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.

Let's Tax The Rich At 100%

I am a huge fan of Warren Buffett - when it comes to investing. You may remember that he not long ago called for raising the tax rates on the rich and uber-rich, as it was unfair that he paid a lower tax rate than his secretary. Personally I hear that comment as an argument for a flat tax, but he went in a different direction.

He proposed raising taxes on those earning more than $1 million, with yet more taxes for those earning more than $10 million.

That beggars the question: what difference would it make? I could go to the theater every day, but it would not make me a movie star.

The Tax Foundation went to the IRS itself for statistics. They were curious what the result would be if the government confiscated ALL the income of those earning $10 million or more.

Here is the result:

Source: Tax Foundation

All that, and we would reduce the deficit by only 12% and the national debt by 2%? But I suspect that you already knew the answer, didn't you?

Can You Deduct Burning Down Your House?

Can you take a deduction for burning your house to the ground?

You may laugh, but I was reviewing a recent case on this issue. It is the third case involving a home barbeque I can remember over as many years.

The case from 3 years ago was Rolfs v Commissioner. It was – understandably – considered quite outside the box.

Theodore Rolfs and his wife (the Rolfs) owned a house on a 3-acre lakefront property in Wisconsin. The house was modest, built around 1900 and it would be fair to say that it was in need of an upgrade.

The Rolfs wanted to renovate, but the work required was so extensive that tearing down the house and constructing anew was a very viable option.

They estimated it would cost $10,000 to $15,000 to demolish the house and remove the debris.

They went a different path and donated the house to the fire department. There were restrictions on the donation: the fire department was to use the house for training exercises, with the understanding that the training would happen shortly after the donation. The Rolfs donated only the house. They did not donate the land on which the house sat.

The Rolfs needed a value for their donation. They contacted Richard Larkin, president of Larkin Appraisals, Inc. who valued the house at $76,000.

The Rolfs donated the house and took a charitable deduction of $76,000 on their tax return. They attached the appraisal report and a letter from the fire chief thanking them for the donation.

The IRS disallowed the charitable contribution.

The IRS argued that a charitable donor does not expect a financial benefit in exchange for the donation. The Rolfs however expected a substantial benefit: the $10,000 to $15,000 in avoided demolition costs, for example, not to mention the benefit of the tax deduction itself.

The IRS further argued that the restrictions the Rolfs imposed affected the value of any donation. The fire department could only use the house for training purposes, and the house was to be destroyed shortly after the donation.

The Rolfs countered that they had an appraisal for $76,000.  And what was the IRS talking about with “restrictions?” After the fire department did its thing, there was NO house standing. The fire department did not want a house. They wanted a house they could burn to the ground. Whatever “restrictions” the IRS was talking about went up in smoke.

The case went to Tax Court.

In a Solomonic gesture, the Court reasoned that there might be a donation, but the amount of any donation would be the value of the house over the value of any demolition and clean-up services received.

The Court observed that the Rolfs donated the house without its underlying land. This meant that an independent buyer would have to move the house. The house was very old and badly in need of renovation. What would someone pay for this? Not surprisingly, the house was almost worthless.

The house was not worth more than the demolition and removal services received from the fire department. The Court decided there was no donation. The Rolfs lost their case.

But they made the tax literature.

There are variations that might have resulted in a different outcome. For example, what if the house had enough value to make it worth the cost and effort of moving?

There is another way to help tax-subsidize a house demolition, however. Have you heard of “deconstruction?” This involves dismantling the house rather than razing it under a bulldozer. It is more expensive, but with deconstruction more home materials remain in usable condition. The materials are then donated, generating a tax deduction. If the value of the tax deduction exceeds the additional cost of the teardown, one has effectively tax-subsidized his/her demolition costs.

The value of the materials can add up. I was reading an article where the lighting fixtures alone were worth over $100 thousand. Can you imagine?