' and 'disgusting,' labels that only he would apply to the situation in which he found himself after Bank of America purchsed the company, that is, unemployed.

* Housing rescue comes up short, detailing the fortunes, or should one say, misfortunes, of the Hope for Homeowners legislation, a plan by Congress to guarantee $300 billion in mortgages and to prevent 300,000 foreclosures, a plan so stellar that since its launch three months ago only 321 applications have been filed and none have received final determination.

* Phil Gramm's 'mental recession', recalling former Senator Phil Gramm's comments, made while serving as Senator John McCain's campaign co-chair, that by voters expressing their concerns about the economy were a "nation of whiners" and that the growing economic mess was but a "mental recession."

All five of these stories exemplify the deficiencies in leadership that have brought this nation's economy to a near-standstill. Two involve Congress, and I set them aside because Congress churns out stupidity so often there's nothing spectacular about it. Another involves a member of the current Administration acting as though perfection was so synonymous with his actions that oversight would be useless. That, too, isn't a particularly novel situation. Yet another involved a former member of the Congress, letting the nation see how disconnected he and his circle were from the realities facing most, if not nearly all, of the nation's populace. It's disappointing and foolish, but not so startling that it should take an annual prize. That leaves the hard-hearted, ruthless, insensitive, short-sighted former CEO of Countrywide, an icon for the business culture in which the tough times afflicting so many was brewed and nurtured. So focused on generating money, no matter the social or long-term price, these money dealers lost sight of why their businesses existed.

One of the 21 stories, Microsoft overbids for Yahoo, explaining how Microsoft offered 161% of the amount for which Yahoo stock was then trading, stock that by the end of the year was trading for 40% of that amount, prompts me to ask a question. This story wasn't a finalist, because companies offering too much when seeking to acquire assets is so common an experience it generally would get a yawn. But in this instance, because of the companies involved, I ask this: "Does Microsoft think that spending money to acquire Yahoo so that it can keep up with Google would somehow make its core product more efficient, more secure, more affordable, more user-friendly, more reliable, and more capable?" In the rush to get bigger, and thus more of a risk to the economy, business entrepreneurs forget that one should not move along to fourth grade until one passes third grade. When Microsoft gets its Windows and Vista operating system working the way they ought, then it should think about trying to "out-google" Google. Imitation is not a good form of creativity, and hopefully when the culling triggered by the current economic crisis is finished, genuine creativity will have surpassed the practice of buying, stealing, copying, imitating, and riding on the ideas and efforts of others. Perhaps the smart approaches will displace the stupid ones. Perhaps.

And on that note, a happy 2009 to all.

Last week, in a letter to the editors of the Philadelphia Inquirer, Scott Duman proposed that all employee payroll and federal income taxes be suspended for six months, all corporate income taxes be suspended for three months, and all capital gains taxes and taxes on dividend income be eliminated for all of 2009. At least part of this idea is not Duman's alone. Two economists, one from Stanford and the other from the University of Rochester have proposed cutting the social security payroll tax and making up the shortfall from general revenues. The National Retail Foundation is proposing a sales tax holiday. In contrast, Michael Kinsley has jumped onto one of my favorite ideas, raising the gasoline tax to absorb the difference between last summer's high prices and this winter's much lower prices.

The idea of having the federal government stop collecting all income and employee payroll taxes is downright dangerous. Where would the federal government obtain money to pay its employees, to maintain the Armed Forces, to make social security and medicare payments to retirees and disabled individuals, and to pay interest on its debt, to give but a few examples of how the cutting off of tax revenue would cripple the nation. Speaking of debt, I suppose Duman prefers that the government borrow even more money to offset the tax revenue loss, so that in future years there would be even more need for tax revenues to pay even higher interest charges. Almost two years ago, in another letter to the editors of the Philadelphia Inquirer, Duman gave a clue as to his solution. He would cut government spending, and I suppose with his proposed cut-off of most federal revenue, he would cut all government spending. In making his argument, Duman touted the successes of the current Administration's economic and tax policies. He noted that home mortgage interest rates were low, that unemployment was low, and that tax receipts were at a record high. Funny how that played out. What appeared to be wonderful news two years ago was simply the illusion that smoke-and-mirror politics casts upon a then-unsuspecting populace.

Duman's proposal reeks of the same political viewpoint that abetted the activities leading to the current economic mess. Note carefully that taxes on capital gains and dividend income would be eliminated for twice the period individual income taxes would be suspended. Perhaps Duman thinks that the rich and moderately wealthy, who are the recipients of most taxable capital gains and dividend income, would put the additional cash flow to good use. Perhaps they would seek out investments with Bernard Madoff or with some investment banker intent on making loans to people with no income, no jobs, and no assets?

Duman's proposal intensifies the same economic malaise that has plagued this nation for several decades. Cutting off revenue for the social security system simply accelerates the date on which the trust funds are exhausted. Considering Duman's aversion to taxation, I suppose the solution is the now not-so-hidden goal of eliminating the Social Security system. Or does Duman think the nation ought to borrow even more money to fund Social Security? Duman's defense of his proposal is that taxpayers would spend the amounts not paid in taxes, thus energizing the economy. This "spend now, pay later" mindset is a significant factor in what ripped apart the economy's infrastructure, and to suggest doing more of the same is not much different than suggesting that the cure for a sunburn is to sit on a beach on a cloudless day bereft of sunscreen.

At least the two economists propose a remedy for the suspension of payroll tax collection. To keep money flowing into the trust funds, they suggest taking those amounts out of the general budget. But to accomplish this, the government needs either to raise taxes or borrow money. I suppose it could print money, but the inflationary effects of doing so are on the Federal Reserve's "don't let it happen" list, making it a very unlikely solution. The two economists point out that suspending payroll taxes would make it less costly to hire workers, but if employers have no work for people to do, they're not going to hire someone even if the person offers to work for one dollar a year. They claim that their idea does a better job of stimulating domestic production than does sending out rebate checks or enacting a sales tax holiday, but I disagree. No matter how extra money is directed into the pockets of consumers, some of that money will be set aside and the rest will be spent, without any guarantees that the products being purchases are produced domestically. The one enticing argument made by the two economists is that a payroll tax suspension reaches lower income households, who surely constitute a substantial portion of those who are in tough economic positions.

The conundrum goes beyond the question of taxes and spending. The conundrum is hidden because the economy is measured with monetary units and monetary equivalents. The trade deficit, the federal budget deficit, tax revenues, per-capita consumption, the amount of foreclosed loans, and many other benchmarks are measured in dollars. Some items, such as barrels of imported oil, natural gas production, and gasoline inventory, are measured in units, but those units generally are not expressed in per-capita terms nor are they expressed as percentages of total resources. Though many economists consider supply-and-demand curves to be at the root of economic analysis, I prefer to think that resource allocation models are more relevant. There is no supply-and-demand curve for triceratops horns, for dodo bird eggs, or for any other item that has been fully consumed by society. We are now at a point where the consumption to date of certain key resources, such as oil, clean water, and certain precious metals, has reduced the planet's inventory to levels that cannot supply anticipated future demand or that can do so only with serious economic displacements. The answer that reductions in supply often reduce demand aren't going to work when the commodity in question is, for example, clean water. That is why economic analysis can be informative only within a larger political framework.

Thus, barring a significant change in consumption patterns, current economic woes may seem trivial compared to the global ramifications of "spend and consume now, pay later" mentalities. The solution is not to try to cajole the economy into resuming past patterns, but to shift into a "spend and consume less, save more, and reduce debt" mode. That shift is going to be painful, not only in an economic sense but in social, political, and even military terms. From this perspective, it makes far more sense to raise taxes, such as gasoline taxes, and to make it even more costly to consume nonrenewable resources. Going on a tax holiday is one of the worst things that this nation could do. That would be the equivalent of spending hours in a tanning booth before going out into the sun without sunscreen. Postponing the inevitable makes no sense if postponement makes the inevitable worse.

Here's yet another one of those tax questions the answer to which is "It depends." It's the next question that often stumps student and practitioner. "On what?" I like these issues because they rip apart the threads holding together the specious assertion that tax is merely a thing of numbers, a game of computations, and thus, not law. Some folks simply cannot conceive that tax analysis is much more like law than it is accounting, auditing, or arithmetic.

It is notable that two days before Christmas, the Tax Court issued an opinion dealing with the tax consequences of human reproduction accomplished through other than what I will call the "traditional" approach. Two thousand years ago, the Roman Empire imposed taxes of a sort that did not require anyone to deal with the issue of how taxpayers came into being. But in this day and age, advances in medical technology present issues that would not have been faced by those practicing law 20 years ago, let alone by citizens and residents of the Roman Empire.

On Tuesday, in Magdalin v. Comr., no, not Magdalene, the Tax Court held that a man was not allowed to deduct the costs of having an anonymous female donor's eggs fertilized with his sperm and of having two other women carry two of the embryos through the gestation period. These costs included fees charged by the in vitro fertilization clinic, amounts paid to the gestational carriers, legal fees, prescription drugs, and charges imposed by the hospital where one of the births occurred. The taxpayer was not married to the donor or either of the carriers, nor were any of them his dependents. According to the facts, the taxpayer had twin sons with his former wife, and those children were born without the benefit of in vitro fertlization. The facts also note that the taxpayer had no medical problems with his reproductive capacity. The procedures were expensive propositions, amounting to almost $100,000 over a two-year period. Only a bit more than $60,000 was claimed as a deduction because of the 7.5-percent floor on the medical expense deduction.

In order for an expense to be qualify for the medical expense deduction, it must be paid either "for the diagnosis, cure, mitigation, treatment, or prevention of disease" or "for the purpose of affecting any structure or function of the body." So tells us section 213(d)(1)(A) of the Internal Revenue Code. The regulations under section 213, specifically, Regs. section 1.213-1(e)(1)(ii), provide that deductible medical expenses are "confined strictly to expenses incurred primarily for the prevention of alleviation of a physical or mental defect or illness." In Jacobs v. Comr., 62 T.C. 813 (1974), the Tax Court added a "but for" gloss to the requirements, and under that test the taxpayer must show "that the expenditures were an essential element of the treatment" and "that they would not have otherwise been incurred for nonmedical reasons." Onto this labyrinth of qualifying conditions Congress has layered yet another restriction, providing in section 213(d)(9) that the expenses of cosmetic surgery or similar procedures are nondeductible "unless the surgery or procedure is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease."

The taxpayer, a physician arguing for himself, took that position that it was his civil right to reproduce, that he should have the freedom to choose the method of reproduction, and that it is sex discrimination to allow women but not men to choose how they will reproduce. Though acknowledging the lack of legal precedent afforded to private letter rulings, he cited PLR 200318017 for the proposition that "expenses for egg donor, medical and legal costs are deductible medical expenses." In turn, the government, represented by counsel, argued that although amounts paid for procedures to mitigate infertility may qualify as deductible medical expenses, the taxpayer "had no physical or mental defect or illness which prohibited him from procreating naturally," noting that he had done so with respect to his twin sons. The government also argued that the expenses were not for the purpose of affecting any structure or function of the taxpayer's "male body" and that "the procedures at issue only affected the structures or functions of the bodies of the unrelated surrogate mothers." Finally, the government made what the Tax Court called an "unexplained assertion," namely, that the government "does not believe that procreation is a covered function of [taxpayer's] male body within the meaning of section 213(d)(1)."

The Tax Court agreed with the government that the taxpayer's expenses were not for medical care because they were not incurred primarily for the prevention or alleviation of a physical or mental illness. It explained that accordingly, there was no need to answer the "lurking questions" as to whether and to what extent the cost of in vitro fertilization procedures and associated costs would be deductible if there were an underlying medical condition. The Court also concluded that the taxpayer's expenses did not affect a structure or function of his body. The Court distinguished PLR 200318017 on two grounds. First, the taxpayer in that ruling was unable to conceive a child using her own eggs after undergoing repeated assisted reproductive technology procedures. Second, the procedures undertaken by the taxpayer in that ruling affected her body because the fertilized donated eggs were implanted into her body.

In explaining its reasoning, the Court indirectly criticized the government's assertion that procreation is not a function of a male's body. Citing the government's own Rev. Rul. 73-201, 1973-1 C.B. 140, the Court noted that the IRS had ruled that the cost of a vasectomy is an eligible non-cosmetic medical expense because it affects the structure of the taxpayer's body, whereas the in vitro fertilization procedures in which the taxpayer had participated did not affect his bodily functions and structures because "they remained the same before and after those processes."

The Tax Court rejected the taxpayer's attempt to cast the deduction issue into a constitutional spotlight. The Court concluded that there were no constitutional dimensions to the case because under the circumstances, "it did not rise to that level." According to the Court, the taxpayer's "gender, marital status, and sexual orientation do not bear on whether he can deduct the expenses at issue." Even with current medical technology, human reproduction affects the female body far more than it does the male body, and thus, at least for the near future, expenses incurred with respect to women participating in medically assisted reproduction are far more likely to be deductible than those incurred by men. Perhaps the cost of surgery to extract male reproductive material that otherwise cannot be made available for the reproductive process in some traditional manner would be deductible, just as surgery to extract eggs is deductible. But in the more distant future, when the technology permitting men to carry children is ready for prime time, the likelihood of expenses incurred with respect to men participting in medically assisted reproduction will be no less likely to be deductible than will be the case for women. Lest one think this is rank speculation or the stuff of fantasy movie plots, Professor Lord Winston, one of in vitro fertilization's pioneers, said as much almost ten years ago.

So after someone correctly replies, "It depends," to the question of whether in vitro fertilization costs are deductible and is asked, "On what?" the answer should be that it depends on whether the procedure was undertaken on account of a medical illness or disease or, alternatively, affected the function or structure of the taxpayer's body (or the body of the taxpayer's spouse or dependent). And yet, that's only part of it. The answer also needs to include a qualification of the initial question. "Are we talking about HUMAN in vitro fertilization?" is a question that needs to be posed to the initial inquirer. Why? See Truskowsky v. Comr. (cost of in vitro fertilization of cattle treated as business expense).

Tax. It's not just about numbers. It's not just about computation. It's about life. There's just about nothing that it doesn't touch. If I were to say that tax is everywhere, I'd be treading far too close to a theological cliff edge. Not over, because tax is too flawed for me to assert that it is omnipotent. Or that its administration or practitioners are omniscient. And, surely we hope, tax is not eternal, and has no after-life.

The current tax debate in New York State is a textbook example of the tax policy issues implicated when a state determines that it must increase revenues as part of a plan to deal with a budget deficit. When cutting expenditures won't suffice, because doing so would terminate or significantly curtail critical state government functions, the only other viable alternative is to increase taxes. According to this CNN story, New York's governor has proposed 137 new or increased taxes, along with a variety of expenditure cuts. The proposal has triggered a not-unexpected debate over which taxes should be increased.

Under the proposal, taxes on beer, wine, non-diet soft drinks, certain fruit juices, and cigars would be increased. User fees and taxes on internet connections, taxi rides, massages, cable television, sports tickets, and movie tickets also would increase. The sales tax exemption on clothing sales under $110 would be repealed. The governor notes that by basing a significant portion of its revenues on taxes collected on Wall Street activities, the state took the risk that those receipts would shrink.

Opponents of these tax increases advocate an increase in the state income tax on taxpayers with high incomes. They argue that the governor's proposals will hurt lower and middle income taxpayers, encouraging many residents, for example, to travel to New Jersey to make purchases because the taxes in that state would be lower than they would be under the governor's proposal.

What justification is there for increasing the taxes and user fees that the governor seeks to increase? In some instances, considering the burden that these items or activities put on society, a user fee increase makes sense. The tax on non-diet soda, for example, which some are calling an "obesity tax," reflects a notion that the sugar in non-diet soda contributes to the health problems caused or aggravated by obesity. But as pointed out in this essay on the issue, there are a variety of foodstuffs that contribute to obesity and there is a lack of evidence that non-diet soda is any worse in this regard than other foods. To that reasoning I would add that even some low-calorie foods can contribute to obesity if they are consumed in large quantity. But as a practical matter, what alternatives exist to recoup the cost to society of bad dietary habits other than at the dietary source? Would it not be silly, if not outrageous, to impose taxes on people based on weekly weigh-ins? The fact that professional sports teams often impose fines on players who don't make weight ought not inspire people to use a similar approach in schools and offices. It's a tempting thought, though.

Has there been some sort of increase in the burden placed on society by people who purchase sports and movie tickets? Or by people who ride in taxicabs? It's probably easier to find justification for increasing the cost of cigars. And though the sales tax exemption for clothing under $110 appears to favor low-income individuals, it wouldn't surprise me to discover that taxpayers of all income levels find ways to take advantage of an exemption that perhaps ought not to have existed in the first place.

If increasing the taxes and fees in the manner proposed by the governor in fact shifts consumer transactions to other states, the net revenue gain from the proposed legislation might turn out to be far less than is anticipated. In the same vein, increasing state income taxes on upper income taxpayers might encourage some of them to shift their residences to other states with lower income taxes, similarly decreasing anticipated state revenues. This conundrum exists with respect to almost all state and local taxes and user fees.

Generally, the political process works to create some sort of balance among the various taxes and fees that are available to state and local governments. Ultimately, there's no guarantee that economic or social analysis will trump the emotions of voters and the re-election concerns of legislators. Students in a tax policy course learn that there are good arguments in favor of each particular type of tax, and good arguments opposing each particular type of tax. The ability to understand these arguments, to design the arguments, and to respond to these arguments is an essential ingredient of success in a tax policy course. What would be an interesting research project is an inquiry into the percentage of state and local legislators who have taken a tax policy course. Another interesting research endeavor would be an examination of how many citizens have studied tax policy to a degree that permits rational and careful analysis of tax proposals. Guesses could be made, and they could be very educated guesses, but they would be guesses. Sometimes, it seems, when legislators enact or increase taxes and user fees, they are guessing that it will work. Perhaps that's the best that can be expected.

One of the many practical points I try to get across to my students in Decedents' Estates and Trusts is that they will encounter clients who want them to make decisions that are not the attorney's decision to make. Though a well-educated and diligent attorney knows the law and understands how it works, an attorney cannot begin to frame a plan or to draft documents until the attorney knows what the client wants to do. Clients usually do not know what they want to do or if they think they know what they want to do, they're unaware of the many options open to them.

One way of dealing with this challenge is for the lawyer to become a teacher, and to explain to the client the many options and considerations that the client needs to take into account. In the process, the client will ask questions and seek clarification. This takes time. Attorneys charge for their time. This is one reason many people don't seek professional advice, because they cannot afford the cost or choose to spend their money in other ways. Now there is a solution to this conundrum, one that can make professional advice more readily affordable, reduce the number of people who fail to seek professional advice even though they need it, in other words, increase the number of potential clients, and make it easier for the attorney to ascertain what the client wants to do.

The solution comes in the form of the second edition of Don Silver's "A Parent's Guide to Wills & Trusts," a 250-page explanation of estate planning aimed not at the law student or lawyer, but at the client. It explains why estate planning matters, why wills and trusts are essential, what options are available, the advantages and disadvantages of those options, the traps and pitfalls that beset the careless, and the dangers in making assumptions about property distribution at death based on mis-information. Silver addresses not only basic legal principles but psychological and practical concerns that affect the decision-making process. For example, he explains that legally no one "owes" an inheritance to someone, but then points out how law is just one factor in deciding whether, and how, to limit or eliminate a bequest to a particular person.

The book consists chiefly of questions and answers. The questions are typical of those that a client might ask of an attorney. Silver covers wills, trusts, life insurance, retirement plans, bank accounts, taxes, health care, and every other topic that comes into play when dealing with estate planning. He considers not only the stereotypical situations, such as married couples with young children, and older people with children and grandchildren, but he also deals with domestic partnerships, divorced beneficiaries, second marriages, spouses who are not citizens, nonresident beneficiaries, co-ownership with friends, beneficiaries with special needs, and pets. He points out the events that might occur but of which clients might not be thinking when they try to sort out how they want their assets distributed when they die. He discusses the selection of guardians for minors, the possibilities of 18-year-olds coming into money, the dangers of not telling the attorney about the family member to whom the client wants to leave nothing, and the challenges of selecting executors and trustees.

Some of the points on which Silver focuses are identical to ones that I spotlight in my Decedents' Estates and Trusts course. My students, who at this stage are not all that different from the educated client who has not been to law school, often react with the same eye-opening astonishment as I'm sure Silver has seen with his clients. Surely the point that there is no one rule and no magic formula is a tough one for people, including law students, who think that law and legal practice consists solely of rules mechanically applied to situations facing the attorney or a court. How many people know that a will provision does not change the beneficiary designation in a life insurance contract? How many people understand that probate is a public process? How many people realize that even with a living trust, a person needs a will? How many people understand why funeral instructions should be in writing and why they ought not be stashed away in a safe deposit box? How many people think seriously about what happens to their email and online accounts when they die? As an aside, students who cannot deal appropriately with these issues are not going to earn a worthy grade in the course.

Though estate planning attorneys would learn nothing new from this book, that's precisely the point. The book is not designed to teach lawyers how to draft estate plans, nor is it designed to teach law students how to read statutes, identify legal issues, or counsel clients. But the book is for lawyers in one important respect. It's something that an estate planning lawyer should give serious consideration as a gift to clients and potential clients. An attorney could give the book to a client with a request that the client read the book and take into account what it says when sitting down to answer the questions that the attorney has presented to the client. Though some clients might not have the ability to do this, most clients are sufficiently educated and literate that they would use the information in the book to prepare themselves for their next meeting with the attorney. In the same way, people who do not think that they need a will, or who think that they can get along quite fine without an attorney, thank you, should benefit from reading this book, particularly the portions that explains why everyone needs a will, and almost everyone needs a trust.

None of this is surprising. After all, Don Silver is an attorney. He has dealt with clients and knows what sorts of obstacles present themselves to people who seek professional assistance in fashioning an estate plan. He knows the sorts of things that haven't even crossed the client's mind, and he knows the misleading information, which he nicely calls myths, which the clients bring with them into their meetings with the attorney. Silver's writing style reflects his experience dealing with people who, for the most part, are not lawyers. He avoids the technical, obtuse, and complex verbiage into which many lawyers sink, often because they erroneously think that lawyering requires writing in an impenetrable style. He writes as though he were transcribing conversations with his family members, friends, and clients, and I think that in certain respects that is what he in fact has done.

This is a book I highly recommend. I recommend it to attorneys to consider as something to give to clients and potential clients. I recommend it to people who are planning to meet with their estate planning attorneys and to people who are thinking about finding an attorney to help them with their estate plans. I recommend it to people who don't think they need a will or any estate planning advice because after reading this book, they will become people who are thinking about finding an attorney to help them with their estate plans.

To order, contact Adams-Hall Publishing or call 1-800-888-4452. A significant discount is in place through December 31, and a discount exists for quantity purchases, which should appeal to lawyers thinking about distributing copies to their clients. The book also makes a good, last-minute holiday gift for that person who has everything. What better way to get them started on their plans for doing something with that everything when the time comes. And more good news: even a single copy (aside from shipping and handling) falls into that "under $10" gift category.

Thanks to Paul Caron's TaxProf blog post, Did Double Tax on Corporate Income Contribute to Economic Meltdown?, I found myself exploring another side of the inevitable process by which people try to turn the current economic mess, or more specifically, proposed remedies, to their advantage. According to the posting, at a December 5 Brookings Institution Conference, called Memo to the President: Tax Reform's Challenges and Opportunities, former Assistant Secretary of the Treasury for Tax Policy, Pam Olson, characterized the double taxation of corporate income as having contributed to the current economic mess. Beginning at page 130 of the transcript of the Conference, Pam Olson explains how the double taxation of corporate income and the deductibility of interest on corporate debt encouraged corporations to borrow money, thus in some way causing distress in the credit markets. Though this theoretical proposition is attractive, the reality is that most of the explosion in corporate debt took place after the tax rate on dividends was reduced to the same special low rate applicable to capital gains, and after that rate was itself significantly reduced. Though one other expert agrees, others point out that many other factors encouraged the run-up in corporate debt. What makes no sense is how corporate double taxation has anything to do with the huge increases in the bad mortgage and other consumer loans that poisoned the credit markets.

What I think is happening is a reverse rerun of an argument that permeates almost every plea for special tax relief. When it comes time to make changes to the tax law, advocates of corporate income tax relief will argue that elimination of the corporate income tax is essential to restoring the health of the national economy, just as a long line of lobbyists have been moving through Treasury and Congressional offices making their case for a piece of the TARP or other pie, whether or not their clients fall within the scope of the industry for which TARP or some other program is designed to rescue.

When I teach the basic federal income tax course, I try to help students cope with the confusion that besets them when they discover that depreciation deductions are permitted for real property even if the property has not declined in value. I point out to them that this isn't the only tax provision favorable to the real estate industry. Students, so terribly insulated from the realities of political life as they move through 16 or more years of pre-law-school education, think I am joking when I tell them how lobbying works. It is not uncommon to insist that failure to grant a particular tax break will cause economic collapse. Usually, because the provisions are enacted and the economy hums along, there is no way of proving the negative, that is, that the economy would have collapsed without the provision in place. Now that the economy in fact has collapsed, it's time for the advocates of provisions not successfully advanced during previous lobbying efforts to return with claims that the absence of their pet provision was a factor in the current economic mess.

Don't get me wrong. I happen to favor corporate tax integration, but of the sort that most advocates would reject. Rather than allowing corporations to deduct dividends, I would prefer to see corporate income taxed to shareholders in the same manner S corporation income is taxed to S corporation shareholders. There are many strong arguments in favor of corporate tax integration, and even stronger ones in favor of the pass-through approach, but it hurts the cause, rather than helping it, to claim that the absence of corporate tax integration was or is a culprit in an economic fiasco fueled by fraud, greed, stupidity, miscalculation, and of course, the refusal to increase taxes and the absurd reduction in taxes at a time when trillions of dollars were expended or committed to fighting a war.

So we need to prepare ourselves for the onslaught of special case pleading. Here are some of the candidates, in predicted quotation format:

"The economic collapse is due in part to the lack of corporate tax integration, so to fix it Congress must enact corporate tax integration."

"The economic fiasco is due in part to the refusal of Congress to permit developers to claim immediate and full deductions for building even more shopping centers, so to clean up the mess Congress must enact an immediate deduction for amounts invested in shopping centers."

"The economic fiasco is due in part to the refusal of Congress to permit more favorable depreciation deductions for NASCAR facilities, so to, oh wait, sorry, Congress already enacted more favorable depreciation deductions for NASCAR facilities because it bought the argument that doing so would prevent economic collapse and, oh, gotta run, have a call coming in."

"The economic mess is due in part to the refusal of Congress to eliminate taxes on interest income, dividend income, capital gains income, and any other sort of income other than wages, so to fix the mess Congress should tax all wages at 80 percent so that the maximum amount of investment income can be steered into those excellent growth funds, you know, like the ones run by that Madoff guy."

"The economic collapse is due in part to the refusal of Congress to provide a tax credit for building sports stadia in cities and towns across America so that they can invite the Arena Football League to put new franchises in those locations, so to restore the economy and create jobs Congress should enact a tax credit for the construction of Arena Football League facilities."

But here's my favorite:

"The economic debacle is due in part to the refusal of Congress to provide a refundable tax credit of $50 billion per year to all law professors who write tax blogs the names of which begin with the letter M, have an upper-case A in the middle of the name, and end with the letter n, and that first appeared in 2004 because the law professors who so qualify know how to use refundable credits in a manner that is beneficial to the economy, and so to revive the national economy Congress should enact such a credit, making it retroactive to 2004."

Yeah, ok. Hurry and get in line before it gets too long.

Three months ago, in Risk Premiums with a Greed Tax?, I suggested that perhaps there should be a tax on greed. I proposed that "The tax would apply when a person's or entity's attempt to accumulate wealth, rather than 'trickling down' benefits to society generally, harms society." Recent news compels me to think about how such a tax would have affected the most recent fraudulent scheme presented by Wall Street.

In news that broke last week, an investment broker was arrested for defrauding customers with a $50 billion Ponzi scheme. Bernard Madoff was charged with securities fraud, for allegedly providing the guaranteed returns he promised his customers by obtaining money from other investors to pay off the earlier entrants into the arrangement. Even a 1 percent fee would have generated $500 million for Madoff. According to the complaint filed by the SEC, Madoff told his employees that his advising business was a fraud, that nothing was left, that it was "one big lie," and that it was a "giant Ponzi scheme." Yet Madoff did have about $200 million remaining which he tried to distributed to employees, family members, and friends of his choosing. Madoff served as president of NASDAQ during the early 1990s. Now he faces up to 20 years in jail and a $5 million fine. According to a CNN story, several European banks were victims of Madoff's machinations.

Madoff's attorney was quoted as saying, "Bernie Madoff is a longstanding leader in the financial services industry. He intends to fight to get through this unfortunate set of events." One question that crosses my mind is this. If Madoff succeeds in getting through these events, at what place does he arrive? Surely his career as an investment broker, as a financial advisor, as a Wall Street executive, is over. So, too, are the lives of those whose investments he squandered. A related question is whether he will find the opportunity to earn enough money to pay a $5 million fine. Yet another related question is whether anyone seriously thinks Madoff ever will find the means to reimburse his victims.

As a practical matter, it's too late for Madoff to find ways to restore the financial status of his customers as things were before he embarked on this money grab. The time to build a protective fund, or some sort of insurance, is during the period someone is engaging in risky financial behavior. All financial behavior is risky, but that risk varies from near-zero to astronomical, depending on the activity and the persons involved in the undertaking. Actuaries know how to evaluate risk, and surely they can tag different financial deals with appropriate risk characteristics. If a risk premium is charged on every financial transaction, then a fund exists that can be used to provide relief to those who, like the couple I saw interviewed on the television at the gym on Monday morning, have "lost everything."

The tougher question is whether a risk premium should be augmented with a tax on greed. In Risk Premiums with a Greed Tax?, I had this to say about greed:

Greed is not the desire to increase one's economic status, particularly because most people on the planet who have that desire pursue their dreams because they are trying to accumulate enough economic assets in order to survive. Greed is the desire to hold far more economic wealth than is necessary for survival, comfort, and even luxurious lifestyles. It is the desire to hold so much wealth that the wealth becomes an instrument of power more effective than the decisions of elected officials, and thus becomes a threat to democracy. Greed is exacerbated when it is coupled with impatience, much like the demand, "I want it all, and I want it now."

How does one know whether greed is tainting a financial transaction? Was Madoff greedy? Or was Madoff someone who feared failure, and having put himself into a corner by making outlandish promises that he could not keep, proceed to act in desperation? Should those who deal with large amounts of money be subject to a different, more exacting, set of standards and treated as more likely to be caught up in greed? Should motive matter? Should the tax be expanded from one imposed on greed to one imposed on greed, carelessness, stupidity, and over-reaching? Or should the risk premium, whether or not in the form of a tax, be determined by actuaries who take greed, carelessness, stupidity, and other factors into account? Are actuaries capable of doing that? Simply because the broker or investment banker can point to degrees earned from prestigious educational institutions does not mean that he or she is free of carelessness or even greed? Is there a track record that can be considered? What sort of risk factor would an actuary have pegged on Bernie Madoff before this news broke?

If industry and government, and society in general, cannot develop workable answers to these questions, the continuing parade of news stories of this sort will do nothing to restore the trust that needs to exist in order for the economy to resume some semblance of productive operation. In a time when people don't know each other the way they did when they grew up together in the same small town, something is required that creates the assurances once more easily obtained in a less inter-connected world. I doubt that a tax or user fee can renew that trust, but it can build a financial cushion, a financial cushion that might help people scale back their fear of dealing in a crumbling economy.

Last week someone brought to my attention advice being given by Charles Schwab to the effect that one should "prepay" state estimated income taxes due in January by sending the check in December 2008 rather than in January 2009. The same advice has poppped up on many web sites, including Renaissance Tax and Business Service, Joe Kristan's Tax Update Blog, and MDManagement Planners. Joe's site includes a chart that taxpayers can use to help themselves decide if this advice makes sense in their case. Take a look.

Unless the AMT causes this to backfire, or unless the taxpayer is in a very low tax bracket in 2008 and expects to be in a very high tax bracket in 2009, this advice makes sense because it accelerates into 2008 the reduction in federal income tax liability caused by the state income tax payment. Technically, one is not pre-paying the state income tax, because the payment is with respect to 2008, and there is nothing in any state's income tax law requiring that the payment be made after December 31, 2008. The practical challenge is the increased difficulty of estimating state income tax liability in December, when the taxpayer does not necessarily have all the information one needs to make that determination. Yet this concern is deceptive, because it is unlikely that when the January 2009 due date for the state estimated income tax payment arrives the taxpayer will have the necessary information. For example, consider the Schedules K-1 due from partnerships, LLCs, and S corporations, which often bring those amazing April (or later) surprises.

Someone asked if the same outcome would be reached if the taxpayer made payments in December 2008 of his or her 2009 estimated state income tax liability. I think that is very risky, and suggested that the taxpayer simply increase the amount of the final estimated state income tax liability payment for 2008 being made in December 2008. My argument is as follows. The December 2008 payment is an estimate, and it is difficult to know with any degree of precision what will end up being the actual 2008 liability. Any state overpayment will end up being available as a credit for the 2009 liability, so the taxpayer will end up in the same place as if a December 2008 payment were tagged as a payment towards 2009 state income taxes. I then got myself into a bit of trouble with an additional bit of reasoning. I noted that the IRS enjoys dealing with people who over-estimate federal income tax liability because those overpayments are interest-free loans to the government. Do people do that? Yes, there are people that do so, particularly folks who have what I will call a hyper-cautious personality. Thus, I asked, would it not be inconsistent for the IRS to object when the same taxpayer is as cautious with state income tax liabilities?

Well, apparently the IRS is a bit touchy about taxpayers who make state estimated income tax payments that are too high. Someone kindly pointed me in the direction of a revenue ruling and a case. In Rev. Rul. 82-208, 1982-2 C.B. 58, the IRS concluded that no deduction would be permitted in year 1 for estimated tax payments for year 1 that were unreasonably too high for year 1. The ruling involved a taxpayer whose income was salary and for which state income tax withholding was sufficient. Clearly the taxpayer was paying a high estimated state income tax in year 1 in order to benefit from the deduction, even though the payments would either be refunded or credited by the state towards the taxpayer's year 2 state income tax liability. On the other hand, in Estate of Cohen v. Comr., T.C. Memo 1970-272, the court rejected the IRS attempt to deny a deduction for high estimated state income tax payments made in year 1 towards year 1 state income tax liabilities because the taxpayer understood that some or many of the income tax deductions taken on the return might be challenged, and if the challenges were successful, state income tax liability would be increased. The taxpayer made high state estimated income tax payment to cover this possibility. Another reason that a taxpayer would take this approach is the one I've already mentioned, namely, the arrival in April of year 2, or later, of Schedules K-1 reporting far more income for year 1 than was expected, often far more income than the partnership's or other entity's tax advisor estimated when contacted by the taxpayer. Absent precautionary payments of state income tax in year 1, the taxpayer ends up having to pay year 1 state income taxes in year 2, incurring interest and perhaps penalties, and obtaining the federal income tax benefit of the deduction for those payments not in year 1 but in year 2. It's the worst of all possible tax worlds. Well, maybe not the worst, but quite unpleasant.

The most important point is that sometime between now and the end of the year, taxpayers and their advisors need to be thinking about these, and other, issues. No matter what the taxpayer decides to do, the worst thing is to ignore the issue only to discover next year that there was something that should have been done before December 31 of this year. This is one reason why, when people claim that early April is the busy time for tax advisors, I disagree, explaining that December often offers the final chance to get some tax things timed correctly. Only 16 tax planning days left in 2008. Use them well.