MauledAgain

Warren Rojas of Tax Notes, made this connection between my recent posts (here and here) on the word for the streamlined process for authenticating documents internationally and the sentencing of a Hull, Massachusetts, man for bank fraud. The fellow generated false tax and income statements in his wife's name and used those documents to obtain loans. Here's the clincher:

EDELKIND, who filed for bankruptcy in October 1999, used his wife's name on all of the loans. EDELKIND prepared loan applications in his wife's name, listing fictitious employment and income information, backed up by forged tax and payroll records. EDELKIND fabricated a variety of documents, including forged "W-2" Wage and Tax Statements and tax returns. As the loans got larger, the amount of income claimed grew as well. Early in the scheme EDELKIND submitted records showing that his wife had an annual income of roughly $200,000 -- by the end he claimed she earned $1.1 million as Chief Operating Officer of a company called Apostille, Inc.

So even the con artist (who gave an address for Apostille, Inc. that postal authorities said would be in the Atlantic Ocean) knew about this word and I didn't. Proof I don't know everything.

And he used tax forms to do his deeds, too. I knew there was a connection.

Andrew Mitchel is at it again. I pointed out in this post of two weeks ago that he had put together a collection of charts depicting a variety of corporate tax cases and the reorganization provisions. Now he has added a group of section 367 charts to his Andrew Mitchel LLC - International Tax Services web site. Defintely worth a look by those studying, teaching, or using these provisions.

Some things don't mix. Oil nd water come to mind. Some things ought not be allowed to mix. Drinking and driving, for example.

So how about this hook-up? Choicepoint and the IRS.

Choicepoint, as most news readers know, from stories such as this one, is a data gathering enterprise that became (in)famous after the personal and confidential records hundreds of thousands of indiividuals were stolen from the company's computers. Now along come the IRS, according to reports such as this one, which awards a 5-year contract to Choicepoint to run IRS data batch processes. The contract could amount to as much as $20 million.

Isn't this nice? Get lax with security, put other people's data, identity and even lives at risk, and be rewarded with a government contract. This suggests that the IRS managers who entered into the arrangement didn't think there was anyone else out there who could be better at what counts, at least not at the specified price.

Fortunately, members of Congress have jumped in to criticize and even attempt to stop the implementation of the contract. Senator Patrick Leahy, joined by Senator Arlen Specter, in a bipartisan effort, has called for a review of the contract to ensure that taxpayer data and privacy are protected. Representative Ed Markey, using a nice word twist, pointed out that the contract left taxpayers with no choice about the destination and spread of their data.

The IRS responded by ordering a full review of the contract. Considering what's at stake and Choicepoint's track record, it had best be a thorough review. I doubt a confirmation of the contract will sit well with people, especially those whose lives have been inconvenienced and ruined by the "make profits at others' expense" philosophy of most big business enterprises.

Other than pressure their legislators, what can taxpayers do? Not much. So, as usual, this falls back on the Congress. It writes the tax laws. It created the IRS. It appropriates tax dollars to the IRS. So it had best do its duty.

No sooner had I posted my "discovery" of the apostille, both word and process, than the English major and expert of the family sent this:

http://switzerland.isyours.com/e/faq/apostille.html
What is an apostille?
An apostille is a special seal applied by an authority to certify that a document is a true [sic] copies of an original. Apostilles are available in countries, which signed the Hague Convention Abolishing the Requirement of Legalization of Foreign Public Documents, popularly known as The Hague Convention. This convention, created in 1961, replaces the time consuming chain certification process used so far, where you had to go to four different authorities to get a document certified.
www.wordfocus.com
apo-,
wordinfoap-, aph- (Greek: from, away from, asunder, separate, separation from, derived from; used as a prefix).
tillo-,
wordinfotill- (Greek: to pluck, tear, pull).

So kudos to my sister for digging this up. And thanks. I don't think I would have guessed a Greek origin.

One never knows when one will learn something new. For me, this time, it was during a visit with one of my cousins, retired from the diplomatic corps. We were discussing estate planning, and the fact that Portugal, where he owns a property does not "understand" or recognize the trust. The lawyer in Portugal needed some documents, including some tax papers, and they had to be certified.

Once upon a time it worked as follows. Let's assume a county tax document. The document was taken to the county court house, where the clerk certified the document. Then it was forwarded to a state official, who certified that the certifying county clerk was indeed who he or she claimed to be. Then this was forwarded to the state's Department of State, which certified the authenticity of the state official's certification. Then it went, if I am remembering this correctly, to the U.S. State Department, which certified it to the other country's consulate or embassy, and then it made its way to the lawyer in the other country.

Fortunately, the U.S. entered into a treaty that streamlined the process. It calls for something called an APOSTILLE. No, not apostle. After I left, my cousin sent me the link to this explanation of an apostille.

Perhaps you knew about this. I didn't. I've learned some law. So, if you ever need to certify a tax or other document to another country, that's how it's done.

The word apparently is both a noun and a verb. At least it is used as a verb on that web site. Imagine if I used it playing Scrabble. I would be challenged. So would you. Now you have proof it's not a figment of your imagination. According to Webster's, it is a noun, not a verb, and it means " marginal note on a letter or other paper; an annotation". Look at the Webster's site for all sorts of trivia about the word. But I haven't found the origin of the word.

It's almost Independence Day. It's a day that means a lot of things to a lot of people. We have opportunities unlike those available to most people in the world. For example, what percent of the world's adults own their own home? In some countries, private home ownership is rare or reserved for a privileged few. Sometimes it's economics, but usually it's politics. And often when it is economics, it's really politics in disguise.

That's why the following response to my post several weeks ago on Home Price Sticker Shock is appropriate at the moment. Dave Harmon wrote:

Here in NYC, the housing boom is driving gentrification (bye-bye, Bowery) and pricing the middle class out of town. It was already messing with the demographics and social structure -- especially, police officers either can't afford to live in the communities they serve, or don't dare to (in the slums). Note that the slums are part of the same problem: these are places where the landlords can't score "enough" money from rent, so they don't bother with maintenance, let alone investment. They just wait for the developers to come along and buy them out, often with subsidies from the same City Hall that couldn't be bothered to deal with the neglect. I'm sure there are tax issues in there, but mostly it's just power politics.... ;-(

Well, there is tax in this, from the beneficial impact of the real estate property tax deduction and the home mortgage interest deduction on home ownership, to the debilitating impact of rapidly rising local property taxes on continued ownership by citizens on fixed incomes, to the variety of incentives, gimmicks, and other control features woven into state and local tax law. If housing prices contine to escalate, and of course the question is whether they will, the tradition of private home ownership by the majority of citizens, nurtured and strengthened by American political and socio-economic characteristics, will be in jeopardy.

Why is this so important? I think "pride of ownership" extends beyond care of the home to care of the community. Home owners have an investment flavored wth an emotional attachment not found in other investments (except, perhaps, cars, jewelry and collectibles). There are many freedoms in independence. Homeownership reflects one.

Happy Independence Day.

This traffic backup/tieup simulator is VERY cool. Run the uphill grade variant and decide if the truck in the left land should be charged an "unwarranted use of left lane for passing beyond capability of truck engine" user fee. The technology exists to do this. Note that in the simulations there are no accidents, bad weather, etc. I was clued into this by a tax faculty colleague. Who says tax profs aren't forward thinking and capable of spotting the cool stuff?

A little more than a week ago I posted a summary and critique of the energy bill approved by the Senate Finance Committee. Today it passed the Senate, 85-12. I guess my thoughts were influential n D.C. NOT!

Many practitioners tell me that they don't focus on pending legislation because it could turn out to be a wasted investment of precious time. That makes sense, to a point. Perhaps if these things got more attention on the public radar we would see better legislation. Then again, perhaps not. Dave Harmon wrote to me, in response to my critique:

What ever made you think that the energy bill was intended to *help* our energy situation? ;-) Our current administration has a pattern of passing bills and laws that actively interfere with whatever they claim to be protecting or encouraging. "Patriot Act" undermines the Constitution, "Defense of Marriage" would keep (same-sex) people from getting married, "No Child Left Behind" attacks the school systems, "CAN-SPAM" requires you to respond to spammers to (supposedly) get off their lists, and so on ad nauseum.And don't get me started on the Department of Homeland (In-)Security!

Although on some of these issues disageement divides the nation, on others it's almost unanimous: Congress does exactly the opposite of what should be done to accomplish what almost everyone agrees ought to be done. Who welcomes spam? Yet why confirm email addresses as Congress provided? Who wants higher energy costs? Yet who, ultimately, will pay the $11 billion cost of the energy bill, if enacted?

And yes, practitioners, clear some room on your "learn more tax law" calendar. This one's on its way.

My recent post on Taxes, Fashion Sense, and the Internet brought some additional information from Dave Harmon: Apparently Cafe Press will put a customer-provided picture or logo (within limits, I suppose) on t-shirts, mugs, whatever). So.... the possibilities of a MauledAgain mug/t-shirt/keychain endeavor is more than an idle threat. As in quip of a month ago:

My children must be glad they're of legal age. No fear that Dad will crank up some MauledAgain t-shirts for them to wear. Hmm. Wait a minute. MY kids would jump at the idea.

So why am I out looking for souvenirs when I could order them up from home.

But... still don't have a logo. Maybe a hammer (maul, get it>) with IRC on the handle coming down on my head?

In response to my announcement that I had put a FeedBurner newsfeed link on the blog, Raj A Kapadia of Mumbai, India, who reads the blog regularly, sent me this news:

Actually, everyone who has a blog on Blogger also gets an Atom NewsFeed, the URL of which is <(URL of the Blog)/atom.xml>. Thus, the URL of the Atom NewsFeed of your Blog is http://mauledagain.blogspot.com/atom.xml. I SHOULD KNOW - I AM SUBSCRIBED TO THAT FEED SINCE THE PAST FEW MONTHS !!

So, again, I learned something. Thanks, Raj.

It leaves me, though, with two questions. I've tried to research an answer to the first but had no success. Haven't tried to figure out the second.

1. How can I find out how many people have news feed subscriptions to the blog? Would that require aggregating statistics from each of the news feed subscription sites?

2. If I post something, and then change it (usually because of typos, sloppy HTML, or experimental HTML that ends up ugly), does the feed get replaced? Does a new feed go out each time I update the post? The one I just did on the tax charts was reposted three times until I could get the HTML the way I wanted it. If it refeeds each time, goodness, it's giving literally meaning to "MauledAgain," hahaha.

So, anyhow, there's a second news feed source for those who are interested in subscribing to the blog.

What's going on here? A Saturday post. A Sunday post. Yes, indeed, it's the summer schedule.

I'd like to bring to your attention a very interesting and useful tax resouce on the web that should be of interest to practitioners, tax law professors, and law students. It's the Andrew Mitchel LLC - International Tax Services web site, particularly the two resouces, Charts of Tax Cases and Reorganization Charts. Andrew, who combines an LL.M. and CPA and practices in Connecticut, specializes in international tax. Of course, because one cannot dig into that area of tax without understanding basic tax, corporate tax, and some other areas, Andrew, like the rest of us, worked through a variety of corporate tax cases and the reorganization provisions. And like many of us, he chose to design visualizations of the transactions. Charts, graphs, pictures, anything that appeals to the eye can be a great help in understanding tax law. That's the case here. As many of you know, I'm a very visually-focused person. That's why creating Powerpoint slides for my courses was a snap.... I had been drawing the pictures on the blackboard. Trust me, the Powerpoint visuals are MUCH more legible.

As I tell my students, there's no point in getting into black letter law until one understands the facts. Understanding the transaction often is the chief stumbling block for a tax student, and, of course, for many tax practitioners and judges. Missing facts, distorted facts, unclear facts, all contribute to confusion. "Mapping out" the facts, whether in a chart, matrix, process flow, Venn diagram, or other graphic representation, is essential.

So, take a look, and if you think one or another of Andrew's charts helps, let him know. And if you're thinking of using them beyond your own eyes, ask him permission. As an author, creator, and programmer, I can state unequivocally that he will be most appreciative. And I'm confident he'll be of help in your goals.

Here's what he has in his still-growing collection. Oh, I'm sure he'd welcome some sharing in reverse. Hey, anything that makes digging through tax transactions easier gets my vote.

Charts of Tax Cases

1. Atlas Tool - (D reorganization with boot)

2. Bhada - (Inversion via 351)

3. Chapman - (B reorganization)

4. Court Holding - (Conduit Seller)

5. Davant - (D reorganization with Strawman)

6. Davis - (section 302 - redemption of preferred stock)

7. Esmark - (Tender offer followed by in-kind redemption)

8. Gregory v. Helvering - (Seminal Case on Form vs. Substance)

9. Intermountain Lumber (Busted 351 exchange)

10. King Enterprises - (Two-step Merger)

11. Morris Trust - (Spin-off followed by merger of Distributing)

12. Plantation Patterns - (Guarantor of debt treated as borrower)

13. Smothers - (Liquidation-reincorporation)

14. TSN Liquidating - (Pre-sale distribution)

15. Waterman Steamship - (Pre-sale distribution)

16. Yoc Heating - (pre-section 338 QSP followed by failed reorganization)

17. Zenz v. Quinlivan - (Part sale / part redemption)

18. Rev. Rul. 67-274 - (Purported B reorg plus Target liquidation is a C reorg)

Reorganization Charts

1. A Reorganization

2. B Reorganization

3. C Reorganization

4. D Reorganization (acquisitive - i.e., not a 355 type transaction)

5. A Reorganization with a drop-down

6. B Reorganization with a drop-down

7. C Reorganization with a drop-down

8. D Reorganization with a drop-down

9. Forward Triangular Merger

Perhaps this is one of the great contributions of the internet to culture. Someone has an idea, and it can be shared with the world in the blink of an eye.

Take a look at this merchandising site. Click on any one of the apparel items and then click on the "Click to enlarge" link so that you can read what it says.

Then think.....

Someone came up with the idea.

Someone manufactures the items.

People are buying the items.

People are wearing the items.

It's all the talk of the ABA-TAX listserve, and it's just been posted to the tax law professors' list. It's spreading faster than bad tax legislation.

Understand, I have, so I am told, no fashion sense. I manage to remember that I am a "winter" and should stick with jewel tone colors. That's why you see me (if you see me) in plain black, navy blue, and the like.

Yet even I know that wearing one of these to a party isn't going to trigger conversation with folks suddenly curious about the tax adventures of a blogging law professor, or the fashion mishaps of a tax blogger. I have a feeling that there is ONE of these items in existence that says on the back "I INVENTED THIS" and that is the direction in which all the folks at the party will head for invigorating conversations. Entrepreneurs... they'll do it every time.

OK, so I'm annoyed I didn't come up with the idea. Even if I had, I don't think I'd be wearing it. Unless, of course, someone paid me $500,000. On principles of fashion, I can compromise. For $500,000. Sure.

Summer officially began several days ago. At least for the astronomers, climatologists, weather forecasters, and anyone paying attention to the length of the day. For me, it begins today. Why? After all, classes have been done for 7 weeks ago, grades were turned in (by me) more than a month ago, graduation was a month ago, and grades were distributed to students two weeks ago. Summer begins today, for me, because yesterday was the last scheduled faculty meeting (though at the last minute it did not happen), I have prepared my fall courses (except for the things that cannot and should not be done until August, such as configuring some of the technology, making updates to reflect relevant tax law changes popping up during the next 6 weeks, possibly changing from infrared to wireless student response pads ("clickers"), and printing out what needs to be printed for the course), I have reached a natural breakpoint in the revision of Tax Management Portfolio 505, and I have finished the semi-annual archiving of email. Oh, and I tidied up the office, to the point where I could wash down the desktops and one can now see more open space on the desk and tables than not.

This means that during the next 6 weeks my posting will be irregular rather than the Monday, Wednesday, Friday, and occasional other day pattern into which it had slipped. With the arrival of summer, my patterns change and I won't necessarily be at a computer on Monday, Wednesday and Friday mornings. Indeed, it is almost certain I won't be. But I'll show up at unannounced times, share some thoughts, and then disappear again for a couple of days.

I know many of you stop by regularly to see what I've added, and that irregular posting makes that a chore. So, I've added a feature to the blog. I was inspired to do this when an ABA-TAX listserve participant asked me how to subscribe to MauledAgain. Once I got the "he wants to BUY a subscription, what has happened to him?" momentary shock out of my mind, I realized what he was describing. News feeds. I knew they existed, I hadn't done much with them, and yet I realized that it was only a matter of time. So the time has arrived. If you use a news reader you can click on the news feed icon on this blog, and set up your news reader to automatically show a posting when something gets posted to MauledAgain. If you don't use a news reader but want to use one, the folks at Blogger and at FeedBurner recommend FeedDemon. I'm sure there are other news readers available that would meet your needs.

Anyhow, I'd be most appreciative if someone using a news reader tries this and lets me know if it works. At the moment, all has been set up and in theory it should operate, but you know how I distrust relying on untested theory. And I'm not content trying it myself when the point is to have it work properly for others.

On a slightly different note, you may enjoy a story passed along to me by a non-blogging colleague. According to this ABA Journal e-report, it is likely that a lawyer's blog that contains advertising content or otherwise invites readers to use the lawyers services would constitute advertising and be subject to the state rules regulating lawyer advertising. That's not surprising or unreasonable. The catch is that in at least one state, Kentucky, a lawyer must pay a $50 fee each time he or she issues advertising. The Kentucky Attorneys' Advertising Commission is studying the question of whether a $50 fee must be paid each time the lawyer posts to the blog. Yikes, that would bankrupt me! Interestingly, the lawyer who noticed the issue is the former chief bar counsel for the Kentucky Bar Association, and he thinks the reason the issue is just now hitting the radar is that he may be the first lawyer in Kentucky to have a blog. Wow. His blog, incidentally, is well worth a visit; after all, it's the Legal Ethics blog, by Ben Cowgill. His "what? $50" story spread through the Internet like lightning. I'm just a wee bit slow catching up to it.

That's all for now. Another sign that it is officially summer is that tax news doesn't come in the torrents that characterize fall, when Congress faces deadlines for enacting legislation, winter, when thoughts turn to the tax filing season, and spring, when everyone, it seems, is writing something about tax as April 15 looms. But I have a few things on the back burner, including thoughts about the latest failure in the continuing saga of the attempt to repeal the antiquated Philadelphia gross receipts tax, the current chapter of which is not yet complete.

Back next week.

Sometimes the simplest of tax questions can trigger the most complex of discussions.

The question put to the ABA-TAX listserve was simple. Can a sole proprietor elect, under the check-the-box regulations, to be treated as a corporation for federal tax purposes? The question was raised by someone who attended a CPE session, was told that a sole proprietorship COULD elect to be treated as a corporation, and who had trouble, understandably, accepting the correctness of the statement.

Those voicing an opinion offered all sorts of rationales and explanations to support one or the other of the championed answers. How could that be? A look at the check-the-box regulations reveals not only the absence of any statement addressing the question directly, but also the absence of definition of organization.

The definition of organization is critical because the check-the-box regulations, and almost every flow-chart portraying their rules, begin analysis with the existence of an organization. If there is an organization, , then the door is open to deciding if it will be a corporation, partnership, sole proprietorship, or division of a corporation for federal tax purposes.

The regulations technically begin by stating that they apply for purposes of determining "the classification of various organizations" and specify that "whether an organization is an entity separate from its owners for federal tax purposes is a matter of federal tax law and does not depend on whether the organization is recognized as an entity under local law."

The next logical step would be to define organization. But the regulations don't do that. Instead, they proceed to identify certain "joint undertakings" (such as joint ventures and other contractual arrangements) that "may" create a separate entity for federal tax purposes. They do, if the participants in the undertaking carry on a trade, business, financial operation, or venture and divide the profits from it.

So are the regulations saying, in effect, "In addition to organizations, which may or may not be treated as separate entities for federal tax purposes, certain ventures and arrangements that are not organizations may qualify as separate entities for federal income tax purposes"? In other words, do the regulations provide that an entity can exist even though there is no organization?

The regulations then kick out of the analysis certain organizations out of the analysis. Presumably, there is no question that they are organizations. Thus, organizations wholly owned by a state aren't recognized as separate entities. Considering that states are tax-exempt, this is not an earth-shattering conclusion. Certain Indian tribes are treated as not being entities.

The regulations then point out, specifically, that organizations with a single owner can choose to be recognized or disregarded as entities separate from the owner. Of course, what first comes to mind is the single-member LLC, which is disregarded as an entity (and thus treated either as a sole proprietorship or as a division of a corporation depending on whether the owner is an individual or corporation) unless it elects to be treated as a corporation.

But the fascinating question is this: Is a sole proprietorship an "organization"? If so, it is a single-owner organization and can follow the same path down the flow-chart or through the analysis as does a single-member LLC.

The regulations then push aside organizations that have separate, special treatment under the Code. For example, a REMIC is an organization (or so one can presume), but it is a REMIC and not a partnership, corporation, trust, sole proprietorship, or division of a corporation.

One would expect the next rule to be "An organization is treated as a separate entity if...." but that's not where the regulations go. Instead, on the assumption that organizations treated as separate entities have been identified, the regulations state that "the classification of organizations that are recognized as separate entities is determined under" specified sections of the regulations. Technically, that makes no sense, because it is under one of those specified regulations that a single-member LLC (presumably an organization) is disregarded and NOT recognized as a separate entity. Literally, the provision that treats a single-member LLC as a disregarded (and not separate) entity is in a Regulations provision that one doesn't reach unless one is dealing with an "organization recognized as a separate entity." I'm beginning to wonder what the flow chart used by the regulations drafters looked like. But, just as too many computer programmers don't flow-chart their projects and end up paying a price or causing their customers to pay the price, so, too, failure to flow-chart this sort of regulation means that at some point the IRS, or its customers, we taxpayers, will pay the price.

The regulations then jump to the definition of a business entity, which primarily pushes trusts (and presumably estates) into their own special corner of the tax classification world. These regulations state: "a business entity is any entity recognized for federal tax purposes (including an entity with a single owner that may be disregarded as an entity separate from its owner) that is not ... a trust .. or otherwise subject to special treatment." Again, the use of the language is deficient. If the IRS wants to treat disregarded entities as a subset of recognized entities, which perhaps it is trying to do, it needs to use better phraseology. Otherwise, we end up with recognized entities that are disregarded.

This is the point at which the question, can sole proprietorships elect to be treated as corporations, runs aground. The rest of the regulations, which take business entities and provide for their treatment, don't impact on the specific question.

One argument that was made is that a sole proprietorship is an organization, because it is organized by a person as a means of doing business. In response, one argues that the sole proprietorship is simply an individual and that no separate organizational structure or procedures exist. Even so, under state law X can set up a sole proprietorship under a business name such as "X doing business as Arf's Biscuits." Is Arf's Biscuits an organization?

Another argument that was made is that if a sole proprietorship is not an organization, it can't be an entity as an undertaking or contractual arrangement because the definition requires that there be "participants" who divide the profits. A sole proprietorship has one participant and the profits are not divided.

Another argument was simply that nothing in the regulations states that a sole proprietorship cannot be an entity, or an organization, or a business entity. Of course, nothing in the regulations states that a sole proprietorship CAN be an entity, organization, or business entity.

To the same effect was an argument that referred to the Preamble to the regulations, which state that protective elections, made when there is uncertainty about status, are not prohibited. Of course, a protective election is simply that, a contingent protection that would fail if, in fact, the organization, entity, or other existence does not qualify to make the election.

I argued somewhat more obliquely. If a tenancy-in-common, "mere cownership" to use the technical phrase, cannot be an entity, can a tenancy-by-one's-self (a sole proprietorship) be an entity? The response is that joint ownership can be an entity, under the joint undertaking or contractual arrangement rule, if there is sufficient "activity" so why can't a sole proprietorship that engages in the same sort of activity rise to the level of an entity? The counter-response is the absence of participantS to divide the profits.

Another response to my argument brought an interesting twist. The regulations state "Mere co-ownership of property that is maintained, kept in
repair, and rented or leased does not constitute a separate entity for federal tax purposes. For example, if an individual owner, or tenants in common, of farm property lease it to a farmer for a cash rental or a share of the crops, they do not necessarily create a separate entity for federal tax purposes." This language suggests that an individual owners does not necessarily create a separate entity, but because it doesn't state that an individual owners can NEVER create a separate entity, it leaves open the possibility that an individual can create a separate entity in the form of a sole proprietorship.

Several cases were cited, including Williams v. McGowan, in which the court held that the sale of a sole proprietorship is the sale of the assets of the sole proprietorship and not the sale of a single business, or presumably, entity. Also pointed out was the Supreme Court's decision in Morrissey, suggesting that entities are limited to corporations, partnerships, and trusts, but the decision does not explicitly so state. And, of course, that sort of definition of entitly leaves out things not in existence when Morrissey was decided, such as the LLC, and it says nothing of estates, which surely are separate from their executors and beneficiaries (and are very similar to trusts for many purposes).

Some interesting arguments were raised on the basis of what would happen if a sole proprietorship were permitted to elect to be treated as a corporation for federal tax purposes. One, citing Braswell v US, asks if the individual would lose the right to raise, as a sole proprietor, the "act of production" privilege under the Fifth Amendment? Would profits retained by the individual generate dividends or interest? If the sole proprietor ceases doing business, is the corporation dissolved, with its attendant liquidation consequences? If not, would retention of interest-bearing accounts create a personal holding company?

Well, one enterprising participant in the discussion, sought a response from the IRS Email Tax Law Assistance. Having known this particular participant for many years, I'm not surprised that he took the initiative to find out what the IRS thinks. The short answer is that the IRS said, "No, a sole proprietorship cannot elect to be treated as a corporation."

The longer analysis is interesting. The IRS cited the regulations that apply to the definition of business entity, but not the regulations that deal with organizations and joint undertakings, which is where most of the discussion, and my analysis, turned its attention. The IRS stated "A business entity does not include a sole proprietorship not classified as a single owner entity disregarded from its owner (an LLC under state law). A sole proprietor is not an entity in and of itself thus, this election cannot be made." Of course, the cited regulations do NOT make this statement. The IRS also quoted the regulations that deal with the consequences of changing classification, but those, to me, provide nothing in the way of guidance.

So now we know what the IRS thinks. I agree with its position. But I don't think the IRS provided persuasive reasoning. The arguments raised by those discussing the question, on both sides, were far more cogent. Why not simply state, "A sole proprietorship is not an organization, and because it does not have more than one participant, it is not a joint undertaking. Accordingly, it is not an entity, and because it is not an entity it is not a business entity for which an election to be treated as a corporation is available."? Isn't that the gist of what the IRS wants to say?

I learned two other things from this discussion. Well, maybe I ought to say that two things I knew or suspected were reinforced. First, the active members of the ABA-TAX listserve can really get into a tax law discussion, of the quality and scope one likes to see from a law school class on a Blackboard virtual classroom discussion board. Second, things get said at CPE and CLE sessions that are flat out wrong, and risking intrusion into another topic, there's no supervision of what is said, and no evaluative mechanism to determine if those attending the sessions have learned anything. Of course, most CLE and CPE sessions are of high quality, and some attendees learn at least something, but there's more education experienced on the ABA-TAX listserve by its active participants and readers than happens for some people in some CLE and CPE sessions.

And, oh won't my students be so appreciative, that another examination question has crawled out of the many pages of discussion that traversed the ethernet during the past few weeks. The best part, for many, I suppose, was that I deliberately sat back and said nothing until near the end. I think some people thought I had email laryngitis. No such luck.

To make an even bigger mess of the tax code?

Here we go again. This time it's the ENERGY POLICY TAX INCENTIVES ACT OF 2005, which was approved by the Senate Finance Committee several days ago. Let's see what it does to the tax law:

* it adds a new investment tax credit to the energy credit, applicable to qualified projects that generate power using integrated gasification combined cycle and other advanced coal-based electricty generation technologies.

* it adds a new investment tax credit to the energy credit, applicable to qualified gasification projects, which are projects that convert coal, petroleum residue, biomass, or other materials recovered for their energy or feedstock value into a synthesis gas composed primarily of carbon monoxide and hydrogent for direct use or subsequent chemical or physical connversion.

* it adds a new investment tax credit to the energy credit applicable to clean coke/cogeneration manufacturing facilities.

* it provides a credit for non-business energy-efficient property, which consists of advanced main air circulating fan, a Tier 1 natural gas, propane, or oil water heater, and tier 2 energy-efficient building property used in a trade or business.

* it provides a credit for the purchase of combined heat and power property, the definition of which includes four conditions and an alternative.

* it provides a nonrefundable business energy credit for the cost of energy efficient appliances.

* it provides a personal tax credit for the purchase of qualified photovoltaic property and qualified solar water heating property used for purposes other than heating swimming pools and hot tubs.

* it provides a business energy credit for the purchase of qualified fuel cell power plants.

* it provides a credit for the purchase of new qualified fuel cell motor vehicles, new qualified hybrid motor vehicles, and new qualified alternative fuel motor vehicles, and the credit would reduce the existing deduction for qualified clean-fuel vehicles.

* it extends the nonrefundable business energy credit to include energy-efficient property installed in a qualified new energy-efficient home during construction by an eligible contractor.

* it creates a new category of tax credit bonds, namely, clean renewable energy bonds, .

* it creates a new category of tax credit bonds, namely, clean energy coal bonds.

* it provides for a temporary election to expense the cost of qualified refinery property.

* it provides a deduction for energy-efficient commercial building property expenditures made by the taxpayer, limited to $2.25 per square foot of property for which the expenditures are made.

* it provides a deduction for the purchase of qualified energy property, which consists of advanced main air circulating fan, a Tier 1 natural gas, propane, or oil water heater, and tier 2 energy-efficient building property used in a trade or business.

* it treats natural gas distribution lines as 15-year property for MACRS purposes.

* it repeals the phaseout of the electric vehicle credit, and increases the credit to varying amounts depending on the specific characteristics of the vehicle.

* it increases the clean-fuel vehicle refueling property credit, and changes certain definitions relating to that credit.

* it increases, from 10 to 30 percent, the credit for solar energy property.

* it modifies the enhanced oil recovery credit, increasing it for qualified projects that use certain carbon dioxide injections.

* it extends the electricity production credit to electricity produced at advanced nuclear power facilities.

* it extends and modifies the renewable electricity production credit, by postponing the sunset date by three years, and adding fuel cells as a qualifying energy resource.

* it postpones the sunsetting of the biodiesel fuel mixture credit.

* it eliminates the sunsetting of certain income exclusions for tax-exempt rural electric cooperatives, and modifies some other highly technical provisions dealing with those cooperatives.

* it creates an excise tax credit for alternative fuels, allowed against the excise tax on alternative fuels.

* it creates an excise tax credit for alternative fuel mixtures, allowed against the excise tax on alternative fuels.

* it permits independent electric transmission companies to use the 8-year ratable gain deferral provision applicable to sales of property used in providing electricity transmission when the proceeds are invested in exempt utility property.

* it provides for the passing through, by cooperatives to their patrons, the deduction for costs paid or incurred to comply with the Highway Diesel Fuel Sulfur Control requirements.

By my count, there are 12 new income tax credits and 2 new excise tax credits, 6 modifications and expansions of existing credits, 3 credit sunset extensions, 3 new deductions, a deduction modification, and 2 other provisions. In the meantime, down the street, the Tax Reform Commission is studying ways to simplify the tax law and increase compliance. Up the street, Treasury and IRS struggle to find ways to deter taxpayers from manipulating complex code provisions to achieve goals not intended by the Congress, noting that the more provision are enacted, the more game-playing fields are opened to the tax shelter manipulators.

Is this any way to run an enterprise, whether a government, a private business, a charity, or any other institution?

No.

Of course energy conservation and the discovery and development of new types of energy sources are activities critical to national defense, economic viability, and preservation of a culture that nurtures democracy and human rights. But is turning the tax law into a chemistry and engineering handbook the appropriate approach?

No.

Notice how the credits are tailored to specific and narrow segments of subdivisions of the energy industry. It appears that, once again, lobbyists have had a field day. Where are tax credits for helping people purchase homes near their place of work, thus cutting down commuting time, which saves energy and reduces pollution. Where are the tax credits for teaching children not to leave the doors wide open in winter, or to teach people not to open a refrigerator in summer and stand there looking over the contents while debating their next move? Where are the tax credits for joining community swimming pools and closing down individual residential pools? Where are the tax credits for designing traffic light systems that don't keep cars waiting, getting zero miles per gallon, while invisible cars proceed on the cross street? Where are the tax credits for encouraging use of passenger trains, oh, wait, Congress is cutting Amtrak funding. Sorry.

Will the Congress authorize the hiring of dozens more Treasury and IRS employees to write the regulations and rulings required to interpret these dozens of new provisions? Will it pay for the hiring of IRS employees to develop the dozens of forms that will be required for these new provisions? Will it authorize the hiring of hundreds more IRS employees to audit the tax returns on which these credits and deductions are claimed? Will it fund programs to ferret out the tax shelter manipulators who will be offering various energy credit investment deals? I doubt it.

If the goal is to persuade individuals and businesses to engage in energy conservation and to develop new types of energy sources, why not let the market do its job? For example, when the price of gasoline reaches $6 a gallon, the demand for hybrid and other alternative fuel vehicles will soar, as demonstrated by the increased interest in hybrid automobiles as gasoline prices climbed over $2 a gallon. What's the point of giving a credit for something people would do on account of market conditions? If the concern is that some people would not be able to afford the purchase, and that a small credit would make the difference, why not operate a grant program for impoverished individuals through the Department of Energy? Well, the answer is that Congress apparently thinks that the IRS is the most efficient federal agency to operate energy and other grant programs disguised as tax credits. Yes, the same Congress that publicly bashes the IRS in order to "get" votes turns around and entrusts administration of its energy program to the IRS. Think about it.

As another example, when the cost of home heating oil and natural gas reaches comparably high prices, the incentive to shift to fuel-efficient appliances and fuel-conserving behavior will increase. Again, if there is a concern with the plight of those unable to afford new heaters and appliances, set up a grant program. After all, of what use is a tax credit, unless it is refundable, to someone with so little income that they don't have tax liability against which to set the credit. Note that, as best I can tell, only one of the credits is refundable.

The notion that American businesses and individuals will conserve energy and switch to more efficient, less expensive forms of energy only if bribed with tax credits is appalling. If that is indeed the case, it speaks volumes about a nation that perhaps is narrow-minded and short-sighted. And if Americans won't otherwise act in energy-wise ways, then it's time to enact laws dictating that they do so. Americans should be expected to do what is right, even if laws need to be enacted to tell us what is right. But to rely on tax incentives to get people to do what they ought to be doing, and very well might already be doing, is wrong. Very wrong. After all, what's next, a tax credit for stopping at stop signs? A tax credit for owning a gun and going a full year without shooting someone out of anger or revenge? A tax credit for eating broccoli? As sarcastic as these questions may appear, it would not be a surprise to see another several dozen lifestyle credits enter the Code next year, another several dozen neighborly behavior tax credits enter the Code the year after that, and for the entire system to become the playground of the monied special interest groups who have no sense or understanding beyond their own little worlds. And if the nation succumbs to being controlled by these narrow-minded and short-sighted special interest groups, it will make the tax code mess one of the lesser concerns of the citizenry.

So what happens when the Tax Reform Commission comes in with a proposal to simplify things, assuming that it will do so. And I think it will do so, if for no reason other than to rack up PR points for the Administration. Can this addicted-to-lobbyists Congress resist the temptation to desimplify the proposal? I doubt it.

Watching Congress turn the tax law into a bureaucratic, inefficient, compliance-deterring nightmare is distressing, frustrating, and frightening. At least, for me, it is. I suppose it's not yet that way for enough other folks for it to matter. Congress, after all, won't stop until it is told to stop. Why else should it stop? That's where the frightening part comes in. Think about it.