Not that they deliberately intend to. I think it's just that the darn thing is so complicated that people tend to "err" on the side of their own benefit whenever there is a "fuzzy" area, not wanting to lose out on what might be rightfully theirs. The govt. interprets this as cheating, but really I think it's only people trying to keep their sanity. I don't think we're as evil as the IRS thinks we are. If the method were super-simplified, I think that we all would benefit - both us and the govt would get what is rightfully ours. Had to get that off my chest as I begin to do my own taxes - last year I had to submit 34 different forms !! I can hardly wait to get started.
We are not the ones who are evil. And the tax system is so unfair and so obviously geared toward the wealthy (who were the ones who wrote up the laws in the first place to protect their interests) that our Founding Fathers would be turning in their graves if they knew what had transpired in the last century and a half. Your feelings are shared by many.
"Erring" in your own favor whenever you find a "fuzzy" area is, not to put too fine a point on it, the epitome of cheating on your taxes. Upon finding a "fuzzy" area that cannot be resolved one way or the other, the non-cheater either errs on the conservative side or splits the difference down the middle. Just remember, if all else fails, if you obtained something of economic benefit during the year, assume that it's gross income until and unless you can find a good reason (e.g., case, IRS ruling, opinion of CPA or tax attorney, etc) to treat it otherwise.
I doubt many of the wealthy feel that the system is "geared toward the wealthy". When 5% of the taxpayers (not the population, just the taxpayers) pay 20% of the income taxes, and 20% pay 55%, you cannot say it is "geared toward the wealthy" in a manner you should be complaining about. Let me know when you pay $1.00 per minute, 24/7/365, then we can commiserate.
Well, I pay much more than $1 per minute in federal taxes, and I absolutely agree that people like me should pay more than 35% marginal. The lower half of the income range are sufficiently burdened by social security/medicare/sales taxes. The needs of the country as we approach a big demographic shift greatly exceed what can be funded by current tax levels. I'd prefer to pay more than to risk the future of my children and grandchildren in a world in which US Treasuries have become junk bonds in the eyes of those (in Asia and petrodollar states) whom we ask to finance our appalling debts.
I just had to do the math and a dollar a minute x 24 x 365 = $525,600. That's a hell of a federal tax. More than I make in a year or two or three or more.
If you ever need a new accountant, look me up.
ChEAr$, Harlan Lunsford, EA n LA
Moderator: If you need an heir, you can adopt me. I send birthday cards, a New Year calendar card, Get Well cards, etc. and I don't talk back. Plus my son writes great Thank You notes.
The Supreme Court has said that there is no obligation to maximize taxes paid; tax _avoidance_ is perfectly legal. "splitting the difference" is unjustifiable. The average of right and wrong isn't right.
And if you have any sort of good reason, you can use it.
Sorry, but "any sort" of good reason isn't enough. Unless you can say truthfully that you had a reasonable belief that your position would be upheld in court, it's still tax evasion. Years ago I worked with a well-established tax attorney who advised a client in this way: "If it ends up in court we're likely to lose, but I think we have a reasonable legal argument that the deduction is proper." Based on that advice (which the client took) he was convicted of tax evasion, and the conviction was upheld in appeal. Stu
Taking an unjustified aggressive position for no reason other than it favors you is tantamount to cheating. There are very, very few areas, particularly with respect to wage-earners, that are so totally devoid of guidance that some reasonable estimate cannot be made, particularly against the basic presumption, from Glenshaw Glass, that if you got some sort of economic benefit from something, that something is reportable income unless you can find a specific, reasonable, reason why it's not.
Actually, it was Judge Learned Hand of the Second Circuit, in Gregory v. Helvering, who stated that one does not have an obligation to pay more than the amount properly required under the statute. You should recall, however, that Learned Hand made that statement in the context of giving birth to the economic substance doctrine, under which a taxpayer is not permitted to rely on a narrow, literal interpretation of the statute if the substance of what the taxpayer did is inconsistent with the purpose of the statute and Congress' policies behind enacting it. As a result, one most definitely has an obligation to make every effort to determine the tax consequences of the substance, not the form (unless the substance is the form), of the taxpayer's transactions, and, by implication, is not permitted to take an aggressive position without consequence merely because the area in question has not been reduced to the level of blackletter hornbook law. In sum, if you want to be aggressive, you better have a damned good reason for it, which impliedly means that you have good reason for believing that the area is not, in fact, ambiguous, merely underdeveloped.
All depends on the context. For example, the executor of an estate can quite frequently 'split the difference' in determining the fair market value of marketable stock included in the estate by taking the mean between the highest and lowest quoted selling prices on the valuation date. See Treas. Reg. 20.2031-2(b)(1). As the volume of available data drops, the degree of difference-splitting permitted increases, see, e.g., Treas. Reg. 20.2031-2(c)(permitting valuation at the mean of the bona fide bid and asked prices on the nearest trading dates before and after the valuation date). Valuation of closely held or nonmarketable interests is more art than science, and a defensible valuation often comes down to a judicious splitting of the difference between competing reasonable valuations. Thus, in the context of valuation, "splitting the difference" is quite acceptable and is frequently "right" when the valuations being split are all "wrong."
Not so. Subjective belief does not count. Larken Rose certainly thought he had a "good reason," but you see where that got him. That sort of "good reason" will get you penalties for taking a frivolous position in addition to the tax, penalties, and interest that you already owe. If you realized an economic benefit that can be reasonably quantified (under the rules relating to accrual accounting for tax purposes) and which is not subject to a substantial risk of forfeiture, then your best bet is that you had "income" upon such realization unless you can come up with a specific, objectively reasonable, reason for why it's not "income." Merely having what you subjectively think is a "good reason" is not sufficient.
Now that's a somewhat truer statement about the tax system. When the income tax was first enacted as a broad-based tax (rather than as a response to the Civil War) it was intended to apply principally to the wealthy, not to the average wage-earner. To get an idea of what "wealthy" connoted back in the 1890's consider that the exemption amount (i.e., amount of income not subject to tax) was $4,000. In other words, most people in the country didn't earn over $4,000 per year. Furthermore, while the excessive brackets of the 70s and early 80s were quite rightly repealed in the 86 tax reform, the marginal utility of income does strongly suggest that the brackets should be more progressive than they currently are. Bill Gates simply does not get the same utility from his billionth dollar of income that the average wage earner gets from his 50-thousandth dollar of income. As such, the tax bite as between Bill and the average wage earner will only hurt equally when Bill's marginal tax rate is substantially higher than the average wage earners. Secondly, the ability to convert what is in reality money earned through personal exertion into lower taxed capital gains soley because one's exertions are directed towards stock trading rather than providing personal services is another area that should be revamped. Thirdly, while there is some rationale for the argument that lower capital gains rates are a necessary albeit implicit means of indexing those gains for inflation, the mechanism does not work fairly or equitably, particularly with the cliff effect of holding property for 1 year plus 1 day. If there is a real necessity for indexing capital gains for inflation, then those gains (or, alternatively, the cost basis) should actually be indexed using some variant of the CPI. By indexing directly, the gain, as determined based on indexing, can then be included in the ordinary income tax base rather than having a separate capital gains tax base - thereby not only making capital gains treatment more equitable, but simplifying the tax system as well.
According to the Federal Reserve Bank based on the consumer price index, $4,000 in 1890 is worth nearly $90,000 today. Even as late as the 1950's the average income for a middle class family was around $3,000.
The purpose is to encourage investing. Perhaps capital gain treatment should be limited to those who purchase their stock directly from the issuing company. Subsequent purchasers aren't doing a whole lot to help innovation other than keep the value of stock higher. Stu
That is not true. If I buy stock directly from the company and nobody wants to buy it thereafter - well, why would I buy it directly from the company in the first place?
What I never understood was why anyone under $50K or so has to pay more than about 10% in fed. taxes. Anyone under that level of income really needs that few extra hundred dollars every paycheck. It just makes me sick when thinking about these huge compensation packages the executives get in corporations -- anyone making over $500K should have an additional % tax. I'd like to hear anyone who tries to say "that will stifle innovation and productivity" -- because most everyone doing the innovation and being productive working for the huge corporations make under $500K. Granted there are the few outliers.
Where did "unjustified" come from? Yes, if the reason is unjustified, that brings it closer to cheating.
So in some cases for simple situations, there's no room for aggressive positions. That isn't relevant; in some cases, there is. A doctor owns his practice (as a business), in which people are fairly high paid. He also owns a McDonalds franchise, which pays minimum wage. Is he required to consider them one business for employee benefit purposes? The law would seem to indicate that, but some years ago there was a legal decision that two completely unrelated businesses were separate even though they had a common owner.
What if the are is, indeed, ambiguous? (When ERISA was written, the definition of "highly compensated" that was clearly stated in the law differed from the one the IRS wrote into its regulations.)
That isn't a case of "splitting the difference" but a good way of getting the correct value.
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