Tuesday, 2 October 2012

"IRS Rules" is Wrong!

One of my, if not my biggest, pet peeves with popular press reporting on taxes is when reporters blame "IRS Rules" for some perceived tax abuse.  For example, today's New York Times (also linked on TaxProf) claims that the difference in tax treatment between a partnership interest and a fee from a corporation is one such rule.

I thought the Internal Revenue Code provided for a separate tax on corporations and for partnerships to be treated as flow-through entities, which is why carried interest is taxed differently than fees paid by a corporation.  Or maybe the Supreme Court? Or the Circuit Courts?  Even Treasury Regulations don't come directly out of the IRS.  The IRS does an incredible amount of work administering the tax laws of the largest economy in the world, and there really are rules published by the IRS that can have substantive effect , but the IRS does not (and cannot) make these more fundamental structural legal choices.

Why care so much?  Because the use of "IRS rules" gives the impression that somehow there is a shadowy underworld of bureaucrats conspiring with shifty practitioners and taxpayers to avoid or undermine obviously correct tax consequences, rather than face the difficult policy choices inherent in constructing a tax law which involve real and difficult trade-offs.  As someone who struggles with these issues, this concerns me. How is the country supposed to engage in a real policy debate without directly confronting these difficult policy choices?    Perhaps not all is lost, though - the Times editorial board seems to be able to get it right.

More personally, however, I suppose I am just tired of explaining to people that the IRS had nothing to do with why Bain can form entities in the Cayman Islands and defer paying taxes.  Oh well.

No comments:

Post a Comment