Monday, May 30, 2005

Food, Taxes, and Appetite Ruination 

In my first analysis of the new domestic production activities deduction under section 199, I noted that the exclusion of gross receipts derived from the sale of food and beverages prepared by the taxpayer at a retail establishment from the domestic production gross receipts (DPGR) on which the deduction is based had opened up a Pandora's box of issues with respect to the distinctions between roasting and brewing coffee. I would have said it opened up a coffee can of issues but my mother informs me that her favorite coffee is now sold in plastic containers.

Now there are some more difficulties with the definition of "food and beverages prepared by the taxpayer at a retail establishment" to consider. I came across this letter from Costco to Treasury while looking for a document in which concerns are raised with respect to the definition of architectural services, a document that I still have not found. So, because today, Memorial Day, is a day on which many Americans make food an even more important highlight of the day, I decided to consider how, in the tax world, the definition of "food prepared at a retail establishment" can generate so much discussion. Ask a four-year old what food is, and the child will reply, "Anything you can eat."

Although Costco's letter described activities in which it engages with respect to food at its retail establishments, the situation it describes are not unique to Costco. They're rather common.

Costco, as most people know, sells all sorts of merchandise at discounted prices, often in bulk quantity. Among the items sold are a variety of groceries, beer and wine where permitted, frozen foods, bakery products, dairy products, meat, and produce. Are any of these items "food and beverages prepared by the taxpayer at a retail establishment"? Costco points out that several of its operations pose the question. In its butcher shop area, Costco employees take huge slabs of beef, trim them of fat, and cut them into roasts, steaks, and other cuts before packaging them in bulk amounts for sale. The butchers also grind meat and package it in huge quantities, usually no less than 6 pounds. Costco explains that none of these items are immediately edible, but require further preparation by the customer. I think it's right that the analysis not be clouded by the fact some people eat raw meat. So I'm told.

Costco store employees also process and package "home replacement meals," in huge quantities, most of which require additional preparation by the customer. In its bakeries, Costco bakes and cooks all sorts of items, again packaged in significant quantities, most of which are ready to eat.

When the IRS issued Notice 2005-14, in which it interpreted some of the issues arising under section 199, it invited comments. To that invitation, Costco responded, not only by describing its food operations and pointing out the issue, but by suggesting the analysis that the IRS should adopt.

There is no question that the Costco stores are retail establishments. However, the IRS Notice excludes facilities from the definition of retail establishment if less than 5% of the total gross receipts derived from the sale of food and beverages prepared at the facility are attributable to retail sales at that facility. Even though the statute does not so provide, the Notice permits allocation of gross receipts between those attributable to wholesale sales of food and beverages, which qualify as DPGR, and gross receipts from retail sales of food and beverages prepared at the retail establishment, which do not qualify as DPGR.

Costco's letter points out that the legislative history noted that gross receipts of a meat packing plant qualify as DPGR but receipts derived at a restaurant from sale of a venison sausage created by the master chef do not qualify. Wow, talk about cutting a fine line. After all, the master chef is doing what the meat packing plant employees do: process food from one form to another, prepartory to its further preparation through cooking. Considering the goals of section 199, which is to encourage taxpayers to perform manufacturing, production, and similar activities in the United States rather than abroad, what's the point of excluding the master chef's processing receipts? Costco's letter then describes the coffee roasting and brewing distinction that I explored in that earlier post. Finally, Costco's letter quotes the legislative history's description of receipts from the sale of bakery items, even if sold by a supermarket and not a dining establishment, as failing to be DPGR.

Costco proposes that for purposes of the denial of the deduction for "food and beverages prepared by the taxpayer at a retail establishment" the word "food" be defined as "an item prepared by the taxpayer that is ready for immediate consumption in a single serving size without regard to whether the item is intended for on-site or off-site consumption." Does this work?

The meat packing plant's receipts would qualify as DPGR because it does not sell items prepared by the taxpayer that are ready for immediate consumption in a single serving size. The proposed definition works.

The restaurant's receipts from the sausage prepared by the chef would not qualify as DPGR because it is an item prepared by the taxpayer (through the taxpayer's employee) that is ready for immediate consumption in a single serving size. Again, the proposed definition works.

The coffee shop's receipts from brewing coffee would not qualify as DPGR because the coffee is an item prepared by the taxpayer that is ready for immediate consumption in a single serving size. The definition gains strength.

What about bakery items? For bakeries that sell individual items to its customers, the receipts would not qualify because the items are prepared by the bakery and are ready for immediate consumption in a single serving size. To this point, the definition appears to be consistent with what it is Congress appears to be trying to do.

What happens, though, to the Costco butcher operations, its home replacement meals, and the bakery items? Costco's letter concludes that application of the proposed definition makes the receipts from the sale of those items DPGR. The cuts of meat and the ground meat are not ready for immediate consumption, putting aside the folks who eat raw meat. The home replacement meals need further preparation by the customer. These results make sense. Costco's butcher shop is, in some ways, a minature meat packing plant. Though I have some doubt about the home replacement meals, so long as they need cooking and not mere heating, the receipts should qualify as DPGR. My doubt arises because a pizza shop can sell a "home replacement meal" which, depending on the distance the customer needs to drive to get home, may require re-heating. Is it time to get into a discussion of the difference between cooking and heating? Some people claim that opening and heating a can of soup does not qualify as cooking. A can of soup, though, is not ready for immediate consumption. Regardless of what one calls the activity that makes it edible, receipts from its sale are DPGR.

The bakery items present some challenges. The example in the legislative history is, as the Costco letter points out, ambiguous and confusing. Does it mean that all receipts from the sale of products produced by the in-store bakery are ineligible? Does it mean that the receipts should be allocated between those arising from sales to retail customers and those sold to, for example, restaurants for re-sale? Does it mean that receipts from items that undergo additional processing qualify, such as sliced bread used by the bakery to make sandwiches sold to customers? Costco's letter notes that a fourth interpretation exists, because one could argue that even a cake prepared by the bakery is not ready for immediate consumption because the "normal" way in which individuals consume a cake is not to dig into it immediately. It needs to be unpackaged and cut into individual slices. Perhaps, the letter notes, the bakery's sale of a slice of cake would generate receipts not qualifying as DPGR.

Costco wants to apply the fourth interpretation. I'm not certain I agree. After all, if the fact that a customer must slice the cake in order to eat it should preclude the "food and beverage" exception from applying, ought not the fact that a restaurant patron must slice the steak likewise preclude the "food and beverage" exception from applying to the retail dining establishment at least to the extent the customer must do something other than put the item into his or her mouth?

These are the sorts of issues that cause people living outside the tax practice world to roll their eyes and exclaim, "Let's just get on with life." Even some of us inside the tax practice world, including yours truly, have that reaction more often than perhaps we are willing to admit. There surely must be a better way than to hyperanalyze the niceties of food preparation. That's not to cricitize the Costco letter, because it addresses issues that must be addressed considering what Congress has done. The criticism is better directed toward the Congress, questioning why it simply didn't exclude receipts arising from food sold at retail from the deduction. Instead of having to create yet another definition, the terms of which require further definition, Congress could have relied on a term that has been defined and refined after decades of application in the sales and use tax area. Such a definition would not work to the benefit of retailers performing wholesale activities, such as Costco, but if the deduction is to discourage taxpayers from moving production overseas, is that incentive necessary for production that is not at risk of being moved overseas, such as the butcher and bakery operations of an establishment such as Costco?

Or, to the extent it makes sense to encourage Costco to maintain its domestic operations, why not simply exclude from DPGR gross receipts arising from the sale of food or beverages for on-site consumption and gross receipts arising from the sale of food or beverages for off-site consumption that require no further activity by the customer other than those activities in which the customer would engage had the customer consumed the items on-site, such as slicing with knife or fork, spooning, pouring, shaking, or mixing? The fact that a customer needs to unwrap a package, slice a cake, pour soup into a bowl, divide 5 pieces of chicken among 5 family members, shake salt onto something, or pour dressing from a separate container onto a salad ought not be treated as food processing that makes the item not ready for immediate consumption. In other words, I'm not certain that the "not ready for immediate consumption" is sufficiently unambiguous to settle the question.

Please don't ruin your Memorial Day picnic or barbecue by starting a conversation about this topic. Wait until everyone is finished eating. Don't ruin their appetites.

So how many tax practitioners were aware, when they decided to enter tax practice, that someday they would be discussing how people eat cake, how meat is prepared, and whether a distinction between cooking and (re)heating can be adequately defined. Perhaps that's one of the reasons tax practice attracts as many folks as it does. One never knows where the next tax law changes will take us. Other than deeper into complexity and further from getting on with life.

Saturday, May 28, 2005

Taxes and the Sale of Baby Wardrobe Advertising Space 

This one was inevitable. A pregnant woman has decided to sell advertising space on her soon-to-be-born child's clothing. Setting up auctions on e-Bay and another site, with a minimum bid of $1,000, she has offered advertising space on the child's clothing for the month of July. She also is willing to accept payment for displaying logos on a stroller. This is a must-read story.

Her inspiration is the viewing of a story about a woman who offered to have temporary tattoos on her body for cash. Her justification is that her older son wears clothing with manufacturer's logos, which in her mind constitutes free advertising for the company. Of course, that's true. I wonder if manufacturers will claim that the amount paid for items with logos is the net of a higher gross purchase price and an advertising space discount.

Anyhow, my almost-instantaneous thought was a tax one. If she succeeds, there will be gross income because there is no question that amounts received for advertising space constitute gross income. But whose gross income? And what sort of gross income?

Is it her gross income because she is selling advertising space on clothing she buys and puts on the baby? Or is it the baby's gross income because it is the baby who is carrying the placard, so to speak? Gross income paid on account of child modeling is the child's gross income, but that's because section 73 of the Internal Revenue Code requires that income from the services performed by a child be treated as the child's gross income, even if the child does not receive the income. But does section 73 apply to amounts received for advertising on a baby's clothing? Is the baby performing a service in the manner of the old-time placard wear? Or is this rental income of some sort? If it is rental income, section 73 does not apply, but that does not preclude a determination that the gross income is the baby's gross income. As for the stroller, it is an easier question. That would be the gross income of the stroller's owner, presumably under the facts that are available, the parents.

Why does it matter? If the income is the baby's income, there will be the benefit of the small standard deduction available to shelter a portion of the income from taxation that would not be available if the income is the parents' or mother's gross income. If the income is rental income, it is unearned income and thus, if sufficient in amount, triggers the provisions taxing the net unearned income of a child under the age of 14 at the rates of the parents.

This isn't the first instance of a baby's wardrobe being offered as marketing space. An earlier attempt was ended after "a torrent of bad press." There are several instances of adults offering their wardrobe as advertising space, but in those situations the question of "whose gross income" is much easier to answer.

One adult couple, professional models, who are asking $25,000 have so far received a high bid of $20.50. As of the time the story was written, the high bid for the baby wardrobe advertising space was, ta da, $9.99.

So perhaps the tax issue won't be worth the time required to think about it. Except, of course, the story mentioned "people who have sold advertising on a bald head" and that has me thinking about the possibilities when what's left of my head hair finally falls out and I have to pay up on the deal with the children (when the top of my head is totally hairless, the rest of the head hair gets shaved, and then I'll look like my nephew-in-law, who, perhaps unlike me, wears it well). The advertising income might be soothing.

Hey, folks, do we see some exam questions here in the "we don't have to make this stuff up" category?

Friday, May 27, 2005

A Fascinating Tax Law Simplification Conundrum 

About two weeks ago the Third Circuit Court of Appeals (in Kean v. Comr., No. 8966-00, 9144-00 (10 May 2005)) handed down a decision requiring a payee spouse to include as income, and permitting the payor spouse to deduct, amounts transferred by the payor spouse to the payee spouse in compliance with a state court temporary support order effective for the period divorce proceedings continued to be underway. In reaching this decision, the Third Circuit took a different route than did the Tenth Circuit, which concluded, in a similar case (Lovejoy v. Comr., 293 F.3d 1208 (10th Cir. 2002)), that the payments were not deductible by the payor spouse nor includible in gross income by the payee spouse. These sorts of "inter-circuit" conflicts are a breeding ground for cases eventually taken up by the Supreme Court.

These cases are a good example of how challenging it can be to simplify the tax law. Many thought that when Congress amended section 71 some years ago that it would provide clear-cut answers for taxpayers sufficient to eliminate most, if not all, of the tax litigation that had sprung up with respect to the tax treatment of transfers between spouses in connection with divorce. Unfortunately, it appears that there is nothing in tax law, perhaps nothing in life, that cannot be made more complicated. Careful analysis suggests that the tax law complexity arises from state law simplicity.

The analysis turns on whether the payments qualify as "alimony or separate maintenance payments." If they do, the payor spouse deducts the payment and the payee spouse includes them in gross income. Otherwise, there is no deduction and there is no gross income. As students in my basic federal income tax course learn during our study of section 71, this simple rule is more than it appears to be. After all, the deduction/inclusion question simply gets shifted to one requiring the definition of "alimony or separate maintenance payments" which, for purpose of brevity, I will call "tax alimony." To be tax alimony, six conditions must be satisified. Most were not relevant to the case but I'll set them out so that the full context can be appreciated.

First, the payment must be in cash. Second, it must be received by or on behalf of the payee spouse under a divorce or separation instrument, which, yes, means yet another definition, but all that matters in this instance is that one understand that means divorce decree, separate maintenance decree, written instrument incident to a divorce decree, written instrument incident to a separate maintenance decree, a written separation agreement, or a decree requiring a spouse to make payments for the support or maintenance of the other spouse. Third, the payment must not be designated by the instrument as non-deductible and non-includible, a requirement that exists simply to permit spouses to forego the deduction and income if it makes sense to do so after making tentative tax liability computations. Fourth, if the spouses are legally separated under a divorce or separate maintenance decree, they must not be members of the same household when the payment is made, and I'll leave for another day what this requirement is about. Fifth, the payor spouse must not be obligated to make payments after the payee spouse dies, because then it would not be a payment for the support of the payee spouse. Sixth, the payor spouse must not be obligated to make payments as a substitute for such a payment after the death of the payee spouse. Only two of these requirements were the focus in Kean.

On top of all of this, the Internal Revenue Code provides that no deduction is available to the payor spouse, and no income arises for the payee spouse, with respect to the portion of any payment that is fixed by the terms of a divorce or separation instrument, whether as absolute dollars or percentage, as child support. The theory is that because a person does not get a deduction for paying his or her children's expenses if he or she is married to the other parent, and because the other parent does not have gross income because those expenses have been paid, the divorce or separation of the parents ought not turn child support into a deduction coupled with gross income.

Of course, because taxpayers generally hunger for deductions, and because the payee spouse often is in a lower tax bracket than the payor spouse, there is incentive for the spouses to try making the child support payment qualify as tax alimony through seemingly clever drafting, either in their own agreement or lobbied into the state court's decree. Thus, the Congress tried to cut this off at the pass by providing that if any amount in the instrument is reduced on the happening of a contingency specified in the instrument relating to a child, such as age, marriage, death, graduation, etc., or at a time that clearly can be associated with such an event, that amount will be treated as child support.

So what happens when a state court orders one spouse to make payments into an account for the other spouse to use for support of herself, the children, and the household expenses of their residence? in Kean, there was no question the payments met three of the requirements: they were in cash, there was no "tax switch" clause, and the spouses weren't in the same household even though that wasn't an applicable requirement anyhow because they were not yet divorced. As to the payee spouse's contention the payments had not been received by her, the court concluded that she had unrestricted control over the account into which they were deposited. As for the requirements that there be no obligations surviving the payee spouse's death, the court concluded that under New Jersey law a temporary support order terminates if the payee spouse dies.

But isn't part of the payment child support? Well, the decree doesn't specify a dollar amount or percentage as child support. Nor does it provide for a reduction in the payment based on an event in the child's life or a date matching up with such an event.

The Third Circuit, affirming the Tax Court, held that the payments met the definition of "tax alimony." The payee spouse made the "but this is child support" argument, obliquely, when she contended that a portion of the payments was for the support of the children, citing the Tenth Circuit's Lovejoy decision and citing a Tax Court decision (Gonzales v. Commissioner, 78 T.C.M. 527 (1999)), in which the Tax Court held, in a similar case, that New Jersey law would not have relieved the payor spouse of the obligation to pay family support if the payee spouse died.

In Lovejoy, the court explained that under Colorado law, amounts specified as child support must be paid after the payee spouse dies, whereas amounts paid for spousal maintenance terminate at death. There was no Colorado caselaw dealing with the treatment of unallocated temporary support. The parties in Lovejoy cited California cases, but, unfortunately, the California courts have split over the issue. Though, as the Lovejoy court notes, "it is not clear under Colorado law which rule trumps the other i.e. whether the abatement of dissolution proceedings upon a spouse's death would negate temporary orders providing for child support payemnts," it nonetheless explained "we are inclined to believe that the Colorado Supreme Court would hold that temporary orders providing for child support payments, even when included within a general unallocated payment obligation, do survive the death of the recipient spouse."

The Third Circuit rejected Lovejoy and Gonzales because it "believe[d] that the decisions rely too heavily on the intricacies of family law and fail to take into account the overall purpose of section 71." Whoa! Isn't the overall purpose of section 71 to limit the deduction/inclusion treatment to spousal support, in contrast to child support and property or equity transfers? The Third Circuit's decision has the effect of making child support deductible to the payor spouse and includible as income by the payee spouse. That result is flat-out contrary to the "overall purpose of section 71." Worse, the Third Circuit brushed off Lovejoy and Gonzales becauset they relied "too heavily" on the "intricacies of family law." Whoa again! Isn't that the real, though unfortunate, characteristic of law? Intricacy abounds. Is it brushed aside because it is too difficult? My students surely would like that approach, though I doubt their future clients would! The fact that the Tax Court concluded New Jersey law WOULD require continuation of the payments demands that the Third Circuit explore more carefully New Jersey law to determine whether, in fact, the fifth and sixth requirements of the "tax alimony" definition had been satisfied.

In all fairness, though, to the Third Circuit, this problem would not exist if the state courts, assisted by state legislatures, did a better job of being more precise. In fact, Lovejoy and Gonzales don't explore the intricacies of state law. They are intricate analyses of deficient state law. Why does state law permit unallocated support orders? Because they are simple and easy to frame? How complicated is it for the state legislature to require state judges to answer two questions. First, how much would the payor spouse be required to pay if there were no children? Second, considering that there are children, how much are you requiring the payor spouse to pay? Considering that the amounts generally are grabbed from tables or software, it isn't a long nor tedious task to answer the two questions. The first amount would qualify, assuming the other requirements are met, as tax alimony. The difference between the first and second amounts would be the non-deductible, non-includible child support.

Thus, because state legislatures are not thinking through the issues, the federal courts must struggle with (or in the case of the Third Circuit, toss aside) the task of determining what state law would be under the circumstances. It isn't unusual for state legislation to leave unanswered a parade of questions; for example, few, if any, state statutes dealing with wills have been amended to reflect the shift from quill pen to digital technology. So, in this instance, the attempt by Congress to simplify the alimony deduction/inclusion question runs aground on the simple question of whether an obligation would survive or not survive the death of the payee spouse.

One last point about the issue. When section 71 was reformed, the fifth and sixth definitional requirements included language to the effect that the expiration of the obligation at the death of the payee spouse had to be included in the text of the divorce or separation agreement. Savvy domestic relations lawyers thus requested state judges include language to that effect in their decrees. I've been told anecdotes by Pennsylvania lawyers who requested judges to include that language and were met with replies to the effect of, "Counsellor, state law provides that this obligation terminates on the death of the payee spouse so why should I put into the decree something already in state law?" In Pennsylvania, at least, payor spouses were unable to get deductions for alimony because the decree lacked language providing the obligation ended at death. That situation led to lobbying, and the Congress amended section 71 to remove the requirement that the language be in the divorce or separation instrument. Instead, the federal tax authorities (IRS, courts) must look to state law. Ah, even the intricacies of state law. All because state court judges were, and remain, unwilling, unable, or unpersuaded, to state in simple terms, in the language of the decree, what amount is for the spouse, what amount is for the children, and that the amount for the spouse terminates at death.

Truly a fascinating simplification conundrum.

Wednesday, May 25, 2005

Where Are the Discounts for the Poor? 

Tax law is so wrapped up in economics and social engineering that it was impossible for me to ignore a letter in today's Philadelphia Inquirer's Dear Amy column. OK, I'm sure you're wondering, why is he reading that? The simple answer is that over the years I have discovered all sorts of fodder for my courses in the stories told by people writing in to Amy or her predecessor Ann Landers, and this contributes to my oft-repeated statement to students, "I don't need to make up this stuff to get a good hypo for class!" Today's column caught my eye because it carried "Professor reconsiders on reference" as a headline. I'll write about the "can you give me a recommendation?" topic at some future time. It's the second letter that highlighted some of the nutrients that let politicians blossom.

The letter writer explained that he or she live near a hospital that serves "thousands of seniors" and that it sits across from a high quality restaurant frequented by senior citizens. The writer disclosed that when he or she asked for a senior discount, the response was that the restaurant did not provide one. The writer argues that nothing is "more logical" than for a restaurant across from a hospital visited by thousands of senior citizens to offer senior citizen discounts. The writer conceded that there is no legal obligation to provide the discount, but that there is "no way to tell" if doing so would increase business. The writer concluded that because other businesses provide this "break" to seniors, it would be a win-win situation for the restaurant owner to do the same.

It was a joy to read Amy's response. She concluded that the restaurant owner would not be in a win-win situation, because there already is a "steady flow of seniors" patronizing the restaurant even in the absence of a discount. Amy kept her response short. Her space is budgeted, and she adapts to the restriction. Fortunately, I have a bit more space to expand on the question.

First, the economics. If the restaurant puts a senior citizen discount into place, the consequence will end up somewhere at or between two extreme outcomes. One outcome is that the discount reduces the restaurant's profits, perhaps generating a loss. The other outcome is that the restaurant increases its prices so that the discount to the senior citizens is offset by the increased revenue from other customers. Perhaps some combination of the two would be the practical short-term effect. In the long-term, the first outcome could lead to the failure of the restaurant, and the second outcome could do the same, as non-senior customers bolt for other establishments and the source of funding for the discount dries up.

Second, the federal budget analogy. To the extent a business offers a discount to any group, it must increase revenue from other customers in order to maintain profits. If senior citizens try to persuade this restaurant to offer a discount, they are also urging, though not stating outright, that they want the restaurant to increase prices for other customers. Or, if confronted with that outcome, they would argue, again without saying it so directly, that the owner should cut profits. How many of these senior citizens would have done that when they were running businesses? In any event, it's not unlike what happens when lobbyists for special interest groups approach legislatures asking for a tax break or a spending benefit. Why? Either the surplus is reduced or the deficit is increased, or other citizens must deal with tax increases or spending cuts to balance the goodie for the special interest group. What actually happens is that so many groups petition for so many breaks that the result is a jumbled mess known as the Internal Revenue Code. And so, the frightening thought occurs to me, that someone like the letter writer will start a campaign for yet another income tax credit, this one for businesses that offer senior citizen discounts. Spare us, please!

Third, fuel for the politicians. These sorts of pleas for special treatment as exemplified by the letter writer's request become grand entrances for politicians who seek votes by trading on the "I'll do something for you" approach to government. What's wrong with that? What's wrong with that is the absence of the "what's good for the nation" approach that recognizes no nation can stand if each citizen is an independent empire jockeying for advantage over every other citizen. Imagine the politician who sees in the letter writer's request an opportunity to gather votes by promising to vote for a law that makes senior citizen discounts mandatory. Or perhaps the letter writer enters politics on such a platform.

Fourth, common sense. The letter writer does not disclose much about himself or herself. Is the letter writer someone scraping by on social security? Is the letter writer retired with a comfortable and secure pension? Is the letter writer the beneficiary of an ample trust fund? Is the letter writer earning investment income on carefully managed investments acquired from prudent savings during his or her working years? Why does that matter? It matters because it goes to the heart of the deep flaw of special interest lobbying, namely, the trend during the past few decades to separate common sense from the process. The letter writer refers to logic. Logic dictates that breaks of any kind, whether government tax cuts, government spending, private enterprise discounts, or other assistance, ought to dovetail with need. A discount for impoverished customers, such as the young widow raising several children alone while mourning her late husband's death in war or at the hands of terrorists makes much more sense than a discount based on the Pepperian deception that "all senior citizens are poor." I'll grant that it might be a bit inconvenient or awkward to identify impoverished customers in need of a discount, but somehow enterprises figure out who is a senior citizen despite the many different definitions that are used.

Fifth, justice. It often is said that law seeks justice, and as a member of the legal profession I direct my efforts, or at least try to direct my efforts, toward the supremacy of justice over all its opposites. Deceit is not justice. Misinformation is not justice. Greed is not justice. Is it "just" to use age as a benchmark for discounts, tax cuts, and other benefits? In some instances, yes. There is nothing unjust about setting an age as the time at which a person can choose to retire and begin drawing on pension benefits, IRA distributions, and the like. But it is unjust, to other customers who are not as financially established, to award discounts based on age. How did we get here? We got here because Claude Pepper and his allies, reacting to the existence of impoverished retirees, embarked on a campaign that rested on the assumption that all senior citizens were in need of financial assistance, suing the same approach that turned social security from an insurance program into an entitlement program that ignores need. Ironically, during the time wealthy retirees began to enjoy more and more discounts and social security benefits were boosted, the proportion of children living in poverty significantly increased. This chart graphically illustrates the point.

My son tells me I'm eligible for certain senior citizen discounts. I'm sure he's right. After all, he's not unlike me when it comes to intellect. I haven't bothered to check. I don't want to know. The letter writer signed the letter "Proudly Way over 55" so I'll sign off "Proudly Passing Up Discounts I Ought Not Get." And no, I'm not over 55. Yet. I'm sure my children will let me know when that happens.

Monday, May 23, 2005

Why Tax Teachers Can't Stand Still 

Anyone who teaches a tax course, most students who have been in a tax course, and a few faculty who have not taught tax courses, have experienced the consequences of the continous and eternal parade of tax law changes that impact not only tax practice but the design and teaching of a tax course. Although the steady stream of tax legislation gets much of the attention, the IRS does its part by issuing regulations and other administrative documents, and the courts decide case after case. Most courses share with tax courses the impact of the occasional case that turns part of the course on its head. Some courses are afflicted by serial administrative rulings. A few occasionally experience what tax law teachers consider part of the routine. For example, the recent bankruptcy law revisions will required bankruptcy law teachers to do some major revisions of their courses, but they don't get to to this every year as do the tax law teachers.

The constant changing is both an advantage and a disadvantage. The advantage is that new legislation or regulations require the teacher to re-examine that area of the course, to prepare new or revised notes, new or revised problems, new or revised problem solutions, new or revised powerpoint slides (if used), new or revised graded exercises, new or revised examination questions, new or revised student response pad questions (if used), and at times a new or revised syllabus. The advantage is that it transports the professor back to the first time a course was taught, namely, a time when the "newness" of things contributed to an enthusiasm and energy that sometimes is lacking when the notes haven't changed much for many years because the course hasn't changed much. The running joke is that the easiest task set belongs to someone teaching Law of the Middle Ages. To the best of my knowledge, there is no such course. But some come frighteningly close, at least in practical application. The disadvantage is that it takes time, often a lot of time, to revise the course. Sometimes schools and their administrations recognize this additional workload and its impact on other professional endeavors. Sometimes they do not. Sometimes it means the professor needs to make time to bring the course up-to-date by, gasp, working on weekends or evenings. When people react with "what a cushy job" when I explain that on average I have 6.5 hours a week in the classroom, I'm almost automatic explaining that each hour in the classroom requires at least several hours of preparation, and that after tossing in preparation and grading of examinations and other evaluative exercises, it's not what it appears to be. Unless, of course, one can simply transfer a course from one year to the next with little or no change. There's another running joke on this one, that of the faculty member who forgot to change the year on the syllabus. Except it's not a joke, it's a story, and I'll not tell it, and, no, it was not me.

I'm inspired to share this explanation because the IRS has just issued new proposed regulations on the transfer of partnership interests in exchange for services rendered to the partnership. If adopted, these regulations will not only clarify the treatment of transactions that did not exist when I first started teaching the course (such as the issuance of options for partnership interests) but also will change existing law and application of existing law by analogy to transactions for which there was no direct authority. To put it simply, the answers to the problems used in the Partnership Taxation, and Introduction to Taxation of Business Entities, courses with respect to the receipt of a partnership interest for services, will change. I had warned my students during the past few semesters that this was going to happen. What makes this more fun is that the publisher of the books I use in these courses is revising them, and has the book at the printer. (I know because I called and asked for page proofs so I can get started on the preparation of the fall courses. Yes, it's "only" May, but I learned years ago not to leave course preparation until two weeks before classes begin because something always happens, and it takes more than two weeks to prepare courses when all these revisions need to be made.) So the new editions are out of date before they are distributed.

So here's the segue from a posting on education to a posting on tax. I'm going to share some of the highlights of the proposed regulations, pointing out that on more than a few of the issues, the IRS has requested comments and suggestions from practitioners. It's a sure sign of the mess subchapter K is in when the IRS notes the practical administration problems and other challenges of getting two or more partnership tax law principles to reconcile. We continue to pay the price for that "make everyone happy" compromises that generated subchapter K, as it turns out it was a "make everyone think they are happy but wait until they see what a mess compromises are" compromise.

The regulations propose that transfers of ALL partnership interests, not just capital interests, be treated as property for purposes of section 83. That means the recipient would not be taxed until the interest vests unless the recipient elects to be taxed at the time of receipt. Under a special rule, the partnership and all of its partners would be permitted to elect determination of the fair market value of the interest using a liquidation value. Commentators had speculated, and courts had suggested, that section 83 applied to transfers of partnership interests, but the extension of section 83 to profits interests is an interesting foray into new territory, even though, as a practical matter, most transfers of profits interests were not subject to taxation by virtue of IRS administrative fiat.

The regulations propose that the general rule taxing a property transferor on the gain or loss realized from using property to satisfy a debt or to pay compensation, including its application to section 83 transactions, will not apply to partnerships transferring capital or profits interests in exchange for services. The preamble to the regulations explains that the nonrecognition concept of section 721 should trump the general rule. Even though the IRS notes that reverse section 704(c) principles in the section 704(b) regulations will ensure that the gain eventually is taxed to the transferring partners, and even though the rule would be good news for most taxpayers, it nonetheless is, in effect, an amendment of section 721, extending nonrecognition from property transfers by a partner to property and services transfers by a partner. Yes, a good argument can be made that section 721 should have been so drafted or so amended, and I tend to agree, but why is the IRS doing what Congress should be doing? The easy answer is that if the IRS doesn't "rescue" the taxpayers, who will? Surely not a Congress inattentive to a lot of important stuff (and not just tax). I understand that answer, but what is disturbing is that somehow the IRS needs to reply to those millions of taxpayers unintentionally afflicted by the alternative minimum tax who suggest ways the IRS can "rescue" them as well.

To synchronize all of this with other areas of partnership taxation, the regulations propose that the service partner's capital account be increased by the amount included by the service partner as compensation income, when that inclusion in fact occurs. It will occur when it is substantially vested, or, if the section 83(b) election is made, when received. And, of course, if there are no substantial restrictions, the vesting occurs on receipt. Similarly, the regulations propose that recognition of income by the services partner is an appropriate time for capital account revaluations.

Similarly, the regulations propose that if a section 83(b) election is made, opening the door to the possibility that the partner would forfeit the interest, the partnership nonetheless may allocate income and other items to the services partner despite the possibility of forfeiture. This is done through the addition of another "deemed to have substantial economic effect" rule because the allocation cannot have substantial economic effect because of the forfeiture possibility. But to qualify for the allocation, the partnership agreement would need to require "forfeiture allocations" if forfeiture occurs, and the usual "all other allocations must be valid" requirement is imposed. A "forfeiture allocation" is an allocation to the services partner, in the year of forfeiture, of items that in effect offset that partner's track record of allocations, contributions, and distributions up to that point. Note that I am paraphrasing a long, convoluted, arithmetic formula in the proposed regulations that I'll leave to the diehard partnership taxation fans to read on their own. This portion of the proposed regulation caps things off with a denial of allocations to the services partner if the forfeiture is planned. This is simply the IRS nipping abusive planning in the bud before it can blossom into something more devious, but I'm sure the artful planners will be culling the proposal looking for any hint of a tax shelter opportunity.

If you want to have a lot of fun, take a look at the proposed example. It's almost as long as one of my blog posts!

Are we done? NO!!!!!

Next, the regulations propose that the "transfer of property subject to section 83 in connection with the performance of services is not an allocable cash basis item within the meaning of section 706(d)(2)(B)." That means the daily proration rules are not mandatory, and the partnership can use interim closing in determining allocations to the service partner who arrives during, rather than at the end of, a taxable year. The regulations also propose that forfeiture allocations can be made out of partnership items arising at any time during the year even if the forfeiture takes place during the year.

The regulations then propose that amounts transferred in connection with the provision of services by the services partner, even if characterized as guaranteed payments, are included in the the service partner's income for the year in which section 83 requires inclusion, and not in the taxable year of the partnership's deduction as is the case for guaranteed payments generally.

Finally, the proposed regulations preclude treating as a partner someone to whom an interest has been transferred if that interest is substantially nonvested, unless the section 83(b) election is made. This makes sense, because it says, in effect, "wait until you really are a partner before expecting to be treated as one."

Back, now, to the education component of the post. There will be more for the students to read. They will need to read the regulations. They will need to read an explanation of the regulation, probably the preamble. Class time is needed to deal with the issues. What can be removed from class coverage without removing it from the course? These regulations, after all, do not make any of the other topics or subtopics any less important. If I take an "easier" topic and leave it to students to learn on their own, I do hear about it. But isn't it good practice to learn how to learn on one's own? After all, the many hundreds, if not more than a thousand, students who sat through Partnership Taxation or Introduction to the Taxation of Business Entities between January 1981 and two weeks ago must learn these new rules "on their own."

I will close with something else that causes anguish for students. These changes, if implemented, obsolete portions of "old student outlines" circulating in the dark corners of the student academic materials exchange alleyways. You can tell I'm not a fan of using old outlines, for the same reason I'm not a fan of trying to get into shape by watching someone else workout. This obsolescence means next year's students must create this portion of the outline for themselves. YAY! It also means I have some GREAT examination material, because students carelessly using old outlines don't do well with "new law" questions. And it makes it so much easier to shut down sympathy when a student inquiring about an undesired grade can be told, "I can tell you used an old outline." Fortunately, there's much less of that in my elective J.D. Introduction to the Taxation of Business Entities course because my warnings drive away students looking for the easy path. After all, according to the J.D. student grapevine, it's the most difficult course in the J.D. Program. As for the Partnership Taxation course in the Graduate Tax Program, the fact it is required means that at least some of the involuntarily enrolled students, unable to grasp the pervasive nature of partnership taxation in a tax practice, try to get by on the "quick and easy" and end up instead with "crash and burn." Yes, the Graduate Tax Program rumor mill describes Partnership Taxation as the most difficult course in the program.

Now folks can see why I make friends quickly when I meet people who teach quantum physics. Somehow, though, it seems as though they've got it easier because Congress doesn't change the laws of physics the way it changes tax law. Sure, Congress probably will try someday, but by then we'll be dealing with more serious problems.

Happy Monday. I'm off to get a root canal and eventually another dental crown. This tax stuff is bad for one's teeth, I guess.

Friday, May 20, 2005

Far Less "Au Revoir" Than Valediction 

Once again it's graduation day, and I could simply repeat what I said last year. But that would be boring. As far as I know, the "do they all have jobs?" question gets pretty much the same answer. Many do, some don't, and many of the latter will find something after the bar exam.

It's a big day for the students who are graduating, and their families. I'd like to see all of them return five years from now, not merely to attend the evening social event called a Reunion, but to participate in a day-time symposium attended by law students in the Classes of 2010, 2011, and 2012. At this symposium the alums would describe how their law school experiences did and did not contribute to their successes and shortcomings in practice. Perhaps, one hopes, hearing words of advice and caution from those a few years older, rather than from the chronologically distant faculty, will nudge some of them away from the bad habits and bad decisions that make law school, and practice after law school, tougher than it needs to be.

This might be the biggest class to have graduated. A few more than 250 is what I've heard. That's not counting the LL.M. (Taxation) graduates. It is a tradition that has survived from the beginning of the school's history to read the names of the graduates as the proceed across the stage to receive their diploma (or, honestly, a rolled up piece of paper that they turn in for their diploma at the Registrar's office). So we'll be there a little longer than usual.

This year, 8 of the 23 students in the top ten percent were enrolled in one or more of my classes, and of those 8, 5 were in one or both of my tax classes. That's as high as it has been for many years. The top ten percent avoid my class, chiefly because they dislike the "during semester" workload that comes with the course. They did well with the "wait until the end" approach used for first-year courses, so why let go of a familiar and successful approach? I'll answer that question next week, if I remember. Of course, if the other 18 enroll in another section of the basic tax course, fine, but how can they, when those faculty also impose "during semester" workloads? What's even more disturbing is the percentage who took the Decedents' Estates course (approximately 60%) and the estate tax and family wealth planning courses (at best 5%), and the percentage of graduates who report that they engage in will drafting and estate planning (far more than 5%). I wonder how many clients ask their attorneys whether they've taken courses in the area of the law applicable to the client's issues.

And, yes, it is raining. It seems it always rains on graduation. The ceremony is indoors, but one has to get there. I like to walk from the law school to the Pavilion because it's faster than driving, good exercise, and a pleasant stroll. Not today. One year a thunderstorm came in with those "sideways" rains that make umbrellas useless baggage. I have never seen so many people just drenched from head to foot while dressed in suits and other dressed-up attire. I do recall a few sunny graduations, and some with breaks in the rain that came at the right time.

This is my twenty-second, yes, twenty-second, graduation at Villanova (other than my own). Add in three at Dickinson, and today is the 25th graduation in which I have participated as a member of a law school faculty. There are few things I've done for as long. Other than life itself, and other than being my parents' child for far more than 25 years, there's being a member of the bar (29 years), the family history addiction (32 years), knowing how to ride a bicycle (almost 50 years), having a drivers' license (35 years), and a few other, well, boring things. Fewer than 25 years? That list is long. I guess that demonstrates I'm young, ha ha ha.

Thanks for rolling down this stream-of-consciousness reflective moment with me. When I mentioned that it was a big day for the graduates and their families, I didn't mean to imply that it wasn't a big day for anyone else. For the faculty, it's similar to sending one's children off to college. It's time for them to fly, though using the phrase "kicking them out of the nest" might be a bit harsh. I know that I will see a few of the J.D. graduates, especially those who come back to enroll in the Graduate Tax Program. I know that I will get email or phone calls from some, usually when they encounter a situation in practice that reminds them of my courses, either to ask me "hey, how did you know this would happen?", to add to my collection of practice lessons for future students in response to my standing invitation to share their experiences, or to ask for guidance in unraveling an issue. But I also know that I will never again see or communicate with many, perhaps most, of the graduates. I'll read about some of them. I'll hear about a few of them. I'll be asked about one or two of them. So the comparison to sending one's children off to college isn't sufficiently precise. It's much more a valedictory event than an "au revoir" moment.

Good luck to all.

Wednesday, May 18, 2005

New York Takes a Strike in the Tele-commuter Tax Game 

The ongoing dispute concerning New York's practice of taxing nonresidents on their entire income derived from employment with companies located in or doing business in New York has taken an interesting turn, according to this report. As I explained in this post and followup, New York has succeeded, to this point, in taxing a Tennessee resident, who is not a New York resident, on all the income he earns in Tennessee doing computer work for a New York organization even though he spends about 25% of his time in New York. So after getting ahead in the count, New York has taken a strike. Swinging.

New York's theory is that it can tax all the income of a nonresident who works for a New York company except to the extent the employee does work outside of New York because the employer deems it necessary for the employee to work out of state. Thus, in the previous case on which I commented, the Tennessee resident was not permitted to exclude any of his income from New York taxation because his decision to tele-commute from Tennessee was not required by his New York employer. Whether that approach, as advocated by New York, is an appropriate or permissible test continues to be debated, and we wait to see if the promise of a further appeal by the Tennessee resident materializes.

In the most recent case, a New York company who employed, among others, a Connecticut resident, moved most of its operations to Viriginia. The New York resident continued to do work by tele-commuting from the company's New York office. At that point, there is no question New York can tax the employee's salary. Several years later, however, the company told the employee either to relocate to Virginia or to tele-commute from home. The company terminated his building pass for the company's New York site and reassigned his office to another employee. It changed the employee's status from New York employee to member of a technical group in Virginia. The employee chose to tele-commute from Connecticut. He no longer worked in New York.

So even though this person no longer had any employment contact with New York, other than being employed by a company that had New York employees, New York insisted it had a right to tax him. An administrative law judge held that because the employee was required to work from Connecticut and did not have the option of working in New York, it was improper for New York to subject him to income taxation. There's no news on whether New York will appeal.

The idea that New York thinks it can tax a person who has no employment contact with New York other than being employed by a company with contacts in New York is startling. Theoretically, what's to stop New York from trying to impose income tax on all the employees, no matter where located, of Citibank, NBC, or any other company with New York employees or even just New York contacts? The previous case involved someone who took 75% of his work out of the state. This case involves someone who took all of his work out of state. Will the next case be someone who never did work in the state? If New York does not go that far, is New York contending that once a person works in New York the person cannot ever escape taxation even if moving away? Suppose the fellow in the most recent case had decided to end employment with the company, stay at home, and begin working from home for Morgan Stanley, which happens to have some New York employees. Would New York try to continue taxing him? What if his neighbor, who never worked in New York, also took a job working from home for Morgan Stanley? Would New York try to tax her? If not, how can New York justify taxing him but not her if the only difference is the fact that in the past he, but not she, worked in New York?

New York has its budget problems. So, too, do many other states. However, the need for money ought not be permitted to encourage state taxation officials, or their attorneys, to get so "creative" that they make unwise decisions. Just as federal and state revenue officials decry the "creative" activities of tax-avoiding taxpayers and their lawyers, so, too, those same officials should set the standard to which they want taxpayers to aspire, and refrain from "creative" but unsustainable revenue collection theories.

After all, whatever might be argued in the case of the Tennessee resident who is in New York for 25% of his employment efforts, there's no way New York can justify taxing a Connecticut resident who tele-commutes from home and never sets an employment foot in the state. That Connecticut resident imposes no financial burdens on New York, and gets no benefits from New York. I'll go so far as to claim that there is a serious Constitutional issue lurking in this case, and that's why I'll predict that New York will not appeal. It has way too much to lose than just the revenue in the case.

Monday, May 16, 2005

Just Another Tweak is Enough? Hardly. 

It is said that imitation is the sincerest form of flattery. Perhaps that's also true of literary imitation in the form of substantial quotation. Yesterday, while amusing myself by googling my full name, I discovered that my April 20, 2005 post on the increase in the number of taxpayers with incomes of $200,000 or more who pay no taxes had been republished, in full, on the Quatloos Tax Practice and Policy and Tax Shelter forum.

Other than "# posted by James Edward Maule @ 10:08 AM" at the end, there is nothing to indicate that the post is a quotation-in-entirety of a MauledAgain post, and, most disappointingly, there's no link to the MauledAgain blog. Easily done, of course, so I'm not sure why it's not there. It could be a problem with incorporating "a href" links, because the links in my post also disappeared, causing another Quatloos poster to provide the URL for the report that I cited in the post.

Attribution concerns aside, the comments made in response to the message of the posting deserve some attention. Rather than responding on Quatloos I decided to drive some traffic to MauledAgain by sharing my reactions here.

Someone using the screen name "Investor" asked, "Are you suggesting that a tax system that allows 0.112% (which is roughly .0001% of the US population) of the high income taxpayers to escape income tax* needs "a major overhaul"?" and responded to his or her own question, "I would say that this indicates that a minor tweak is needed (maybe a phase-out of investment interest deductions for high AGI), not a major overhaul. There are other issues that lead me to believe that a major overhaul is needed, but not this one." Because of the attribution omission, it isn't clear whether Investor was querying ME or the Quatloos poster who posted my post. In any event, I'll respond. The point isn't that there is a gaping hole that demands a major overhaul. The point is that when an elite few can create for themselves, or have created for themselves, rules and contextual application that puts them in a "not tax paying" us versus everyone else who is the "taxpaying them," a serious erosion of taxpayer morale is planted like a cancer among the "taxpaying them." Another tweak is simply a further gaming of the system. The need for the major overhaul isn't the extremely small percentage of lost revenue. It's the need to restore taxpayer morale, and compliance, by junking a system that fertilizes "we'll find one way or another to avoid paying taxes no matter what tweaks what" cancers such as those that create the problem I blogged and that was then shared on Quatloos. Overlooked in Investor's analysis is another important fact, namely, the number of people with incomes over $200,000 who avoid paying tax is increasing at a rate that threatens to spread as does a rapidly metastizing cancer.

The next Quatloos poster, Levendis, pointed out that the alternative minimum tax was enacted in response to tax-avoidance abuses in which far fewer taxpayers engaged than currently escape taxation despite having more than $200,000 of income. What Levendis did not mention, but perhaps intentionally left unspoken, is the manner in which the AMT "remedy" has become an affliction on a huge number of taxpayers never intended to be caught by its net. That's the problem with tweaking a complex structure, as I pointed out some time ago in my Pleiotropy post. Investor replied, decrying the spread of the AMT to middle-class taxpayers, and characterizing complexity as the biggest problem affecting the tax system. Yet Investor had just finished suggesting another "tweak" rather than overhauling the system. Tweaks, or more precisely, bundles of tweaks and tweaks of tweaks, is what creates the hated complexity.

The Quatloos discussion then turned to two causes of the "over $200,000 tax escape," namely, the fact that the investment interest deduction and the medical expense deduction, which are not added back for AMT purposes, and which are not phased out as income increases, are the primary tax reduction factors in 23.1% and 8.6%, respectively, of the returns showing no income tax. Investor then raised an important consideration: "You may say that a system in which a person can have income of $200K and pay no taxes is unfair, but there are also a variety of other policy/economic considerations here. If someone has so much margin interest that it is completely eliminating their taxable income at the $200K AGI level, they obviously have huge investments. I would venture a guess that if you looked at these "zero income tax payers" over a span of 5-10 years, they pay more income taxes in the aggregate than the average American earns over that same period, and at a much higher effective rate. To look at one year and scream, 'this is unfair' is very narrow minded (I assume that this report does not imply that it is the same individuals year after year with $200K AGI and no tax liability)."

It is true that the report does not identify the taxpayers, and thus prevents the sort of 5-10 year analysis that would be more helpful in understanding the underlying economics. If, however, a person has no tax liability because of the investment interest deduction, it means not only does that person's investment interest expense equal or exceed investment income, that person also has little or no other income. So how are they paying their bills? Dipping into investments? But why would their investment interest expense exceed investment income? What's the sense in borrowing $5 in order to earn $4? The answer is that these folks may be "speculating" (translation: gambling) with investments. Should the tax law be "financing" that sort of "enterprise"?

Yet this discussion is too narrow. The investment interest expense and medical expense deductions account for 31.7% (and only 31.7%) of the situations in which no tax is paid by taxpayers with adjusted gross incomes equal to or exceeding $200,000. If one turns to taxpayers with expanded income equal to or exceeding $200,000, the single-most cause of no tax liability is the exemption from taxation of interest on state and local debt obligations. In the first group, miscellaneous deductions (at 21.4%) and "all other tax credits" (at 21.0%) are for all intents and purposes equally responsible for the non-taxation status of these returns as is the investment interest expense deduction. In fact, that latter deduction doesn't even show up as a separately identified cause of non-taxation on the returns with expanded income of $200,000 or more. So there's a lot more involved than simply the investment interest expense and medical expense deductions, and a "tweak" would need to be far more complicated than simply playing with those two deductions.

So long as specialty groups and their advocates continue to persuade the Congress that a dollar of one type of income is different from, and should be taxed differently (or not at all) than is a dollar of some other type of income, so long as those groups and their advocates continue to persuade the Congress that expenditures for some purposes should cause a reduction of tax liability, and so long as special interest groups and their advocates continue to push for direct tax liability reductions in the form of credits for every sort of favored activity, the tax burden distribution will be skewed in favor of the influential and powerful who use their energies to lobby for an unfair (and thus complicated) tax system. In turn, the number of wealthy who avoid taxes will increase. Similarly, the tax-disfavored will seek, in increasing numbers, a way to jump on the "tax reduction bandwagon." Some will fall prey to the hawkers of illegal tax shelters and off-shore schemes. Others will drop out of the system, or at least try. Still others will turn increasingly to "pay cash, pay less" arrangements. The corrosive effects of the "tax avoiding us" and the "tax paying them" cancerous divide will accelerate, and the tax system will begin to fail. Already, more than $300 billion a year goes unpaid, much of it unreported. The impact is far more serious than a million marchers parading down the Mall on a Sunday afternoon protesting this, that, or the next thing.

The Congress is losing touch with the overwhelming majority of taxpayers, who want to be law-abiding but who cannot help but think they are gullible fools for complying with laws that, to them, appear to be ignored or twisted by (or written to the advantage of) others who are more influential and powerful. Why Congress thinks it can fend off the problem by enacting tax cuts that reduce a person's taxes by several hundred dollars, while billions of tax dollars go uncollected baffles me. I suppose Congress thinks that throwing some bread to the masses will distract them, or sufficiently ease the disgruntled, while the rate on capital gains plumments toward zero, while the credits, deductions, and special exceptions for the influential and powerful grow in number and value, and while the quietly increasing "nibbling at the edges" noncompliance by the not-so-powerful replicates the impact of those silent termites lunching in the support beams. After all, who cares if a termite eats 0.112% of the wood? Each year. I've yet to meet a pest control technician who simply "tweaks" termites and stays in business.

Friday, May 13, 2005

Congress, Please, No More Tax Bribes 

The federal income tax law is groaning under the weight of ever increasing numbers of credits and deductions inserted in hopes that one or another of someone's worthy cause will be advanced by the supposed impact on taxpayer behavior of a tax incentive to behavioral change. Almost a month ago, I noted, in a somewhat mocking post that the Tax Reform Panel was "discovering" what everyone else has known for years when it issued an interim report that inspired this newspaper headline: Too many deductions, credits fill U.S. tax code, panel finds.

Everyone knows how this has come to be. Everyone agrees it must stop. Everyone understands the negative impact on tax compliance of these "my cause is so special it deserves to be in the tax law" provisions. Everyone knows the impact of these complexities on the rising cost of tax compliance. OK, maybe not everyone. Perhaps someone living under a rock missed out on the news.

Of course, not everyone will state publicly that he or she knows and understands the corrosive effect of using the tax law to try altering people's behavior. But that doesn't mean they don't know and understand those effects. The lemming mentality that grips politicians under pressure to do for their favored groups what some other legislator did for his or her devotees pervades legislatures.

If any of us thought that the Tax Reform Panel's warnings would change behavior, we were mistaken. Perhaps there ought to be a tax credit for legislators who refrain from introducing social engineering provisions into the tax code, with an additional credit for those who refuse to vote in favor of such measures. JUST JOKING. No, uh, maybe I ought to be serious about that.

Instead, the parade of tax goodies continues. So here we go again.

This time it's a dual-pronged tax proposal wrapped into wider-reaching proposed legislation that aims to accomplish a goal against no one with any degree of sense can speak negatively. Last week, Representative Carolyn Maloney re-introduced the Breastfeeding Promotion Act that has been introduced in at least two previous Congresses. In fact, it's been around so long that the Internal Revenue Code section that it proposes to add (section 45G) was used for another credit, as has been the next one in line (section 45I).

Quoting from the Representative's press release, "The purposes of this act are to promote the health and well-being of infants whose mothers return to the workplace after childbirth, and to clarify that breastfeeding and expressing breast milk in the workplace are protected conduct under the amendment made by the Pregnancy Discrimination Act of 1978." That it makes sense to encourage breastfeeding is undeniable, as painstakingly detailed in the 2003 Congressional Research Service Report, Breast-feeding: Impact on Health, Employment and Society. It's the use of the tax law, and the correlative complexity, rather than a more direct approach that injudiciously adds to the current crisis in tax law.

Again quoting from the Representative's press release, the bill covers four purposes: (1) to amend the Civil Rights Act of 1964 to protect breastfeeding by new mothers,(2) to provide tax incentives for businesses that establish private lactation areas in the workplace, (3) to provide for a performance standard for breast pumps, and (4) to allow breastfeeding equipment to be tax deductible for families."

The second tax prong, making breastfeeding equipment tax deductible, cannot be criticized so long as there is a medical expense deduction in the tax law. Breastfeeding equipment is medical equipment just as eyeglasses, hearing aids, and similar items, and so I would have responded "yes" to a question about its deductibility had I been asked this question before this bill prompted me to explore the question. But I'm not certain that the IRS would agree with me, because in one private letter ruling (PLR 8919009), it concluded that medical expenses did not include the cost paid by a pregnant woman for instruction with respect to "(g) Breast feeding/bottle feeding; and (h) Newborn care and the adjustments of becoming a parent." There is no other guidance from the IRS, and I could not find any cases addressing the issue. So, to the extent the bill clarifies that the medical expense deduction should cover breastfeeding equipment then this particular amendment to the tax law makes sense. In any event, it adds a five-word subparagraph and a one-sentence definition to the Internal Revenue Code, in language that doesn't defy comprehension.

It's the first tax prong, establishing a credit to encourage businesses to set up private breastfeeding areas in the workplace, that not only unnecessarily complicates the tax law but also falls short in accomplishing the goals of the bill's sponsors. The complication to the tax law is not only an entire Code section, consisting of five subsections, layered with dollar limitations, definitional challenges, the computational requirements of a recapture provision, the incorporation of other, existing, tax law rules, and an array of conforming rules with respect to such things as basis and double benefits, but the need for taxpayers to maintain additional records, pay return preparers additional fees to fill out forms, and to certify the qualification of expenditures and policies with respect to the matter.

Don't get me wrong, and don't take my objection to the proposed tax credit as an objection to the goals of Representative Maloney. I'm all for breastfeeding of infants. I agree that the practice is good for infant, mother, and society. If, and that's a big "if" on which I reserve judgment, it is appropriate and necessary for the FEDERAL government to step into the arena of how parents nurture and nourish their children (and I understand that some reasonable arguements can be made to that effect, as well as to the opposite conclusion), then the sponsors should be proposing a law that requires government and employers to accommodate the breastfeeding of infants. It ought not leave mothers at the mercy of whether their employer decided it did or did not need a tax credit. For example, employers that presently are in financial difficulties are swimming in deductions and credits, and thus the proposed bill gives them no incentive to accommodate nursing mothers.

So what to do? Make it a law. Make it mandatory. After all, the minimum wage is mandatory for covered employees. Employers aren't thrown a "take it or leave it" tax credit as an incentive to do something that they're left with a choice to do or not do. Federal law requires airline passengers to submit to pre-flight inspection. It doesn't leave the success of this security measure to the whims of people deciding whether to take an optional tax credit for choosing to undergo the inspection.

At best, tax incentives for behavior should do no more than to encourage behavior which society thinks is nice but not essential. Even so, I disfavor tax incentives for behavior, but I can understand the arguments made by their supporters when the behavior in question is something desirable but not within the scope of a government to command. If tax incentives must be used to entice people to do what they must do, then government has sunk to the level of bribing its citizens to behave. That, in a political world controlled by the under-taxed wealthy and their lobbyist allies, is not government but organized corruption.

The sponsors of this bill should be saying, and perhaps are trying to say, to employers, "You must accommodate nursing mothers." If an employer gets a reward for doing so, in the form of a tax reduction, then why not similar rewards to people who comply when told, "You must stop at stop signs," "You must put your clients' funds into escrow," or "You must report all outbreaks of mad cow disease in your herd." To the extent society is becoming a "what's in it for me" and "show me the money" culture, Congress is contributing to this degradation of civilization by enacting tax legislation that pays certain citizens to do what they ought to be doing aside from legal compulsion, let alone when required to do so by law.

If it doesn't stop here, where and when will it stop? When there are 43,583 tax credits for every imaginable cause, and the entire country shuts down because everyone is swamped with the task of identifying which 1,304 credits apply to their specific situations, while investing hundreds of hours into compliance?

Yes, Representative Maloney got herself some good press re-introducing this bill on Mother's Day. But she, and her co-sponsors, could do the country an even greater service by ditching the credit, making the accommodation of nursing mothers mandatory, and leaving it at that. After all, if the nation's employers need to be bribed to accommodate our mothers, we've reached a most pitiful sad condition such that more than the tax code needs to be ripped out by the roots.

Wednesday, May 11, 2005

Trying to Land a Deduction 

Anyone who wonders how the tax law can become complicated can get a glimpse into the process by reading through this explanation of how one well-intentioned new deduction has opened up a debate the answer to which isn't as obvious as either side seems to think that it is. Though I know what I would do if I were writing the statute, that's irrelevant, because the statute, as written, doesn't provide enough guidance to resolve the issue. So there's complexity-causing step number one: Congress fails to provide a sufficiently specific direction. In many ways this is not only step number one, it's the only step. It isn't fair, is it, to treat the next steps in the process as "complexity-causing"?

The provision in question is the new section 199. Section 199 allows a deduction equal to a specified percentage (it increases over the next few years) of the lesser of something called "the qualified production activities income of the taxpayer for the taxable year" or taxable income for the taxable year. The second element can be ignored, as it is designed to prevent the deduction from generating a negative taxable income, an issue not germane to this discussion. But what is "qualified production activities income" or QPAI as it has come to be known? The statute provides that it equals any excess of the taxpayer's "domestic production gross receipts" for the taxable year, over the sum of the cost of goods sold allocable to those receipts, other deductions, expenses, or losses directly allocable to those receipts, and a ratable portion of other deductions, expenses, and losses not directly allocable to those receipts or to another class of income. Whew. Fortunately, the issue requires a focus on "domestic production gross receipts" or, to use the rapidly emerging acronym, DPGR. What is DPGR?

The statute tells us that DPGR means the taxpayer's gross receipts derived from any one or more of three major areas of activity. The first major area is any lease, rental, license, sale, exchange, or other disposition of any of three types of property. The first type of property is any qualifying production property manufactured, produced, grown, or extracted by the taxpayer in whole or in significant part within the United States. The second type of property is any qualified film produced by the taxpayer. The third type of property is electricity, natural gas, or potable water produced by the taxpayer in the United States. The second major area of activity is construction performed in the United States. The third major area of activity is engineering or architectural services performed in the United States for construction projects in the United States. The statute also tells us that DPGR does not include the taxpayer's gross receipts derived from the sale of food and beverages prepared by the taxpayer at a retail establishment, or from the transmission or distribution of electricity, natural gas, or potable water.

Anyone with experience reading tax statutes, or the sort of paraphrasing I've shared, and even folks who've never seen a tax statute can figure out that Congress engaged in some picking and choosing in designing the deduction. The limitation to activities in the United States is at the heart of the deduction, which is designed to give U.S. enterprises an incentive to generate product and to sell it (hopefully overseas so as to reduce the trade deficit, but no one really wants to say that because it re-opens the door to the mess that Congress tried to solve with the deduction and some associated provisions). But why distinguish between food prepared at a retail establishment and food prepared elsewhere? I explored this in my first analysis of this new deduction and I'll let those who missed it go take a look when they're finished with the present concern.

Because we're going to focus on "construction performed in the United States" there's no need to analyze the definitions of qualifying production property, qualified film, or the words "manufactured, produced, grown, or extracted." Suffice it to say many paragraphs could be written on each of those. Beginning to get a sense of why tax law becomes so complicated?

The statute does not define "construction." Should it? After all, don't all of us know what "construction" is? It means to build something, right? Well, maybe.

So the IRS had to step forward and define the term. In Notice 2005-14, a long document that parses much of the statute, the IRS (in section 3.04(11) of the Notice) said more about construction than one might have guessed (other than those who know me and know that I can speak or write for long periods of time based on one key word or key phrase).

The IRS began by defining construction as the construction of real property, and then defined real property as "residential and commercial buildings (including items that are structural components of such buildings), inherently permanent structures other than tangible property in the nature of machinery, inherently permanent land improvements, and infrastructure)." The IRS points out that local law is not controlling in determining whether property is real property for these purposes, citing the Conference Report to the legislation. OK, so there's complexity-causing step two, namely, the writing of rules by the staff of the Joint Committee on Taxation to fill in the gaps in the legislation that come to its attention after the legislation is too far along to be changed but before too much time goes by. The IRS also notes, not surprisingly, that tangible personal property such as appliances, furniture and fixtures, sold as part of a construction project is not real property for purposes of the decution. But then the IRS throws in a reference to another rule in its Notice, concluding that if more than 95% of the total gross receipts derived by a taxpayer from a construction project are attributable to real property, ALL of the total gross receipts derived by the taxpayer from the project are treated as DPGR from construction.

Having defined construction as the construction of real property, the IRS then turned to the definition of "construction" in the phrase "construction of real property." If this seems a bit weird to those of you not immersed in the reading of tax (or other statutes), understand that it is "normal" in the world of statutory legal analysis. Hmmm. No wonder lawyers are sometimes seen as being a bit "cagey" with their words. So, the IRS explains that it and the Treasury Department (of which it is part) "believe" the term "construction" includes "most activities that are typically performed in connection with the erection or substantial renovation of real property, but does not include tangential services such as hauling trash and debris, and delivering materials, even if the tangential services are essential for construction." But, it also notes, "if a taxpayer performing construction also, in connection with the construction project, provides tangential services such as delivering materials to the construction site and removing its construction debris, the gross receipts derived from such tangential services are DPGR." The IRS explains that "[i]mproving land (for example, grading and landscaping) and painting are activities that are considered 'construction,' but only if they are performed in connection with other activities (whether or not by the same taxpayer) that constitute the erection or substantial renovation of real property." And, because of how the statute is crafted, the IRS excludes from the definition of "construction" any activity within the definition of "engineering and architectural services."

Hang on. We're almost there. Because it doesn't bear on the issue under discussion, we can skip over the definition of infrastructure, which was used in the definition of construction as "construction of real property," and the definition of substantial renovation. Those are two tangents that lead to paths we will not travel today. Those who have never been in one of my classes can see glimpses of how I construct coverage of a topic, shunting to the side deeper analyses of terms and issues that distract from the bigger picture.

But it is important to consider one more term before turning to the issue. The IRS defined the phrase "derived from construction" as including both the proceeds from the sale, exchange, or other disposition of real property constructed in the United States, whether or not sold immediately after construction is completed, assuming all other requirements are met, and compensation received for construction services performed in the United States, assuming all other requirements are met). However, the IRS concluded that DPGR does not include gross receipts from the lease or rental of constructed real property. And the IRS concluded that DPGR does not include gross receipts attributable to the sale or other disposition of land.

It didn't take long before representatives of "a coalition of U.S. firms engaged in the residential land development and homebuilding businesses" responded (in this document) to the IRS invitation to comment on Notice 2005-14 and objected to the exclusion from DPGR of gross receipts from the sale or other disposition of land. They took a two-part approach in their criticism of the IRS rule.

First, the coalition representatives pointed out that the statute does not exclude land, and that because Congress did identify certain activities or products as ineligible for the deduction, it would have excluded land had it intended to do so. Of course, no one really knows what Congress, or any individual member of Congress intended, or even if they intended anything considering few, if any of them, read their legislation, but I'm being picky in terms of how the coalition representatives make their point. A stricter reading yields the simple argument that there is nothing in the statute excluding land proceeds from DPGR, period. The coalition representatives pointed out that although Notice 2005-14 contains no explanation for the exclusion, IRS and Treasury officials have expressed publicly concerns that land speculators will engage in minimal construction activities in order to get a deduction, something that the coalition's members would not be doing because they are engaged in construction development and not land speculation. Of course, the line is not that bright, but the coalition representatives, borrowing from a similar provision in another area of the income tax law, proposed an alternative approach that would weed out land speculators from construction project developers. They also argued that land is a raw material in the construction of a building just as coal and gold are raw products used in the manufacture of products made from them. Finally, they argued that it makes no sense to treat land as a different sort of real property when it comes to defining proceeds derived from construction of buildings that necessarily are built on land.

Second, the coalition argued that compliance with the rule in Notice 2005-14 would be difficult, if not impossible, to achieve. Separating gross receipts, cost of goods sold, and deductions into those attributable to the land and those attributable to the buildings and other qualifying property would require accounting in which developers currently don't engage. Worse, they explain, "[t]he exclusion would therefore force land developers and homebuilders to undertake both sampling and valuation methodologies that would engender substantial controversy upon subsequent examination by the Internal Revenue Service." Anyone familiar with the issues and disputes arising when purchase price is divided between nondepreciable land and depreciable buildings can envision the sort of audit and litigation that would be generated by even more complicated apportionments of not only purchase price, but construction costs, and sales proceeds.

If it weren't for the fact that huge amounts of money flow into and out of land development and building construction each year, this analysis might not be more than an academic exercise in the study of tax complexity origins. However, the dollar amounts involved make this an issue of great practical importance, and one that needs to be resolved sooner rather than later.

What's at stake is the profit that, however measured, is attributable to the land component of the construction project. If the coalition is correct, and the proceeds attributable to the land should not be taken out of the computation, then the cost of the land also should not be taken out. Because the deduction is based on QPAI, and because QPAI is computed by subtracting costs from receipts, it is the profit on the land that is at issue. Because it can take as many as 10 years from the time the project begins with the acquisition of the land or an option to purchase the land until the final building on the property is sold, the profit attributable to the land can be considerable.

So who's right?

Technically, I think the coalition is correct because its representatives rely on a statute that does not exclude land from the picture. I think IRS and Treasury Department concerns about abuse can be handled not only by something along the lines of the proposed anti-abuse provision (which would deny the deduction if non-land construction costs were less than 10% of the total project cost), but also by the Notices' use of construction industry standards in identifying eligible taxpayers and by the W-2 wage limitation, which would limit or eliminate the deduction for land speculators because they pay little or no wages in connection with their investment.

On the other hand, the deduction focuses on "production" and although construction companies "produce" buildings, roads, infrastructure, and similar land improvements, they don't "produce" land. Unlike processors of coal and gold, who remove the substances for use in other places, the land is there when the construction company arrives, and it is there when they leave. They don't leave behind exhausted coal fields or empty gold mines. Actually, many developers do scrape off the topsoil and sell it, a practice that annoys me no end for several reasons (e.g., environmentally unsound, requires new homeowner to replace the topsoil perhaps by purchasing it from the construction company's purchaser) and now that they'll get a deduction for a percentage of their topsoil extraction profit, it's even more annoying. But the upshot is that the statute doesn't restrict the deduction to "qualifying construction" the way it restricts the deduction in the manufacturing, extraction, growth, or production areas. If Congress had used the adjective "qualifying" then the IRS would have a much firmer foundation (sorry!!) on which to rest its conclusion.

Those who wish to micro-manage the interface between tax and the economy would limit the deduction to the portion of the profits attributable to the land that arise from the impact of the construction activity but not the portion arising from general price increases or developmental sprawl in general. In other words, the land developer's deduction would reflect the contribution made by the developer's activity to the value of the land as a part of the economy. After all, any land developer willing to tell it as it is must admit that there remains an element of land value speculation even as the construction project moves along from zoning changes to ribbon-cutting.

Observe how a tax expert must understand the land development and construction business in order to begin analyzing the issue. Fortunately or unfortunately, depending on how I look back at life, I've had more than the average person's share of building construction experience, as plumber's assistant one summer way back in my high school days, to purchaser of new homes built under my watchful (and, to the contractors, annoying) eye. Perhaps some members of Congress have had similar experiences. Perhaps they thought about and envisioned the "construction" process when they were writing (oops, they don't write) and voting for the legislation enacting the deduction. Nah. Didn't happen that way.

So for want of a conscious decision by the Congress, necessitated by the practical realities of the construction business, the IRS and taxpayers must expend time and money resources trying to resolve this matter. Perhaps it will be resolved in a revised Notice or other administrative issuance. Perhaps it will be resolved through audits that end up in litigation. Perhaps it will be resolved when the Tax Court's decisions are uniformly affirmed, or reversed, by the Courts of Appeal. But perhaps it won't be resolved until conflicting Courts of Appeals decisions end up compelling the Supreme Court to take on the issue, probably late in the decade. Yes, indeed, if enough steps are taken on the tax-law-as-a-complexity journey, that's where the question ultimately will land. Oh, that was awful.

Oh well. Perhaps for some this post broke new ground.

Monday, May 09, 2005

Beam Me An A, Scotty! 

The grading marathon continues, and I take occasional breaks to let my brain rest. During one break, I took a look at incoming email from one of the law lists to which I subscribe. It contained an abstract of an article by Tom Alleman originally published in Texas lawyer. It's an article well worth reading. Here's the part that captured my attention and should encourage others to read his take on pro se litigants. He describes what it was like in his first post-law school job, one that he held at the federal court house in Kansas City:
As time went on, I met all manner of people who had business for the court. We met several people who complained that some government department or other was beaming invisible rays at their heads. One of these poor souls came in on a quiet Friday afternoon, so another clerk and I took him over to the Lexis terminal, at that point an imposing stand-alone console about the size of a small desk. We turned it on, typed in "Stop beaming rays at John Doe's head," hit "enter" and turned it off. Doe left happily, the voices in his head now silent, and we returned to our duties, knowing that we had helped one American citizen obtain justice in an imperfect world.
I remember those Lexis terminals. Maybe I can dig one up and keep it on standby in my office. It might come in handy someday.

OK, I'd better get back to grading. Before my students start beaming subliminal A messages to me.

Friday, May 06, 2005

It's Exam Grading Time 

When I first started teaching law school, I was "warned" by older colleagues that the most burdensome part of being a law professor is examination grading. I can understand why some law (and other) faculty feel that way, but I'm not convinced it's the most burdensome.

I mention this because I have three examinations to grade this semester. One was administered Monday evening, with some rescheduled for last night. All have been graded. Another examination is being administered as I write, and the third will be given tomorrow morning. Grades are due by mid-week so that they can be processed and graduation information prepared. So this post will be short, as will be Monday's.

CREATING an examination is the tough part. It is challenging. One must find questions "that work" but that don't invite students to do no more than write "all they know" about a subject. Law school is a graduate school, and it would be more effective, but inefficient, to have students take oral examinations in front of three-person or five-person faculty panels. Ideally, they would be comprehensive rather than limited to specific courses. That would put an end to the "write all you know and hope the professor finds worthwhile information in the dump" approach. My examinations deter and penalize that behavior, which is why they are so challenging to design.

The grading itself can be tedious. Not that I have any right to complain, but handwriting has become very difficult to read as a general proposition. I'm waiting to find out if the software that permits students to do examinations on computers comes in a version that prevents them from "taking" a digital copy of the examination. That's important because I do not make previous examinations available. Especially in tax, once I design a good set of facts, I can spin all sorts of questions off that fact situation. I do not want to coach students on those specific facts, which is what they would want to have done for them if they had those facts. Nor do I want to go through what I had to do when I did publish old examinations, which was an explanation of why a particular question made no sense, or had useless information, or lacked information, because the tax law had changed. Now that tax law changes every year, it is easier to design new questions by adapting older ones, but that is not where I want student focus to be.

What is most burdensome with examinations is coping with the disappointment that comes from discovering one's students, as a group, have learned some very strange things about the law. This is, of course, offset by the glee of discovering a student who was apprehensive about their course grade has done well. It varies from semester to semester and from course to course. Sometimes, classes as a whole write great exams. Other times, it isn't so great. There almost always are students with excellent grades. It's when some students begin to populate the lower grade regions that it's time to contemplate if this reflects deficiencies in the course. Almost always, the reason is either the student's inattentiveness to and absence from the course, or some sort of outside distraction afflicting the student during the examination period.

Part of the problem is that student anxiety increases when the entire course grade rests on one end-of-semester examination that is packed in with other examinations. Students who are in both of my J.D. courses this semester have examinations on back-to-back days. Their brains will be tired tomorrow morning. I have tried to offset this "sink or swim, never have feedback" approach still prevalent in many law school courses by giving assignments during the semester that count for a portion of the grade. Some of the assignments are done out of the classroom, and others are in-class exercises that are unannounced.

For students, the primary benefit of these exercises is feedback. They can determine if they are on the right track. They can make adjustments before it is too late. It is superior to finding out AFTER the examination period that one has a particular study, testing, or writing flaw that poisons all one's exam performances. It builds up self-confidence where and when it ought to be nurtured. For me, it lets me know which students need to be reminded to refocus. It tells me if I am "losing" a substantial portion of the class such that I need to make adjustments. Although students sometimes complain about being graded throughout the semester, almost all come to appreciate what the Dean calls "huge amounts of work" by me. After all, in courses such as Trial Practice and those meeting the practical writing requirement, along with Clinic experiences, students are evaluated constantly rather than at one time. The misleading attractiveness of the "one exam at the end" approach is that it is easier, but when I can give a much shorter examination because some of the scoring already has been done, I endure much less "burdensomeness" than do many of my colleagues as they test their endurance grading everything at once.

In the J.D. courses, students drop the lowest 2 of 10 scores (so that I don't need to deal with whether class absence was or was not justified). In the Graduate Tax Program course, students drop the lowest one of 4 scourse, even though all 4 are, at the moment, out of classroom exercises. The J.D. total exercise score counts for 1/3 of the grade, but in the Graduate Tax Program it counts for 1/5.

I want to find a way to shift more of the scoring into the semester. Doing that in the J.D. program will be a fairly simple matter. The use of student response pads ("clickers") means that I can count more in-class question responses toward a grade, and I am pondering making 40%, rather than 1/3, of the grade dependent on semester work. Perhaps even 50%. In the Graduate Tax Program, it is more difficult. Students attend only 14 100-minute classes rather than 42 50-minute classes. Thus, it is far more likely students will be absent when an in-class exercise is given. The limited 2-credit course and the nature of the material (Partnership Taxation) already puts a huge time pressure on adequate coverage, and in-class exercises simply would increase that time constraint problem. I've not yet introduced clickers into my Graduate Tax Program course. I'm still trying to get Graduate Tax Program students to check the on-line Blackboard classroom as often as they should. Some do, but far too many do not, even with the help of the Program's staff who take time to teach the students the very easy 3 steps for accessing Blackboard.

So, back to grading I go. And I'll let others wonder if it is really true that no matter how challenging it is to take an examination, it is even more challenging to create and grade them. It's true of crossword puzzles. That's the clue.

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