A Torrent of Tax Charts

The supply of weather-related analogies to describe Andrew Mitchel's tax chart production is beginning to run dry. How ironic, considering that in the spirit of the season, I've reached for a reference to the way hurricane rains come down. One thing I can share is that Andrew's tax chart endeavors bear no resemblance to a stationary front. He's ever on the move.

This time, he has generated 53 new charts, bringing the total to 600. In Roman numerals, that's DC. That's just too extenuated a connection to have earned a place in the post title. Oh, well, on to the list:

1. Cadbury Schweppes(Freedom of Establishment and U.K. CFC Legislation)
2. Hazeltine (Busted 351 Exchange)
3. Indofood International Finance Ltd. (Hypothetical Beneficial Owner Under Indonesia-Netherlands DTA)
4. Marks & Spencer (U.K. Group Relief for Non-U.K. Losses)
5. Prévost Car, Inc. ("Beneficial Owner" Under Canada-Netherlands Tax Treaty)
6. Vitale (Partner in Limited Partnership Engaged in U.S. Trade or Business)
7. Vodafone 2 (Freedom of Establishment & U.K. CFC Legislation)
8. Weikel (351 Exchange Followed by B Reorganization)
9. Rev. Rul. 55-143 (Nonresident Alien With Funds in Bank Safe-Deposit Box At Time Of Death)
10. Rev. Rul. 69-413 (Parent of Acquiror Not A Party to A Purported F Reorganization)
11. Rev. Rul. 73-442 (DISC Single Class of Stock Requirement)
12. Rev. Rul. 73-605 (Consolidated Tax Liability-Member Payments)
13. Rev. Rul. 77-479 (Recapitalization Prior to IPO)
14. Rev. Rul. 78-281 (Non-Functional Currency Borrowing & Purchase)
15. Rev. Rul. 78-397 (Forward Triangular Merger: Circular Flow of Cash)
16. Rev. Rul. 79-150 (Conversion of Brazilian "S.A." to "Limitada")
17. Rev. Rul. 79-289 (D & F Reorganization with Liabilities Exceeding Basis)
18. Rev. Rul. 80-239 (301 Distribution Thru Conduit Entity)
19. Rev. Rul. 81-132 (Transferor Ownership Not Attributed in 351 Exchange for Treaty Purposes)
20. Rev. Rul. 81-247, Sit. 1 (COBE - Merger With a Drop of All Assets)
21. Rev. Rul. 81-247, Sit. 2 (COBE - Merger With a Drop of Some Assets)
22. Rev. Rul. 83-156 (351 Followed by 721)
23. Rev. Rul. 84-44 (Forward Triangular Merger Not Part of 351 Exchange)
24. Rev. Rul. 84-104 (Consolidation Treated As Merger In Reverse Triangular Merger)
25. Rev. Rul. 84-111, Sit. 1 (Partnership Conversion to Corporation: Assets Down & Stock Up)
26. Rev. Rul. 84-111, Sit. 2 (Partnership Conversion to Corporation: Assets Up & Assets Down)
27. Rev. Rul. 84-111, Sit. 3 (Partnership Conversion to Corporation: Partnership Interests Down)
28. Rev. Rul. 87-110 (368 Reorganization of 50% Partner Terminates Partnership)
29. Rev. Rul. 88-48 ("Sub-All" In C Reorganization With 50% of Assets Sold)
30. Rev. Rul. 92-85 Sit. 1 (FDAP Withholding on 304 Transaction)
31. Rev. Rul. 92-85 Sit. 2 (FDAP Withholding on 304 Transaction)
32. Notice 94-93 (Domestic Inversion With Disproportionate Shares Issued)
33. Rev. Rul. 96-29 Sit. 1 (F Reorganization Followed By IPO)
34. Rev. Rul. 96-29 Sit. 2 (Forward Triangular Merger Followed By F Reorganization)
35. Notice 2003-22 (Offshore Deferred Compensation Arrangement (Listed Transaction))
36. Rev. Rul. 2008-15, Sit. 1 (Section 4371 Excise Tax on Outbound Ins. & Fgn-to-Fgn Reins.)
37. Rev. Rul. 2008-15, Sit. 2 (Section 4371 Excise Tax on Outbound Reins. & Fgn-to-Fgn Reins.)
38. Rev. Rul. 2008-15, Sit. 3 (Section 4371 Excise Tax on Outbound Ins. & Fgn-to-Fgn Reins.)
39. Rev. Rul. 2008-15, Sit. 4 (Section 4371 Excise Tax on Outbound Ins. & Fgn-to-Fgn Reins.)
40. Rev. Rul. 2008-18, Sit. 1 (S Election In F Reorg With QSub)
41. Rev. Rul. 2008-18, Sit. 2 (S Election In F Reorg With QSub)
42. Section 304 Anti-Abuse Rule [Temp. Reg. 1.304-4T(a), Ex.]
43. Killer Forward Triangular Merger [Temp Reg. 1.367(b)-14T(b)(4), Ex.]
44. Two Party Like-Kind Exchange: Partial Boot [Reg. 1.1031(b)-1(b), Example 1] 45. Two Party Like-Kind Exchange: Assumption of Liabilities [Reg. 1.1031(d)-2, Example 2]
46. Ultimate Beneficial Owners Under Derivative Benefits Test [PLR 200201025]
47. Ultimately Owned Under Derivative Benefits Test [PLR 200409025]
48. Outbound 332 Liquidation With 80% Domestic Subsidiary Corporation [PLR 200448013]
49. PFIC Look-Thru For Gain on 25% Owned Subsidiary [PLR 200604020]
50. Outbound Forward Triangular Merger With Subsidiaries
51. Swiss Treaty - LOB: Active Trade or Business Test [Switz.-U.S. Income Tax Treaty MOU Para. 4, Ex. I]
52. U.S. Partnership vs. Foreign Partnership (CFC vs. Non-CFC)

The charts can be accessed by topic or chronologically.

For those needing cross-references to my previous commentary on Andrew's chart work, look here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, and here.

Why Bother Having Prerequisites?

Once again, I was startled to learn something that a student shared on a course evaluation. According to this student, it is "unreasonable" for me to expect students to remember what they had learned in previous courses. Whoa! That is so shocking I cannot fathom where or how the student came to that conclusion.

Perhaps it should not have surprised me. In Partnership Taxation, there are numerous times when the material requires us to "look back" at concepts studied in Taxation of Property Dispositions, which is a prerequisite for Partnership Taxation. Yet far more often than not, students looked bewildered when I asked them to recall the process of dealing with nonrecognition, depreciation recapture, installment sales, gain realized, or other subjects from the previous course. Until now, I had thought it was for some reason other than what appears to be the case.

It appears that some students consider what is learned in a course something to be returned on an examination and then purged from the brain. The goal for these students, it appears, is to earn a string of grades that permits the hanging of a degree on an office wall. Excuse me, but I had considered the goal to be an immersion into and a mastering of tax law and tax thinking processes so that one could be an effective tax practitioner. That means carrying into practice, and implicitly, into subsequent courses, what is learned in the program. The point of earning a master’s degree, whether an LL.M. or M.T., is to demonstrate a mastery of the subject. Oh, how I wish for that three-hour, oral examination before a panel of faculty used in other disciplines to be incorporated into J.D. and graduate tax programs.

It’s not that I expect students to remember Revenue Rulings citations, or the intricacies of how mortgages are treated in like-kind exchanges. I’m encountering students who continue to confuse amount realized with gain realized. I’m finding that some students don’t understand that the disposition of an installment note can trigger gain even if the disposition is by gift. I’m discovering that some students don’t grasp that there is no depreciation recapture with respect to real property subject to straight-line MACRS. It’s not that these things aren’t being taught. They are. I’ve checked. The person teaching the course was a student in several of mine. He was an excellent student, he knows how I teach, and he brings the same effort and goals to the classroom. He simply has no way of preventing the "brain dump" in which some students seem to engage after the exam. Goodness, I’ve had students tell me, in response to my advice that they go back and review their notes on depreciation recapture, or nonrecognition, or whatever, that they deleted or tossed out their notes. On the other hand, some former students with more than a few years of practice tell me they still have their notes and outlines from my courses, so perhaps there is hope that the "brain clearing and note trashing" approach is confined and eliminated before it becomes a trend.

Helping Students with Tax Problem Solving Processes: The Spurned Checklist

Though I usually expect students to learn tax problem processes by following how a problem is solved in class, noting the sequence of the analysis and identifying the relevant and necessary information, there are some instances in which I provide the process to the students in the form of a checklist, or what could better be called a step-by-step process list. In the basic tax course, for example, I do this with the overall process of computing the tax liability of a minor child. In Partnership Taxation, I do this for sales of partnership interests, partnership operating distributions, partnership liquidating distributions, and for some others.

The partnership checklists are long, in some instances requiring 15 major steps, some of which have as many as 6 sub-steps. Sequence is essential. Doing something out of order makes things a mess. For example, the taxable year must be brought up to date before other steps are analyzed. Yet students continue to jump to the first issue they see, which usually is the section 751 analysis, and they end up missing parts of the analysis and in some instances reaching erroneous conclusions. What is lacking is what I call academic discipline. The checklist must take precedence over the impulse that strikes the student when reading the problem.

One of the most serious difficulties I have noticed over the years is the application of the wrong checklist. Students sometimes use the sale checklist when the transaction is a distribution, and vice versa. The first step in the checklist, incidentally, is "What is it? Is it a sale? Is it a distribution?" I repeatedly try to hammer home the importance of using the appropriate checklist. Every semester 10 to 20 percent of the students use the wrong checklist. It kills their grade. For a few years, in the early part of this decade, the percentage of students using the wrong checklist declines. "Progress!" I thought to myself. I thought too soon. Three semesters ago, the percentage of students using the wrong checklist increased. But that isn’t the worst part.

Much to my surprise, last fall I noticed a few students who didn’t even bother to use any checklist. Then, this past spring, it became an epidemic. "Checklist? We don’t need no stinkin’ checklist!" What was written can best be described as disorganized snippets of disconnected repetition of rules or facts, smatterings of analysis relevant or not relevant to the question, and huge omissions from the sequences that should have been followed. The lack of academic discipline evidenced by these answers is overwhelming. Are these the same students who complain that they haven’t been told what the answers are? I do not know. Are these the same students who report investing one or two hours a week in a course for which my strongly recommended out-of-classroom study time is four to eight hours per week? I do not know. What I do know is that these are not the students earning A, B+, and B grades. If they were to earn the same grade in their other courses that they earn by totally disregarding my advice and instructions with respect to the use of checklists that I give them, they would not graduate. That would be good, because no client is well served by a practitioner who uses the wrong checklist or, worse, doesn’t use one at all and overlooks most of what needs attention.

Tax Rules and Tax Problem Solving Processes

One of those epiphany moments happened to me when I read a complaint on a course evaluation filled out by a student in the Graduate Tax Program. The gripe was one I have seen on some other evaluations. The student simply claims, "He doesn’t tell us what he wants the answer to be."

The epiphany is the realization of how deeply entrenched in rule memorization our students have become. They think that a tax practitioner, and some J.D. students think that a lawyer, demonstrates proficiency by reciting rules. The occasional token deference to application to facts might show up when one of these students confronts one of my assigned problems or examination question.

Somehow the students are not getting the message that the key to successful tax practice, or legal practice, is adapting a problem solving, or problem prevention, process to a set of facts. Because there are so many possible fact combinations that clients can bring to the practitioner, a process is far more valuable than a set of rules, and in many instances knowing the rules with nothing more is quite inadequate. If mere knowledge of rules were sufficient, computers could be programmed to replace practitioners.

When I try to determine how our students end up with a fixation on rules, my attention turns to high school, and even more significantly, to undergraduate education. Consider an example. In the K-5 grades, students begin learning arithmetic by learning some "rules." They learn that two plus three equals five. In a good school system, they learn why that is so. Students memorize multiplication tables, but with good teachers, they learn that there is a system, or process, underlying those tables, and the memorization slowly transforms into comprehension. When it is time to tackle the computation of 7,598,394 added to 9,430,484, it is time for a process, and not the memorization of a rule that gives the answer. Likewise, when asked to multiply 498 by 984, a memorized multiplication table, standing alone, isn’t worth anything. Students who study and learn the process of adding or multiplying do well. So what happens to turn good students into Graduate Tax Program participants who want the answer provided so that it can be repeated back to the instructor?

What happens, I think, is that some high school teachers and many, many undergraduate faculty reward the regurgitation of information. The "google" effect, the notion that all answers exist "on the internet," compounds the problem. It is easier to test what a student knows rather than whether a student can think. Often, the testing of a student’s ability to think is wrapped in the testing of a student’s expression of his or her feelings about an event, a book, or a work of art.

The more troubling aspect of this student demand for a slate of question answers provided before the question is asked, for lists of rules, and for grading based on the ability to "give back" the rules is that by the time they reach my classes they should have been broken of this bad academic habit. Understandably, some students might reject the message and yet succeed in passing courses until they reach mine. But I don’t think that explains the substantial proportion of students who have not yet grasped the idea that it is through process that one solves and prevents tax problems.

Perhaps an example from Partnership Taxation explains what is so disturbing. As complex as they are, the rules with respect to the sharing of liabilities boil down to two basic precepts. For recourse debt, a partner’s share is the portion that the partner would bear if everyone pursued their legal rights with respect to the debt. For nonrecourse debt, a three-step analysis is applied. I could ask, on an examination, for a repetition of those rules. That, however, is a waste of time. It only tells me that the student can copy information from his or her notes onto an examination paper. Rather, sometimes I present them with the following true-false question, or a variation: "Because limited partners have limited liability, they never share in recourse liabilities." The answer is false. I also ask why, because a guesser has a 50% chance of being correct. Why? Because a limited partner could guarantee a recourse debt. Alternatively, a limited partner may be obligated to contribute additional capital when called upon to do so under the terms of the partnership agreement. What is the most frequent response? True. The reason? Because limited partners are liable only up to the amount of their original contribution. That is nonsense, but I see it so frequently, in almost the same language each time, that I am convinced there is some old outline or other "study guide" floating around with this incorrect assertion. The better students think about the proposition and apply the rules to possible facts. The not-so-good students “look up” the answer, and in this instance, fall flat on their faces. Now, of course, they can read this post and repeat the answer back to me, assuming I ask the question again. But has these students learned to think for themselves? Or for their clients?

America's Top 25 Heritage Sites and Me

American Heritage Magazine, a subscription to which came to me as a gift from my younger sister the lawyer, recently published the results of a reader poll for America's Top 25 Heritage sites. I decided to match up my travel decisions with those results, to see how closely my interest in historical events and places aligned with the American Heritage Magazine list. This quick enterprise also provides me with hints for future travel.

I have visited, at least once and in several instances more than once, these places:

1. Smithsonian Institution Museums, Washington, DC
2. Gettysburg National Military Park, Gettysburg, PA
3. Statue of Liberty National Monument and Ellis Island, New York, NY
5. U.S. Capitol, Washington, DC
6. Independence Hall and Liberty Bell Center, Philadelphia, PA
7. Colonial Williamsburg, Williamsburg, VA
8. The White House, Washington, DC
9. Yellowstone National Park, WY
10. Arlington National Cemetery and Arlington House, The Robert E. Lee National Memorial, Arlington, VA
11. Historic Jamestowne and Jamestown Settlement, VA
12. Mt. Rushmore and Wounded Knee Battlefield, MT
13. USS Constitution, Boston, MA
14. George Washington's Mount Vernon Estate and Gardens and George Washington's Grist Mill and Distillery, Mount Vernon,VA
15. Bunker Hill Monument and Battle of Bunker Hill Museum, Charlestown, MA
17. Ford's Theatre National Historic Site, Washington, DC
18. Shenandoah National Park and Manassas National Battlefield Park, Manassas, VA
19. The Alamo at the San Antonio Missions National Historic Park, San Antonio, TX
20. Little Bighorn Battlefield National Monument, Crow Agency, MT
21. Valley Forge, Washington's Crossing, PA
23. Niagara Falls, Fort Niagara, NY
25. Old State House and Faneuil Hall, Boston, MA

I have not visited these sites:

4. USS Arizona and USS Missouri Memorials, Pearl Harbor, HI
16. Appomattox Court House National Historical Park, Appomattox, VA
22. The Wright Brothers National Memorial, Manteo, NC
24. Antietam and Monocacy Battlefields, Frederick, MD

It helps that at one time or another in my life I have lived in, near, or within a day's trip ride of most of the sites I've visited. There are interesting stories about most of the visits. Some occurred when I was but a child, thanks to my parents' interest in history and their willingness to teach their children about these places. Others occurred more recently, two within the past several months, thanks to a friend who also is willing to teach and share knowledge and who was surprised to learn that I had not been to those places.

Surely a "Top 50" list will appear because there are sites that many will claim should be on the list. For example, Promontory, UT probably would make the Top 50 list, along with Fallen Timbers, Ticonderoga, Yorktown, Sutter's Mill, and other places where important events in our nation's history took place. When that list appears, I'll figure out if I maintain that .840 batting average.

If Lunch is Free, Are Taxes Waived?

Recently, I finished reading David Cay Johnston's "Free Lunch," a powerful expose of how a small group of mostly wealthy individuals and, in some instances, their corporate enterprises, have milked the nation for their own gain. It took me some time to read the book because I could handle only one or two chapters at a time. It would have been far more pleasant had I found a book that persuaded me that my carping about how Congress does business was off the mark. Instead, I discovered even more reasons to understand my distaste for the modern American political process and the greed of those hardly in need.

Johnston answers a question that touches the core of what this nation should be about. How can it be, that in a nation as economically successful as ours has been, so many people are jobless, facing foreclosure and bankruptcy, lacking quality health care, and struggling to make ends meet? The answer lies in wealth and income distribution, which in recent years has tilted increasingly in favor of a very few at the expense of the great many.

Centuries ago, nobility enriched themselves through the use of serfs, slaves, and indentured servants. These workers put more into the economy than they withdrew, permitting the wealthy to accumulate more than they contributed. Though present-day America, and most other places, does not countenance outright slavery and servitude in a physical sense, Johnston demonstrates how, and this is my articulation, not his, economic slavery runs rampant.

It's worse than corporate executives pulling down compensation that is hundreds and thousands of times what the rank-and-file earn, despite the impossibility of an executive contributing hundreds or thousands of times more genuine value than does an ordinary worker. It's worse than the obvious biases in the tax system that favor the wealthy at the expense of the middle class, and, to a lesser extent, the working poor.

What has been transpiring behind closed doors, in corporate boardrooms and during high-end restaurant meals, in politicians' offices and on junkets to here and there is infuriating. Early in the book, Johnston describes how lobbyists persuade governments, or more accurately, legislators and agency bureaucrats, to tilt the marketplace in favor of their clients. The so-called free market isn't free, not only because government is reluctant to enact and enforce laws that protect the market, but also because government interferes with the market in ways that benefit a select few.

Some of the abuse is wrapped up in federal, state, and local tax systems. There are taxes imposed on the public that fund business enterprises that profit one or two or a few owners. There are taxes that go uncollected because enforcement is ignored, though excuse after excuse is paraded forth when and if the discrepancies are noted publicly.

Johnston does more than provide a list of abuses, abuses that range from subsidies for elite golf courses to fraudulent stock options, from corrupted deregulation to the sale of taxpayer-financed public assets like turnpikes and sewer plants to manipulation of the electricity market, and from government-assisted oligopolies to lying about the cost of the Medicare prescription drug legislation. Johnston presents these machinations not as would a lawyer using technical language and obscure references, but through stories. Where he can, he reveals what was happening behind the headlines unbeknownst to all but the few who were directing the efforts and the few who had no choice but to go along for the ride. One does not need to be a lawyer, an accountant, an actuary, or a private investigator to learn from Johnston's account of what went wrong. This book not only is an interesting read, a powerful indictment, and an understandable explanation, it also should be required reading during this election year.

Johnston's book was published late last year, which suggests it went to print no later than last fall. When the book appeared, the subprime mortgage crisis had yet to crescendo into the catastrophe it has become, gasoline prices were yet to explode upwards, and the other economic problems of recent months had yet to surface. Johnston, though, provides the explanation for how the economy has become such a mess. It's a wonder that the charade lasted this long. Unless the underlying causes of current economic woes are identified, understood, and eliminated, all of the stimulus payments, gasoline tax holidays, and other superficial distractions will do nothing to prevent America from back-sliding into a medieval system of economic nobles and economic serfs, or worse. One supposes that medieval serfs knew that they were being mistreated and understood why. One wonders whether most Americans understand why their economic situations are so shaky at best. The sad news is that it will take much more than reform of the federal tax system to fix things. The worst news is that much of what is proposed as reform is more of the charade.

Tax Without Nuance

It is said that teachers learn from students and that the students do not have a monopoly on the learning that takes place in a course. My experience corroborates that observation. One avenue of learning, for me, is the student evaluation form. Specifically, the comments sometimes cause me to recoil in horror.

A student in last semester's Graduate Tax Program Partnership Taxation course, in an effort to persuade those reading the evaluations that I am a terrible teacher, noted that one of my teaching flaws was the dedication of class time to "nuances." I suppose that this student thinks that tax without nuance should be the focus of graduate tax program education.

The disadvantage to anonymous student evaluations is that there is no way to engage this student in a dialogue that would assist him or her in restructuring his or her view of taxation so that in practice the student doesn't trip over the inattention to detail that dovetails with a lack of appreciation for the role of nuance in taxation. This anonymity is designed to protect students, though the fact no one sees the evaluations until grades are submitted and distributed makes any sort of disadvantage to identification quite unlikely. Somewhere, there is a student soon to be practitioner with LL.M. or M.T. who sneers at the value of nuance in taxation.

Nuance is the essence of taxation. Perhaps there could be taxation without nuance, but I teach to prepare students for the realities of what they must handle, and with limited time, exploration of some ideal world must be relegated to the Tax Policy course. For example, there is a difference between inventory items and substantially appreciated inventory items. The former are in play when a partnership interest is sold, whereas the latter is relevant when there are distributions. It's a distinction that trips up the inattentive. I focus on this difference in class, and often find a place for it on the exam. It is not alone, of course, but it is one of the simpler nuances to use as an illustration. Failure to respect this sort of nuance is the doorway to malpractice.

Perhaps there is some expectation that teachers will "dumb down" the tax law to some short sound-bite-like generalities that can be returned as such in a memorization demonstration. However and wherever that expectation is developed, it is the obligation of the tax teacher to destroy it. It is an expectation to be dashed. It's harsh, but necessary. It is disappointing to me that someone can reach a course as advanced as Partnership Taxation in a Graduate Tax Program and still be under the impression that those who omit or gloss over nuances are somehow better teachers than those who give nuance in tax its due.

What have I learned? I've learned that students can arrive in my courses with unrealistic expectations. And I have learned that I must add yet another one to the list of misimpressions that I specifically identify and target for destruction during the course. The clients of these present and future tax practitioners deserve no less.

$4.50 or $45,000,000? You Do the Tax Return!

In What is the Value of the Charitable Deduction for the Human Body?, David Brennan asks a good question. The standard answer is that one looks to the amount at which a willing buyer and a willing seller would exchange the item. Is there a market for human bodies? Apparently so, even though trafficking in them is illegal. Read this book review but be careful when, where, and with whom you do so. According to this analysis, try $45,000,000.

I can't resist making this observation. If the same concepts that generated the notion of component depreciation were applied, the human body would be worth the sum of the value of each of its ingredients. According to this computation, we're talking $4.50.

Coordinating Income Tax Return Due Dates

Several days ago, in IR-2008-84, the IRS announced it was changing the due date for extensions of time to file returns from October 15 to September 15 for partnerships, S corporations, trusts, and estates. The reasoning makes sense as a way to deal with a practical return filing problem, but the solution only goes so far. I am going to focus on partnerships just to make it a bit easier to explain the problem.

Under existing rules, a partnership that obtains an extension of time to file its return must file by October 15. That is the date on which it must supply Forms K-1 to its partners. But those partners, presumably having obtained their own extensions of time to file because they did not have the tax information from the partnership, also must file on October 15. In all likelihood, the partnership has mailed the Forms K-1 and the partner doesn't get them until October 16, 17, 18, or later.

Under the revised rules, the partnership must file and send the Forms K-1 by September 15. That should allow sufficient time for the partners to file by October 15. Or does it?

Suppose the partnership is a partner in another partnership that is a partner in a third partnership. It isn't difficult to imagine that the partnership won't get its return filed by September 15 because the third partnership's Form K-1 for its partner (the second partnership) doesn't get to the second partnership until, say, September 19, and then the second partnership gets the Form K-1 to the first partnership by, say, September 23. So now the first partnership gets the Form K-1 to its partners by, say, September 27. One of its partners is, yes, an S corporation. So the S corporation files, and gets the Form K-1 to its shareholders by October 1. One of the shareholders is a trust. It now files, and gets its information to its beneficiary by October 5…

The problem simply is that when there is a "chain" of pass-through entities, the theory breaks down when it meets practice. Surely if the chain isn't too long, the IRS change does solve the problem. But if the chain is long, or there are excessive delays in getting Forms to partners, shareholders, and beneficiaries, or if the preparers cannot do the returns the same day the Forms K-1 arrive, the problem continues.

Do I have an answer? No. So long as the pass-through concept exists, the problem exists. One could prohibit long chains, but there are serious constitutional and policy problems with that approach. One could come up with some sort of super-extension system, but the tax is due on April 15, so the taxpayer, to avoid interest and penalties, must play it safe and overpay. And all of this assumes that all the entities have the same calendar taxable year.

Is it any wonder when the "make tax returns due on the person's birthday" proposal resurfaces now and then, that I grimace? I described that nonsense in Tick Tock... Countdown to April 15, so I won't delve into it here.

All in all, the IRS deserves kudos for trying to solve the problem and coming up with something that deals with most of the situations afflicted by it. Now I must go and change my Partnership Taxation class notes, illustrations, slide sets, and problem answers.

Virtual Fireworks? What's Next? Virtual Oil?

On Friday, in When Is a Shortage Not a Shortage?, I noted the decline in fireworks importation because of a shortage of shipping ports in China. I suggested that depending on one country for a product or service wrapped up in American life could be antithetical to independence.

Thanks to my younger sister, I now have discovered how we will cope when there are no more fireworks available for importation. We'll go virtual. How quickly can you click a mouse? No, not the animal.

So what's next? Virtual oil? Virtual gasoline? Perhaps we can pay virtual taxes with virtual dollars. The possibilities are, well, virtual.

When Is a Shortage Not a Shortage?

It's one thing after another, isn't it? A few weeks ago, in If Only It Were Prices Getting Depressed , I noted that hops and barley malt could be added to the growing list of items for which shortages are popping up. Now comes news, reported, for example in Fireworks Shortage Could Dampen July 4th that there is insufficient fireworks for pyrotechnicians to do all that they had planned to do for this evening's Independence Day celebrations. No town having an event will go without fireworks, but the word I don't see but that comes to mind is rationing.

Technically, the shortage is not a shortage of fireworks. It's a shortage of ports in China through which they can be shipped to other countries, such as ours. It seems that the fireworks industry in China, which makes almost all of the world's fireworks, had a few not-so-small problems. First, a warehouse holding fireworks awaiting export simply exploded. Second, officials discovered shippers trying to send out containers filled with fireworks but labeled as something else, probably much more benign. Third, because of the Olympics, the government closed several ports to shipment of fireworks.

There's no backup. If this problem isn't cleared up soon, say bye-bye to fireworks at baseball games, county fairs, and perhaps next year's Independence Day celebrations. If that's not sufficiently alarming, think of the essential goods we use but no longer manufacture. What happens if China invades Taiwan, the United Nations imposes a trade sanctions, and/or the United States and other nations take military action? What ultimately did in Japan during World War Two was its inability to maintain imports of oil and other essential goods. Come to think of it, that was a factor in Japan's decision to go to war in the 1930s and to attack the United States in 1941.

So fireworks are not essential. We could live, inconveniently, without them. Can we say the same of everything else we need and import? If the next world war is an economic battle fought in part in cyberspace, could it already have started?

All those morose thoughts aside, Happy Fourth of July.

So What Are YOU Doing With Your Stimulus Payment?

In Can a Tax Rebate Band-Aid Stop the Economic Bleeding?, I argued that the tax rebate, now with the fancy name of stimulus payment, wasn't going to do much of anything to fix the economic mess. I did confess, in Tax Rebate Program Gets More Expensive, that:

To be fair, I should give this "stimulus" concept credit where credit is due. It has stimulated some of my blog posts that otherwise would not have existed.

So here we go, it's another post about that stimulus payment.

The question this time is simply what are taxpayers doing with their rebate, excuse me, stimulus payments? Forget about statistics. Take a look at How I Spent My Stimulus. I like the one that refers to the stimulation of Italy's economy. I wonder if the politicians who created the economic stimulus program are checking out that page. Better yet, I wonder if someone is doing a poll that asks, "Does the rebate stimulate you to vote for the incumbent?"

The question next time is one I've already asked. What happens when the flow of stimulus payment checks comes to a close? Is it back to debt financing?

Killing the Revenue Idea That Won't Die

Last week, in The Pennsylvania Legislature Gets It Right, I shared the news that the legislators in Harrisburg had convincingly rejected the governor's proposal to lease the Pennsylvania Turnpike. Referring to the claim by the chair of the House Transportation Committee that the proposal was a "dead issue," I asked, "Does this mean the proposal truly is dead?"

In a bizarre twist of legislative maneuvering, the proposal has been retrieved from its grave and made the subject of hearings by the House Transportation Committee. According to this Philadelphia Inquirer story, the chair explained that he "remains convinced" the proposal is "a bad idea." So why the hearing? The hearing, I think, is part of a process to strike down the proposal so that it cannot be enacted. It's akin to driving the stake through the vampire's heart. The previous 185-12 rejection margin did not prohibit the governor from signing the lease. Instead, had it passed the governor would have been required to sign the lease. There's something about politics and legislative gamesmanship that makes it difficult to deal with things straight up. Is it any wonder that politics and politicians have not served the nation well?

During these hearings, representatives of the company with what the Governor says is the winning bid paraded their usual accolades for the sale of the golden goose. Somehow they expect us to believe that they can pull a profit for themselves out of an enterprise that currently does not make a profit, without raising tolls or cutting maintenance. Though claiming it is a "rock-solid" proposition, there's nothing to explain how conversion of the taxpayer-owned turnpike, that charges tolls sufficient to meet expenses, into a private for-profit arrangement that puts money into a Spanish company enriches anyone other than that company.

The Committee heard testimony from two finance professors who explained that the value offered by the lease is less beneficial to the Commonwealth and its taxpayers than is the legislation enacted last year. Ironically, these experts were retained by the House Democratic Caucus. The Governor is a Democrat.

When I first addressed this issue, in Selling Off Government Revenue Streams: Good Idea or Bad?, I noted that "[t]he answer might lie in the story of the fellow who killed the golden goose. I wonder if he'd do it again if he had the chance." Some months later, in Selling Government Revenue Streams: A Bad Idea That Won't Go AwayI asserted, "Pennsylvania can do better than to mortgage its future and sell off the well-being of its citizens." During the House Transportation Committee Hearing, one of the experts put the same point this way: "Why sell your prized asset in a buyer's market?"

Yes, indeed, why sell the Turnpike?

The chair of the Committee has not indicated when, if at all, the Committee would vote on the matter. If the Committee rejects it, it becomes almost certain that the idea is dead. Well, dead until the next session of the legislature. So don't throw out those stakes and mauls.

Was Someone on Capitol Hill Paying Attention?

Earlier this month, in What is the Farm Bill's Date of Enactment, I suggested that Congress re-enact the bill in its entirety and that:

it could add a provision that specifies that the date of enactment is the date that the President signs whatever is sent to the White House in June, or, if it is vetoed, the date that the House and Senate override the veto. Alternatively, the Congress could replace the phrase "date of enactment…." with a specific date, for example, May 22, so that even if the entire bill is re-enacted, there would not be any disadvantage to someone who takes action or fails to take action between May 22 and the date that the entire bill, in contrast to the bill with the missing title, becomes law.

Surprise! When it re-enacted the bill, though technically it enacted another bill --- more on that later ---, Congress included two provisions that were absent from the earlier enactment. In Section 4 of the Food, Conservation, and Energy Act of 2008, an enactment of H.R. 6124, Congress provides:

(a) In General- The Act entitled 'An Act to provide for the continuation of agricultural programs through fiscal year 2012, and for other purposes' (H.R. 2419 of the 110th Congress), and the amendments made by that Act, are repealed, effective on the date of enactment of that Act.
(b) Effective Date- Except as otherwise provided in this Act, this Act and the amendments made by this Act shall take effect on the earlier of--
(1) the date of enactment of this Act; or
(2) the date of the enactment of the Act entitled `An Act to provide for the continuation of agricultural programs through fiscal year 2012, and for other purposes' (H.R. 2419 of the 110th Congress).

In section 3, Congress provides:

The Joint Explanatory Statement submitted by the Committee of Conference for the conference report to accompany H.R. 2419 of the 110th Congress (House Report 110-627) shall be deemed to be part of the legislative history of this Act and shall have the same effect with respect to the implementation of this Act as it would have had with respect to the implementation of H.R. 2419.

They don't teach this in civics, do they? Wait, do they still teach civics?

Digging through the details is a good lesson in legislative process. Congress passed H.R. 2419 and sent it to the President. The President vetoed the legislation. On May 22, 2008, Congress voted to override the veto. Someone noticed that the trade title that was enacted as part of the bill had been omitted from the document sent to the President. Therefore, it could be argued that the trade title had not become law because it had not been through the process of being vetoed and then enacted by the veto override. That reasoning makes sense, because if the President had signed H.R. 2419, the trade title would not have been enacted because it was missing.

Rather than passing the trade title separately and sending it to the President, the Congress took H.R. 6124, which was H.R. 2419 as reintroduced, containing the full version of what would have been in H.R. 2419 had everything been included, passed it, and sent it to the President. The President vetoed it. On June 18, 2008, Congress voted to override the veto. Because of the language in section 4(a), this had the effect of repealing everything in the H.R. 2419 version of the legislation as of the moment of its enactment. In other words, H.R. 2419 became a legislative nothing. That left H.R. 6124 as the definitive legislation, including section 4(b), which makes May 22, 2008 the date of enactment of H.R. 6124 because that it the date of enactment of H.R. 2419 before its repeal, a conclusion that follows from the fact H.R. 2419 was enacted before H.R. 6124. Because the trade title is in H.R. 6124 it is treated as having a date of enactment of May 22, 2008 even though it was not in H.R. 2419.

So, even though H.R. 6124 was not enacted on May 22, 2008, it is treated as though it were enacted on that date. This outcome, as strange as it may appear, makes sense for at least two reasons. First, the provisions aside from the trade title were enacted on May 22, 2008. Second, taxpayers rely on legislation and take actions when legislation is enacted. If the date of enactment were delayed until June 18, 2008, that action might give taxpayers an unintended opportunity to escape, work around, or avoid provisions that were in place on May 22, 2008.

In What is the Farm Bill's Date of Enactment, I had predicted that if Congress failed to fix this date of enactment conundrum, litigation surely would follow. By adding sections 3 and 4 to the legislation, Congress eliminated any serious challenge to the legislation's effective date determination. Though I am consistently critical of how the legislative process has become corroded under the stewardship of Congress during the past several decades, I will give it credit where credit is due. I wonder, though, whether someone on Capitol Hill had read the suggestions in What is the Farm Bill's Date of Enactment. There had been, and have been, visitors from IP addresses and domains that correlate with the Hill, so it is a possibility. If that in fact is the case, I'm simply glad they did not name section 4 after me.

When Less is More: Law School in Two Years

The sound bites, once again, give a different impression than do the deep readings and analyses. Northwestern has announced that it is giving its students the option to complete law school in two years. Some of the headlines make it easy to infer that students would benefit from a 33% reduction in tuition and receive a 33% reduction in education.

In reality, the Northwestern option requires students to accomplish in two years what usually is accomplished in three. On top of that, Northwestern has retooled its curriculum so that students can tack on a semester of what has come to be called "experiential" learning, or what I call practice-relevant education.

Will the new option work? Surely it can, if properly administered. If students can complete a four-year undergraduate degree in three years by taking on additional work each semester, why cannot law students accomplish the same? There are 52 weeks in a calendar year, and traditional law school schedules fill 28 weeks with classes. Some try to manipulate class length so that only 26 weeks are dedicated to classes. Even with 4 weeks added to permit final examinations, there are at least 20 weeks during the year that go "unused" unless the student finds employment that is useful either from an "experiential" perspective or, at a minimum, from a financial angle. For students who have completed one traditional year of law school study, the first option is rather limited.

Northwestern isn't the first law school to adopt the two-year option. Several years ago, it was pioneered by Dayton. The latter school, however, isn't one of those powerhouse, elite, highly-ranked institutions as is Northwestern. Just as everyone was excited when Harvard adopted ideas already in use at the "not so elite" law schools, thus somehow making the ideas acceptable, so, too, much more attention has been given to Northwestern's initiative. Perhaps there's some sort of sense that until one of the "top" schools approves something by doing it, the idea doesn’t have sufficient merit.

The new option isn't as curtailed as one might think. By requiring attendance during the summer, and thus putting some of those 20 weeks to good use, the school isn't cutting the program time and investment by 1/3. In fact, it's not cutting it by 1/6, because the intensity of the program is heightened, and the traditional three-year program is accelerated.

Northwestern will not admit anyone into the accelerated program unless the applicant has two or three years of "substantive work experience." In other words, they want students who have lived in the world beyond school. Hurray, I say. Students with a few years in what one is tempted to call "the real world" make for better law students. Northwestern justifies the decision by explaining these applicants have developed better time management skills, necessary for doing well in the accelerated program. True, but there's more. These applicants are more mature. They're more likely to be attending law school on their own buck, and not mommy's and daddy's. They're far more likely to be attending law school because they want to be there, and not because they're bright people who score well on standardized tests but have no idea what they want to do with their lives. Those are the reasons these students will succeed at doing more in less time. The focus, maturity, time management skills, and self-investment that they will bring are the qualities one wishes would be brought by all law students.

Northwestern also will require students in the accelerated program to take three new required courses. One, for example, is quantitative analysis. I wonder, though, why not make this a prerequisite to admission, while offering a remedial course for those who didn't know that it would be required or who came to a late realization that they wanted to go to law school? Why invest 2 or 3 valuable law school credits on a course that should be taken in college by everyone? If medical schools can assign, in effect, the task of teaching organic chemistry to the undergraduate schools, why can't law schools do the same with respect to the courses that aren't law courses but that are essential to law practice? How horrible would it be to replace one or two of those political science or English literature courses with something far more valuable to success in law school and law practice?

It's unclear, according to Northwestern, whether tuition will be scaled back. I doubt that it will. So what's the financial incentive? Every law school applicant should know the answer, but many do not. Add another, earlier year of law practice income into the "is law school financially a good investment?" spreadsheet, and the financial prognosis improves.

The impact of the two-year program could be significant if it works. For that reason, it ought to be the subject of continued and intense study. Though criticisms have already been leveled against it, before it has been given a test drive, those have been carefully addressed and other aspects dissected by Bill Henderson in anEmpirical Legal Studies post that I highly recommend. It is must reading, even for those who are among the skeptics most unlikely to read it.

What's hopeful about Northwestern's announcement is that the world of law school pedagogical experimentation is growing. The current system doesn't work, though there is much pretense that it does. The chasm between the academy and practice continues to grow, and most employers increasingly complain about the practical inadequacies exhibited by recent law school graduates whom they have hired. There's only so much that theory can provide. It takes a courageous, and strong Dean, and a courageous or intensely curious law faculty, to allow or encourage the institution to try new things. The group of schools that sits around waiting to see what everyone else does may discover that the train has left the station a bit sooner than expected.

There's no assurance that Northwestern's and Dayton's experiments will solve more problems than they create. But even if they fail, and failure does not include modification and retooling, they will teach law school administrators and faculties at least a few good lessons, and perhaps even more. As I tell my students, in reference to class preparation of assigned problems, not trying at all is far worse than trying and getting it wrong. The latter experience is an experience from which one can learn, whereas the former experience teaches nothing. With their two-year programs, Northwestern and Dayton will be teaching not only law students but other law schools, other law faculty, and the law practice world. Let's hope everyone is paying attention.

The Pennsylvania Legislature Gets It Right

One reader thinks my posts criticizing the proposal to lease the Pennsylvania Turnpike, the most recent being last Wednesday's How Do Toll Road Lessees Make a Profit?, was a factor in last Wednesday's vote by the Pennsylvania House to reject the proposal. This reader gives me way too much credit. I certainly do wish that the legislators in Harrisburg and those in Washington, D.C. would visit MauledAgain but I'm sufficiently realistic to know that they don't.

The proposal to lease the Pennsylvania Turnpike to a Spanish company, according to Legislator: Turnpike lease now ‘dead’, went down 185-12. The linked article uses the adverb "soundly" to describe the outcome, but I think "overwhelmingly" and "convincingly" convey a better sense of how badly the proposal fared after careful analysis revealed its flaws.

Does this mean the proposal truly is dead? So claims the chair of the House Transportation Committee. He said, " There may be lawyers who may say we could do it, but in the realm of public opinion, it is a dead issue." Yes, I suppose there are lawyers who can bring resoundingly crushed legislative proposals out of the grave, but it would take more than a miracle. If this proposal were to pass now, those hypothetical lawyers would be doing more than lawyering.

What does remain alive is the plan to convert I-80 into a toll road. I shared my thoughts on whether roads should be toll roads, and what those tolls should be used to finance, in User Fees and Costs. As I discussed in Are State Gasoline Taxes the Best Source of Highway Revenue?, using tolls from I-80 to pay for toll-free highways in other parts of the state is difficult to justify.

In addition to the various arguments I put forward in opposition to the proposal, many of which were echoed by the legislators though not necessarily because I advanced them, the lawmakers also seemed perturbed that they had not seen any of the bids other than the one that was declared the winning bid and packaged into the legislation. One legislator wondered aloud if it was the highest bid.

Technically, there's nothing to prevent the governor from accepting another bid and sending it as part of a new proposal to the legislature. There's probably nothing in the law preventing the governor from putting the lease out to a bidding process yet again. But why do that? How likely is it that the legislature would fall over itself to approve a different, though substantially similar proposal?

Another aspect of the process that annoyed legislators is how the state paid for the bid process. Money in the Motor License Fund, that could have been used to repair highway infrastructure, was used to pay the lawyers and consultants involved in creating, drafting, and advocating the proposal.

Here's the shocking news. Technically, if the proposal had been approved, it would have required the governor to sign it. The rejection of the legislation does not prohibit the governor from signing the proposal. But if he does, the outcome might be quite messy. Unquestionably, litigation would ensue.

Though the disappointed asset grabbers called the vote a "political trick," the words of another legislator put the situation in a clear light. Speaking of the proposal, he said, "It is just such a bad deal, it’s like a fire sale."

Helping Tax Clients Understand Taxes

Julian Block has written yet another book. This time, it's "Ultimate Tax-Saving Resource '08." Like his three books in 2006, reviewed in Tax and Relationships: A Book to Read and Give, A New Book on Taxation of Residence Sales: Don't Leave Home Without It , and A Tax Advice Book for People Who Write and Illustrate Books, and the one from 2007, reviewed in Another Tax Book for Tax and Non-Tax People to Read, this latest volume is ideal for taxpayers who want to understand taxes and their tax advisors without sitting through an LL.M. (Taxation) or M.T. program. Too often, tax practitioners rattle through Code sections and arcane tax language when answering client questions or mapping out tax planning strategies. Too often, to make the explanations comprehensible to the client, the practitioner needs to provide a condensed introduction to taxation course while the client anxiously glances at the professional's billing clock. This book would make a nice handout for practitioners to bestow on their clients. Perhaps when they see in print many of the same things their advisors keep telling them to do, clients will be more likely to keep good records, think about taxes throughout the year, and keep their tax attorneys, tax accountants, and tax return preparers informed of changes in the client's life.

Ultimate Tax-Saving Resource '08 is a hefty edition, exceeding 400 pages. The book is packed full of explanations, tips, warnings, examples, and other resources. Rather than looking at each topic in detail, I've selected the segments that particularly resonated. That's not to say the rest of the book is any less helpful or worthwhile.

The first chapter makes a good first impression. Julian begins with an important point, typically overlooked by all those folks who think federal income taxes are on stage during early April and in the wings the rest of the time. In "Year-End Tax Tips," Julian goes through the decisions and transactions that need attention before the ball falls in Times Square, and that ought not be tucked away until the tax return visit with a tax practitioner in February or March of the following year. It's not that Julian has discovered an array of heretofore unknown planning tips. It's that he makes it clear to the reader why these are important and why they deserve attention while there is still time to do something that is good for the taxpayer's tax health. One segment of the chapter advises the reader to "make tax planning a year-round job." That is excellent advice. If I could quibble, I would have used "Tax Planning is a Year -Round Job" as the chapter title. But for all I know, that's a quibble with an editor and not with Julian.

In chapter 2, Julian turns to one of the most confusing topics in the tax law for the typical taxpayer. It's time to help people understand the rules applicable to dependency exemptions. This area of the law was substantially revised several years ago, and it tossed out many principles and concepts that tax practitioners and taxpayers alike thought they had mastered. It has become time to re-tool. Julian pays close attention to several of the thornier issues in this area, dependency deductions for the children of divorced parents, and dependency exemptions for live-in lovers. It's not just seasoned, and thus cynical, tax experts who will appreciate the inclusion of Charles Osgood's Ode to POSSLQs that Julian has included. When working with taxes, if one does not find time and reason to laugh, one very well may end up crying, and they won't be tears of joy. Humor is a fine seasoning for a tax book or a tax course.

What's next? In chapter 3, Julian addresses the tax consequences of home sales. As is the case with chapter 2, Julian has selected a tax topic that impacts many taxpayers. Do tax practitioners and taxpayers need to read this down-to-earth explication of section 121, its regulations, and the niceties of the many rulings and judicial decisions interpreting them? Yes, indeed. Just the other day, my mother said to me, "I heard some tax advice on a radio news show and I think it was wrong." After listening to what was said, I -- ever the teacher -- asked my mother why she thought it was wrong. It was wrong on two counts, and my mother spotted both errors. The person giving the advice treated the sales price as the gain, and used $250,000 rather than $500,000 as the exclusion for a married couple. So let me add to the list of people who should pick up a copy of Julian's latest book. Yes, people who give tax advice on radio news shows. How my mother has become adept at taxes, and she's not a tax professional or practitioner, is another story. I need to ask her if she's been reading Julian's books.

Subsequent chapters look at the tax consequences of marriage and divorce, travel expenses, moving expenses, and itemized deductions. In chapter 8, Julian explores tax tips for businesses. Though there are many, many taxpayers whose income is reflected on Forms W-2 and perhaps 1099s, there are more than a few who operate businesses, particularly small businesses, and who can learn much from what Julian shares. Ask any tax practitioner or tax return preparer what it is like when a client reveals that during the previous calendar year, the client opened and operated a business. How likely is It that what the client did and did not do is not what would have been advised? Now tax advisors can say to their clients, "If you happen to open a business before we meet again, read chapter 8 in this book. In fact, read the entire book." Similarly, chapter 9 examines investment strategies. Chapter 10 is the chapter every taxpayer hopes is important for someone else. It explains how audits work. Yet it begins with a discussion of record keeping, which in some ways is insurance against adverse audit outcomes that are attributable to the lack of evidence justifying deductions, credits, and exclusions. It certainly isn't in the "I'll read this if I get audited" category. Again, I would have made the chapter title more persuasive and powerful, but that's a minor concern.

The last three chapters address filing tips, figuring and paying taxes, and social security taxes. Many taxpayers need and want to know about extensions, the advantages and disadvantages of IRS advice, adjusting withholding, the AMT, and what is subject to social security taxation. Julian takes the reader through a solid overview of topics that are complicated in their fullness. He does so in the same way he does in the other chapters, by using stories based on actual tax cases. When I noticed that he takes the reader through the Harris case, which I use in my basic tax course, I understood he uses one of the techniques I used to persuade my students that tax is not boring. All I will say here about that case is that it involves a wealthy elderly widower, two twin sisters who were Playboy Bunnies and became the widower's mistresses, payments by the widower to the two sisters, and the arrival on the scene of the IRS, special agents, and the Justice Department, and tax fraud prosecution. How does it turn out? Tax practitioners, read the case. Taxpayers who don't want to slog through the legal analysis, read Julian's book.

What I like about this book is that it introduces readers to tax concepts, tax terminology, and tax principles without compelling them to dig through the Internal Revenue Code, it regulations, IRS rulings, cases, and other legal material. That effort is best left for tax practitioners, and, of course, law students enrolled in tax courses. Someone not educated in tax law but who has read this book will have a more productive conversation with his or her tax advisor. It is also more likely that record-keeping will improve, decisions will be made in timely fashion, advice will be sought before the client enters into transactions, and deeper appreciation for what the tax advisor is trying to do will evolve.

To order a copy, contact Julian Block at 3 Washington Sq., #1-G, Larchmont, NY 10538 or go his website, julianblocktaxexpert.com. Or, as was the case with the previous books, email Julian at julianblock@yahoo.com.

EDIT: To order the book please visit www.nucostore.com
or click on this link.

How Do Toll Road Lessees Make a Profit?

One of the advantages of blogging is that I learn things I might not otherwise discover. In response to Turnpike Lease: Bad Policy and Now a Bad Deal, Lee Matchett shared what he calls "another twist" to the proposed arrangement. And indeed a twist it is. He noted that as one tries to determine why the lessee would fork over big bucks for the rights to take over what currently is the equivalent of a break-even enterprise, the answer must be found by "think[ing] through the deal from the other side." He asks:

What does the lessee have to gain, and what are the lessee's potential pitfalls?. One obvious potential liability for the operator would occur if there was a decrease in revenue caused by, say, a decrease in the vehicles deciding to use the toll road. What could cause this? Well, perhaps if alternative roads were improved, or if some other form of transportation were made available (mass transit, rail, etc.), maybe drivers would opt not to pay the increased tolls.

He then directed me to Patrick Bedard's column in the February issue of Car and Driver magazine. It's an important read for drivers, taxpayers, citizens, and voters. Not only are lessees extracting promises from state and local governments to refrain from making improvements to highways offering alternative routes to the leased toll road, they are also compelling the governments to make those alternate routes less attractive by reducing speed limits for no sensible reason (other than to steer vehicles onto the lessee's road) and by adding traffic signals and other restrictions that otherwise have no reason to exist.

Lee's point is important. I've consistently warned that the only way for private enterprise, in the business of making profits, to extract profits from a toll road that presently breaks even is to increase profits, cut services and maintenance, or both. So now the nasty twist to the deal is revealed. Revenue can be increased without raising tolls by coercing drivers to use the toll road. To the free market advocates, I direct this question: Is that how a free market works? If so, it's not a free market. Toll road lessees want to use public resources, namely, the legislature and highway department) to crush any opposition (the alternative roads). It's been happening in the corporate world, to no good end, and now invades the public sector through these "privatization" boondoggles.

Lee directed my attention to section 14.1(a) of the proposed lease agreement, an almost 700-page compilation of promises, payments, limitations, definitions, exceptions, and similar provisions that make the Internal Revenue Code seem simple. Section 14.1(a), which defines the "adverse actions" in which the Commonwealth promises not to engage, appears to exclude from "adverse actions" any "development, redevelopment, construction, maintenance, modification or change in the operation of any existing or new mode of transportation (including a road, street or highway) that results in the reduction of Toll Revenues or in the number of vehicles using the Turnpike." But at the same time, there does not appear to be any language prohibiting the Commonwealth, or any governmental authority established under its laws, from doing anything that would increase traffic on the turnpike. In other words, where is the promise that speed limits on nearby roads will not be reduced to 25 mph for no good reason or that traffic lights and stop signs won't be installed at every intersection on parallel highways? I wonder what would happen to the deal if the legislature insisted on putting in language that prohibits changes that steer drivers onto the leased turnpike? In fact, I wonder what would happen to the deal if every legislator and voter in the state read the proposed agreement.

When a Tax Statute Needs Fixing, Who Makes the Repair?

Four years ago, Congress added section 409A in order to curtail a variety of abuses that were taking place with respect to deferred compensation. The abuses rested on time value of money principles, in ways that conflicted with the tax principle that a cash method taxpayer must include compensation in gross income when it is actually or constructively received. It's not that deferred compensation violates the tax law per se, as there are all sorts of tax advantages for deferred compensation arrangements structured in ways that comply with the qualifications for tax-favored deferred compensation plans, but that arrangements no satisfying those qualifications were being used to obtain the same, or better, tax breaks.

The provisions of section 409A are extensive and complex. The gist of the statute is that compensation deferred under a nonqualified plan must be included in gross income for the taxable year during which the plan fails to comply with specific rules with respect to distributions, benefit acceleration, and elections. The Congress also delegated to the Treasury and thus the IRS the authority to promulgate regulations "necessary or appropriate to carry out the purposes of this section."

Regulations were proposed, with effective dates that are now beginning to trigger application of the new rules. They also have triggered extensive discussion among members of the teaching profession, including tax and other law professors. Why? Most K-12 teachers and higher education faculty are employed under 9 or 10 month contracts. Some institutions permit these employees to elect to receive their pay over a 12-month period. Other institutions automatically make the payments over a 12-month period. The institution's incentive is the postponement of some portion of the cash outlay to beyond the close of the school year. The employee's incentive to make the election is to have a regular stream of monthly income, for psychological and budgeting purposes. In present value terms, the cost to an employee almost always is less than $100, whereas to an institution with 1,000 employees, the benefit is on the order of $100,000. For this reason alone, most faculty make the election.

Technically, when the election is made, the employee is deferring compensation. For example, if a teacher's salary is $60,000 for a school or contract year that runs from September 1, 2008, to June 30, 2009, the teacher would be paid $6,000 per month in the absence of the election. Thus, $24,000 of the salary would be received in 2008, and $36,000 would be received in 2009. If the teacher makes the election, the teacher would be paid $5,000 per month. Thus, $20,000 of the salary would be received in 2008, and $40,000 would be received in 2009. There is a deferral of $4,000 of compensation from 2008 into 2009.

Under the general principle underlying section 409A, if the salary in the preceding example is paid out over 12 months, the $4,000 of deferred compensation should be taxed in 2008. The Treasury, however, decided that this sort of deferral is not the abuse to which section 409A was directed. Accordingly, the regulations provide that the $4,000 will not be taxed in 2008 if the employee makes the election, makes it before the first day of the academic year to which it applies, makes the election irrevocably, and specifies how the compensation will be paid (e.g., in equal monthly, weekly, or other periods over the 12-month acacdemic year).

For employees of institutions that require the employee to make an election, the institution must check the technical language of the election form to make certain that it complies with the regulations. That is not too onerous a task, though it surely must be an inconvenience, and a trap for employees of institutions that are unaware of the need to do this. For employees of institutions that automatically pay the salary over 12 months, the challenge is much more substantial. Unless the institution creates an election form and an election procedure, the $4,000 in the preceding example will be included in 2008 gross income. Not only is there a burden on these institutions to create the process and formalities, there is a burden on hundreds of thousands of teachers to obtain the election form, fill it out, and return it to their payroll or other administrative officers. Surely, some institutions will overlook this requirement. Surely, some teachers at institutions that adopt election procedures will be confused and some others will ignore it.

During a discussion of the "election exception" in the regulations, someone suggested that it would have been easier had the regulations deemed the election to have been made by all teachers on 9 and 10 month contracts being paid over 12 months, unless they elected to have the deferred compensation taxed in the earlier year. Very few would make that sort of election. In other words, if institutions automatically make the payments over a 12-month period, the teachers should be treated as having elected that outcome. I'm going to guess, but it may be that in school districts whose teachers are members of a union, the 12-month payout is part of the negotiated contract ratified by the teachers, and if so, there's a good argument that the ratificiation constitutes an election to be paid over 12 months. Why, then, require each teacher to make a separate election?

Though the suggestion is overflowing with common sense, it was criticized as running afoul of another tax principle. The Treasury and the IRS, so goes the argument, lack the authority to exempt a group of taxpayers from section 409A without requiring those taxpayers to take affirmative steps, i.e., the election, to escape the rules. Thus, if the statute provides for a silly result, which it does in the instance of teachers being paid over 12 months, the administrators of the tax law have no proper recourse other than to seek a technical amendment of the statute by Congress. The disadvantage to this approach is that it sometimes takes Congress several years to fix its mistakes. In one instance it took three decades. The irony is that when teachers begin complaining to their Congressional representatives, the staff of those representatives will draft "How dare you do this?" letters to the Treasury and IRS. Savvy IRS Commissioners inform the Congress that the IRS simply is enforcing the law Congress enacted.

To me, the provision in section 409A that authorizes Treasury to promulgate regulations "necessary or appropriate to carry out the purposes of this section" shifts the debate over the teacher election provision from one of whether Treasury could take the suggested "deemed made" approach to one of whether the "deemed made" approach makes sense. To me, the proposal makes much sense. Employees who already have made or are making elections in accordance with the institutions' existing policies continue to do so. Life goes on as usual. Employees who automatically receive pay over 12 months, because their institutions decided to take that approach or because the union bargained for that approach, are treated as having made an election without being required to bother themselves with the process. Life goes on as usual. The intrusion of the tax law is negated.

Often, however, there is no such escape clause giving Treasury and the IRS authority to fine-tune the statute. In those instances, consider what would happen if the IRS and Treasury enforced the statute asa written. The combination of poorly drafted statutes coming out of the Congress (due in part to the increasing influence of special interest groups and the drafting of legislative language by members' staffs not expertised in tax) and the foot-dragging on technical corrections (often held hostage for unrelated matters) would create havoc with tax administration.

A classic example is section 102(c). It provides that the exclusion of gifts from gross income does "not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee." Simple enough, isn't it? Yet what happens when Mom, who operates a gift shop, hires daughter to work for her? Along comes daughter's birthday, Mom buys her a gift, and under the literal language of section 102(c) daughter has gross income. It's a ridiculous result. The person or persons drafting section 102(c) should have included the phrase "in connection with the employment relationship" after the word transferred. So why hasn't this absurdity become a problem? The Treasury, in a proposed regulation, provided that section 102(c) would not be applied in that sort of situation. Did Treasury, by doing so, in effect amend the statute? Yes. Should it have? Even the advocates of strict interpretation would be hard-pressed to reject what Treasury did. There are a number of places in the Code where the Tresury and the IRS have "come to the rescue of Congress" or, perhaps, to the rescue of themselves and of taxpayers.

Though it's difficult to oppose Treasury and IRS "bailouts" of Congress in at least some of the situations in which they have done so, the temptation is oh, so strong, to let Congress reap what it sows, just to teach it and the nation that elects it a lesson or two. Imagine if the tax law were administered by the IRS as literally drafted. It could be a nightmare and then some. It might just spark some genuine change in how Congress does business and it might just bring the quality of Congressional work product to a professional level.

I suppose one answer is that the extent to which Treasury and the IRS bail out the Congres depends on the extent to which it is consistent within the guidance coming from the legislative history. That, too, is troubling because it means the staff writes what the law should have been, and that is a very different process from the law being written and enacted by elected officials. If it is wrong for the IRS and the Treasury to "revise" the statute to fix a Congressional error, is it any less wrong for unelected staff to do so in legislative history or even in post-legislative explanations as is currently done?

In any event, if you are employed under a 9 or 10 month contract and are paid over 12 months, you will be well served if you contact your payroll or other administrator to make certain all is at it needs to be so that the deferred compensation is not taxed in the year before it is received. It also would make sense to check your 2008 W-2 form next January to make certain it reflects what it should reflect. Have fun.

EDIT 17 June 2008: OK, joke over, errors removed. No one in the Congress noticed.

Gasoline, Oil, and Windfall Profits Taxes

On Tuesday, the Senate rejected an attempt to impose a windfall profits tax on oil companies. Why the proponents of such a tax think that it would increase the amount of oil in the ground, reduce the cost of finding and extracting that oil, lower the expense of refining it into gasoline, or improve vehicle energy efficiency isn't clear. The rejected legislation also would have permitted lawsuits against OPEC. And how, if at all, would a successful litigant enforce a judgment against OPEC?

The rapid increase in gasoline prices is a product of several developments. None of the problems each of these developments reflects would be solved by imposing a windfall profits tax or by suing OPEC.

First, worldwide demand for oil has caught up to, and passed, worldwide supply. Persuading OPEC to ramp up production, which for all practical purposes means convincing Saudi Arabia to increase output by a fraction of the world's shortfall, would do nothing but accelerate the day when OPEC would explain that it had no more oil to pump, or at least insufficient oil to pump. The solution is to find ways to replace oil as an energy source, and to find ways to reduce oil use while its replacement is sought, developed, and prepared for market.

Second, speculators, who are nothing more than gamblers, are betting that oil prices will rise, and so they purchase oil futures. That in and of itself drives the price higher. Again, it is a matter of supply and demand. As more and more speculators, including hedge funds, commodities dealers, day traders, institutional investors, and others looking for the "quick and easy" profit try to purchase future oil, the price increases because the amount of future oil is no less constrained than is the amount of present oil. The solution is to examine the extent to which stock, commodities, futures, and other trading should be regulated to remove the element of gambling. The difficulty is that these markets, like most others, involve an element of risk, and thus reflect an element of gambling. To outlaw everything that involved a gamble would be to outlaw life. On the other hand, if the trading in oil futures, or any other stock, commodity, or other item, is adversely affected by manipulation, deliberate mis-information, or other forms of cheating, then intervention is required because those practices make the market one that is not free.

Third, the price of oil, and gasoline, in dollar terms, has increased because the value of the dollar is plummeting. No tax and no litigation against OPEC would solve that problem. The latter course of action might make the weakening of the dollar even worse. The solution to the weakening of the dollar is to lessen or eliminate the things that weaken the dollar. There are two that need significant and rapid attention. One is the federal budget deficit, and the other is the trade deficit. The things that need to be done to fix those aren't as easy as imposing a tax on some "abstract" set of entities, which, when one thinks about it, is a tax on those who own those entities, including investors, pension plans, university endowment funds, and other shareholders. What needs to be done is the opposite of what people suggest is the problem. Consumption needs to be curtailed until it matches domestic production. Those who want to ramp up consumption to "jump start" the economy ought to be putting their efforts into ramping up domestic output. Why cannot American enterprise develop and market renewable energy? Why is this nation so willing to become dependent on other nations for goods and services that are essential to the well-being and survival of the United States? To what extent do government economic and tax policies put national well-being and security in a back seat to the enrichment of the rich?

If oil companies indeed are reaping windfall profits, should not the marketplace react by a refusal to purchase their products? To some extent, that is not possible because gasoline, diesel fuel, and other petroleum products have become an essential commodity. But to some extent it is possible, because these items are being wasted. For example, those who drive at 80 mph in 55 mph zones are not only creating safety risks, they are burning far more gasoline or diesel fuel than they would at 55 or 60 mph. Can there be that many people indifferent to the price of gasoline? A local Lukoil station raised its prices to $4.49 per gallon for regular gasoline, an amount significantly above what is being charged by other stations in the vicinity. Local residents surely are avoiding this station, but out-of-town drivers are likely to stop there because it is close to an Interstate highway interchange. Perhaps competitors can put up signs directing people to their stations, so that eventually the Lukoil station loses most or all of its business or reduces the price.

One issue that doesn't get sufficient attention is the definition of windfall profits. The sound bite gurus harp on the total profits of oil companies. They could just as easily harp on the total profits of Microsoft, a company that delivers a product far less reliable than the gasoline and other petroleum products sold by the oil companies. What matters is rate of return. Consider this example. A company pays $40 for something it sells for $50. It incurs $5 of expenses in doing so. Its profit is $5, which is a 10% rate of return on the $50 of sales. Now suppose what it pays for its product increases to $80. Some might think that it should increase its retail price to $90 to recoup the $40 increase in the wholesale price. At this point, the company would be earning $5 of profits on $90 of sales, a return of only 5.6%. The company, which was expending $45 to make $5, would be expected to expend $85 to make $5. That makes no sense. Instead, the company ought to increase the price of its product to $100. It would then earn $10 of profits, the same 10% rate of return it realized before the wholesaler increased the price. Only if the price is increased to something more than $100, ignoring for a moment increases in the $5 cost per item of operating the business, could one claim that there is a windfall. Any other definition would justify imposing an extra tax on any investor who experiences an increase in the interest rate being paid by the bank or other debtor with which the investor has a deposit or investment. The problem is that this analysis uses numbers, and requires a sequence of reasoning that most people reject as too complicated. It doesn't fit into a sound bite. Unfortunately for sound bite devotees, life does not fit into a sound bite. Nor does the solution to the existing and forthcoming economic crises in housing, energy, and health care. Somewhere, somehow, someone needs to take America past the sound bite and past the "quick and easy" to a place where reward is attained through significant effort. Otherwise, the price of gasoline may become the least of our worries.

Turnpike Lease: Bad Policy and Now a Bad Deal

The Philadelphia Inquirer Editorial Board, in Take the Next Exit, has taken the same position on the unwise proposal to lease the Pennsylvania Turnpike as I have taken. In Selling Off Government Revenue Streams: Good Idea or Bad?, I pointed out disadvantages to leasing the turnpike, including the decrease in accountability and the dangers of selling off a public revenue stream. About a month later, in Are Citizens About to be Railroaded on Toll Highway Sales? , I criticized the secretive nature of the bidding process and suggested that the matter be put to a referendum. Three months later, in Turnpike Cash Grab Heats Up, I bolstered my opposition to the lease plans with information indicating that turnpike tolls would increase astronomically in order to generate the profits that the lessee would expect to yank out of a public asset. No sooner had the legislature rejected the governor's idea than it resurfaced, necessitating even more criticism, in Selling Government Revenue Streams: A Bad Idea That Won't Go Away, a post whose title summed up the problem. The governor either hasn't been reading my analyses of his turnpike lease proposals or has been reading them and then ignoring them. He's moved ahead, awarded the lease to a company from Spain, and has submitted the deal to the legislature for approval.

In its editorial, the Philadelphia Inquirer Editorial Board highlighted even more disadvantages to the arrangement. As economic conditions have changed, the assumptions used by the lease proponents to make the deal appear to be a "no lose" situation have also changed. Though the governor and his allies claim that the deal will generate $1.1 billion per year, it assumes that the investment of the up-front payment received from the lessee would generate a 12.5% annual yield. There's a phrase for that, even before the economy worsened. It's "wishful thinking." Using a more realistic 8.5% annual yield, which is what the state pension fund managers anticipate when they invest their holdings, the annual revenue stream drops to $800 million. But is 8.5% as realistic as it gets? The only investments getting that sort of return are very risky ones. Can one imagine the outcry if in an attempt to make the deal work, the state puts the money into the stock market and it tanks? Safer investments are generating 1, 2, perhaps 4% yields. That means annual revenue from the lease arrangement of $100 million to, at best, $400 million. And for this the governor wants to give up the right to the Turnpike tolls? Last week, in Is Tax Ignorance Contagious?, I wondered about the governor's tax education. Now I'm wondering about his economics studies.

The Philadelphia Inquirer Editorial Board prefers the imposition of tolls on I-80. This is an idea that I have discussed on several occasions, including Raising Revenue Through Tolls Isn't Simple. I continue to prefer mileage-based road fees. I first advocated this approach more than three and a half years ago, in Tax Meets Technology on the Road. I provided a more detailed explanation of how it works and why it makes the most sense in Mileage-Based Road Fees, Again. I revisited the proposal, which has been implemented in other jurisdictions, in Mileage-Based Road Fees, Yet Again, after support for it began to emerge from some public officials. The governor of Pennsylvania, unfortunately, for some reason is unwilling or unable to make a 21st century proposal to the Commonwealth, and instead insists on embracing a financing arrangement that smacks of the late 20th century business style for which the economy is now paying the price.

I call on the governor to step up with genuine leadership. Put aside the advice of the interest groups, the foreign investors, the deal-makers, and the folks who want to profit at citizen expense, and turn to something that is gathering support and being implemented in other areas. Putting in place a mileage-based road fee system not only provides revenue needed to maintain highways and bridges and not only does so in a fair and rational way that keeps the revenue in the hands of the public, it also will energize Pennsylvania commerce and industry by providing an opportunity for software and hardware developers to create jobs as they manufacture and install the mileage-based road fee system. Pennsylvania deserves better than a deal that sends toll revenue to Spain.

How to Cheat at Taxes

The information that I found most interesting in Friday's Philadelphia Inquirer article about one of state senator Vincent Fumo's confidantes agreeing to testify at Fumo's scheduled trial in the fall was not that fact but the revelation of how that confidante, Howard Cain, managed to escape paying taxes for 16 years. Cain's agreement to testify against Fumo was part of an arrangement by which prosecutors will seek reduced penalties and prison time when Cain pleads guilty to tax evasion charges next week.

What Cain did to evade paying income tax is fairly easy to describe, but more difficult to explain. Cain arranged for the fees and other income that he received for performing services to be paid to a corporation that he owned. Because he was the sole shareholder, sole officer, and sole director, there was no one to object to his decision to have the corporation fail to provide W-2 or 1099 forms to Cain. Thus, the IRS did not know that Cain's corporation was paying him income.

It is not clear from the story whether Cain’s corporation filed tax returns. If it did, then one would expect the return to show a deduction for the payments to Cain, or distributions to Cain, or some combination of the two. Would that not alert the IRS, or its computers, to the inconsistency between the information on the corporate return and the lack of reporting by Cain because he filed no return? If the corporation did not file a return, why was that not picked up? Perhaps because 1099 forms were not being filed for the payments made to the corporation. If the circumstances are as can be inferred from the story, no obligation to file 1099 forms may have existed.

It comes down to reporting, not just with respect to the taxpayer’s tax returns, but also with respect to information returns, including W-2 and 1099 forms. Unfortunately, every time the IRS or Treasury suggests tightening up the reporting requirements so that the sort of information gap exploited by Cain can be closed, lobbyists appear to explain how the imposition of a reporting requirement on their clients not only would be a huge hardship for their client or the industry in which the client participated but also would destroy the national economy.

I wonder how many people will read about, or have read about, this particular fraudulent stratagem and have concluded that the only flaw is getting caught. I wonder how many people think that they have the skills to avoid getting caught. I wonder how many more people will try. I wonder how many have already tried and have managed not to get caught. I wonder how many will get caught. Hopefully, all of them will be discovered. I doubt that will happen.

What is the Farm Bill's Date of Enactment?

Last week, in Honoring Those Who Serve, I explained the mess Congress made with the farm bill. What Congress sent to the President was missing Title III. The President vetoed the bill. On May 22, the Senate and the House voted to override the veto. But because Title III was not in the bill, it was not enacted. Though some have suggested that none of the bill was enacted, others claim that the bill in the form sent to the President, vetoed, and then approved in the override, was enacted. In other words, everything but Title III has been enacted. What will Congress do next to fix this mess?

In Farm Bill Headache May Continue, J. Taylor Rushing reports that the Senate may vote on the entire farm bill when it returns. The House, on the other hand, wants to pass an amendment or some other "small-scale" fix. Yesterday, the Senate passed the entire bill, including the previously omitted title.

Why does this matter? It matters because there are provisions in the legislation that take effect on the date of enactment, or that apply to transactions entered into on or after the date of enactment, or that preclude application of certain provisions to property owned before the date of enactment, or that otherwise refer to the date of enactment. Therefore, it becomes important to determine when the legislation was enacted.

If Congress re-enacts the entire bill, is the date of enactment the day the bill is re-enacted, or is it May 22? Would the date of enactment for provisions in Title III be the day the entire bill is re-enacted? If the provision refers to "the date of enactment of this act" does it refer to May 22 or to the day that the entire act is enacted for the first time? One could argue that "this act" was not enacted on May 22 because only part of "this act" was enacted on that date.

If Congress enacts Title III on its own, or some other "small-scale" fix, is the date of enactment of the bill split into two? What then is the "date of enactment of this act"? Does it depend on whether the provision making that reference is in Title III or in another title? Or would the date of enactment for the entire bill be the date that its last piece is put into place when Title III or the "small-scale" fix is enacted?

If Congress wants to put an end to this nonsense, it could add a provision that specifies that the date of enactment is the date that the President signs whatever is sent to the White House in June, or, if it is vetoed, the date that the House and Senate override the veto. Alternatively, the Congress could replace the phrase "date of enactment…." with a specific date, for example, May 22, so that even if the entire bill is re-enacted, there would not be any disadvantage to someone who takes action or fails to take action between May 22 and the date that the entire bill, in contrast to the bill with the missing title, becomes law.

Otherwise, the question may end up being litigated. Consider someone who makes a purchase or enters into a transaction on May 25. Without an answer in the final legislation, this person may end up in a dispute with the IRS concerning the applicability of the new provision to the May 25 transaction. So although there is no way to sue the Congress or its staff for sloppiness, the gaffe will find its way back into the public spotlight several years hence. That simply cannot be good for the nation, can it?

Fertilizer and the Tax Code

Joe Kristan, of Tax Update Blog fame, provides me with more fodder for MauledAgain. In IRS - THE UBER-BUREAUCRACY Joe quotes from my Not to Its Credit indictment of what Congress has been doing to the tax code. He notes my exasperation:

I object to the Internal Revenue Service being turned into a institution that is focused more on the technical requirements of energy production activities than on administering revenue laws. I wonder why financial incentives to produce and conserve energy aren't administered by the Department of Energy.

Joe then makes an interesting point, one to which I did not pay the attention it deserved. Joe writes, with regard to the point I made:

This point is almost always ignored in discussing tax complexity. Every specialized tax credit - like the "agricultural chemicals security credit" included in the new farm bill - adds a little more to the power of the IRS. Thanks to these sorts of provisions, the IRS is a powerful public policy player in energy, housing, research and development, charitable giving, regulation of non-profits, employment policy, retirement policy, and now, fertilizer. Congress is well on the way to turning the IRS into a shadow super-agency with influence across the whole range of public policy. The IRS Commissioner is a bigger player in some policy matters than the cabinet secretary nominally overseeing the area.

Joe’s point not only is interesting, it is important. With so much government policy being encoded in the tax law, and with so much delegation by the Congress to the IRS, it’s no wonder that the IRS is on everyone’s radar. Select a business, or activity, or transaction, and what the IRS decides and promulgates is important not only with respect to tax collection but with respect to how one manufactures vehicles, farms land, builds houses, develops medicines, researches energy development, or simply breathes. I hadn’t mentioned the fertilizer issue. But I’m glad Joe brought it up. He expresses a sense of doom not unlike what I have shared on other matters:

It's hard enough for IRS agents to just determine somebody's income. Having them oversee research and development, or fertilizer, isn't very promising.

So true, but let me cast Joe’s concern in even gloomier light.

Before its amendment by the American Jobs Creation Act of 2004, Internal Revenue Code section 45(c)(1)(C) specifically included “poultry waste” as a qualified energy resource for purposes of the section 45 renewable electricity production credit. Section 45(c)(4) specifically defined poultry waste as “poultry manure and litter, including wood shavings, straw, rice hulls, and other bedding material for the disposition of manure.” The 2004 amendment removed the language because it expanded the scope of qualified resources to include “open-loop biomass” which is defined in section 45(c)(3)(A)(i) as including “agricultural livestock waste nutrients.” That term is defined, in turn, in section 45(c)(3)(B)(i) as “agricultural livestock manure and litter, including wood shavings, straw, rice hulls, and other bedding material for the disposition of manure.” Section 45(c)(3)(B)(ii) defines agricultural livestock to include “bovine, swine, poultry, and sheep.” In other words, the chicken and turkey manure tax credit was expanded so that cows, pigs, and sheep did not feel left out. Congress did some equal opportunity shoveling down on the farm.

We’re told, in articles such as Waste Not from Farm Industry News, that chicken manure is a fertilizer. So it turns out that the IRS has been dealing with fertilizer since 1999, when the Tax Extension Act of 1999 inserted former section 45(c)(1)(C) into the Code. Fear not, Joe, the IRS has had almost a decade in which to become expert in fertilizer and manure.

The possibilities are endless, but my mother reads my blog. So I’ll leave to your imagination the word play that is so tempting. Chicken manure is just too genteel a term to use to describe what Congress has been doing to the Internal Revenue Code.