Paul L. Caron

Tuesday, April 26, 2005

Kahn on An Argument for Structural Change in Tax Deduction Classification

KahnJeffrey Kahn (Santa Clara) has published Beyond the Little Dutch Boy: An Argument for Structural Change in Tax Deduction Classification, 80 Wash. L. Rev. 1 (2005).  Here is part of the abstract:

One of the most active disputes in tax law today is the question of the proper treatment of a plaintiff, a portion of whose taxable damage award is paid to his attorney pursuant to a contingent fee arrangement....

Regardless of how the Supreme Court resolves the discrete issue that is before it, what is alarming is that the current dispute is just one small example of a much larger problem. Instead of dealing with the root cause of the problem, the focus (both in the courts and in Congress) has been on whether to provide a "fix" for the specific plight of the taxpayers who have raised the issue in the context of a suit for damages. The Supreme Court and Congress, like The Little Dutch Boy, may be willing to plug one hole, but the broader problem is a structural fault in the "dam" of the tax law system - namely, the improper classification of a significant number of expenditures as itemized deductions. This Article argues that, instead of plugging one hole at a time, it is time to replace the dam.

The thesis of this Article is that the current list of nonitemized deductions wrongly excludes a number of items, especially some that are directly connected to the production of income. This wrongful exclusion imposes an unwarranted and severe tax burden in far more circumstances than the attorney fee problem on which Congress exclusively focused. The harsh consequences resulting from the misclassification of a number of items are exacerbated by the stringent limitations currently imposed on many itemized deductions; but even the repeal of those limitations, which is unlikely to occur, will not cure all of the harm that a wrongful classification causes. The author hopes that highlighting several examples of misclassification will induce Congress to implement a commission to study the entire classification system rather than to rest on its laurels for solving one small part of the problem in the 2004 Act.

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