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Friday, February 6, 2009

Why Neil Buchanan Will Never Be Treasury Secretary

From Tax Prof Neil H. Buchanan (George Washington):  Geithner, Daschle, Killefer, and Me:

I could not help but wonder what would happen if my tax situation were to become a matter of public debate.

I actually have recently become aware of an issue that might raise an eyebrow or two. My employer provides me with a laptop computer (in addition to my office desktop computer), which I use while traveling to conferences, etc. I also, of course, keep it at home when I am not on the road, using it for everything that I do on a computer. Since much of what I do is not job-related, I am using the computer (that the university owns) for personal as well as professional matters. As a matter of tax law, the question is whether the professional use is enough to prevent this from being counted as income to me, in the same way that use of my desk chair at work is excluded from my income. If so, this would be a deviation from consistent income tax rules, because my employer's provision of this computer makes it unnecessary for me to spend my own money on a laptop computer (which I surely would otherwise do). If I get to use this computer tax-free, I am being treated better than people who pay taxes on their salaries and then use their after-tax income to buy a laptop computer to use at home.

Stated this way, it becomes obvious that the only way I should be able to exclude the value of this benefit from my income is if the Internal Revenue Code explicitly allows me to do so. Otherwise, the default is for me to pay tax on the value of what I am receiving. The thing is, I had never even thought about this until a couple of weeks ago, when the issue was raised on the TaxProf blog (linking to an article from the Chronicle of Higher Education). As it turns out, there is no provision in the Code that excludes university-provided laptops from being taxable. Since I received the computer on Jan. 1, 2007, I need to amend my 2007 taxes and to get this right when I do my 2008 taxes on April 14 of this year.

Why did I not get this right in the first place? It simply never occurred to me. Once I thought about it, it was obvious that this was presumptively taxable and that I should do a bit of checking. Still, I made an error in my favor on my taxes; and if this had come up during a vetting process, the natural thing to do would be to verify that I had made an error and then to pay the unpaid taxes. If asked, my only defense would have been, "I never thought about it until now." ...

One positive outcome from all of this is that I now have removed any doubt about my eligibility for government service. ... This is not, however, a persuasive argument that the tax code is too complicated or that these employer-provided benefits should be untaxed. The tax code is too complicated, but even a perfectly stripped down tax code must deal with the messy realities of life. Many forms of compensation are not paid in cash. I very explicitly negotiated to receive a laptop as part of my compensation, and I accepted a lower cash salary in return. If this type of thing is excluded from taxes because "it's too complicated" or "people would never think about that," we open up yet another loophole allowing people to avoid taxes by being paid in things rather than in dollars.

On the other hand, there are still plenty of people who are guiltlessly non-compliant. We can do as much as is reasonably possible to let people know about the things that might not seem obvious to them that must be included in income, but life is too rich and varied to cover all of the possibilities in advance. When errors are discovered, they should be rectified. I hope that we have not reached the point where every tax error is disqualifying. I also hope, however, that the current situation does not encourage Congress to undermine still further the consistent application of tax principles.

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«On the other hand, there are still plenty of people who are guiltlessly non-compliant.» Sure, but there are small tax errors and "tax errors" worth dozen of thousands of dollars. The latter are a bit more difficult to explain away, especially for people that can well afford tax accountants, and should really use them.

Posted by: Blissex | Feb 7, 2009 7:02:05 AM

Well, sir I don't know about your computer, but if you are so negligent that you do not know to pay self employment tax when no FICA has been taken from your pay and your employer has consistently reminded you that you owe the tax then I guess you should not be Treasury Sec.

Just for fun, load a 2000-2006 version of Turbo Tax and see what happens when you input the W-2 data without reporting any FICA. Guess what, it will tell you to enter some.

Posted by: Sid Finkel | Feb 7, 2009 7:48:39 PM

I think you would be straining the limits of the de minimis rule on that one! You should return the laptop to your employer as a sign of your good will and buy 2 laptops from your personal funds. One for you and one for a disadvantaged student. Then you can sleep nights!

Posted by: Deserttaxguy | Feb 8, 2009 9:14:27 PM