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.

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."

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.

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.

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.

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.

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.

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
Anyway!

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:

THINK THIS IS FUNNY?

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.

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?

Revisiting How Lawyers Communicate

My post Monday a week ago on the difficulties clients have understanding their lawyers, Clients to Lawyers: We Don't Understand You, brought a very interesting response from a reader who wishes to remain anonymous. Not surprisingly, lawyers are not the only highly educated professionals who struggle to communicate with those who do not share their vocabulary or thinking style. The response contains two anecdotes that would be amusing but for the seriousness of the matter. It also contains some interesting insights into legal education.

I was entertained by your post on the difficulties clients have understanding lawyers because it reminded me of an argument I had with my husband's physician about 12 years ago.

At the time, we lived in Kentucky. The doctor had explained to my husband that he had high cholesterol and sent him home with a one-page diet sheet and a cookbook recommendation. The diet sheet's copyright date was a decade in the past, and the cookbook by the American Heart Association was surprisingly unhelpful. I made a list of the issues I had with the diet sheet and cookbook, and my husband allowed me to come to his next doctor's appointment. The physician was not amused by my criticisms (and in fact he later wrote me a nasty letter about my attitude and put a copy in my file, which was sent along to my new physician when we moved to Pennsylvania).

One of my major complaints about the cookbook was that the introductory text about the medical conditions associated with heart attack were written in complex language most people could not understand easily. I did a couple of readability calculations and came up with a graduate-school reading level. I asked the doctor if he had thought of having video presentations or about getting other written materials that would be more useful.

He complained to me that he didn't see why he should bother, since many patients just threw the papers away in the parking lot. At the time, I was a substitute teacher in the local school district, and I asked him how many of those patients could actually read the materials he provided. I got a blank stare in return, then a rant about how people who had health problems ought to want to read the advice they were given.

He never saw that his style of communication was not appropriate for all his patients, and he didn't like being told some of his patients might be healthier if he found different ways to communicate with them.

My favorite story about the over-educated versus the under-educated comes from a friend who was a speech therapist at a school district in New York State. The principal (in his first year at the school) was complaining to the school secretary and the speech therapist about a couple who had not responded to a letter asking them to authorize summer school for their special-education child. The exchange went something like this:

"I don't think either of them can read," the school secretary told the principal.

"But we sent them a letter," the principal said. "They have to respond to the letter. Send them another copy."

"I don't think they can read," the secretary repeated. "They don't have a phone, either, so you'll need to go out there to talk to them."

"Usually someone from the staff goes out and talks to the parents," the speech therapist said.

"Send them another copy of the letter," the principal said. "They're supposed to read to the letter."

-----

When I worked at Cornell, there were a lot of editors on campus handling various publications. If your college has some, maybe one would be willing to edit or critique papers so your students receive some practical, direct feedback. I would offer my services, but currently the newspaper where I work is down an editor, so none of us have much extra time.

I find your writing fairly clear, so bringing in an editor might not be required. I think some students will respect the comments more if a law professor makes them; others may respond better if an editor -- a specialist in language, not law -- puts them through their paces. Then there are the students who won't listen unless you show them the video or put it on YouTube. Such are the unpredictable ways of education.

As always, I am enjoying all your posts.

If law students are not going to respect the comments of a professionally trained editor because the person is not a law professor, they are in for a challenging career. Lawyers encounter many people who are not lawyers or law professors, and to treat them as inferior because they lack a legal education is short-sighted. Failure to respect the person for whom services are being provided and who is paying for those services disrespects not only the client but the profession and the lawyers in the profession who do treat clients and others with due respect. One of the many reasons I value law school clinics, and advocate that every law student should enroll in one provided the resources are available to make that possible, is that it gives the law student an opportunity to interact professionally with people who are not lawyers and who are unlikely to understand someone who jabbers in legalese. It can be, as one of my colleagues who teaches a clinic has said, "a humbling experience."

Revisiting IRS Compliance Audits

Several weeks ago, in Congress and Tax Audits: Criticizing Others for Its Own Mess, I explored the ramifications of the news that the IRS had commenced its latest compliance audit program. Elaborating on comments by others that taxpayers selected for such audits faced "the nightmare of all audits" and an experience in which no one wants to take part, I pointed out some characteristics of these audits that make them different from the typical IRS audit.

Not long after, I received an email suggesting I look more closely at the IRS current system of compliance audits, called the National Research Program (NRP). I was told it was "not anything like the old system." Specifically, the practice of requiring a taxpayer to prove every entry on a return is, I am told, "absolutely untrue." The NRP, I am told, produced a "much more palatable system for taxpayers" and that many would not even be aware their returns had been selected for a tax compliance audit. It was suggested that I take a look at the NRP.

And so I looked more closely at the NRP. According to the IRS Announcement describing the NRP,

To gain an estimate of taxpayer compliance, the IRS launched the NRP, a three-year study of tax year 2001 returns of individuals. The study involved the review and examination of about 46,000 randomly selected returns. These audits were completed by the fall of 2005. To gather statistically valid data, the return selection process for the NRP included an over-sampling of high income returns. This enabled IRS researchers to draw valid conclusions about important sub-categories of taxpayers.
* * * * *
The updated NRP estimates also include estimates of the Net Misreporting Percentage (NMP) for each major line item on individual income tax returns. The NMP is the net amount that was misreported on a given line item expressed as a percentage of the total amount that should have been reported on that line item...

Unfortunately, the announcement doesn't tell us much about the specifics of the NRP.

So I turned back to the IRS Announcement issued earlier this year that informed taxpayers that a new round of compliance audits would be commencing in late 2007. According to the IRS,

Internal Revenue Service officials today announced plans to launch a new National Research Program (NRP) reporting compliance study for individual taxpayers that will provide updated and more accurate audit selection tools and support efforts to reduce the nation’s tax gap.

The latest NRP study will be the first of an ongoing series of annual individual studies using an innovative multi-year rolling methodology. The study will start in October 2007 and examine about 13,000 randomly selected tax year 2006 individual returns. Similar sample sizes will be used in subsequent tax years.

An advantage of using this method, which combines results over rolling three-year periods, is the IRS will be able to make annual updates to compliance estimates and develop more efficient workload plans on an annual basis, after the initial three annual studies. Previous studies started from scratch, drew tax returns from a single tax year and involved examinations of more than 45,000 taxpayers.

“The new program will be a big step forward for tax research,” said Acting IRS Commissioner Kevin M. Brown. “Our approach will reduce burden on taxpayers, improve our audit selection techniques and give us more timely information to help reduce the tax gap.”

* * * * *

The initial group of taxpayers whose returns are selected for audit under the new NRP study will start receiving official letters in October informing them that they are part of the research study. The majority of individuals will have specific lines of their returns confirmed through in-person audits with an IRS examiner. Some of the individuals whose returns are selected for inclusion will not be contacted if the IRS can obtain matching and third-party data that confirms the accuracy of their return. The targeted research design of the new individual NRP avoids the need for IRS agents to routinely check all the lines of a taxpayer’s return.

So it does appear that the practice of requiring taxpayers to confirm every entry on the tax return has been modified, and that only some of the selected taxpayers will face that challenge. I'm not ready to agree that no taxpayer will be required to prove every item on a return, because nothing in the IRS Announcement indicates that proving every entry no longer will be a routine practice. To me, this explanation means that there will be times IRS will require taxpayers to do so. I can imagine two types of situations. One is the return with several dozen entries, all of which need to be checked under the "targeted research design" of the NRP. Another is a situation in which many, most, or all of the entries turn out to be wrong, and the auditor continues until it can be determined if the tax return is totally in error. On this point, my assertion that the selected taxpayers are required to prove every item on the return must be modified to an assertion that the IRS requires most of the taxpayers to prove many of the items on the return.

As best I can tell, the compliance audits designed using NRP results are modifications of the old system. It isn't totally unlike that system, because it has the same goal, namely, ascertaining compliance rates on each type of item, produces a noncompliance percentage for each major line item, and gives the IRS information from which it can determine which returns to select for regular audits. The differences are a matter of scale. For example, fewer taxpayers are selected, and some are not required to show up in person for the audit. As to the latter point, my assertion that the process takes time needs to be modified to an assertion that for many of the taxpayers the process takes time whereas for some of the selected taxpayers their time is not impinged.

Is the new arrangement more palatable for taxpayers? For taxpayers who don't even know their returns have been selected and audited, sure. But for the others, it's still no walk in the park. As I pointed out in Congress and Tax Audits: Criticizing Others for Its Own Mess, tax lawyer Ian Comisky was quoted in a Philadelphia Inquirer story, when referring to the 13,000 taxpayers selected for the process, as saying "You don't want to be one of those 13,000." There's a reason for that observation, one based on experience and on listening to the reactions of clients to the compliance audit.

The principal point of Congress and Tax Audits: Criticizing Others for Its Own Mess remains unchanged. The IRS would have far less need for compliance audits, would find fewer taxpayer errors, would be far less concerned about taxpayers gaming the system, and would be cast as the villain far less often if the Congress would demonstrate some civic responsibility and fix the tax law so that compliance was easier and more likely to occur. Anyone who does not think that the tax law has grown into an out-of-control mess needs only to sit in a basic tax course, or better, to try to teach basic tax in 42 50-minute sessions, to discover that the simplest of concepts has become a morass of exceptions, exceptions to exceptions, definitional components, special rules, coordination clauses, effective date complexities, and other details that display not only ineffective micromanagement of citizen lives but also the influence of the rich and powerful who use their assets other than for the betterment of the nation and its people. That the IRS has found a way to temper the aggravation of the compliance audit is noble, but doesn't make the underlying problem any less of a threat to the nation.

I thank the person who clued me into the fact that not every line on every selected return is scrutinized during a compliance audit and the fact that not every taxpayer must appear at an IRS office. Perhaps that news brings comfort to a few of the 13,000 taxpayers receiving those IRS letters during the past few weeks. Anyone who does end up sitting in an IRS audit for a compliance audit is invited to share their experience.

Social Security Email: Nonsense Breeds Nonsense

Someone sent me an email last week, on the topic "Social Security." I'm not going to republish the entire message, particularly because I would be contributing to the dissemination of yet more nonsense. I do, however, want to focus on several of the claims made in this email because they simply are unfounded.

For example, the email claims that "Franklin Roosevelt, a Democrat, introduced the Social Security (FICA) Program. He promised: * * * * 3.) That the money the participants elected to put Into the Program would be deductible from Their income for tax purposes each year,"

Nonsense. There is nothing in the proposal for the social security plan that suggested allowing a deduction. In fact, the legislation enacting social security stated "For the purposes of the income tax imposed by Title I of the Revenue Act of 1934 or by any Act of Congress in substitution therefor, the tax imposed by section 801 shall not be allowed as a deduction to the taxpayer in computing his net income for the year in which such tax is deducted from his wages." Nor could it be deducted in another year because it isn't paid in any other year.

There does exist a deduction for one-half of social security taxes paid by self-employed individuals. This deduction is designed to provide a deduction for the "employer portion" of the payment equivalent to the deduction allowable to employers who pay the employer portion with respect to their employees.

As another example, the email claims that Roosevelt also promised: "5.) That the annuity payments to the retirees Would never be taxed as income." Again, there is no evidence that Roosevelt made that suggestion. Social security payments were not included in gross income as a matter of administrative practice. Subsequently, legislation was enacted to include a portion of social security benefits in gross income. Even if Roosevelt had made such a suggestion and persuaded the Congress to adopt it, no Congress can prevent a subsequent Congress from taking action to the contrary. A promise made by a Congress is at best valuable until the expiration of that Congress, and sometimes it doesn't even last that long.

The email then presents some questions and answers. Here's one: "Q: Which Political Party eliminated the income tax Deduction for Social Security (FICA) withholding? A: The Democratic Party." As noted above, there never was such a deduction, so it could not have been eliminated. The deduction for one-half of self-employment taxes continues to exist, so no one can be blamed for eliminating it.

Another question and answer wins the prize for misinformation: "Q: Which Political Party started taxing Social Security annuities? A: The Democratic Party, with Al Gore casting the "tie-breaking" deciding vote as President of the Senate, while he was Vice President of the US." Whoa! The provision that requires a portion of social security to be included in gross income is section 86 of the Internal Revenue Code. Section 86 was enacted by section 121(a) of Public Law 98-21, known as the Social Security Amendments of 1983. Public Law 98-21 passed the house by a vote of 243-102, with Republicans voting 80-48 in favor and Democrats voting 163-54 in favor. It passed the Senate 58-14, with Republicans voting 32-8 in favor and Democrats voting 26-6 in favor. In 1983, Al Gore was not Vice-President and thus not President of the Senate. Public Law 98-21 was signed into law by Ronald Reagan, who by that time no longer was a Democrat.

For all of my law school teaching career, I have emphasized to my students that what they think is the "fun" part of lawyering, namely analysis and theoretical policy discussion, cannot begin until the facts are known. Good lawyers know what facts need to be ascertained, and good lawyers know how to find facts, how to interview clients, how to do empirical research, how to find information. There's more to research than finding the law. In many respects, it is easier to find the law than it is to determine the facts.

Many people, including lawyers, are woefully remiss when it comes to checking facts. Baseless rumors are started by the evil, the manipulative, the power-obsessed, the revenge seekers, and the deranged, and they acquire lives of their own. Politicians and their operatives pepper the airwaves and the internet with what must be called by its true name, propaganda. People too lazy, too uneducated, too busy, too disinterested to check the authenticity of what's being said don't simply ignore it, but believe it, and then replicate it, contributing to the spread of nonsense throughout the world.

There's much wrong with the social security system. The things that are wrong should be noted and criticized. Proposals for improvement should be made. There's no need for an overkill that rests on deliberately crafted erroneous information. In this instance, it seems to me that those who are cooking up worst case scenarios lack the self-confidence to rest their arguments on reality. Rather than being content to argue truthfully and prevail by a narrow margin, they seek to win by a crushing margin, one that can be attained only through lies and propaganda. They might think they are serving the nation well, and contributing to the well-being of the world, but they are accomplishing nothing more than the fertilization of the sick minds in which this sort of nonsense is reproduced and spread throughout society. Shame on them, and shame on the inability of the nation to teach its citizens the critical importance of ascertaining facts, confirming facts, and arguing from facts rather than from lies.

Hi, I'm NOT from the Government But I'm Here to Audit Your Tax Return

The story of a recent federal income tax case begins as one expects a federal income tax case to begin. A taxpayer files a return, the IRS audits the return, the IRS asserts that the taxpayer owes more income tax than is shown on the return, the taxpayer either pays and sues for a refund or contests the IRS assertion by filing a petition in the Tax Court. In the Tax Court, the taxpayer presents evidence and makes arguments against the IRS position, though sometimes taxpayers don't bring forth useful evidence. Taxpayers who don't introduce the right evidence might not have evidence to support their position, or might not quite understand what must be done, procedurally and strategically, to persuade the Court of their position.

There are instances, though, when an income tax case begins differently. Taxpayers fail to file the required returns, the IRS identifies the taxpayers, attempts to contact the taxpayers and persuade the taxpayer to file returns, and when the taxpayer fails to respond or fails to file, the IRS files returns on the taxpayer's behalf. Sometimes the taxpayer continues to ignore the IRS and the matter proceeds to collection. In other instances, the taxpayer finally responds, and contests the IRS tax computation, usually because the IRS does not allow the taxpayer deductions other than the standard deduction and one personal exemption deduction.

A case decided by the Tax Court last Tuesday, Creed J. Pearson v. Commissioner, T.C. Memo. 2007-341, began when the IRS identified the taxpayer as having failed to file returns for a five-year period. The IRS contacted the taxpayer, the taxpayer was unresponsive, and the IRS then filed returns on the taxpayer's behalf. The taxpayer disagreed with the computed tax liability, and filed a petition in the Tax Court. The taxpayer argued that the IRS, in filing returns on his behalf, did not take into account deductions to which the taxpayer claimed he was entitled for business expenses, qualified residence interest, property taxes, and charitable contributions. However, the taxpayer did not provide dollar amounts for these deductions nor did the taxpayer explain how much of each item shown on a list of payments made by the taxpayer were connected with a particular deduction. The IRS, in turn, conceded that the taxpayer was allowed to deduct certain expenses, and adjusted the tax liability accordingly. For example, based on information returns from third parties, the IRS determined that the taxpayer was entitled to deductions for qualified residence interest. The Tax Court held that the taxpayer had not done anything to persuade it that he was entitled to deductions other than those allowed by the IRS. The taxpayer has not filed tax returns for any year following the five years at issue in the Tax Court.

At this point, a case that could be described as routine and uninteresting became unusual and thought provoking. The taxpayer, according to the Tax Court, "strongly opposes the beliefs and actions of a particular organization (the Organization), and he asks that we allow him to audit the Organization and pay the taxes he owes out of the proceeds of that audit, even though petitioner’s tax liability is not related to the Organization." The taxpayer explained that the reason he had not filed tax returns, and planned to continue not filing, was the failure of the IRS to "take** some action against the Organization."

The Tax Court pointed out that "There is no provision in the Code that gives us the authority to allow one taxpayer to audit another taxpayer in order to reduce his tax deficiency." The Tax Court denied the taxpayer's request.

I have a mixed reaction to this outcome. It's not that I think the Tax Court was wrong. It reached the only permissible outcome. It's that the idea of taxpayers auditing each other might bring a new and helpful dimension to tax law enforcement. However, I do share Joe Kristan's concern, nicely explained in Tax Court Averts Anarchy, that if taxpayers began auditing each other, the social fabric would be unlikely to survive. Yet Joe, too, had a "fleeting moment" of thinking that perhaps there was something here that could be woven into a productive idea. My moment hasn't been so fleeting. There is something about Pearson's request that makes me wonder if there isn't something that Congress could adopt that would increase tax compliance.

In analyzing the notion of taxpayer audits, I start with the proposition that there is in place a system that permits taxpayers to give information to the IRS that leads to increased tax collection. The IRS has discretion to pay taxpayers for these leads, if they turn out to be fruitful. So it's not as though the social fabric presently lacks some sort of peer pressure legitimization. True, the actual audit is undertaken by the IRS. Consider, though, that in some instances a taxpayer is in a better position to conduct an audit than is the IRS, because the taxpayer, for example, knows more about the other taxpayer's activities, or has a better understanding of the industry. Could the IRS be given authority to "deputize" citizens to perform audits when the opportunity presents itself and promises to generate tax revenue that is unpaid because of evasion?

In some respects, the social fabric about which Joe is concerned rests, and should rest, on a collective sense of right and wrong and not on the imposition of order by some nameless, faceless, and disconnected government or governmental bureaucracy. The current system creates a good deal of "us versus them" in the shape of "taxpayers versus the IRS." Yet IRS employees are taxpayers, the IRS is merely an extension of all citizens, including taxpayers, and so "taxpayers versus the IRS" becomes the classic "we have met the enemy and it is us." Even if taxpayers are not auditing their neighbors and employers, and even if taxpayers aren't informing the IRS about other taxpayers, ought there not be some sort of "pay your taxes" message when people discuss taxation? Is not the social fabric strengthened when citizens work together for the common good, rather than engaging in the "I am special and use my own rules" mantra of the "me generation" and its successors?

Compare tax law enforcement to other law enforcement. Citizens are urged to prevent others from driving vehicles while intoxicated. Not only are citizens requested to call the police if they see a drunk driver or know an inebriated person has put themselves behind the wheel, they are encouraged to take away car keys. The latter approach poses the risk of being "brutally murdered" in somewhat the same way that Joe Kristan suggests auditing our in-laws might bring about.

Perhaps something akin to how traffic cameras can best be used would make some sense. As more and more traffic cameras are installed, traffic authorities have the time and resources to view a shrinking percentage of what I'll call "film." It is more efficient to have that film available when a citizen calls with a report of drunk driving, illegal turns on red, ignoring stop signs, going through red lights, and other violations. The responsible driver is "auditing" other drivers, and can pass information on to authorities who then can use the "film" to determine if the report is correct, and if it is, to corroborate the evidence offered when proceedings are initiated. In other words, auditing is separated from enforcement. Anecdotally, it seems that the notion of drivers "auditing" drivers is already here, and so it isn't all that bizarre to wonder if taxpayers auditing taxpayers could be an effective and efficient tool to increase tax compliance and dampen tax fraud.

We live in a world that ridicules the tattle-tale, kills the snitch, and disrespects the peace maker. Children are being murdered every week in Philadelphia by out-of-control gun slingers, and people are so scared they don't step forward with information. Whistle blowers routinely are fired, to the extent that an overwhelming segment of the work force chooses to turn a blind eye to corruption and fraud. The nation has lost the sense of common purpose, communal effort, and sacrifice for the good of the whole that once permeated the social fabric and made this country a role model for the international community. If our tax law and our tax system ever was a role model for the world, it surely isn't one now. At least it ought not to be one. It's not something of which we can be proud. It is OUR tax system, not THEIR tax system. It ought to be a tax system of the people, by the people, and for the people. We are, whether or not we like it, our neighbor's keeper.

Actio Gratiarum

Tomorrow is Thanksgiving. I don't plan to post tomorrow, and I have a feeling many regular readers won't be checking in. So though it's a day early, here's my annual Thanksgiving litany. Consider incorporated by reference those from 2006, 2005, and 2004.

For the past three years I've shared my gratitude for the people whose encouragement and guidance shaped my professional career, for the people who contribute to my tax knowledge and understanding, for the existence of technology that makes it possible for me to share my tax thoughts with the world, and for other gifts that enhance what I do as a tax law professor and tax writer.

This year, I want to express my appreciation for life beyond tax. Though tax intrudes on almost everything, there is much to life that isn't just tax.

So thinking back through the past year, there are abundant reasons to be thankful:

• I am thankful for my family, steadfast and tolerant, amused and amusing, loved and loving.
  
  
• I am thankful for the arrival of a daughter-in-law who is a delightful, charming, diligent, bright, and fine companion for my son Charles Edward Maule.
  
  
• I am thankful that despite the rain, it was a great day in Lake Forest when Karen joined the family.
  
  
• I am thankful for my friends, who tolerate both my requested advice and my freely-given opinions, who listen, and who teach.
  
  
• I am thankful that I had the opportunity to travel throughout western Europe for two months, visiting grand cathedrals and village churches, exploring museums and stores, touring medieval cities and modern metropolises, traveling on roads and canals, climbing mountains and ambling along beaches, eating find food and learning so much.
  
  
• I am thankful that I met some of my cousins who live in and near Caserta, Italy, and that I could visit again my friends in Maule, France and my friends and cousins in England.
  
  
• I am thankful for www.ancestry.com and www.familysearch.org and for all the people who have published on the Internet information that is helpful to me in my genealogical endeavors.
  
  
• I am thankful for Toyota having designed and manufactured a hybrid vehicle that a friend has named the Stealthmobile, for now I consume even less gasoline.
  
  
• I am thankful for the time and effort contributed by the people who made it possible for me to sing at the Kimmel Center in Philadelphia, along with more than 450 other voices, in the largest choir ever to assemble in that outstanding facility.
  
  
• I am thankful for the people whose patience, encouragement, and teaching helped me reach the point where I could be one of those voices without making a fool of myself.
  
  
• Habeo gratias quandoquidem est quaedam sapiens, dimidium alium cerebri, dea indicii, inflatus pro exercitationis praecipui, socia percuriosa, origo aeternam subridendam et bonae risioni, conscia fanatica.

Happy Thanksgiving to all, no matter where you may be or with whom you may be. May the next year bring more reasons for thankfulness and may it be filled with joy.

Clients to Lawyers: We Don't Understand You

A member of the ABA-TAX listserve passed along a chart that reflects the outcome of a 2006 survey of lawyers' affluent clients taken by a Prince and Associates, Inc., a group that advises professional organizations and other businesses on "strategic, profitability, and structural business issues."

The survey was a repeat of one done three years earlier, in 2003. In every instance, attorneys did worse. The percentage of respondents agreeing that "My attorney talked down to me" rose from 31.6% to 46.2%. The percentage concluding that their "Attorney didn't speak English" rose from 70.1% to 81.7%. The clients who were surveyed are described as affluent, and it would not be a wild guess to conclude that most of them are educated or highly educated, successful in their fields, and savvy about many things in life. Yet they struggle to understand what their attorneys are saying.

Although law schools do relatively good jobs teaching their students some things, it is no surprise to discover that they are not teaching their students to communicate effectively with clients. Aside from clinical programs, where the effectiveness of communication with clients ranges from barely acceptable to outstanding, law schools generally do not give their students much, if any, instruction in how to "translate" legal-ese into language that the client can understand.

It is not all that difficult to focus student attention on decongesting legal language. I try, by making it clear to the students at the beginning of the semester that one of the goals of the course is to learn how to take statutory or regulatory language, or the messages in a judicial opinion, and to express the meaning in a way that can be understood by the typical client. It is not unusual to hear me or a student begin a statement or question with the phrase, "so in other words," as we try to speak in language one is more likely to hear outside of the legal world. Yes, there are limitations, particularly when a technical word or phrase cannot be replaced with some less complicated expression. Frequently, I ask students what they would say to a client, and I expect the response to be presented in language that would be effective under the circumstances.

There are several factors that contribute to this communication gap between lawyers and clients. It ought not be difficult to make adjustments that diminish the effect of these factors.

For one thing, many students arrive in law school thinking that being a lawyer means speaking and writing in long, complex sentences using fancy words that make for good sound bites. Years ago, in assisting a student learn to read judicial opinions, I noticed that the student was highlighting in yellow the sentences in the opinion that "sounded elegant," rather than those that addressed the core issues. Students think that if they pepper their writing with "heretofore," "whomsoever," "party of the first part," and similar words and phrases, they will be considered excellent legal writers. Some effort is made to break students of this habit, but it isn't done often enough, or strongly enough.

For another thing, the people who evaluate law student writing are lawyers or other law students. Student writing is evaluated by law professors, almost all of whom at one point in their professional lives were members of a bar and many of whom dealt with clients. Student writing also is evaluated by practitioners who volunteer to judge moot court arguments and the related briefs, or, in some instances, writing competitions. Student writing is evaluated by other students charged with selected members of law journals, and by students serving in editorial positions on those journals or in reviewer positions in organizations administering moot court and other competitions. When students write client letters or memos, rarely, aside from clinics, are those documents given to a non-lawyer who is asked, "Does this make sense to you?"

Yet another challenge is the experience that students bring to law school. Many law students have spent their lives communicating with people who share, to a greater or lesser extent, their culture, language, intelligence, and experiences. Unless a law student has devoted several or more years to being a teacher, a social worker, or someone who interacts with people not accustomed to using long words, speaking in complex sentences, or juggling three or more thoughts simultaneously, the law student very likely does not understand why it is necessary to adjust one's word choice, sentence structure, and message organization to fit the comprehension and vocabulary levels of a client.

Yet another problem is the tendency of law students to think that lawyers simply regurgitate black letter law when communicating with someone else, whether client, partner, or judge. Many law school courses and examinations reinforce this counterproductive perspective. The goal of a law student is to become a teacher. As I point out in Learning to Teach and Teaching to Learn:

The lawyer who as an associate writes a memo to a partner on a particular point of law is TEACHING the partner.

The lawyer who argues a case in front of a judge or panel of judges TEACHING the judges.

The lawyer who counsels or advises client with respect to particular course of action is TEACHING the client.

The lawyer who negotiates a deal with counsel for the other party is TEACHING the other lawyer.

The lawyer who represents a client at a hearing or administrative proceeding is TEACHING the administrative law judge or other hearing officer.

When a lawyer becomes managing partner, the lawyer will be TEACHING the law firm's staff.

When a lawyer becomes a judge, the judge will be TEACHING the jury, the litigants, the attorneys representing them, and society in the opinion she writes.
When a lawyer becomes in-house counsel, the lawyer will be TEACHING the officers and directors of the corporation.

With memoranda, oral arguments, briefs, petitions and other tools of the profession, lawyers seek to explain, to convince, to demonstrate and to unravel things. Those are some of the things that teachers do. It isn't difficult to see that a good lawyer must be a good teacher.

Good teachers know how to communicate not only knowledge but also comprehension, and good teachers know how to adjust their delivery and approach to match the education and experience of their students. Whether law schools are doing enough to teach their students to be teachers is a volatile question, particularly when one considers the extent to which law school faculty are, or are not, educated to be educators.

By the time lawyers realize that their inability to communicate well with clients can cost them money, either on account of losing clients or because additional time must be invested to explain things again but in a less confusing way, it is too late for them to redo their law school education experience. Instead, they must seek continuing education of some sort, whether in a program direct towards lawyers or in communication courses at a local college or university. Few lawyers do this, in part because they don't have the time, in part because they don't see the connection between such courses and the success of their practice, in part because few such courses are offered in CLE programs, and in part because CLE credits aren't approved for taking such courses in a college or university setting. Yet this is no reason not to adjust law school curriculum so that attention is given to how law students learn to communicate with clients and not merely other professionals with law degrees.

I close with a footnote. Last week, in You Are A Genius!, TaxProf blog reported that according to the Blog Readibility Test, "the level of education necessary to understand" MauledAgain was "High School." I ran the test later that day, and it reported that the requisite level was "College (Undergrad)." In his comment to the TaxProf blog post, Martin B. Tittle explained that he, too, had run MauledAgain through the Blog Readibility Test and "to "College (Undergrad)" after today's TaxProf Blog post." Of course, I wonder if that's an upgrade, if the goal is to write in a manner that maximizes the number of people who can read and understand what I'm saying.

Tittle also ran MauledAgain through a variety of readability tests accessed through Readability.Info, a URL he acquired from Dan Solove's Concurring Opinions blog, which was the source of Paul Caron's TaxProf blog post. Here are the results obtained by Tittle:

Kincaid: 9.9
ARI: 11.1
Coleman-Liau: 11.6
Flesch Index: 62.0
Fog Index: 12.8
Lix: 44.7 = school year 8
SMOG-Grading: 11.3

I ran the same test a week later. The results?

readability grades:
Kincaid: 9.6
ARI: 10.7
Coleman-Liau: 11.3
Flesch Index: 63.6
Fog Index: 12.6
Lix: 43.5 = school year 7
SMOG-Grading: 11.1
sentence info:
37605 characters
8177 words, average length 4.60 characters = 1.44 syllables
392 sentences, average length 20.9 words
51% (201) short sentences (at most 16 words)
18% (74) long sentences (at least 31 words)
5 paragraphs, average length 78.4 sentences
11% (44) questions
45% (178) passive sentences
longest sent 146 wds at sent 384; shortest sent 1 wds at sent 33
word usage:
verb types:
to be (261) auxiliary (141)
types as % of total: conjunctions 5(419) pronouns 7(590) prepositions 11(906) nominalizations 2(167)
sentence beginnings:
pronoun (77) interrogative pronoun (18) article (57)
subordinating conjunction (19) conjunction (12) preposition (36)

According to the info page on the site, the Flesch Index uses a 1-100 scale, with "standard English documents" averaging 60-70. SMOG-Grading and Fog Index scores are school grades.

Isn't there something bizarre about the results, though? Does MauledAgain have, on average, 78-sentence paragraphs? Nonsense. Something's wrong with the measurement algorithm.

Yes, I'm proud of these results. Why? It is a challenge for me to keep my sentences short, my paragraphs brief, and my word count manageable. It is a challenge to keep all the thoughts in my brain from tumbling out in one huge and complex bundle of verbosity. My experience writing Tax Management Portfolios, which I often describe as "translating tax-ese into English that professionals can understand," has made me a better writer and has sharpened my ability to communicate.

Now, if someone wants to have fun, they can test the articles and other documents I have written in Latin, French, and Italian. There, we might have something of a communication challenge.

A Few Tax Courses Do Not a Tax Program Make

On Monday I received a letter from the folks at U.S. News and World Reports, asking me why I had not returned the rankings survey they had sent several weeks ago. The answer to that question is simple. I had not received a survey during the past year. I did receive one last year, and the year before that, and I'm beginning to think about changing my response strategy.

The survey is intended to provide information on U.S. News rankings for law school tax programs. One of the categories for which the magazine ranks law schools is "Law Specialties: Tax Law". The survey refers to tax programs.

Here's one of my peeves with the survey, aside from the general futility of trying to rank tax law programs the way people try to rank major league pitchers, college football teams, or "beautiful people" for other magazines. The survey includes every law school in the country. It does not limit the choices to law schools with tax programs. Why does that matter? It matters because many law schools do not have tax programs. They simply offer one, two, or perhaps three or four, tax courses to their J.D. students. In a few instances the courses are taught by adjunct faculty rather than members of the full-time faculty. Yet because the school's name is famous, the school ends up getting votes for a program that does not exist. The appearance of a few tax courses in a J.D. curriculum does not make a tax program.

What I have been doing is eliminating from contention any law school without an LL.M. (Taxation) Program. Then I select 6, rather than the requested 15, schools. Why 6? Because there are 6 that I consider to be top-notch, though admittedly with some differences among them. The U.S. News survey does not ask me to rank my choices. That, too, is a deficiency in its survey process, and contributes to my decision to limit my selections.

I wrote a note to U.S. News when I returned the survey. I wrote it on the letter that I received. I pointed out that I had not received a previous request and thus ought not to be presumed a laggard in responding. I also pointed out, in fewer words, what I'm sharing in this post. Fewer words? Yes. As thorough an explanation? No.

But now I'm beginning to think that I will no longer fill out the survey. I will return it, so that the folks at U.S. News understand that I'm not being an ignorant, unresponsive fool. I will probably send along a copy of this post. If I am asked to do a survey for the general law school rankings, which has happened once in my teaching career, I'm thinking I will do the same thing, though I'd send along copies of other posts that deal more directly with law school rankings generally.

It reminds me of an old joke that includes this line, "So, who do you think is going to win the World Series this year, the Yankees, the Dodgers, or the Celtics?" Something like that. I can't remember the punch line. But I think U.S. News has come up with an even better joke. Hey, any chance of me being on the NFL Pro Bowl ballot?

When Congress Can't Do Things On Time

It's the time of the year when I begin preparing my spring semester courses. That's a long story in and of itself, which someday I will tell so that those who think it's a matter of assigning readings from a book can understand that there is much, much more to the process. My checklist for one of the spring 2008 semester tax courses has 26 major steps to process.

One of the things that must be done is to download relevant tax forms so that they can be made available to students. I provide the forms not for the purpose of teaching students how to fill them out, but to give them a sense of how complex tax provisions are reflected in complex forms. I want them to see what happens when conceptual and theoretical ideas enter the tax law and then need to be translated into something useful to taxpayers and tax administrators.

The spring 2008 tax course materials should include the 2007 forms. When I went to the IRS web site, I discovered that the 2007 forms are not ready. I didn't expect that they would be, but I figured I'd check just in case they were. No matter, I'll check again in a few weeks. My guess is that the forms will appear just as the school is closing for the semester break. The finalization of the course materials will wait until mere days before classes begin.

Or perhaps the forms won't be ready in time for the beginning of classes. This year, as has happened more than occasionally in the past, the IRS is in a conundrum. To have forms ready for mailing and other distribution at the start of tax season, the design process must begin in the fall, and the form proofs must be ready for the printer by mid-November. The IRS must crank out hundreds of different forms, thanks to the many complexities that Congress has jammed into the tax law. So it's not as though all of the forms can go to the printer on the same day. In a well-managed system, forms are generated and sent to the production side of things in a steady sequence of incremental steps.

According to a letter from the Treasury to several Senators, if forms are not finalized by November 16, whatever forms have been printed must be "pulped, pulped, re-printed, and re-mailed at a substantial cost to the taxpayers." One might ask why any forms are printed until the Congress finishes its legislative tinkering, and the answer is that under such an approach the printing of forms could not begin until January, assuming Congress does not return for a special session. It is totally inefficient for the Congress to wait until the last minute to deal with tax changes that affect form design and printing, but in its defense, Congress is acting as do most Americans and most students, namely, adhering to the principle that things should be done at the last minute. As one might guess, I'm not that sort of person. I learned early in life that if one plans to prepare for a Tuesday class on Monday, something will happen on Monday to prevent the preparation. That doesn't bode well for the Tuesday class, and because I owe it to my students to be prepared, I think ahead and give myself some "cushion" time.

When Congress delays tax legislation until very late in the year to which it applies, or even until early in the following year, it does more than just wreak havoc for the IRS forms designers and producers. It makes tax planning impossible. It causes the risk of noncompliance to grow. It increases the odds that a taxpayer will pay more tax than the taxpayer ought to pay. In short, it causes chaos.

Defenders of the status quo claim that this is how the system works, that people have learned to cope with it, that members of Congress have so much to do that it is unrealistic to think that they could do any better than they are. This is nonsense. Nothing in the law requires this sort of bad planning and retroactive tinkering. Unfortunately, nothing in the law requires competent planning, thoughtful consideration of late legislative actions on citizens and federal agencies, or efficient time management and project planning.

It is tempting to propose a Constitutional amendment that restricts legislation to prospective application. There are two flaws in such an approach. One is that it shuts the door to genuine emergencies when, for example, an increase or decrease in revenue needs to take effect for the current or preceding year in response to an economic or military crisis. The other is that a change to a flawed provision ought not be limited to future years simply because it took time for the flaw to be discovered, for the remedy drafted, and for the advocates for repair to find sufficient votes. It is frustrating, of course, that almost every lobbyist-generated tax law change is marketed to the Congress as a response to a genuine emergency when, in fact, it's nothing of the sort.

The latest uncertainty arises from the inability of the Congress to fix the alternative minimum tax. Or, more precisely, it arises from the inability of the Congress to turn its attention in a timely way to the question. The problems with the AMT are not new and did not surface yesterday. The problems have been growing during the past few years, and they were predicted by tax experts even earlier. The need to repair the AMT is not an emergency like the devastation of a hurricane. It is not sudden and unexpected. It is not the product of uncontrollable nature but the result of bad planning and design by the very institution, the Congress, that now stumbles to clean up its own failures.

Could a "prospective only" rule be crafted that allowed for retroactive legislation under specified circumstances? Probably, though the lobbyists again would try to define those circumstances so as to preserve their opportunities to push through retroactive legislation.

Would such a rule work? I doubt it. Such a rule doesn't address the underlying problem. Unless there were some provision prohibiting the election to Congress of procrastinators, people lacking in time management skills, folks who are inconsiderate of others, and individuals who put the interests of specialized groups above the interests of the nation, the problem facing the IRS and taxpayers as the 2007 tax return filing season approaches will continue to trouble the country for a long time.

A prospective only rule would make the AMT problem worse. It would prevent the Congress from fixing the problem in time for the 2007 tax year. So perhaps a different sort of rule is required. Perhaps the Constitution ought to provide that until the Congress finishes its work, no member is permitted to return home to campaign or to engage in campaign fund-raising. Members of Congress need to learn that they were elected to serve, not to devote substantial amounts of energy to preparing for, and seeking, another term. If they want another term, then they can earn it by doing their job in a timely and competent way, for which a reward can be re-election. Voters, though, need to stop re-electing members of Congress because of yet more promises likely to go unfulfilled or because of favors granted. Perhaps a practice used in many other organizations would make sense, namely, after serving a term (or perhaps two in the House), a member must stand down for one or two terms before being again eligible to return. That sort of rule might encourage members of Congress to focus on their legislative work.

It's not just the tax law that is affected, though that is the area with which I am most familiar. It's a problem that affects every area of federal law, and that has manifested itself on several occasions in the partial shut-down of the federal government. It's a problem that makes one wonder where Congress has its scheduling priorities.

So don't panic when you cannot find tax forms later this year or even in January. Do, however, be certain that you have the most recent version. And then hope that the forms aren't changed yet again after you file your 2007 return. Yes, that has happened. Yes, it can happen again.