Tax Code Written In Pencil

No less than nineteen acts of Congress amended the Internal Revenue Code in 2008. While this may be slightly above average, it isn't that exceptional. Indeed, there is a fair argument that not enough tax legislation was enacted in 2008.

For example, there is still not a consensus in Congress regarding what estate taxation laws will look like in 2010, and the President's proposal which many planners had assumed would become law, was shot down in the Democratic party controlled U.S. Senate just this past week. This set of laws, like many parts of the tax code, are primarily important to private individuals because it influences how they will structure and plan their affairs.

Uncertainty, even apart from the merits of particular tax provisions, can prevent economically important transactions from proceeding. If positive change is being considered, it may make sense to wait in order to benefit from it. If negative change for a particular client is being consider, one has to determine if the deal originally contemplated will still make sense in future years in its original structure. Sometimes impending tax changes can cause a deal to be rushed forward, but, that is the less common consequence of tax law uncertainty.

Lawyers who handle tax conscious matters, like myself, must always draft with an eye towards how the tax code might plausibly look in a few years, in addition to how it looks now. For example, one particularly complex tax matter I handled involved a business that was set up a few months before one of the biggest changes in corporate tax law in the last forty years, and then not revised to reflect those changes. Fixing the problems that resulted, in a sensible way, to do what made economic sense absent tax considerations for that business, required a ten year plan for the business to be put into place.

Another big part of tax practice is discerning whether customary ways of handling transactions in a particular industry have a primarily economic basis, or flow from tax considerations. If they do flow from tax considerations, one must then determine whether the tax laws that made a particular industry custom a good choice at the time it was adopted are still on the books today.

For example, both the renewable and non-renewable energy sectors are very tax driven. Many important trends in those industries can be traced directly to specific tax code changes, and 2008 brought some of the biggest overhauls to that area of taxation in many years. One of the reasons that Toyota's last big fuel economy oriented cars, the Prius, was a hybrid, while its new fuel economy oriented car for this year is not a hybrid, has as much to do with changing tax incentives as it does with automotive engineering.

Similarly, overall charitable giving flows to a significant extent from fundamental economic issues beyond tax law, and is relatively stable relative to the size of the economy as a whole. But, the form in which charitable gifts are made is very tax sensitive. A subtle change in how car donations were treated for tax purposes, for example, has dramatically and directly changed the number of in kind automobile donations made to non-profits. This, in turn, drives what kind of charitable fundraising strategies a large share of the entire non-profit sector adopts.

Part of this flows from the intense detail of economic regulation that the tax code imposes on the economy -- not so much its magnitude as its attention to detail. Part of it flows from the ever moving targets needed to make ways and means match up to spending needs as the economy goes through its cycles.

Finally, part of this great microeconomic impact of the tax code flows from the counterintuitive fact that lots of the tax code impacts very small numbers of people. As a result, there is little organized opposition to industry capture of legislative efforts in those areas. For example, while I work with more of the tax code than many lawyers and I am intimately familiar with how life insurance products are taxed, I personally, have only a dim understanding of how this plays out with life insurance companies which receive special treatment under the Internal Revenue Code (of course, I know who to ask if I have questions and how to ask those questions efficiently in terms a tax lawyer is comfortable using). Without someone else raising a red flag, I might not notice a key legislative change to life insurance taxation tucked into one of the nineteen tax bills for the year, even though I follow that fairly closely and often read the text of the bills themselves during the legislative process.