MauledAgain

The next time you get annoyed, frustrated, bewildered, shocked, or overwhelmed by a federal income tax form or by trying to fill one out, say to yourself, "It could be worse."

It could.

It is.

Come live in Pennsylvania and see what happens when you set up an LLC.

An LLC is a limited liability company. It's not a corporation, it's not a partnership, it's not a trust. It is an entity invented in Wyoming several decades ago, and now permitted in all states.

For federal income tax purposes, LLCs with one member are treated as sole proprietorships and those with two or more members are treated as partnerships. The LLC can elect to be treated as a corporation but that rarely, if ever, happens. Most states follow the federal approach.

But what does Pennsylvania do? At first, Pennsylvania treated LLCs as corporations for state corporate income tax purposes and for state capital stock tax purposes (the latter is the tax that has driven businesses OUT of the state, causing the legislature to schedule its phaseout, but that has been put on hold because the state needs money. Of course the state needs money.... businesses and their jobs have been leaving).

Then Pennsylvania decided to treat LLCs as partnerships for state income tax purposes. But they treat the LLC as a corporation for capital stock tax purposes.

Understand that LLCs don't have capital stock because they're not corporations. So that makes the idea of imposing a capital stock tax on them as sensible as imposing a gasoline fuels excise tax on the sale of shoes, or better yet, imposing a bridge toll on people who don't cross the bridge.

OK, so there are some conceptual problems here. Sometimes I wonder if the folks making these decisions took a tax course. I surely hope they weren't students in my courses. What an embarrassment.

But the real problem is the practical one. LLCs are required to fill out a capital stock tax form that is designed for corporations. The form asks for the names of corporate officers. Duh, there aren't any. It asks for the name of the corporation. OK, cross out the word corporation and ink in "LLC" and maybe (after a few more years of doing this) someone will get the message. The form asks for shareholders' equity at the beginning and end of the year. LLCs don't have shareholders so they don't have shareholders' equity. But, well, we can figure out what the Department of Revenue wants to know, so plug in a number for something approximating members' equity. They ask for percentage of stock owned by each shareholder. Huh? In fact, if the LLC is set up to make special allocations, there is no one fixed percentage. So one has to write in "varies" across the tiny spaces provided for percentage numbers.

Then there is the manufacturing exemption, and the reconciliation schedules, and, new for this year, a multiple-column multiple-row classification matrix. By the time one is finished:

The federal income tax return for the LLC is 2 sheets (4 pages) plus a K-1 for each member partner.

The Pennsylvania income and capital stock tax return for the LLC is 8 sheets (16 pages) with 2 of the sheets being a fold out exemption schedule. Plus, of course, a K-1 for each member partner and a second K-1 for each nonresident member partner.

The irony is that almost all LLCs are small business operations. So they qualify for the $125,000 "valuation exemption" for the capital stock tax. But they still must fill out the forms, which could be as many as 10 pages including schedules.

And the form has such entries as this: If line a is more than twice as much or less than half as much as line b, enter ..... WAIT! Is this algebra class? Sometimes I think that computer game players who need a job line themselves up to create tax forms with sections that aren't unlike the "aha secret place to click to get more ammo" features one finds in computer games.

The "paperwork burden" that Pennsylvania imposes is absurd. The LLC either pays someone to do the returns, or a member of the LLC does the return. The cost of paying someone, or the value of the time, can be significant when compared to the income each member draws from the LLC. This is especially so if the LLC is a start-up company.

The Department of Revenue offers electronic filing. No way. This is the same Department of Revenue that won't permit taxpayers to download the capital stock tax forms from its web site.

Maybe Vincent Fumo can muscle the water companies or some other utility to make contributions so he can set up a "fix the Pennsylvania tax system and its tax administration and tax filing systems" Foundation. If it does half the job he claims his South Philly "We can use PECO dollars better than PECO customers can use reduced rates" Foundation does, he'd make the news for a good reason.

I'd volunteer to go fix it myself if they gave me the authority, but I doubt the folks in Harrisburg would appreciate the outcome. Taxpayers would, but hey, what do taxpayers know? (he says with more than a tinge of sarcasm).

Let me duck so I don't get run over by the stampede of LLCs joining in the exodus of businesses from Pennsylvania. I'll hang around just in case the Governor decides that I deserve to be a Keystone Opportunity Zone, with tax credits that let me not worry about filing forms or paying taxes. Oh, wait, the KOZ form is probably another 45 pages with questions asking me to report the number of shareholders in my LLC.

Stay tuned. There are more tax returns yet to do.

Here in the Philadelphia area (and the rest of Pennsylvania for that matter) much is being written about the proposal to give Comcast a tax break for keeping its corporate offices in Philadelphia.

It all goes to show that whatever the feds can do, the states and localities can do just as well.

Find an industry or company that is doing quite well, and find a way to throw more money their way. Not that the outcome will be a reduction in the cost of the company's product or services. Or even a reduction in the rate of increase of the company's pricing.

The Governor of the Commonwealth defends his proposal by claiming that Comcast will bring 1,000 more jobs to the region if it gets the tax break, and very easily could add another 2,000 jobs in the future.

And without the tax break? I suppose the Governor's reasoning suggests that without the tax break Comcast will not add the jobs. That means Comcast either will require its existing workers to do more work, or Comcast won't do the work that the 1,000 hypothetical new employees would have done, or Comcast won't go out and offer to purchase Disney.

If Comcast has enough money to purchase Disney, how does it not have enough money to hire 1,000 new workers? Sure, perhaps Comcast doesn't have enough money to do both, but if it genuinely needs 1,000 new employees to make quality cable service available at reasonable prices to customers in its monopoly-controlled service area, then spend the money on the jobs and retreat from or postpone participation in the "Bill Gates purchase the world" competition.

But that's not what this is REALLY about, and the people involved must think that the rest of us will fall for the "more jobs" mantra because jobs are difficult for some people to find at the moment. Note, some people. Nurses, accountants, natural gas riggers, hey, some folks have the skills that are in short supply. And what about a guarantee that if Comcast gets the tax break and fails to create 1,000 new jobs it pays the escaped taxes, with interest and penalties? There's no need for a "no way Comcast loses" flavor to the deal, is there?

No, what this is about is extortion. Companies do this. Sports franchises do this. Athletes do this. Anyone who thinks he, she, or it can get away with the "I'm running away from home unless you increase my allowance and reduce my chores list" gambit tries to pull it off. (Hey, do kids have chores anymore?)

The response ought to be, "then leave." Where will you go? California? New York? Some state with higher income tax rates? Or some state with seemingly a lower tax burden? (Note, "seemingly") And after you and all your employees show up, putting additional demands on that state's government and its localities for services, you'll discover that taxes will go up. Including yours. And especially your employees'.

Take a lesson, corporate managers, from the sports teams that leave a city because the locals can't or won't give in by spending tens of millions of tax dollars for a playhouse for athletes who earn poverty wages (oh, excuse the sarcasm). Then these teams, wooed by the greener grass on the other side of the fence in some other town, pick up and leave. Supposedly the locals suffer for their insolence in not publicly funding a private enterprise. Gee, Los Angeles has really suffered since Al Davis went back to Oakland and the Rams went to St. Louis. (more sarcasm, but this topic really invites it.)

And how long did the honeymoon last? Count the number of such teams that moved back, or moved yet again. Give Al Davis of the Oakland Raiders a call. He's quite experienced in the game, and I'm sure at this point he'll has a totally different perspective than he did years ago. Better yet, call the towns that did the wooing and ask them if they're all that happy about their success. Call the folks in Phoenix and ask them about their joy in having enticed the Cardinals to leave St. Louis and traipse west into the desert. Sometimes departures are good for everyone involved, except those who depart.

The advocates of these individualized tax breaks argue that they are necessary, because without them all of the state's citizens will suffer in some way. Well, even WITH the tax breaks the citizens will suffer because someone has to make up the revenue loss. Oh, no, say the advocates, the additional revenue will come from the 1,000 new employees who arrive and pay income taxes. True. Except that the 1,000 employees and their families will impose additional demands on state and local government services, such as the need for 1,800 additional seats in schools, teachers to go along with them, highways (which will become more clogged), etc. etc. And so local real estate taxes will go up. Bridge tolls will go up. The cost of lost time sitting in traffic jams will go up.

What the "Comcast needs a tax break" advocates don't want to hear are the pleas of the "all businesses need a tax break" advocates. Why not a tax break for the mom and pop grocery store in Chinatown? Why not a tax break for the self-employed home hospice care giver? Why not a tax break for the landscaper? The three-person tree removal companies? The woodworking outfit? After all, together these businesses could create not 1,000 but 2,000 or 5,000 or 10,000 jobs if their taxes were reduced. Instead, they see an increase in the state income tax, a deferral of the repeal of the antiquated capital stock tax, a revenue department that still doesn't quite grasp how an LLC should be taxed.

Well, the reason these small businesses don't get tax cuts is two-fold. First, they don't have clout. Second, without the tax cuts they become more vulnerable to the mega-companies buying out the world. Don't you want your landscaping done by the ComcastDisney Lawn Mowing Subsidiary? How about nursing care from the ComcastDisney Nursing Practice?

Why don't they have clout? They don't get to rub shoulders with the "movers and shakers." They aren't invited to the meetings and parties where the decisions get made. They can't afford big-time political campaign contributions. Standing alone they don't have enough to offer. Until now, they haven't had enough incentive to stand together, these owners of small businesses that offer goods and services in a wide expanse of industries and service fields.

Here's why this sort of "tax break for the big and wealthy" doesn't work. To make up the revenue loss, costs are increased for the "small and not wealthy" businesses. Costs include not only taxes, but decreased public services, increased time waste, and lost revenue on account of the continuing exodus of residents from Philadelphia to other places. As small businesses then join the flood of people crossing City Line Avenue, the city's tax position worsens, it raises taxes yet again, and the cycle accelerates. Eventually the Comcasts will leave, long-term leases or not. (They'll find lawyers who can get them out of those leases, and that's assuming they don't have escape clauses written in at the outset, which surely they must.)

There's the story of the guy who killed the goose that laid the golden eggs. There's also the story of the exiles who ate the seed corn. Somewhere in here Comcast might figure out that it would be better off NOT getting a tax break. Not only in terms of public relations, but in terms of long-term present value analysis that looks not only at the corporation's projected financial statements but also at the projected financial statements of the city and state from whom it is trying to extract these tax breaks.

Unless of course, Mr. Roberts, after you acquire Disney with the money you've saved in tax breaks, you decide to distribute the acquired Disney shares to each of your cable subscribers. Now THAT would be rather innovative, wouldn't it? And a public relations coup that would dwarf the effect of announcing that flush with the financial werewithal to acquire Disney you really don't need the tax breaks.

Think about it. (And if you do it, I won't even charge you for my advice.)

I should know better than to think that commentary on marriage and taxes can fit into a brief posting to this weblog, but the question is out there, at least for those not familiar with the intricacies of tax law:

"Will the same-gender couple marriages in San Francisco be recognized for tax purposes?"

The answer is no. The IRS has interpreted the federal tax laws dealing with marriage (e.g., joint returns by married couples, the estate and gift tax marital deductions for transfers to one's spouse, the gain deferral provision applicable to transfers between spouses and transfers incident to divorce) as limited to persons who are validly married under state law. The courts have agreed. The San Francisco same-gender couple marriages aren't valid under existing California law.

"What about same-gender couple marriages in Massachusetts if it turns out that the legislature in Massachusetts doesn't resolve the issue and the decision of the Supreme Judicial Court takes effect as scheduled?"

The answer here is that a federal statute not in the Internal Revenue Code limits recognition of marriage for purposes of federal law to marriages between a man and a woman. So despite the IRS definition of marriage as a marriage valid under state law, the same-gender couple marriages that would presumably take place in Massachusetts won't be recognized for federal income tax purposes. I'm no expert on Massachusetts state income tax, but I suppose that for state income tax purposes Massachusetts would be required to treat same-gender marriages as it treats different-gender marriages in terms of joint filing and whatever other tax benefits and tax detriments affect married couples in Massachusetts.

Civil unions? Not marriages for federal income tax purposes.

So that answers the questions, but there's more to consider.

A couple that is treated as married for federal income tax purposes usually is worse off, in terms of the federal income tax, than if they were not married. That's the so-called "marriage penalty." (The couple is better off for purposes of the federal estate, gift, and generation-skipping transfer taxes.) But sometimes they are better off; that's the so-called "marriage bonus." Generally, if the each of the two persons has roughly the same income, they're worse off, and if they have substantially different incomes, they are better off. The best "marriage bonus" is attained when one spouse has no income. (Interesting insight, isn't it, into what the tax law encourages?)

I've written several journal articles discussing the marriage penalty and bonus, and related issues. E.g., Tax and Marriage, Unhitching the Horse and Carriage, 67 Tax Notes 539 (1995). It's on-line only through subscription web sites such as Lexis, Westlaw, and Tax Notes, so there's no point in trying to link to what would be a dynamic link.

Anyhow, many others in the tax profession, mostly law faculty but also several practitioners, have also written on this topic. So if you're interested, there's a lot out there to read. Not only is the problem analyzed and dissected, a variety of solutions are offered.

My solution? I don't think marital status ought to have anything to do with taxation. Now that gets some people upset, because they think that it would mean the end of civilization if the tax law did not in some way encourage or reward marriage (even though the income tax "marriage penalty" does far more economic damage than is offset by the benefits of estate and gift tax marital deductions). Pennsylvania's income tax, for example, though permitting joint filing, doesn't treat married couples different from single persons (principally because there is a flat tax rate). Despite what some may think, civilization in Pennsylvania has not ended.

My solution reflects not so much my unwillingness to accept the notion that married persons SHOULD be treated differently from single persons for tax purposes, as it is a rejection of the discrimination between husbands and wives and other combinations. Consider, for example, two sisters who remain in the family home, care for their elderly parents, and in turn maintain the household after their parents die. Their economic position is no different than that of a married couple. They have similar non-tax concerns; for example, the spousal hospital visitation preference that is one of the concerns raised by same-gender couples seeking marital status is no less a concern for the two sisters. Of course, anyone can execute powers of attorney and other legal documents, but not only do many hospitals, banks, and other institutions deal inadequately with these documents, it's sadly just not something that many people think about or get around to doing. The same is true of wills, burial directions, health care powers of attorney, medical directives, etc. etc. (As an aside, many institutions accept declarations of marital status without getting into paperwork proof whereas they won't accept declarations of other legal relationships (such as a power of attorney) without a process that is not unlike the annoyance of filing a tax return!)

The broader solution, beyond treating people as individuals when it comes to tax returns, is to treat people as individuals when it comes to everything else (setting aside the question of minors and the limitations on their capacity to function as individuals with respect to legal matters). Think for a moment, again, of the toll booth. "Welcome to the Ben Franklin Bridge." "How much is the toll?" "Well, there's $1 for you, and if the woman in the passenger seat is your wife, it's another 50 cents, but if not, it's another $1." "She's my wife." "Prove it." How long would Americans (or people in any country, for that matter) put up with this silliness?

So what to do about the hospital visitations, domestic benefits, health care coverage, and all the other incidents of marriage? Permit people to name a "designee" for purposes of hospital visitation, medical decisions, default beneficiary under insurance policies and retirement plans, and so on. Would a person be permitted to name a different designee for different purposes? Yes, but it usually would be unwise for a variety of reasons. Would a person be required to name a spouse? No. Sometimes a spouse is NOT the best person to have a power of attorney, or to be a beneficiary, to make medical decisions, or to be a "designee."

Would a person and the designee file a joint tax return and get tax benefits? No. Because there wouldn't be any joint returns or tax benefits on account of having a relationship of any sort with any person. No deductions for boyfriends, no exemptions for fiancess, no bridge toll discounts for mistresses, and so on. Excuse the sarcasm there, but the attempted use of tax law to influence people's behavior in areas in which even the psychological experts don't quite understand why people behave as they do is a grand example of Congressional and lobbyist hubris.

So what happens to marriage?

Nothing.

And everything.

Marriage should be to the state as is birth and as is death. And as would be the naming of a designee. Or the revocation of such a naming. Or the ending of a marriage. That's the libertarian in me talking. Hear me out.

Consider birth. The state records births (and people are under obligations to register births with the state when they occur). Note that it is the state and not the federal government that does the registration (though the issuance of social security numbers to children for purposes of claiming tax dependency exemptions brings the federal government very close to operating a central birth registry). And even as a libertarian, I recognize the need for society (through government) to know when a person arrives (either as a visitor, an immigrant, or as a new-born).

No state (nor the federal government) requires the filing of an application for permission to bring about a birth. (If the government tried to do that, the ranks of the libertarians would swell to enormous proportions.) Though some may advocate requiring licenses to cause birth, that is flat-out inconsistent with the concept of personal liberty as enshrined in the Constitution. Governments are known to have encouraged births, discouraged births (e.g., the People's Republic of China), and to have been indifferent. Governments and others can advocate and fund programs to teach people (read: youngsters) about the consequences of causing birth, but licenses for doing so aren't issued.

The same is true of death. Again, even though there are some who might favor such an idea (I don't), governments do not require licenses to die. That's pretty much for practical reasons, but most plans advanced by advocates of euthanasia include some sort of pre-death regulation. That is yet another factor that makes euthanasia a controversial topic (and one in which the government ought not be involved).

So why, of the three chief genealogical events (birth, death, marriage), is marriage singled out (sorry, couldn't resist) for special treatment? Is it any more significant than causing birth? Hardly. Is it because traditionally, births were caused only as a follow-up to marriage? Many so think, but history demonstrates that most "traditional" practices end up being 19th and 20th century customs that were unlike their 16th century predecessors. For example, the current out-of-wedlock birth rate isn't very different from the out-of-wedlock birth rate in medieval England.

The reason, I think, is the incompletion of the church-state separation that began during the Protestant Reformation, that sharpened during the Enlightenment, and that was incorporated into the First Amendment. True, full separation of church and state has not happened. The marriage situation is a good example.

States record births. States do not record the christening, the baptism, the bris, the sealing, or the dedication (to name but a few of the religious ceremonies that accompany the arrival of a new child). Clergy do not record births on behalf of the parents who bring their child for a religious celebration of the birth.

States record marriages. States provide for ceremonies for the "performing" of marriages. Technically, the state is providing for the "witnessing" of a marriage. Must one marry in a government building? In front of a government official? No. One can marry in front of clergy and the state accepts it. That means, at one level, the state is accepting or rejecting clergy in terms of the validity of the marriages they "perform" or witness. That alone is a First Amendment problem. Most European countries have this figured out. One marries in front of a government official, and if one chooses to have a religiously witnessed or blessed marriage, one does so. They are two independent ceremonies. As is the recording of a birth and the baptism of a child. And, interestingly, as is divorce (where the disparity between treatment by church and treatment by state is very sharp).

In most civilizations, marriage has its roots in religious ceremony (as do just about every other ritual or practice in society). Unlike the cutting of hair, the attainment of legal age, the acceptance in the warrior group, or the recording of birth, civil union has not separated itself from religious marriage. Because no one advocates interfering with religious definition of marriage (other than the difficult-to-defend arrangement that ended polygamy in Utah), the question is one of how the CIVIL government ought to deal with relationships between people.

And that's how I came to think that the naming of a "designee" is the solution. It doesn't try to match religious marriage with a civil imitation thereof. For those inclined to think along the following terms, it leaves to God the things that are God's and to Caesar the things that are Caesar's. It lets a person have multiple spouses for religious purposes (if the religion so professes) but limits the person to one designee for civil purposes.

I know of no religion that would permit the two sisters (from that example a few paragraphs back) to marry. I know of a few religions (or denominations) that bless same-gender unions, and there may be a few that technically permit same-gender marriage. Most religions and denominations (there have been a few exceptions) permit marriage. Some accept divorce, others do not. Most have some sort of ceremony on the arrival of a new-born. Most (if not all) have some sort of ritual upon death. At present, all of these events (other than marriage) are independent of the civil transaction. It should be so with all.

Will civilization as we know it end if same-gender couples are permitted to marry? I doubt it. The problem is that the state ought NOT be defining marriage because in doing so it intrudes into religious matters. The state ought to be defining the rights of named "designees". Does the state have an interest in encouraging marriage? It has an interest in encouraging stable relationships of all sorts. It has an interest in the welfare of children. It has an interest in domestic (family) tranquility. To date, the state has not demonstrated that it (or its bureaucrats or officials) are any more skilled at bringing these things about than are the clergy, members of communities of believers, agnostics, atheists, or secularists. It's time for the state to stop trying to do the same or a better job than the churches, temples, mosques, worship halls, and synagogues are doing and time to develop methods to improve the efficiency and effectiveness of civil transactions.

Marriage is a specific type of relationship between people that even now the law considers as something that is witnessed rather than created. The state can no more create marriage than it can create love.

Well, long as this is, it isn't and wasn't intended to be a treatise or a full-blown proposal. It's a thought. Maybe it will have some useful effect. After all, the path that the nation is on at the present is divisive, emotional, and politically charged. Perhaps it makes more sense to sort out the issues and think them through so that a new landscape can be designed before trying to resolve matters by working within existing frameworks.

Your comments are welcome.

I heard a commercial this morning on my drive to the gym. It shed some fascinating light on what I consider one of the core problems in the administration of the tax law.

The commercial begins with an assertion that no longer is a car shopper limited to a choice of new and used. Now there's a THIRD category, neither new nor used. What is it? The Lexus certified PRE-OWNED vehicle. Huh? PRE-OWNED? Isn't that just a fancy way to say used without saying used? It's bad enough to use the word, but the commercial surely is claiming that pre-owned is neither new nor used. Sure, some of us can see through the lie, but what about youngsters and those lacking the requisite perception skills? Let's face it. Either the car is new or used. If it has been owned and used, you can call it pre-owned, but that doesn't mean it is neither new nor used. Stop with the spin.

The tax law often makes distinctions between recourse and non-recourse loans. If a loan is recourse, the lender can take the assets of the borrower if the borrower defaults. If a loan is non-recourse, the lender can take only the assets that have been pledged to the repayment of the loan, that is, the loan is secured by the asset but there is no personal liability. A loan can be partially recourse and partially non-recourse, but the tax law treats each part as a separate loan.

Why the difference? Because there is personal liability on recourse loans, and not on non-recourse loans, the impact of the loan on a partner's basis in a partnership interest differs. Without getting into the technical stuff, basis is "good" because it allows losses to pass to the partner for use (perhaps) on the partner's individual return. A recourse loan creates basis for the partners who are personally liable for the loan. Limited partners aren't, by definition, liable. So they don't get basis from a recourse loan. They get basis, however, from a nonrecourse loan.

So the incentive for a tax shelter promoter is to have the financing of the project be nonrecourse. Then basis can be obtained by (and losses passe through to) the limited partner investors. OK, then make the loan nonrecourse. That is more easily said than done (try it next time you take out a mortgage on your house: ask the lender for a nonrecourse loan and let me know if they stare you down or break out in hysterical laughter). So the lender wants recourse (especially if the project is something other than real estate) but the promoter wants nonrecourse.

How do they try to make people happy? Let's quote an attorney who once asked me, "So how can we make the loan recourse for the lender and yet get the IRS to believe that it is nonrecourse?" My answer is that you can't. That's what the IRS and the courts say. But that hasn't stopped people from trying to "hide" the personal guarantees or other recourse devices by keeping them outside of the main loan documents and outside of the partnership agreement. Some get caught, some don't. It takes dozens of pages of IRS regulations just to deal with this issue. (Section 752 of the Code and its regulations if you're really dying to get into this).

So what's the connection to the Lexus ad? Well, the tax shelter folks want to pretend that a recourse loan isn't recourse, when presenting the facts to the IRS. Lexus wants its customers to think that a used vehicle isn't used. Look, it's recourse or it's nonrecourse, it's used or it's new, a woman is pregnant or not pregnant. It boggles my mind that so much energy goes into the art of pretense.

It's nothing new. Take a look (here comes the theological connection) at the Gospel of Matthew, chapter 23, verses 25 and 27. It doesn't work to clean the outside of a dirty cup, leave the inside unwashed, and then claim that the cup is clean. Sure, it's human nature. Well, maybe not. Maybe society can get past this culture of pretense. It afflicts tax law, it afflicts advertising, and it afflicts a long list of activities and situations that generally are troublesome in one way or another.

I can understand the motives of the tax shelter promoters. If you can't get a nonrecourse loan from the lender, the deal is pretty much dead. Well, maybe it ought to be, considering how most of those deals turn out to be good for the promoters and bad for the investors. But what's Lexus' problem? It wants to sell a used car that it has certified, and rehabilitated? Then say so. It's a certified and restored used vehicle. But don't claim that it's neither new nor used. That's just plain stupid. And wrong.

I wonder if this pretense stuff was really the problem that led to the decline of the Roman Empire? That's for another day.

I'm in the late stages of writing a BNA Tax Mgmt Income Tax Portfolio on "Tax Incentives for Low-Income Areas." At first glance, it's easy to explain what it's about. It's an analysis of tax law provisions that encourage taxpayers to conduct business or to make investments in ways that pump money into areas that are poverty stricken.

Sounds good. Noble. Effective. Worthwhile. Efficient.

But is it? If it requires a full Portfolio (pretty much a book, unless one insists that a book cannot be spiral bound), then there's surely a lot going on.

Indeed, there is. First, there is the question of what is a low-income area. Pretty simple, right? Let's say, an area where n% of the population has income less than $y. Well, that's not far from the approach taken, except that there are different types of low-income areas. There are empowerment zones, enterprise zones, renewal communities, a special District of Columbia zone, and so on. Why? The short and simple answer is political expediency. So the n% and the $y varies, depending on what sorts of advantages are to be provided. The number of zones that the government can designate has been increased twice since the concept first found its way into the tax code more than a decade ago.

Second, what sort of business or investment should be encouraged? Most of the provisions, for example, don't permit benefits to activities such as golf courses, spas, and similar entertainment facilities. I guess (being sarcastic) that poor people don't have time for, or need, spas? There are more than a dozen types of investments and business activities that qualify for benefits. Things like "qualified equity investment," "renewal community business," "enterprise zone facility," "enterprise zone business," "qualified business entity," and my favorite, the "qualified zone academy." Each of these (and many other) terms are in turn defined by reference to other terms which themselves need to be defined. Each is somewhat like and yet a little different from the other, so the room for taxpayers to trip over the minutiae of technicalities is very high.

Third, what sort of benefit should be provided? An exclusion from gross income? A deduction? A credit? These are, of course, all good things because they reduce income tax liability. But they're not equal. A $100 credit is much better than a $100 deduction, because the credit reduces tax liability by $100 but the deduction reduces tax liability by $100 multiplied by the taxpayer's marginal tax rate (assuming, of course, that the deduction survives a gauntlet of floors, ceilings, limitations, phaseouts and other contraptions invented, for the most part, by those unwilling to put the real tax rates front and center (that'll be the subject of another posting, later). So? Well, at last count there are 16 different benefits, most in the form of credits and deductions. Some types of qualified activities or investments trigger one of the benefits, and others trigger more than one. Some benefits are available to only one type of qualified activity or investment but others are available to more than one. Charting this out pictorially would require a 4-D arrangement. Ah, the Matrix. Yep, that's where tax specialists go when they die. JUST JOKING.....

As I learned all of this and then wrote a book explaining it, I began to wonder. WHY? Why such a hodge-podge? Why all the definitions, rules, benefits, different areas?

WHY NOT JUST GIVE EACH POOR PERSON $T each year? That would be a LOT EASIER to administer. It wouldn't take 25 tax provisions. In fact, IT WOULDN'T EVEN BE IN THE TAX CODE. Of course, in recent years all sorts of non-tax public welfare stuff has been put into the tax code. Probably because the IRS is better at administering this stuff than the agencies that ought to be dealing with it.

Is it because Congress doesn't want people to know that it has enacted all these provisions that help the poor? And that amount to a type of dole?

NO.

Because a lot of this money doesn't reach the poor. The poor don't pay federal income tax and generally don't file tax returns other than, in some cases, to get the refundable earned income credit (another complex mess from Dr. Frankenstein's lab).

So that might be part of it. Of course, if $T were distributed to each poor person, that person would have spendable dollars that would flow back into businesses in the normal course of the everyday marketplace. THAT is a better form of government assistance to the economy than these contrived plans that provide employment to bureaucrats and deal managers and, yes, indeed, people who write books about it.

But I think there is something more involved. When each poor person would be given $T, he or she could use that money as he or she wished, within the bounds of existing law. In contrast, if the money is funneled through enterprise zones and qualified businesses and qualified property, the use of the money is HIGHLY REGULATED AND CONTROLLED. The present system not only is complex, it is a device for bureaucratic CONTROL of what should be laissez-faire (French for "LEAVE IT ALONE!!" (sort of) :-) ) market economics.

There have yet to be any studies demonstrating that these "incentives" (in contrast to general tax reductions for the middle class, or increases in the earned income credit for the working poor) have had any real effect. General economic news tends to suggest, no, not really.

Incidentally, this is not a partisan problem. These provisions have been planted and nurtured (and repeatedly amended, expanded, and upsized) by both Democratic and Republican administrations and Congresses. Ah, something the major political parties have in common (despite what they say): CONTROL PEOPLE'S BEHAVIOR THROUGH THE TAX CODE.

And that would take us to things like the TAX CREDIT FOR ADOPTING A CHILD. ("Hey, Mabel, we get $500 off our taxes this year if we adopt a kid." RIGHT!!!). As if one can raise a child for $500. "Yes, John, we adopted you because it saved our taxes." God forbid someone gets adopted because the parents want to love and nurture a child. I really believe that NO ONE has let this $500 tip the balance one way or the other when it comes to such a serious decision as adoption (but isn't someone planning to pay people to get married or something like that? It's getting scary.) But this post is long enough, so perhaps I'll come back to that topic on another day.

Listserves are great. I belong to at least a dozen. Don't worry, Dean, other than the several for family history they're all law related.

One of the benefits from the listserves is the steady parade of exam question possibilities that I can pose to my students. When they claim the question is unrealistic or irrelevant, I salute my listserve associates by explaining to the students that a practitioner's practice-world client indeed had the problem presented to the students. (The academy - practice dichotomy I'll leave for another day).

Last night someone posted a question to a tax listserve concerning the deductibility by a would-be lawyer of bar review and bar exam expenses. My students ought to be able to answer that question because we cover it in the course. Why do I include it? I've learned that when students are dealing with topics that relate to their lives or their planned lives they pay closer attention.

Anyhow, in the listserve discussion I pointed out that the expenses aren't deductible because they prepare the would-be lawyer for a new trade or business, that of being a lawyer. Not only has the IRS said that in regulations, there are cases in which the courts have so held.

Then I pointed out that according to the IRS someone who already is a lawyer and who pays expenses to study for, and take, the bar exam in another state is not permitted to deduct those expenses because (according to the IRS) the practice of law in one state is a DIFFERENT trade or business than practicing law in another state. Standing alone, that seems to make sense. The law in one state differs from the law in another (even though in recent years the disparity is beginning to diminish). If someone licensed to practice law in Pennsylvania tried to practice in New York, at least in theory, he or she would be unable to do so because he or she lacks knowledge and understanding of New York law.

But wouldn't the same hold for teachers? Suppose someone who is licensed to teach in Ohio moves to North Carolina. This may not be true today, but at the time in question, North Carolina requires the teacher to take courses in subjects such as North Carolina government, the history of North Carolina, North Carolina geography, and the like. Are the expenses incurred by the teacher deductible? The answer turns on whether being a teacher in Ohio is the same thing as being a teacher in North Carolina. Teachers in Ohio probably don't know much about North Carolina government, history, or geography. Just like Pennsylvania lawyers don't know much about New York legal procedure or parking regulations. Yes, Ohio teachers know the same algebra that North Carolina teachers know. But Pennsylvania lawyers know the same federal environmental law, Constitutional law, and criminal law that New York lawyers know.

What did the IRS conclude? That being a teacher in one state is the same trade or business as being a teacher in another state, even if the subject matter differs.

I make certain my students learn about this. It's such fun letting them discover how far from ideal the tax law really is.

Does the IRS have something against lawyers? I doubt it, considering many of its employees are lawyers. Does the IRS especially like teachers? At the time of the IRS ruling on the matter, teachers were in short supply. Maybe that had something to do with it.

There are many teachers in my extended family, including my sister and my niece-in-law. Let's see if they decide to share a "teachers are special and more important than lawyers" with us. Then I'll let my OTHER sister (who is a lawyer) respond. And I, the compromised lawyer-teacher, will sit back and watch!

I finally succeeded in getting Turbotax loaded and running. It took a while because of some problem with kernel32.dll, and ended with a work around. The downside is that having loaded the program, it's now, yes, TAX TIME!! Yippee.... (sarcastically).

There's a huge pile of paper to dig through, to find the stuff relevant for the return. It's getting difficult to remember the years I did the returns by hand. I've been using Turbotax for 11 years. It's a fine program, but it cannot dig through the paperwork and digital files for me. And it can't do the "pre-entry human decision" stuff.

I can't imagine what it's like for folks who don't have tax education, and who have to sift through all their papers. Sure, take the big box to the tax return preparer, but having been on THAT side of the desk, I can guarantee that sometimes ONLY THE TAXPAYER KNOWS. I can't complain... God gave me a brain that understands (most of) income taxation. But it still is absurd that so much energy, talent, brain power, and money goes into tax compliance (that's the return filing part), and, worse, "creative" tax planning that recently has come to border on, and too often, is in fact, fraud.

Imagine if "they" simplified the tax system and all these resources could be turned to something more productive (say, curing cancer, improving the education system, fixing the health care system....)

Well, each day I do a little bit of data entry. When I need a break from writing the technical stuff ABOUT taxes. It's early still. The fun will be in April when friends start calling, their panic evident as they realize April 15 is around the corner and they haven't even thought about the tax thing.

That's one reason I get started on mine early.

Eventually I share my ideas of how the tax system can be repaired. Stay tuned.

So the Administration wants to pile bunches more provisions onto the existing pile of law known as the Internal Revenue Code. Why not replace existing provisions? Why not combine things? Why add bunches more credits, exclusions, special rates, and exceptions?

You'll soon discover I'm not a fan of the existing tax code, nor am I enthused about the proposals to make it even more complex. It is true that I understand a fair amount of the tax law, and once upon a time I read the code cover to cover. That was when it could be published in one volume. Now it's two, each volume thicker than the one I read, and each one wider and taller. And the print size? Smaller, of course.

Maybe the grand plan is to make the tax code so huge that five million new jobs for tax lawyers, tax accountants, tax return preparers, tax appraisers, and tax actuaries will be created. Now THAT surely will get the economy going. It's much like hiring a bunch of folks to move bricks back and forth without building anything.

Closing on a note of appreciating the good life. Imagine if the toll booths on bridges required toll computation the way Congress wants us to compute federal income tax liability. People would die of old age waiting in line.

Stay tuned.