Friday, May 25, 2012

The Philadelphia Real Property Tax: Eternal Circles 

That old quip about death and taxes takes on an even sharper meaning when one considers the never-ending story of the Philadelphia real property tax system, its flaws, and the politicians who run in circles as they purport to deal with a serious fiscal issue. My commentary on the tale began in An Unconstitutional Tax Assessment System, and continued through Property Tax Assessments: Really That Difficult?, Real Property Tax Assessment System: Broken and Begging for Repair, Philadelphia Real Property Taxes: Pay Up or Lose It, How to Fix a Broken Tax System: Speed It Up? , Revising the Board of Revision of Taxes, How Can Asking Questions Improve Tax and Spending Policies?, This Just Taxes My Brain, Tax Bureaucrats Lose Work, Keep Pay, Testing Tax Bureaucrats Just Part of the Solution, A Citizen Vote on Taxes, Freezing Real Property Tax Reassessments: A Nice Idea, The Tax Price of a Flawed Tax System, Can Bad Tax Administration Doom the Tax?, Taxes and Priorities, R.I.P., BRT, A Tax Agency Rises from the Dead, and Tax Law as Subterfuge: Best Use Valuation v. Current Market Valuation, How to Kill a Bad Tax System That Will Not Die?, The Bad Tax System That Will Not Die Might Get Another Lease on Life , Robbing Peter to Pay Paul, Tax Style, and Don’t Rob Peter to Pay Paul: Collect Unpaid Taxes.

Just as I thought there might not be much more to say about this saga, along comes a Philadelphia Inquirer report that examines the growing public discussion about the effects on property owners of assessments being reset to market value. What caught my eye in the article was not the description of which neighborhoods would see assessments increase and which would see them go down, but the musing that “there seems to be little rhyme or reason why that divide between assessed and actual market value would be less than $4,000 in Kingsessing but more than $18,000 in West Fairhill.” Though the city’s finance director mentioned in response that some people think properties on the lower end of the price range end up with more accurate assessments, he also noted that when one looks at the assessment-to-market-value comparisons, “it seems much more random than that.”

The answer is simple. Current assessments have been derived by a group of assessors who did not and do not necessarily think in the same manner, give the same weight to particular factors, or exercise the same judgment when dealing with subjective matters such as a property’s condition. Though in theory the same system should be in place for the assessment of each property, in practice the process generated all sorts of outcomes that cannot be reconciled with each other on any sort of rational basis. In theory, the market sets the value, but in any given year, the market usually is quiet with respect to most properties and even with respect to most adjacent properties. Properties, though, are valued for other purposes, such as an owner’s application for a home equity loan, but this information is not public, unless the property owner wants to make it public, such as for purposes of contesting an assessment. Outfits such as Zillow provide asserted values, but those figures reflect basic data such as property size, number of rooms, and sales of nearby properties, without taking into account the condition of the property’s electrical, plumbing, heating, and other systems, the existence of radon or termites, or the condition of the interior.

Ultimately, valuation is a guess, and in the market place it is determined by where two guesses meet. That is how two different people can end up paying different amounts for the same product or service. In the property tax assessment process, more than one person is guessing, and each uses a different perspective, influenced by differences in education and experience. The new assessment system being put into place by the city attempts to push these variables to the side. Only time will tell if it makes a difference, or if the widespread inconsistencies continue. And if they do, the story’s ending will be pushed off even further into the future.

Wednesday, May 23, 2012

The Failure of Tax Policy Deductions: Specific Evidence 

Earlier this month, the Congressional Research Service released a study of section 179 first-year expensing and section 168(k) bonus depreciation. These provisions are poster children for the repeated “tinkering” by the Congress with tax provisions that contribute to complexity not only in terms of computation, but also in terms of dynamic instability. The overall conclusion of the report is that these frequent changes in the tax law have failed to provide any sort of economic benefit to the nation. The report does not seem to be available online, but can be purchased from private vendors.

The CRS report concludes that “temporary accelerated depreciation is largely ineffective as a policy tool for economic stimulus.” At best, it provides benefits to taxpayers who already had planned to make the investment rewarded by the special deductions. In terms of economic efficiency, the provisions fare poorly, because they “worsen the deadweight loss associated with the federal tax code” and “divert some capital away from relatively productive uses and into tax-favored ones.” Similarly, the provisions get low marks for tax equity, tilting “the federal income tax away from vertical equity,” having “no effect on the taxes paid by small business owners over time on the income that can be attributed to the affected assets,” and having “no discernible effect on the distribution of after-tax incomes.” When it comes to tax administration, the benefits in terms of reduced depreciation record-keeping for assets whose cost is totally written off under the provisions is more than offset because “the rules governing the use of the allowance add a layer of complexity to the tasks of administering and complying with the tax code,” generating costs that are “regressive to firm size.”

About a year ago, in Who’s More Important in the Tax World? People or Machines?, I reviewed the reasons I object to section 168(k) and the overuse of section 179. To highlight some of my comments:
More than two years ago, in Just Because It Didn’t Work the First 50 Times Doesn’t Mean It Will Work Next Time, I criticized the revival of section 168(k) bonus depreciation and the expansion of section 179 first-year expensing. I argued that these changes to the tax law don’t help restore vitality to the American economy. I wrote:
Does it make sense to increase deductions for acquisitions of equipment? How does that restore confidence in the economy, which is essential to putting the nation back on track. How does a tax provision that encourages businesses to use their limited funds to buy machinery put people in this country back to work? * * * * *
Almost a year ago, in If At First It Doesn’t Work, Try, Try, Try Again, I criticized the Obama Administration for proposing a change in the tax law that would permit taxpayers to deduct the full cost of asset acquisitions made in 2011. I noted:
Such is the life of one of the business world’s favorite tax breaks. Entrepreneurs salivate at the idea of getting a deduction for making an investment. * * * * *
I then asked:
The previous incarnation of section 168(k) “bonus depreciation” as well as continual expansion of section 179 expensing have been consistently hailed as solutions to the nation’s economic woes of the moment. Yet no evidence exists that these tax giveaways have had the claimed effect. Why is it, for example, that during 2008 and 2009, while businesses basked in the benefit of 50-percent bonus depreciation, the economy got worse, not better? * * * * *
Last December, in When the Bonus Depreciation Tax Deduction is Not a Bonus for the Economy, I concluded:
This expansion of section 168(k) bonus depreciation is touted as yet another essential piece to putting the economy back on track, which is pretty much the equivalent of asserting police departments would be improved if they hired and gave guns and badges to convicted felons. This approach hasn’t worked in the past, and it won’t work now. * * * * *
Coming on the heels of my recent post, The Failure of Tax Policy Credits: Specific Evidence that described the failure of the first-time homebuyer credit to revitalize the housing market, this CRS report adds to the growing list of reasons that the Congress must cease and desist from using the tax law as a disguised spending program that does little, if anything, for the vast majority of Americans.

Monday, May 21, 2012

Don’t Rob Peter to Pay Paul: Collect Unpaid Taxes 

A little more than a week ago, in Robbing Peter to Pay Paul, Tax Style, I reacted to news that some state legislators are trying to divert gaming revenue from wage tax reductions to supplementing revenue for the financially distressed Philadelphia School District. I concluded:
Hence the dilemma. There are four choices. Let the school system fall apart. Cut city services significantly. Increase the wage tax by 15 percent. Increase real property taxes on properties that are, and have been, grossly undervalued for at least a decade.
After my post appeared, a reader contacted me to point out that there is a fifth choice, namely, collecting back taxes that have not been paid. According to this reader, there are thousands of delinquent taxpayers, with an accumulated unpaid tax debt of $472 million. These statistics are reported in an analysis of Philadelphia’s unpaid taxes that examines a variety of aspects of the problem. According to the story, there are more than 110,000 properties on which taxes have remained unpaid past the due date. The reader asks a good question, specifically, “Why should the person who continues to pay their taxes have them increased over and over again and be forced to pay for those who haven’t paid their taxes for decades, and have no intention to pay in the future?” I replied with questions of my own, because I don't understand what the hold-up is with respect to foreclosing on these properties. Is it a concern that flooding the market with sheriff sales will drive down the prices? Is it a staffing resource issue, namely, how many sales can the department process in a week? Is it a logjam in the courts? Where is the bottleneck?

According to the previously mentioned article, the city has proceeded against only 18 percent of delinquent properties, and in recent years the number of sheriff sales has declined. Whatever might be the reasons, it’s not a market value problem. According to a related article, a renowned valuation expert examined 72,000 of the delinquent properties and concluded that almost 71,500 of them were worth more than the accumulated tax debt, and that 68,500 of the properties were worth at least twice as much as the unpaid taxes. According to yet another article in the series, one reason is the disarray in the city’s property and tax delinquency records. The accounts in this story are reason to lift one’s eyebrows. The system is filled with erroneous classifications, non-delinquent properties tagged as delinquent, payments not credited to the property for which made, liens not cleared after taxes are paid or properties transferred to new owners with allegedly clear titles, and records for properties that no longer exist because they’ve been subdivided or merged into another property. One taxpayer afflicted with the consequences of this chaos noted, “we are still trying to solve a problem that was created by poor performance of city agencies.”

A petition now exists for Philadelphia taxpayers to sign, urging the city to get moving on collecting back taxes and asking the state to compel the city to do so. Considering that other counties in the state need one or two years, at most, to collect unpaid taxes, it is not unreasonable to expect the city of Philadelphia to get up to speed, quickly.

Friday, May 18, 2012

Putting Tax Money Where the Tax Mouth Is 

Certain taxpayers are in the habit of trying to obtain public funding for private sector enterprises through tax breaks. The gist of the argument is that the private sector activity for which they seek a tax break is good for the public. The problem with that argument is that pretty much every private sector activity, aside from criminal behavior, is good for the public. Carried to its extreme, the argument supports a conclusion that every private activity ought to be the recipient of tax breaks. As a practical matter, the private activities that benefit from this feeding at the public trough are those with sufficient funds to hire lobbyists to push for advantages unavailable to most entrepreneurs.

The long-term disadvantage of this approach to funding private sector enterprises has reared its ugly head in Chester, Pa. That city has been in woeful financial condition for decades. A few years ago, a stadium was built in Chester, which is used primarily by a major league soccer team. More than four years ago, in Soccer Franchise Socks It to Bridge Users, I criticized the decision of the Delaware River Port Authority to divert bridge toll revenue from bridge repairs and maintenance to funding of that soccer stadium. In addition to diverted bridge tolls, another $77 million of taxpayer funds, perhaps more, was funneled into the project, as described in this article. In addition, the site was granted property tax exemption for a period of time ending in 2014. One of the arguments for public funding of the park was the promise that it would bring economic development and transactional activity to the city of Chester, thus increasing the city’s tax base and increasing its revenue. Now, according to this Philadelphia Inquirer story, facing a revenue crisis, in part because the promised economic development did not materialize, Chester has announced that “it is considering a 10 percent tax on ticket sales and a 20 percent charge for parking” at the stadium.

A team representative expressed dissatisfaction with the idea of taxing tickets and parking, and claimed it would be “catastrophic to our business.” The representative then offered the clever argument that the promised development did not occur because no one would want to invest in Chester when there “could be future taxes.” Wasn’t the entire argument for public funding the notion that the city of Chester would have increased tax revenues from the activity generated by the taxpayer-funded private enterprise?

Here’s the problem. Private enterprise, which for the most part rejects taxation and government regulation, is quick to find ways to tap into public funding that is financed by the very tax systems that private entrepreneurs detest. Though the argument that a particular private enterprise is good for the public gets transformed into a plea for public funding, what’s missing is evidence that the public funding is necessary. And, if the public funding is necessary because the private enterprise otherwise is not economically viable, ought not the private sector not pursue an uneconomical proposal? Ought not the question be whether the private enterprise is necessary for the health and welfare of the public? It’s one thing to seek public financing for a private enterprise that puts out fires, prevents river flooding, and improves public safety. It’s a totally different animal to seek public funding for the construction of a stadium that is important to the small fraction of the public that cares about the sport in question.

The absurdity of private enterprise feeding at the public trough is illustrated by the almost-completed deal to finance the construction of a stadium for the Minnesota Vikings. The team, a member of a league that hauls in billions of dollars of revenue every decade, managed to cajole state and local legislatures to approve public funding for its private activity. According to this Alexandria, Minn., Echo Press story, Minnesota would fork over $348 million and Minneapolis would dish up $150 million for the construction of a stadium owned by taxpayers who supposedly were going to use their increased after-tax-cut dollars to fund job-creating enterprises. So apparently the get-richer-quick deal is to buy some votes, get a tax cut, use a fraction of the tax cut to hire lobbyists, and have those lobbyists extract tax dollars from the government.

Here are two solutions. The first is easy. When a private enterprise seeks government funding, just say no. If it’s an economically viable project, it will survive in the free market on its own. The second solution is an alternative, to permit flexibility in cooperation between the public sector and the private sector. When the private sector entrepreneurs offer promises that their project will increase government revenues, hold them to that promise. Compel them to offer a number. Compel them to guarantee that if the revenues do not materialize, they will make up the difference. If they truly believe their project will do what they promise it will do, they ought not hesitate to agree, because the guarantee rarely if ever will need to be met. I doubt, though, that the private sector handout seekers will agree to such a guarantee, because they know the reality of these sorts of deals. The promised tax revenue benefits rarely, if ever, show up.

Wednesday, May 16, 2012

The Failure of Tax Policy Credits: Specific Evidence 

Recently, Sarah J. Webber, of the University of Dayton School of Business Administration, released a paper written last year that explores the effectiveness of the first-time homebuyer credit. In Don’t Burst the Bubble: An Analysis of the First-time Homebuyer Credit and Its Use as an Economic Policy Tool, Webber concludes that real estate experts advocating use of the credit to stimulate the housing market “have failed to objectively evaluate the true economic benefit of the homebuyer credits” and “have not empirically demonstrated that the homebuyer credits stabilized the real estate market or that the recent, modest improvement in the market would not have occurred but for the credits.” Worse, “despite the credits, economic data suggests that foreclosures continue to plague the real estate market and home prices have yet to fully rebound.”

Webber points out more effective approaches were available. Congress could have “funded the administration of a subprime mortgage modification program,” using the revenues lost through the credits. Alternatively, if pushing money into the hands of homebuyers “was necessary,” a better solution, in light of the difficulty in proving tax credits to be “the most effective and efficient vehicle,” would be, quoting National Tax Advocate Nina Olson, “a HUD-directed spending program where the home buyer is given the money at closing.” This is the point I have been making about tax policy credits for many years, most recently in posts such as The Problem with Income Tax Vehicle Credits, Congressional Mis-delegation Endangers Tax Collections, and More Criticism of Non-Tax Tax Credits, When Tax Credits Aren’t Worth the Trouble, The Disadvantages of Tax Incentives, Tax Incentives Gone Wild, and Tax Credit = Reverse Tax.

In her analysis, Webber points out the challenges of using the tax law as a substitute for direct subsidies and other approaches to solving problems. The first-time homebuyer credits posed administrative challenges to the IRS, even more serious than those posed by credits generally. Policing compliance was difficult, with tens of thousands of falsely-claimed credits, and logistical difficulties in finding ways for the IRS to confirm the validity of credit claims. The opening of hundreds of thousands of investigative files and the freezing of even more refund claims based on the credit have choked the tax system. Criminal charges have been brought against taxpayers and against tax return preparers gaming the system. The fact that prisoners were claiming and receiving refunds based on the credit should be enough, standing alone, to demonstrate the foolishness of trying to hide subsidies and federal spending in the sheep’s clothing of tax credits.

Worse, because of the stratification of the home market and the different rates of foreclosure between low-cost homes and high-end residences, the credit appears to be subsidizing the latter much more than the former. Considering that the Congressional Research Service has concluded that falling prices and low interest rates have contributed far more to the modest recovery in the residential real estate market, the value of the credit not only is questionable in terms of its goals, it poses far more disadvantages than advantages. It is even possible, according to some researchers, that the credit merely affected the timing of purchases by those who would have been purchasing homes in any event, and did not increase the finite pool of home buyers. Others have argued that the credit prevented the market from clearing out the effects of the housing bubble and even encouraged the building of new homes at a time when that market was saturated. In all fairness, similar arguments can be made against direct spending subsidies, although those can be more precisely directed at specific market targets, and are much more transparent in their administrability.

There are lessons to be learned from this experience, even as other lobbying forces are ramping up their efforts to add more credits to the tax law for their pet projects. It’s not a question of whether the stated goal of a credit is a good thing, because of course it is a good thing to encourage home ownership, adoption, energy efficiency, use of alternative fuels, research and development, and the other dozens upon dozens of activities funded by tax credits. What is not a good thing is to fund these activities in a manner that hides the increase in federal budget deficits that are condemned when they occur through direct spending. If it’s acceptable to increase the deficit to fund these activities, why is it not acceptable to increase the deficit to improve education, enhance worker training, and repair the infrastructure, to name a few of the activities for which funding is so strenuously challenged?

Monday, May 14, 2012

Tax Cheating and Tax Complexity 

Late last week I received a press release describing a new book, Tax Cheating: Illegal – But Is It Immoral?, written by Donald Morris, an associate professor of accounting at the University of Illinois Springfield, a CPA, a certified fraud examiner, and a former tax practitioner. According to the press release, the book focuses on the question, “But who is to blame for tax cheating when most partaking in the activity don’t even realize they are breaking the law and are merely victims of the complexity of the tax code which is born out of 100 years of adding special provisions and exceptions?”

When I read this question I was taken aback. If a person does not realize he or she is breaking the tax law, the person is not committing fraud. Depending on the circumstances, the taxpayer could be accused of being negligent, perhaps even reckless. But in order to commit fraud, there needs to be intentionality and knowledge. For example, in Conforte v. Comr., 692 F.2d 587, 592 (9th Cir. 1982), the Court of Appeals for the Ninth Circuit explained that tax fraud is “intentional wrongdoing on the part of the taxpayer with the specific intent to avoid a tax known to be owing.” The Ninth Circuit repeated this position in Estate of Trompeter v. Comr., 270 F.3d 767, 773 (9th Cir. 2002), and in Maciel v. Comr., 489 F.3d 1018, 1026 (9th Cir. 2007), to cite just two of the cases demonstrating the vitality of this analysis.

There is no doubt, as Morris and many others assert, that the tax law is woefully complicated. There is no doubt it ought not be so complicated and need not be so complicated, and that at least some of the complexity is attributable to the campaign and other political games played by the legislators entrusted with the fiduciary duty of providing the nation with the best possible tax law. There also is not doubt that the pervasive complexity of the tax law causes taxpayers to make mistakes, even when they are putting forth their best efforts to comply. If a taxpayer makes a computational error, doesn’t realize that a deduction claimed last year isn’t available this year, is unaware of a newly enacted credit limitation, or mis-identifies a window as qualifying for an energy credit, the taxpayer is not committing tax fraud. The taxpayer is negligent, and perhaps there is a question of whether failure to research the tax law, keep up with changes in the tax law, or refer tax return preparation to a professional is immoral, but those acts do not rise to the level of tax fraud.

It is possible, though, that some taxpayers view the complexity of the tax law as increasing the probability that they will not get caught. Those taxpayers, however, are intent on cheating, and simply let the cover of complexity weaken whatever other deterrents exist to discourage tax cheating. Yet tax cheats do not limit themselves to complicated tax laws. Some of the most simple tax laws – such as a per-carton cigarette tax, the use tax, and the real property transfer tax – are the targets of significant numbers of tax evaders. Tax complexity might make it easier for tax cheats to rationalize their behavior, convinced that they need to cheat to keep up with the citizens sufficiently wealthy to purchase tax breaks for themselves. The irony is that most taxpayers convicted of criminal tax fraud or penalized for civil tax fraud either are among the ranks of those active in purchasing tax breaks or are among the large groups of taxpayers benefitting from decades-old widespread tax breaks.

Blaming dishonesty on complexity is totally off the mark. Complexity might enhance the temptation, but it does not create the noncompliant tax evader. The noncompliant tax evader is a reflection of the same cultural deficiency that encourages people to go straight out of the left turn lane, to go through EZPass toll booths without an EZPass device, to file false Medicare and Medicaid claims, and to assert that they were one of the 5,000 people on a public transit bus that crashed.

Friday, May 11, 2012

Robbing Peter to Pay Paul, Tax Style 

Philadelphia’s School District is in financial trouble. That’s not news. Tax revenues are down, spending cuts have not eliminated the budget deficit, and steeper cuts could cause the school system to collapse. The mayor has proposed increasing school district real property tax revenues by working a tax increase into the real property assessment reform, a proposal noted in The Bad Tax System That Will Not Die Might Get Another Lease on Life.

Now comes a Philadelphia Inquirer story that describes efforts by some state legislators to divert gaming revenue from wage tax reduction to supplementing the school district’s revenue. The legislators advocating this move are trying to prevent the shuttering of numerous schools while protecting city property owners from real property tax increases. The problem, according to the city administration, is that the city would then face a revenue shortfall unless it increased the wage tax by half a percentage point, which is roughly a 15 percent increase.

Hence the dilemma. There are four choices. Let the school system fall apart. Cut city services significantly. Increase the wage tax by 15 percent. Increase real property taxes on properties that are, and have been, grossly undervalued for at least a decade.

What would you do? What will the legislators do? Do you think they will do what you would do?

Wednesday, May 09, 2012

Tax Credit = Reverse Tax 

Almost a year ago, Pennsylvania State Representative Jesse White announced plans to introduce legislation “that would provide a tax credit for the adoption of a dog or cat.” Late last week, as reported in this article, the attempt to add the credit to the state income tax law failed by a vote of 97-96.

This effort is a textbook example of why it is so difficult to clean up the tax law. Any sort of objection to this credit will bring howls of protest and derision from many of those who like animals and have pets. I say many and not all because I like animals and have had pets, but I’m no fan of cluttering the income tax law with a provision whose goals can and should be accomplished in other ways.

The goal of the legislation is “to encourage adoption and discourage puppy mills and also ease the burden on shelters.” Those are noble goals. The tax law, and the Department of Revenue, are not appropriate vehicles for accomplishing those goals. I have criticized the use of tax incentives to achieve non-tax purposes at the federal level, as discussed in posts such as The Problem with Income Tax Vehicle Credits, Congressional Mis-delegation Endangers Tax Collections, and More Criticism of Non-Tax Tax Credits, When Tax Credits Aren’t Worth the Trouble, The Disadvantages of Tax Incentives, and
Tax Incentives Gone Wild, and I am no less critical of similar approaches at the state level. For example, would the Department of Revenue be responsible to make certain that taxpayers who claim the credit keep the adopted dogs and cats and don’t abandon them or drop them off at a shelter a few months later after filing their tax returns?

The state of Pennsylvania has a history of providing financial support to animal shelters. This is a classic case of good public spending, no matter what the so-called smaller-government and anti-tax advocates claim. Public health and safety is threatened when animals run wild that ought not be running wild, and the establishment of shelters provides a public service. Thus, the public ought to fund the efforts to take those animals off the street. In recent years, however, the anti-spending forces have succeeded in cutting state funding for shelters in half and have proposed to eliminate the funding altogether.

Representative White’s proposal would limit the credit to $7.5 million. It’s unclear what would happen if 25,001 taxpayers claimed the credit. That issue aside, why not simply provide $7.5 million of funding to animal shelters? Surely that is a more efficient use of $7.5 million than dishing out tax credits to taxpayers who may or may not even need the financial support to adopt a dog or cat. Despite the claims of the cut-taxes, cut-spending crowd, the $7.5 million credit increases the state’s budget deficit by the same amount as would $7.5 million in spending. Once again, I make the point that a tax credit is spending in disguise, and yet anti-spending legislators vote for tax credits without blinking.

The proposed credit has several other flaws. Why is it limited to dogs and cats? Is that not discrimination against those who favor other animals? I have a law school classmate friend who rescues birds and who has successfully advocated on behalf of birds that have been mistreated. Is her work no less noble than the work of those trying to save abused, abandoned, and neglected dogs and cats?

The proposed credit suffers from the same misguided notions as does the federal income tax adoption credit. It is inconceivable that anyone would consider the credit the tipping point between adopting and not adopting. Considering that the cost of raising and caring for a child or pet exceeds the credit or proposed credit by orders of magnitude, no one should rely on the credit as the financial wherewithal to taking on the responsibilities of having a child or pet.

The worse aspect of the credit is a defect that it shares with all other credits. The credit is a reverse tax. Setting aside the increased budget deficits generated by tax credits, if revenue is to be maintained when a tax credit is enacted, taxes must be raised across the board to fund the credit. Thus, those who, for whatever reason, cannot or do not adopt a dog or cat, are being taxed, whereas those who receive the credit, even net of the taxes they pay due to the across-the-board tax increase, are not paying additional tax. Thus, the enactment of a funded tax credit is a tax on those who fail to do whatever it is that those who qualify for the credit are doing. And if taxes are not increased to fund the credit, everyone pays through the economic effect of increased budget deficits. Either way, those who do not adopt pets are being taxed or charged. I wonder, once those who support the anti-tax groups because they don’t want to pay more taxes figure out the reverse tax implicit in the tax credits enacted by the supposed anti-tax, anti-spending legislators, will they shift their support to those who take a more sensible approach to taxation and spending?

Monday, May 07, 2012

Tax Incentives Gone Wild 

Two separate developments that appeared last week provide even more warnings about the dangers of relying on tax incentives to accomplish goals that are far beyond the scope of a rational tax law. This is not the first time that I’ve addressed this concern, as evidenced by posts such as The Problem with Income Tax Vehicle Credits, Congressional Mis-delegation Endangers Tax Collections, and More Criticism of Non-Tax Tax Credits, When Tax Credits Aren’t Worth the Trouble, and The Disadvantages of Tax Incentives, and I doubt it will be the last.

The first development was the introduction in Congress of a proposed “Qualifying Renewable Chemical Production Tax Credit Act of 2012”. This is truly a bi-partisan effort, as the each of the two members of Congress who introduced the bill belong to one of the two major political parties. The legislation would add a section 45S to the Code equal to 15 cents per pound of eligible content of renewable chemical produced by the taxpayer during the taxable year. Each taxpayer’s credit is limited to its share of a $500 million limitation allocated by the IRS among taxpayers claiming the credit. The definition of eligible content is a long, technical, and exception-ridden description that chemical engineers can understand, though few, if any, tax practitioners or IRS employees would appear to be well versed in terms such as biobased content, renewable chemical, biobased content percentage, biological conversion, thermal conversion, and renewable biomass. I daresay that the legislators who introduced this bill did not write it, and if compelled to hazard a guess, I’d put this language in the hands of lobbyists.

Not only would this legislation require the IRS to jettison revenue officers so that it could hire chemical engineers, it also would require the IRS to fire even more revenue agents so that it could hire more economists and scientists. Why? In allocating the $500 million spending increase masquerading as a tax credit, the IRS would be required to determine “the number of jobs created and maintained (directly and indirectly) in the United States” by each taxpayer’s credit allocation, “the degree to which the production of the renewable chemical demonstrates reduced dependence on imported feedstocks, petroleum, non-renewable resources, or other fossil fuels,” “the technological innovation involved in the production method of the renewable chemical,” “the energy efficiency and reduction in lifecycle greenhouse gases of the renewable chemical or of the production method of the renewable chemical,” and “whether there is a reasonable expectation of commercial viability.” It is not the role of the IRS to engage in these sorts of determination. Putting aside the question of increased government spending, why not allocate $500 million to the Department of Energy and tell it to administer this program? The answer, of course, is all sorts of nonsense about how the tax law is the better vehicle for accomplishing the purposes of the spending program, but the true answer is that it’s simply a way to spend money without disclosing the expenditure. That might resonate with people who don’t understand that reduced revenue, whether through credits or otherwise, and increased spending have the same effect on the budget deficit. It doesn’t resonate with those of us who can see through the ploy. But, speaking of ploys, it’s an election year, and the introduction of this bill might be nothing more than a sop to some campaign contributors.

The second development was a GAO report, Energy Conservation and Climate Change: Factors to Consider in the Design of the Nonbusiness Energy Property Credit, that explores the possibility of changing the section 25C nonbusiness energy property credit to one that is calculated using performance-based standards rather than simply the cost of the improvement incurred by the taxpayer. In a sentence set in bold and much larger font, the report declares: “Performance-based credits may have significantly higher compliance and administrative costs than cost-based credits.” And on what agency would these higher costs fall? The IRS, of course, which would need to dismiss even more employees tasked with tending to the agency’s primary revenue collection function. The report also explores the use of floors in the computation of the credit, which would make the tax law even more complicated, adding to the misery of taxpayers and the administrative and compliance burdens placed on the IRS.

Considering that the GAO issued the report in response to requests by the Congress, there is a significant possibility that the tax law will become even more complicated, even as the Congress tosses about the phrase “tax simplification.” Rather than listening to the Congress, Americans ought to be watching what the Congress does. And one of the things that it does is to make the tax law more complicated, for reasons that have nothing to do with sound tax policy.

Friday, May 04, 2012

Using the Tax System to Steal Identities 

They are persistent, that much must be conceded. I’m referring to people whose intelligence and cleverness could accomplish much to benefit society, but who choose to use their talents to do evil. The other day I received an email with the subject line “RE: Tax Exemption Notification” from a person using the name Isabella Charlotte. I doubt this person exists, and if she does exist, I doubt she is the sender of the email. I doubt that Charlotte is her surname. In the body of the email was a purported IRS logo, and a letter that began, “Sir/Madam, Our records indicate that you are a Non-resident.” Really? Guess what, Isabella Charlotte or whoever you are, I am not a non-resident. I cannot imagine what IRS records would exist showing me to be a non-resident. Of course, at that point I knew the letter was a scam, a product of a twisted and devious mind, but I kept reading.

The letter continued, “As a result you are exempted from United States of America Tax reporting and withholdings. . .” Even if I had not yet concluded that the letter was a scam, that phraseology would seal the deal. It’s not professional tax terminology. The letter then proceeded to request that I “recertify” my status by filling out “form W-4100B2.” Attached to the email was a concocted Form W-8BEN, not a “form W-4100B2.” The letter asked that the form be sent by fax to 1-815-390-1251, but the attached form requested that it be sent to 1-267-427-1363. The attached form actually asked that it be sent “to fax no- 1-267-427-1363 Via Email TO irs.usa@5acapital.com.” The forms, of course, ask for all sorts of identifying information, including social security number, bank name and account number, and so on.

Perhaps I give this “Isabella Charlotte” too much credit for intelligence and cleverness. Consider the sloppiness of this attempt to steal identities. Inconsistent form numbers. Inconsistent fax numbers. Grammatically confusing sentences. Absurd email address. Perhaps “Isabella Charlotte” doctored up a more sophisticated scam in an effort to avoid being linked to the originator of this particular phishing attempt. The clincher is the claim by “Isabella Charlotte” to represent “IRS Public Relations.”

So who is responsible for ridding the planet of this behavior, and curtailing the activities of those who engage in these counterproductive enterprises? Government? Which ones? The private sector? Who pays? The funneling of resources that could be used for more productive endeavors into the prevention of, and punishment for, fraudulent activity is a sad commentary on the failure of the species to make better progress. Sadder still is the probability that somewhere, someone will provide to this “Isabella Charlotte” and others like her the requested information. Again, it comes down to education, combined with careful monitoring of those who lack or lost the capacity to deal with these sorts of scams. And again, who is responsible? And who pays?

I wonder how much more prosperous the economies of every nation could be if this sort of behavior could be stamped out. Whatever is being done isn’t enough, because the practice continues. It will stop when it becomes a fruitless exercise. That hasn’t happened yet. Why?

Wednesday, May 02, 2012

Obstacles to Property Tax Reform 

Consider the situation in which two homeowners find themselves. Each lives in the same real property tax jurisdiction. Each owns a home worth $300,000. One pays real estate taxes of $1,500. The other pays real estate taxes of $3,500. Why the difference? A variety of factors contribute to the inequity. Appraisals are inconsistent. Appraisals are done at different times. Appraisals are not updated. The tax is computed using an arbitrary fraction of presumed value.

This sort of situation is the poster child for the Philadelphia real property tax system, although similar problems surely afflict localities across the nation. I’ve been writing about the Philadelphia real property tax dilemma since my first post, An Unconstitutional Tax Assessment System, and I have continued with a series of posts, Property Tax Assessments: Really That Difficult?, Real Property Tax Assessment System: Broken and Begging for Repair, Philadelphia Real Property Taxes: Pay Up or Lose It, How to Fix a Broken Tax System: Speed It Up? , Revising the Board of Revision of Taxes, How Can Asking Questions Improve Tax and Spending Policies?, This Just Taxes My Brain, Tax Bureaucrats Lose Work, Keep Pay, Testing Tax Bureaucrats Just Part of the Solution, A Citizen Vote on Taxes, Freezing Real Property Tax Reassessments: A Nice Idea, The Tax Price of a Flawed Tax System, Can Bad Tax Administration Doom the Tax?, Taxes and Priorities, R.I.P., BRT, A Tax Agency Rises from the Dead, and Tax Law as Subterfuge: Best Use Valuation v. Current Market Valuation, How to Kill a Bad Tax System That Will Not Die?, and The Bad Tax System That Will Not Die Might Get Another Lease on Life.

Fixing the problem should be simple. Appraise properties at current market value, and divide current revenue by total valuation to obtain the rate. One difficulty, as noted in The Bad Tax System That Will Not Die Might Get Another Lease on Life, is the temptation to increase revenues in the process of fixing valuations. The two processes should be kept separate. Another major problem, as discussed in a recent Philadelphia Daily News article, is the reaction of property owners who suspect that an appraisal set at market value will cause their real property taxes to increase. Though some property owners who have that worry might be worrying needlessly, there is no doubt that a substantial number of properties in fact are undervalued, and their owners will face higher taxes.

One taxpayer quoted by the article claims that her property taxes will increase to $5,500 a year. How does she know that? Does she have both the new appraisal and the new rate? No, because the new rate continues to be the subject of debate among the city’s leaders. This person also claimed, “I feel like I love the city and it doesn’t love me back.” How is a city supposed to show love? By selecting random individuals for tax breaks in the form of under-market valuations? By giving tax breaks to those who claim to “feel like I love the city?” How does one identify individuals who qualify? If the test were a matter of finding people willing to speak those words, the real property tax base and its revenues would plummet. Should the fact that someone has benefitted from years of inequitably low taxes, in comparison to property owners paying at higher effective rates, matter?

There are in place a variety of arrangements that property owners can use to blunt the impact of real property tax increased caused by the restoration of equity to the system. Some taxpayers qualify for programs designed to assist those who are economically disadvantaged in terms of income and those who qualify for certain benefits for the elderly. There also is a law that permits property owners to defer tax payment if their assessments increase by more than 15 percent. The deferred payments, plus interest, are due when the property is sold. In addition, the city is considering phasing in the tax increase, though no mention is made of phasing in the tax decrease for the taxpayers who have been relatively over-paying during the past several decades. The city also is trying to persuade the state legislature to enact a $15,000 across-the-board homestead exemption.

Coalitions of taxpayers are urging the city to delay switching to assessments based on actual value. One risk of doing so is a $41 million revenue loss triggered by a state tax board decision that opens the door to more appeals by taxpayers whose properties are over-valued. Ultimately, the question is how much longer should some taxpayers in the city, who have been paying disproportionately higher real property taxes, continue to subsidize taxpayers who have been paying disproportionately lower real property taxes? This question, it must be understood, overlooks the tougher question of how to ameliorate the effect of years of this unjustifiable subsidization, because the practical answer to that question is simply that it won’t happen. For that, the subsidized property owners have something for which to be thankful and a reason to appreciate the fact that things could be much worse.

Monday, April 30, 2012

A Questionable Health Tax Proposal 

Earlier this month, the Institute of Medicine of the National Academies released the third in a series of reports on the state of public health in this country. In the third report, the Institute turned to the question of funding federal public health efforts to cope with the “large proportions of the U.S. disease burden” that can be prevented. The proposal rests on the belief that the need for medical care and its associate costs can be reduced by preventing disease, illness, and injury, and on the belief that the cost of prevention is less than the cost of treating the disease, illness, or injury. The report mentions the benefits of reducing tobacco use, and increasing immunizations, seat belt use, healthy nutrition, and physical exercise.

The Institute proposes that federal public health funding be doubled, that state and local funding currently directed into clinical care be redirected to public health purposes when the clinical costs become reimbursable under Medicaid or Affordable Care Act state health insurance exchanges, and the enactment of “a national tax on all medical care transactions.” The Institute considered pretty much every sort of tax possibility, including increases in estate taxes, sales taxes, intangibles taxes, life insurance proceeds taxes, property taxes, and value-added taxes.

It may shock some readers of MauledAgain, but I question the wisdom of dealing with these issues in the manner the Institute suggests. The idea of encouraging prevention efforts has my full support. It is logical and makes sense to use seatbelts, to wear helmets when riding motorcycles, to exercise, to eat healthily, and to avoid tobacco use.

The tough question is how to increase prevention efforts and to decrease choices that ultimately contribute to the escalation in health care costs. There are three pathways, not mutually exclusive, to achieving better prevention efforts. The first is to compel people to engage in prevention efforts. The second is to pay people to engage in prevention efforts. The third is to educate people so that they conclude that prevention matters, decide that they want to make better choices, and learn how to make those choices.

The first pathway is blocked by a variety of obstacles. Compelling people to go to the gym, or to eat broccoli, meets public resistance. There’s the matter of the federal Constitution and state Constitutions. There are lessons to be learned from Prohibition, one of which is the realization that alcohol consumption, in moderation, has health benefits, and is not the per se bad practice that some believe. That there are statutes requiring the use of seat belts and prohibiting texting while driving is encouraging, but there’s as much pressure to repeal those laws as there is to expand them to widen the scope of obligatory safe behaviors and prohibited unhealthy activities.

The second pathway is nothing more than a bribe, though many probably prefer the less glaring term incentive. Though money might induce some people to change their health habits, the amount required to do so might consume whatever savings can be obtained through prevention.

The third pathway is the most efficient route to implementing the sort of changes that will reduce long-term medical costs. Education costs money, but does it require the sort of funding that the Institute proposes? Is it not possible to reform elementary and secondary education to include in the curriculum information and instruction in preventative care and common sense health measures? Is it not possible to insert health prevention education into existing social programs that serve adults who are beyond their school years? Even so, even with all the education money could buy, some people are dead-set, pun intended, on living in ways that are unhealthy and that ultimately will lead to increased medical costs. There are some things taxation cannot cure.

Friday, April 27, 2012

The Disadvantages of Tax Incentives 

A recent case provides good insight into the disadvantages of using the tax law in an effort to encourage or discourage particular economic or other activity. In previous posts, such as The Problem with Income Tax Vehicle Credits, Congressional Mis-delegation Endangers Tax Collections, and More Criticism of Non-Tax Tax Credits, and When Tax Credits Aren’t Worth the Trouble, I have shared a variety of reasons that it makes little or no sense to use the tax law as a substitute for direct funding and oversight by the agencies expertised in the area in question.

In McGuire v. Comr.,, T.C. Summ. Op. 2012-34, the Tax Court held that the taxpayers, a married couple, did not qualify for the section 36 first-time homebuyer credit. The taxpayers failed to qualify because they signed the lease-purchase agreement for the property on March 20, 2008. Although the parties agreed that the agreement constituted a purchase and the property was used as a principal residence, the credit applied to property purchased after April 8, 2008, and before July 1, 2009.

Hindsight suggests that had the taxpayers waited 20 days, they would have obtained a $7,500 credit. The lesson appears to be that if there is any possibility of a tax incentive being enacted with respect to a particular type of transaction or activity, a person should wait, unless the transaction or activity is essential. It’s silly to postpone purchasing groceries for months on end on the off-chance the Congress might enact a food market stimulation credit. But is it so silly to hold off making other sorts of acquisitions? Not at all. According to a recent report from the National Restaurant Association, roughly thirty percent of restaurants are delaying expansion and renovation projects because they don’t know if Congress is going to restore the expired special 15-year recovery period for restaurant property. The projects that are on hold would put $30 billion into the economy through direct expenditures and ancillary economic impacts, and create roughly 200,000 new jobs.

What makes the use of tax law incentives particularly detrimental is the refusal of the Congress to enact a set of rules that have any sort of long-term sustenance that permits long-term business and personal planning. The pattern of letting incentives expire, or come close to expiration, only to re-enact them, sometimes retroactively, is a practice designed to permit members of Congress to solicit funds for their electoral campaigns. There’s much more to sell when dozens of tax law provisions are on their death beds. The well-being of the national economy demands stability, continuity, predictability, and reliability in the tax system. By putting personal electoral goals ahead of the nation’s well-being, Congress is selling the nation short and ultimately risks selling it out.

Wednesday, April 25, 2012

Trust and Taxes 

Perhaps there is another element in the raging debate about taxes. Perhaps the disagreement has less to do with how much a government collects and spends and more with whether the taxpayers trust those who are serving in government positions. This observation surfaces from a story about a town whose citizens voted to oppose tax increases and then, a year later, voted to increase taxes.

In New Jersey, local governments are not permitted to increase taxes by more than 2 percent without voter approval. More than a year ago, the town of Medford found itself with a huge budget deficit. At that time, the mayor and town council requested approval by the voters of a 25 percent increase in property taxes. The proposal was defeated, by a factor of five to one. The town eliminated its recreation department and programs, cut back public works expenditures, chopped salaries for town officials, and laid off police. Next up on the list of expenditures to be cut was municipal trash collection.

In the meantime, the town’s mayor resigned after being caught in a sex scandal, and discovery of financial mismanagement compelled the departure of four members of town council. In January of this year, a new mayor and new members of council, from the same political party as those who had departed, were elected. They brought back the proposal to increase property taxes by 25 percent. The proposal passed, 57 percent to 43 percent.

What happened? Why did so many voters change their minds? There appear to be two major considerations.

First, according to interviews with voters, some of whom were ready to vote “no” in the most recent referendum but who changed their minds, it seems that they wanted to give the newly elected officials a chance, considered them sincere, and went from distrusting the town government to trusting the newly elected slate of officials. One voter noted that she now had a better idea of what was happening with the tax revenues.

Second, according to these interviews, residents concluded that if the town eliminated municipal waste removal, the cost of contracting with private companies for the same services would be costlier than paying taxes to have the town provide the service. As one voter put it, “The logistics would be difficult.” Another voter explained, “I don’t know how I could afford to have them [the items put out for collection] all taken away unless we all pay for it as a community.” Unlike private contractors, municipalities do not operate with a need to build profit into the price, and provided – and this is a big provided – the town operates efficiently, it makes more sense to leave public functions to the public.

These two factors readily combine. The voters deserve to be treated in a manner that justifies trust in public officials, and public officials need to treat that trust as a sacred and fiduciary obligation. As the town’s new mayor put it, “[We were] humbled by the idea the people trust us, and it’s not lost on us.” As New Jersey Governor Christie, who championed the limit-unless-overridden-by-vote plan and who urged the voters to reject the 25 percent increase proposal, put it, “"Good for them. Higher property taxes for Medford. Congratulations. If the people of Medford want to pay higher property taxes, that's their call. . . . I said I would vote no, but . . . this is a democracy." Democracy provides the opportunity to kick out incompetent, corrupt, and manipulative politicians, which the people of Medford did but which too few voters across the country do in local, state, and national elections. Democracy does not exist in the private sector, and the so-called free market is a woeful failure when it comes to purging the planet of incompetent, corrupt, and manipulative business entities and their operatives.

Two years ago, I addressed the question of tax referenda in Tying Tax Revenue to Voter Responsibility, explaining:

The key to balancing government budgets is not a simple matter of limiting tax revenue and triggering a free-for-all among the proponents of particular state services. The key is to price out and advertise the cost of each service that voters tell their representatives that they wish to receive. Pennsylvania has a similar property tax limitation in place, but it can be exceeded if the voters approve a budget that is based on an increase above the cap. By shifting responsibility onto voters, and making it clear that they must pay for what they want, particularly with respect to items that take the form of a user fee, governments can move away from spending decisions that are made by legislatures without any specific directive from voters. The cap ought not be an iron-clad revenue increase restriction that has no bearing to the actual costs of providing government services, but a cap on the spending decisions that are not specifically authorized by voters.

Ultimately, when complaints about high taxes circulate, the response, “You voted for it,” should either dampen the griping or inspire people to reconsider, and cut back, their government services wish list. The debate before each tax referendum, though probably loud, intense, and heated, will be educational, worthwhile, and productive. Imagine how cathartic it will be to listen to the proponents of a tax for a particular service debate those who do not want to pay taxes to provide that service. It will take the issues out of the back rooms and put them on the table Tying ownership of the expenditure process with ownership of the taxing process makes much better sense in the long-run than unworkable and impractical absolute revenue caps.

It seems to have worked that way in Medford. The governor of New Jersey may not agree with the outcome, but to his credit, he pushed through legislation that has moved the politics of government finance closer to the system I advocate.

Monday, April 23, 2012

If the IRS Can’t Get It Right, Is It Any Wonder Taxpayers Struggle? 

A recent discussion on the ABA-TAX listserve ultimately revealed a rather disturbing error in an IRS audit guide. The issue involves the computation of section 751(a) ordinary income or loss. Section 751(a) applies when a partner sells a partnership interest, and is designed to characterize as ordinary the portion of the selling partner’s gain or loss that is attributable to the partnership’s ordinary income items.

Until 1999, Regulations section 1.751-1(a)(2) provided the following rules for determining the amount of ordinary income or loss that a selling partner must recognize:

The income or loss realized by a partner upon the sale or exchange of his interest in section 751 property is the difference between (i) the portion of the total amount realized for the partnership interest allocated to section 751 property, and (ii) the portion of the selling partner's basis for his entire interest allocated to such property. Generally, the portion of the total amount realized which the seller and the purchaser allocate to section 751 property in an arm's length agreement will be regarded as correct. The portion of the partner's adjusted basis for his partnership interest to be allocated to section 751 property shall be an amount equal to the basis such property would have had under section 732 (including subsection (d) thereof) if the selling partner had received his share of such properties in a current distribution made immediately before the sale. See §§1.732-1 and 1.732-2. Such basis shall reflect the rules of section 704(c)(3), if applicable, or any agreement under section 704(c)(2). Any gain or loss recognized which is attributable to section 751 property will be ordinary gain or loss. The difference between the remainder, if any, of the partner's adjusted basis for his partnership interest and the balance, if any, of the amount realized is the transferor's capital gain or loss on the sale of his partnership interest.
In 1999, to reflect amendments to section 704(c), and for other reasons, the Treasury amended the regulation. When the regulation was proposed, the preamble (see 63 Fed. Reg. 4408) explained:
B. Section 751.

Section 751(a) provides that to the extent an amount realized on the sale or exchange of a partnership interest is attributable to the transferor's interest in unrealized receivables or inventory items of the partnership, the amount realized is considered to be an amount realized from the sale or exchange of property other than a capital asset. Thus, the transferor partner may recognize ordinary income or loss on the sale or exchange of its partnership interest. Under the current section 751 regulations, the amount of income or loss realized by a partner on the sale or exchange of an interest in section 751 property is equal to the difference between: (i) The portion of the total amount realized for the partnership interest allocated to section 751 property, and (ii) the portion of the transferor partner's basis in its partnership interest allocated to the property. Generally, the portion of the total amount realized allocated to section 751 property is determined by the seller and purchaser in an arm's length agreement. The portion of the partner's adjusted basis in the partnership interest allocated to the section 751 property equals the basis that the property would have had under section 732 if the transferor partner had received its proportionate share of the property in a current distribution immediately before the sale.

The proposed regulations amend these rules for determining the transferor partner's gain or loss from the sale or exchange of its interest in section 751 property. Rather than attempting to allocate a portion of the transferor partner's amount realized and adjusted basis to the section 751 property, the proposed regulations adopt a hypothetical sale approach. Thus, the income or loss realized by a partner from section 751 property upon the sale or exchange of its interest is the amount of income or loss that would have been allocated to the partner from section 751 property (to the extent attributable to the partnership interest sold or exchanged) if the partnership had sold all of its property in a fully taxable transaction for fair market value immediately prior to the partner's transfer of the partnership interest.

The proposed regulation was adopted by T.D. 8847, and reads as follows:
Par. 6. Section 1.751-1 is amended by:

1. Revising paragraphs (a)(2) and (a)(3).

* * *

The addition and revisions read as follows:

§ 1.751-1 -- Unrealized receivables and inventory items.

* * * * *

(a) * * *

(2) Determination of gain or loss. The income or loss realized by a partner upon the sale or exchange of its interest in section 751 property is the amount of income or loss from section 751 property (including any remedial allocations under § 1.704-3(d)) that would have been allocated to the partner (to the extent attributable to the partnership interest sold or exchanged) if the partnership had sold all of its property in a fully taxable transaction for cash in an amount equal to the fair market value of such property (taking into account section 7701(g)) immediately prior to the partner's transfer of the interest in the partnership. Any gain or loss recognized that is attributable to section 751 property will be ordinary gain or loss. The difference between the amount of capital gain or loss that the partner would realize in the absence of section 751 and the amount of ordinary income or loss determined under this paragraph (a)(2) is the transferor's capital gain or loss on the sale of its partnership interest.

During the course of the discussion about section 751(a) on the ABA-TAX listserve, a participant suggested that it would be helpful to look at a section 751 audit guide that the IRS had posted on its website. The IRS document, chapter 7 of the Partnership – Audit Technique Guide, Dispositions of Partnership Interest, states:
The amount of the disposing partner's ordinary gain or loss is the difference between the amount realized attributable to the hot assets less the partnership's adjusted basis associated with these assets.
What appears in the IRS audit guide is a paraphrase of Regulations section 1.751-1(a)(2) as in effect before the 1999 amendment by T.D. 8847. Thinking perhaps that the document was old, I checked its date. According to the website, it was revised in March 2008. At the bottom of the web page is a tag line stating that the page was “last reviewed or updated: January 25, 2012.”

What’s happening here? Are IRS auditors examining sales of partnership interests and applying old law? Are taxpayers, where old law produces a less advantageous outcome than does current law, citing the current version of the Regulations and demonstrating the obsolescence of the audit guide? Is anyone even aware of this discrepancy?

Partnership tax law is complex, conceptually challenging, and daunting. It’s easy to misapply the applicable law. It’s easy to overlook a critical fact. It’s easy, but dangerous, to apply old law, and that’s true for any area of tax law, not just partnership tax law, as well as any area of law, period. It is not unknown for students in my Partnership Taxation course, and in other courses, to apply old law, and almost always it’s a result of using an old outline passed down through the years.

As another ABA-TAX listserve participant noted when I posted a much shorter version of this discovery, “Well, so much for trusting information provided by the ‘Horse's mouth’.” So true, but not surprising, as there are more than a few cases in which taxpayer reliance on erroneous IRS advice was not treated by the court as justifying the erroneous position taken by the taxpayer on the tax return. But it indeed is disturbing that the agency charged with administering tax laws does not understand those laws. Can taxpayers be expected to do any better?

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