You Are Excused By: Mark W Adams

(Wow, of all days to spend the morning writing instead of watching "Morning" Joe Scarborough melt down and get his ass suspended.)

Hilzoy is understandably alarmed and puzzled by some of the mischief that has come to light regarding the never ending AIG bailout, which at $150 billion is about to become the single most costly "investment" the government has ever made to a single corporate entity.

Hilzoy's confusion/outrage stems from Treasury Secretary Paulson reinterpreting a provision of the tax code which slipped through with little notice while Washington was consumed with the $700 billion bailout debate and the election drama.  The result is a $140 billion windfall to the American Banks.

Andrew C. DeSouza, a Treasury spokesman, said the administration had the legal authority to issue the notice as part of its power to interpret the tax code and provide legal guidance to companies. He described the Sept. 30 notice, which allows some banks to keep more money by lowering their taxes, as a way to help financial institutions during a time of economic crisis. "This is part of our overall effort to provide relief," he said.

Now Hilzoy reminds us that she's not a lawyer, let alone a tax lawyer, yet insists that this just doesn't seem right, especially when you read the whole Washington Post story -- if you can keep awake long enough to weed through something most people simply hate.  I feel her pain. Americans justifiably have a Pavlovian sleep response to the word "taxes," so I'll forgive you if this doesn't make the top of your reading list today.

The key question is: does the Secretary (or the President or any part of the executive branch) have the authority to simply repeal acts of Congress?  In this age of signing statements, the answer may be self-evident, but I guess not.

More than a dozen tax lawyers interviewed for this story -- including several representing banks that stand to reap billions from the change -- said the Treasury had no authority to issue the notice.

Several other tax lawyers, all of whom represent banks, said the change was legal. Like DeSouza, they said the legal authority came from Section 382 itself, which says the secretary can write regulations to "carry out the purposes of this section."

Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company's losses to offset their gains and avoid paying taxes.

Lawmakers decried the tax shelters as a scam and created a formula to strictly limit the use of those purchased losses for tax purposes.

But from the beginning, some conservative economists and Republican administration officials criticized the new law as unwieldy and unnecessary meddling by the government in the business world.

"This has never been a good economic policy," said Kenneth W. Gideon, an assistant Treasury secretary for tax policy under President George H.W. Bush and now a partner at Skadden, Arps, Slate, Meagher & Flom, a law firm that represents banks.

The opposition to Section 382 is part of a broader ideological battle over how the tax code deals with a company's losses. Some conservative economists argue that not only should a firm be able to use losses to offset gains, but that in a year when a company only loses money, it should be entitled to a cash refund from the government.

During the current Bush administration, senior officials considered ways to implement some version of the policy. A Treasury paper in December 2007 -- issued under the names of Eric Solomon, the top tax policy official in the department, and his deputy, Robert Carroll -- criticized limits on the use of losses and suggested that they be relaxed. A logical extension of that argument would be an overhaul of 382, according to Carroll, who left his position as deputy assistant secretary in the Treasury's office of tax policy earlier this year.

Yet lobbyists trying to modify the obscure section found that they could get no traction in Congress or with the Treasury.

"It's really been the third rail of tax policy to touch 382," said Kevin A. Hassett, director of economic policy studies at the American Enterprise Institute.

I'm not a tax lawyer either, but I think I can put this in terms we can all appreciate.  Tax law was a required course when I was an eager legal beagle.  My tax law professor said you could tell the tax lawyers from the rest of the profession by the size of their biceps -- Popeye-like from carrying around those huge books.  (And here I always thought you could tell by the thickness of their glasses.)

The United State Tax Code of 1986 As Amended (coincidentally that was the year I took tax law) is a two volume monster that reflects the revenue statutes as passed by Congress.  The companion to The Code is a four volume set of Federal Tax Regulations that track and interpret The Code.  The Regulations were christened The Gospel According to the Commissioner of Internal Revenue by my professor.  Each of these six books is three inches thick and filled with the most mind-numbingly confusing edicts imaginable. 

Now I had the privilege of clerking for two gentlemen while I was in law school, both of whom were CPA's and attorneys -- tax lawyers.  Between running errands for them, updating their tax law library was part of my responsibilities.  See, the Code as well as the Regulations were much like the Pirate Code -- more like a set of guidelines.  The real "law" came in the form of daily IRS rulings, weekly updates and slip opinions from the tax courts that I had to collate daily and insert in their proper place on a wall-sized bookshelf filled with court opinions and tax practice guides.  After wearing out my nicest shoes in three months and aware that my brain was in danger of seizing up for good, I moved on to more invigorating pastures in the legal field.

But when you think about it, the IRS Commissioner as well as the Treasury Secretary have immense discretion when it comes to enforcing the tax laws.  Just like a police officer who has the discretion of giving you a warning or impounding your car when s/he stops you for a rolling stop at an intersection, the members of the executive branch have complete discretion on whether to arrest you if they're a cop, prosecute you if they're the district attorney, or even reduce your sentence at the probation department and let you go under the executive's pardon authority. 

So if the Federal Government decides it's just going to let someone slide on tens of billions of dollars worth of tax liability, who's going to complain?  Certainly not the tax payer who otherwise owes the money and who is always free to write a bigger check than required to the treasury.  Congress can jump up and down all it wants, declaring this or that illegal, but if the executive decides not to make that its priority, decides not to enforce that law, the courts aren't going to interfere between the two political branches and second guess the executive's discretion.  In fact, it's doubtful that anyone would have standing to sue the Secretary or Commissioner in this case, including a Congressman/woman let alone a lowly taxpayer who isn't directly affected.

Think about it this way.  If you don't pay your taxes this year (presuming you owe any) and the IRS sues you, the prosecutor on behalf of the Commissioner can cut you a deal, like forgiving some or all of the interest or penalties if you pay up in full on the courthouse steps.  Clearly this is a reduction in revenue that Congress did not specifically authorize.  Indeed, by providing for interest and penalties, Congress authorized exactly the opposite result.  Anyone want to second guess the executive authority in that case?  It is really no different legally if the Treasury forgives the banks their tax haven schemes to ease the overall economy's current crisis.

It's not rocket science.  They're the government.  They do what they want.  You just had your accountability moment and the consequences will begin January 20th.