Soap Operas of the Tax World: Trust Fund Tax Disputes

Businesses often succumb to the temptation to use taxes withheld from employees’ salaries to overcome cash flow problems. Unfortunately these types of “government loans” are often fatal to the business and the “responsible persons” financial well being. The resulting tax disputes often involve lengthy and expensive procedural battles between business owner and non-owner “responsible persons.”

Employers are generally required to withhold federal income taxes and the employee’s share of FICA taxes from an employee’s wages. These funds are often referred to as “trust fund” taxes. Employers are required to remit trust fund taxes to the government and they are fully liable if the taxes are not timely remitted. Moreover, the employer and the “responsible persons” are jointly and severally liable for a 100% trust fund recovery penalty (TFRP) if the taxes are not timely remitted. Generally “responsible persons” include anyone who has the ability to make financial decisions for the business, including owners, managers, and even lesser employees such as bookkeepers.

When trust fund controversies arise involving non-owner responsible persons the non-owner responsible persons may be tempted to turn over or disclose employer records or assets or even identify other responsible persons and their personal assets. This is often a viable strategy because it is the IRS’ policy to collect the trust fund tax only once. Therefore, by identifying other responsible persons and their assets the informer may be able to avoid paying the TFRP personally.

Non-owner employers may also find this course of action necessary to prevent the employer from taking steps to shift the tax liability to the non-owner employee. There are a number of ways that employers try to shift the liability to non-owner employees. For example, employers may promise to pay the tax by entering into a settlement agreement or an offer-in-compromise for less than the full amount of tax owed. In the event that the settlement or offer is accepted it is likely that the IRS will then pursue the non-owner employee for remainder of the unpaid tax liability. Similarly, employers may promise to pay the tax by agreeing to an installment agreement with the sole aim of buying time to conceal assets. Once the assets are sufficiently concealed the employer may simply go out of business, leaving the non-owner employee on the hook for the remaining unpaid taxes.

Employers may also attempt to halt the government’s collections efforts with the aim of encouraging the IRS to pursue the employee before the assessment and/or collections statute of limitations expires as to the employee. Employers may be able to do this by seeking a collections due process (CDP) hearing at a time when the CDP hearing will not begin before the assessment and/or collections statute of limitations for the employee runs.

But savvy non-owner employees are not helpless in these situations. They can fight back by taking steps to halt the collection process against themselves or by agreeing to extend the tax assessment or collection period against themselves so that the IRS is not under a time constraint to collect the tax from them before the deadline expires. Moreover, they may even pursue civil suits against the business and the business owner for recovery of the taxes that they paid or will have to pay.

These types of procedural battles are often inevitable due to the business and the business owner undergoing financial difficulties and the non-owner employees not wanting to pay the businesses tax liability personally. Perhaps this would be different if the business or business owner was in position to simply agree to pay the trust fund and/or the TFRP. But the business’s financial difficulties are typically why these types of disputes arise in the first place.

These disputes involve multiple taxpayers each of whom pursue multiple tax and non-tax administrative and judicial remedies. These tax disputes can play out over more than a decade. In the end, these types of procedural battles are lengthy and costly for all parties involved, often result in the government not collecting the taxes that are owed, and take up too much of the IRS’s and the courts’ limited resources.

There are a number of ways that these situations could be avoided or at least resolved in a more effective, amicable, and fair manner; however, any viable option would have to come from Congress. Congress should enact legislation to provide an administrative remedy to specifically address these situations. Such a remedy should include providing all parties involved with a single forum for timely resolving these types of disputes, a means for getting all of the necessary parties to the forum, rules for determining who is liable for what, and sanctions for parties who choose not to participate in the proceeding (such pursuing collections efforts against the non-participating party first). The appeals office would probably be an appropriate forum, so all Congress would really need to provide would be a means for getting all of the parties to that forum, rules for allocating liability, and granting the appeals office the authority to impose the sanctions against non-participating parties.

August 5th, 2005 | No Comments »

Taxpayer: It’s All About Valuation; IRS: We’re Damned if We Do

Many tax practitioners agree that valuing property for tax purposes is the most important issue that they face. Yet valuation issues are often murky and amorphous. In most cases valuation disputes are resolved in favor of the party that has the most convincing valuation expert. In other cases valuation disputes are resolved on even less definite grounds. This brings me to Garwood Irrigation Company v. Commissioner, which is one of my favorite cases.

The Garwood case involved the valuation of the taxpayer’s water rights. Both the IRS and the taxpayer put on valuation experts to establish the true value of the taxpayer’s water rights. Initially the IRS asserted that the correct value was $76,609,000 and the taxpayer asserted that the value was $31,410,000. At trial the IRS’s valuation expert placed the value at $45,809,384 and the taxpayer’s valuation expert placed the value at $10,700,000. As outlined in the thirty-nine-page decision, the court found that the taxpayer’s water rights were actually worth $22,532,519 – $8,877,481 less than the value that the taxpayer had originally claimed on its tax return.

There are several issues that make this opinion interesting. One issue is that the court heard valuation evidence put on by both parties, experts who were deemed qualified as experts by the court, but it chose to ignore that evidence. For the lay readers, courts often write very lengthy opinions to justify either departing from the law and/or the evidence. This often helps to ensure that the court’s ruling is not overturned by higher courts. A thirty-nine page opinion from the tax court is not unheard of, but it is not that common. This leaves one wondering what evidence or circumstances really impacted the court in such a manner as to cause the court to disregard the experts’ opinions.

With no firsthand knowledge of the case, I wonder if the fact that the IRS initially tried to collect $76 million from the taxpayer and only $45 million in court had anything to do with it. For sure the $76 million valuation came from an ambitious or anti-taxpayer revenue agent and that figure made it into the revenue agent’s report. Upon receiving the case, the IRS attorney no doubt got a second opinion that resulted in the $45 million value. Tax court cases are not tried before juries, but I wonder if this was the equivalent of throwing a skunk in the jury box. Could it have been enough to kill the IRS’s case from the outset?

Another interesting issue is that the government would have been better off had it not taken any actions whatsoever. In the end, the government lost the tax revenues that it paid to prosecute Garwood and the government lost the tax revenues that Garwood had already agreed to pay.

I can imagine the feelings of the IRS attorney who lost this case. I can also feel the taxpayer’s attorney’s embarrassment (pleasant surprise?) in placing the value too low. Attorneys, especially tax attorneys, seek out rules. If no rule can be found then attorneys make persuasive arguments based on similar situations or policy. This framework provides order and it facilitates the resolution of disputes. Yet, valuation issues do not fit neatly into this framework — especially when the courts are involved. Perhaps that is why valuing property for tax purposes is the most important issue faced by many tax practitioners.

August 3rd, 2005 | No Comments »

More on The Tax Code Complexity Debate

I was wondering how the tax code complexity debate had progressed while I was away. So it appears that the blogosphere keeps going even when I am not here (sorry, it’s just one of those “what if a tree falls in the woods and you are not there to hear it” kind of things). Having been away for a while, maybe it is my turn to stir the pot again? So I will comment on Joe Kristan’s post, Ben Bateman’s post (of unknown origin) as cited by James Maule, and then James Maule’s posts.

Joe Kristan asserts that the code is asked to do too much. I don’t agree with that statement. Being able to adjust where tax revenues originate from is a valid economic tool at the government’s disposal. This tool is no different than the government’s ability to spend and print more money, to issue and pay debt, and arguably to set interest rates and enter into international trade agreements. The fact is that there are not that many economic tools at the government’s disposal to regulate and possibly stimulate the economy. Why should the government ignore one of the few tools in its economic toolbox? I know that this is an amorphous contention, but the last recession showed how useful such tools can be to help our economy pull out of economic troubles. One can only speculate, but I would guess that our economy would be at least a little worse off if the government hadn’t had the ability to adjust our tax laws (to issue larger refunds, to increase certain tax credits, to maintain historically low tax rates, etc.). So I would say that the code is asked to do what it should – to stimulate the economy in times of economic downturn and hopefully to fill the coffers during times of economic plenty.

Ultimately I think most people would agree that we should all pay our fair share. Just how much our fair share is depends on our circumstances (and unfortunately, our inclinations) – rich-poor, young-old, married-unmarried, etc. Could the code be fine-tuned so as to more adequately allocate the fair share? Yes, but Congress has made some (limited) progress there (for example, I am thinking of the elimination of the marriage penalty). If accounting for this allocation makes the code more involved, then so be it. Aren’t a strong economy and more appropriate allocations of taxes worth it?

Ben Bateman’s post (as cited by James Maule) made some good points. Mr. Bateman made the point that the code is organized and simple when compared to other codes and that it should not be measured against the standard of perfection. I agree. The code effectively provides for a great number of financial transactions and it does so very very well. Lets be honest, of the trillions (or however many) of financial transactions that occur daily, monthly, yearly only a very few raise thorny tax issues. Even when taxpayers come up against thorny code sections those provisions have a way of working themselves out (i.e., not being spotted by the taxpayer or the government, being settled by the government in favor of the taxpayer, etc). Is the code perfect? No, but neither is anything that any human being has created. Along this line I think that any writing (pick any writing as an example), if read with the same critical eye as some read the tax code, would present the reader with numerous inconsistencies and ambiguities. So such arguments or citations to thorny code sections has little meaning.

James Maule also made some points. I applaud Mr. Maule’s belief that his tax students as practitioners do not spread the fear of the tax code, but that ignores the realities of how many tax practitioners carry on their practices. I personally receive numerous calls involving cases where various tax practitioners (most of whom where tax students at one point) have used fear of the tax code to get clients and to overcharge clients. Even worse, these cases often come to my when the tax practitioner accepted a fee but either did nothing or really botched the job. Not to name names, but you could Google reputable and disreputable companies with the term “consumer complaint” to read such stories. The companies of JK Harris and Omni Financial come to mind, not to imply that those companies are reputable or disreputable.

Also, Mr. Maule also states that he does not see how persons who are not sitting in tax classes learn to fear the code if they have not taken the individual tax courses. I would suggest that reading a blog post entitled “The Tax Code is Simple. Not!” might do the trick – especially if it was penned by a tax professor.

So here is another way to think of the Code. I have noticed that many business owners and individuals have some form of legal survival book on their bookshelves (which I have heard other attorneys jokingly refer to as “legal pornography”). You know the kind of book. It provides very general and dated legal information. Based on the number of these types of books that I have seen I am guessing that people actually use them. Personally I think that such books are great if they (1) get the person say 60% or more of the way to the answer and (2) they allow the person to carry on an informed discussion with their legal counsel (who often charge way too much to explain the basics). I think that the code does these two things and I think that it does them very well. So the code should be sold as a companion to various legal survival guides.

July 28th, 2005 | No Comments »

The Tax Code Debate

I typically do not carry on debates on this blog because the statistics show that my readers are looking for topical issues rather than debates. But I think many readers would enjoy this debate. So I will say a few more things about the tax code debate.

First, Mr. Maule, it was not my intent to “attack” anyone. When a reader pointed out that my post might be construed as an attack, I decided to post Mr. Levine’s article over mine. That seemed like the right thing to do. Anyway, please accept my apology if you felt “attacked,” as that was not my intent.

But let’s explore the issue some more. Perhaps you felt the post was an “attack” because it introduced a new element into the debate. That element is tax scholarship and the way tax law is taught. Surprisingly, based on your latest response, I think we might be on the same side of a lot of these issues (perhaps I will have to read some of your work). However, let me say a few things here. It is related. I will connect it up, so please bear with me.

I face one major obstacle in my practice on an ongoing basis (actually I face several obstacles, but this one bothers me the most). Namely, taxpayers believing that they are helpless when faced with a tax dispute with the IRS. It has been my experience that this view almost always comes from a belief that the IRS uses a complex weapon called the tax code to destroy taxpayers’ lives. As I wrote my last post I had just concluded a meeting with a taxpayer who held this view.

The particular taxpayer had worried about his tax problem so much that it compromised his health. The stress almost killed him - literally. At the beginning of that meeting I handed the taxpayer a copy of the Code. I told the taxpayer that the index was in the front and I asked the taxpayer to try to find the applicable code section. The taxpayer did so. I then asked the taxpayer to read the section and tell me what it said. The taxpayer did so. The taxpayer then asked, “is that it?” and, “is that what I have been worried about?” My answer was “yes” and “yes.” I then showed the taxpayer the applicable procedural code sections. The taxpayer laughed and then cried.

You see Mr. Maule, this taxpayer (along with many other taxpayers that I have represented) was under the belief that the tax code was undecipherable and that his life was going to be destroyed by it. In his case the belief turned out to be false, yet it still did great harm to the taxpayer. The same belief has harmed many of my other clients — although the harm is often not as direct. I have seen the belief destroy marriages. I have seen the belief separate parent and child and turn friends and partners against each other.

I personally feel that this belief harms society as well. So you may ask why this is relevant to our discussion of tax scholarship. Let me explain. When I asked that taxpayer why he held this belief the taxpayer related that his nephew is in law school. Apparently his nephew’s tax professor had impressed this view upon his student. This case only involved one law professor and one law student. Three weeks before it was one accounting professor and one accounting student. Years before that it was my very own tax professors.

So do I have some negative opinions of how tax law is taught and about tax scholarship? Yes, I suppose I do. At some level you understand, and I am sure you would agree, that a professors words and beliefs shape the views of the next generation of tax practitioners and, indirectly, our societies beliefs about our tax system. As a professor your beliefs do the same. So Mr. Maul, you can continue to tell your students and others that the tax code is hopelessly complex. That is your right.

All I intended by my post was to let others know that that is not the only view out there. Perhaps I did that in-artful way and for that I am sorry. As you can see I take this issue a little personally. So I hope there are no hard feelings. I didn’t mean to “attack” your or anyone else. Mr. Maule I truly wish you the best. As an aside, this debate has destroyed a post I was writing on why it is better to study tax law than classic literature (oh well, maybe I can post that piece after the readers have forgotten about this debate).

July 22nd, 2005 | No Comments »

Views on the Tax Code

Having read Mr. Levine’s post, I think that his post framed the issues in this debate better than my post did. Therefore, I have pasted his post on top of my own. Hats off to you Mr. Levine. His post is as follows:

On the 17th, Kreig Mitchell had a posting entitled The Case for the Internal Revenue Code. Mitchell takes issue with the concept that the Internal Revenue Code is overly complex or obscure. In summary, he concludes:

Having spent countless hours poring through the Code and the Regulations, I can tell you that our Code is not too complex. Our Code is clear, simple, and well organized given what it was designed to do. We should not complain about the Code; we should complain about the Treasury Regulations.

On the 20th, Profession James Maule responded to Mitchell’s comments in a posting entitled The Code is Simple? NOT! In that posting, Maule concludes:

If the Code were so clear and simple as [Mitchell] contends, things such as Tax Management portfolios would not be necessary. Now, it could be that all the rest of us are lacking some special skill or insight, but I guarantee you there are times I read a Code provision, especially one recently enacted or amended, scratch my head (maybe that’s why I’m losing my hair), read it again, read it to myself out loud, try to rewrite it, and sometimes begin inventing words to describe the poor quality of the provision.

And eventually along come the technical corrections. I wonder why those are necessary, he asks sarcastically.

Sorry, [Mitchell], on this one I flat out disagree. Even accepting the substantive mess that it has to reflect, the Code is not as well organized or drafted as it could be. After all, I think my translations are far less convoluted. I’ll let the practitioners score that assertion.

Today, Mitchell responded. I think that his comments were a little too ad hominem for my taste. (And remember: I’m the guy who refers to those who oppose his positions on estate tax repeal and the gutting of the Social Security system as knaves and fools. Thus, it can be reasonably assumed that I have a high ad hominem threshold.) However, let me add a few observations to the debate.

At the outset, I happen to agree with Mitchell that the Code is fairly well organized. I would go further and even argue that the organization of the Code has a certain elegance about it. I also agree with Mitchell that the organization of the regulations is both haphazard and marked by significant gaps.

That having been said, however, the Code’s draftsmanship leaves a great deal to be desired. Here, Maule has it correct: All too often, the writing is murky to the point of being totally opaque. I suspect that there are a number of reasons for this.

First, the Code is not a single document. It is an ongoing, dynamic document, built up layer by layer via successive amendatory enactments, many of them drafted in the wee hours of the morning. Under the circumstances, it is not surprising that there are numerous apparent conflicts between certain sections and downright incomprehensibly drafted provisions.

Second, the Code is a product of political give and take. As a consequence, virtually every general rule is followed by exceptions placed in the Code to address specific situtations. These specific exceptions can be either problems, real or imagined, by particular industries or businesses or ways to avoid the application of the general rules to broad classes of taxpayers. (As examples of the latter, consider the many provisions that do not apply to smaller transactions, the exemption of certain loans from the imputed interest rules, for instance.)

Third, at least with respect to income tax, what is being taxed is an intellectual concept. That is, while most of our clients understand income to mean the cash that they receive for their labor or when they sell assets, as any reasonably bright law student should be able to tell you, the concept of income is far broader than that. The fact that we are taxing a concept results in practical drafting difficulties in tacking down with precision when and how this rather elusive concept is taxed. The differential rates of tax imposed on different types of income only ratchet up these drafting problems.

Fourth, while I agree with Mitchell concerning the arrangement of the regulations, the more recently drafted regulations (”recent” in this context meaning those drafted in the last 15 years or so) are generally quite helpful in illuminating the relevant Code provisions. Of course, there are too many instances when Code provisions are not addressed in regulations.

Could the Code (and, here, I actually mean both the Code and the regulations) be drafted more clearly? Certainly. However to do so, the drafting process would have to take place in some arena where all participants are pledged only to make the Code clearer and not to make any substantive change in the law. This could occur, but only if the participants belong to a prietly caste who agreed to have their meetings on Mars with all communication with Earth cut off while they deliberate. (Sounds like the premise for an unlikely Twilight Zone episode.)

So who’s right? On one hand, my experience with state statutes of various sorts leads me to side with Mitchell. By comparison with these statutes (other than Uniform Acts which tend to be well-drafted), the Code is a model of clarity.

On the other hand, I spent three hours today on a project where I had to cite chapter and verse with respect to the the tax treatment of non-resident aliens with respect to certain transactions in the U.S. The question was simple and the answer should have jumped out at me. It didn’t. The reason that it didn’t was that the Code in this area is at its cryptic best (or worse, depending on your point of view). In other words, there is a good case to be made for Maule’s conclusion.

Where do I stand? A place in which I rarely reside–the middle.

July 21st, 2005 | No Comments »

The Case for the Internal Revenue Code

It seems to be a generally accepted belief that our Internal Revenue Code (the Code) is too complex. But this belief has no foundation in reality. The Code is a model of clarity and simplicity for all it is to accomplish (I bet you never heard anyone say that before).

Let’s be clear, the Code provides a means for laying and collecting taxes on every taxable transaction that Congress has deemed appropriate — no matter what legal, financial, or human structuring that it comes under. We should able to agree that any written code that is to accomplish this task will by necessity be involved. This is especially true given the complexity of business and financial transactions today. The beauty of our Code is that it addresses this colossal task very well.

Let me describe the Code for those of you who are skeptical. The Code is very well organized. It is divided into eleven subtitles, with each subtitle covering a different type of tax (such as income tax, estate and gift tax, employment tax, excise taxes, etc.). Each subtitle is further subdivided into smaller units, including chapters, subchapters, parts, subparts, sections, subsections, paragraphs, subparagraphs, sentences, clauses, and subclauses. Code sections are the heart of the Code. Code sections are typically very brief. The longest Code sections are only a few pages long. Code sections are very precise. Every word counts (except when the IRS or the courts overlook or ignore a word here and there). Moreover, the Code has a very descriptive index that makes it easy to find relevant material.

To illustrate the clarity and simplicity of the Code, we should look at the Treasury Regulations (the Regulations). The Treasury Department promulgates the Regulations. The Regulations spell out much of our federal tax law, sometimes by supplementing Code sections or outlining judicially created law and at other times creating law from scratch. Like the Code, the Regulations generally carry the weight of law.

But the Regulations are very poorly organized. Generally the Regulations begin with a prefix number that represents the corresponding Code subtitle (e.g., 1 for income tax, 20 for estate tax, etc.). Then there are sections and subsections, with the sections referring to Code sections. Not every Code section has a corresponding Regulation section. Sometimes the Regulation subsections follow the Code subsections and in other cases the subsections are merely random. As with the Code, the sections are the heart of the Regulations. Regulation sections are very verbose, detailed, and often poorly written (if not outright conflicting). Regulation sections often run on and on. Even worse, some of the Regulations include circular references that only lead you back to the place where you started. The Section 1502 consolidated return regulations provide numerous examples of each of these points. Worse than that, the Regulations have no index. Some individual Regulation sections do have individual indexes, which they are almost always incomprehensible and deceptively worded. Therefore it is very difficult to find relevant material in the Regulations.

There have been many occasions where, when reading the Regulations, I have thought to myself, “Okay, I am a pretty smart guy, probably smarter than most, and I like myself and all, but honestly, I don’t know what the past three or four pages that I just read said. I know that it has the answer I am looking for because I recognize all of the right key words, but it just isn’t doing anything for me.” It is at that point that I start over at the beginning with a renewed determination. For some strange reason the children’s’ story about “the little engine that could” seems to come to mind. That is often when the breakthrough comes. Eureka. The Regulation is poorly worded, it contains a circular reference or a reference that goes no where, it fails to mention anything about my client’s facts, or it is beyond human comprehension.

I have worked with enough tax practitioners to know that I am not alone here. It has been my experience in working with tax practitioners that there are generally three ways to deal with this type of issue. The first is to find something else to do and hope no one asks you any questions (this one is limited to associate attorneys at large firms or partners at large firms that can pass the work off to associate attorneys). This one might be called the “walk away and look innocent” technique. The second is to curse and possibly throw the Code (which often contains the Regulations in the back) against the wall, out of the window, or at anything else that might be in throwing distance. The third is in some combination to cry, drink, sleep, and seek the solace of a loved one with the aim of discovering a new career. And that is how experienced seasoned tax practitioners react. God help the non-tax practitioner.

Having spent countless hours poring through the Code and the Regulations, I can tell you that our Code is not too complex. Our Code is clear, simple, and well organized given what it was designed to do. We should not complain about the Code; we should complain about the Treasury Regulations.

July 17th, 2005 | No Comments »

The Structure of Tax Revolutions

The title of this post is based on Thomas Kuhn’s The Structure of Scientific Revolutions. Kuhn’s classic work explores scientific achievements to show how scientific knowledge has progressed over the years. Kuhn’s framework for examining the progression of scientific knowledge provides a useful way of viewing our tax laws, how they came about, and where they might go in the future.

In general, Kuhn proposes that scientific disciplines arise out of individual solutions to particular problems. Solutions to similarly situated problems are identified as being related and are grouped together. This grouping allows individuals to apply lessons learned from one problem to help solve other problems. Eventually enough of the problems and solutions are grouped together to form a body of knowledge worthy of academic study. At that point one or more all-encompassing textbooks appear. Students coming into the study of this new academic discipline are able to use the textbook’s paradigm to gain a quick in-depth knowledge of the subject. Not having to spend as much time figuring out the basics, the new students are quickly able to advance the new academic discipline. More and more problems are resolved as the discipline matures. The new problems and solutions are added to the textbook paradigm and are mastered by the newest students.

The students who came into being under the textbook paradigm spend their professional lives toiling under the framework provided by the paradigm. Eventually the professionals become committed to the paradigm for their survival. They reject major attempts to rewrite the textbook paradigm, preferring only to refine the paradigm. The professionals come to see the textbook paradigm as an end instead of a means to an end. Professionals believe that if a problem can not be solved it is not because a failure of the paradigm, it is because the paradigm just yet to be applied properly to the problem. At that point the academic paradigm becomes highly technical and not wholly useful. Refinements on top of refinements on top of refinements result a body of knowledge that even the most sophisticated computers can not fully manage. The textbook paradigm starts to break down. Specific problems arise that the textbook paradigm cannot adequately address. Newer practitioners and progressive thinkers start addressing the unresolved problems by applying pre-paradigm logic. The pre-paradigm logic gains in popularity and it becomes the subject of study. Eventually the old paradigm is discarded and the new one is put into place — a scientific revolution has occurred. The process then begins anew.

Kuhn’s paradigm very aptly describes the progression of our tax laws. Our tax laws have their history in the now humorous one page tax return and its accompanying pamphlet (that was the Internal Revenue Code). From that base the old code sections grew more verbose and new code sections were added as the government became aware of taxpayers circumventing the rules (i.e., problems were identified and solved). Simultaneously a body of administrative and judicial tax law developed (see http://www.irstaxtrouble.com/tax_law.php for an overview of our tax laws). As this body of tax law developed, several seminal tax law textbooks appeared. Tax law became a well-established field of academic study. The students of this textbook paradigm became the practitioners who sought to continually refine the paradigm. Our tax laws were revised several times, with the Internal Revenue Code undergoing major revisions in 1939, 1954, and 1986. Enough problems were solved that it justified the creation of newer textbooks (tax practitioners recognize books by authors such as Bittker, Eustice, McKee, and others). The tax law began focusing on very technical and specialized problems. This is where our tax laws are today.

So what does today’s textbook paradigm look like? What paradigm are tax students being taught and under what paradigm are tax practitioners toiling? In general, the current paradigm is based on taxes being levied on earned income, income inherent in transferred property, and value inherent in transferred property. Tax practitioners today (myself included) view tax problems in terms of taxable gain. Thus tax practitioners spend their days looking for ways to:

1. Avoid or defer recognition of income,
2. Recognize and accelerate all permissible deductions,
3. Characterize transactions as capital or ordinary for income and deduction purposes, and
4. Recognize all applicable credits.

These four seemingly simple tenets make up today’s tax paradigm. They they consume almost all (if not all) of the tax practitioners talents and mental energy throughout his or her professional career.

But this paradigm has proven ineffective in addressing several problems. Some of these problems involve the inability to collect taxes and the inability for the paradigm to work effectively in an international economy (one only has to look at the problems with old Section 114 and new Section 199 to see how this has been playing out). As problems such as these increase in importance, newer and more progressive tax practitioners have begun discussing new tax regimes, such as consumption-based and value-added tax regimes. We are now at a point where these types of tax regimes are considered worthy of study (which they were not just two decades ago).

If Kuhn’s theory is correct, and it is applicable to our tax laws, then it appears that we might be nearing a tax revolution — a tax revolution that will result in a new consumption-based tax regime.

July 15th, 2005 | No Comments »