Monday, June 03, 2013
Another issue was presented to the court. The corporation claimed a deduction for all of the compensation that it paid to its employees. The corporation did not claim any general business credits, including the section 45A Indian employment credit. The IRS concluded that the corporation was entitled to that credit, reduced by the section 38(c) credit limitation. Accordingly, under section 280C(a), the IRS reduced the amount of the corporation’s compensation deduction by the amount of the section 45A credit. The reduction in tax liability caused by the credit was less than the reduction in tax liability caused by claiming all of the compensation as a deduction rather than the reduced amount of the compensation.
The corporation raised two arguments in opposition to the IRS position. First, it argued that the section 45A credit is not mandatory. Second, it argued that if a reduction in the compensation deduction were appropriate, the reduction should be the amount of the credit after application of section 38(c)(1) and not the gross amount of the credit before application of section 38(c)(1). It is the first argument that most interests me.
Six years ago, in No Thanks, Uncle Sam, You Can Keep Your Tax Break, I addressed the question of whether deductions and credits are mandatory or optional. I concluded that they are optional, unless there is specific statutory or other authority reaching the opposite conclusion with respect to a specific deduction or credit. In this case, the Tax Court’s specific holding was that the corporation’s compensation deduction must be reduced, under section 280C(a), by “that portion of the wages or salaries paid or incurred for the taxable year which is equal to the sum of the credits determined for the taxable year under sections 45A(a), . . .” The Court emphasized that the key word is “determined” and that it means something other than claimed, allowed, or allowable. The Court pointed out that section 45A itself does not “allow” a credit, but simply provides for an “amount . . . determined” which in turn is part of the section 38(a) general business credit. The Court also pointed out that other elements of the section 38(a) general business credit, in other words, other credits, are permissive.
Technically, the issue was whether the compensation deduction should be reduced under section 280C(a). The answer clearly is that it must. That issue, however, is a different issue from whether the section 45A credit must be claimed. In this instance, the corporation, compelled to reduce its compensation deduction, relented and accepted the use of the credit because at that point there was no advantage in forgoing the credit. Perhaps under other circumstances, a taxpayer will reduce the compensation deduction and yet conclude it is better off not claiming the credit. The Uniband decision does not prohibit taking that return position. It simply mandates the reduction of the compensation deduction.
Interestingly, the corporation pointed out that it would have been better off, tax-wise, if it had hired fewer Indians. The Court agreed. The corporation also pointed out that because Congress intended the section 45A credit to encourage the hiring of Indians, the Court’s interpretation of section 280C(a) conflicted with that Congressional purpose. The Court, however, explained that because the language of section 280C(a) is unambiguous, the intent of Congress is overshadowed.
Once again, better drafting by the Congress would have better served this corporation, and Indian tribes generally, but once again, the statutory framework is unnecessarily self-conflicted. If the goal is to maximize Indian employment, then taxpayers ought to be given the flexibility necessary to make that goal attainable. Worse, one wonders why the Congress insists on using the tax code rather than direct spending grants to encourage its goal of maximizing Indian employment. The cynics would answer that it permits Congress to spend money while claiming that it is reducing taxes and not spending money. And I would agree.
Friday, May 31, 2013
An Indian tribe, together with a domestic corporation, formed a corporation. Eventually the Indian tribe came to own all of the stock of the corporation. The corporation filed a consolidated return with the Indian tribe. The IRS issued a notice of deficiency on several grounds, including the unavailability of the consolidated return for an Indian tribe and a corporation. The corporation argued in response that it was tax-exempt because it was owned by an Indian tribe.
The Tax Court held that although Indian tribes are tax-exempt, corporations owned by Indian tribes are not tax-exempt unless they are an integral part of the tribe. The Court expressed doubt that the “integral part” test applied, but rather than resolving that issued, determined that the corporation was not an integral part of the tribe. The Court rested its conclusion on six points: (1) the corporation is a commercial venture and does not perform government functions, (2) the corporation functions in its own name and on its own behalf, (3) the corporation was not solely owned by the tribe during its first three years and nothing prevents its shares from being sold to owners other than Indian tribes, (4) the tribe lacks the right to manage directly the corporation’s operations, (5) the tribe’s ability to liquidate or indirectly control the corporation arises from the tribe’s position as sole shareholder and not from statutory authority, and (6) the corporation does not lack financial autonomy from the tribe nor depend on it for payment of operating expenses.
The Tax Court also rejected the corporation’s assertion that it has sovereign immunity and thus cannot be taxed. The Court concluded that the corporation failed to establish that it has sovereign immunity, and also failed to demonstrate that having sovereign immunity would make it an integral part of the tribe.
As for the consolidated return, the Tax Court held that the Indian tribe is not a corporation with which the corporation could join in filing a consolidated return. The court also held that even if the tribe were considered to be a corporation, it did not make a consolidated return, did not consent to the consolidated return, and did not report its items on the consolidated return.
Wednesday, May 29, 2013
Had the reader who did the computations used 5 pounds instead of 20 pounds, he would have concluded that the Code weighed 20 pounds. He had used my estimate of a 2,000 page Code, which he treated as equivalent to 4 reams, and multiplied 4 reams by 20 pounds, to reach the 80 pound conclusion. Multiply 4 reams by 5 pounds generates a 20 pound conclusion.
Even so adjusted, the reader’s estimate is double what I measured using a bathroom scale. The difference reflects the fact that 2,000 pages requires 1,000 sheets of paper. There also is the difference in paper thickness, and a difference in size, with my Code being 7 inches by 10 inches and not 8.5 inches by 11 inches.
Is it possible to compute the number of pages in the annotated Code that I weighed by using its weight? I think a fairly good estimate can be obtained. If a standard ream of 8.5 inches by 11 inches weighs 5 pounds, then a ream of paper that is 7 inches by 10 inches weighs 3.75 pounds ((70/93.5) x 5). Thus, the 10-pound annotated Code uses 2.67 reams of 7 inch by 10 inch paper. But that paper is thinner, so to weigh 10 pounds, the annotated Code must contain closer to 3 reams, which is 1500 sheets. With two-sided printing, that is the equivalent of 3,000 pages.
If there are 3,000 pages in the annotated Code, there surely are fewer pages in the actual Code after the annotations are stripped out. The annotations are roughly one-third to one-half of the text. They contain effective date and other provisions not in the Code itself, text of the Code as it existed before amendment, and editorial notations, along with editorial “front matter” and an index. Thus, the Code itself would contain roughly 1,500 to 2,000 pages.
That this approach generates a conclusion very much in the ballpark with my earlier conclusion (discussed in Bush Pages Through the Tax Code?, Anyone Want to Count the Words in the Internal Revenue Code?, Tax Commercial’s False Facts Perpetuates Falsehood, How Tax Falsehoods Get Fertilized, A Slight Improvement in the Code Length Articulation Problem, and Tax Ignorance Gone Viral) of a 2,000-page Code is not surprising, and it corroborates my conclusion that the claims of a Code containing tens of thousands of pages indeed are the erroneous assertions that I have demonstrated them to be. What remains is for this information to be circulated in the same viral manner as have what I will generously tag as “mistaken” Code-length claims.
Monday, May 27, 2013
Undoubtedly, though some disagree, taxes are the price paid for civilized society. And civilized society is something more than grabbing all that one can grab, yelling “It’s mine,” and looking for ways to use others as stepping stones for entry into an artificial economic elite.
But none of the discussion would or could take place were it not for the sacrifice of those who paid taxes in a different currency while purchasing civilized society for this nation. They paid with lost limbs. They paid with lost sight, and lost hearing. They paid with lost dreams. They paid with blood.
Previous Memorial Day posts:
Free, Freedom, Fees, and Taxes
Memorial Day, Taxes, and Remembering the Future
Memorial Day: Why a Holiday From Taxes?
Honoring Those That Serve
Memorial Day: How Important are Taxes Really?
A Memorial Day Essay on War and Taxation
Gasoline and War
Friday, May 24, 2013
Several days ago, this reader shared with me his experiment with determining the size of the Code. He had purchased 500 sheets of 8.5-by-11-inch copy paper. He noticed that the package indicated it weighed 20 pounds. Using my estimate that the Code is about 2000 pages long, and not the absurd claims of 50,000 or 75,000 pages, he calculated the weight of the Code at 80 pounds (the equivalent of 4 500-sheet 20-pound packages of paper). He concluded that if the Code weighed 80 pounds, he would not be able to pick it up to read. So he did some more research. He determined that a piece of paper weighs .16 of an ounce. Thus, 2,000 pages would weigh 20 pounds (.16 x 2000, divided by 16). He then suggested that I go to the post office or the meat department at a grocery store to weigh my copy of the Code.
When the reader suggested I weigh the Code, I used a trick I learned when I needed to weigh a suitcase. I weighed myself on the bathroom scale. I then picked up my 2-volume CCH Internal Revenue Code, and weighed myself again. The difference? 10 pounds, or roughly 5 pounds for each volume. Keep in mind that the 2-volume CCH version of the Code includes not only the Code, but a huge amount of amending acts, text of the Code as existing before each amendment, and effective date information.
Why the difference between my 10-pound outcome and the reader’s 20-pound result? There are three reasons. First, 2,000 pages require 1,000 sheets of paper because both sides are used. Second, the weight of the paper in the CCH volumes is lower than the weight of copy paper because the paper is thin. It’s almost onion-skin paper, which many people probably haven’t ever experienced. Third, the reader was weighing paper that is 8.5 by 11 inches. The CCH code pages are 7 inches by 10 inches. The CCH pages, at 70 square inches, are 25% reduction from the 93.5 square inches of letter-sized paper.
So, when someone says that the tax code weighs heavily on them, they surely aren’t intending to be literal. Unless, of course, they are foolish enough to continue believing the absurd claim that the Internal Revenue Code contains tens of thousands of pages.
Wednesday, May 22, 2013
Napolitano begins, in his very first sentence, with the nonsense claim that the nation has “a tax code that exceeds 72,000 pages in length.” Even though I don’t expect Napolitano to have read posts such as Bush Pages Through the Tax Code?, Anyone Want to Count the Words in the Internal Revenue Code?, Tax Commercial’s False Facts Perpetuates Falsehood, How Tax Falsehoods Get Fertilized, A Slight Improvement in the Code Length Articulation Problem, and Tax Ignorance Gone Viral, which explain why that claim is wrong, I do expect someone with a law school education to have the ability to determine the length of the tax or any other legal code, and to get it right. As I tell my students, it’s not a disaster if you can’t figure something out, but it becomes a catastrophe when you don’t bother to ask for help in figuring it out.
Napolitano then claims that social security and income taxes are nothing more or less than theft. Somewhere he missed the class in which it was explained that without taxes there is no government, without government there is no civilization, and without civilization there is no justice. The notion that taxes constitute theft reflect the mindset of someone who is accustomed to getting and taking, without paying. That is what infants understandably do, but at some point infants need to mature and understand that highways, police protection, health, retirement security, and national defense don’t just appear without payment the way baby bottles and baby food is handed to the infant. Folks like Napolitano, who worked hard to get where there are but who think they did it all on their own, fail to acknowledge the contribution that everyone else has made to their success.
Napolitano then describes social security as a Ponzi scheme. He claims it was intended to cause voters to become dependent on “Roosevelt’s Democrats” and to provide “minimal financial assistance to those too old to work.” He claims – and this canard has gone viral – that because average life expectancy was 61 years of age but social security was not available until age 65, that the system “was geared to take money from the average American worker that he would never see returned.” Here’s how it works, your honor. It’s called insurance. In fact, the official name is Federal Insurance Contributions Act. The “I” in FICA is for insurance. And how does insurance work? It’s one of the few things in life where we really don’t mind paying and not recovering. I’m confident Napolitano has paid homeowner’s insurance premiums. I don’t know if he has collected, and with any luck and care he hasn’t. And that’s good. To collect on homeowner’s insurance, automobile insurance, or any other liability insurance, something bad has to happen. In the case of social security, the bad that happens is that a person lives past the point of working age without having amassed sufficient financial resources, perhaps because of bad health, perhaps because of being laid off, or perhaps because a corporate employer breached its promise to pay a pension, which is not unlike what happened when in the 1920s. Insurance is not a Ponzi scheme. Everyone in the insurance pool pays, but not everyone collects. Is social security perfect? No. Should it be paying benefits to those who don’t need the insurance? Probably not. Should the retirement age be increased in light of longer life expectancies? Probably. But the fact that it – like every other insurance program has required from time to time – needs to be tweaked does not make it theft. But perhaps Napolitano and his ilk think that people who pay fire insurance premiums and who do not collect because their properties have not burned down have been robbed by the insurance company.
Napolitano claims – in another assertion gone viral – that Roosevelt designed social security using “a system established in Italy by Mussolini.” Actually, long before Roosevelt was elected and Mussolini came to power, social justice advocates had advanced the notion of financially secure retirement, along with other horrifying ideas such as fair wages, safe working conditions, social justice, and full employment. The fact that Roosevelt and Mussolini each adopted some pieces of this worldview doesn’t make social security a creature of Mussolini anymore than Napolitano’s purchase of an automobile model favored by criminals an indication that Napolitano bases his policies on decisions by wrongdoers. This sort of twisting of facts is a long-established, clever, but wickedly inappropriate debating technique.
Napolitano claims that over time the social security system “was paying out more money than it was taking in.” That’s just flat-out false. Social Security has collected far more than it has paid out, in anticipation of payments to be made in the future, just as insurance companies establish reserves. What is true is that if things continue as they are, at some point in the future the system will reach the point of having paid out what it has collected and then having no funds to make further payments. But it’s also possible – though unlikely – that some new avian flu would wipe out so many people that social security will be relieved of a good portion of the actuarially expected future payments. What needs to be discussed is the fact that the social security system has invested those reserves in federal debt obligations issued to fund the deficits amassed by the geniuses who cut taxes while authorizing trillions in spending on undeclared wars (including not only Afghanistan and Iran, but also Vietnam, Grenada, and a long list of military actions undertaken by politicians of both political parties).
Napolitano then worships at the feet of Ron Paul, thrilled with the latter’s response to a young man who asked “If I earn a dollar, how much of it am I entitled to keep?” Paul responded, “All of it.” But why didn’t Paul, or the young man, or anyone else ask, “If I drive on a street, how much am I obligated to pay? If I put trash out at the curb and it disappears, how much am I obligated to pay? If I go to a public park, how much am I obligated to pay? If my house is being robbed and I call for help, how much am I obligated to pay?” Napolitano, in league with those who denounce so-called “takers” and who criticize the entitlement mentality, is paying homage to a question resting on entitlement and ignoring the value of obligation and responsibility.
Napolitano argues that “government exists to work for us.” True, and it works fairly well – though not perfectly – for many people. But if it were to work well for Napolitano, it would be working badly for millions of Americans. The issue, of course, is that “us” is a very slippery word, and has no real meaning when held up against the philosophical, theological, economic, and social divisions that divide this nation. Napolitano’s reliance on the Constitution to prove that taxation is illegal ignores the fact that the Constitution contemplates and permits taxation, and has done so since its first draft.
When Napolitano likens tax collection to home invasion robberies, he demonstrates either that he totally misunderstands taxation, or that he likes taxation so long as he and his friends get to dictate what happens with tax receipts. He wasn’t writing like this five, seven, or ten years ago. He makes that clear when he deals with the Sixteenth Amendment, and instead of recognizing it as part of the Constitution, as it is, he condemns it as the work of “progressives [who] took over the government in the first decade of the 20th century.” You know. Progressives. Those awful people who believe in financially secure retirement, along with other horrifying ideas such as fair wages, safe working conditions, social justice, and full employment.
Napolitano and his friends argue against a process that they enthusiastically use when they are in full control of government. Why? Because if they shifted their focus to the substantive issues, they would fail miserably in trying to defend the things that they and their friends have done. And when they try to criticize substantive decisions, they end up looking foolish because for every instance they denounce, they and their friends are responsible for five, ten, or twenty as many. Thus the retreat to an attack on government and taxation, because to them, government is wonderful when they are in control, but an awful thing when the people speak and someone else is in control. Taxation is not theft, Napolitano knows that, and hopefully soon everyone else will also know that he is preaching what he knows is incorrect.
Monday, May 20, 2013
The challenge with taxes on activities or things that can disappear, such as a tax on cigarettes, is that they themselves can disappear. To the extent that a tax on a socially, medically, and economically disfavored practice has the effect of diminishing or eliminating that practice, the revenue raised by that tax will be diminished or eliminated. Whether such a tax should be used in lieu of more direct means of eliminating behavior detrimental to society is one question. But surely using such a tax as a reliable source of revenue is questionable. Some smokers interviewed for the article suggested that they, and others, would cut back or stop smoking if the tax were to be approved.
Interestingly, though opposition from smokers to the cigarette tax would be expected, at least one person changed his mind after he learned the purpose for the proposed tax increases. He noted that the schools “need help” and suggested that “They should raise it up even more.”
Of course, there is opposition to the tax. One opponent suggested that it is wrong to tax “something that someone has the right to” because “[i]t’s not illegal.” If taxation were to be limited to illegal activities and things, government would disappear. In the long run, that would free illegal activities and things to flourish, bringing demand for government intervention, and its accompanying need for revenue.
Friday, May 17, 2013
Julian Block Looks at Marriage, Divorce, Affairs, Engagements, and Cohabitation in the Shadow of Tax
The title of the book is somewhat misleading. Though Julian talks about the tax consequences of marriage and divorce, he also talks about other aspects of relationships that aren’t within the bounds of those two events. For example, he discusses the tax challenges facing gay and lesbian couples, pointing out that having their relationships treated as marriages for federal tax purposes isn’t necessarily the best outcome in every instance. The tax consequences of marriage can be good or bad for a heterosexual couple, depending on the circumstances and income levels, and the same variation in treatment awaits married gay and lesbian couples once their marriages are recognized. I could quibble with Julian’s predictions of whether that will happen, but in all fairness, he and I are tax guys and if we start making predictions with respect to other areas of the law, we’re both skating out to thinner ice. As another example, Julian addresses the tax issues that arise when “women . . . receive currency, cars, clothing, dwellings, furs, gems and other valuables from men with whom they are amorously involved.” He has such a nice way with words, Julian does.
Following his introduction, Julian provides a series of questions and answers that focus on concerns that are more likely than not to affect large numbers of couples, married or otherwise. By putting the questions and answers in conversational rather than technical language, Julian makes his book readable by the audience he is attempting to reach. Topics include not only the obvious alimony and property settlement concerns, but also filing status, child support, personal and dependency exemptions, and medical expense deductions, to name several.
Julian then turns to the topic of filing status, picking up on issues such as the marriage penalty and marriage bonus, death of a spouse, personal and dependency exemptions, and joint liability on joint returns. He discusses the tax treatment of legal fees, which can arise not only with respect to divorce but also when prenuptial agreements are being negotiated and drafted, and when child custody and support disputes arise whether or not the parents ever were married. He also provides a down-to-earth discussion of the tax problems faced by same-sex couples. He correctly points out that if the Supreme Court axes DOMA, same-sex couples need to visit their tax advisors sooner rather than later. Julian’s discussion of annulment contrasted with divorce is important. He uses the Kim Kardashian story to illustrate his point. For example, if an annulment was granted, any joint returns that had been filed need to be undone. Though, as I pointed out, Julian is a tax expert, he, not unlike yours truly, does not limit his intellectual pursuits to tax. His commentary on how the 72-day period of Kardashian’s marriage ties in to cabalistic methods of Scriptural interpretation should get the reader’s attention.
Ever aware of the practical side of tax, Julian again explores how a person can use tax returns to “unearth hubby’s hidden assets.” My quibble here is that there are times when it’s the wife who has assets that are squirreled away somewhere. But in his defense, “unearth hubby’s hidden assets” has a much better ring to it than “unearth spouse’s hidden assets.” Julian also provides some advice on dealing with the financial challenges of divorce, aside from the tax ramifications.
Because divorce often involves sale of the family residence, Julian includes a chapter on the tax consequences of home sales generally. He discusses the 3.8 percent surtax that applies to the unexcluded portion of home sale gains. He points out that this makes it even more important to dig out evidence of expenditures that increase adjusted basis in the residence. Because most married and divorced couples, and pretty much everyone else, eventually will receive social security benefits, Julian discusses how they are taxed, and how those computations come into play if the marriage or divorce takes place after one or both of the individuals has started receiving social security benefits.
What can I say that isn’t already evident in the title of the next chapter, “Having an Affair Can Be Taxing”? The stories, based on news reports and court cases, aren’t products of Julian’s imagination. As I tell my students, “We don’t need to make up this stuff.” Julian discusses not only traditional affairs but also the tax treatment of unmarried couples.
As he does with some of this other books, Julian appends several chapters dealing with issues that come up whether or not the primary transactions, in this case, marriage and divorce, are in play. He advises his readers how to deal with withholding computations, how to go about amending a return, how to make use of IRS publications, and how to get tax help. All of these situations affect huge numbers of taxpayers, many of whom can use the advice.
Not surprisingly, I recommend this book. It’s not the first book of Julian’s I’ve recommended, and I doubt it will be the last. He’s a prolific writer. I add this book to the list of his previous ones, "MARRIAGE AND DIVORCE: Savvy Ways For Persons Marrying, Married Or Divorcing To Trim Their Taxes - And They’re Legal," which I reviewed in Tax and Relationships: A Book to Read and Give (Feb. 2006), "THE HOME SELLER’S GUIDE TO TAX SAVINGS: Simple Ways For Any Seller To Lower Taxes To The Legal Minimum," reviewed in A New Book on Taxation of Residence Sales: Don't Leave Home Without It (Aug. 2006), "TAX TIPS FOR SMALL BUSINESSES: Savvy Ways For Writers, Photographers, Artists And Other Freelancers To Trim Taxes To The Legal Minimum," reviewed in A Tax Advice Book for People Who Write and Illustrate Books (Dec. 2006), "Year Round Tax Savings," reviewed in Another Tax Book for Tax and Non-Tax People to Read (Feb. 2007), "Travel and Moving Expenses: How To Take Maximum Advantage Of Every Tax Break The Law Allow," reviewed in Tax Travels and Tax Moves: Book It with Block (Sept 2007), "Ultimate Tax-Saving Resource '08," reviewed in Helping Tax Clients Understand Taxes (June 2008) and "Julian Block’s Tax Tips for Marriage and Divorce," reviewed in Julian Block Talks Tax with Married, Divorced, and Other Couples (Jan. 2011), “Tax Deductible Travel and Moving Expenses: How To Take Advantage Of Every Tax Break The Law Allows!,” reviewed in Julian Block: On the Road Again (July 2011), “Julian Block’s Easy Tax Guide for Writers, Photographers, and Other Freelancers,” reviewed in A Tax Book for Writers (and Others) (Oct 2011), and "Julian Block’s Tax Tips for Year Round Savings," reviewed in Tax Planning: A Chore That Never Sleeps (Jan. 2013).
Wednesday, May 15, 2013
In previous commentaries, such as Bush Pages Through the Tax Code?, Anyone Want to Count the Words in the Internal Revenue Code?, Tax Commercial’s False Facts Perpetuates Falsehood, How Tax Falsehoods Get Fertilized, and A Slight Improvement in the Code Length Articulation Problem, I explained what was wrong with the several variations of Internal Revenue Code length that have been broadcast by those who have contributed mightily to the misinformation parade.
Let’s begin with Hal Hawkins, who in his post attempts to depict what the Internal Revenue Code would look like if printed. He shows a photograph of four stacks of paper approximately six feet in height tagged “Tax Code.” Knowing that the printed Code, even with the text of uncodified statutory provisions and amendment notes, fills two volumes that are about four inches high, I continued reading Hawkins’ post, not to acquire more misinformation, but to detect where his mental process went awry. He relies on the claim of House Speaker John Boehner that the Internal Revenue Code contains four million words. Hawkins then claims that he “found a downloadable TXT file of the entire tax code on the U.S. House website,” downloaded it and then ran it through a word counter. He claims this file has 4.139 million words. I examined the file he downloaded. It’s far more than the Internal Revenue Code. It’s the Internal Revenue Code, along with amendment language, effective date information, amendment annotations, and text of each provision in the Code as it existed before each amendment. So, if a particular section was amended 20 times, there could be at least 20 times as much text to cover the previous versions plus all of the amendment and effective date information that is not codified. Had Hawkins bothered to educate himself or consult with a tax expert, he would have spared himself being highlighted in today’s MauledAgain commentary. Of course, his claim that a flat tax, fair tax, or 9-9-9 would solve the problem merely confirmed my conclusions about his lack of tax expertise.
Next comes Gregory Gwyn-Williams, Jr., of CSNNews, who in Obama Proposes More Taxes - But, Tax Code Is Already 13 Miles Long! decides to go horizontal rather than vertical in his measurement game. Working with the debunked 73,954-page Internal Revenue Code length claim, and using an erroneous 11-inch page height, he concludes that if all the pages were ripped out and placed end to end they would pan 12.84 miles. Of course, the Internal Revenue Code is nowhere near 73,954 pages in length. I know that because I have a copy of the Code sitting next to me. And the paper on which it is printed is not 11 inches in height. It is 9 inches in height. Nor does Gwyn-Williams consider the fact that 2 inches on each page is empty top and bottom margin, so his calculations are erroneous for at least three reasons.
Let’s turn to Paul Nowak, who in his Iris Speed Reading & Information Management Blog claims that it would take 13 days of non-stop reading to get through the claimed 3.7 million words of the Internal Revenue Code. Being one of the very few people in the world who has read the entire Internal Revenue Code, several times, and knowing it did not take me the 308 hours Nowak claims it would take, I dug into his underlying data. Where did he get his starting point of 3.7 million words in the Internal Revenue Code? He puts the blame on “IRS National Tax Advocate Nina Cooper.” The link goes to an editorial by National Taxpayer Advocate Nina Olson. Unfortunately, she gets it wrong, falling into the trap of counting the words in the ANNOTATED Internal Revenue Code rather than the words in the Internal Revenue Code itself. My guess is that she assigned the task to an underling, who had no idea what he or she was doing.
And if these gifts of ignorance about the Internal Revenue Code are not enough, let’s finish today’s survey of tax code ignorance by looking at another widespread piece of tax ignorance. In his The Futurist blog at World Future Society, Thomas Frey, though offering strong and sensible arguments for why the tax code ought not be as complex as it is, shares this nugget of misinformation: “In case you’re thinking this is a ridiculous idea, the IRS is already making changes to the tax code at a rate of more than once a day – 4,680 changes since 2001.” This statement causes my confidence in the entire post to plummet. Folks, the IRS does not, and cannot, change the tax code. It is the Congress that changes the tax code. Yes, the tax code is a mess. Why do American voters let the culprits off the hook every two years, by sending them back for another opportunity to wreak havoc on the nation’s tax laws?
With all that needs to be done to fix the nation’s problems, there ought not be tolerance for the distraction of people who prefer to argue that the sun does not rise in the east, that the planet is flat, that rape cannot cause pregnancy, that Russia can be seen while standing on the ground in mainland Alaska, that the printed version of the Internal Revenue Code would be 24 feet high or stretch for 13 miles, or that everyone’s child can play left tackle in the NFL. Aside from the fact that the length of the Internal Revenue Code is far less important than what is IN the Code, tax reform requires deep and serious analytical examination of complex issues in a complex society, and not limbic system excitement about some far-fetched myth that takes root and multiplies in the fertile ground of ignorance.
Note: A reader considers the "Russia can be seen while standing on the ground in mainland Alaska" reference as a "swipe at Palin." Palin said, "And you can actually see Russia from land here in Alaska." Later, the statement was repeated in modified form, "They're our next-door neighbors and you can actually see Russia from land here in Alaska -- from an island in Alaska." The reader suggested that my "Russia can be seen while standing on the ground in mainland Alaska" reference is repeating a myth. It is not. The myths were "I can see Russia from my house" and "I can see Russia from my backyard," which I did not repeat, until now, in a context making it clear that those two statements are myths. The reader added that Palin said other ridiculous things, such as the one I highlighted in It's Not a New Tax. I had enough tax ignorance examples in the last paragraph in the original post and wanted to demonstrate that ignorance is no less prevalent in the non-tax world, and that it is not tax law that can be blamed for ignorance.
Monday, May 13, 2013
The proposed transaction on which the IRS was asked to rule is quite simple. A corporation owns a piece of improved land that it wants to donate to a qualified tax-exempt charity. The improvements on the property had been depreciated. The property in the hands of the charity would have an adjusted basis equal to the taxpayer’s adjusted basis. The answer to the technical question posed to the IRS, to be described in a subsequent paragraph, would determine what ultimately mattered to the taxpayer, that is, the amount of the charitable contribution deduction.
Generally, under section 170, computation of the charitable contribution deduction begins with the fair market value of the property being contributed. This amount is reduced if any one or more of several limitations apply, as described in section 170(e)(1) and (3) and in regulations section 1.170A-4(a) and (c). Section 170(e)(1) requires a reduction of the amount of the deduction equal to the amount of gain that would not have been long-term capital gain if the taxpayer had sold the property for its fair market value.
Section 291(a)(1) provides that if a corporation disposes of section 1250 property, it must recognize ordinary income equal to the excess, if any, of the potential section 1245 ordinary income over the actual section 1250 ordinary income. The potential section 1245 ordinary income is the amount of gain that would be treated as ordinary income under section 1245 if the property were section 1245 property. Section 291(a)(1) also provides that it does not apply to the disposition of property to the extent section 1250(a) does not apply because of any exception in section 1250(d).
Section 1245 ordinary income equals the excess of the deemed amount realized over the adjusted basis in the property. Under section 1245(a)(1), the deemed amount realized is the lesser of the recomputed basis of the property or, in the case of a sale, exchange, or involuntary conversion, the actual amount realized, and in the case of any other disposition, the property’s fair market value. Section 1245(a)(2) defines recomputed basis generally as the adjusted basis increased by depreciation and amortization deductions with respect to the property allowed or allowable to the taxpayer or any other person with respect to the property.
Section 1250 ordinary income equals the excess of the deemed amount realized over the adjusted basis in the property. Under section 1250(a)(1)(A), the deemed amount realized is the lesser of the post-1975 additional depreciation with respect to the property or, in the case of a sale, exchange, or involuntary conversion, the actual amount realized, and in the case of any other disposition, the property’s fair market value. Section 1250(b)(1) defines additional depreciation as the depreciation with respect to the property, except that for property held for more than one year, it means depreciation to the extent it exceeds the amount of depreciation that would have resulted if depreciation for each year had been computed using the straight-line method. Section 1250(d)(1) provides that the section 1250 ordinary income rule does not apply to a disposition by gift. Regulations section 1.1250-3(a)(1) provides that the term gift has the meaning given to it by regulations section 1.1245-4(a), which in turn defines gift generally as a transfer of property that in the hands of the transferee has a basis determined under section 1015(a) or (d).
Because the transfer by the taxpayer to the charity would cause the charity to have the same adjusted basis as did the taxpayer, the transfer to the charity is a gift. Accordingly, section 1250 does not apply because of the exception in section 1250(d)(1). Accordingly, section 291(a)(1) does not apply because of its exception for transfers by gift. Though PLR 201318003 describes the section 170(e)(1) reduction, it does not address whether it applies because it was not asked to do so. If the property is fully depreciated, or if the property had been depreciated using the straight-line method, there would not have been any section 1250 ordinary income had the property been sold, and in that case section 170(e)(1) would not generate a reduction.
If you’ve made it this far, it is not unlikely that your eyeballs are spinning, your brain is hurting, and your frustration with tax law complexity is strengthening. None of this nonsense would be required if the tax law taxed income as income, with an inflation adjustment for adjusted basis to prevent taxation of gain that reflected price level changes rather than changes in actual property value. Section 170(e)(1) exists because the capital gains tax break is considered to be too generous, and section 291(a)(1) exists for the same reason. The enactment of those two provisions, along with others that are similar, demonstrates some of the flaws in the capital gains tax break. Rather than patching the problem with a variety of legislative band-aids, the Congress needs to do serious corrective surgery. Otherwise, there is a genuine risk that the tax law patient will die. And when that happens, the nation dies because, as Edmund Burke explained, “the revenue of the state is the state.”
Friday, May 10, 2013
Those who, like Palin, tag this legislation as enacting a “new tax” are making what is now an inexcusable error. The ignorance underlying this error was highlighted out in Tax: Perspective Matters.
The error is inexcusable because there exists more than enough explanations of what this legislation does and does not do. For example, in Confusing Commentary Confuses Tax Discussions, I explained why the position taken by a Philadelphia Inquirer reader in a letter to the editor that Pennsylvania’s attempt to collect the use tax constituted a “new tax” or a “tax hike” was total nonsense. Attempting to collect an existing tax does not create a new tax. It might increase the taxes being paid by a noncompliant taxpayer, but to call it a new tax is as foolish as calling enforcement of an existing speed limit the enactment of a new speed limit law when the enforcement targets drivers who have been ignoring the speed limit. My December 2011 commentary was not the first or only time that I have attempted to educate people about the difference between enactment of a tax and enforcement of a tax. Two months earlier, in Collecting the Use Tax: An Ever-Present Issue, I explained how use tax collection works, refuted the claim that collection of use tax by out-of-state retailers is voluntary, and described how the existence of nexus obligates out-of-state retailers to collect use tax. The Senate legislation extends the reach of this obligation. And that previous commentary was also not my first visit to the world of use tax collection. As I wrote in that post:
This is not my first commentary on use tax collection in an internet age. Seven years ago, in Taxing the Internet, I pointed out that “when it comes to taxing transactions and activities conducted on or through the internet, or taxing access to the internet, those transactions, activities and access should be taxed no differently from the way in which transactions and activities conducted through means other than the internet are taxed” and proposed that states should “tax retail transactions as catalog sales are taxed, imposing use tax collection responsibilities on those with sufficient nexus to the taxing state.” Three years later, in Taxing the Internet: Reprise, I reacted to the introduction of legislation allowing states to shift use tax collection responsibilities to merchants with no connection to the state, noting that despite the claims of advocates for this approach, state 1 has no “independent and sovereign authority” to impose a sales tax on a transaction that takes place in state 2, or to require a merchant in state 2 with no nexus in state 1 to collect use tax on behalf of state 1. I reminded readers that “What’s hurting states is their unwillingness to do what must be done to collect use taxes.” Three years later, in Back to the Internet Taxation Future, reacting to a reappearance of the proposal to permit state 1 to require retailers in state 2 with no state 1 connection to be taxed by state 1, I explained why progress had not been made, pointing out the inability of legislators and others to distinguish between sales and use taxes, the silliness of claims that internet retailers are not required to collect sales taxes at all for any state, the unwillingness of state legislatures and state revenue departments to identify and audit taxpayers not in use tax compliance, the mischaracterizations of the Supreme Court’s 1992 decision in Quill Corp. v. North Dakota, and the inability of legislators, state employees, and citizens to understand the limitations of the Due Process Clause. A week later, in A Lesson in Use Tax Collection, I took a look at California’s approach of requiring in-state business entities to register and report their out-of-state purchases, an approach not without flaws but a step forward in the correct direction.So clearly the use tax is not a new tax. Objecting to it on those grounds weakens the credibility and effectiveness of the position taken by opponents of the Senate legislation.
A better argument, one that I favor, is to point out the regulatory burden that the legislation imposes on retailers who have no connection with the state imposing the use tax. As I wrote in Collecting the Use Tax: An Ever-Present Issue, “States . . . trying to bring use tax collections closer to what they should be under current law, need to do something more than the cheap ‘shift the work to out-of-state retailers’ approach that violates Constitutional safeguards.” If a resident of State 1 makes a purchase from a retailer in State 2, who has no connection with State 1, State 1 ought not be given the green light to compel the State 2 retailer to engage in tax collection on behalf of State 1. And that brings me to the next argument.
Another better argument, another that I favor, is to point out that compelling out-of-state on-line retailers to do use tax collections while letting out-of-state bricks-and-mortar retailers off the hook, not only is unfair but raises Constitutional concerns. For years, long before there was an internet, residents of states with use taxes have traveled to neighboring states that do not have sales taxes, have made purchases, have returned home, and have failed to pay use taxes. Why are the retailers in the no-sales-tax state not similarly compelled to collect use taxes. For example, working from a situation described in A Peek at the Production of Tax Ignorance, what is the justification for compelling the on-line retailer in Delaware to collect use taxes when selling to a Pennsylvania resident while not similarly compelling the bricks-and-mortar store in Delaware to collect use tax when selling to a Pennsylvania resident? The answer, of course, is that the effort to push use tax collection work onto the backs of out-of-state retailers is a child of the bricks-and-mortars retailers lobby, and that group surely has no interest in compelling their own members to take on the workload they want to put on the on-line retailers.
I oppose the Senate legislation. But in arguing against it, I am not going to rely on the patently erroneous “no new taxes” argument. Nor should anyone else. Instead, the arguments should be based on the unwarranted regulatory burden and the unjustified discrimination against out-of-state on-line retailers in favor of out-of-state bricks-and-mortar retailers.
Does opposition to the Senate legislation leave states at a disadvantage when it comes to collecting use tax? No. As I explained in Collecting the Use Tax: An Ever-Present Issue:
Instead, they need to examine what other states have done, to learn, for example, from California officials whether the California approach worked out, to invite businesses to offer their proposals, to start examining tax returns and other records to identify taxpayers most likely to be deficient in use tax payments in amounts making audit and collection procedures worth the effort, and to publicize these efforts in an attempt to educate other residents of their use tax obligations. Perhaps states might consider paying out-of-state retailers to act as collection agents, as it is likely that retailers would be willing to engage voluntarily in use tax collection if the cost of doing so was defrayed by the state with a wee bit of profit thrown into the payment. Surely there are other ideas that are efficient, effective, and within the bounds of Constitutional restrictions.It’s time for state legislatures to do something more than to ask the federal government to rescue them from their use tax dilemma.
Wednesday, May 08, 2013
First, in order for 4 million words to fit on 5600 pages, there would need to be 715 words per page. Can this be done? A test in Word demonstrates that a five-letter word can be repeated 765 times if the margins are set to one inch, if the lines are single-spaced, the font is set at 12 point, and no paragraph breaks, tabs, or indents are used. The Internal Revenue Code, however, is replete with paragraph breaks, indents, and long words. Fitting 715 words of Internal Revenue Code text on 5,600 pages is possible, but only if a font smaller than 12 point is used.
Second, as I explained in Anyone Want to Count the Words in the Internal Revenue Code?, the Internal Revenue Code consists of roughly 2,000 pages, so fitting 4 million words on 2,000 pages would require 2,000 words per page, which would in turn require the use of a microscopic font point that does not exist.
Third, as I also explained in Anyone Want to Count the Words in the Internal Revenue Code?, there are roughly 400,000 words in the Internal Revenue Code. That’s a lot, but there’s no need to multiply the truth by ten in order to make a sound bite splash in the gullible mainstream media and the wacky world of social media.
Fourth, as I explained in How Tax Falsehoods Get Fertilized, sometimes it is possible to trace mis-information to its source. In this instance, thanks to the folks at this fact-checking site, the root of the problem goes back to the publisher of an annotated Internal Revenue Code. When CCH publishes the Code, it publishes not only the Code, but the text of certain sections of amending acts, and also the text of the Code as it existed before amendment. For example, section 168 of the Code, which deals with the accelerated cost recovery system of depreciation, fills 76 pages, but only 24 of those pages are the actual Code whereas the other 52 pages contain the text of amending acts, the text of provisions not in the Code, and the text of section 168 as it existed before various amendments. In other words, the CCH version of the Internal Revenue Code is much more than the Internal Revenue Code. So when the IRS Taxpayer Advocate Office concluded that the Code contained 3.8 million words, it did so by downloading a zipped file of the CCH version of the Code, which includes enormous amounts of material never in, or no longer in, the Code. Unfortunately, the fact-checking site concluded that the 4-million-word count must be correct. It’s not. I explained why this number is way off the mark in Anyone Want to Count the Words in the Internal Revenue Code?.
I’m not making excuses for a 400,000-word Code. There’s no reason for it to be that long, and much of what makes it long are special provisions for special interest groups. What I am saying is that credibility is important when advocating for tax reform, and it is difficult to place credibility in persons who repeat the same disproven information. It doesn’t take long to take a look at Bush Pages Through the Tax Code?, Anyone Want to Count the Words in the Internal Revenue Code?, Tax Commercial’s False Facts Perpetuates Falsehood, How Tax Falsehoods Get Fertilized, and A Slight Improvement in the Code Length Articulation Problem to separate the gross exaggerations from reality. The Code is enough of a mess – on that point I agree with Lance – without needing to overstate the case in a manner that undercuts the point that needs to be made.
Monday, May 06, 2013
Though it is unclear if the taxpayer in this case would have been able to produce evidence of an adjusted basis and fair market value corroborating the claimed deduction, it is unquestionable that failure to produce that evidence closes the door to the deduction, period. Whether the taxpayer in this case had the information but did not know that the information should be produced, or did not have the information, is unclear. One thing, though, is clear, and that is the need for taxpayers to retain records relating to asset acquisition.
In several posts within the past year, including The Importance of Tax Record Keeping and The Aggravation of Tax Paperwork, I have stressed the need to be careful with respect to generating and retaining records for tax purposes. It may be an inconvenience, and it may contribute to paper or digital clutter, but it is essential.
Some commentators, trying to assist individuals who wish to remove as much paper as possible from their residences or offices, suggest that tax returns and related records can be tossed after three years, or in some instances, after seven years. For example, in How Long to Keep Your Tax Returns, the author separates tax returns and tax records into three groups to be disposed of after three, six, and seven years, respectively. In How Long Do I Need to Keep This? - A Guide to Receipts, Statements and Financial Clutter at Home, the author suggests that credit card receipts for major purchases with a warranty be stapled to the owner’s manual and filed for the term of the warranty, and that checks be trashed after seven years, although the author also recommends keeping indefinitely insurance policy information, and keeping annual automobile registration information for one year. If the taxpayers in Cole were following this advice, they may have de-cluttered themselves into the loss of a deduction.
On the other hand, the IRS provides advice explaining that records relating to assets need to be kept until the end of the limitations period for the year in which the taxpayer disposes of the asset. Similarly, other commentators, such as this advisor gets it right.
Nine years ago, in To E-File or Not to E-File: That is The Question, I noted:
Though some people don't hold onto their tax returns for more than say, 3 or 7 years, relying on the statute of limitations, I recommend holding onto all returns, if for no reason other than to maintain records of basis and to guard against the strange day when the IRS claims a return from some years ago was not filed, which would open the statute of limitations, and which can be rebutted quite easily by providing a copy of the return.With so much conflicting advice circulating on the internet, taxpayers must take care to get good advice and then to follow it. Disposing of tax returns and tax-related records might be appealing to those who detest any sort of clutter, but doing so can be costly.
Friday, May 03, 2013
Recently I learned that at about the same time that I published Tax Commercial’s False Facts Perpetuates Falsehood and How Tax Falsehoods Get Fertilized, other commentators were reporting on their prediction of the growth in the page number. In How Many Pages Long is the U.S. Income Tax Code in 2013?, the folks at the Political Calculations Blog explained that they had expected the number of “regular 8-1/2” x 11” sheets of paper to explain the complexity of the U.S. federal tax code” had grown to 73,954 rather than the 77,030 that they had predicted.
This report provides a slight improvement in how commentators articulate the number of pages issue. Rather than saying that the 70,000-plus pages is the size of the Internal Revenue Code, these commentators refine the language to indicate that it is the number of pages used by CCH not only to provide the text of the Code but also the regulations, annotations, and other materials. One quibble on this point is that some of those pages are not used by CCH to “explain the complexity” of the Code or even to explain anything, because some of those pages consist simply of republication of statutory and regulatory text, and not the explanations found in the CCH annotations and other editorial material.
Yet mis-articulation continues. The title of the post is not “How Many Pages Are Needed to Present the Code, the Regulations and Explanations” but “How Many Pages Long Is the U.S. Income Tax Code in 2013?” The post does not answer that question, as it does not purport to measure the length of the Code itself. Worse, the title of the post refers to the “U.S. Income Tax Code.” What is that? There is no such thing. There is an INTERNAL REVENUE Code, and the reason for the use of those precise words is that the Internal Revenue Code includes not only provisions relating to the federal income tax, but also provisions relating to the federal gift tax, the federal estate tax, federal payroll taxes, federal excise taxes, and other items. Someone who wants to focus on the income tax needs to go through the Internal Revenue Code and separate the pages that contain income tax provisions from those that contain provisions relating to other taxes. Similarly, the 70,000-plus pages in the CCH publication to which the Political Calculations Blog commentators refer are not all devoted to the income tax.
The erroneous terminology referring to a “U.S. income tax code” shows up again in the body of the post. That convinces me that the use of this language is not an accident or a typographical error, but intentional. Is it a matter of confusing “internal revenue” with “income tax”? Is it a matter of thinking that the Internal Revenue Code contains only the income tax? Whatever the cause, it makes it more difficult to free the record from errors. Does it matter? Yes. Precision matters.
Wednesday, May 01, 2013
In a long series of posts, including A Memorial Day Essay on War and Taxation, Peacetime Tax Policy While Waging War = Economic Mess, Some Insights into the Tax Policy Mess, and What Sort of War is the “Real Budget War”?, I have explained why the decision to cut taxes during a time of increased military and homeland security spending generated adverse long-term consequences for the national economy and the American people. Unfortunately, the way things turned out proved my predictions to be accurate. Had I been wrong, the economy would be booming, unemployment would be low, income inequality would be minimized, and military and homeland security success would be backed up by a robust economic foundation. Time has run out on chances to prove that the foolishness of cutting taxes during wartime was a sensible decision.
Not all legacies are deserving of praise. Surely the cut-taxes-raise-spending legacy is one that future generations will regard as misplaced, unfortunate, and the hallmark of a nation that lost its way.