Wednesday, August 31, 2005

Weak Joints

Yesterday, I criticized Kleinrock for confusing the Joint Economic Committee with the Joint Committee on Taxation. I called the JEC "a satrap of the knavish right."

In the back of my mind, I began to have doubts. Had I gone overboard in rhetorical excess? Much to my relief, after I did further research, I discovered that my initial instincts were correct.

Going to the website of the JCT and drilling down a bit, I came to the Committee's explanation of "How [It] Fulfills Its Statutory Mandate." The explanation was lengthy. It described how:
The Joint Committee staff does not operate either as a majority staff or as a minority staff. It does not have the duty of representing one particular point of view on an issue. Consequently, it is able to examine critically tax policy in all its aspects.
The explanation noted that, "the Congressional tax committees need a source of independent, nonpartisan technical tax advice even when the party controlling the Congress (House and/or Senate) is the same as that controlling the Executive Branch."

Compare that charter with the way the JEC operates. The description of how the Committee operates is set forth in three scant paragraphs. Among the "research reports" it offers are such even handed offerings as "A Brief Explanation of the Economic Burden Imposed by Federal Taxes" which purports to explain how "[e]conomic theory gives policymakers solid support for resisting tax increases and preferring spending reductions as a method of reducing the federal deficit." The Democratic side of the Committee's website has similar broadsides from the other side of the partisan divide. Of course, the Democrats cannot cast their position papers as being the work of the Committee staff (apparently a group of Heritage Foundation wannabes), so, facially at least, they seem to have a lower degree of legitimacy.

The ideological slant of the JEC is apparently intentional. According to an article in the NRO by Bruce Bartlett, in the early 80's the Committee became a supporter of supply side economics. (Remember, the supporters of supply side economics have been described by Bush II economist Greg Mankiw as "charlatans and cranks." By comparison, calling them "knaves" is almost complimentary.) While Bartlett contends that the Committee currently lacks focus with "House and Senate Republicans tend[ing] to go their own way," he doesn't even attempt to make any pretense that the Committee is, as is the JCT, independent. Perhaps that's why the JCT has come under attack by such partisans as the WSJ editorial page for allegedly using incorrect predictive models (read: "predictive models that don't merely rubber stamp the economic nonsense ladled out by the Republican right").

In any event, just remember this shorthand distinction: JCT reports are reports of a single, joint, and impartial staff. JEC reports are the tendentious products of a group of determined ideologues.

Tuesday, August 30, 2005

The Partnership Profit Allocations of Sin

The RothCPA blog calculates that the average per partner cost of the KPMG settlement with the government is $265,000. It assumes that there are 1600 partners who will share the loss. I think that these calculations are overly optimistic.

First, the amount to be paid is not tax deductible (the agreement with the government has an explicit provision to this effect). That means that, assuming an average 45% marginal rate (including federal and local income taxes and SECA, etc.), the total cash profits that KPMG must generate to have $456 Million in cash to pay the government is about $1 Billion. Assuming further that there are 1600 partners to share the burden, the firm must generate $625,000 in profits even before the partners see any cash to take home.

Second, however, the agreement with the government calls for KPMG to abandon certain lines of business altogether. Thus, it is logical to assume that there will be fewer than 1600 partners to share the burden. The number of partners will likely decrease even further in subsequent years (the amount is to be paid over 3 years) by defections and net attrition in the partnership ranks. (I suspect that loss in partnership ranks due to retirements will likely not be made up by younger people willing to become partners due to the sharp reversal in the value of a KPMG partnership position.) Assume that the average number of partners who will share the burden is 1400. In that case, the per partner profits needed to pay the settlement is over $714,000.

Add to this incredible burden the cost of dealing with the hugh number of claims, the loss of client base due to KPMG's tarnished image, the loss of profits due to the business lines that must be shed as part of the settlement agreement, the increased overhead due to the monitoring requirement imposed by the settlement agreement, and finally the reduction in the firm's productivity due to the pall that settles over it due to the battering that it will take, you can see the beginning of a death spiral.


Before anyone else points it out, there's an error in my calculations. I assumed a 45% marginal rate, but actually used a 55% marginal rate in the calculations. This is why I'm a tax lawyer, not a tax accountant.

In any event, applying the 45% marginal rate, the total cash profits necessary to generate the $456 Million settlement is about $829 Million. That amount, divided by 1600, results in a per partner burden of $518,125. Divided by 1400, the per partner burden is a little over $592,000.

I still think that KPMG is in death spiral territory, however.

Some Tax Service

Kleinrock today breathlessly reports that "[a]ccording to research conducted by the Joint Economic Committee (JCT) [sic], the estate tax generates costs to taxpayers, the economy, and the environment that far exceed any potential benefits that it might arguably produce." The KR report then goes on to list the alleged benefits uncovered by the research. Wrong.

First, the Joint Economic Committee is not the JCT. The JCT is the Joint Committee on Taxation. The difference is more than mere nomenclature. JCT reports are created by a nonpartisan technical staff of the Congressional Joint Committee on Taxation. The efforts of the JCT have been attacked by the knavish since the JCT's research points to a steep increase in the growth of the federal debt if the estate tax is repealed.

The Joint Economic Committee, on the other hand, is a satrap of the knavish right, lead by Representative Jim Saxton of New Jersey. Don't believe me? Take a look at a summary of the JEC's workproduct here.

More significantly, however, is that KR's report of alleged benefits from estate tax repeal appear to be drawn from a JEC report from 1998. There is a 2003 JEC update, but the talking points repeated by KR, even though set forth in that update, are merely quotes drawn from the 1998 report. There is no attempt to actually update the research. By way of example, the contention that the estate tax causes environmental degradation is based on a study "conducted prior to EGTRRA of 2001." The update acknowledges that the allegation that the "existence of the estate tax has reduced the stock of capital in the economy by approximately $497 billion, or 3.2 percent" is drawn from the 1998 report and does not take into account the dramatic increase in the unified credit amount enacted in the EGTRRA of 2001.

In sum, KR's report is simply negligent.

Saturday, August 27, 2005

Hide and Seekers

Via beSpacific, I discovered the database of the Fugitive & Electronic-Only Documents Committee of the American Association of Law Libraries, Government Documents Special Interest Section. The purpose of the Committee is to:
  1. Identify and report to GPO fugitive and electronic-only U.S. federal documents on law and policy. A "fugitive document" is defined as a U.S. federal publication that, according to U.S. Code Title 44, should be distributed to libraries through the Federal Depository Library Program, but that hasn’t been cataloged or distributed by GPO. An "electronic-only" document is defined as an electronic U.S. federal publication that GPO has cataloged and assigned a Persistent URL, but that GPO will not distribute to depository libraries in tangible format.

  2. List fugitive, electronic-only, and tangibly-distributed U.S. federal documents on law and policy on the GD-SIS Website.

  3. Facilitate hard copy publication of some of these documents.
Some of the publications look too incredibly pedantic and dull to ever be the focus of an intentional attempt at suppression for political purposes (e.g., "Frequently Asked Questions About Copyright : A template for the Promotion and Awareness Among CENDI Agency Staff"). These documents are probably lost for the same reason that I can't find my glasses once or twice a week--I simply forgot where I put them.

Other documents, however, may have potential political bombshells hidden in them (e.g., "Privacy Office Report to Congress, April 2003-June 2004," Department of Homeland Security. Privacy Office) and its possible that they have been lost in order to keep the information contained therein from the public.

Although I can't say for certain, even a innocuous-sounding title such as the report "Process Assessment Report for a Dialogue on Impacts of Anthropogenic Noise on Marine Mammals" by the Marine Mammal Commission could fall within this category. (The Navy has been trying to push certain types of new sonar systems that allegedly pose the possibility of serious harm to marine mammals. James Taylor, Pierce Brosnan, and Jean-Michel Cousteau are on the story.)

In any event, its heartening to know that someone is keeping track.

Tuesday, August 23, 2005

Knaves Waiting for a Vote

Even the normally complacent Kleinrock (subscription required) has been shocked by what it calls the GOP's "Biased Survey on Estate Tax Repeal." The Kleinrock report notes:
While [the GOP] questionnaire recipients will probably be against the government profiting from a person's demise, they also might not know that few estates actually pay the tax. That shortfall in knowledge will likely make them side with abolishing what is dubbed the "Death Tax" on the questionnaire.

This support will come despite the fact that roughly 99 percent of estates pay no estate tax at all. Among the few estates that do owe taxes, the effective tax rate -- that is, the percentage of the estate that is paid in taxes after the exemption and deductions to, say, charities -- averaged about 19 percent in 2003, according to the IRS. That percentage is far below the top estate tax rate of 50 percent.

Questionnaire recipients also will not know that for many large estates that do owe estate taxes a substantial proportion of their assets have never been taxed. According to the Joint Committee on Taxation, the majority of assets in estates valued over $10 million consist of untaxed capital gains -- that is, property, stocks, and bonds that have appreciated in value since they were first purchased by the decedent but have never been subject to tax.
However, the report then quotes at length baloney dished out by knavish courtier William Beach of the Heritage Foundation as to the alleged negative impact of the estate tax. It is interesting to note that Beach, one of the A Team hacks who regularly lobbies against the estate tax, has apparently abandoned the argument that the estate tax forces families to sell their closely-held businesses and farms. This argument was so plainly specious that even he must have realized that it was a clear loser.

Economic arguments, on the other hand, are more difficult to refute. More often than not they are developed in academic-like papers that are difficult to contest in 25 words or less. One of Beach's arguments is as follows:
[The estate tax] directly undermines job creation and wage growth; and these . . . effects make death tax repeal everyone’s concern. [In other words, even we cannot make the case with a straight face that most or even many Americans will be directly affected by the estate tax. So we have to create the bogey-man of collateral economic damage.] Heritage Foundation economists estimate that the federal estate tax alone is responsible for the loss of between 170,000 and 250,000 potential jobs each year. This additional employment never appears in the U.S. economy because the investments that would have resulted in higher employment are not made.
Where's the study that Beach relies on? So far as I can determine, there was only one Heritage study, published in 2002 by Alfredo Goyburu entitled "The Economic and Fiscal Effects of Repealing Federal Estate, Gift, and Generation Skipping Taxes." The study does not support the 170,000/250,000 figure used by Beach. Instead, the predicted job-creation numbers run from a low of 25,000 to a high of 121,000.

Even these numbers are suspect since the Goyburu's analysis "incorporated a capital gains exclusion of $1 million on transferred estates and a $3 million exclusion on spousal transfers." In other words, the analysis uses an assumption of a tax break that is not in the bill being considered by the Senate. Thus, we are offered a comparison between a Heritage apple and a Congressional lemon. For any analysis to have value (and it's not clear that this one does), it must at least attempt to analyse the same proposal that is being voted on.

Kleinrock picked up on the easy stuff--that the survey question was the political equivalent of "Do You Favor Continued Beating of Your Wife." However, it failed to dig a couple of levels down and examine the substantive contentions being bandied about by Beach.

Monday, August 22, 2005

A Tax Hootenanny

On August 3, Paul Caron at Tax Prof asked "Why Don't They Write Songs About Tax Profs?" That was followed by a posting on August 11 ("A Tax Song for Your iPod") and a posting by the Tax Guru on August 14 linking to an mp3 of the Beatles' "Tax Man" as performed by Nickel Creek.

This seemed to me to be a perfectly good excuse (actually any excuse would do) to post a link to my favorite tax song, "Sales Tax," performed by the Mississippi Sheiks.

Thursday, August 18, 2005

Section 230 Update

On August 4, Leslie Samuels and Diana Wollman wrote to Cono R. Namorato, Director,Office of Professional Responsibility, of the IRS and Stephen A. Whitlock, Deputy Director, Office of Professional Responsibility, IRS, to confirm that the Service agreed with their interpretation of Circular 230 as applied to certain types of agreements, term sheets and educational materials.

Specifically, the following do not constitute written advice that would be subject to the covered opinion rules of Section 10.35, and thus need not contain the "opt-out legends":
  • Transaction Agreements and Other "Operative" Agreements Between Parties to a Transaction--"transaction agreements and other 'operative agreements', and proposed revisions to such agreements provided by practitioners, are clearly not within the meaning of a covered opinion because these agreements and drafts do not constitute 'tax advice'. These are (and are intended to be) binding agreements between the parties to the transaction - - not advice from the practitioner."

  • Term Sheets for a Transaction--"These are really just 'early' versions of . . . operative agreements . . . .We do not believe that these could possible be covered opinions for the same reasons that the agreements and drafts of agreements could not be. These simply are not tax advice and no taxpayer would mistakenly think that a term sheet is advice or that it could possibly rely on a term sheet to avoid penalties."
  • Articles, Training Outlines and Presentations and Books--"[W]e understand that some practitioners are still concerned that these types of materials may be seen as containing 'tax advice' because they explain how the law works and often include hypothetical fact patterns followed by an analysis of how the law applies to the hypothetical facts. They may even address the facts of a real case, such as a case that was the subject of a court decision, an IRS ruling or a news story. "We believe that it would be inappropriate to interpret the rules to cover such materials. These are clearly intended to be educational, not to transmit advice. While it is true that other practitioners and taxpayers may often refer to such materials in formulating a view as to the actual consequences to a specific taxpayer of a given transaction or situation, these materials are not themselves 'advice'."
The letter and a companion letter that dealt with similar Circular 230 issues pertaining to certain letters and opinions issued in connection with securities offerings and M&A transactions are available at Tax Notes and the BNA Daily Tax Report.


I now have free links to both the August 4 Samuels/Wollman letter and the July 1 Samuels/Wollman letter.

Update II

Michael J. Desmond, Treasury’s acting deputy tax legislative counsel, "in response to questions about recently published letters from New York lawyers who refer to agreements reached with OPR officials during private meetings" has stated that "[u]nanswered letters to the IRS are not guidance." See here.

Tuesday, August 16, 2005

Late Better Never

In CCM 200532046, the Office of Chief Counsel opined that the assessment of a penalty under Code Section 6672(a) against a "a responsible person is subject to the same assessment period under section 6501 as applies to the employer's return, even where the exceptions under section 6501(c) apply to the employer's return."

The general rule under Section 6501(a) is that a "tax must be assessed within three years after the return was filed, whether or not such return was filed on or after the date prescribed." This general rule is subject to a number of exceptions set forth in Section 6501(c) such as fraud. Most significantly, Section 6501(c)(3) provides that if a return is required and not filed, the tax may be assessed at any time. In other words, the statute of limitations never begins to run until a return is filed.

Citing a case that is not officially reported (Lauckner v. U.S., 1994 WL 837464 (D.N.J. 1994)) the Chief Counsel reasoned that "the penalty imposed on the responsible person is simply an enforcement mechanism for collecting the employment tax liability imposed on the employer and is based on the employment tax return."

Well, yes and no.

Liability under Section 6672 is only triggered if the person against whom the penalty is proposed is both a responsible person and willfully fails to pay over the withheld trust fund taxes. In other words, even if there is a finding that there is employment tax due, two additional determinations most be made to support an assessment.

While a penalty can be assessed against more than one individual, the tax due can only be collected once. Thus, if a penalty is assessed against several individuals, but the total tax due is collected from one of them (or from some collateral source), the penalty against the others will be deemed to be satisfied. In this regard, Section 6672 does operate as an enforcement, rather than a punitive, mechanism.

However, an individual can be the subject of a Section 6672 assessment even if he or she has no obligation or authority to file the employment tax return. In such cases, it is inequitable to allow a tolling of the statute of limitations under Section 6672 because, for instance, other individuals associated with the business failed to file the requisite returns.

I'm Against It!

John DeBruyn posed this question: "Should blogs that deal with tax matters as you do here with TaxBiz carry a Circular 230 disclaimer. The question has come up with regard to the ABA-TAX discussion including such a disclaimer as something the list server slaps on every message that goes through." I take a Marxist approach to such things:
I don't know what they have to say,
it makes no difference anyway -
whatever it is, I'm against it!
No matter what it is or who commenced it,
I'm against it!

Your proposition may be good,
but let's have one thing understood -
whatever it is, I'm against it!
And even when you've changed it or condensed it,
I'm against it!

I'm opposed to it.
On general principles I'm opposed to it.
The goal that Circular 230 attempts to achieve is quite simple: A letter from a lawyer or other tax advisor should not be the tax practice equivalent of buying a get out of jail free card unless the author of the communication stands behind it. Thus, idle cocktail party chatter cannot be relied upon as authority for a position that is latter determined to be without factual or legal foundation.

You will note that there is no disclaimer of any sort found on this blog. The reason is simple: As a reader, you ain't my client (even though you may otherwise be a client). Certainly, I do not believe that I need a disclaimer to establish the rather elemental proposition that questions and issues discussed here cannot be used to justify a position on a tax return if the issue is fact specific. For the same reason, one cannot generally rely on listserve discussions to justify a position on a tax return.

There are, of course, issues that present purely legal questions. Relatively few issues, however, fall into this category. To the extent that they do and I address them either on this weblog or on a listserve, I suppose that someone can quote me as secondary authority with respect to a particular return position. However, this does not seem to me to be an area of abuse that Circular 230 is intended to address, so I feel no need to publish a disclaimer either on this weblog or in conjunction with listserve comments that I might make or on apparel that I wear to cocktail parties.

Monday, August 15, 2005

Small Business

This afternoon, one of the other attorneys in the office circulated material from an organization known as the Small Business Council of America opposing the repeal of the estate tax. (Note: I have not linked to the website of the Small Business Council of Amercia, because the distributed material did not set forth a link and the only URL I could find using a variety of search engines was, which was a "dead" link.) The attorney urged the other attorneys in the office to write letters to their Congressional representatives using the SBCA material. Even though I oppose the repeal of the estate tax, I will not send such a letter for several reasons.

First, I don't know enough about the SBCA. Even though in a previous statement submitted to Congresss when commenting on legislation it stated that "through its members, [it] represents well over 20,000 enterprises in retail, manufacturing and service industries," I can't really find out a good deal about the organization.

Second, while both the SBCA and I oppose the estate tax repeal, I am not in agreement with the SBCA's proposed substitute. Among other suggestions, the SBCA is in favor of increasing the unified credit to $3.5 million (I think that $2 or $2.5 million with regular COLA increases is more reasonable), an exemption from the estate tax of the first $1 million in qualified plan assets passing to a surviving spouse or $500 thousand if the assets are going to another heir, and a reduction in the top marginal rates under certain circumstances.

Third, as a matter of principle, I do not merely cut and paste my name on material authored by others and send it to legislators as my own. I retain the somewhat quaint notion that either the legislators or someone on their staffs actually reads letters from constituents and gives some weight to the actual content. Extending this concept one step further, I feel that content that is obviously a cut and paste job taken from a mass mailing campaign designed by a lobbying group is discounted by the legislator or staff member. While I have no first-hand experience in working in a legislative office, I suspect that it is more likely than not that my notion runs counter to what actually occurs. I'm willing to bet that mass-mailing campaigns using cookie-cutter letters actually have a greater impact than even the most well-reasoned customed tailored communication. But that's my opinion and I'm standing by it.

All that having been said, I was heartened by the fact that some small business lobbying groups are waking up to the fact that the estate tax repeal will increase the taxes paid by small business owners and others who are only "moderately" wealthy (and, increase taxes paid by individuals who are not really wealthy at all). In a future posting, I hope to be able to name names of some of the really, really wealthy who will reap a disproportionate benefit from the repeal of the estate tax.

Sunday, August 14, 2005

Western Spaghetti

Sorry for the light blogging lately. I'm currently on vacation and the lead-up to a vacation is always an extremely busy period at work.

To make up for it, I give you, via Prof. Bainbridge, an answer to a question that I know has been vexing you for years: Why does dry spaghetti breaks into more that two pieces when you attempt to snap it to cook smaller strands. See here.

It's worth following the links back to find this one concerning the late Richard Feynman's ruminations on the topic. What's interesting is not the spaghetti issue itself, but the illustration of a curious mind at work.

Monday, August 01, 2005

Well Maybe National News Organizations Are Not All That Bad

This from George Rush and Joanna Molloy of the Tribune Media Service:
KARL ROVE HAS earned himself some gossip payback.

President Bush's deputy chief of staff and foremost fishwife is fending off whispers about his friendship with lobbyist Karen Johnson.

Rove, who stands accused of using leaks and slurs against Sen. John McCain, terrorism adviser Richard Clarke and CIA agent Valerie Plame, was mum when we called about Johnson, a never-married, fortysomething GOP loyalist from Austin, Texas.

The two are said to have become acquainted when Johnson sat on the board of then-Gov. George W. Bush's Business Council.

"Their friendship reportedly deepened after Bush appointed Johnson - a little-known spokesperson for the Texas Good Roads Association - to a seat on his Transportation Department transition team in 2000," reports. "The plum appointment enabled Johnson's lobbying firm, Infrastructure Solutions, to snare such high-paying clients as Aetna and the city of Laredo."

Johnson now travels frequently between Washington, D.C., and Austin, where she often appears at Rove's side at parties, according to Radar.

"Although there is no evidence that their relationship is anything but professional, the close association between the married White House aide and the comely lobbyist has long raised eyebrows in conservative Texas circles," the mag reports.
Haven't we heard this before:
Ambassador DeSadeski: Our Premier is a man of the people, but he is also... a man, if you follow my meaning.
From Dr. Strangelove: Or How I Learned to Stop Worrying and Love the Bomb.