Saturday, July 29, 2006


Before this week, even I did not fully appreciate the lack of character of the Republican Party. Their attempt to pass their bill to slash taxes on the estates of multi-millionaires by attaching it to a long overdue increase in the minimum wage is simply breathtaking in its cyncism.

According to an analysis by the Center for Budget and Policy Priorities, the bill would put an average of $1,200 a year into the hands of 6.6 Million people. In other words, there would be a total economic benefit to the lowest economic classes in this country of just short of $8 Billion a year. The gutting of the estate tax, however, would put $1.4 Million a year into the hands of 8,200 people. That is, the richest of the rich would receive a benefit of just short of $10 Billion a year.

One thing that the CBPP missed is that the radical reduction of the estate tax is that it's the gift that keeps on giving. That is, the change in the minimum wage has to be periodically updated to keep pace with inflation. By way of example, since September 1997, the purchasing power of the minimum wage has deteriorated by 20%. Thus, the increase in the minimum wage is not nearly as much of an increase as it is a clawback to where it once was.

On the other hand, the reduction of the estate tax will always keep up with inflation, since no matter how wealthy the wealthy get, their savings from the changes in the bill will always keep pace.

Thursday, July 27, 2006

I Wish I Had Said That

In her discussion on the Bush Treasury Department's report, A Dynamic Analysis of Permanent Extension of the President's Tax Relief, Linda Beale says that:
Bush, of course, is convinced that dynamic analysis is the way to go. His budget proposal for 2007 proposed establishing a Treasury Division on Dynamic Analysis. I wonder if the 147 or so people laid off from the estate tax audit team will move over to Dynamic Analysis to figure out how to paint rosy scenarios for the way eliminating the estate tax on multimillionaires will cause the economy to take off in a new spurt of growth?
The report, apparently authored by noted government economist Rosie Scenario, states that its projections will only be achieved if there is "an offsetting change in government revenues or spending." In other words, there will be significant budget deficits as a result of the tax cuts unless we cut government services. As I pointed out previously, it is mathematically impossible to balance the budget based on cuts in non-military, discretionary spending. This means that the economic benefits of the Bush tax cuts can only be realized if the cuts are made up by subsequent tax increases.

Got that now?

Tuesday, July 25, 2006

No Room at the Court

Tax disputes arise in different ways. The taxing authority can challenge a position a taxpayer takes on a return or a taxpayer can file an amended return, in effect, challenging a position he or she had previously taken. If the taxing authority fails to honor the position on the amended return, the taxpayer can generally sue for a refund.

In Billings v. Commissioner, handed down by the Tax Court today, the dispute arose in a slightly different manner.

Mr. Billings learned that his wife had embezzled money in 1999. He filed an amended joint return with his wife for that year and requested innocent spouse relief from the Tax Court. The type of petition that he filed is known as a:
"nondeficiency stand-alone" petition--"nondeficiency" because the IRS accepted his amended return as filed and asserted no deficiency against him, and "stand-alone" because his claim for innocent spouse relief was made under section 6015 and not as part of a deficiency action or in response to an IRS decision to begin collecting his tax debt through liens or levies.
In a previous case, Ewing v. Commissioner, 118 T.C. 494 (2002), the Tax Court had agreed that it had jurisdiction to hear such cases. However, the decision in Ewing was reversed by the Ninth Circuit (439 F.3d 1009 (9th Cir. 2006)) and the Ninth Circuit's position has been adopted by the Eighth Circuit (Bartman v. Commissioner, 446 F.3d 785, 787 (8th Cir. 2006)).

Today, the Tax Court threw in the towel and agreed that it lacked jurisdiction. The opinion, however, was merely a plurality opinion, with a separate concurrence and three dissenting opinions. (See the summary at TaxProf.)

The irony is that the issue may ultimately be nothing more than a footnote since a bill, S. 3523, has been introduced by Senators Feinstein and Kyl. The bill would allow nondeficiency stand-alone petitions to be filed "with respect to liability for taxes which are unpaid after the date of the enactment" of the Act. In other words, the only individuals who will not be able to file nondeficiency stand-alone petitions are Billings, Ewing, Bartmann, and anyone whose nondeficiency stand-alone petition is currently pending and with respect to which a decision is rendered prior to the date of passage of the bill.

What advice to clients: Hurry up and wait (until S. 3523 passes).

Hat tip to TaxProf for the links to Ewing I, Ewing II, and Bartman.

Second Thoughts: Upon reflection, I think that the last sentence of my analysis is incorrect. It is based on the assumption that the doctrine of res judicata would bar Billings, et al., whose nondeficiency stand-alone petitions either are or would be dismissed for lack of jurisdiction prior to the passage of S. 3523, from refiling after its passage. I now believe that they could refile. After all, the first dismissal was due to a lack of jurisdiction which, by virtue of S. 3523, will be cured retroactively. Presumably, their cases would fall within the class of cases that S. 3523 would allow since their cases would be filed "with respect to liability for taxes which are unpaid."

Runaway Taxes

TaxProf has a good summary of resources and commentary on H.R. 1956, the bill now pending in the House that would gut the ability of the states to tax corporate income. See my previous comments here.

Among the material that can be found there is a link to the National Governors' Association's report, Impact of H.R. 1956, Business Activity Tax Simplification Act of 2005, on States. According to the report, in 2007 alone, the states would collectively lose almost $8 Billion in revenue. By way of example, Maryland would lose $106.4 Million, representing 26.8% of its corporate income tax revenue. The CBO reports more modest, but still significant, revenue losses of a billion dollars in the first year of enactment, growing to $3 Billion annually by 2011.

H.R. 1956 is a bad bill. Perhaps worse than the substance of the bill is its dishonesty, being cast as a "tax simplification" measure.

Don't be fooled.

Sunday, July 23, 2006

As Honest As The Day Is Long

In Casablanca, Rick fixes the roulette game to allow a young Bulgarian refugee to win enough money to buy an exist visa. His croupier, Carl, is challenged by another customer who was watching:
Customer: Say, are you sure this place is honest?

Carl (fervently): Honest! As honest as the day is long!
Only fools will believe the Bush Administration's explanation for eliminating over half of the lawyers in the IRS who audit estate and gift tax returns. The story is reported by the NYT here.

Bush Administration apologist spokesman Kevin Brown "dismissed as preposterous any suggestion that the I.R.S. was soft on rich tax cheats. He said that the money saved by eliminating the estate tax lawyers would be used to hire revenue agents to audit income tax returns, especially those from people making over $1 million."

Right. The Bush Administration is as honest as the day is long.

First, according to the article, citing the aforesaid Brown as the source, "estate tax lawyers are the most productive tax law enforcement personnel at the I.R.S. . . . For each hour they work, they find an average of $2,200 of taxes that people owe the government." While Brown argues that:
[C]areful analysis showed that the I.R.S. was auditing enough returns to catch cheats and that 10 percent of the estate audits brought in 80 percent of the additional taxes. He said that auditing a greater percentage of gift and estate tax returns would not be worthwhile because "the next case is not a lucrative case" and likely to be of relatively little value.
This may be technically true, but it is also irrelevant. After all, it only follows that one can gut the enforcement staff without any diminution in audit revenue if one is assured that the remaining staff will only focus on those estates that owe taxes. In reality, this is not likely to be the case, since it is not certain before an audit is conducted whether or not any tax is due.

To illustrate this point, assume that every police speed trap picks up one speeder for every 100 cars that pass by. Assume further that there are 100 speed traps and each picks up 1 speeder (i.e., 100 total speeders).

Using Brown's logic, we could reduce the number of speed traps by 99% since only 1 in 100 drivers are actually exceeding the speed limit. Of course, what actually will occur is that the last remaining speed trap will only pick up 1 speeder, since that speed trap's percentage is still only 1 in a hundred. Thus, the reduction in the total number of law enforcement personnel causes a similar reduction in the number of speeders apprehended.

Second, as a practical matter, the loss will be even greater than the percentage reduction in enforcement since the reduction in audits will embolden those who want to "game" the tax system. Assume that drivers knew that the number of speed traps had been dramatically reduced. Over time, because they would have a lower incentive to monitor their speed, we could expect that there would be a greater number of speeders on the road. The same thing happens in tax law.

In fact, practitioners actually refer to this behavior as "audit roulette." Specifically, taxpayers willingly take positions that they know the IRS can probably successfully challenge because (i) they may not get audited at all or (ii) even if audited, they can settle the case for less than 100 cents on the dollar. This tendency is especially pronounced in estate planning with taxpayers taking positions using aggressive property valuation appraisals.

Any practitioner in the area knows that John Hruska, an IRS estate tax lawyer in New York who is active in the National Treasury Employees Union, which represents IRS workers, is correct when he says that "This [the gutting of the estate tax audit division] is not a game the poor will win, but the rich will."

Some readers of this blog have taken exception to my constant reference to the Bush Administration's tax policy makers as "knaves." Only fools would take exception now.

Saturday, July 22, 2006

Relatively Flat

I've long contended that the U.S. tax system, taken as a whole, is relatively flat and not very progressive. The Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, has just issued various analyses of S. 3626, Senator Landrieu's "compromise" estate tax bill. Within the specific analysis of the bill, there are these two charts:

(Click to enlarge image. Original can be found here.)

The second chart shows the current distributional effect of all federal taxes. The average federal tax rate is 21.2%. Individuals in the $75-100,000 economic class have an average tax rate of 23.2%. Wealthy individuals, those making between half a million and a million dollars, have an average tax rate of 25.9%. Significantly, if you really start to hit it big and jump into the over $1 Million a year class, your average rate actually falls to 25%. This is not terribly progressive. Of course, when blended with state taxes, that are generally regressive, the system, as a whole, is even less progressive than shown in the table.

Under the Landrieu proposal (the first chart), the average tax rate for individuals in the $75-100,000 economic class would fall by 0.1%. Wealthy individuals, those making between half a million and a million dollars, will see their average tax rate fall by eight times that amount. The rate for those in the over $1 Million a year class would fall by a "mere" 0.4%. Of course, individuals making less than $75,000 a year get no tax benefit under the bill. Thus, the Landrieu proposal further reduces overall progressivity.

Of course, these two charts don't tell the whole story. Since the estate tax cuts will increase the federal deficit, there will be a continuing trend away from progressivity by, for instance, attempting to reduce Social Security benefits and throwing the costs of various programs onto the states. (Given the tax competition between states, this will only accelerate the trend toward regressivity. Wealthy individuals are more mobile, thus can more easily arrange to avoid having their income taxed by states that attempt to inject progressivity into their tax systems.)

Hat tip: TaxProf.

Friday, July 21, 2006


From time to time, I check on the paths of readers of this blog to see where they're from. This morning, a reader came in from India via an Alta Vista search.

The significance of this is that it has been widely reported that the Indian government had blocked access to a large number of blogs, including Blogger and Typepad based blogs. See this story on Boing Boing on July 17. The blocking may have been somewhat more selective than originally reported. According to this story in the WSJ online on July 19:
Several telecom operators confirmed there were more than 15 sites they were directed to block. Close to a third of the sites were home to blogs, the personalized Web logs that have become popular in India, just as they have in other parts of the world. Among the Web sites blocked are parts of Blogger and GeoCities. Included on a list seen by The Wall Street Journal are sites that showcase views of an Islamic holy man, conservative Hindus, and Dalits, the low caste in India pejoratively referred to as untouchables.
(Emphasis added.)

Either all parts of Blogger were not blocked or the blocks have been substantially lifted.

Wednesday, July 19, 2006

Walmart Is Smiling

Judge J. Frederick Motz of the United States District Court for the District of Maryland, has sustained Walmart's challenge to the Maryland Fair Share Health Care Fund Act. His opinion in the case of Retail Industry Leaders Association v. Fielder holds that the Act is preempted by ERISA. In reaching his decision, Judge Motz ruled that the industry trade association, rather than Walmart itself, had standing to bring the action.

In a nutshell, the Act imposed a "tax" on non-governmental firms doing business in Maryland that have 10,000 or more employees. The tax was in the amount of 8% of the firm's payroll in Maryland, but would be reduced dollar for dollar to the extent that the firm expends funds for employees for "health insurance costs." The Act defines "health insurance costs" to mean "the amount paid by [the] employer to provide health care or health insurance to employees in [Maryland] to the extent the costs may be deductible by [the] employer under federal tax law."

The class of employers potentially affected by the Act was small:
There are four non-governmental employers of 10,000 or more people in Maryland: Johns Hopkins University . . . , Northrop Grumman Corp. . . . , Giant Food Inc. . . . , and Wal-Mart. When enacting the law, the Maryland General Assembly anticipated that only Wal-Mart would be affected by the Act's spending requirement.
The important issue raised by the case are not those limited questions of standing, preemption, or the equal protection that were actually addressed by the Court. Rather, the principal issue is whether we can stop the continued erosion of the availability of affordable health insurance.

The Act was ham-handed. It singled out one company, although admittedly one that has a limited "likeability factor" because of its reputation for brutal cost cutting that inflicts pain upon both its employees and its suppliers. The Act was passed solely to make it appear as if the legislature was actively addressing the health insurance issue, when, in fact, the legislature was simply avoiding any creative attempt to grapple with the problem.

My sense is that there are "bad guys" in the health care debate. Insurance companies, for instance, have so much invested in the current system that they will move heaven and earth to oppose real reform. However, health care reform should be designed to accomplish its legitimate goal: the establishment of a system that provides broadly available and affordable heath care for all Americans. If some bad guys may get injured in the process, so be it. But the process should not be directed toward punishing businesses that we simply do not like.

Tuesday, July 18, 2006

Law Office Technology On the Cheap

In June, I gave a presentation at the Maryland State Bar Association's annual presentation on how to start a solo practice. The presentation, Technology for the Solo Practitioner or How Can You Be Two Places at Once When You're Not Anywhere at All, should be of interest to a much wider audience.

My thesis is that extremely inexpensive technology as the use of scanners, pdf, Internet fax services, etc., not only allows paper dependent businesses (e.g., law firms, accounting firms, etc.) to go paper-less easily and cheaply, but that quite spectacular overall efficiencies and cost reductions will result when they do so. What is baffling to me is why there has not been greater adoption of these methods.

Certainly, it is not because the core programs are so difficult to master. After all, the use of word processing was quickly and broadly adopted even though in the early days one had to be quite technologically savvy to use word processing programs successfully. And, of course, computers were constantly freezing up and crashing.

In contrast, the conversion to a paper-less office requires nothing more than a slight extension of existing skill-sets. Presumably, in most offices, the basic foundation, involving the use of email, the creation of standard document filing and nomenclature, is already in place. Moreover, the base technology, the personal computer, is far more stable than it was even five years ago, much less fifteen years ago.

I don't know the answer as to why there has not been a more rapid movement to paper-less small and medium-sized offices. I only know that the impediment is neither the cost nor the availability of appropriate technology.

Thursday, July 13, 2006

War Against the States

One of the more contentious issues in state tax is that of nexus. That is, whether the activities of a business have a sufficient connection with any particular state to allow the state to either impose income tax on the business' activities or force the business to collect sales tax on sales to residents of the state. Two bills before Congress are apparently attempting to use the guise of tax simplification to weaken the ability of states to tax corporate income.

According to a CRS report, State Corporate Income Taxes: A Description and Analysis, the proposed legislation, H.R. 1956 and S. 2721,:
is intended to further modify the state taxation of businesses engaged in interstate commerce.The legislation would impose new regulations on how states impose taxes on multistate businesses, through (1) imposing uniformity on the time component of nexus determination and (2) expanding the definition of goods and services subject to the nexus rules. The legislation would not directly address the complexity of the state corporate income tax structure — in particular, the various apportionment formulas (and allocation rules). . . .
Many economists and other researchers who analyze state corporate income taxes agree that the critical issue with the current state corporate income tax structure is the variability in the allocation and apportionment of corporate income from state to state. The current mosaic of state corporate income tax rules creates economic inefficiencies for the following reasons: (1) relatively high compliance costs, (2) increased opportunities for tax planning by businesses, and (3) potential gaps and overlaps in taxation. The new regulations as proposed in H.R. 1956 and S. 2721, would exacerbate the underlying inefficiencies because the threshold for business —the 21-day rule, higher than currently exists in most states — would increase opportunities for tax planning leading to more "nowhere income." In addition, expanding the number of transactions that are covered by P.L. 86-272 [a previous federal enactment "simplifying" the nexus question] would have expanded the opportunities for tax planning and thus tax avoidance and possibly evasion.
In other words, the proposed legislation is a wolf in sheep's clothing.

One criticism of the report. On page 18, it refers to "de minimus [sic]" standards. Mrs. Sheff would not be pleased.

Wednesday, July 12, 2006

A Penny Cut Is a Penny Spent

Yesterday, President Bush crowed about how his tax cuts somehow generated more revenue for the Federal government. David Wessel of the WSJ succinctly deflated this fantasy:
Do Tax Cuts Pay for Themselves?

Not if you read the fine print in the new White House midsession review of budget trends. "While difficult to estimate precisely," Treasury long-run analyses of the effects of President Bush's tax cuts "may ultimately" raise total national output of goods and services by 0.7%.

So is that enough to pay for the tax cuts, even after allowing them to work their economic magic over the next 10 years? The Center for Budget Policies and Priorities, a Washington think tank and advocacy group that is distinctly unfriendly to Bush fiscal policies, says it isn't. "A 0.7 percent increase in the economic output that the Congressional Budget Office has projected for 2016 would represent an additional $146 billion [in gross domestic product]," it says. "If new revenues equaled as much as 20% of the additional output, the increase in revenues resulting from making the tax cuts permanent (assuming Treasury's best-case assumptions) would be $29 billion."

That's a lot of money. But how does it compare to the size of the president's tax cuts? The congressional Joint Committee on Taxation, using conventional analyses, says making the president’s tax cuts permanent would reduce federal revenues in 2016 by $314 billion. That is more than 10 times what the Treasury analysis suggests tax cuts would generate by prompting more hours of work, more savings and investment and more efficient use of resources.
(Link in the original.)

There's a recent CRS report out that concludes that even when tax cuts are targeted to incentivize savings, the net result is to reduce national savings. The report, Savings Incentives: What May Work, What May Not, finds that:
Most of the government incentives to save come through the tax system. For FY2006, these tax incentives are estimated to cost the U.S. Treasury $125.6 billion in forgone tax revenues — almost 40% of the estimated FY2006 budget deficit. The tax incentives primarily benefit higher-income families because they (1) are more likely to save, and (2) face higher marginal tax rates and thus benefit more from sheltering income from taxation. The tax incentives, however, appear to be relatively ineffective in inducing new saving — many of the families benefitting from the tax incentives likely shifted funds from other saving accounts into the tax-preferred accounts. Consequently, public saving is lower because of the forgone tax revenues due to the tax incentives while personal saving may be only slightly increased at best. In designing pro-saving policies, it is important to consider the aggregate effects of the policies on all components of national savings, both public and private.

The Bush Administration and the President's Advisory Panel on Federal Tax Reform have advocated expanding tax incentives as the primary policy to encourage saving. Personal saving has been shown to be fairly unresponsive to tax incentives, however, and they may substantially decrease public saving (that is, increase the budget deficit). The long-term net effect on national saving is likely negative.
(Emphasis added.)

Of course, all government incentives designed to encourage savings are not created equal. The types of savings that the Bush Administration favors are particularly pernicious:
Both the Bush Administration proposal and the President's Advisory Panel plan shift savings incentives from the front-loaded form to the back-loaded form. Most of the arguments regarding increasing private saving, however, apply to front-loaded savings plans. Back-loaded plans or Roth IRAs eliminate (1) the immediate reward to retirement saving (the tax deduction), and (2) the need to save for future tax liabilities. Consequently, shifting from front-loaded to back-loaded savings approaches may reduce personal savings. In addition, the long-term revenue loss from these proposals could be substantial thus leading to a large reduction in public saving. The result of these savings proposals could be a large reduction in national saving and a reduction in economic growth.
(Footnote omitted, emphasis supplied.)

The bottom line is that Bush Administration tax policies are making us, collectively, poorer. No amount of puffery by the Knave-In-Chief can change this reality.

Tuesday, July 11, 2006

The National Review Needs a Tax Lawyer

Postings have been light lately due to the press of work, but I could not let this one go by. It proves that it is possible to be both a knave AND a fool.

In a pro-estate tax repeal editorial screed, the NRO accused the Joint Committee of Taxation of ignoring the revenue effects that the proposed estate tax repeal bill would have by repealing the step-up basis rules. Thus, according to the NRO:
The JCT reported that repealing the death tax would cost the federal government $281 billion in revenue over the first five years. But that number doesn’t include the effects of a provision in the bill to eliminate the exemption that heirs currently receive from paying capital-gains taxes on the assets they inherit.
There's only one problem with the NRO's argument--that's not what the repeal bill would do.

The JCT explanation of the repeal bill can be found here. On pages 6-7 of the explanation, the JCT tells how under current law, there will be a very limited modification of the step-up basis rules in 2010. This modification, which will only be effective for one year, would effectively limit the step-up in basis for decedents dying in 2010 to $1.3 million. In other words, for one year the step-up basis rules are modified in a way that will increase income tax revenues. However, after that one year, the current statue's provisions sunset and the step-up in basis rules, unmodified, are reinstituted.

Even this limited one-year modification of the step-up basis rule would be repealed under the proposed estate tax repeal bill. As the JCT explains on page 16:
The provision also repeals the modified carryover basis rules that, under EGTRRA [which is to say, current law], would apply for purposes of determining basis in property acquired from a decedent who dies in 2010. Under the provision, a recipient of property acquired from a decedent who dies after December 31, 2009, generally will receive date-of-death fair market value basis under the basis rules in effect under present law with respect to decedents dying prior to 2010.
In other words, the NRO is simply wrong both as to what the law is and also what it would be if the estate tax repeal bill is enacted. Contrary to the NRO's analysis, there would be no positive revenue effect due to the repeal of the basis step-up rules. In fact, in 2010, the only year in which the basis step-up rules are currently scheduled to be modified, the repeal bill repeals the modification, essentially reducing, rather than increasing, any additional income tax revenue that would offset the losses from the repeal of the estate tax. Since, under current law, there will be no estate tax in 2010, the repeal bill triggers a net revenue loss in 2010.

Before the NRO accuses the JCT of bad faith, it should at least read and attempt to understand the provisions of the bill.

Hat Tip: TaxProf.

Slight Correction: The above analysis was not of the full estate tax repeal proposal, but was of the "Permanent Estate Tax Relief Act of 2006" (a.k.a., "Estate Tax Repeal Lite"). This bill would not completely repeal the estate tax, but would simply gut it. It is the current bill that Frist is trying to push through the Senate.

The criticism of the NRO stands, however, since it was the JCT's revenue loss estimates for this bill that the NRO wrongly attacked.