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Thursday, February 18, 2010

Pilot Deliberately Crashes Into IRS Office Building in Austin, Blames Tax Reform Act of 1986

Andrew Joseph Stack, 53, intentionally flew a small plane into an Austin, Texas building housing IRS offices and posted a seven-page anti-IRS manifesto entitled, Well Mr. Big Brother IRS Man... Take My Pound of Flesh and Sleep Well.

The Tax Foundation notes that the manifesto blames the independent contractor provisions of the Tax Reform Act of 1986:

https://taxprof.typepad.com/taxprof_blog/2010/02/pilot-deliberately.html

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Comments

Did he have any sort of a valid point about the 1986 law? Just curious.

Posted by: Eric Blair | Feb 18, 2010 1:19:55 PM

Gee, and I thought he would have been complaining about the real estate passive loss rules.

[/ducks]

Posted by: Captain Ned | Feb 18, 2010 1:27:26 PM

Could someone explain this law to me? If someone gave his life because of it I would like to at least do him the honor of knowing what upset him so much. It is not clear from what he wrote. The guy was obviously despondent and maybe not entirely sane in other ways but God knows the government, business and chance ruin people every single day. Anything artificial like a law can be fixed it it is really that onerous.

Posted by: curious | Feb 18, 2010 3:41:32 PM

Yes, he had a valid point. Engineers and allied professions hired as temp workers have to find "contract houses" to serve as intermediaries so corporations can treat them as "leased employees". These contract houses typically rake off 30 to 50 percent of the rate in exchange for paying the FICA taxes. Many corporations will not hire temps except through these contract operations because of a fear of retroactive penalties.

His anger was misdirected, though. The IRS is simply enforcing the law.

Posted by: Doug | Feb 18, 2010 4:42:40 PM

Here's the explanation. Let's say you are a company and you need to hire a temp programmer for 8 months. In practice, you won't just hire them directly using a 1099 because, if they choose, they can later claim they were "really" permanent employees (due to this law) and sock you for the FICA. So you insist they go through a "contract house", which insulates you by making them "leased employees". The temp programmer loses about 35 to 50 percent of his/her income to the "contract house". The contract house pays the FICA out of that, and keeps the remaining 25 to 40 percent as profit. (For the programmer, good luck finding one that doesn't take more than that.)

For an engineer or programmer this is a LOT of money -- enough to cover a lot of unemployment.

I have no idea why he thinks the IRS is responsible for this, it's the law.

Posted by: Doug | Feb 18, 2010 4:48:54 PM

If its what I think it then is it is Title 1702 or something like that. Basically the Brokers lobby group paid a congessman in 1986 (cannot remember the guys name) to put a provision in the tax reform bill that would make it illegal for companies to employee IC's except through brokers. There was some huffing and puffing for a few years but after that it was basically ignored by everyone in the buisness. I know it has not come up in a conversation with a potential client here in Cal in more than 20 years.

The law is still on the books so it gives the IRS a lot of leverage to screw around with IC's if there is a disputed tax return and the IRS can cause no end trouble for the IC if they want to.


Posted by: jmc | Feb 18, 2010 5:29:14 PM

I think the law just make it illegal to assign ICs from one firm to another. You can be an IC for a client and if you follow the law you should be okay.

One alternative solution is to incorporate and have your client subcontract to your corporation. You can be a contractor to your coroporation, with respect to items which can be specified in a statement of work. If necessary, you can place corporate stock into a foreign trust.

Posted by: Dan Lavatan | Feb 18, 2010 8:40:21 PM

So why is an engineer or programmer who sub-contracts any different than a roofer etc...? Is it because a lot of the building trades deal in cash or did the lawmakers just single out technical professionals to appease a special interest?

I hate to say it but it seems like the guy had a very valid point. My degree was in electrical engineering and though I moved on to owning a business in another field fairly shortly after starting practice I never heard of this law and would have been massively PO'd to find out about it. Not plane flying into a building mad but I certainly know extortion when I see it. This is pretty shocking.

Posted by: George | Feb 19, 2010 7:03:15 AM

Some contract houses do not allow ICs to be incorporated and will fire them if they find out about it after the fact, or the company leasing the employee from the IC house may not allow the contractor to be incorporated. This happened to a co-worker of mine. He was fired with ZERO notice.

Contractors I worked with all called their IC houses "pimps" for very obvious reasons. I've never met an IC who did not fully despise his or her pimp. Knowing this law was a factor, I'm surprised this guy didn't take out more people. There is a huge amount of anger and outrage bubbling in the employed and unemployed or underemployed populace. (Of course most software engineers are disgruntled to begin with, in my experience.)

Companies like IBM ditching thousands of regular employees at once (who then have no recourse, if they want to stay in IT, to joining a pimp and working for less than half their IBM salary (now hourly wages, with IC houses) are exacerbating the situation and the hostile environment. I know; I'm one of them.

Posted by: Peg C. | Feb 19, 2010 7:13:09 AM

The H1B is part of this - young Indian engineers are sponsored into the US by MBE's (Minority Business Enterprises), set up and owned by recently naturalized senior Indians. They live in communal apartments, carpool by taxi to and from work, and work basically as indentured servants for peanuts, putting in 12 to 20 hour days as required under threat of return to India. This really destroyed the ability for the average American Joe or Jill Engineer to compete - they have either become management/procurers of slaves, or have been burned out of the IT industry. As a 53 year old white American with a 33 year resume in EE/SE/IT, who did not go into management, I can no longer get hired. Title 1706 of the 1986 Tax reform was the blood guarantee that put the pimps in business, and ensured a steady flow of young slaves for the IT mills.

Posted by: Jeff Charles | Feb 19, 2010 11:15:37 AM

My understanding is that if you are working at full-time at a company's offices and at its direction, you are an employee. I understand why you might want to be paid directly as a 1099 consultant, but you're not, so software companies aren't going to take the risk and do it that way. Hence leasing the employees from another actual employer that pays FICA. And this is not in any way specific to software development, except that programmers had a special exemption from this treatment until 1986, and I'm sure it was nice while it lasted. The only real fix would seem to be to convince software companies to bring programmers on as actual fully-loaded employees for the 6 or 8 months that they are needed.

Posted by: Matt M. | Feb 19, 2010 11:46:55 AM

"The temp programmer loses about 35 to 50 percent of his/her income to the "contract house". The contract house pays the FICA out of that, and keeps the remaining 25 to 40 percent as profit. (For the programmer, good luck finding one that doesn't take more than that.) "

I've worked with several contract houses, and the relationship is a little more complex than the middle-man extortion listed above.
In addition to paying FICA, these contract houses tend to also offer the following:
1) Placement - you go to them without knowing where you will work, and they'll find a company to hire you. Or, they are actively recruting for the employer, and seek you out based on your online resume posting (like on monster.com)
2) Benefits - they offer health and 401K (even with matching), but typically not paid vacation or sick time since you are hourly
3) Guarenteed payment - one problem with being a 1099 worker is that you are trusting the software company to pay you when you invoice them, which they are not always good at doing. The contract house automatically gives you direct deposit every two weeks.

So it is value-added. But there are two valid complaints:
1) The Tax Reform Act of 1986 forces us to have this middleman, even in cases when both the company and the contractor would rather not use the middleman.
2) The amount of money the middleman takes may be significantly more than the value they add.

#1 is a very valid point, and the law should be repealed because of it.
#2 is a matter of negotiation. The middlemen (we called them headhunters, you guys have been calling them contract houses, they call themselves consulting companies) can be squeezed if the employer and contract coordinate their negotiations, and you can reach a point where the relationship is fair. But this often doesn't happen, especially with contractors not familiar with the process.

-Matthew

Posted by: Matthew in Austin | Feb 19, 2010 12:20:58 PM

So it is value-added. But there are two valid complaints:
1) The Tax Reform Act of 1986 forces us to have this middleman, even in cases when both the company and the contractor would rather not use the middleman.
2) The amount of money the middleman takes may be significantly more than the value they add.

#1 is a very valid point, and the law should be repealed because of it.

When the company and the contractor would rather not use the middleman, they are not in fact forced to. They just have to treat the the "contractor" who works full-time at the company's offices as what he in fact is, an employee of the company. This is equally true of any other type of consultant who takes a full-time position working for a firm. What is so special about programmers that this solution does not work for them?

Posted by: Matt M. | Feb 19, 2010 12:53:12 PM

Matthew, I have worked for at least 6 different contract houses and only two of them offered a (questionable) group health insurance plan, which contractors themselves had to pay the premiums on. I've never encountered any of the value-add examples you listed except for direct deposit, so I think it's dangerous to say they all "tend to offer" this stuff. Don't count on it.

Maybe it's different in Texas, but I speak for Michigan and Utah.

Posted by: Programmer | Feb 19, 2010 1:39:56 PM

Any temp house will do that. They take a big cut of your pay right off the top.

Posted by: Doc Merlin | Feb 19, 2010 4:28:01 PM

All of the commenters here seem to miss the fact that a 1099 contractor can deduct all business expenses, which he cannot easily do as an employee.

These include all home-away-from-home, travel, computer hardware & software expenses. This can easily amount to a tax savings of $20,000 per year. Furthermore, many contractors earn so much more (some 50% more) than a captive employee that they, like me, can justify working only 6 months a year. Working short term effectively disqualifies the contractor from unemployment compensation, participation in 401Ks and other "benefits." So why should 3% for "unemployment" insurance be taken out of such a contractor's wage who works 6 months on a W-2. What I always needed was "employment" insurance that paid me if I were unlucky enough to land a 1-year contract.

Kudos to the Austin pilot. He has shown more timid souls the Sam Adams, John Brown and von Stauffenberg way to resolve problems with the oppressor. And it's no excuse that it is the Tax Code, not the IRS, who is responsible for the misery. Any Auschwitz intern was justified in killing any of his keepers. No excuse allowed by the sucker that it was Hitler, not he, who was responsible.

Goering, Goebbels, Himmler, et. al. already tried that argument and lost. Dick Cheney and Henry Kissinger will face the music if they ever venture overseas.

Posted by: jimbino | Feb 20, 2010 1:06:40 PM

By the way, I see a business opportunity arising out of our Austin hero's frustration. Why don't a bunch of disgruntled IT professionals get together and incorporate a cooperative venture that would offer conditions to their liking?

Posted by: jimbino | Feb 20, 2010 1:10:22 PM