The Skip Tax - Part Two

 

How does one work with the skip?

In my experience, the skip is usually the realm of the tax attorneys, although that is not to say the tax CPA does not have a role. The reason is that most skips involve trusts, and trusts are legal documents. CPAs cannot create legal documents. However, let that trust age a few decades, and it is possible that the next set of eyes to notice a technical termination or taxable distribution will be the CPA.

Let’s pause for a moment and talk about the annual exclusion and lifetime exemption.

The gift tax has an annual exclusion of $18,000 per donee per year. There is also a (combined gift and estate tax) lifetime exemption of $13.6 million per person. If you gift more than $18 grand to someone, you start carving into that $13.6 million lifetime exemption.

The skip tax has the same exclusion and exemption limits as the gift tax.

The problem is that a gift and a skip may not happen at the same time.

Let’s take two examples.

(1)  A direct skip

That is the proverbial gift to the grandchild. Let’s say that it well over $18 grand, so you must file a return with the IRS.

You gift her a $100 grand.

The gift is complete, so you file Form 709 (the gift tax return) with your individual tax return next year.

The transfer immediately dropped at least two generations, so the skip is complete. You complete the additional sections in Form 709 relating to skips. You claim the annual exclusion of $18 grand, and you apply some of the $13.6 million exemption to cover the remaining $82 grand.

Done. Directs skips are easy.

(2)  An indirect skip

Indirects are another way of saying trusts.

Remember we discussed that there is a scenario (the taxable termination) where the trust itself is responsible for the skip tax. However, there is no skip tax until the exemption is exhausted. The skip may not occur for years, even decades, down the road. How is one to know if any exemption remains?

Enter something called the “inclusion ratio.”

Let’s use an example.

(1)  You fund a trust with $16 million, and you have $4 million of (skip) lifetime exemption remaining. 

(2)  The skip calculates a ratio for this trust.

4 divided by 16 is 25%.

Seems to me that you have inoculated 25% of that trust against GST tax.

(3)  Let’s calculate another ratio.

1 minus 25% is 75%.

This is called the inclusion ratio.

It tells you how much of that trust will be exposed to the skip tax someday.

(4)  Calculate the tax. 

Let’s say that the there is a taxable termination when the trust is worth $20 million.

$20 million times 75% equals $15 million.

$15 million is exposed to the skip tax.

Let’s say the skip tax rate is 40% for the year the taxable termination occurs.

The skip tax is $6 million.

That trust is permanently tainted by that inclusion ratio.

Now, in practice this is unlikely to happen. The attorney or CPA would instead create two trusts: one for $4 million and another for $11 million. The $4 million trust would be allocated the entire remaining $4 million exemption. The ratio for this trust would be as follows:

                       4 divided by 4 equals 1

                       1 minus 1 equals -0-.

                       The inclusion ratio is zero.

                       This trust will never have skip tax.

What about the second trust with $11 million?

You have no remaining lifetime exemption.

The second trust will have an inclusion ratio of one.

There will be skip tax on 100% of something in the future.

Expensive?

Yep, but what are you going to do?

In practice, these are sometimes called Exempt and Nonexempt trusts, for the obvious reason.

Reflecting, you will see that a direct skip does not have an equivalent to the “inclusion ratio.” The direct skip is easier to work with.

A significant issue involved with allocating is missing the issue and not allocating at all.

Does it happen?

Yes, and a lot. In fact, it happens often enough that the Code has default allocations, so that one does not automatically wind up having trusts with inclusion ratios of one.

But the default may not be what you intended. Say you have $5 million in lifetime exemption remaining. You simultaneously create two trusts, each for $5 million. What is that default going to do? Will it allocate the $5 million across both trusts, meaning that both trusts have an inclusion ratio of 50%? That is probably not what you intended. It is much more likely that you intend to allocate to only one trust, giving it an inclusion ratio of zero.

There is another potential problem.

The default does not allocate until it sees a “GST trust.”

What is a GST trust?

It is a trust that can have a skip with respect to the transferor unless one or more of six exceptions apply.

OK, exceptions like what?

Exception #1 – “25/46” exception. The trust instrument provides that more than twenty-five percent (25%) of the trust principal must be distributed (or may be withdrawn) by one or more persons who are non-skip persons before that individual reaches age forty-six (46) (or by a date that will occur or under other circumstances that are likely to occur before that individual reaches age forty-six (46)) (IRC §2632(c)(3)(B)(i)).”

Here is another:

Exception #2 – “25/10” exception. The trust instrument provides that more than twenty-five percent (25%) of the trust principal must be distributed (or may be withdrawn) by one or more persons who are non-skip persons and who are living on the date of the death of another person identified in the instrument who is more than ten (10) years older than such individual (IRC §2632(c)(3)(B)(ii)).”

Folks, this is hard terrain to navigate. Get it wrong and the Code does not automatically allocate any exemption until … well, who knows when?

Fortunately, the Code does allow you to override the default and hard allocate the exemption. You must remember to do so, of course.

There is another potential problem, and this one is abstruse.

One must be the “transferor” to allocate the exemption.

So what, you say? It makes sense that my neighbor cannot allocate my exemption.

There are ways in trust planning to change the “transferor.”

You want an example?

You set up a dynasty trust for your child and grandchildren. You give your child a testamentary general power of appointment over trust assets.

A general power of appointment means that the child can redirect the assets to anyone he/she wishes.

Here is a question: who is the ultimate transferor of trust assets – you or your child?

It is your child, as he/she has last control.

You create and fund the trust. You file a gift tax return. You hard allocate the skip exemption. You are feeling pretty good about your estate planning.

But you have allocated skip exemption to a trust for which you are not the “transferor.” Your child is the transferor. The allocation fizzles.

Can you imagine being the attorney, CPA, or trustee decades later when your child dies and discovering this? That is a tough day at the office.

I will add one more comment about working in this area: you would be surprised how legal documents and tax returns disappear over the years. People move. Documents are misplaced or inadvertently thrown out. The attorney has long since retired. The law firm itself may no longer exist or has been acquired by another firm. There is a good chance that your present attorney or CPA has no idea how – or if – anything was allocated many years ago. Granted, that is not a concern for average folks who will never approach the $13.6 million threshold for the skip, but it could be a valid concern for someone who hires the attorney or CPA in the first place. Or if Congress dramatically lowers the exemption amount in their relentless chase for the last quarter or dollar rolling free in the economy.

With that, let’s conclude our talk about skipping.

 

Spotting The Skip Tax - Part One

I was reviewing something this week we may not have discussed before. Mind you, there is a reason we haven’t: it is a high-rent problem, not easy to understand or likely to ever apply to us normals. If you work or advise in this area (as attorney, CPA, trustee or so on), however, it can wreck you if you miss it.

Let’s talk a bit about the generation skipping tax. It sometimes abbreviated “GST,” and I generally refer to it as the “skip.”

Why does this thing even exist?

It has to do with gift and estate taxes.

You know the gift tax: you are allowed to make annual gifts up to a certain amount per donee before having to report the gifts to the IRS. Even then, you are spotted an allowance for lifetime gifts. While there may be paperwork, you do not actually pay gift tax until you exhaust that lifetime allowance.

You know the estate tax: die with enough assets and you may have a death tax. Once again, there is an allowance, and no tax is due until you exceed that allowance. The 2024 lifetime exemption is $13.6 million per person, so you can be wealthy and still avoid this tax.

As I said, we are discussing high-end tax problems.

Then there is the third in this group of taxes: the generation skipping tax. It is there as a backstop. Without it, gift and estate taxes would lose a significant amount of their bite.

Why Does the Skip Exist?

Let go through an example.

When does the estate tax apply (setting aside that super-high lifetime exemption for this discussion)?

It applies when (a) someone with a certain level of assets (b) dies.

How would a planner work with this?

Here is an idea: what if one transfers assets to something that itself cannot die? Without a second death, the estate tax is not triggered again.

What cannot die, without going all Lovecraftian?

How about a corporation?

Or – more likely – a trust?

When Does The Skip Apply?

It applies when someone transfers assets to a skip person.

Let’s keep this understandable and not go through every exception or exception to the exception.

A skip person is someone two or more generations below the transferor.

          EXAMPLE:

·       A transfer to my kid would not be a skip.

·       A transfer to my grandchild would be a skip.

What Constitutes a Transfer?

There are two main types:

·       I simply transfer assets to my grandchild. Perhaps she finishes her medical degree, and I buy and deed her first house.

·       I transfer assets through a trust.

The first type is called a direct skip. Those are relatively easy to spot, trigger the skip immediately and require a tax filing.

You already know the form on which the skip is reported: the gift tax return itself (Form 709). The form has additional sections when the skip tax applies.

          EXAMPLE:

·       I give my son a hundred grand. This is over the annual dollar limit, so a gift tax return is required. My son is not a skip person, so I need not concern myself with the skip tax sections of Form 709.

·       I give my grandson a hundred grand. This is over the annual limit, so a gift tax return is required. My grandson is also a skip person, so I need to complete the skip tax sections of Form 709.

What Is the Second Type of Transfer?

Use a trust.

Here is an example:

• Create a trust in a state that has relaxed its rule against perpetuities (RAP).

a.     This rule comes from English common law, and its intent was to limit how long a person can control the ownership and transfer of property after his/her death.

• Fund the trust at the settlor’s death.

a.     If that someone is Jeff Bezos or Elon Musk, there could be some serious money involved here.

•   The settlor’s children receive distributions from the trust. When they die, the settlor’s grandchildren take their place.

• When the grandchildren die, the great grandchildren take their place, and so on.

What we described above BTW is a dynasty trust.

The key here is - before the skip tax entered the Code in the 1970s - the then-existing gift and estate tax rules would NOT pull that trust back onto anyone’s estate return for another round of taxation.

Congress was not amused.

And you can see why a skip is defined as two generations below the transferor. Congress wanted a bite into that apple every generation, if possible.

How Does Skipping Through A Trust Work?

There are two main ways: 

EXAMPLE ONE: Say the trust has a mix of skip and nonskip beneficiaries, say children (nonskip) and grandchildren (skip). The IRS chills, because the trust might yet be includable in the taxable estate of a nonskip person. Say the last nonskip person dies (leaving only skips as beneficiaries) AND nothing is includable in an estate return somewhere. Yeah, no: this will trigger the skip tax. To make things confusing, the skip refers to this as a “termination,” even though nothing has actually terminated.   

EXAMPLE TWO: The trust again has a mix of skip and nonskip beneficiaries. This just like the preceding, except we will not kill-off the nonskip beneficiary. Instead, the trust simply distributes to a skip or skips (say the grandchildren or great-grandchildren). This triggers the skip tax and is easier to identify and understand.

If Skipping Through A Trust, When Is the Tax Due?

Look at Example One above. This could be years – or decades – after the creation of the trust.  

The trustee is supposed to recognize that there has been a skip “termination” of the trust. The trustee would file the (Form 709) tax return, and the trust would pay the skip tax.

And – yes – in the real world it is a problem. What if the trustee (or attorney or CPA) misses the termination as a taxable event?

Malpractice, that’s what. An insurance company will probably be involved.

What About Example Two?

This is a backstop to the first type of transfer. In the second type there is still a nonskip beneficiary, meaning that the trust has not “terminated” for skip purposes. The trust distributes, but the distribution goes to a skip.

Say the trust distributes a 1965 Shelby Mustang GT350 R.

First, nice.

Second, the skip tax is paid by the beneficiary receiving the distribution. The trust does not pay this one.

Third, the trustee may want to warn the beneficiary that he/she owes skip tax on a car worth at least $3.5 million.

Fourth, realistically the trust is going to pay, whether upfront or as a reimbursement to the beneficiary. The tax paid is itself subject to the skip tax if it comes out of the trust.

How Much Is the Skip Tax?

Right now, it is 40 percent.

It changes with changes to the gift and estate tax rates.

That 1965 Shelby GT 350R comes with a skip tax of at least $1.4 million. It takes a lot of green to ride mean.

How Do You Plan for This Tax?

The skip is very much a function of using trusts in estate planning.

Trust taxation can be oddball on its own.

Introduce skip tax and you can go near hallucinatory.

This is a good spot for us to break.

We will return next post to continue our skip talk.

Nigerian Oil And IRS Termination Assessment

I am reading a 34-page case that starts with the following:

During the first quarter of 2015 petitioner received about $750,000 from entities allegedly seeking to purchase Nigerian crude oil. Shortly thereafter he attempted to wire $300,000 to a foreign bank. The U.S. Secret Service flagged the transaction and alerted the Internal Revenue Service.  Believing that petitioner intended ‘quickly to depart from the United States or to remove his property therefrom,’ the IRS made a termination assessment under Section 6851(a).

I have never seen a termination assessment in practice.

It has to do with IRS Collections, and one does not just stumble into this. The IRS discovers (or is otherwise led to believe) that one has concealed assets with no intention of informing the IRS.

COMMENT: BTW a taxpayer has probably crossed the line from civil to criminal here. He/she should see a tax attorney, as matters are going south very soon.  

If dealing with a tax year for which the filing date has passed (for example, your 2018 tax year) then the collection is referred to as a jeopardy assessment.

If dealing with one’s current tax year, then it is a termination assessment. The IRS just closes your tax year (irrespective of what month or day it is), fast-forwards the notice periods and goes after your assets.  Think drug trafficking, for example, and you get the idea.

The other thing that would trigger a termination assessment is suspicion that one is going to flee the country.

Our protagonist is named Ugori Timothy Wilson Onyeani. Nope, I cannot explain how that collection of names came together, but let’s hereafter refer to him as UTWO.

UTWO was born in Nigeria. He moved to the U.K. to practice medicine. There was misconduct and his medical license was revoked. He came to the U.S. and got an MBA from DeVry University.

In the same year as he graduated from DeVry, he incorporated American Hope Petroleum & Energy Corp (AHPE). Mind you, there were no Board of Directors, employees, records, meetings, operations or the glimmer of any.

What it did have was a website.

 COMMENT: You see this coming, don’t you?

UTWO presented AHPE as an “independent crude oil purchasing and selling expert,” alleging it had “a team of experts” and was “securely invested in crude purchasing.”

COMMENT: Did I mention that UTWO had zero background in oil and gas? One would think his father was a politician.

He represented that he was brokering the sale of crude oil owned by the Nigerian National Petroleum Corporation (NNPC).

Mind you, the NNPC had no idea who he was, but let us not interrupt UTWO’s story.

A couple of companies stepped-up and wanted to buy oil from AHPE. There are deposits for such things, so the two advanced $744,895.

COMMENT: Born every minute, it seems.

On or around March 3, 2015 UTWO attempted to wire $300 grand to London. His bank flagged the transaction and starting investigating. He responded by opening accounts at another bank, one in his name and one in AHPE’s name.

UTWO was scrupulous about handling company funds, though, using them for clearly business purposes such as trips to Sea World, purchases from Victoria’s Secret, trips to aquariums and flooring for his house.

Eventually the second bank also got spooked about AHPE/UTWO’s activities and froze his accounts.

The Secret Service informed the IRS, who came in with an audit. They found deposits over $800 grand (income as far as the IRS was concerned), no business expenses and a tax bill of $289,043.

The bank remitted the $289 grand to the IRS. The bank was no fool.

Then came a twist:  AHPE/UTWO returned $400 grand of advance deposits in a private settlement.

All the above took place in the same year - 2015. 

In 2016 UTWO and his wife filed their joint individual income tax return. The return reported his wife’s income of $41,893 and that was about it.

The IRS had a meltdown. It had found $800 grand, and UTWO was reporting none of it. The IRS wanted tax of $273,407, a fraud penalty of $205,055 and a slushee machine.

COMMENT: The fraud penalty is 75%. Never, ever go there.

Off they went to Tax Court.

Let’s go through the numbers again. The IRS found approximately $800 grand. AHPE/UTWO returned $400 grand of it. This leaves $400 grand. The IRS levied a tax payment of $289 grand, representing a tax rate of over 70%.

What about the fraud penalty of $205 grand, asked the IRS.

Where is the evasion - a badge of fraud - asked the Court.

The IRS answered: the fraud occurred when he filed a personal return leaving out the $800 grand.

Disagree, answered the Court. UTWO was preserving the position he was arguing in Court, i.e., that the IRS assessment was improper. It would have been legal suicide for him to report otherwise.

And the funds were held in IRS escrow, pointed out the Court. At that point evasion of tax was impossible.

The Court determined that no penalties were appropriate.

And UTWO got out of this as well as possible.

The key?

That he received $800 grand and repaid $400 grand in the same year. As a cash-basis taxpayer, he could not deduct that $400 grand until he paid it. He paid it in the same year as he received the $800 grand, so he could net the two.

I suspect he will get a refund.

IRA or 401(k): Which Is Better If You Get Fired?

Name me a major difference between an IRA and a 401(k).

I will give you the setup.

After 17 years in the construction industry, Mr C lost his job in 2010. He was unemployed for the next year and a half.

Mrs C was also going through a difficult stretch and lost her job. She was eventually reemployed, but at approximately half of her former salary.

Both Mr and Mrs C were age 56.

He depleted his savings. They then turned to the retirement accounts. You know why: they were trying to survive.

Mrs C took out approximately $4,000 from her retirement.

Mr C told his insurance agent to withhold taxes when he took distributions, as he did not want any surprises come tax time. He took monies out at different times, in different amounts and from different accounts. To add to the confusion, he was also sending money back to the insurance agent, presumably to settle-up on the income taxes withheld on the distributions.

All in all, he took out approximately $28,000.

Mr and Mrs C later received 1099s for approximately $17 thousand, which they reported on their tax return.

Question: what happened to the other $11,000 ($28 - $17)?

Who knows.

Unfortunately, the actual distributions taken from the retirement accounts were closer to $32,000.

Real … bad … accounting … happening … here.

But let’s be chivalrous: Mr and Mrs C did not receive all the 1099s. It happens.

The IRS – of course – did receive all the 1099s. They probably also have all the socks that go missing in clothes dryers, too.

And the IRS wanted tax on the $15,000 that Mr and Mrs C did not report.

No surprise.

And 10% penalties.

Must be that “early” distribution thing.

And more penalties on top of that, because that is the way the IRS rolls these days.

Not OK.

Mr and Mrs C represented themselves (“pro se”) at the Tax Court.

And I love their argument:

They had dutifully paid their taxes for more than 30 years without fault or complaint. Could the Court find it in its heart … you know, this one time?

The Court could not grant their argument, as you probably guessed. Thirty years of safe driving doesn’t mean you can go on a society-threatening tear one sodden Saturday night. It just doesn’t work that way.

The Court decided they owed the tax. They also owed the 10% penalty for early distribution.

What they didn’t owe was another IRS penalty on top of that. The Court found that they did the best they could and genuinely believed that the broker was using the monies Mr C forwarded to cover withholding taxes. They were as surprised as anyone when that wasn’t the case. It created a tax hole they could not climb out of, at least not easily.

Here is my question to you:

Did they take monies from their 401(k)s or from their IRAs?

Whatchu think?

I am thinking their IRAs.

Why?

An early distribution from an IRA is defined as age 59 ½. Unless there is an exception (you know, like, you died), you are going to get tagged with that 10% penalty.

On the other hand, the age test for a 401(k) is 55.

The Cs got tagged, thus I am thinking IRA.

To be fair, there is more to this exception. Here are some technicals:

•    It applies only to company sponsored plans, like 401(k)s.
•    It applies only to a plan sponsored by the company that let you go. That 401(k) at a former employer doesn’t qualify.

And here is the biggie:

·       You have to withdraw the money in the same year you are let go. You cannot stagger this over a period of years.

Why that last one?

Seems harsh to me. Isn’t it bad enough to be fired? Why not make it the year of discharge and the year following? Is Congress concerned that getting fired will become the next great tax shelter? How about lifetime pensions for 30+year tax CPAs?

Thought I would slip-in that last one.

Mr and Mrs C were age 56. Old enough for 401(k) relief, but too young for IRA relief.

BTW, if you need money over several years, there may be a way around the “you have to withdraw the money in the year you were let go” requirement.

How?

Roll your 401(k) money into an IRA.

Then start “substantially equal periodic payments” from the IRA. This has its own shortcomings, but it is an option.

And you can withdraw over more than one year without triggering a penalty.

Problem is: you have to withdraw over a minimum number of years and the annual payouts can vary only so much. It is of little help if you need money, lots of it and right now.

I do not believe we have spoken of “substantially equal” payments on this blog before. There is a reason: that is dry country and likely to send both of us into a coma. Let me see if I can find a case that is even remotely interesting. 

How Choosing The Correct Court Made The Difference

I am looking at a District Court case worth discussing, if only for the refresher on how to select a court of venue. Let’s set it up.

ABC Beverage Corporation (ABC) makes and distributes soft drinks and non-alcoholic beverages for the Dr Pepper Snapple Group Inc. Through a subsidiary it acquired a company in Missouri. Shortly afterwards it determined that the lease it acquired was noneconomic. An appraisal determined that the fair market rent for the facility was approximately $356,000 per year, but the lease required annual rent of $1.1 million. The lease had an unexpired term of 40 years, so the total dollars under discussion were considerable.

The first thing you may wonder is why the lease could be so disadvantageous. There are any number of reasons. If one is distributing a high-weight low-value product (such as soft drinks), proximity to customers could be paramount. If one owns a franchise territory, one may be willing to pay a premium for the right road access. Perhaps one’s needs are so specific that the decision process compares the lease cost to the replacement cost of building a facility, which in turn may be even more expensive. There are multiple ways to get into this situation.

ABC obtained three appraisals, each of which valued the property without the lease at $2.75 million. With the lease the property was worth considerably more.

NOTE: Worth more to the landlord, of course. 

ABC approached the landlord and offered to buy the facility for $9 million. The landlord wanted $14.8 million. Eventually they agreed on $11 million. ABC capitalized the property at $2.75 million and deducted the $6.25 million difference.

How? ABC was looking at the Cleveland Allerton Hotel decision, a Sixth Circuit decision from 1948. In that case, a hotel operator had a disastrous lease, which it bought out. The IRS argued that that the entire buyout price should be capitalized and depreciated. The Circuit Court decided that only the fair market value of the property could be capitalized, and the rest could be deducted immediately. Since 1948, other courts have decided differently, including the Tax Court. One of the advantages of taking a case to Tax Court is that one does not have to pay the tax and then sue for refund. A Tax Court filing suspends the IRS’ ability to collect. The Tax Court is therefore the preferred venue for many if not most tax cases.

However and unfortunately for ABC, the Tax Court had decided opposite of Cleveland Allerton (CA), so there was virtually no point in taking the case there. ABC was in Michigan, which is in the Sixth Circuit. CA had been decided in the Sixth Circuit. To get the case into the District Court (and thus the Circuit), ABC would have to pay the tax and sue for refund. It did so.

The IRS came out with guns blazing. It pointed to Code Section 167(c)(2), which reads:

            (2) Special rule for property subject to lease

If any property is acquired subject to a lease—

(A) no portion of the adjusted basis shall be allocated to the leasehold interest, and

(B) the entire adjusted basis shall be taken into account in determining the depreciation deduction (if any) with respect to the property subject to the lease.

The IRS argued that the Section meant what it said, and that ABC had to capitalize the entire buyout, not just the fair market value.  It trotted out several cases, including Millinery Center and Woodward v Commissioner. It argued that the CA decision had been modified – to the point of reversal – over time. CA was no longer good precedent.

The IRS had a second argument: Section 167(c)(2) entered the tax Code after CA, with the presumption that it was addressing – and overturning – the CA decision.

The Circuit Court took a look at the cases. In Millinery Center, the Second Circuit refused to allow a deduction for the excess over fair market value. The Sixth Circuit pointed out that the Second Circuit had decided that way because the taxpayer had failed its responsibility of proving that the lease was burdensome. In other words, the taxpayer had not gotten to the evidentiary point where ABC was.

In Woodward the IRS argued that professional fees pursuant to a stockholder buyout had to be capitalized, as the underlying transaction was capital in nature. Any ancillary costs to the transaction (such as attorneys and accountants) likewise had to be capitalized. The Sixth Circuit pointed out the obvious: ABC was not deducting ancillary costs. ABC was deducting the transaction itself, so Woodward did not come into play.

The Court then looked at Section 167(c)(2) – “if property is acquired subject to a lease.” That wording is key, and the question is: when do you look at the property? If the Court looked before ABC bought out the lease, then the property was subject to a lease. If it looked after, then the property was not. The IRS of course argued that the correct time to look was before. The Court agreed that the wording was ambiguous.

The Court reasoned that a third party purchaser looking to acquire a building with an extant lease is different from a lessee purchaser. The third party acquires a building with an income stream – two distinct assets - whereas the lessee purchaser is paying to eliminate a liability – the lease. Had the lessee left the property and bought-out the lease, the buy-out would be deductible.

The Court decided that the time to look was after. There was no lease, as ABC at that point had unified its fee simple interest. Section 167(c)(2) did not apply, and ABC could deduct the $6.25 million. The Court decided that its CA decision from 1948 was still precedent, at least in the Sixth Circuit.

ABC won the case, and kudos to its attorneys. Their decision to take the case to District Court rather than Tax Court made the case appealable to the Sixth Circuit, which venue made all the difference.

Killing Off The Tax Code

It will never happen.

Two months ago, Rep Bob Goodlatte (R, VA) sponsored H.R. 352, the “Tax Code Termination Act.” Since then approximately 70 additional Representatives have jumped onboard.

What does the bill propose to do?

Starting in 2018, the bill would eliminate individual, corporate, partnership and estate taxes. Payroll taxes and self-employment taxes would survive.

Congress would have until July 4, 2017 to propose and enact a new tax system to replace the current.

What is the purpose? Here is Representative Goodlatte’s explanation:

It has become abundantly clear that the tax code is no longer working in a fair manner for our nation’s citizens. Many Americans look at the dim state of our economy, and the billions of their tax dollars that are being given to private businesses and they want to know why they cannot keep more of their hard earned tax dollars. The tax code Americans are forced to comply with is unfair, discourages savings and investment, and is impossibly complex. It has become too clear that the current code is broken beyond repair and cannot be fixed, so we must start over.”  

He is not so much proposing the permanent abolition of the tax system as proposing a drop-dead date for its replacement. Why?

Although many questions remain about the best way to reform our tax system, I am certain that if Congress is forced to address the issue we can create a tax code that is simpler, fairer, and better for our economy that the one we are forced to comply with today.”

Congress won’t reach a consensus on such a contentious issue unless it is forced to do so.”

The bill is skeletal, and it does have an odd provision requiring a future Congress to meet a two-thirds majority to delay or repeal the bill.

Predictably, the very act of sponsorship has pushed the usual political suspects into a jeremiad, prophesying the end of the world as we know it.

Still, I can understand Rep Goodlatte’s premise: without prodding, the sinecured political class will not reform the tax system. Why would they? The tax code is just one more weapon they can and do wield to augment and retain power.