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If brevity is the soul of wit, then Congress, Treasury have none of it

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Gary Barron, CPA
Frost, Ruttenberg & Rothblat, P.C.<br/>
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A Google search for “tax reform” resulted in 1.2 million hits. Who would have thought Iceland had a need for tax simplification?   In the U.S., the recommendations of President Bush’s Advisory Panel on Federal Tax Reform reflect many of the same concepts set forth in the Tax Reform Act of 1986, the mother of all U.S. tax reform legislation.   Congress’ primary objective for enacting the 1986 overhaul of the Internal Revenue Code was to promote fairness, efficiency and simplicity — praiseworthy goals.  

As we move toward the next presidential election, the cry for tax reform will increase. The 20th anniversary of the 1986 act affords an opportunity to look back. Perhaps Congress should take pause before going down that road again.

Some of the 1986 rules were intended to limit benefits from tax shelters. Congress believed the perceived widespread use of tax  shelters contributed to public concern that the tax system was unfair.   The resulting passive activity section of the code is about six times longer than the Bill of Rights. Apparently, it’s more complicated to provide an equitable tax system than to secure basic human rights. But one must remember: The Bill of Rights was composed by our founding fathers; the 1986 act came from a committee that included a senator forced to resign for sexual misconduct and a member of the House sentenced to prison for misuse of public funds. .<br/>
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One might think such an explicitly written code section would require little clarification — but one would be wrong. The regulations promulgated by the Department of Treasury are longer than the combined length of Shakespeare’s Macbeth and Hamlet. In Hamlet we read,  “To be, or not to be, That is the question: Whether ’tis nobler in the mind to suffer the slings and arrows of outrageous fortune or to take arms against a sea of troubles, and by opposing end them? To die, — To sleep— No more…”   .<br/>
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In the Treasury regulations, we read: “Special rule for significant participation — (i) In general. An amount of the taxpayer’s gross income from each significant participation passive activity for the taxable year equal to a ratable portion of the taxpayer’s net passive income from such activity for the taxable year shall be treated as not from a passive activity if the taxpayer’s passive activity gross income from all significant participation passive activities for the taxable year (determined without regard to paragraphs (f)(2) through (4) of this section) exceeds the taxpayer’s passive activity deductions from all such activities for such year. (Treas.Reg.1.469-2T(f)(2))”  .<br/>
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After reading that, Hamlet would probably opt for “not to be.”  The regulations prepared by the Treasury have been criticized by everyone from members of the accounting and legal professions, to Ann Landers in a 1990 newspaper column.   And, after 20 years, the Treasury still hasn’t completed these regulations.  Some sections are still “Temporary”, others are listed as “Reserved.”  This seems to mean, “We know we need to do something, but we still can’t figure out what that ‘something’ is yet.”  

The quest for simplicity continued with the publication of a 27-page IRS guide about passive activities, and the creation of a three-page form with 12 pages of instructions and a two-page form with 16 pages of instructions. The IRS estimates the time required to keep records, learn about the law, prepare, copy, assemble and mail these two forms is about 19.25 hours.

My fellow CPAs are not complaining. I have friends who have sent children to college thanks to the passive activities rules. The end result is a more complicated and burdensome system of tax — the complete opposite of the lofty goals envisioned by Congress.  After reviewing this attempt at simplification over the past 20 years, Puck, from Midsummer Night’s Dream, would likely say: “Lord, what fools these mortals be.”  

Gary Barron, CPA is the founding member of the Tax Department
at Frost, Ruttenberg & Rothblatt, P.C.,

 
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