Legislators dealing with tax law need curiosity

If you ever watched the show “The Big Bang Theory,” you heard the fictional Sheldon speak of the real Richard Feynman.

Feynman was a professor of theoretical physics at Cal Tech, Los Alamos resident during the Manhattan project, and 1965 Nobel Prize winner in physics.

Feynman was, by his own description, a “curious fellow.” While working on his doctorate at Princeton, Feynman took part in Graduate College seminars arranged by the dean. At one session, the dean noted an upcoming presentation by a hypnotist.

Advance warning was given because the hypnotist wanted a few volunteers to be hypnotized during his presentation.

When the request for volunteers was made, Feynman, sitting at the back of the room, yelled “Meeeeee.” No one else said anything. Only one person was curious enough to experience what this hypnotism was all about. I too, am curious. I am a dumb version of Feynman. My capacity to understand is quite limited, so I stick with topics within my expertise.

One such topic is partnership tax allocations. Partnerships do not pay tax. They accumulate items of income and deduction, and then pass them on to their partners.

How this is done can be simple or complicated. Tax allocations must match the partners’ economic arrangement. Complex (or simple) economic arrangements lead to complex (or simple) allocations.

The tax law has detailed rules that try to align the tax and the economics. Feynman said, “If you thought that science was certain – well, that’s just an error on your part.”

Making partnership tax allocations “work” is not scientific and even less certain. We need to recognize that and do the best we can to deal with it.

Senate Finance Committee Chair Ron Wyden of Oregon has proposed dramatic changes to the rules for partnership tax allocations. His objectives – fairness and simplicity.

There is much fairness in Wyden’s proposals. This fairness comes at a cost of great complexity. I think Wyden is a good man with good intentions. I don’t think he understands what happens when a partnership tax return is prepared.

When I first read his proposals, I wanted to leap up and be the first to respond. Given my interest in partnership tax issues, I thought that, if anyone should respond, it should be “Meeeeee.”

Unlike Feynman, others jumped up before me. There have been several excellent articles in tax journals pointing out the problems with the Wyden proposals.

I doubt you have read these articles. I will summarize. Wyden’s proposals are simply not workable. They come from a desire to better match tax and economics. They will not be comprehensible to those who prepare most of the 28 million partner (K-1) information returns.

Wyden also serves on the Joint Committee on Taxation, which works with Congress and professional staff to develop tax policy.

I have written often about the sad state of our tax laws. By this, I do not mean so-and-so pays too much (or too little) tax. I would like to see a logical tax system. I care little about whose ox is gored by this system.

We have a complete breakdown of the legislative process. The tax legislative process no longer consults policy experts. It consults lobbyists, who are entirely about whose ox is gored.

Wyden is trying to move the ball down the field. I just think he’s going about it wrong. I do believe he will listen to those who prepare tax returns, many of whom are not experts in partnership tax law.

Feynman said, “I would rather have questions that can’t be answered than answers that can’t be questioned.” Members of Congress no longer accept questions about their “answers.”

Feynman knew nothing of the tax law. He knew how to solve problems with integrity. One final quote could guide our tax policymakers.

“You can know the name of a bird … (but) know absolutely nothing whatever about the bird. Look at the bird and see what it’s doing – that’s what counts. I learned very early the difference between knowing the name of something and knowing something.”

We need a curious chair of a legislative committee who wants to make things better, as long as he is willing to learn how the bird actually functions.

Jim Hamill is director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.

Go to Source

Powered by WPeMatico