Generalities &
The Internal Revenue Code
The Internal Revenue Code
One of the things nearly everyone agrees on is some laws are needed to allow all of us to live together.
For example, few people would disagree speed limits in neighborhoods with children save lives. However, imagine instead of seeing a sign “Speed Limit 30 MPH”, the sign simply said “No Speeding?”
Now when you drive through the neighborhood, how fast do you go? If you are driving 30 MPH and you are stopped by a policeman who gives you a $150 ticket for speeding, what do you do? You could go to court and tell the judge you were only doing 30 MPH which isn’t speeding. But the policeman tells the judge you were speeding. Without a clear definition of what constitutes speeding, the judge could decide either way.
The point is “No Speeding” is such a general statement it could be interpreted in many different ways and all would have some basis in logic. The policeman could have a reasonable basis for believing 30 MPH was speeding. You could have a reasonable basis for believing you weren’t speeding, and the judge could have a reasonable basis for their decision one way or the other.
When you factor into this the cost of having to go to court to assert your innocence and the fact the judge might be more inclined to believe the policeman instead of you, most people would just pay the ticket. In that case, you would likely be very upset about what you considered to be an injustice, but the blame wouldn’t lie with either the policeman or the judge. The ones responsible for the entire situation were the legislators who passed such a ridiculous law.
Before long, there would be so many protests the law would have to be changed so everyone would have a clear understanding of what constitutes speeding.
Internal Revenue Code
While people wouldn’t tolerate a speeding law as general as the one outlined above, they tolerate the same type of generalities in the Income-Tax-Code. An 4/1/2019 article in the Tax Advisor entitled “Exploring The Undefined”: Trade or business pointed out the following facts:
- The term “trade or business” is one of the most widely used terms in the tax Code
- “Generally” defined in Section 162(a)
- Has never been “thoroughly defined”
- Lack of a precise definition has led to numerous court cases and IRS rulings
The following is from the IRS site: Trade or Business?
A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. The facts and circumstances of each case determine whether or not an activity is a trade or business. The regularity of activities and transactions and the production of income are important elements. You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. You do need, however, to make ongoing efforts to further the interests of your business.
Part-Time Business
You do not have to carry on regular full-time business activities to be self-employed. Having a part-time business in addition to your regular job or business also may be self-employment.
Example: You are employed full time as an engineer at the local plant. You fix televisions and radios during the weekends. You have your own shop, equipment, and tools. You get your customers from advertising and word-of-mouth. You are self-employed as the owner of a part-time repair shop.
The above contains many generalities which can be understood differently by different people. What does “good faith” mean? What does “profit motive” mean? What does “ongoing efforts” mean?
Let’s say you are working to create a software product to compete with Facebook. While this seems like a very difficult goal, you can believe you are operating your business in “good faith” even if others might think it was impossible. An IRS agent may look at your activities and decide you aren’t operating in “good faith” and you are actually using your alleged “business” to purchase things like computers, internet access, cell phones, printers and other items for personal use and deducting these items from your income as business expenses. The IRS disallows all of these business deductions and makes you repay the income taxes you saved.
“Revenue Ruling 99-7” takes 8 pages to discuss when driving to and from a taxpayer’s residence might be deductible as a business expense, but it DOES NOT provide a clear definition. Instead, it merely gives some examples.
The federal Internal Revenue Code is full of these types of general “rules” subject to interpretation. This is one of the reasons tax professionals love it. They use imprecision for the benefit of their clients. It’s also the reason the rest of us trying our best to comply with the tax code despise it.
Conclusion
The courts have ruled, before people can be convicted of a crime, they must have the ‘mens rea’, a Latin phrase which generally means “a person has to know their actions were against the law, and they intentionally did it anyway”.
Even though the IRS can do things like seize homes and other assets if they find your interpretation of a “business deduction” is different from theirs, you are guilty until you prove yourself innocent.
This creates a huge problem for most of us. We don’t have the resources to challenge arbitrary IRS rulings in court. It’s almost always less expensive for a business to just pay.
No wonder the Internal (Infernal) Revenue Code is universally hated.
It has over 4,000,000 words to actually define almost nothing and are incomprehensible to almost everyone, including the IRS agents delegated to enforce it.
It has over 4,000,000 words to actually define almost nothing and are incomprehensible to almost everyone, including the IRS agents delegated to enforce it.
Money magazine used to have an issue where they gave accounting firms who specialized in federal income tax preparation hypothetical income and expense data on a married taxpayer and asked them to prepare a return. No two firms ever agreed on the amount of federal income tax their hypothetical taxpayer owed. Sometimes, the difference between the highest and lowest amounts calculated from the same hypothetical data was over $40,000.
Contrast this with The FAIRtax. Yes, there may be some disagreements over whether a particular purchase qualifies as a legitimate non-taxable business purchase. However, there will be no argument over how much money you made because The FAIRtax is only paid when people purchase “new” retail goods and services.
Does anyone think there will be many disputes with the definition of “new” or “retail” or “goods” or “services”?
Former President Clinton could have been speaking for all of us who are forced to live under the “general definitions” abounding in the Internal (Infernal) Revenue Code when he responded to a grand jury question,
“It depends on what the meaning of the word ‘is’ is. If the—if he—if ‘is’ means is and never has been, that is not—that is one thing. If it means there is none, that was a completely true statement. … Now, if someone had asked me on that day, are you having any kind of sexual relations with Ms. Lewinsky, that is, asked me a question in the present tense, I would have said no. And it would have been completely true”.
While bureaucrats and some highly paid tax professionals seem to delight in the kind of complicated and convoluted reasoning used by President Clinton, most of us don’t have the time or the interest.
If the people who write this tripe want to interact with others who enjoy these word games, they can have regular meetings with them, but don’t impose your idea of fun on the rest of us.
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