Some of you are old enough to remember the lighted street lamp, the fog rolling in, Rod Serling’s voice and those words:
"You're traveling through another dimension, a dimension not only of sight and sound but of mind. That's the signpost up ahead - your next stop, the Twilight Zone."
Well get ready, because when you enter the realm of the Internal Revenue Code, you will enter the Twilight Zone.
If you ever want to give yourself a migraine headache, spend a few minutes reading the Internal Revenue Code. I mean, who writes this stuff? The architects and drafters of the Internal Revenue Code took heed of a story told in the Book of Genesis, "...let us go down, and there confound their language, that they may not understand one another's speech..."
Judge Learned Hand, a well and widely respected and oft cited legal philosopher and jurist wrote regarding our income tax laws:
“…words of…the Income Tax…merely dance before my eyes in a meaningless procession: cross-reference to cross-reference, exception upon exception —couched in abstract terms that offer [me] no handle to seize hold of [and that] leave in my mind only a confused sense of some vitally important, but successfully concealed, purport, which it is my duty to extract, but which is within my power, if at all, only after the most inordinate expenditure of time…”
Keep in mind, this guy was a judge, a well trained, educated, highly regarded jurist. If the code dances before his eyes, what must it do for ordinary citizens? The Tower of Babel comes to mind.
Let’s try a few examples. How about starting with § 1.6011-4 Requirement of statement disclosing participation in certain transactions by taxpayers. I just picked that out of the blue. If this doesn’t demonstrate a meaningless ‘cross reference to cross reference’ then nothing does. Even the title to the section makes no sense. The first two paragraphs of this section state:
(a) In general. Every taxpayer that has participated, as described in paragraph (c)(3) of this section, in a reportable transaction within the meaning of paragraph (b) of this section and who is required to file a tax return must attach to its return for the taxable year described in paragraph (e) of this section a disclosure statement in the form prescribed by paragraph (d) of this section. The fact that a transaction is a reportable transaction shall not affect the legal determination of whether the taxpayer's treatment of the transaction is proper.
(b) Reportable transactions—(1) In general. A reportable transaction is a transaction described in any of the paragraphs (b)(2) through (7) of this section. The term transaction includes all of the factual elements relevant to the expected tax treatment of any investment, entity, plan, or arrangement, and includes any series of steps carried out as part of a plan. There are six categories of reportable transactions: listed transactions, confidential transactions, transactions with contractual protection, loss transactions, transactions with a significant book-tax difference, and transactions involving a brief asset holding period.
A taxpayer has to read paragraph (c)(3) to determine if he participated. Then he has to go back to paragraph (b) to actually decide whether whatever he did was something that has to be reported. In doing so, he has to make sure he reads subparagraphs (2) through (7). Then he must decide for what year(s) this whole event took place and must be reported. For this, he must look to paragraph (e). Finally, the taxpayer must go back to paragraph (d) to find out what form he has to use.
Whew!!! [Author looks around room for bourbon decanter]
I get it. All of my readers are thinking, ‘So what. This section does not, nor will it ever apply to me.’ Likely true. Let me pick something closer to home for many American taxpayers. If you do not already know it, many middle class Americans are subject to something known as the Alternative Minimum Tax (AMT.) Would you like to take a look at some of the language that governs this provision.
I thought not. But let’s look anyway. U.S. Code › Title 26 › Subtitle A › Chapter 1 › Subchapter A › Part VI › § 55. Alternative minimum tax imposed.
(a) General rule
There is hereby imposed (in addition to any other tax imposed by this subtitle) a tax equal to the excess (if any) of—
(1) the tentative minimum tax for the taxable year, over
(2) the regular tax for the taxable year.
(b) Tentative minimum tax
For purposes of this part—
(1) Amount of tentative tax
(A) Noncorporate taxpayers
(i) In general In the case of a taxpayer other than a corporation, the tentative minimum tax for the taxable year is the sum of—
(I) 26 percent of so much of the taxable excess as does not exceed $175,000, plus
(II) 28 percent of so much of the taxable excess as exceeds $175,000.
The amount determined under the preceding sentence shall be reduced by the alternative minimum tax foreign tax credit for the taxable year.
(ii) Taxable excess. For purposes of this subsection, the term “taxable excess” means so much of the alternative minimum taxable income for the taxable year as exceeds the exemption amount.
(iii) Married individual filing separate return In the case of a married individual filing a separate return, clause (i) shall be applied by substituting 50 percent of the dollar amount otherwise applicable under subclause (I) and subclause (II) thereof. For purposes of the preceding sentence, marital status shall be determined under section 7703.
I trust all of that was as clear as mud. One more.
With all of the brouhaha over Obamacare, let me offer some of that language as well. Assuming you are actually able to read the below excerpt, I think it clearly portrays the insane complexity of our tax code.
SEC. 1401. REFUNDABLE TAX CREDIT PROVIDING PREMIUM ASSISTANCE FOR COVERAGE UNDER A QUALIFIED HEALTH PLAN.
(a) In General- Subpart C of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 (relating to refundable credits) is amended by inserting after section 36A the following new section:
‘‘SEC. 36B. REFUNDABLE CREDIT FOR COVERAGE UNDER A QUALIFIED HEALTH PLAN.
‘‘(a) IN GENERAL.—In the case of an applicable taxpayer, there shall be allowed as a credit against the tax imposed by this subtitle for any taxable year an amount equal to the premium assistance credit amount of the taxpayer for the taxable year.
‘‘(b) PREMIUM ASSISTANCE CREDIT AMOUNT.—For purposes of this section—
‘‘(1) IN GENERAL.—The term ‘premium assistance credit amount’ means, with respect to any taxable year, the sum of the premium assistance amounts determined under paragraph (2) with respect to all coverage months of the taxpayer occurring during the taxable year.
‘‘(2) PREMIUM ASSISTANCE AMOUNT.—The premium assistance amount determined under this subsection with respect to any coverage month is the amount equal to the lesser of—
‘‘(A) the monthly premiums for such month for 1 or more qualified health plans offered in the individual market within a State which cover the taxpayer, the taxpayer’s spouse, or any dependent (as defined in section 152) of the taxpayer and which were enrolled in through an Exchange established by the State under 1311 of the Patient Protection and Affordable Care Act, or
‘‘(B) the excess (if any) of—
‘‘(i) the adjusted monthly premium for such month for the applicable second lowest cost silver plan with respect to the taxpayer, over
‘‘(ii) an amount equal to 1/12 of the product of the applicable percentage and the taxpayer’s household income for the taxable year.
Does anyone want to try to explain that in plain English? I can’t. OK, maybe I can but the point is neither I nor anyone else should have to interpret it.
This unnecessary complexity carries with it a far greater negative consequence. Basically, the complexity of the language makes it more difficult for those intended as beneficiaries to actually claim the credit. In practice, this credit is designed to offset some or all of the cost of health care premiums for those in the lower economic brackets. Data suggest that many of the individuals who would be eligible for this credit include those less educated, those for whom English is a second language, and those with limited internet access. While many others would also be eligible, the ability to realize the benefit from this credit for those listed may frequently depend on the assistance of others. Why is that? Our tax code should not be so obtuse that it is, in reality, incomprehensible to a majority of Americans.
If you can make sense of all of this then you are a better person than me. At least brighter. It gets worse but I will spare you.
Reading this post wasn’t very fun was it? Sorry. But maybe it offers a glimpse of the inane language we have allowed Congress to hold over our heads. Collectively we might try taking English as a Second Language to better understand this stuff.
Better yet, we could demand that Congress completely overhaul the tax code.
Happy trails to you, until we meet again. C’mon, sing along! Happy trails….