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.

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.

Visitors

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.

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.

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.

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.

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.

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.

The IRS Is Under Water

The following is a slightly edited version of an email from an attorney with the IRS in its National Office that I received via a tax-related listserve:

Friends, I thought I would enlist your help since you are the current section or committee leaders of some of our most interested bar groups and likely to have the most comprehensive e-mail mailing lists of those who would find this useful. Please pass this information around among your groups.

As you may know, the main IRS building was heavily flooded on Sunday and has been closed since. It will be a while until electric power comes on and we are invited back in to work. Before too long, attorneys should be able to get in to retrieve documents.

Our phone system works and individual attorneys can check their voice mail. Our e-mail server came up today but, as of now, only attorneys with Blackberries have access to our network. . . . By next week, we hope to get some access for the rest of our lawyers -- a few desktops on our intranet to share. Our other computer applications are not yet available, including saved work.

We will try to figure out how to get things done while away from our offices. There will be a few challenges and we hope people will bear with us. . . .

Thanks in advance for your cooperation and patience.

Bag Men

According to Wikipedia:

A bag man (or bagman) is a person designated to collect money in a protection racket. Originally the term only applied to Mafia members collecting for mob bosses, but the term later spread to use in corrupt police precincts where a foot patrolman was the designated "bagman" to pick up and deliver bribes from the local mob(s) to the precinct captain. In many cases, the bagman receives a percentage of the money collected.

* * * * *

In many cases, the bagman acts as "insulation" to protect higher-ups from exposure or direct prosecution.

It is clear from the report of the Senate Committee on Indian Affairs (the McCain Report) and today's story in the Washington Post that Grover Norquist, Ralph Reed, and Amy Moritz Ridenour were all using their respective non-profit organizations to prevent public disclosure of the lobbying efforts of Jack Abramoff. Marcus S. Owens, a tax lawyer at Caplin & Drysdale and a former Internal Revenue Service official, was quoted in the WaPo article as saying that, "It's not a tax-exempt activity to act as a bag man for Jack Abramoff." However, that's exactly what happened, with the various entities controlled by Norquist, Reed, and Ridenour laundering money from Abramoff and his clients, raking off a "commission" for themselves in the process.

Paul Kiel of TPM Muckraker suggests that Norquist and Reed (and, presumably, Ridenour as well, although her case is somewhat more complex), do not face any potential criminal charges. He states that:

The worst that could happen to Norquist, according to [Melanie Sloan, a former federal prosecutor and the Executive Director of Citizens for Responsibility and Ethics in Washington], would be for the IRS to crack down on ATR. His group would lose its 501(c)3 status. That would result in hefty fines, and his donors would be mighty upset, since their contributions would suddenly become taxable. One of the pillars of the modern conservative movement would be disgraced. Pretty bad. But there's not really a criminal case to make against Norquist. No jail time.

Of course, as I previously noted, in Norquist's case, the lion's share of the money to his operation came through his 501(c)(4) entity, not his 501(c)(3) foundation. Thus, the loss of tax exempt status would not have a major affect on his donors.

I am not nearly as pessimistic as Kiel or Sloan. After all, the improper use of the 501(c)(4) and 501(c)(3) organizations was not incidental, it was part of their basic fabric. Thus, the improper tax reporting was not some minor foot fault, it was intentionally false. And, the returns filed by these organizations are executed under penalties of perjury.

I know little about the requirements concerning lobbying disclosures, but apparently there is no criminal penalty associated with filing a false lobbying report with Congress. See here:

PENALTIES. Whoever knowingly fails: (1) to correct a defective filing within 60 days after notice of such a defect by the Secretary of the Senate or the Clerk of the House; or (2) to comply with any other provision of the Act, may be subject to a civil fine of not more than $50,000.

I have to believe that there must be some criminal sanction triggered by operating a wide conspiracy to hide this information from public disclosure.

Update

Kiel has updated his previous post.

It would appear that if there's a will, there's a way to prosecute Grover Norquist.

* * * * *

We at TPMm have some current and former federal prosecutors in our readership, who wrote in to disagree with Sloan's analysis.

One, who currently works in the Justice Department, wrote in to say that any material false statement by Norquist in his filing documents with the IRS would be a felony.

And here's another reader, a former federal prosecutor:

If Norquist was running ATR as you describe (or as the Senate report describes), it's virtually inconceivable that he was doing so completely on his own. But if he had even a tacit agreement with at least one other person to make ATR appear eligible for 501(c)(3) status when in fact it was not, then he and that other person conspired to impede the lawful functions of the Internal Revenue Service, which is known to federal prosecutors (like myself, once) as a "Klein conspiracy." It gets you up to five years in prison under section 371 of Title 18 of the United States Code.

Now that's more like it.

Cheap Dates?

Kleinrock has reported that:

To sweeten the pot [with respect to passage of the "Permanent Estate Tax Relief Act of 2006"], [Ways and Means Chairman Bill] Thomas added language to his bill that creates a new 60 percent deduction for qualified timber capital gains. This deduction alleviates the tax treatment of timber gains under current law (which is based upon the legal form of ownership of the underlying timber assets). The provision is effective for qualifying gains recognized from the date of enactment through calendar year 2008. The measure is sure to entice Democratic Senators like Patty Murray (D-WA) and Maria Cantwell (D-WA) whose constituents would benefit from such a provision.

Emphasis added.

The staff of the Joint Committee on Taxation today issued an estimate of the revenue loss that the bill would cause. Over ten years, the estimate for the revenue loss from the estate tax portion of the bill is $279 Billion. The estimated revenue loss for the change in tax treatment of timber gains is only $940 Million. (Note: The revenue loss numbers for the change in tax treatment of timber gains from 2006 through 2016 is greater than $940 Million, but the losses for 2006 through 2008 are already part of the law, but the tax break "sunsets" after 2008. Thus, the net effect of the change which removes the sunset provision is the $940 Million.)

Somehow, this brings to mind the old joke where the question is raised: "Just what kinda girl do you think I am." and the punchline is: "We just established that, now we're only negotiating over the price."

Hat Tip on the Joint Committee Report to TaxProf.

Racing to the Bottom

The article, Interstate Competition and State Death Taxes: A Modern Crisis in Historical Perspective, 33 Pepp. L. Rev. 835 (2006), by Jeffrey A. Cooper, discusses the difficulties that states have in imposing various estate and inheritance taxes.

Prior to 1924, various states, lead by Florida, began to compete to attract wealthy residents by repealing various taxes that triggered upon death. In that year:

Congress amended the Internal Revenue Code to allow a taxpayer's federal estate a dollar-for-dollar credit for all or a portion of the state death taxes paid by that estate. In 1926, in response to demands from state leaders, Congress increased the maximum amount of this "state death tax credit" to eighty percent of the federal estate tax otherwise payable under the 1926 rate tables.

(All quotes have footnotes omitted.)

In due course, all of the states enacted at least a "pick-up" tax. That is, a tax equal to the maximum allowable Federal estate tax credit.

However, beginning in 2001, the Federal estate tax credit was phased out over a four year period. Cooper describes what happened next:

The state death tax uniformity of the late twentieth century is now but a memory. Interstate competition to attract wealthy residents begins anew.

* * * * *

The popular media has fanned the flames of this renewed interstate competition. One need not read past the headlines to figure out the advice being dispensed. Readers of Forbes have been encouraged to say, "Florida or Bust." Wall Street Journal subscribers have been educated on "A Reason to Relocate." In states with death taxes, local newspapers warn of a pending exodus of wealth. A front-page article in Crain's New York Business decried that retirees are simply "fleeing New York" in response to its state death tax. The Connecticut Law Tribune titled its editorial about the new Connecticut death tax "A 'Run Away' Tax," predicting state residents would run away to Florida in response.

This media pressure has both molded public opinion and helped shape the agenda for the field of estate planning. Helping taxpayers choose their state of domicile has become a fundamental element of modern estate planning practice. Domicile considerations have become so paramount that at least one author has suggested that lawyers in states with death taxes may have an ethical duty to discuss with estate planning clients the virtues of moving out of state.

Amid this backdrop, state leaders seem to be presented with a choice: lose your state death taxes or lose your wealthy residents. A past generation of state leaders faced a similar conflict and confronted a similar decision. Presented with the choice of losing state residents or abandoning state death taxes, they were prepared to choose the latter. The Congress of 1926 preempted that decision. The Congress of 2006 seems unlikely to take similar action.

As such, state leaders of 2006 may have no political choice but to finish what their predecessors started. Looking out across the new death tax landscape after EGTRRA, modern state leaders may consider it futile to compete with Florida and the other death tax havens. They may simply decide that state death tax revenues come at too high a political cost and turn elsewhere for needed tax dollars.

As I have pointed out numerous times here, while the Federal income tax is slightly progressive, state taxes tend to be regressive. (The best analysis is found in Who Pays? A Distributional Analysis of the Tax Systems In All 50 States by the Institute on Taxation and Economic Policy.) That problem has become more pronounced as the Federal tax regime has become flatter with fewer state tax-related deductions. Moreover, since some otherwise deductible taxes (e.g., state income taxes) are subject to the alternative minimum tax, wealthy taxpayers are presented with even greater incentives to leave states which rely on moderately progressive income taxes (e.g., New York, Maryland) and move to states that rely heavily on regressive sales taxes (e.g., Florida).

While directed only at the effect that decoupling has with respect to state estate and inheritance taxes, Cooper's conclusion could just as well apply to many of the recent changes in tax policy at the Federal level that have had a deleterious affect on the ability of states to levy taxes:

State leaders will abandon this traditional source of revenue in favor of others. Burdens will shift. Some taxpayers will lose while others will gain.

Let there be no question: The rich will gain. Moderate income and poor taxpayers will lose. And the public services offered by states and localities (including education) will dramatically decline.

Hat Tip: TaxProf

W Is Not TR

Thinking of taking a vacation at a national park this summer? This report, What Visitors to America's National Parks Will Experience During Summer 2006, by the Coalition of National Park Service Retirees may give you second thoughts:

Despite "happy talk" assurances from political appointees at the Department of the Interior and National Park Service (NPS), all is not well this summer in America's national parks. A Coalition of National Park Service Retirees (CNPSR) analysis of the status of 37 national parks – including 17 surveyed in detail by the Coalition -- finds widespread evidence of major problems that will be evident this summer – including decreased safety for visitors, longer emergency response times, endangerment of protected resources, and dirtier and less well-maintained parks – and only grow worse in the coming years.

* * * * *

Key findings of the CNPSR survey include the following:

1. Visitors and resources at national parks will be put at greater risk this summer than in the past due to extensive full-time emergency and law enforcement staff cuts.


2. Most surveyed parks will have fewer law enforcement rangers on the job this summer to protect park visitors and park resources.


3. Visitors to parks this summer will see evidence of deteriorating park operations resulting from reduced preventative maintenance, in terms of scheduled custodial checks, roadside litter pickup, and upkeep for grounds and buildings.


4. Widespread cuts in seasonal hires will mean future or lower-quality visitor services, interpretive services, resource protection and maintenance. [Emphasis in the original.]
   


5. Widespread cuts are putting the parks in an almost purely "reactive" posture, falling far short of the law and Congressional intent to protect the resources for future generations.


6. The park maintenance backlog has increased rather than been reduced, as promised.


7. NPS budget shifts are taking place largely at the expense of leaving key staff positions unfilled.

Some people are not happy:



Hat tip: Docuticker.

The Strength of Hercules

I follow a policy of not commenting on cases that either I or my firm are or have handled. However, that policy does not extend to commenting on cases that rely on cases that either I or my firm are or have handled. Science Applications International Corp. v. Comptroller, handed down by the Maryland Tax Court on May 11 falls into this category.

The holding in Science Applications was primarily based on the holding of the Court of Appeals of Maryland in Hercules Inc. v. Comptroller, 351 Md. 101(1998) where I represented the taxpayer. The opinion in Science Applications indicates that the Comptroller's Office either does not or is incapable of understanding the basic Constitutional principles concerning a state's ability to tax companies conducting interstate business.

The principles can be stated simply: A state can only tax economic activities that take place within its borders. However, a state can utilize a formula to tax a portion of a unified business conducted in more than one state so long as the formula reasonably reflects the actual business being conducted in the state attempting to levy the tax. Two or more entities may be aggregated into a single business for state tax purposes if there is an "operational connection" between their business activities.

Science Applications International Corporation had operations in Maryland. However, it also was the parent corporation that owned Network Solutions, Inc. Network Solutions operated independently of its parent. According to the findings of fact:

[Network Solutions] was managed independent of and separate from [Science Applications]. Approximately 5 of the 385 [Network Solutions] employees . . . came from [Science Applications]. [Network Solutions] hired a separate management team from outside [Science Applications], including technical, sales and marketing personnel. [Network Solutions] had a separate Board of Directors. [Network Solutions] had its own Human Resources Director and made its own decisions as to whom to hire and fire. Its first post-acquisition CEO was recruited through a national search campaign.

Based on these facts, it would seem beyond question that, as interpreted by the Court of Appeals in Hercules, there was no operational tie between Network Solutions and Science Applications. The Comptroller apparently argued, much as it had in Hercules, that statements in the parent's annual reports and the parent's financial statements supported a finding that there was an operational connection between the two businesses.

Apparently, the Comptroller hasn't figured out that the "operational function" test means that there have to be facts which show an active flow of "operational value" between two businesses before their respective incomes can be aggregated for state income tax purposes. That test requires that the the direction and control exercised by the parent to the subsidiary has to be greater than that which is exercised by any member of the board of directors of a company. In fact, as the name of the test would seem to indicate, the operations of the parent and the subsidiary have to be intertwined.

My understanding is that the Comptroller is not appealing this decision. However, I also understand that the Comptroller is going to refuse to pay interest on the refund due to Science Applications. Since I am currently involved in litigation on a similar issue, I will not comment on the Comptroller's obstinance or cramped reading of the statute that requires that interest be paid on tax refunds.

Lies, Damn Lies, and the JEC

Today, Kleinrock reported that the estate tax repeal effort may not be dead. Specifically, it reported that "Senate Majority Leader Bill Frist (R-TN) [whose brother's family will benefit to the tune of a half a billion dollars from estate tax repeal--ed.] is looking for a legislative vehicle in which to attach his initiative [to repeal the estate tax] and get it through Congress. Currently, the top candidate is the pension reform bill."

Also today, TaxProf had links to two position papers on the estate tax.

The first was Neil H. Buchanan's paper The JEC’s Estate Tax Report: Myths and Legends, 111 Tax Notes 1133 (6/5/06). In that paper, Buchanan takes on the oft-repeated baloney of the JEC that the estate tax threatens small businesses. He shatters the argument, concluding:

[T]he closest thing that the JEC has to a credible source regarding the "burdens" of the estate tax cannot rule out the possibility that heirs are able to pay estate taxes if they want to hold onto the family business. The economists who wrote the study even suggest that business owners might not care enough to do all they can to keep the business in the family. The latter possibility means that, even if we do someday find evidence of businesses that were "busted up" by the estate tax, we cannot be sure that was even a bad result from the standpoint of the decedent.

Buchanan notes three other arguments that the JEC frequently drags out in support of repeal. One of those is that the estate tax has reduced the stock of capital in the country by approximately $847 million. He characterizes this argument as being "highly suspect."

Lo' and behold, TaxProf also links to a new missive from the JEC, Reconsidering the True Revenue Yield of the Estate Tax. In that report, the JEC contends that "[a] study from the U.S. Treasury Department found that "estate taxes have a dampening effect on the reported size of taxable estates," reducing reported estate sizes by 14 percent." The report itself does not provide any citation or link to the study, but a quick Google search located it here. The study, literally, reaches the precise conclusion that the JEC reports, but that conclusion does not apply to the current estate tax. Why?

By its terms, the study "explored the effects of estate taxation on bequests using time series data for the period 1948 through 2000." Thus, the percentage of estates subject to the estate tax was significantly higher than it is today.

Furthermore, the report explicitly denies the its conclusion supports the implication that the JEC would read into it, namely that wealth is being diminished as a result of the estate tax. Thus, the report states, "As with much of the work on the taxable income elasticity, it is not clear whether this measures the effects on saving and wealth accumulation, or reflects tax avoidance." (Emphasis added.)

Buchanan notes that JEC reports have a "cover page, with the title of the report above an American eagle seal and [JEC Chair Jim] Saxton's name." Too bad they lack any intellectual honesty.

And the Winner Is . . .

In the category "Dumbest Rationale In Support of Any Policy Argument From a Supposedly Intelligent Media Outlet" goes to (here I fumble with the envelope), the WSJ Editorial Board who make this argument in support of repeal of the estate tax:

[T]he best thing gay activists could do for themselves at the federal level would be to support repeal of the death tax, since under current law gay couples often lack inheritance rights.

Wrong. The best thing that gay activists could do is argue that the provisions of IRC Section 2056(a) (unlimited spousal bequests) should be extended to gay and lesbian unions.

Just a Wild Ass Guess?

Before the Bush Administration again begins to push a program to "reform" (read "gut") Social Security, you should read the report just issued by the CBO, Projections of Net Migration to the United States. It shows that the estimates of the solvency of the Social Security trust fund are based upon assumptions that, in the dry words of the report, "are subject to a high degree of uncertainty."

Estimates of immigration trends are necessary components in determining the future size of the Social Security trust fund, since:

higher rates of immigration improve the [Social Security] system's solvency, at least for a time—because the immigrant population is disproportionately composed of people of prime working ages, with relatively small percentages of children and the elderly. However, outlays are also affected: those immigrants will eventually retire and become eligible to collect Social Security benefits.

Both the Social Security Administration and the Census Bureau make such estimates. The estimates vary significantly. In 2003,

[a] Technical Panel on Assumptions and Methods was appointed by the Social Security Advisory Board to review the trustees' methodology and key demographic and economic assumptions used to project the future financial status of the system’s trust funds, including assumptions about immigration.

With respect to immigration, the Technical Panel's estimates were strikingly at variance with the estimates of both the Social Security trustees and the Census Bureau. The following chart dramatically illustrates the differences:

(Click chart for larger image.)

You will note that the trustees' estimates are, in the near term, the lowest estimates of the three. This contributed to their recent finding that the trust fund would be depleted earlier than previously estimated. If the Technical Panel's estimates are correct (or, more appropriately, closer to correct), we have more time to deal with structural problems in the system than the trustees' estimates would lead us to conclude. And remember, the estimates as to immigration are only one set of assumptions that go into the final estimate of system solvency. Thus, any single report by the trustees has to be taken with a large heaping of salt because the various assumptions upon which the trustees' conclusions are based "are subject to a high degree of uncertainty."

Estate Tax Commentary Update

Jim Maule summarizes a plan he previously outlined for repealing the estate tax in exchange for the income taxation of unrealized appreciation in the decedent's propert. The original plan is set forth here. His summary is set forth here. At the end of the summary, he sets forth the most concise and compelling reasons to oppose the current efforts to abolish the estate tax:

The debate over the estate tax, and the various proposals, including mine, plays out against a backdrop that is very disconcerting, and if it isn't, it ought to be. Most advocates of estate tax repeal refuse to accept the idea of taxing unrealized appreciation at death. They want a system that taxes investment income at low or zero income tax rates and to the extent accumulated, escapes estate taxation. Likewise, they want growth in investment assets to escape taxation. Whatever wonderful arguments can be paraded out in favor of exempting investment income from taxation, the upshot is that the burden of paying for government shifts to wage earners. That shift has already started. Considering the decline in real wages, the payment of low wages to undocumented workers, and the difficulty for wage earners to accumulate sufficient post-taxation discretionary income to move into the investor class, the ability of the nation to sustain itself by seeking all necessary revenue from wage earners is at risk. Many who reply that the solution is to cut government spending are among the first to object when a specific government expenditure is nominated for termination.

There's an undercurrent to the taxation debate that transcends taxation. It goes to the heart of whether this country will continue to have a middle-class, one of the significant indicia of genuine freedom and democracy, or whether it will atrophy into another of the "many ruled by a few" arrangements that have dominated human history. This question is even more provocative when one considers the ways in which the few have made their way into the elite. Though it is important that discussion of these issues be done in a manner that permits the entire citizenry to understand what is at stake, I have serious doubts that it will. The rhetoric accompanying the small estate tax repeal slice of the much larger question about what sort of nation we are, want to be, and will be, reinforces my doubts.

(Emphasis added.)

Linda Beale takes on the WSJ op-ed of Nobel Laureate Edward C. Prescott (which can be found here by subscription only). Astonishingly, Prescott does little more than restate the standard arguments in favor of repeal which have repeatedly been shown to be factually false (e.g., there will be no impact on charitable contributions, the tax hits hardest on small, entreprenuerial businesses, the cost of compliance is roughly equal to the revenue raised, the tax is levied on income that has already been taxed, etc.). (Aside: When a Nobel Prizewinner relies on arguments that, in the main, are well-known to be factually untrue, shouldn't a recall of the Prize be in order?) All of Prescott's empty empirical arguments, however, are nothing more than garnish around his quasi-religious philosophical argument that:

[W]e can only grip the neck of our vibrant economic goose so tightly before it eventually dies and quits laying those golden eggs. And many of those golden eggs come in the form of capital that allows descendents to keep family businesses intact, or to begin new businesses that fuel our economy.

Beale cuts through the foliage and states:

The analogy is colorful, but off target. We are not gripping the neck of our goose at all tightly--we have in fact one of the lowest tax burdens of any of the developed world. Further, estate taxation doesn't prevent descendents from keeping the family business intact--with current exemption levels at $2 million for individuals and $4 million for couples, few businesses are threatened with the tax. While the heirs may diversify their investment and continue to make good as ongoing entrepreneurs, there would likely be room for more entrepreneurial activity without those dynastic families.

Prescott's conception of fairness shortchanges the important function of the estate tax to level the playing field at least somewhat for children born into poverty compared to the richest few. This redistributive function is important, and it should not be disregarded.

In a very real way the fight over the estate tax transcends the details, pro and con. At the bottom, Maule and Beale get it right: It's about about what sort of nation we are, want to be, and will be.

The State of the Estate (Tax)

This report from the Center on Budget and Policy Priorities makes it clear that most Americans would receive no benefit from the repeal of the estate tax. Since 2000, the "lifetime credit amount" (the amount of wealth that can be transferred over one's life without the imposition of any estate tax) has risen from $675,000 per individual ($1.3 Million per married couple) to $2 Million per individual ($4 Million per married couple) today. It is scheduled to rise to $3.5 Million per individual ($7 Million per married couple) by 2009.

As a consequence of this change, the percentage of decedents' estates that are subject to estate tax has fallen dramatically as this graph shows:


The CBPP also reports that the small business/small farm poster children constantly trotted out by the pro-repeal forces really has no current basis in fact:

The Congressional Budget Office estimates that, had the 2006 exemption level of $2 million ($4 million per couple) been in place in 2000, the number of taxable farm estates would have dropped by more than 90 percent, and the number of taxable family-owned businesses by almost three-quarters. At an exemption level of $3.5 million ($7 million per couple), as will exist in 2009, fewer than 100 family businesses and only 65 farm estates would have paid any estate tax.

(Emphasis added.)

And, among this rather elite group, it is unlikely that any would have to sell the family farm:

The CBO considered the question of whether the estate tax forces family farms and businesses to be sold. CBO found that of the few farm and small business estates that would owe any estate tax, the vast majority would have sufficient liquid assets (such as bank accounts, stocks, bonds, and insurance) to pay the tax without having to touch the farm or business. For instance, at a $3.5 million exemption level ($7 million per couple), only 13 farms would have faced such a liquidity constraint. Furthermore, those farm and business estates facing liquidity problems would likely have other options available to them — such as spreading their estate tax payments over a 14-year period — that would allow them to pay the tax without having to sell off any of the farm or business assets.

Of course, there are real victims of the estate tax. The Bush Cabinet for example. And let's not forget the family of Bill Frist.

Still Keeping My End of the Bargain

In the Spring of 1966, I was flunking Latin at Baltimore City College. My teacher, the legendary Mildred Sheff, offered me a deal: She would pass me with a "D" if I promised never to take Latin again. I am proud to say that I have kept my end of the bargain for almost 40 years. (I am also happy to report that I recently saw Mrs. Sheff, now in her 90's, at the supermarket and she's still quite energetic. )

I don't think that it's a violation of the terms of the deal to report on a new website that collects opinions given by the Maryland Attorney General's Office to the various clerks of the court. The site is here. One of the opinions, dated August 2, 2002, by Julia Andrew, delves deeply into Latin scholarship as follows:

Over the past several months, I have received inquiries from a couple of your offices regarding the meaning of the initials "sct" appearing at the top of the formerly-used form of marriage application/license/certificate of marriage. A copy of the old form is enclosed. Apparently, persons in interest needing a foreign language translation of their marriage certificate have inquired about the meaning of the abbreviation.

I have determined that "sct" stands for "scilicet," although it is an improper abbreviation. Knowing that some official documents, such as wills, use to commence with the formal greeting: "Know All Ye Men By These Presents" and recollecting from my high school Latin studies that "scire" means "to know,"I did a bit of checking in Black's Law Dictionary, 7th ed., under "scire" and variations thereof and found the following:

scilicet (sil-a-set or -sit). [fk. Latin scire licet "that you may know"] That is to say; namely; . . . .
Abbr. sc.; scil. ; (erroneously) ss.

Black's Law Dictionary, 7th ed., p. 1347. Now it is more common to see "to wit," which also means "That is to say; namely." See Black's Law Dictionary, 7th ed., p. 1498.

Please do not hesitate to contact me if you have any questions concerning these matters.

I do not consider my publication of this information a breach of contract. I think (and hope) that Mrs. Sheff concurs.

I Try To Be Fair

Even when disagreeing with other commentators, I try to fairly describe their arguments. One part of that process is to, whenever possible, link to their comments.

Yesterday, the Tax Foundation's Tax Policy Blog had a report on a CRS study, "Flat Tax Proposals and Fundamental Tax Reform: An Overview." Tax Policy Blog then presented what purported to be the summary of the CRS study as set forth in the study. However, the excerpt was not complete and was edited to make it appear that the CRS study agreed with the Tax Foundation's basic tax policy recommendations. That is not the case as the study itself states:

Should the tax base be income or consumption? Is one inherently superior to the other? How do they stack up in terms of simplicity, fairness, and efficiency —the three standards by which tax systems are generally assessed? There appears to be insufficient theoretical or empirical evidence to conclude that a consumption-based tax is inherently superior to an income-based tax or vice versa.

One issue associated with the choice of a tax base is equity — how the tax burden will be distributed across income classes and different types of taxpayers. For example, a tax is "progressive" if tax paid as a percentage of income increases as income rises. Although some types of consumption taxes can be designed to achieve any desired level of progressivity with respect to consumption alone, their progressivity with respect to income could only be approximated. Also, a consumption tax would involve a redistribution of the tax burden by age group, with the young and old generally bearing more of the total tax burden than those in their prime earning years. And the transition from an income-based tax to a consumption-based tax would have the potential for creating windfall gains for some taxpayers and losses for others.

A definitive assessment cannot be made of the effects of taxing consumption on either economic efficiency or the aggregate level of savings. Although the current tax system's distortions of the relative attractiveness of present and future consumption (saving) would be eliminated, to raise the same amount of tax revenue, a consumption-based tax would require an increase in marginal tax rates (since consumption is smaller than income). This action, in turn, would increase the current system's distortion between the attractiveness of market (e.g., purchased products) and nonmarket activities (e.g. leisure). The net effect on overall economic efficiency cannot be ascertained theoretically. In addition, economic theory indicates a consumption tax would not necessarily produce an increase in saving. The increase in after tax income might reduce saving, while the increase in the return to saving may increase it; the net result is uncertain.

A positive aspect of a consumption-based tax is the ease with which the individual and corporate tax systems could be integrated. In addition, the problems introduced by separate provisions for capital gains, attempts to distinguish between real and nominal income, and depreciation procedures would essentially be eliminated. It is doubtful, however, that a consumption-based tax would have much effect on the complexities introduced into the system to promote specific social and economic goals. Many of the same factors that influenced the design of the current income tax system would exert the same influences on the final design of a consumption tax.

Whether one prefers income or consumption, one tax rate or multiple tax rates, a critical point to remember is that the benefits to be derived from tax revision would result from defining the tax base more comprehensively than it is under current law. A tax with a base that is comprehensively defined would prove more equitable and efficient than a tax with a less comprehensively defined base.

(Footnote omitted, emphasis added.)

In other words, the study concludes that the Tax Foundation's hobbyhorse can't run.

It's a Very Simple Game?

The late Baltimore sports commentator Charley Eckman used to say "It's a very simple game." Apparently, that's not necessarily the case.

A recent study, "Scattering of a Baseball by a Bat," concludes:

A ball can be hit faster if it is projected without spin but it can be hit farther if it is projected with backspin. Measurements are presented in this paper of the tradeoff between speed and spin for a baseball impacting a baseball bat. The results are inconsistent with a collision model in which the ball rolls off the bat and instead imply tangential compliance in the ball, the bat, or both. If the results are extrapolated to the higher speeds that are typical of the game of baseball, they suggest that a curveball can be hit with greater backspin than a fastball, but by an amount that is less than would be the case in the absence of tangential compliance.

Theoretically, then, if you can hit a curve ball, it will travel further than a similarly hit fastball. This presumably increases the likelihood of the batter hitting a home run. However, a hit fastball will move with greater speed. One would think that this would thus increase the number of hits "through the hole" in the infield. However, the authors warn:

These results will have implications for the issue of whether an optimally hit curveball will travel farther than an optimally hit fastball. To investigate this in detail requires a calculation of the trajectory of a hit baseball . . . . Such a calculation requires knowledge of the lift and drag forces on a spinning baseball. However, given the current controversy about these forces, further speculation on this issue is beyond the scope of the present work.

Hat Tip: ResourceShelf's DocuTicker.

Tradesport and Taxes

This evening, I noticed that shares of "Republican Party Candidate to Win the 2006 Maryland Governor [sic] Race" are now trading at 39 on Tradesport. I immediately began thinking.

I know a few Republicans whom I can goad into putting down bets on Gov. Ehrlich to win at even money.

If, for every $100 I bet with Republicans on Gov. Ehrlich to lose, I buy $80 in Tradesport contracts for "Republican Party Candidate to Win," I am guaranteed in all events to win $20. That's because if Ehrlich loses, I win $100 from a Republican, but lose my $80 in Tradesport contracts. Conversely, if Ehrlich wins, I lose $100 to a Republican, but I get back roughly $200, or a net of $120, from my Tradesport contracts.

So why haven't I quit my day job?

Well, first there's the obvious difficulty of locating, then investing in, and then enforcing a lot of barroom bets. As a practical matter, this is fairly hard work.

But there's a tax problem.

If Ehrlich loses, I'm ok. While I've lost $80 in Tradesport contracts, I will get back $100 of cash which I will likely not report as income. After all, friendly bettors don't generally turn out 1099's or W-2G's and I'm not that honest.

However, if Ehrlich wins, I get a net of $120 which is going to be reported to the IRS by Tradesport. Assuming that my marginal tax rate, both federal and state, is about 40%, I only net out $52 on the Tradesport side of the transaction. Since I've lost $100 in the barroom, I'm down a net $48. Theoretically, of course, I could attempt to deduct the $100 I lost in the barroom against my Tradesport "winnings," claiming that both were a form of wagering. There are obvious record keeping and proof problems involved in this, however, which are likely to be insurmountable.

Moreover, it's not clear that "investing" in a Tradesport contract is technically gambling. In that case, my $120 in Tradesport "winnings" is simply a short term capital gain that cannot be offset by my $100 gambling loss.

I think that I'll keep my day job.

DeLay Legal Fee Update

Raw Story is reporting that Tom DeLay's legal bills in 2006 now top $400,000.

Not to worry.

According to OpenSecrets.org, as of March 31, 2006, DeLay's campaign committee had cash on hand of $1,450,959. As previously reported here, he can spend all of that on his legal defense. Of course, according to reports filed on February 15, upon which I based my last report, DeLay only had $1.3 million cash on hand. And, according to the Raw Story report, the $400,000 in legal fees paid by DeLay this year also include $110,000 from his campaign fund.

In essence, DeLay's campaign fund has become a $1.56 million legal defense fund.

The Nineteenth Family

Via TaxProf, there are links to a terrific report by Public Citizen and United for a Fair Economy on the 18 incredibly rich families that are providing the financial muscle behind the ongoing efforts to repeal the estate tax. In addition to describing the ways in which these families have mounted their campaign, the report also sets forth a comprehensive listing of and rebuttal to the principal lies of the campaign (Foes Have Misled the Public About the Cost and Reach of the Estate Tax; Foes Have Misled Public About Harm to Family Farms and Small Businesses; Groups Have Lied About the Cost to Collect the Tax; More Fables: The Double Tax; The Estate Tax Is Misleadingly Characterized as a Tax on Hard Work).

However, the report missed one important family that has lead the way in storming the ramparts of the estate tax--The Frists.

While perhaps not providing as much financial muscle as the 18 families listed in the report, Little Brother Doctor Senator Bill has been the point man in the Senate for estate tax repeal. While the Senator's net worth is a measly $15-45 million, Big Brother Tom and his family, according to Forbes, have a net worth of $1.7 Billion. Tom's current holdings in HCA, Inc., alone, (5,563,198 shares) are worth, as of close of business on April 25, 2006, almost $252 Million.

I won't bother to undertake as precise an estimate of the tax savings the Frist family would enjoy if the estate tax were repealed, but it's safe to say that it's well (very, very well) north of $200 Million.

It must be nice to have relatives friends in high places.

Knaves Environmental Style

I don't often comment on environmental issues here. The reason is that I feel that I lack the necessary competence with respect to the basic science issues involved. I can't possibly bring to bear the level of expertise as, say, the contributors to RealClimate.

But financial numbers are another story. After all, over my almost thirty years in practice I've had to review more than my share of financial reports and business tax returns. Thus, I try to delve into financial information in order shed light on the lies dished out by knaves. There is now a case in point dealing with the politics of the environment.

The Republican controlled House Committee on Resources has just put up a website on Earth Day titled "myth-information." It's an outrage. But, rather than rant, I decided to look at some of the alleged "information" offered by the knaves Committee. Specifically, I examined the claim the Committee makes on the website that:

Money is flowing to conservation in unprecedented amounts... But much of it is not actually used to protect the environment. Instead, it is siphoned off to pay for bureaucratic overhead and fund raising, including expensive direct-mail and telemarketing consultants.

The Committee offers as evidence the "fact" that various environmental organizations have "4.9 billion dollars in net assets" yet spend "almost zero dollars for the environment." This charge is allegedly backed up by a chart showing the income and net assets of 29 environmental organizations.

First, let's examine the source of the "4.9 billion dollars in net assets." Of that amount, $3.1 billion is in the coffers of the Nature Conservancy. What the hell are they doing with all that money anyway?

Well, to find out, one has to take a look at the Nature Conservancy's financial reports. Unlike, say, Grover Norquist's Americans for Tax Reform, the Nature Conservancy actually publishes its financials on its website. Of course, some knowledge about how the Conservancy works might be important. In examining its website, we learn that:

In the United States, The Nature Conservancy uses land acquisition as a principal tool of its conservation effort. The Conservancy helps to protect approximately 15 million acres in the United States.

Additionally, the Conservancy acquires conservation easements. It's website explains that:

A conservation easement is a restriction placed on a piece of property to protect its associated resources. The easement is either voluntarily donated or sold by the landowner and constitutes a legally binding agreement that limits certain types of uses or prevents development from taking place on the land in perpetuity while the land remains in private hands. Conservation easements protect land for future generations while allowing owners to retain many private property rights and to live on and use their land, at the same time potentially providing them with tax benefits.

Now, take a look at the Conservancy's 2005 financial statement. You will find that $2.47 billion of the Conservancy's assets are either in "conservation lands" or "conservation easements." Another $1.2 billion are in "endowment investments" or "planned giving investments." There's another $568+ million in "investments held for conservation projects." In other words, the bulk of the Nature Conservancy's assets are held for and used to advance its environmental efforts. In fact, 82% of all funds donated to the Nature Conservancy go directly to conservation programs. See here.

Close examination of the financial statements of the organizations on the Committee's list with next two largest net worths, The Conservation Fund (net worth of $282 million) and the Trust for Public Land (net worth of $225 million) show that their assets are also primarily devoted to their conservation efforts. (For The Conservation Fund's financials, see here. For the financials of the Trust for Public Land, see here.)

Income? The Committee shows that the 29 organizations listed had income of $1.831 billion dollars. Of that amount, $761 million was income of the Nature Conservancy (that is, more than 41.5% of the total) and, as shown above, most of that went to operations, not lobbying or fundraising. Similar analyses of the income and expenses of other organizations that rank high on the Committee's net income list, the Trust for Public Land and the World Wildlife Federation for instance, also show that most of their income goes to their operations. (The WWF's financials are here.)

The Committee's website is nothing more than propaganda. Worse, it's false. Worse yet, it directly slanders organizations that have long demonstrated their devotion to conservation and environmental preservation.

There is some good news, however. Josh Marshall has named Committee Chair Richard Pombo as one of the Congressman who may possibly be indicted in the Abramoff investigation. Can't happen too soon.

Results on the Estate Tax

RESULTS describes itself as "a nonprofit grassroots advocacy organization, committed to creating the political will to end hunger and the worst aspects of poverty." On April 18, it held a press conference concerning the attempts to repeal the estate tax. A transcript of that conference is available here and an mp3 recording is available here.

Former IRS Commissioner Sheldon Cohen offered some of the most pointed remarks:

[A] lot of the confusion in proposed repeal is setting up straw men and then knocking them down. Much of the argument says, well, this is double-taxation; you get taxed on the income, and then you get taxed on it again. Ninety percent – over 90 percent of the value of estates has never been taxed. That is, it’s generally appreciation that's occurred.

Also I think most of us forget that the so-called death tax, which is really an estate tax, occurs at the end of life. So it's been deferred for 50, 60, 70 years of work. So if you discounted it by the fact that it's paid at the end of life, instead of installments during the period of time which accumulated – the wealth is accumulated, you'd get a much lower number.

Progressive taxation – that is, the higher your income, the higher the rate of tax – has been with us since the very beginning. Teddy Roosevelt was in favor of this kind of taxation. This is not particular party or group. We each have our own points of view, depending on where we sit. But progressive tax has been with us right from the beginning. The question is always, "How much progression?" And that's a legitimate argument.

The real impact on small business is almost nil. As Mr. Carlson indicated, the impact on small family farms is virtually nil. The impact on small family businesses is virtually nil because the tax law now has exemptions for family farms and for family business that are slightly larger than the general exemption. And they also allow for longer payout, so that – in my practice – I’ve been practicing law for a little over 50 years – I have never seen a family business that was sold because of the estate tax. They are sold, because the kids don’t want to manage the business, the kids are off just being doctors or lawyers and don't want to go back into the farm, or don't want to go back into the family manufacturing business. That occurs all the time. But it isn't because of the estate tax that the business is sold.

Nobody's talked about – and the (charity, or very charity) of mentioning this – what an important element here – is that the estate tax, as well as the income tax, are an encouragement for charity. That is, since we have deductions in beneficial gifts to charity, we're (all) encouraged to give to worthy causes. Nobody knows for sure how much is going to be lost when, as and if these – either the income tax were to be pushed down in rates, or the – or the estate tax were to disappear. But if that were to be the case, there are estimates that go to 13-plus billion up to 20 billion. I’m not an economist; I don't want to project those numbers.

I do know that it does affect people's behavior. People give a little more to charity because there is tax benefit. We saw that the President and the Vice President both took advantage of large charitable deductions at the end of last year. That was just announced this last week, when they filed their returns.

So it’s an important element. And I think it's been missing from the discussion. And it will be missing, because the charities can't say it out loud. They can't say it because their donors might get offended.

(Emphasis supplied in all cases.)

Another participant in the press conference, Robert Carlson, made this point:

The present estate tax only affects about 300 farm estates per year. That's less than one percent of all farm estates. And those are Department of Agriculture numbers.

What is most dangerous about the proposal to end the estate tax, however, is that with its ending – which would only affect, again, less than one percent of farm estates – we would have imposed the capital gains on gains in farm estates, and that would affect many more people. So there would be a net – there would be a net loss; there would be many more losers than gainers among the farm community and family farms and ranchers, if the estate tax were to be eliminated.

(Emphasis added.)

In other words, as I have pointed out before, the repeal will actually impose additional tax burdens on most small estates, including smaller family businesses and farms.

Finally, Adam Hughes, of OMBWatch, noted that Senator Kyl's suggested "compromise" was no compromise at all:

That proposal would cost between 81 and 84 percent of full repeal. And what we're talking about there is around 770 billion added to the debt over the first 10 years.

Dick Cheney Speaks Out In Favor of the Estate Tax

Ok, the title is simply untrue. But Dick Cheney's recently released income tax return does present a strong argument for the retention of the estate tax.

Ordinarily, the ability of an individual to reduce his or her income taxes through charitable deductions is limited to a certain percentage of the individual's income. In reaction to Hurricane Katrina, those rules were suspended with respect to charitable contributions made between September 27, 2005, and the end of that year. As a consequence, in 2005, Cheney was able to satisfy various pledges that he had made to charitable organizations that would otherwise had taken years to fulfill. Citizens for Tax Justice discusses Cheney's strategy here.

The CTJ report also claims that Cheney reduced his 2005 taxes by almost $1.1 Million due to the Bush tax cuts. CTJ does not explain how it made that determination. If it used the post-Katrina suspension of charitable deduction limitations in their calculation, its conclusion is simply not justified. The reason that Cheney had such high charitable deductions is that the tax law provided him with a strong incentive to cash in his Halliburton stock options and contribute them to charity in 2005. Absent the temporary suspension of the limitations on deducting charitable contributions, the contributions would inevitably have been made, but at a much later date. While taken as a whole, the charities to which Cheney directed his contributions received a Katrina-related benefit by getting their money now, not later, the Cheneys' total income tax bill, over time, would likely have been about the same.

Nevertheless, this brings us to the estate tax. As presently formulated, the estate tax generally falls on the estates of the wealthy and, most heavily, on the estates of the very wealthy. Within the estate tax are provisions that strongly encourage charitable giving. Some of these allow wealthy contributors to "double dip." Thus, in Cheney's case, he received a charitable contribution that wiped out any tax on the income on his stock options. (As reported by the Washington Post, "[t]he options largely were from Halliburton Co. . . . [with] [s]maller amounts came from companies for which [Cheney and his wife] had been board members, including Electronic Data Systems, Procter & Gamble, Lockheed Martin and Anadarko Petroleum Corp.") Furthermore, the net proceeds that Cheney would have realized had he exercised the options and taken those proceeds into income are also effectively taken out of his estate for estate tax purposes. Assuming that these proceeds would have been taxed in his estate at a fairly high marginal rate, one can reasonably conclude that the economic cost to him and his wife of each dollar of these charitable contributions was significantly less than fifty cents because of the tax savings provisions they were able to utilize.

As a practical matter, the Cheneys' contributions illustrate that tax incentives do work to "create" charitable contributions that would ordinarily not be made. After all, absent the provisions that increased the charitable deductions that the Cheneys would have been allowed to take in 2005, the charities would have had to wait for their money. There is no reason to expect that a similar dynamic is not at work in the estate tax area.

BTW, the WaPo story completely misses the post-Katrina change in the tax law as the reason that the Cheneys' contributions in 2005 were so high. Instead, it buys into the Cheney cock and bull story that the contributions were made in late 2005 because the "options were at a good value for the benefit of charity." Right. And the estate tax overly burdens family farms and small businesses and there are alligators living in the sewers in New York.

What Did the Trustee Know and When Did He Know It?

A memorandum recently issued by IRS Area Counsel, PLR 200614006, promises to be a major headache for trustees of various types of trusts. Specifically, the memorandum asserts the following:

1. The IRS can levy upon payments from any trust to a beneficiary in order to enforce its rights under a tax lien even if the trust contains spendthrift provisions.
   


2. Perhaps more significantly, in the event that the delinquent taxpayer/beneficiary has a fixed right to trust income, the levy attaches not only to each payment, but also to the taxpayer/beneficiary's "fixed right to obtain a future distribution from the trust." This means that the Service can seize and sell the actuarial right to the payment stream. It does not mean that it can demand immediate payment from the trustee. However, this is potentially devastating to the taxpayer/beneficiary since the payment stream, sold at auction, is likely to be sold at a deep discount. Thus, the seizure and sale will likely make only a small dent in the taxpayer's liability to the IRS, while possibly stripping the taxpayer of his or her patrimony.


3. Most troubling from the standpoint of a trustee, the memorandum concludes that when a trustee distributes funds that he knows are encumbered by a federal tax lien and the funds "enter the stream of commerce and cannot be traced" (which presumably occurs virtually any time cash is paid to the beneficiary and it can't be recovered), the trustee is liable for tortious conversion for intentionally impairing the lienor's security. This would seem to pose significant problems for institutional trustees such as banks. In many cases, one department of a bank (e.g., the mortgage service department) may have knowledge of a tax lien against a beneficiary. That knowledge is likely not regularly transmitted to the trust department and, in many cases, the mortgage service department may not even be aware that its customer is a beneficiary of a trust with respect to which the bank is the trustee.

PLR 200614006 is part of an emerging trend where the Service aggressively pursues various sorts of rights to satisfy tax liens, even in cases where the rights had traditionally been considered protected from creditor attack. These methods of asset protection, most of which are effective against non-governmental creditors, such as disclaimers, tenancies by the entireties, and spendthrift provisions in trusts, simply will no longer ward off attacks from the Service.

The Shorter Seder

For those of you who think that the Passover Seder is too long, you might try going here.

Hat Tip: Cheshyre.

How Grover Norquist Can Pay His Legal Defense Costs With Tax Deductible Charitable Contributions

Yesterday, I pointed out how Tom DeLay can pay his legal defense costs from his campaign war chest if he is indicted for criminal acts allegedly taken in conjunction with his duties in Congress. Grover Norquist has a potentially better way to go--getting his defense costs paid via tax deductible contributions to his 501(c)(3) organization, the Americans for Tax Reform Foundation. Here's how.

Any criminal charge against Norquist would likely be tied in some fashion to his activities with either the Americans for Tax Reform Foundation or the related 501(c)(4) organization, Americans for Tax Reform. Both appear to be incorporated as non-profit organizations under the laws of the District of Columbia.

Section § 29-301.05 (14) of the D.C. Code provides that a non-profit corporation has the power:

To indemnify any director, or officer, or former director or officer of the corporation, or any person who may have served at its request as a director or officer of another corporation, whether for profit or not for profit, against expenses actually and necessarily incurred by him in connection with the defense of any action, suit, or proceeding in which he is made a party by reason of being or having been such director or officer, except in relation to matters as to which he shall be adjudged in such action, suit, or proceeding to be liable for negligence or misconduct in the performance of a duty. Such indemnification shall not be deemed exclusive of any other rights to which such director or officer may be entitled, under any bylaw, agreement, vote of board of directors or members, or otherwise[.]

(Emphasis supplied.)

Typically, when corporations are formed, the organizational documents (e.g., the bylaws) provide the broadest possible indemnification provisions allowed by law. Since the D.C. statute is open-ended, the bylaws of ATRF and ATR more than likely have provisions that allow indemnification even of costs incurred in defending against criminal charges. The provisions may or may not provide for reimbursement of the costs in the event of a conviction, but, as a practical matter, if Norquist were charged and convicted after a full-blown trial, it is unlikely that he would be able to repay the attorneys' fees advanced by either ATRF or ATR.

Now here's the genius part: as of the end of 2004, ATRF, the 501(c)(3) foundation that can accept tax deductible charitable contributions, owed ATRF, the 501(c)(4) organization, almost $6.5 Million. (Take a look at Statement 7 the 2004 tax return of ATR, which is on page 18 of the exhibits to the complaint filed with the IRS by Citizens for Responsibility and Ethics In Washington.) Thus, ATRF can take in up to $6.5 Million of tax deductible dollars, repay the loan to ATR, and ATR can use all of that amount to pay Norquist's legal fees.

Aside

I've been puzzled as to why ATR has been subsidizing ATRF. After all, contributions to ATR are not tax deductible while contributions to ATRF are. The subsidy has actually been growing. Line 65 of the 2001 tax return of ATRF, set forth on page 78 of the exhibit to CREW's complaint, shows that at the beginning of 2001 the amount owed by ATRF to ATR was $4,257,206 and the debt increased to $4,909,208 by the end of that year. As noted above, it increased to $6.5 Million over the next two years.

I can only think of two reasons, neither of which are intellectually satisfying:

• In appropriate circumstances, contributors to ATR can deduct their contributions as business expenses. This does not seem to account for the disparity since ATR seems to have a wide array of contributors who are not taking their contributions as business deductions.
  


• Much of what ATRF is doing is not truly tax deductible, but because so much of its operations are funded via loans, it made an unattractive audit target when the expenses were being incurred. At some later date, however, after the statute of limitations period had run with respect to any improper deductions, the loan to ATR is repaid via funds obtain through charitable contributions. In other words, the timing mismatch between the date of expense and the receipt of (tax deductible contribution) income is designed to camouflage the improper activities from scrutiny. Quite frankly, I have to believe that this is too clever and devious even for Norquist.

If anybody with more experience in 501(c)(3)'s and 501(c)(4)'s has any idea as to why the relationship between ATRF and ATR has been structured in this way, I would be glad to hear from you.

Why DeLay Didn't Delay

One of the factors that may have motivated Tom DeLay's withdraw from his Congressional race is that he can now use all of the money in his campaign fund for his legal defense.

According to Federal Election Commission Advisory Opinion 2000-40, campaign funds can be used for legal defense where, as is likely the case with DeLay, the defense fund relates to allegations that arise out of his official duties. As of February 15, DeLay's campaign fund had cash of almost $1.3 Million.