Monday, December 31, 2007

When is a 15% Tax Rate Not a 15% Tax Rate? 

Last Wednesday, the Tax Court issued its opinion in Weiss v. Comr., 129 T.C. No. 18 (2007). The case highlights the dangers of using sound bites, as Congress often does, to describe a tax law change or tax break.

People who know something about taxation, and even some who don't, are familiar with the provision that taxes qualified dividends at 15 percent. It's quite a simple concept, even if it is objectionable. Would it not make sense, if asked for the tax on $100 of qualified dividends, to respond, "$15"? Would it not make sense to conclude that if a person shifted investments from tax-exempt bonds to stocks generating qualified dividends of $24,376, that their federal income tax liability would increase by $3,656?

Well, surprise. Adding $24,376 of qualified dividends to gross income can increase a taxpayer's federal income tax liability by much more than $3,656. Much to the taxpayer's chagrin, this point was made clear to Tobias and Gertrude Weiss by the IRS and the Tax Court. What the Weisses did was to leave the qualified dividends out of gross income, and to add $3,656 to the tax otherwise computed. That omission, however, caused their alternative minimum taxable income, and their alternative minimum tax, to be understated. It also caused their regular taxable income to be understated, because adding the qualified dividends to gross income increases adjusted gross income, and thus increases the limitations that apply to various itemized deductions. It also increases the amount of social security benefits included in gross income, an issue in the Weiss case.

This phenomenon, that the net increase in federal income tax on account of an additional dollar of qualified dividends can exceed fifteen cents, is a characteristic of the famous "bubble." A similar outcome is generated when someone in the 15-percent marginal bracket who also receives social security benefits earns an additional dollar of gross income. The tax increase can be as much as 22.5 cents.

I wrote about this problem 16 years ago, in Getting Hamr'd: Highest Applicable Marginal Rates That Nail Unsuspecting Taxpayers, 53 Tax Notes 1423 (1991). It has been cited and quoted almost a dozen times. I doubt, though, that anyone in Congress has read it. That's too bad, because repairs could be made if members of Congress understood the wool that was pulled over their eyes and the eyes of the citizenry by the folks who shoved phaseouts into the tax law as a way of raising taxes without raising rates. The alternative minimum tax, patched yet again, is so flawed that it, too, needs adjustment. Either it should be repealed and the regular tax fixed, or the regular tax should be repealed and the alternative minimum tax, in some modified form, should take center stage. Having both a regular and alternative minimum tax is nothing more than a blood-soaked band-aid masking the need for deeper surgery.

Part of me sympathizes with the Weisses. They thought that they'd be paying tax at a rate of 15 percent on their qualified dividends. That's what the politicians told them, as they toured the country crowing about the wonderful thing they had done. Unfortunately, the Weisses incurred tax on their qualified dividends at an effective rate exceeding 15 percent.

Of course, part of me doesn't sympathize with the way the Weisses filled out their tax return. They ignored the instructions, notwithstanding a feeble argument that the form and the instructions were ambiguous. On that point, the answer simply is that qualified dividends are a subset of taxable dividends. So had they filled out the form properly, they would not have invested time and money pursuing their case.

On balance, though, all of us benefit from the approach taken by the Weisses. Though they lost, they brought this embarrassing problem with the tax law into the spotlight. Nothing I write today can change the result in the Weiss case. But perhaps it will contribute to tax law reform that will spare others the same rude shock.

Friday, December 28, 2007

Tax Relief = Return to Serfdom? 

The challenges faced by people on fixed incomes when local property taxes increase has been widely reported. For example, I explained one facet of the problem in Independence, Taxes, and Homeownership.

A variety of plans to alleviate the difficulties have been proposed, including one that I reviewed in Tax Relief Based on Age and Income? and a cluster of others I dissected in New Pennsylvania Tax "Reform" Doesn't Add Up.

Now another arrangement has begun to catch on with public officials in a few communities. There's quite a message in the headline for this story: New York Town Lets Senior Pay Off Property Tax Bill With Cheap Labor, which was reported on Christmas Day.

At first glance, the deal appears to be a no-brainer, win-win, great solution invention. People on fixed incomes in the town of Greenburgh, New York, trying to find ways to pay higher and higher real property taxes, can be hired by the town at $7 an hour. Their wages are used to pay a portion of their real property taxes. The town prefers that these people not sell their homes and leave, and these people want to stay. A town official suggests that it could use the services of retired physicians and accountants, lawyers, and people who can thins such as the work of receptionists. Greenburgh and its officials, however, are not the pioneers. Similar arrangements have been crafted in Concord, Massachusetts, Boulder County, Colorado, and in other locales.

At second glance, there are some disadvantages. In Boulder County, not every person who wants a job under the plan can get one. Unions worry that when the local government hires people on fixed incomes at low wage rates, the number of jobs available for union members decreases. Unless state legislatures make changes to their income tax laws, the wages earned by the people in the program are subject to state income tax, and thus the real property tax bill is not reduced by as much as the full amount of the wages. Unless the person has unused standard deduction or personal exemption deduction amounts, his or her federal income taxes also would increase.

At third glance, the arrangement appears to be a u-turn in the history of public fiscal policy. For centuries, people rendered unto their overlords and governments chiefly by providing unpaid labor. Yes, there have always been fees, customs, duties, and excises, but for most of those with little economic wealth, their "contributions" to whatever form of society existed were made in their capacity as serfs. As economies changed, and people were "untied" from the lands that they worked, a variety of taxes replaced the practice of providing services to the government through laboring on the fields or in the entourage of a nobleman. Feudal tenure, though leaving remnants of its practices and customs in modern law, faded away.

But now serfdom may be making a comeback. Imagine a society in which citizens do not pay taxes but answer government phones, teach in government schools, work in government hospitals, file papers in government offices, and perform other tasks in exchange for whatever the government provides its citizens. At what point would towns and counties try to restrain their serfs from going to another location? At what point would the serfs be prohibited from switching careers? Proponents of the arrangements, which admittedly have some positive values, probably would argue that things would never reach such a point. Without a doubt, they would claim that safeguards would remain in place. I wonder, though, what advice we would get if we could bring forward in time someone who benefitted from the practice of feudal tenure and who was told that guarantees were in place to ensure there would always be sufficient numbers of people to work the land owner's lands.

Despite the benefits of these arrangements, there is something unsettling when people on low or fixed incomes, many of them retired, must go out to the fields and offices, earning very low wages, in order to retain ownership of their homes. Will the future bring more "Will Work for Real Property Tax Relief" signs than "Will Work for Food" signs?

I suggest that those designing these arrangements, and those who inevitably will craft the second generation of such plans, go slowly and very carefully. Sometimes society doesn't realize it's riding a trend toward an undesired result until the journey is already underway.

Wednesday, December 26, 2007

A Tax on Christmas? Really? 

According to this Daily Express political commentary, people in England face a 225 pound "stealth tax bill" for this Christmas. That's roughly US $450. The claim is that when a household adds up what it pays in value added tax on gifts, excise duties on alcohol, and fuel tax on petrol used in traveling to visit friends and relatives, it will discover that it has contributed roughly 225 pounds to a 5.65 billion tax haul by the government.

I'm in no position to dispute the calculations reported in the story. I have no basis to think that the VAT on a personal music player isn't 30 pounds, or that the excise on a bottle of champagne isn't 6 pounds. From what little I know, those figures seem to be correct. Of course, I have no idea how many bottles of champagne are purchased in England because of Christmas, let alone the number of personal music players purchased as gifts.

What bothers me is the notion that these are "stealth" taxes, in other words, taxes that are collected without anyone knowing that they are being collected. Perhaps there are people in England who do not realize a VAT is imposed on their purchases. When I've been in England, I've seen notices and packaging legends disclosing the fact that a particular percentage of the price is for VAT. The petrol pumps set forth the fuel tax. I don't know if the alcohol excise duty is prominently displayed, but I wasn't looking for it and wasn't focused on alcohol acquisition.

For me, a stealth tax exists if the seller of a product does not disclose that a portion of the price is being used to reimburse the seller for a tax paid by the seller, or if some component of an income tax computation is altered in a manner that changes effective rates without changing stated rates. The latter is a feature of the several phase-outs that infect the American Internal Revenue Code.

The terminology is not the invention of the political commentator. The Shadow Treasury Chief Secretary used the term in a criticism of the Labour government. The criticism implies in some sense that there were no VAT, fuel, or excise taxes until Gordon Brown stepped up to be prime minister. Can that really be the case?

The row over taxation, not unlike the soundbite battles to which we are treated here in the States, does generate some interesting assertions. Mike Denham, a former Treasury economist, is reported to have said: “While Santa Claus is coming down the chimney, Gordon Brown is sneaking through the back door and taking the presents from under the tree.” It definitely makes for a fine visual, and probably will inspire someone to make a cartoon for YouTube.

The same reasoning could be used to conclude that there is a stealth tax on Easter, on Valentine's Day, on every holiday, and even on people's birthdays and wedding anniversaries. I wonder how many people see it for what it is. Perhaps next year folks will ask Santa to bring a gift card entitling the bearer to some free tax law, economics, and public policy courses at one of England's many fine institutions of higher learning.

Monday, December 24, 2007

A Holiday "Gift" from the Congress 

Two years ago, in Legislatures Take a Holiday From Taxes, I carped about the unwillingness and inability of legislators to schedule their tasks so that they do what they are elected to do, or to do what they are elected to do in a timely manner. I pointed out that the "ran out of time" excuse is unacceptable.

The first example that I presented in 2005 will trigger deja vu. I wrote:
First, the United States Congress whiffs on reform of the alternative minimum tax that would prevent 15 million more taxpayers, mostly from the middle class, coming within its reach for the first time in 2006, even though the tax was designed to prevent the wealthy and ultrawealthy from using deductions to lower their tax liabilities below a specified minimum. According to Senate Majority Leader Bill Frist, as reported by a number of sources, including this Los Angeles Times story, earlier this week asserted that Congress "had run out of time" to finish work on the proposed legislation fixing the problem.
Change the number of affected taxpayers, change a few names, and we're ready for the reruns.

This year, Congress managed to enact a "patch" to the AMT. I remember when I was a child, fixing my own bicycle tires and tubes, that one would reach a point where yet another patch on the tube was a guarantee of a flat tire, or worse, shortly thereafter. There are only so many patches that can be slapped onto something. If in doubt, check out patched software. But at least there is a patch, so it could have been worse.

The timing of the "patch" is awful. Congress enacted the patch and sent it to the President for his signature on December 19. Shortly thereafter, its members went home. They leave behind a cadre of IRS employees who are faced with the unenviable task of updating forms and computer software to reflect the enacted patch in time for the upcoming filing season. In When Congress Can't Do Things On Time, I explained how the legislative delay would cause all sorts of problems for taxpayers and the IRS. To its credit, the IRS, along with the Treasury Department and the President, has promised, to quote the TaxProf blog, "to minimize the disruption and delays in the tax filing season caused by the late passage of the bill." As a practical matter, the effort falls on IRS employees. Trust me, the President isn't going to be giving up his holiday break to get IRS software updated or to change tax forms. Nor is the Secretary of the Treasury.

So while the Congress and others get to enjoy this holiday period with family and friends, some IRS employees will be putting in extra hours, perhaps to the point of missing family get-togethers, to do work that they were scheduled to do one or two months ago, simply because the Congress cannot manage itself. The public has a negative view of the IRS, but can it not come to understand that the IRS is a creation of the Congress and that in this instance IRS employees are going above and beyond the call of duty to fix yet another mess created by the Congress? The idea of Congress walking out to enjoy a holiday while others must labor on isn't all that different from factory bosses and other economically powerful magnates living the high life while their employees put in long hours without holiday breaks. If Dickens were alive, he'd have material for another novel.

So this year, while enjoying the food, the gifts, the gatherings, and the fun, stop for a moment and think of the people at the IRS, and at some commercial software firms, who are racing the clock, trying to minimize or eliminate the filing season delay that can postpone your receipt of a refund that will pay for those gifts and the food. If you're one of those people caught between the Congress and the calendar, grinding away in your office so that the rest of us can begin filing tax returns on or near the usual starting time, the rest of us thank you. I have tried to make the voters aware not only of why their refunds may be delayed, but of the effort you are making to compensate for the shortcomings of a Congress afflicted by time management deficit disorder.

Friday, December 21, 2007

Taxation of Kidney Swaps: Dispelling the "Ivory Tower" Myth 

Almost two years ago, in The Taxation of Kidney Swaps, I concluded that taxpayers who swapped kidneys for transplantation into their respective spouses have gross income because that's what the black letter law of tax states. I also questioned whether the IRS would pursue the matter if the taxpayers did not report gross income. About a month later, BNA published my essay, Taxation of Kidney Swaps, as part of its "Insights and Commentary" series, but the link no longer works and I cannot find the article on-line.

Only recently have I discovered that both the MauledAgain post, The Taxation of Kidney Swaps, and the BNA essay have generated reactions. In Blawg Review #46, Sean Sirrine writes: “If you want to get real serious, you can read [Prof. Maule’s] "The Taxation of Kidney Swaps" in which he makes a good argument that people who are swapping kidneys should (legally speaking) be paying taxes on the exchange. Talk about a topic to get your blood boiling!” My tax blogging colleague Joe Kristan, in KIDNEY SWAPS: NOT A 1031 EXCHANGE?, suggested, tongue in cheek I’m sure, that the solution is for the two couples to divorce and make use of the section 1041 nonrecognition provision.

But over at Tax Guru, Kerry Kerstetter recorded a question that pointed out the BNA version of Taxation of Kidney Swaps and that wondered “Can you be taxed on receipt of a kidney? What I wonder is, if you and I each have a car of equal market value and we trade them, would we be taxed? Beyond the obvious bio-ethics issues, I don't see the difference.” Kerry’s response:
As learned and entertaining as Professor Maule is, this is a perfect example of how ivory tower academics (and some attorneys I have known) love to let their imaginations go wild and conjure up scary tax scenarios out of what are actually innocent events.

If I were advising these people from my real world perspective on tax matters, I would have them sell their kidneys to each other for one dollar each and completely avoid the entire subjective valuation of a bartering transaction. While the black market price for kidneys may be as much as $50,000 (per a recent episode of Nip/Tuck), each person is actually entitled to establish her own price. While some cold-hearted bastards might say they should auction the kidneys to the highest bidders, basic private property rights allow us to set out own prices for things we own; so who is to say one dollar isn't appropriate?

They can each prepare a bill of sale for one dollar and report the transactions on Schedule D of their 1040s, with a cost basis of zero. The tax on one dollar of long term capital gain (acquisition date = date of their birth) will be the least of their worries.
When I read this planning tip two thoughts crossed my mind. First, no one in the ivory tower considers me an ivory tower academic, as I am one of the few who focuses on the law practice world far more than on the legal philosophers’ arena. Second, it just can’t be that the tax consequences of a barter exchange are avoided simply by pegging each component as a one-dollar sale. So, off I went to do some research. Not on the first question, though that might be a fun survey to conduct, but on the second.

In Rev. Rul. 79-24, 1979-1 C.B. 60, the IRS analyzed the tax treatment of barter club members who exchanged legal services for housepainting services. The IRS concluded that the fair market value of the services received by the lawyer and the housepainter was includable in income. The fair market value of the services is not a nominal one dollar, but the amount for which the services would sell or trade on the open market.

The courts that have dealt with the question make it clear that when there is an exchange, the value must be determined according to an objective market place and not according to values arbitrarily assigned by the taxpayers. For example, in Rooney v Commissioner 88 T.C. 523 (1987), the Tax Court held that “under sec. 61, I.R.C. 1954, an objective measure of fair market value must be employed to measure compensation received in goods or services; thus, Ps must include in income their share of the normal retail price of the goods and services received by the partnership.” The Court explained:
We agree with the court's reasoning in Koons. In our judgment, section 61 requires an objective measure of fair market value. See Koons v. United States, 315 F.2d at 545; Kaplan v. United States, 279 F. Supp. 709, 711 (D. Ariz. 1967). Under such standard, the petitioners may not adjust the acknowledged retail price of the goods and services received merely because they decide among themselves that such goods and services were overpriced.
The Court further concluded:
In our judgment, the petitioners must value their compensation by applying an objective measure of fair market value. For such reasons, we hold that the fair market value of the goods and services received by the petitioners is the prices charged by the partnership's clients to their retail customers.
Similarly, in Baker v. Commissioner, 88 T.C. 1282 (1987), the Tax Court explained:
Gross income includes the fair market value of property received in payment for goods and services. Sec. 61(a); 1 sec. 1.61-2(d)(1), Income Tax Regs. The amount of commission income received by petitioner in 1981, therefore, is to be determined on the basis of the fair market value of the trade units petitioner received as commissions in 1981. This apparently is the first case involving the valuation, for Federal income tax purposes, of trade units received by members of an organized barter exchange. Our recent opinion in Rooney v. Commissioner, 88 T.C. 523 (1987), involved accountants who, on an ad hoc basis, agreed to accept goods and services in payment of delinquent accounts. We held that in valuing the goods and services received by the accountants, an objective standard was to be used. We stated that -
section 61 requires an objective measure of fair market value. * * * Under such standard, [taxpayers] may not adjust the acknowledged retail price of the goods and services received merely because they decide among themselves that such goods and services were overpriced. [Rooney v. Commissioner, supra at 8-9.]
In Koons v. United States, 315 F.2d 542 (9th Cir. 1963), an employee received household moving services in partial payment for accepting a job at a new location. The Ninth Circuit in Koons rejected the argument that the amount of income charged to the employee with respect to the moving services should be measured on the basis of a subjective valuation thereof by the taxpayer. The Ninth Circuit stated that -
the use of any such [subjective] measure of value as is suggested is contrary to the usual way of valuing either services or property, and would make the administration of the tax laws in this area depend upon a knowledge by the Commissioner of the state of mind of the individual taxpayer. We do not think that tax administration should be based upon anything so whimsical. * * * We think that sound administration of the tax laws requires that there be as nearly objective a measure of the value of services that are includible in income as possible, and the only such objective measure * * * is fair market value. * * * [315 F.2d at 545.]
In the context of summons enforcement proceedings, a number of courts have accepted as reasonable respondent's contention that barter exchange transactions create circumstances that are conducive to improper tax avoidance. United States v. Pittsburgh Trade Exchange, Inc., 644 F.2d 302, 306 (3d Cir. 1981); Korpi v. United States, an unreported case ( D. Mass. 1984, 84-1 USTC par. 9203 at 83,344 n. 1, 53 AFTR 2d 84-1048 n. 1); United States v. Island Trade Exchange, Inc., 535 F. Supp. 993, 996-997 (E.D. N.Y. 1982). We share that concern.

In 1982, Congress expanded the return reporting requirements of section 6045 to make barter exchanges, among other organizations, subject thereto. Sec. 311 of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 324, 600-601. The purpose of this change in section 6045 was to improve compliance with respect to the reporting of taxable transactions conducted through barter exchanges. S. Rept. 97-494, at 246 (1982). Thus, it appears that Congress also has recognized the potential for tax avoidance inherent in barter exchange transactions.

The absence of the use of currency and the tax reduction motives suggested in literature of the exchange suggest to us that the operations of the exchange and the tax effect of transactions occurring within the exchange deserve close scrutiny. The above factors also further support the adoption, for tax purposes, of an objective test for the valuation of trade units received by petitioner and by members of the exchange.
In other words, the idea of avoiding the tax consequences of a barter exchange by setting the value at a nominal amount such as one dollar had been tried, and generated a strong negative reaction by Congress, and thereafter by the courts. The revenue ruling and cases that I’ve noted have been cited with approval and followed in more than a few other cases, and in an FSA. Paul Caron reached a similar conclusion through a similar analysis in Tax Consequences of Kidney Donations.

So what Kerry proposes won’t fly. I worry that the IRS not only would reject the nominal amounts, but impose penalties for trying to avoid tax consequences through a strategy that has been roundly rejected by the authorities.

I hesitate to make a comment about the supposed “ivory tower” nature of my original The Taxation of Kidney Swaps post. Support for my conclusion can be found in IRS pronouncements and court opinions. It doesn’t get much more real world than that. Whatever shortcomings I have, and I have them, it doesn’t include being an ivory tower academic, much to the chagrin of many in the so-called law school academy.

Wednesday, December 19, 2007

Raising Revenue Through Tolls Isn't Simple 

As reported in this story, the Federal Highway Administration in effect told Pennsylvania to revise its request for approval of the I-80 toll plan. The federal government adopted a plan that permits three states to impose tolls on interstates "for the purpose of reconstructing and rehabilitating interstate highway corridors that could not otherwise be adequately maintained or functionally improved without the collection of tolls." Virginia and Missouri have claimed two of the spots, and Pennsylvania is trying to take the third.

The FHA did not reject or approve the plan. It concluded that Pennsylvania's proposal did not adequately meet the threshold for the three-state federal plan. The FHA noted that Pennsylvania did not demonstrate that the tolls would be used only for I-80 improvements. The FHA did not seem to agree that toll revenues used to fund highways and bridges elsewhere in the state constituted operating costs of I-80. The FHA raised procedural issues, seeking proof that local planning organizations were contacted and that local, regional, and interstate travelers had input.

Although the final federal decision is a year away, speculation that the toll plan won't fly has increased. If the plan fails, funding for mass transit and highway repairs needs to be found in some other revenue source. Suggestions include higher state gasoline taxes, increased vehicle registration fees, mass transit fare hikes, and the controversial plan to lease the Pennsylvania Turnpike. In fact, the next day, Governor Rendell renewed his call for the turnpike lease.

As I pointed out in Selling Government Revenue Streams: A Bad Idea That Won't Go Away and Selling Off Government Revenue Streams: Good Idea or Bad?, the leasing of the turnpike is a bad idea. Without repeating all of the arguments, the plan comes down to the killing of the goose that lays the golden eggs. The arguments made on behalf of the plan fall apart when throughly dissected, and what remains is nothing more than a grab by particular segments of the private sector for assets and wealth that belong to the public.

The FHA reaction to the I-80 toll plan tosses another consideration into the turnpike leasing plan. The Turnpike is an interstate highway, though it was a toll road before it became an interstate highway and thus is subject to a different set of rules when it comes to imposing tolls on interstate highways. Yet if the point of the leasing plan is to extract cash for purposes other than repair and maintenance of the turnpike, isn't there the same general concern that underlies the federal requirement not met by the current I-80 toll plan application? In other words, as a user fee, the tolls collected from users of the turnpike, or I-80, should be used to pay the costs that those users impose, namely, the damage and wear-and-tear to the highway that is being used. An argument can be made that a portion of the toll, or user fee, can be expended to improve air quality in the corridor through which the highway passes, because users inject pollution into that area as they use the highway.

Unfortunately, the issue isn't going to be resolved on the basis of economic analysis, the weighing of public costs and utility, the worth of user fees, or the disadvantages of selling government out to wealthy private interests. Instead, as has happened with so many federal and state legislative decisions during the past several decades, it will come down to politics. More specifically, it will come down to campaign contributions and the granting of favors. And we know, when that is how the game is played, the people with money and assets end up with more, everyone else ends up paying more, and the promised benefits do not materialize as promised. Someday Pennsylvanians and those using Pennsylvania highways are going to rub their eyes, blink, and ask, "How did this happen?" The response will be, "While you were sleeping."

Monday, December 17, 2007

Deadlines for Turning In Grades 

The faculty at Wayne State Law School has a very strict grade due-date policy, which came to my attention thanks to Paul Caron's TaxProf Blog. If a faculty member fails to turn grades in by the deadline, the Dean can impose sanctions on the faculty member. Those sanctions range from reducing or eliminating travel and research funds to casting negative evaluations on the faculty member's teaching competence for purposes of retention, promotion, tenure, and merit compensation.

Thinking that Wayne State had a deadline with which compliance might be difficult, I looked at its rules. Faculty have four weeks in which to do the grading, and in some instances more than four weeks because the deadline is measured, in some cases, from the end of the examination period, which could be one or several or more days after a particular exam is administered. Apparently failure to comply with the deadline is not a recent problem, because the Wayne State policy getting attention is a revision of one adopted twenty years ago.

I began grading on Friday. I began on Friday because the exam in one of my courses was administered on Thursday evening. Because the examination schedule is known before the semester begins, I can block off time on my calendar to do grading. Why start grading right away? First, the exam and what I expect student answers to express are fresh in my mind. Second, it doesn't get easier to grade an exam if one waits. Third, I am paid to teach, and teaching includes providing feedback, including the feedback that comes in the form of the course grade, of which the exam is a component. Fourth, the sooner I grade, the less likely an intervening event will cause me to be unable to grade or incapable of finishing the grading on time.

My views on grading are not widely shared, nor are they popular. So what's new? One reason I grade as soon as the exams are ready to be graded, though it is not the primary reason, is to demonstrate that it can be done. Why do I want to make that point? I think that students deserve feedback in a timely manner. I am not permitted to tell students what they have earned in the course until grades are officially released. By the time that happens, the students' recollection of the exam, and why they wrote what they wrote, is stale. For spring semester grades, so much time goes by that students rarely seek to discuss or learn from their exam experience. To the extent that a student considers a grade to be a factor in deciding whether to take another course in that subject matter area, the student learns of fall semester grades too late to add or drop courses for the spring semester.

Surely there are stories from Wayne State about faculty who did not turn in grades on time. Otherwise there would not have been a need for the policy and the approved penalties. It is unlikely that the situation arose on account of a faculty member's unforeseen illness or other intervening emergency. Administrations find ways to deal with those sorts of situations when they arise, though in many instances none of the alternatives are ideal. I've heard stories about adjunct faculty neglecting to turn in grades, and leaving examinations at the bottom of a pile of papers in their offices. Yet the Wayne State policy appears directed toward full-time faculty, because adjuncts are not eligible for tenure, and usually are not eligible for merit compensation programs. It is much easier to terminate the contract of a noncompliant adjunct than it is to dismiss a tenured member of the faculty.

Administrators usually do a pretty good job of reminding faculty that grades are due. I have seen reminders distributed two weeks and one week before the deadline. Of course, for me, they are irrelevant, because my grades have been turned in by that point, but it does make it difficult, if not incredulous, for someone to claim that he or she forgot that grades were due. Grading, to me, is no less an essential aspect of teaching than going to the classroom to teach that it bewilders me how someone could forget to do the grading.

What I don't know is if Wayne State has ever invoked its policy with respect to a full-time member of its faculty. I surely hope not. Law students deserve better than to have grades delayed even longer than they are under current deadlines.

Friday, December 14, 2007

Lawyers Are Just Like People: Some Good, Some Bad 

People don't like lawyers. So I'm told. People like their own lawyers but not the other person's lawyer. So I've also been told.

Yet most lawyers are decent people, hard working, well-intentioned, and caring. It only takes a few, though, to tarnish the profession's image.

Even though the same can be said of other professions, it's the lawyering profession that gets the spotlight when it comes to the pervasive effect on the many of the bad deeds of a few. Consider the impact on people's perception of lawyers of these recent news items:

1. Lawyer charged with running 25-year fraud: A Philadelphia lawyer sent runners out to find cracked sidewalks in front of businesses. They returned with a friend or relative in tow, who would claim to have fallen and suffered injuries. The injuries either were pre-existing, or were alleged soft tissue injuries. The fake lawsuits numbered at least in the hundreds. Fifteen people have been arrested.

2. U.S. v. Partridge: The Seventh Circuit issued an order to show cause why the attorney representing the taxpayer "should not be fined $10,000 for his frivolous arguments and noncompliance with the Rules, and why he should not be suspended from practice until he demonstrates an ability to litigate an appeal competently and responsibly." The Court described the attorney's behavior as "obstructionism" and noted that "[t]he problem is not simply his inability to distinguish between plausible and preposterous arguments. It is his disdain for the norms of legal practice (19 issues indeed!) and the rules of procedure." The statement of facts prepared by the attorney did not, according to the Court, contain any facts.

3. Court Supervision of Attorney Ordered due to Lack of Civility: A judge in New York orders court supervision of an attorney who referred to opposing counsel as "hon," "dear," and "girl" and who asked why she did not have a wedding ring on her finger. According to the judge, the lawyer's behavior reflected gender bias and "a lack of civility, good manners and common courtesy." The lawyer has appealed and claims things were taken out of context, suggesting that "hon" was intended to be "Hun [a]s in Attila." The deposition was being taken in a legal malpractice case. The lawyer also objected to the appointment of a supervising referee Because he was "not aware of any rule or law which requires civility between counsel."

4. Solo Convicted in Sex Scam: An attorney was convicted of assisting her husband, also an attorney, obtain compensation from four men with whom she had affairs. The husband threatened to sue the men unless they settled the alleged emotional distress cases. The husband had been convicted earlier this year. The wife's attorney claims that what she and her husband did "was ordinary conduct that lawyers do. The only thing not ordinary is it was about sex." The husband has appealed and the wife plans to do so.

5. Heading To Prison, Yagman Goes Down Fighting: Los Angeles lawyer Stephen Yagman was convicted of tax evasion and other criminal charges, and was sentenced to three years in prison. Yagman alleges he was singled out for prosecution because he filed police brutality and other lawsuits on behalf of clients against government officials.

6. Lawyer Convicted of Tax Evasion Blames High-Profile Partner: An attorney pled guilty to tax evasion, and then explained his behavior on the financial difficulties of his law partner. During a five-year period, the attorney earned $1,800,000 and did not pay more than $600,000 in taxes on that income. The partner with the alleged financial difficulties has been investigated by the IRS and was reprimanded by the state bar grievance panel for failure to provide a client with a written fee agreement and for providing insufficient information to the panel when it investigated the complaint.

I wish the media, the popular press, and others would report on the lawyers who do pro bono work, who solve problems for their clients, who participate in Habitat for Humanity projects, who tutor children in underprivileged schools, who contribute time and services to charitable organizations, and who take active and productive leadership roles in their communities. Every once in a while I see such a story. But for each story I see, I come across a half dozen or dozen that shine the news spotlight on an attorney who has not served the profession or society very well.

Wednesday, December 12, 2007

IRS Issues Medical Expense Deduction Ruling But It Has No Surprises 

The IRS has released Revenue Ruling 2007-72, in which it rules that the following three expenses qualify as medical expenses, and are deductible to the extent they are not reimbursed by insurance or otherwise, subject to the various limitations that apply to the medical expense deduction:

Item 1: the cost of undergoing an annual physical examination performed by a physician, with the cost including not only the physician's services but also laboratory tests.

Item 2: the cost of a full-body electronic scan, performed at a clinic by a technician, without prior consultation with a physician.

Item 3: the cost of a home pregnancy test kit.

Considering the definition of medical care, and the list of expenses that the IRS or courts have already treated as medical expenses, the surprise would have been a conclusion that one or more of these three items did not qualify. Section 213(a) allows a deduction, subject to limitations, for expenses for medical care and certain other items. Section 213(d)(1)(A) tells us that medical care "includes amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body." Regulations section 1.213-1(e)(1)(ii) tells us that medical care "includes X-rays and laboratory and other diagnostic services" and that "[a]mounts paid for obstetrical services are deemed to be for the purpose of affecting a structure or function of the body and therefore are paid for medical care." In PLR 200140017, the IRS ruled that amounts paid for the following tests qualified as medical expenses: ankle brachial index, abdominal aortic aneurysm, carotid ultrasound scan, thyroid ultrasound scan, body composition, blood and pulse pressure, oxygen saturation, lung capacity screening test, hearing screening, vision screening, urine analysis, osteoporosis screening test (for women only), complete blood count with differential (blood study), chemistry panel (blood study), h pylori screen (blood study), lipid panel (blood study), cholesterol screen (blood study), c-reactive protein (blood study), fibrinogen (blood study), homogysteine (blood study), thyroid stimulating hormone screen (blood study), T uptake, T4, T7 thyroid studies (blood studies), CEA test for pancreatic, liver, bladder, and colon cancer (blood study), CA-125 test (blood study), prostate cancer screen (PSA blood study), fasting glucose screen (blood study), hepatitis C screen (blood study), CT heart calcification scan, CT lung scan, nutrition panel and iron studies, diabetes hemoglobin Al c, lupus screen, lupus Level II (double stranded DNA), hemochromatosis, gout screen (uric acid), rheumatoid arthritis screen (rheumatoid factor), sickle cell disease, hormone blood studies package (estrogen (estradiol), follicle stimulating hormone (FSH), testosterone, luteinizing hormone, prolactin), and take-home screening kits that aid in the detection of conditions such as colon cancer, hepatitis C, and HIV.

The IRS explained that a "diagnosis may encompass a determination that disease is absent. The determination of a medical condition may include testing for changes in the functions of the body, such as those resulting from pregnancy, that are unrelated to disease." It also reasoned that [i]n determining whether an expense is for either medical or personal reasons, the recommendation of a physician is important," and cited several cases to support that proposition.

The question that interests me is not whether the IRS has reached the correct conclusion. There is no doubt that it has. The question that interests me is why it has taken the IRS so many years to issue a revenue ruling explaining that the cost of several very common and long existing medical procedures, the annual physical and routine lab tests, qualify medical expenses. It is a safe assumption to conclude that people have been treating these expenses as medical expenses for decades. The Revenue Ruling in effect says, "What you have been doing is correct." I cannot imagine what would have happened had the IRS reached a different conclusion.

Though full-body electronic scans and home pregnancy tests haven't been around nearly as long as annual physicals and routine lab tests, they have been with us for more than a few years. Again, why did it take so long for the IRS to deal with these fairly common procedures in a Revenue Ruling?

But perhaps there is a more interesting question: Why did the IRS even issue a Revenue Ruling? Would not a PLR suffice? Did not PLR 200140017 suggest what the outcome would be with respect to the second and third items? Was there a flood of requests for private rulings with respect to these matters? Did a taxpayer or a tax advisor wanting ironclad authority for a return position somehow persuade the IRS that a revenue ruling was essential? Or did someone on Capitol Hill cause the IRS to issue the revenue ruling because it was of utmost importance to a particular, influential constituent?

It's nice that the IRS has issued this ruling and has settled whatever microscopic shred of doubt that might have existed about the matter. It is true, as Joe Kristan points out, that most taxpayers end up not deducting medical expenses, either because they elect to claim the standard deduction or because of the various limitations on the medical expense deduction and itemized deductions generally, and so the ruling doesn't have a practical impact on very many taxpayers. It would be much, much more encouraging if the IRS would issue Revenue Rulings with respect to the many issues that involve large dollar amounts and significant numbers of taxpayers but for which there is no clear answer and reasonable arguments that can be made in support of the various proposed conclusions. With the IRS being as busy and underfunded as it is, and with so many issues needing guidance, it is a bit puzzling why a revenue ruling was issued with respect to three questions that affect very few taxpayers and for which the answers were relatively obvious to those familiar with federal income taxation, especially considering the number of years taxpayers have managed to file returns without the benefit of the revenue ruling. Perhaps this is the opening entry in a restoration of the days when the IRS issued as many as six or seven hundred revenue rulings each year.

Monday, December 10, 2007

A Closer Look at a Technical Self-Employment Tax Issue 

My posting late last month, Social Security Email: Nonsense Breeds Nonsense triggered several inquiries from a reader. He pointed out that when a self-employed individual computes self-employment taxes, which is what self-employed individuals pay in lieu of FICA, the individual's earnings from self-employment are multiplied by .9235, even though the individual also is permitted to deduct for income tax purposes one-half of the self-employment tax. He asked why do the "discount" and the deduction co-exist? He suggests that the deduction and the "discount" are redundant if the rationale is to put self-employed individuals on par with employees. He also asked why the discount applies to all earnings from self-employment even though only the Medicare portion (2.9%) applies to all earnings from self-employment.

The income tax deduction exists because employers deduct the employer portion of FICA. By permitting the self-employed individual to deduct one-half of the self-employment tax, the individual is being put into the same income tax position as he or she would be if he or she were two people, both an employer and an employee. For example, assume R hires E and pays a salary of $10,000. R would withhold $765 from E's salary for FICA, and R also would pay $765 in FICA taxes, for a total of $1,530. E's take home pay, ignoring other taxes and withholdings, is $9,235. Ignoring other compensation costs and other taxes, R would deduct $10,765. If, for simplicity sake, R is in a 30% income tax bracket, R's income tax liability is reduced by $229.50 on account of the $765 deduction. If E were self-employed and had net earnings of $10,000, then, ignoring the "discount," E would pay a self-employment tax of $1,530. Without a deduction for $765 of that tax, E would be in a less advantageous position than if E were an employee. Thus, the income tax deduction of $765 for self-employed E causes E to save income taxes of $229.50, assuming E is in a 30% income tax bracket.

That part was easy. The second part of the question is more difficult.

Let's return to E, who decides to quit employment and turn to self-employment. Because E must now pay $1,530 rather than $765 in social security taxes, lacking an employer who will kick in the other $765, E must generate earnings from self-employment of $10,765 in order to end up with $9,235 "take-home" compensation. If the 15.3% self-employment tax rate is applied to $10,765, the resulting tax is $1,647.05. This is more than the $1,530 paid by R and E collectively when E was employed by R. With the "discount," only 92.35% of E's net earnings from self-employment is taxed. Multiplying $10,765 by .9235 generates taxable net earnings of $9,941.48. Close enough, I suppose, for government work. The multiplier should be .9289, because $10,765 multiplied by .9289 is $9.999.60. Perhaps that is close enough.

It appears that the "discount" and the income tax deduction address two different equalization concerns, and do not generate duplicate results. For example, after applying the "discount," self-employed E then incurs self-employment taxes of $1,521.05 ($9,941.48 x .153), and only the deduction of $760.52 of that tax puts E into the same position as E would have been had E been employed by R.

The third part of the question also is challenging. Does it make sense to apply the discount to self-employment income exceeding the OASDI cap, considering that employers and employees do not pay social security taxes on wages exceeding the cap? The answer appears to be no. The solution would be a more complicated computation of self-employment taxes. If the Congress eliminates the OASDI cap, as some have proposed, this part of the question disappears.

This exercise demonstrates that sometimes I learn from my readers when they send me information, and sometimes I learn when they ask me questions that compel me to think. I wish every law student understood that one can learn other than through a diet of information deliveries, and that being compelled to think exercises the brain in ways no other pedagogical method can. It's fun being a student when a reader asks a question. Sorry, I'm not paying tuition for the privilege!

But I do want to return to that small discrepancy between a discount of .9235 and what I compute as an appropriate discount of .9289. Does such a small difference matter? Yes. According to the IRS Statistics of Income, Individual Income Tax Returns, 2005, roughly $22.7 billion was paid in self-employment taxes for 2005, the latest year for which information is available. Working backwards, this suggests that roughly $148,366,013,071 of taxable self-employment income was reported ($22,700,000,000/.153). Working backwards yet again, this suggests that before application of the .9235 "discount," individuals reported earnings from self-employment of $160,656,213,396 ($148,366,013,071/.9235). How much self-employment tax would be reported if the a discount of .9289 rather than .9235 were applied? First, take $160,656,213,396 and multiply by .9289, for a result of $149,233,556,624. Second, multiply $149,233,556,624 by 15.3%, for a result of $22,832,734,163. That is an annual increase of roughly $132,734,163 in self-employment taxes. It's not much as a percentage of the currently reported total, but it would be a welcome increase to the social security trust funds. It won't solve the social security funding problem, but sometimes every little bit helps. Of course, the income tax deduction for self-employment taxes would increase by roughly $61,367,081, so there would be a bit of a decrease in general fund revenues.

And for those who are curious, no, I do not expect the students in the basic federal income tax course to do these sorts of computations. Nor do we address the topic of self-employment and social security taxation at a level that reaches this deep into the questions. It does give me, however, yet another example to share with them of how complicated tax law truly is.

Friday, December 07, 2007

The Social Security Reform Game 

Jonathan Barry Forman, who is the Alfred P. Murrah Professor of Law at the University of Oklahoma College of Law, passed along a link to the American Academy of Actuaries Social Security reform game. It is common knowledge among those who pay attention to important current events that there is a funding shortfall in the social security program, and that unless changes are made, insolvency will occur sooner rather than later. The numbers are staggering. Jon passed along two tidbits: Over a 75-year period, federal budget, in Analytical Perspectives (page 189) estimates predict a $6.4 trillion shortfall, and in perpetuity, it's $153trillion. That's a lot of money.

I had not seen this American Academy of Actuaries Social Security reform game. Thank you, Jon, for bringing it to my attention.

The American Academy of Actuaries Social Security reform game challenges players to solve the program's financial problems. It permits players to try different alternatives, such as increasing taxes, cutting benefits, raising normal retirement age, eliminating some or all of the cap on taxable wages, and other choices.

I've tried it. It's fun. If you are the sort of person who enjoys playing Monopoly because you're not playing with your own real money, then the American Academy of Actuaries Social Security reform game is for you. It's better than being banker. Of course, in the long run, some of the dollars are our own real money, and what Congress decides to do will have much more of an impact on our lives than whether we win or lose at Monopoly.

Wednesday, December 05, 2007

Deconstructing Tax Myths 

Not too long ago, an email arrived in my inbox that made me chuckle and then made me think. I often refer to the need to teach core tax principles to Americans and not just to lawyers and accountants. There are two reasons. One is that an educated citizenry is less likely to be snookered by the deceptions Congress and state and local legislators insert into the tax law. For example, in How Small is Tax Small?, I stated:
I wonder how Congress would behave, and how it would be constituted, if every citizen understood tax law as well as those who truly understand it do. I wonder if it would resemble the outcome when the carnival con artist is exposed for what he is. Then I begin to wonder why basic tax isn't a required high school course. Maybe they don't want people to understand fully what the tax law comprises. Maybe they want people to be stuck thinking that the deceptive explanations fed to them are plausible.
The other is that an citizenry uneducated about taxes begins to buy into the "all taxes are bad" nonsense that ignores the need in civilized society for public funding of public benefits.

The first portion of the email caused me to chuckle, because it is a humorous way to describe the scope of federal, state, and local taxation. Nothing is left untouched. Such is tax, which intrudes into every corner of life. Here goes:
Subject: Taxes

Tax his land,
Tax his bed,
Tax the table
At which he's fed.

Tax his tractor,
Tax his mule,
Teach him taxes
Are the rule.

Tax his work,
Tax his pay,
He works for peanuts

Tax his cow,
Tax his goat,
Tax his pants,
Tax his coat.

Tax his ties,
Tax his shirt,
Tax his work,
Tax his dirt.

Tax his tobacco,
Tax his drink,
Tax him if he
Tries to think.

Tax his cigars,
Tax his beers,
If he cries, then
Tax his tears.

Tax his car,
Tax his gas,
Find other ways
To tax his ass.

Tax all he has
Then let him know
That you won't be done
Till he has no dough.

When he screams and hollers,
Then tax him some more,
Tax him till
He's good and sore.

Then tax his coffin,
Tax his grave,
Tax the sod in
Which he's laid.

Put these words
upon his tomb,
"Taxes drove me
to my doom...."

When he's gone,
Do not relax,
Its time to apply
The inheritance tax.
I must say it's amazing that someone whose poetry skills aren't much better than mine finds their creation zipping around cyberspace because it touches a nerve, as most humor does. The email then continues with a list of the different sorts of taxes that exist:
Accounts Receivable Tax
Building Permit Tax
CDL license Tax
Cigarette Tax
Corporate Income Tax
Dog License Tax
Excise Taxes
Federal Income Tax
Federal Unemployment Tax (FUTA)
Fishing License Tax
Food License Tax
Fuel Permit Tax
Gasoline Tax (42 cents per gallon)
Gross Receipts Tax
Hunting License Tax
Inheritance Tax
Inventory Tax
IRS Interest Charges
IRS Penalties (tax on top of tax)
Liquor Tax
Luxury Taxes
Marriage License Tax
Medicare Tax
Personal Property Tax
Property Tax
Real Estate Tax
Service Charge Tax
Social Security Tax
Road Usage Tax
Sales Tax
Recreational Vehicle Tax
School Tax
State Income Tax
State Unemployment Tax (SUTA)
Telephone Federal Excise Tax
Telephone Federal Universal Service Fee Tax
Telephone Federal, State and Local Surcharge Taxes
Telephone Minimum Usage Surcharge Tax
Telephone Recurring and Non-recurring Charges Tax
Telephone State and Local Tax
Telephone Usage Charge Tax
Utility Taxes
Vehicle License Registration Tax
Vehicle Sales Tax
Watercraft Registration Tax
Well Permit Tax
Workers Compensation Tax
I'm going to venture a safe guess and suggest that the list is incomplete. For example, where is the use and occupancy tax or the municipal emergency services tax?

The email then makes its political point:

Not one of these taxes existed 100 years ago, and our nation was the most prosperous in the world.

We had absolutely no national debt, had the largest middle class in the world, and Mom stayed home to raise the kids.

What in the world happened? Can you spell "politicians!"

And I still have to "press 1" for English!?!?!?!?
Whoa! Had the author omitted everything between "FUNNY?" and "What in the world..." the point of the message would be focused. Instead, we are treated to assertions that are either untrue or irrelevant other then to demonstrate the anger that cannot be contained or disguised by the humorous poetry or the list that encourages thinking about the scope of taxation.

Had the author looked at something like Taxation History of the United States, he or she would have learned that a federal income tax existed more than 100 years ago. So, too, did state inheritance taxes. Examining Fact Sheets: Taxes -- History of the U.S. Tax System would have informed the author that liquor taxes existed more than 200 years ago.

A little more research would turn up articles such as Slouching Towards Utopia?: The Economic History of the Twentieth Century: -VII. From the British to the American Century, which would disclose the salient fact that the United States was not the most prosperous nation in the world 100 years ago. The assertion that there was "absolutely no national debt" is nonsense, and anyone who wants to become educated on the subject can read something like The United States National Debt, 1787-1900, which discusses the national debt from its beginnings more than 200 years ago.

It's unclear whether the assertion about the size of the middle class refers to total numbers or percentages. Nor is it clear how middle class is defined for these purposes. But during the nineteenth century, there wasn't much of a middle class in this country or elsewhere.

Whether "Mom stayed home with the kids," which may or may not be a generally accurate statement about life 100 years ago, or whether someone must press 1 for English, which is true in at least some voicemail systems, doesn't seem to tell us much, if anything, about the scope of taxation or the history of taxation. These claims illustrate what happens when emotions trump intellect while a person is communicating.

The email began "At first I thought this was funny...then I realized the awful truth of it. Read to the end!" Yes, I thought the poem was funny. By the time I read to the end, I was no longer laughing. Not because of anger or disgust about mothers, children, voicemail systems, or the national debt, but because misinformation contains to fertilize accumulated American ignorance. I read somewhere that attempting to rebut nonsense gives it a life of its own, but the alternative, letting it percolate and multiply, is much worse, isn't it? Someone needs to step up and tell people that the assertions are wrong, sharing an explanation of the research and intellectual effort that separates accurate statements from the inaccurate ones. Otherwise we'll end up with a nation that thinks the earth is flat, that taxes did not exist until 100 years ago, and that they are the center of the universe.

Monday, December 03, 2007

Consult Your Tax Advisor 

Last week I received a letter from Ford Motor Company's Regional Sales Manager for the Philadelphia Region. It was addressed to me in my capacity as proprietor of JEMBook Publishing Co. The letter was captioned "IMPORTANT YEAR-END TAX TIP REMINDER." "Good," I thought to myself, "tax advice from Ford."

The letter states, "Buy a new eligible Ford truck or van and you may qualify for the accelerated federal tax depreciation allowance for vehicles over 6,000 lbs. in Gross Vehicle Weight Rating." After identifying Ford vehicles that are eligible vehicles, the letter continues, "Under the Tax Relief Reconciliation Act of 2003, qualified small-business owners may, in the first year of service, deduct up to $108,000 of the actual cost, including the amount financed, of new business trucks with a GVWR of 6,000 pounds or greater." The letter then explains that these tax opportunities when combined with low interest rates makes this a great time to purchase a Ford truck. The letter does, thankfully, suggest, "Talk to your tax advisor...."

In a footnote to both of the quoted sentences, the letter states, "Both the Jobs and Growth Tax Relief Reconciliation Act of 2003 and the pending Job Creation Act of 2004 are applicable to small business owners only. Under Internal Revenue Code Section 179(b), trucks (and cargo vans with no seats behind the driver's seat) having a Gross Vehicle Weight Rating (GVWR) of 6,000 to 14,000 lbs. qualify for a maximum of $10,000 in first-year depreciation (limited to $25,000 on GVWR 6,000 to 14,000 lbs. SUVs). There are some limits and phase-outs on the Section 179 deduction, so purchasers should always consult their tax advisors regarding their specific situation."

Whew. Yes, please consult a tax advisor, and hopefully one who has more understanding of federal income tax law than this letter demonstrates.

I get the impression that this is a recycled sales pitch. Why else would it describe as "pending" a tax bill that was enacted three years ago? Why would it use a dollar amount ($108,000) that applied in 2006? The section 179(b) dollar limitation in effect for 2007 is $125,000. The letter is not something that was lost in the mail for several years, because it specifically refers to "possible 2007 Tax Depreciation and Deductions" and urges a purchase "by December 31, 2007." Interestingly, even though the letter reflects the 2006 dollar limitation of $108,000, it continues to refer to the Job Creation Act of 2004 as "pending."

As I tell my tax students, tax law is dynamic. It changes so frequently that even tax professionals need to take great care to make certain that they are using the correct provisions and the appropriate amounts.

The letter's description of $108,000 as the "maximum ... in first-year depreciation" is incorrect. The 2007 dollar limitation of $125,000 (not $108,000) applies only to the section 179 component of depreciation. Any amount not deducted under section 179 is deducted under section 168, though over a period of several years. Thus, the total depreciation in the asset's first year of service is a combination of the section 179 deduction, as limited, plus the section 168 deduction for the first recovery year. Though most Ford trucks do not cost $125,000, there is at least one circumstance under which a portion of the purchase price of a truck costing less than $125,000 would end up being depreciated under section 168. For taxpayers who purchase more than $500,000 of section 179 property in 2007, the dollar limitation of $125,000 is reduced dollar-for-dollar for each dollar by which the total amount exceeds $500,000. Thus, a taxpayer who purchases $625,000 of section 179 property faces a dollar limitation of zero.

From a technical perspective, the letter cites section 179 and section 179(b) for the proposition that trucks with GVWRs of 6,000 to 14,000 pounds qualify for the full section 179 deduction barring application of "limits" (presumably the taxable income limitation) and "phase-outs" (presumably the reduction in the dollar limitation on account of purchases during 2007 of section 179 property exceeding $500,000). Yet it is section 280F(d)(5) that excludes those vehicles from the section 280F(a) limitation on the total depreciation (section 179 and section 168) that can be claimed with respect to passenger vehicles by defining those vehicles as not passenger vehicles. Not that many people read the fine print in the footnotes of a sales letter, but any opportunity to remind the citizens of this nation that the Congress has made the tax law a complex morass of convoluted rules should never be missed.

One more technical note is important, even though it falls within the category of "picky." It's not the Job Creation Act of 2004. It's the American Jobs Creation Act of 2004.

What is a prospective purchaser told when he or she arrives at a Ford dealership? Are they given the same information that is in the letter? Are they strongly urged to consult their tax advisor? What happens if the person makes the purchase, thinking he or she can deduct the cost of the truck, only to discover early in 2008, when filing a tax return, that they were misinformed? Ford might be protected from liability because of the fine print, but what price will it pay in public relations impact?

I have some sympathy for anyone trying to explain tax depreciation to a client or customer. Putting together the overview that I share with my students is no simple task. Yet I wonder if the folks who sent this letter ran it by the company's tax department. Did they "consult their tax advisor" as they suggest their prospective customers do? Surely the phrase "pending Job Creation Act of 2004" would have made someone's eyes widen and brain cells begin to whir. Maybe someone would have seen the $108,000 figure and surmised that a close review of the entire letter was in order.

Is it any wonder that so long as there are taxes of any sort, there will be a need for tax attorneys? Is it any wonder that LL.M. (Taxation) programs continue to be popular, and that more and more of them are instituted each year? Is it any wonder that the simple act of buying a truck for one's business is entangled in federal income tax law?

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