Paul L. Caron

Friday, January 2, 2009

The Top 10 Tax Stories of 2008

Continuing a TaxProf Blog tradition, below the fold are the Top 10 Tax Stories of 2008, generated from a post on the TaxProf Discussion Group, beginning with Joe the Plumber, Tax Pork Added to the Bailout Bill, and Tax Policy in the Obama-Biden Administration:

1.  Joe the Plumber:

Dorothy A. Brown (Emory):

I think one of the top ten stories of 2008, was that tax reform played such a large role in the recent Presidential election. Not only did the policy wonks get involved, but everyday Americans got informed on the various tax proposals of the candidates. To me one of the funniest aspects was Joe the Plumber’s take on taxes. Joe the Plumber was concerned that he was going to pay more in taxes under an Obama administration if he bought a plumbing business and that business had net income in excess of $250,000. In reality, Joe would get a tax cut under the Obama tax plan – yet Joe wasn’t going to vote based on his current tax situation, but his hoped for future tax situation. Joe’s vote was based on his tax liability under an Obama Administration if he bought this hypothetical business, and in this stagnant economy, that business managed to net $250,000. Now that’s change we can believe in!

Jeffrey A. Cooper (Quinnipiac):

Hands down, my vote goes to Joe the Plumber. A guy who was neither named Joe, nor technically a plumber, managed to put tax policy on the front page of every national newspaper. While some of his anti-Socialism rhetoric may have been overblown to say the least, Joe became the personification of the fundamental tax policy differences between John McCain and Barack Obama. I'm not sure whether voters were more or less informed on the issues as a result of Joe's emergence into the national spotlight, but he certainly inspired voters to talk about tax policy (perhaps without even realizing they were doing so). And then, to top it all up, it turned out that Joe had a few pesky tax problems of his own that we could all spend days analyzing. What a gift to us all!

David Elkins (Netanya College School of Law):

My vote for top tax story of the year goes to Joe the Plumber (the legend, not the actual person), the struggling plumber who was supposedly being prevented from buying the plumbing business he had been working in ten hours a day for fear that he would earn over $250,000 and be hit by higher taxes. Joe symbolizes the misconceptions and irrationality that often dominate public discussion of tax issues. True, tax law is complicated and the public cannot be expected to understand its intricate details. Nevertheless, when a focus of political discourse is an individual who apparently prefers continuing working ten hours a day as a modestly-paid salaried employee rather than purchasing the business for fear of earning too much, it is noteworthy. (Of course, one response to the charge would be: Don't be afraid, go ahead and purchase the business because the odds are you won't actually be earning all that much anyway. Now there's a bit of wisdom you probably wouldn't learn in Harvard Business School.)

2.  Jim Maule (Villanova): Bailout Bill Survives Thanks to Piggy-Backed Tax Provisions:

The Emergency Economic Stabilization Act of 2008 could not find its way through the Congress until dozens of tax breaks were added to the legislation. Originally a three-page proposal that went nowhere when first proposed, the bill was amended to add specific procedures and standards that responded to criticisms levelled by many members of Congress. Nonetheless, even in its expanded 100-plus-page form, the proposal was voted down. Someone quickly remembered how to get legislation through the Congress: dress it up with tax breaks that individual members could parade before their constituents, or one or two special constituents, and the re-election insurance reversed numerous votes. The bailout provisions remained the same. Somehow, a plan rejected by a majority of the Congress became ideal without anything significant being done to the plan that had fallen short. How did the defects in the bailout become cured? How did the shortcomings of the plan get resolved or become advantages? Simple. Totally unrelated tax giveaways to a variety of special interests made it easy to overlook the problems in the bailout, problems that are now causing people to ask why Congress enacted the legislation without improving it. The answer lies in the power of tax.

The irony is that the 150-plus-page legislation became a 500-page monstrosity because 350 pages of tax provisions were attached to the original proposal. How many years will pass before the Treasury Department issues regulations dealing with all of the new provisions? How many taxpayers were compelled or will be compelled to make major changes in their business plans in order to deal with the changes? Some examples of the provisions with the power to move an otherwise unpassable piece of legislation through the Congress include more generous depreciation deductions for "qualified retail improvements," "qualified smart meters," and "qualified smart grid systems," increases in depreciation allowable in the year of acquisition for certain reuse and recycling property, an extension of the period of time during which taxpayers can place in service motorsports entertainment complexes that qualify for more generous depreciation deductions, increases in depreciation allowable in the year of acquisition for "qualified disaster property," and a long, long list of assorted energy-related investments and practices, which may or may not have a beneficial impact on the nation's energy woes.

3.  Paul L. Caron (Cincinnati), Tax Policy in the Obama-Biden Administration:

Fifteen Tax Profs offerred their views on the tax policy challenges facing the incoming administration.

4.  Ann Murphy (Gonzaga), IRS's New Tax Return Preparer Guidance:

The change in the tax preparer penalty is a big one for accountants/attorneys/enrolled agents.

5.  Paul L. Caron (Cincinnati), High-Profile TaxProf Moves:

2008 saw the most high-profile moves of Tax Profs at Top 25 schools in recent memory:

6.  Alan D. Westheimer (Houston), Stobie Creek Investments v. United States, Nos. 05-748T & 07-520T (Ct. Fed. Cl. Apr. 1, 2008):

I believe the Federal Claims Court granting the government’s motion to exclude the testimony of Stuart Smith and Ira Shepard in the Stobie Creek Investments trial on the basis that it was about the law upon which the court needed no expert help is a top tax story. There is a long tradition of tax experts advising the courts on how the law should be applied to certain fact situations and the distinction between informing the court about the law and about other relevant issues is truly blurred. The government came up with a novel argument that got this court’s attention and produced this bad result.

7.  Paul L. Caron (Cincinnati),  Tax Issues Raise by Obama, Biden, McCain, Palin, Clinton Tax Returns

8.  Ann Murphy (Gonzaga), Alioto v. Cimmissioner, T.C. Memo 2008-185 (July 31, 2008):

The facts of Alioto are compelling. A whopping amount due (from returns Joe Alioto filed with his previous wife) and a win to the taxpayer under the very difficult standard of "abuse of discretion" under 6015(f). It's just a fun one.

9.  Bridget J. Crawford (Pace), Embattled NY Official Raises "Non-Filers Syndrome" as Tax Defense:

One of the weirdest stories involved Charles J. O’Byrne, aide to New York Governor David A. Paterson. O’Byrne offered “late-filing syndrome” as one of the reasons that he failed to file tax returns from 2001 to 2005. Others may have scoffed, but we tax professors sympathized. We know several among us who suffer from “late-grading syndrome.”

10.  Ann Murphy (Gonzaga), Ordlock v. Commissioner, 533 F.3d 1136 (9th Cir. July 24, 2008):

Even if someone qualifies as an innocent spouse, community assets may be used to satisfy the deficiency (makes it really a good question whether someone in a community property should even apply for innocent spouse relief).

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Glad you all are getting such a big, hilarious laugh from Joe-the-Plumber's irrational fear of making over $250K. I can tell you that Jason-the-Attorney, in his second year in a solo practice, did make right at $250K this year. I'm new to paying this kind of taxes, but I started working on a worksheet for a 4th Quarter estimated payment, my first, and it looks like the base rate is 33% plus another 15% for the self-employment tax?!?!?! I quickly decided it simply isn't worth it to work that hard just to have to give it away to the Moochers. You can go ahead stick a fork in my ass because I'm done. If that's not Socialism, then I don't know what is. What right do the Moochers have to rob me of my hard-earned profits? Where is my right to keep the fruits of the sweat of my labor and the productive capacities of my mind? Yes, I'm P.O.'d.

Posted by: J | Jan 2, 2009 5:26:18 PM

Good Lord, where do you dig up people like this? I mean the commenters, not their subjects.

Posted by: Pink Pig | Jan 2, 2009 5:26:18 PM

> A guy who was neither named Joe, nor technically a plumber,

Wrong on both counts.

(1) His middle name is Joseph, for which the traditional nickname is "Joe", and it's not at all odd for folks to go by their middle names.

(2) He doesn't have a plumbing license in some Ohio jurisdiction, but others in that area don't require such a license and even that jurisdiction doesn't require licenses of folks who own plumbing biz (as Joe proposed doing).

Also, he's a plumber because that's what he does.

Posted by: Andy Freeman | Jan 3, 2009 4:57:42 AM

J. with a long comment like that, all you are going to get from the snarky mainstreamers like PinkPig, is... well, snark. Besides, your comment addresses a moral question, and this is a tax law blog, more or less -- it's focussed on the legal details of government theft, not its morality.

If you are really bothered by how much money they take from you, consider that some big donations to "these guys" would cut into that tax bite a fair bit right now.. and possibly a lot more in the long run.

Posted by: Seerak | Jan 3, 2009 4:57:42 AM

The guy's name is Joe; he goes by his middle name, as many people do, maybe even some of you. He is a plumber because he does plumbing work. If he had a license, which many skilled tradesmen do not have for various reasons unrelated to their competence, he would not then "technically" be a plumber, he would simply be a plumber who put himself through the bureaucratic bullshit to get a license.

Joe was entirely right to wonder if buying a business would put him in a higher tax bracket as the business grew. Misrepresenting his question makes you look stupid not him. However I noticed that both Obama and Biden ridiculed Joe in front of campaign audiences, misrepresenting him the same way.

Think about that for a minute. Both the candidates for prez and vice prez misunderstand business economics so thoroughly that they cannot describe a tax conundrum accurately, and - more important - they think nothing of making fun of one of their fellow citizens to other fellow citizens in their quest for the office.

Wow. Certainly confirmed my impression of Mr Obama as the arugula-eating snob who sneers at ordinary people who go to church and hunt on the weekends, and who if they were not bitter before, probably are now at the thought that their new president is someone who despises them and is going to bankrupt them. 2010 can not come fast enough for me.

Posted by: Yehudit | Jan 3, 2009 4:57:42 AM

A lot of people are missing the essential complaint made by Joe the Plumber. He isn't worried that he will make over $250,000 from his own physical labors andd sweat, but from his efforts and activities as a business owner. If he gets competent tax advice, he will probably purchase the assets of the existing business, not the corporate stock, and will operate as a LLC, or an S-corp. The net earnings will pass through to him, and be reported on his personal 1040, even if the business must use much of its "profits" to (a) pay down the bank loan he is likely to use to purchase the assets, (b) build up its inventories, (c) carry a larger amount of accounts receivable, (d) purchase new assets to supplement what he purchases from the seller (due to obsolescence) or for expansion, and (e) increase working capital. The cash distributions from the company checking account may barely be enough in a good year to cover these planned uses, and if the economy ever slowed, or crashed (that would never happen with the prosepect of coming total Democratic control of government!), the "profits" will not be sufficient. One of the first lessons learned in a Finance 101 course is to distinguish between profits and cash flow, as many a profitable business has gone under due to cash flow problems in a downturn due to inadequate cash reserves.
I am stunned that lawyers, especially lawyers, don't realize where Joe's profits will come from as a business owner. It will probably come from his employment of employees who will make more for the business than they take out in wages, bonuses, payroll taxes and fringe benefits. After all, isn't this how senior law partners make some of their annual compensation - they exploit the h*** out of their bright junior associates by working them long hours at a high billable hour rate, and pay them 30% to 40% of the gross billing? I wouldn't be suprised if some of the most senior partners at some of the biggest NYC or Washington law firms take home $250,000 or more from their associates and junior partners just from the tiered nature of their partnerships.
In conclusion, there are probably plenty of plumbing company owners across the United States who make more than $250,000 a year in good years, who haven't crawled under a sink in years. We ought not to blame Joe for being an optimist, especially when he knows more about plumbing, business structures, finance and tax planning that some tax professors.

Posted by: Jim | Jan 3, 2009 4:57:42 AM

you guys are awfully hard on Joe. The man had hopes of bettering himself and called Obama on the fact that his proposed tax policy was punitive. If I were he, I too would think long and hard of taking on risk in a redistributionist society such as that contemplated by our president-elect.

Your mocking tone undercuts the credibility of your points.

Posted by: drthom | Jan 3, 2009 4:57:42 AM

Could we please clear up Joe the plumber and his lack of license.

You do NOT have to have a license as a plumber unless you are the Master or the OWNER of the business. All the apprentices and journeymen work under that license. So yes you can be a plumber WITHOUT a license in your name.

In fact most do not have a license. They work for a business THAT DOES have one.

Posted by: mrbill | Jan 3, 2009 4:57:42 AM

Would Joe The Plumber Corp have to pay high corporate tax rates? Are they as high as 40% for small businesses as well as large companies?

Posted by: DaveC | Jan 3, 2009 4:57:42 AM

IIRC, 80% or so of Americans think that the highest tax rate on even the wealthiest earners should be <33%. So Joe was right in the mainstream.

Posted by: JD | Jan 3, 2009 5:44:08 AM

What about Charlie Rangel? Surely the tax-evasions of the Chair of the tax-writing committee of the House of Representatives should make the top ten?

Posted by: Zach | Jan 3, 2009 5:48:53 AM

Why bring up Charlie Rangel when you can mock Joe the Plumber? I'm sure it just slipped their mind. I also liked that out of 3 blurbs on Joe the Plumber, there were zero that had anything positive to say.

Posted by: Joe the 3L | Jan 3, 2009 12:18:32 PM

Dear TaxProf(Mr. Caron):

I am a little shocked that you would have postings by other professors(?) that would get the basic facts of the Joe the Plumber situation so incredibly wrong. Others have posted the correct details, so I won't go into that.

It is just amazing that Ms. Brown, Mr. Cooper, & Mr. Elkins are so ignorant of the issue they chose as the top story. My goodness they sure come across as whiny little elitist snobs. Maybe that is why they are in academia??


Posted by: WJ | Jan 3, 2009 12:18:33 PM

Seerak gets it perfectly. "a tax law blog...focussed on the legal details of government theft, not its morality."

Posted by: Bill Lever | Jan 3, 2009 12:18:33 PM

The snide tone of your colleagues in their comments about Joe the Plumber is staggering. All the more reason why I am glad that those who can, do, and those who can't, teach. I'd hate to work with a bunch of jerks like that.

Posted by: B | Jan 3, 2009 12:18:33 PM