Steven J. Willis
(c) Steven J. Willis 1997
All rights reserved.
Each of the following examples are real provisions from Forms, statutes, regulations, or other tax authorities. In each case, someone was paid to write these words.
1. Schedule J for Form 1118.
The title to this form, which must be important to someone, reads:
Separate Limitation Loss Allocations and Other Adjustments Necessary to Determine Numerators of Limitation Fractions, Year-End Recharacterization Balances, and Overall Foreign Loss Account Balances
According to IRS estimates, recordkeeping for this form should take approximately 89 hours and 15 minutes, learning about the form should take 1 hour and 5 minutes, and preparing the form should take 2 hours and 15 minutes.
Heck, it took me that long to read the title.
If you don't believe me, click here to see it:
2. Section 509(a).
The flush language to this important section, which defines private foundations, reads:
For purposes of paragraph (3), an organization described in paragraph (2) shall be deemed to include an organization described in section 501(c)(4), (5), or (6) which would be described in paragraph (2) if it were an organization described in section 501(c)(3).
President Reagan included this sentence in his speeches as as example of the Code being undecipherable. During his and subsequent administrations, we've seen 121 tax bills pass Congress. At least a dozen involved "simplification." However, the above sentence remains.
I guess they spent their time on the really complicated stuff.
3. Section 168(i)(2)(B).
This depreciation section limits deductions for "computers and peripheral equipment." Understandably, it must define the term.
Somebody got paid to write the definition. I wonder how long it took.
(B) COMPUTER OR PERIPHERAL EQUIPMENT DEFINED. -- For purposes of this paragraph--
(i) IN GENERAL. -- The term "computer or peripheral equipment" means--
(I) any computer, and
(II) any related peripheral equipment.
By the way, what does the term mean for purposes of other paragraphs?
4. Mother-in-law rule.
Frequently in tax law, the behavior of one person affects the tax consequences of family members. we are our "brother's keepers" so to speak.
For purposes of section 4946 - dealing with private foundations - a person's family includes:
his spouse, ancestors, children, grandchildren, great grandchildren, and the spouses of children, grandchildren, and great grandchildren.
That means you are a member of your mother-in-law's family, but she is not a member of your family.
Sound OK? It also means that what she does taints you, but what you do cannot affect her!
5. Collapsible corporations.
Try diagraming the following sentence in section 341(e)(1). It contains 342 words, 25 parentheticals, 17 commas, 2 dashes, and 1 period.
For purposes of subsection (a)(1), a corporation shall not be
considered to be a collapsible corporation with respect to any
sale or exchange of stock of the corporation by a shareholder, if,
at the time of such sale or exchange, the sum of -
(A) the net unrealized appreciation in subsection (e) assets of
the corporation (as defined in paragraph (5)(A)), plus
(B) if the shareholder owns more than 5 percent in value of the
outstanding stock of the corporation the net unrealized
appreciation in assets of the corporation (other than assets
described in subparagraph (A)) which would be subsection
(e) assets under clauses (i) and (iii) of paragraph (5)(A) if
the shareholder owned more than 20 percent in value of
such stock, plus
(C) if the shareholder owns more than 20 percent in value of
the outstanding stock of the corporation and owns, or at
any time during the preceding 3-year period owned, more
than 20 percent in value of the outstanding stock of any
other corporation more than 70 percent in value of the
assets of which are, or were at any time during which such
shareholder owned during such 3-year period more than
20 percent in value of the outstanding stock, assets similar
or related in service or use to assets comprising more than
70 percent in value of the assets of the corporation, the net
unrealized appreciation in assets of the corporation (other
than assets described in subparagraph (A)) which would
be subsection (e) assets under clauses (i) and (iii) of
paragraph (5)(A) if the determination whether the
property, in the hands of such shareholder, would be
property gain from the sale or exchange of which would
under any provision of this chapter be considered in whole
or in part as ordinary income, were made -
(i) by treating any sale or exchange by such
shareholder of stock in such other corporation
within the preceding 3-year period (but only if at the
time of such sale or exchange the shareholder
owned more than 20 percent in value of the
outstanding stock in such other corporation) as a
sale or exchange by such shareholder of his
proportionate share of the assets of such other
(ii) by treating any liquidating sale or exchange of
property by such other corporation within such
3-year period (but only if at the time of such sale or
exchange the shareholder owned more than 20
percent in value of the outstanding stock in such
other corporation) as a sale or exchange by such
shareholder of his proportionate share of the
property sold or exchanged, does not exceed an
amount equal to 15 percent of the net worth of the
6. Luxury Automobiles.
We hear alot about how the tax system should tax the rich more than others. People should pay according to their ability to pay. Appropriately then, section 280F limits depreciation on "luxury" automobiles. That sounds fair, until you learn that, pursuant to section 280F(a)(1)(A)(iii),
a "luxury automobile" is one costing over $12,760.41.
Where did the 41 cents come from?
7. Depreciation in general.
Section 168 provides the timing rules for various types of propery. Logically,
property which has an actual life of between 4 and 10 years is deemed to be "5-year property" which means it has a "recovery period" of 5 years, which means a taxpayer must depreciate it over 6 years.
Unless, of course, section 179 makes it depreciable over 1 year or section 280F streaches it to more than 6 years. "Five year property," however, is never depreciated over 5 years.
That makes sense.
8. Qualified Stated Interest.
Section 1273 and its Treasury Regulations include a definition of "qualified stated interest," often called QSI for short.
But, section 1273 has a parenthetical exception for amounts "other than" QSI.
Ok, that would be not QSI.
But, section 163(e) and its regulations refer to interest "other than" the 1273 parenthetical.
That makes it not not QSI.
Naturally, there is an exception to that provision, which then gives us the concept of:
Not not not qualified stated interest.
9. Charitable Contributions.
Section 170 allows deductions for charitable contributions. Computing the amounts can be difficult stuff. Luckily, the Treasury Department issues regulations helping to explain the Code, which is sometimes difficult to read.
Thank goodness for the fellow who helped draft Treasury Regulation section 1.170A-12(e)(2) to explain the "special factor" used for "the valuation of a remainder interest following two lives":
10. Tax Games.
Twelve years ago I wrote a law review article entitled "Masks, Magic, and Games: the Use of Tax Law as a Policy Tool." It appeared in Volume 4 Number 1 of The American Journal of Tax Policy for Spring 1985.
Generally, I offered the theory that much of what tax lawyers and accountants do amounts to game playing and magic tricks. Clients do not understand what we do, but they know it somehow magically helps them. This breeds disrespect for the tax system, ultimately hurting us all.
My editors were quite kind in publishing the article largely as I had written it. However, they found the last sentence of the piece a bit scandalous and refused to print it. The sentence would have appeared as an afterward, following the conclusion.
Finally, twelve years later - and for your enjoyment - I hereby publish it for the first time:
An unorthodox, but to the point summary of my message is that these many games we play amount to a form of tax masturbation: sure they can be fun and exciting - even seductive - but, ultimately, are we not just abusing ourselves?