Death, Taxes, and Law: Commentaries

By Daniel B. Evans
Copyright © 2003-2004. All rights reserved.
Not legal advice.

Table of Contents

Tax Reform and Campaign Promises

November 28, 2004

It's not unusual for a politician to break a campaign promise. Even politicians with the best of intentions find that changed circumstances require actions inconsistent with campaign rhetoric. So, it's not unusual for an elected leader to be hedging on campaign positions some months after an election. What is unusual, and may set some sort of a record, is for a candidate to begin discussing their plans to breach their campaign promises only a couple of days after the election is over.

During the campaign for President, George Bush repeatedly claimed that he would not raise taxes on the middle class. Yet in his press conference on November 4, only two days after the election and one day after claiming victory, George Bush began to describe his plans for lowering still further the taxes on the wealthly and raising the taxes on the middle class.

George Bush calls his plan "tax reform," but the inevitable result of the "reform" will be a change in relative tax burdens.

Changes in relative tax burdens is inevitable because of the arithmetic. Bush has already admitted that "tax reform" must be revenue neutral, which means that it must raise the same amount of revenue as the present tax code. Now, if the law is changed and the total amount of tax revenue is the same, then it is inescapable that some people are paying more in tax while others are paying less.

For Bush and the Republicans supporting him, the people who will be paying more are the middle class and the others who are paying less are the wealthy, as can be seen from the history of the Bush administration and the various ideas that are being advanced by Bush and his supports.

And I've completely ignored the repeal of estate tax and the privatization of Social Security, both of which could have the effect of increasing the tax burdens on the middle class.

So what's on the wall is not just writing, but a proclamation in glowing neon. But you still have to open your eyes and look (and think), because Bush is not going to tell you what he's doing. During the press conference, Bush said that "If I'm going to -- if there was a need to raise taxes, I'd say, let's have a tax bill that raises taxes, as opposed to let's simply the tax code and sneak a tax increase on the people. It's just not my style." Given Bush's history of saying one thing and doing the opposite, the fact that he took the time to deny he would try to sneak a tax increase by the American people is excellent evidence that he intends to do just that.

Will fiscally conservative Republicans go along with this money-grab for the wealthy? Will the voters catch on to the political bait-and-switch?

It's too early to make predictions, but it's safe to say that it's going to be an interesting four years.

[Next up: Some suggestions for real tax reform.]


[Table of Contents]

A New War Tax Protest

October 24, 2003

I've become aware of a new argument by those morally opposed to war and the payment of taxes in support of war based on the Religious Freedom Restoration Act of 1993.

Courts have previously ruled that there is no First Amendment "free exercise of religion" defense to the payment or collection of taxes. However, the RFRA seems to shift the burden of proof. In deciding the constitutional issue, the courts have looked to whether there was a reasonable secular governmental purpose for the law that conflicted with religious beliefs. Under the RFRA, if the burden on the religion is "substantial," then the government has the burden of demonstrating that the law is the "least restrictive means" available to carry out the governmental purpose.

A Quaker named Priscilla M. Lippincott Adams has made this argument to both the Tax Court and the Third Circuit Court of Appeals and it was rejected. Adams v. Commissioner, 110 T.C. 137 (1998), aff'd 170 F.3d 173 (3rd Cir. 1999), cert. den. _ _ U.S. _ _ (No. 99-798).

Her employer, the Philadelphia Yearly Meeting of the Religious Society of Friends (i.e., the Quaker meeting of which she is a member) has been served with a levy by the IRS to garnish her wages to collect the back taxes owed, and the Meeting has refused to comply with the levy, so the US is now taking the Meeting itself to court to collect the taxes (and penalties) from the Meeting as the taxpayer's employer. United State v. Philadelphia Yearly Meeting, Civil Action No. 03-CV-4254 (U.S.D.C. E.D.Pa.)

The case is interesting because the Meeting's defense is not that the Meeting itself is opposed to war, but that it cannot violate the religious convictions of one of its members, and so it is asking the U.S. to find another way to collect the tax, and not require the Meeting itself to act as a tax collector for the IRS.

This argument was previously raised by the Meeting as a constitutional defense to a similar action, and the Meeting lost. United States v. Philadelphia Yearly Meeting of the Religious Society of Friends, 753 F.Supp. 1300 (E.D. Pa. 1990). The question now will be whether the statutory test is sufficiently different from the constitutional test to require the IRS to find a "less restrictive means" to collect the taxes owed.

Additional information about the litigation can be found at and


[Table of Contents]

Tax Table Madness

June 10, 2003

Has anyone actually tried to read the new tax act (the "Jobs and Growth Tax Relief Reconciliation Act of 2003")?

I recently spent close to one hour just trying to figure out what tax rates are going to apply to 2003.

Let me give you an example. Section 104(a) of the act states that:

Clause (i) of section 1(i)(1)(B) (relating to the initial bracket amount) is amended by striking "($12,000 in the case of taxable years beginning before January 1, 2008)" and inserting "($12,000 in the case of taxable years beginning after December 31, 2004, and before January 1, 2008)".

What does that mean? It means that, in the years 2003 and 2004, the 10% bracket is the first $14,000 of taxable income for married taxpayers filing jointly and $7,000 for single taxpayers and married taxpayers filing separately. Why does it mean that? Well, I'll leave that as an exercise for the student.

Oh, and the 10% bracket is going to be indexed for inflation in 2004 but not in 2003 or 2005 (when it reverts to the "old" $6,000/$12,000 limit for a few years).

Tax laws are always a little difficult to understand, but the most recent amendments are really pushing the envelope.

Just look at section 1. (Please.) The tax rates for individuals are supposed to be found in sections 1(a) through 1(d). Except that the rates shown in sections 1(a) through 1(d) are not the rates you actually apply. For the actual tax rates, you look to section 1(i)(2). Except for the 10% bracket, which is found in section 1(i)(1). Except that you don't actually apply the rates found in section 1(i)(2) to the brackets that are shown in sections 1(a) through 1(d) (or section 1(i)(1)), because of the inflation adjustments dictated by section 1(f) (which apply to the 10% bracket only in 2004 and years after 2008). And except that the 15% tax bracket for married taxpayers is not determined by section 1(a) or (d) (with or without section 1(f)) but by section 1(f)(8).

Clear enough?

But we're not finished. If you have capital gains (or dividend income), there's another exception, and you have to wade through section 1(h) to figure out what special rates might apply to what parts of your income.

And all of that is just to determine the tax rates. It's no picnic trying to figure out taxable income. (Although I have to admit that, figuring out the taxable amount of Social Security benefits, the inflation-adjusted standard deduction, the phase-out of itemized deductions, and the phase-out of the inflation-adjusted personal exemption begins to look easy after you've gotten past section 1.)

Or at least it seems easy until you get to the alternative minimum tax, which might apply to you even if you have no tax shelters and no tax-exempt income.

I just give thanks to everything that is good and holy in the universe that Congress wasn't trying to simplify the law. (Try to imagine the mess we would facing then.)


[Table of Contents]

Unauthorized Practice of Law (ABA Style)

May 15, 2003

For reasons that aren't clear to me, the President of the American Bar Association formed a "Task Force" to develop a "model definition of the practice of law."

In September of 2002, the task force published the following draft of the model definition on which it was working:

(a) The practice of law shall be performed only by those authorized by the highest court of this jurisdiction.
(b) Definitions:
(1) The "practice of law" is the application of legal principles and judgment with regard to the circumstances or objectives of a person that require the knowledge and skill of a person trained in the law.
(2) "Person" includes the plural as well as the singular and denotes an individual or any legal or commercial entity.
(3) "Adjudicative body" includes a court, a mediator, an arbitrator or a legislative body, administrative agency or other body acting in an adjudicative capacity. A legislative body, administrative agency or other body acts in an adjudicative capacity when a neutral official, after the presentation of evidence or legal argument by a party or parties, will render a binding legal judgment directly affecting a party’s interests in a particular matter.
(c) A person is presumed to be practicing law when engaging in any of the following conduct on behalf of another:
(1) Giving advice or counsel to persons as to their legal rights or responsibilities or to those of others;
(2) Selecting, drafting, or completing legal documents or agreements that affect the legal rights of a person;
(3) Representing a person before an adjudicative body, including, but not limited to, preparing or filing documents or conducting discovery; or
(4) Negotiating legal rights or responsibilities on behalf of a person.
(d) Exceptions and exclusions: Whether or not they constitute the practice of law, the following are permitted :
(1) Practicing law authorized by a limited license to practice;
(2) Pro se representation;
(3) Serving as a mediator, arbitrator, conciliator or facilitator; and
(4) Providing services under the supervision of a lawyer in compliance with the Rules of Professional Conduct.
(e) Any person engaged in the practice of law shall be held to the same standard of care and duty of loyalty to the client independent of whether the person is authorized to practice law in this jurisdiction. With regard to the exceptions and exclusions listed in paragraph (d), if the person providing the services is a nonlawyer, the person shall disclose that fact in writing. In the case of an entity engaged in the practice of law, the liability of the entity is unlimited and the liability of its constituent members is limited to those persons participating in such conduct and those persons who had knowledge of the conduct and failed to take remedial action immediately upon discovery of same.
(f) If a person who is not authorized to practice law is engaged in the practice of law, that person shall be subject to the civil and criminal penalties of this jurisdiction.

There are all sorts of things wrong with this definition, and I hope to address some of the problems in a later commentary.

Oddly enough, I was not alone in criticizing the draft, and many groups within the ABA were distinctly unenthusiastic about the proposed definition.

Following hearings that produced a number of negative comments on the first draft, the task force regrouped and recommended the following resolutions for the ABA House of Delegates:

RESOLVED, that the American Bar Association recommends that every jurisdiction adopt a definition of the practice of law.
FURTHER RESOLVED, that each jurisdiction’s definition should include the basic premise that the practice of law is the application of legal principles and judgment to the circumstances or objectives of another person or entity.
FURTHER RESOLVED, that each jurisdiction should determine who may provide services that are included within the jurisdiction’s definition of the practice of law and under what circumstances, based upon the potential harm and benefit to the public. The determination should include consideration of minimum qualifications, competence and accountability.

The reasons for this recommendation were contained in a report which I shall not reproduce here.

The following is the text of an e-mail message that I sent to the LPM-Discuss list of the Law Practice Management Section of the ABA (of which I am a member) in response to a proposal that the section support the most recent draft resolution:

The problem with the ABA's second stab at a definition of the "practice of law" is that it is largely meaningless, and the little meaning that it does have does not show the ABA (or the legal profession) in a very good light.
The 9/18/02 draft of the "practice of law" was criticized for being overly broad. For example, an ad hoc committee of the Real Property, Probate and Trust Law Section of the ABA expressed the concerns that the draft "ignores the realities of the marketplace and may be viewed as a self-serving attempt by the ABA to prohibit competition." The response of the Task Force was to drop any pretense of attempting to create a model definition and instead to promulgate something that is little more than a platitude, that the practice of law is "the application of legal principles and judgment to the circumstances of another person or entity." On the many jurisdictional and practical problems described in the accompanying report, the Task Force simply punted, recommending that "each jurisdiction should determine who may provide services that are included within the jurisdiction's definition of the practice of law and under what circumstances."
So the Task Force is NOT recommending a definition of the practice of law, but only a "basic premise" that should be included in whatever definition "every jurisdiction" adopts. Does this "basic premise" have enough substance to debate? Is there any there there?
And the criticism of the first draft as a "self-serving attempt by the ABA to prohibit competition" has not been addressed. If anything, the second draft is more vulnerable to criticism because it makes no attempt to propose any exceptions or limitations whatsoever. Even the accompanying report does little to dispel the presumption that the "practice of law" is what lawyers do and that the definition should be as broad as possible to "protect the public" against those who are not lawyers.
Finally, I would like to suggest that this flimsy imitation of a "definition" is simply not worthy of the ABA. Lawyers are supposed to know the law, and to have analytical skills, and yet a prestigious organization of lawyers is now proposing a "basic premise" that is so rudamentary and unrefined as to be entirely useless as a rule of law. Is this supposed to make the ABA look smart?
If there really are public interests to be protected, and if a definition of the practice of law is necessary to protect those public interests, why can't the ABA produce a REAL definition? Is there some kind of deadline that must be met? Why not spend the effort to do the job right and develop a definition that can withstand close scrutiny and serve as a model or framework for the protection of the public?


[Table of Contents]

Morbid Estate Planning

April 2, 2003

In the last few years, I have seen increasing interest in what I would call "morbid" estate planning, by which I mean estate planning techniques that only "work" if the client dies sooner rather than later. These techniques include interest-only self-cancelling installment notes, deferred private annuities, and back-loaded private annuities.

The estate planning "edge" in each case is the belief or assumption that the client will die sooner than would be expected from the mortality tables used by the IRS.

Take, for example, a relatively standard private annuity transaction. An older family member ("Mom") transfers cash or property worth $X to a younger family member ("Child") in exchange for Child's promise to pay $Y each year to Mom for the rest of Mom's life. If the $Y is calculated correctly, then there is no gift because the present actuarial value of the annuity payments equals the value of the cash or property transferred. But if the values are equal, what is the point?

The point is that the annuity payments stop when Mom dies, and the value of the property transferred is no longer part of her estate for estate tax purposes. If Mom were 65 years old, and she were to transfer $100,000 to her child, current IRS tables (April 2003) would require an annuity of $8,378 each year. If Mom lived until age 75, she would have received only $83,780 back of the original $100,000, which means that at least $16,220 has passed to the child tax free. (Actually more, taking into account investment gains on the $100,000 transferred to the child.) But Mom has a life expectancy of 20 years at age 65, not 10 years. If Mom lives 20 years, then she will have received $165,560 from her son, meaning that the son has repaid her back the originally $100,000 and then some. If the purpose of the transaction was to save estate tax, then Mom's long life could make the estate taxes worse, not better, by requiring the child to make annuity payments to Mom that actually increase her estate.

The other techniques I mentioned, such as interest-only self-cancelling notes, deferred annuities, or back-loaded annuities, are just different ways of upping the stakes. The initial payments to Mom are smaller (or nonexistent) but the later payments to Mom are larger. If Mom dies early, the children win big. But if Mom lives too long, then the transaction blows up in everyone's face and the IRS makes money picking up the pieces.

The recent popularity of these techniques is probably due to the fall of the stock market. Lawyers are always looking for an "edge" over the IRS actuarial tables, and as long as interest rates were high or stock values were rising, lawyers were willing to bet that the client's investments could out-perform the interest rates the IRS is required to use for annuities, life estates, and other future interests. Once the stock market went south, the same lawyers starting looking for another edge, and decided to start betting that the client's life would not last as long than the mortality tables would suggest. So lawyers started to sell clients on the tax benefits of dying early.

I started to recommend one of these kinds of transactions to one of my clients, and then stopped when I realized what I was doing. My clients were healty, active adults in their mid to late sixties. Why would I wish them to die prematurely? To put it another way, if I had to bet whether they were going to live longer or die early, why wouldn't I want to bet that they were going to live longer?

There is a school of thought that some of these transactions can be justified by the possible future repeal of the estate tax. If there's going to be an estate tax for the next seven years, but no estate tax after seven years, then it makes sense to do things that decrease the taxable estate in the short run even if those same things increase the taxable estate in the long run. But with growing budget deficits and shrinking income tax revenues, estate tax repeal is not a sure thing. So the danger is that the short-term solution is going to turn into a long-term problem.

But I think that estate tax repeal is just a back-up argument. I believe that most of these kinds of transactions are being planned for older clients who have medical problems (such as cancer or heart disease) that lead their lawyers and families to believe that they are not going to live out their normal life expectancies, and so tax planning for an early death is appropriate. But it's still just probabilities, and should we be betting against remissions, medical advances, or even outright miracles?

And that's why I call this kind of estate planning "morbid." We should be wishing and planning life for our clients, not death.

"I have set before you life and death, blessings and curses. Choose life so that you and your descendants may live...."
Deut. 30:19.


[Table of Contents]

Unauthorized Practice of Law: York County

March 29, 2003

Lawyers can be their own worst enemies.

The York (Pa.) County Bar Association has "won" an injunction against a C.P.A. for having the temerity to prepare and file articles of incorporation for clients. York County Bar Association v. Kirk, No. 99-SU-00773-07 (York Co. C.P. 12/20/2002), now on appeal to the Superior Court, No. 106 MDA 2003. This injunction is both bad law and bad politics.

Courts in Pennsylvania have previously held that the unauthorized practice of law does NOT include filling in simple applications, and articles of incorporation are as simple as applications get. The form can be downloaded from the web site of the Pa. Department of State, and the only the only things you need to fill in are the name of the corporation and the total number of shares of stock authorized. That's it.

Some lawyers will argue that it's not so much the articles of incorporation themselves as the "legal advice" necessary to decide whether or not to incorporate. To some extent, that's true. But that just creates a further problem for lawyers because most of the issues surrounding the decision to incorporate are tax decisions, not legal decisions, and it's too late to argue that accountants can't give tax advice.

The rules and regulations of the Internal Revenue Service allow accountants to both prepare returns and represent taxpayers in disputes with the IRS. Under the U.S. Constitution, those regulations are part of the "Supreme Law of the Land," and no judge can enjoin an accountant from representing clients in tax matters just because the judge doesn't think it's a good idea.

And it should be pointed out that the rules and regulations of the Pennsylvania Department of Revenue also allow accountants to prepare tax returns and represent clients in disputes with the DoR, so there really isn't any conflict between federal law and state law.

But what about the "legal issues" in incorporating? The short answer is that there really aren't any. The corporate form limits the liabilities of the shareholders for corporate debts, but everyone knows that. There are some formalities that should be followed, such as adopting by-laws, electing directors, and electing officers, but for most one-shareholder and two-shareholder corporations, it's just a matter of filling in forms that can be purchased at many office supply and stationery stores.

So the injunction is bad law. But even worse, it is bad politics.

Many people don't like lawyers, especially large groups of lawyers working together. The ever-present suspicion is that lawyers are always looking to line their own pockets by making the legal system more complicated and time-consuming, which allows them to increase their billable hours and their fees.

So now an entire county bar association has ganged up on one accounting firm. Why? According to the lawyers, it was to "protect the public." Protect the public from what? There was no allegation that the accountant was giving bad advice or harming any of his clients in any way. The only allegation was that the accountant was providing services that the lawyers thought they should be providing.

And the public knows what that means. The lawyers were looking to stop competition. The suspicion of many people (myself included) is that the problem with the services of the accountant is not that they were inferior or defective, but that they were competent and cost-effective, and the higher-priced lawyers were worried that they were losing clients.

But will the injunction get those clients back? No, because if those clients didn't want to hire a lawyer before, they aren't going to want to hire a lawyer just because their accountant is out of business. They'll just find the forms on the Internet and fill the forms in themselves.

And those clients will also remember that the accountant they liked doing business with was driven out of the market by some lawyers for some reason that the clients don't really understand. And they'll resent that. And the image of lawyers will go down even more.

A few more such "victories" and we shall be undone.


[Table of Contents]

Evans Law Office
Daniel B. Evans, Attorney at Law
P.O. Box 27370
Philadelphia, PA 19118
Telephone: (866) 348-4250