Senator Tom Coburn v. IRC 107

Here is an other guest post from Robert Baty.  Bob is a retired IRS Appeals Officer.  He has something of an obsession with an obscure Revenue Ruling from 1970.  Revenue Ruling 70-549 allows colleges affiliated with the Church of Christ to provide faculty and administration with Section 107 cash housing allowances as "ministers of the gospel" regardless of what their position is. When I think of Bob Baty and Revenue Ruling 70-549, I'm reminded of Ahab and Moby Dick

Ahab's a little more easy going.  You can call me Ishmael.

Did you see it?

Tax Decoder
By Senator Tom Coburn (R-OK)
December 2014 - Page 192

(excerpt)

"The parsonage allowance (IRC 107) should be eliminated."

I appreciate the fact that Senator Coburn included the issue in his report, but I am quite disappointed in him, personally, for the way he handled the matter.

Senator Coburn has been in the Senate for many years and I am not aware that he has done anything to actually repeal IRC 107, cure its constitutional defects, or otherwise reign in what most might consider its abuses.

I wonder whether or not Senator Coburn is actually familiar with IRC 107 and the disputes over its constitutionality and abuses.  His report appears to simply copy much of what it has to say from Senator Grassley's earlier report which was a consequence of his investigation into some million dollar ministries.

In the case of Senator Grassley, he farmed out thinking about what to do about IRC 107 to his religious friends and, to no surprise, his religious friends told him, and by implication Congress and the President, to keep hands off of IRC 107.  They did.  They did nothing about IRC 107.

Annie Gaylor and Dan Barker have been litigating the constitutionality of IRC 107 for a number of years.  Last year they were successful in getting Federal District Judge Barbara Crabb to declare IRC 107(2) UNconstitutional, a violation of the Establishment Clause of the 1st Amendment to the United States Constitution.  

What did Senator Coburn have to say about that?
Nothing!
Why wasn't he publicly supporting Annie's and Dan's efforts?

This year, the 7th Circuit was asked to review Annie's and Dan's case and without judging the merits of Judge Crabb's ruling as to IRC 107 simply had the case dismissed because, in the opinion of the 3 judge panel (which gave no indication they actually read and understood Annie's and Dan's position), they did not have "standing" to ask Judge Crabb to decide the IRC 107 issue.

The 7th Circuit panel noted that the U.S. Supreme Court has never considered a "standing" issue such as is presented in Annie's and Dan's case.  The appeal period continues to run.  It is not yet known, at least not by me, whether or not Annie and Dan will ask the U.S. Supreme Court to review the 7th Circuit ruling.  I hope that they do.

Having lived in Oklahoma for the first 55 years of my life, I have a special interest in Senator Coburn and his antics regarding the IRC 107 issue.   Senator Coburn's report names names at times and at other times leaves the names out in rather conspicuous fashion.

For instance, Senator Coburn's report states, in part:

"A prominent California church designated the whole salary of its senior pastor as a housing allowance, prompting an investigation from the IRS. In the midst of that lawsuit, Congress limited the allowance to the fair rental value of the home plus certain expenses – the only time Congress has modified the tax break."

You can form your own opinions as to why Senator Coburn, after naming other names in his report, did not mention that that church was the Saddleback Church and that senior pastor was Rick Warren.  Congress and the President (Bush) was wrong-headed in dealing with that matter and their action was NOT because they were concerned about a problem with IRC 107 but rather they were concerned about helping their religious constituents who wanted to block the 9th Circuit Court of Appeals from taking up, on the Court's own initiative, the constitutional issue regarding IRC 107 (i.e., should Rick Warren get any tax exempt housing allowance simply because he was a "minister"?)

Cute, Senator Coburn, cute.

Another name Senator Coburn doesn't mention is that of one of his constituents, a basketball coach named Jerry Jobe.

Why didn't Senator Coburn mention the case of Jerry Jobe as an example of how successful so-called "ministers" have been in exploiting IRC 107 and the manner in which the politicians have allowed the IRS to administer IRC 107?

Jerry Jobe's case is responsible, in large part, in my opinion, for all of the current, popular, public debate and litigation over IRC 107; even though it was decided 30 years ago.

Never heard of it?
Not surprising, but I would that it was otherwise.

Jerry Jobe had been a coach in public schools for some time when he was hired on by a private school in Oklahoma, what is now Oklahoma Christian University (OC).  In consequence of being hired by OC, Jerry got a letter from his church leaders saying he was ordained and registered it at the courthouse so that he could claim part of his salary for coaching basketball was payment for services of a minister.

The local IRS office in Oklahoma challenged Jobe's housing allowance claim on the basis that OC was NOT an "integral agency of the church".  Apart from the fact the majority of folks who owned and operated OC were church-going folks, there wasn't much going for the proposition that Jobe should get his tax free benefit.  The issue was to be resolved around the question as to whether or not OC was an "integral agency of the church".

Founders of OC are on record of unanimously passing what has been reported to be a "landmark resolution" which included "we believe that such an institution should be kept separate and apart from the church".  For those familiar with what is commonly referred to as the "Church of Christ", that statement will harken back to the historical, theological "college question" controversy.

Historically, OC and similar schools such as Abilene Christian University and Pepperdine University have been owned and operated as private enterprises, though enjoying tax-exempt status as educational institutions, independent of the church while church members owned and operated them consistent with their respective religious beliefs.

As a matter of fact, law, and theology, OC, Abilene, Pepperdine, et al, are NOT "integral agencies of the church".

How then, did Jerry Jobe win his case, and he did win his case?

Jerry Jobe simply waived Revenue Ruling 70-549 in the face of the local IRS litigators who, at the behest of the National Office, were forced to back down.

As it turned out, Revenue Ruling 70-549 was a political plum awarded to the constituents of George H.W. Bush and Omar Burleson who put the squeeze on the IRS in order to bail Abilene Christian University (ACU) out of mess over the housing allowance for ministers where the school had been paying some of its employees in tax free housing.

The IRS tried to hold the line, apply the law, and deny the benefits to the ACU employees, and they were doing OK for awhile.  Then George and Omar showed up to put the squeeze on the IRS at the highest levels and the IRS eventually capitulated and issued Revenue Ruling 70-549.

About that same time, Texas Christian University (TCU), involving the Christian Church, Disciples of Christ, went to court over the "integral agency" issue and lost.  Ronald Flowers was the individual used as the test case for TCU.  The experience changed Ronald Flowers who subsequently indicated he had come to believe IRC 107 is UNconstitutional.  

While TCU went to court and lost, ACU went behind closed doors and got an administrative ruling that allowed them to win.  For those familiar with the historic disputes between the "Church of Christ" and "Christian Church", that outcome may strike you, and properly so, as somewhat backwards.

For those looking for a bonafide IRS scandal, the real story behind Revenue Ruling 70-549 involving George H.W. Bush, Omar Burleson, and the Nixon administration is the one that should be being pursued.  The consequences are burdening us yet and Congress and the President, Senator Coburn, et al, do not appear to be willing to do their job to resolve it, and it could be resolved quite easily for such reasons as Senator Coburn noted in his report.

IRC 107 appears to enjoy considerable special interest support for all the wrong reasons.

I would that it were otherwise.
I hope it will be; sooner rather than later.

Justice Antonin Scalia Led High Point Of Gettysburg Ceremonies

Originally published on forbes.con on November 20, 2103.  This is the last of the forbes.com sesquicentennial posts, but not my last word on the Sesquicentennial.

When last you heard from me my covivant was chiding me for subjecting us to an extra hour or so of chilly weather sitting in plastic chairs waiting for the "Dedication Day" ceremonies to commence.  It is an annual event in Gettysburg, but of course this was very special because it is the 150th anniversary of the dedication of the cemetery at which Abraham Lincoln delivered the Gettysburg Address.  A couple of the speakers noted the irony of Lincoln's prediction- "The world will little note nor long remember what we say here, but it can never forget what they did here."-, since his words are so well remembered.

I was quite moved overall by the ceremony.  After all, any event that finishes up with the Marine Corps Band playing the Stars and Stripes Forever has to be a good event.

There was a great musical prelude starting with the Gettysburg High School Ceremonial Brass Band, dressed in Civil War period style uniforms, then "President Lincoln's Own Band", a group formed as a result of Spielberg's movie Lincoln, who re-enact the 1860s Marine Corps Band and finally the actual Marine Corps Band, which we were told, having been founded in 1798, is the oldest professional music organization in the United States.  People were talking through the prelude and there was even somebody with a device playing something annoying.  CV continued to read her book, which might have been distressing, but it was part of the Repairman Jack series, so I am inclined to let it pass.

As the 11th PA Volunteer Infantry Color Guard was presenting the colors, the Battle Hymn of the Republic was played.   The singing was barely audible.  Other than the chorus, those verses are not that well known.  People my age are more likely to know some sort of parody that will include something like "he was flying down the highway in a 47 Ford."  Then came the National Anthem, which this crowd of several thousand knew pretty well.  I found it pretty moving and was glad that there was no wise guy who yelled "Play ball" afterwards.

The various guests were introduced including a surprise addition.  He was not listed in the program anyway.  That would be Antonin Scalia.  Justice Scalia's  part was towards the end and actually received the only standing ovation.  We'll get to that.  I am not going to give you a total blow by blow, particularly since I am not such a great note taker.  Besides the actual reenactment of the Gettysburg address there were two attempts to model it.  One was by Lauren Pyfer, a junior at Upper Dublin High School who had won a competition called In Lincoln's Footsteps.  She updated the "conceived in liberty" metaphor to the idea that liberty and equality are part of the country's genetic make-up.  The logic flowed pretty well from there. I'm going to have to hunt down a copy.  The other was by Secretary of the Interior Sally Jewell who expressed concern for the comfort of the crowd in keeping it short.

We heard from Scott Gordon Perry whose congressional district includes Gettysburg and Senators Pat Toomey and Bob Casey - Republicans all.  I was amazed at the rhetorical tri-fecta they achieved.  I did not hear any reference to equality from any of them.  Perry even managed a little bit of a nod to the neo-confederates like it wasn't really that clear what all that fighting was about back in July.  Governor Tom Corbett, also a Republican, did mention something about equality for all.

Historian James McPherson's speech was quite good.  He started with the little tidbit that the day was also the 230th anniversary of the Treaty of Paris, which officially ended the Revolutionary War.  He referred to the Battle of Gettysburg as the hinge of fate, not just of the United States, but also the world.  He invited us to ponder how 20th Century Europe would have fared without the United States being, you know, united.

Even though the President did not attend we did get words from him - two sets actually.  The second was recorded and was part of the ceremony Scalia starred in.  The first set was delivered by Ranger Morgan Brooks.  Something that was explained to me once is that all the uniformed Park Service people wear the same uniform and are called rangers.  So you can't really tell right off a naturalist from an historian.  Not so the law enforcement rangers.  The law enforcement rangers, though wearing the same uniform, are also packing heat and can arrest you if you need arresting.  Ranger Brooks is a law enforcement ranger.  I don't think they explained why she was given the honor of delivering the President's words.  It was a good thing, though, since without her and Reverend Nelson Strobert who delivered the benediction, it was a pretty white crowd up on the platform.

The President's Message

President Obama, through Ranger Brooks, told us that when things are quiet in the White House he will linger in an office that Lincoln used that includes a copy of the address written in Lincoln's hand. There was some real eloquence in the President's message

I linger on these few words that have helped define our American experiment: "a new nation, conceived in liberty, and dedicated to the proposition that all men are created equal."
Through the lines of weariness etched in his face, we know Lincoln grasped, perhaps more than anyone, the burdens required to give these words meaning. He knew that even a self evident truth was not self executing; that blood drawn by the lash was an affront to our ideals; that blood drawn by the sword was in painful service to those same ideals.

I like that contrast of self evident versus self executing.  I also like the reference to the Second Inaugural, which is actually an even better speech than the Gettysburg Address.  This is the context that the President Obama was drawing from:

The Almighty has His own purposes. "Woe unto the world because of offenses; for it must needs be that offenses come, but woe to that man by whom the offense cometh." If we shall suppose that American slavery is one of those offenses which, in the providence of God, must needs come, but which, having continued through His appointed time, He now wills to remove, and that He gives to both North and South this terrible war as the woe due to those by whom the offense came, shall we discern therein any departure from those divine attributes which the believers in a living God always ascribe to Him? Fondly do we hope, fervently do we pray, that this mighty scourge of war may speedily pass away. Yet, if God wills that it continue until all the wealth piled by the bondsman's two hundred and fifty years of unrequited toil shall be sunk, and until every drop of blood drawn with the lash shall be paid by another drawn with the sword, as was said three thousand years ago, so still it must be said "the judgments of the Lord are true and righteous altogether.

President Obama also gave us a moment reminiscent of Doris Kearns Goodwin's performance on July 1:

This quintessentially self made man, fierce in his belief in honest work and the striving spirit at the heart of America, believed that it falls to each generation, collectively, to share in that toil and sacrifice.
Through cold war and world war, through industrial revolutions and technological transformations, through movements for civil rights and women's rights and workers rights and gay rights, we have.

Talk like that drove my Central Florida friends out early on July 1.  The people who left early from my section yesterday were part of a bus tour with orders to only stay through the address reenactment.

Starring Antonin Scalia

The part of the ceremony that provoked the most positive crowd reaction was led by Justice Scalia.  I doubt that picking him for the job was an offset to that gay rights comment, but you never know.  Sixteen people from thirteen different countries were sworn in as American citizens.  It was mentioned that Justice Scalia's father was an immigrant.  He talked about what great opportunities there are in America and that his grandmother wanted him to grow up to President, so he was a bit of a let down.  I thought it was a little insensitive to bring up about the only thing that the new citizens did not just become eligible for, but nobody seemed to mind.  Among the countries listed were Canada and the United Kingdom.  I wonder if they are fleeing the horrors of national health care.  Also included was Burkina Faso, which I have to confess I had never heard of.  It turns out that it was called the Republic of Upper Volta back when I was collecting stamps, which is the source of much of my lamentably deficient geographic knowledge.  When our new fellow Americans were done abjuring all allegiance and fidelity to any foreign princes or potentates, the crowd gave them a standing ovation.

This is a great country.

You can follow me on twitter @peterreillycpa.

Live From Gettysburg Address Sesquicentennial

Originally published on forbes.com on November 19, 2013.

It was quiet in Gettysburg yesterday afternoon. My covivant and I stopped at the National Cemetery around 4:00 and only a couple of people were there.  Plastic chairs were already set up facing the podium.  A large screen was set up in the field near Meade's Headquarters where the ceremonies will be simulcast for the overflow crowd.  That would be the bunch who do not have the foresight to get there at 7:00 AM for the ceremonies that begin in earnest at 10:00 AM.  There will be music starting at 8:30. 

 The rangers were not giving out attendance estimates.  They had been as high as 30,000 to 40,000 when it was expected that President Obama would attend. On the one hand it would have entirely fitting for our President to be there. On the other hand, it would probably be a logistical nightmare.

The Visitor Center was abuzz with set up for a panel discussion - These Honored Dead: Death And Rebirth In The Civil War - preceded by book and DVD signing by Ric Burns and Drew Gilpin Faust, author of This Republic of Suffering.  When we got there I resisted the temptation to buy one of the books that I might not get around to reading.  I really felt proud of myself for not adding to accumulation from when we were here for the 150th Anniversary of the battle.  On the way in though we had been chatting with Bob Korkuc. He told us that he was working on a kind of biography of a New Hampshire soldier named Bernie Harding, which is nice.  Then he had to go and tell me about the book that he had already had published Finding A Fallen Hero - Death Of A Ball Turret Gunner in which he describes his efforts to find out exactly what happened to his uncle Anthony Korkuc who was part of the crew of one of the 97 B-17s lost during Big Week in February 1944, which according to the infallible source firmly established Allied air superiority in the skies over Germany.  If you don't see the connection to Gettysburg, you lack historic imagination.  At any rate, I felt compelled to order it on amazon when we got back to the hotel, so I did not escape without buying a book after all.

There were representative of the Confederation of Union Generals at the book signing including a Joshua Chamberlain.  He is the third Joshua Chamberlain I have met this year.  He really has the look.  There is a genetic advantage.  His name is Tom Chamberlain and is a cousin.

Rather than staying for the panel discussion, CV and I went to the event at David Wills house in the center of town.  David Wills was the lawyer charged with the creation of the creation of the National Cemetery. President Lincoln stayed at his house the night before the dedication ceremony.  It was a short walk to the train station.  We got there just as a Lincoln re-enactor was arriving, presumably James Getty who will be reenacting the address in a couple of hours.  There is a picture in this story from the Pittsburgh Tribune Review. We chatted a bit with the reporter Mike Wereschagin.  He had actually read my coverage of the battle.  I'm starting to feel like a real journalist, which would be nice since then I would be over in the Media tent rather than on a folding chair in front of the podium as I write this.

"President's Lincoln's Own Band" was performing at the Wills house.  The Band is composed of the musicians who performed in the movie Lincoln wearing the same uniforms that they wore in the movie. CV and I got to chat with them last night at dinner in the hotel and this morning at breakfast.  Apparently, the cold presents problems for them beyond discomfort as the larger instruments warm up more slowly which puts them out of tune.  The band will be performing this morning at the Ceremony.  The Marine Corps Band will be playing the National Anthem.  It was President Lincoln that started the tradition of the special relationship between the Presidency and the Marine Corps Band.

As we arrived I started chatting with a big fellow.  He said he was here out of his love for the Constitution.  We didn't create a disturbance or anything, but he got me going just a little, because this morning is about the Declaration.

As I finish this up it is about 8:00 AM and CV and I are crammed into the plastic chairs in front of the podium.  She is giving me a little bit of a hard time because there are still some open seats.  Around us are people from Pittsburgh, Illinois and Boston.  The musical prelude will start in about an hour.  I'm not the only one here who hopes that the President will surprise us and show up anyway, but it is not that likely.

You can follow me on twitter @peterreillycpa.

I Really Missed President Obama At Gettysburg Address Sesquicentennial

Roughly a year later I have been republishing my forbes Sesquicentennial real time posts.  This one went up at the end of October in anticipation of the Gettysburg Address Sesquicentennial under a slightly different title.  There was bit of a flap about the President not attending, but if you know the layout of Gettysburg it was probably a blessing for the rest of us.  He was represented quite well at the ceremony.   

In the last Presidential election, I knew my candidate, Jill Stein, was not going to win.  I was comforted by the belief that at the Sesquicentennial of the Gettysburg Address, we would have either a member of Mr. Lincoln's party, a party which might take some time in the coming month to reflect on its roots in the struggle for human equality, or our first African-American President attending the event.  Being inclined towards grandiosity, I even started a We The People petition to have all our living Presidents attend.  That would give us two members of Mr. Lincoln's party, three former governors of states then in rebellion and an honest to goodness war hero to complement our first African-American President, who is from Illinois.

So I was a little disappointed by the Park Service announcement this morning

Update on Dedication Day -
Secretary of the Interior Sally Jewell and Pulitzer Prize-winning historian James McPherson will share the keynote speaker role on November 19, for the 150th anniversary of President Lincoln's Gettysburg Address. President Obama will not attend and the Secretary of Interior will represent the administration. This year’s Dedication Day ceremony will observe the 150th ...Anniversary of President Abraham Lincoln's Gettysburg Address. The ceremony takes place at 10 a.m. in the Soldiers' National Cemetery and is sponsored by Gettysburg National Military Park, the Gettysburg Foundation, the Lincoln Fellowship of Pennsylvania and Gettysburg College.The event also features the U.S. Marine Band; “President Lincoln’s Own Band” from the movie, Lincoln; Governor Tom Corbett; a reading of the Gettysburg Address by Lincoln portrayer James Getty; and U.S. Citizenship and Immigration Services will administer the Oath of Allegiance to sixteen new citizens.

On the bright side, it will probably be easier to get around.

The commemoration of the Gettysburg address is an invitation to look at our real roots.  Many people view the Constitution as our founding document.  I disagree, as did President Lincoln. Our founding document is the Declaration of Independence. Other than the unfortunate failure to use gender neutral language these words don't need much in the way of amendment:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.--That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, --That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

Reading the Federalist Papers, I take away the notion that if the Founders started from scratch today, they would come up with something different.  If the country were a church, the Declaration would be our creed.  The Constitution would be the by-laws.  That's not to say that we should go messing with the Constitution too much.

Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed.

As Gary Wills wrote in Lincoln at Gettysburg: The Words that Remade America:

the Constitution itself, is by no means unitary; it is a provisional compromise between the ideal political principle of the Declaration, and the actual selfishness of the people North and South.

The Supreme Court in the Dredd Scott decision tried to resolve the contradiction between a Constitution that talked of returning people held to service or labor to their masters and the principles of the Declaration.  It resolves the dilemma by saying that when we said "We the People" we didn't mean "them".

A free negro of the African race, whose ancestors were brought to this country and sold as slaves, is not a “citizen” within the meaning of the Constitution of the United States.When the Constitution was adopted, they were not regarded in any of the States as members of the community which constituted the State, and were not numbered among its “people or citizens.”
The only two clauses in the Constitution which point to this race treat them as persons whom it was morally lawfully to deal in as articles of property and to hold as slaves.

My covivant and I were at Gettysburg for the Sesquicentennial of the battle.  One of the things that was mentioned several times was that the Battle of Gettysburg was the worst man-made disaster in the history of the Americas.  The armies moved out quickly leaving a small community to deal with thousands and thousands of dead bodies and wounded soldiers.  It was up to the President to wring some meaning out of the tragedy.  As Wills wrote:

Lincoln was able to achieve the loftiness, ideality, and brevity of the Gettysburg Address because he had spent a good part of the 1850s repeatedly relating all the most sensitive issues of the day to the Declaration’s supreme principle. If all men are created equal, they cannot be property.

There were people at the time who thought Lincoln had pulled a fast one with the address

It was to uphold this constitution, and the Union created by it, that our officers and soldiers gave their lives at Gettysburg. How dare he, then, standing on their graves, misstate the cause for which they died, and libel the statesmen who founded the government? They were men possessing too much self-respect to declare that negroes were their equals, or were entitled to equal privileges.

Nonetheless, his interpretation that we are dedicated to "the proposition that all men are created equal" has stood the test of time.

It is too bad that President Obama cannot make the ceremony, but just by being our President on that day, he is doing his part to commemorate the promise.

As John McCain said in perhaps one of the classiest concession speeches ever:

A century ago, President Theodore Roosevelt's invitation of Booker T. Washington to visit -- to dine at the White House was taken as an outrage in many quarters.  America today is a world away from the cruel and prideful bigotry of that time.  There is no better evidence of this than the election of an African American to the presidency of the United States.  Let there be no reason now -- (cheers, applause) -- let there be no reason now for any American to fail to cherish their citizenship in this, the greatest nation on Earth.  (Cheers, applause.)

You can follow me on twitter @peterreillycpa.

Sallie Mae Not Opposed To Bankruptcy Relief For Student Loans

Originally Published on forbes.com on April 6th,2012

______________________________________

Alan Collinge, founder of StudentLoanJustice.org , and Sallie Mae on the same page? Can such a thing be? Well maybe not exactly, but it may be that they are not as far apart as you think. A couple of weeks ago I heard from Martha Holler, Senior Vice President, Corporate Marketing & Communications for Sallie Mae.  Being a mere $193 billion (assets) company, they don’t have the kind of media access a famous activist like Alan Collinge has, so they wanted to talk to me about how to get their story across on the forbes.com platform.  Here is the email from Ms. Holler that got us going:

I read Alan Collinge’s blog and your comments about it with interest and would welcome the opportunity to discussstudent loan debt and recently proposed legislation. I will be in New York on April 24 with Sallie Mae President & COO Jack Remondi and SVP of Public Policy Sarah Ducich and would love to meet. Would you have 45 minutes to meet with us?

As we discussed the arrangements for the meeting,  my conscience was stricken with the notion that I was becoming guilty of impersonating a journalist.  I was afraid that this email might cause them to cancel, but I sent it anyway in the interest of full disclosure:

Actually I am located in Westborough Massachusetts but I like to get down to the city every once in a while and there is somebody else I need to meet with around then anyway.  I should be clear that I am just a contributor to forbes.com.  I work full time as a CPA.

That didn’t cause them to back out.  I thought I could use some help from a real journalist so I asked my friend Jonathan Schwartz, who runs Interlock Media, a not-for-profit corporation based in Cambridge that makes films on environmental and human rights issues to help.  Among their films is Turned Out, a powerful documentary about sexual assault in prison:

We supplemented the team with John Whalen, an Interlock intern, who was immensely helpful, not least in handling much of the driving including especially the city part.

Sallie Mae On Increasing College Costs

So there I was in Connolly’s on 45th Street sitting across from John F. “Jack” Remondi, President and Chief Operating Officer of Sallie Mae.  I started off by asking him if he really is worried that college costs might go down, which would hurt their business.  I got that from the Sallie Mae 10-K.  He kind of smiled and said that was the type of risk that they had to disclose to shareholders but he did not think it was very likely.  Then I asked him about the assertion made by Allan Collinge and others that the industry profits from student defaults.

Sallie Mae On Defaults

The argument has a certain logic to it.  The interest and principal on most of Sallie Mae’s portfolio is federally guaranteed.  If somebody goes delinquent, but then starts making some payments, many of those payments will be late fees, which is extra income to Sallie Mae beyond the interest and principal that is guaranteed.  Mr. Remondi indicated that this argument ignores costs. Before turning a loan over to the federal government for delinquency, a process that takes about a year, Sallie Mae, on average, will contact the borrower seventeen times (They are required to contact them twice).  Given the limited time and the amount of material we were covering, there was some necessary vagueness in our discussion, but Mr. Remondi was very clear on this:

When someone is delinquent, it takes work to pursue service. Sallie Mae faces five times the servicing costs as compared to servicing a current loan.If we had all current accounts, we would trade late fees for delinquent costs. Absolutely.

Given what else I’ve learned about Sallie Mae, I’m inclined to believe him.

What About Refinancing ?

Sallie Mae is at an interesting crossroads right now.  The program that generated most of its portfolio, FFELP, is not guaranteeing any new loans.  Sallie Mae expects to be making money off that portfolio for the next twenty years, though, and is buying portfolios of other institutions that hold FFELP loans.  Given its infrastructure, Sallie Mae can presumably service them more profitably.  Since it is a federal guarantee that gives the portfolios their gilt edge, it strikes me that this might not be the optimal deal for the taxpayers.  We will get the ones that stink while Sallie Mae makes money off the ones that perform.

Mr. Remondi set me straight on something that I had not understood from the 10-K.  Although many of the borrowers are paying fixed rates, the lenders are getting variable rates (roughly LIBOR +2). (There is a true-up done with payments either coming from or going to the federal government.  Currently they are going to the federal government.)  Sallie Mae when it buys the loans up, secutitizes them giving institutional investors something like LIBOR+1.  That seems like a pretty sweet deal, if you already have the servicing infrastructure in place.  My question was and still is why the taxpayers don’t do this.  Why don’t we, the taxpayers, refinance the whole FFELP portfolio ?  We are already stuck with the down side of it.  This is another thing that Sallie Mae tells its shareholders it is worried about:

For instance, during the fourth-quarter 2011, the Administration announced a Special Direct Consolidation Loan Initiative that provides a temporary incentive to borrowers who have at least one student loan owned by ED and at least one held by a FFELP lender to consolidate the FFELP lender’s loans into the DSLP program by providing a 0.25 percentage point interest rate reduction on the FFELP loans that are eligible for consolidation. We currently do not foresee the initiative having a significant impact on our FFELP Loans segment. However, the initiative is an example of how the Administration and Congress could detrimentally affect future estimated cash flows and profitability from our FFELP Loan portfolios through their actions.

 Mr. Remondi did not seem all that worried, but I don’t think he was smiling when I asked him about this.

The Big Question – What About Bankrurptcy ?

This was the most exciting thing about the interview to me, but the Sallie Mae people did not think it was that big a deal.  Ms. Ducich explained how the bankruptcy exemption for student loans evolved over time, with the last most draconian piece being added by a floor amendment.  They indicated that Sallie Mae is not opposed to bankruptcy protection for student loans, provided that it applies to all student loans and there is some sort of good faith attempt at payment for five or six years.  You should not be able to graduate and immediately declare bankruptcy.  (Calm down, Alan, I know you think those stories are apocryphal).

Alan Collinge and John Remondi Around The Campfire ?

I have this strong desire for everybody to get along.  Somebody once told me it is because I am an Aquarian.  So the image of the President of Sallie Mae and the student loan activist singing Kumbaya about bankruptcy protection is irresistible to me.  Sadly, the Sallie Mae people tell me much of what Alan says is “factually inaccurate”.  There is a lot to sort out there, which I will leave for future posts.  I hope some of those will come from Sallie Mae, who will further aid me in my ambition to become the Tom Sawyer of blogging.

You can follow me on twitter @peterreillycpa.

Supreme Court Has Taken Ammunition From IRS In Son Of Boss Cases - Time To Fix Bayonets ?

Originally Published on forbes.com on April 6th,2012

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Just so the lawyers do not think I am a moron, I suppose I should talk about what is good about the Supreme Court’sdecision in the Home Concrete case. Normally the IRS has three years to audit you after you have filed your return. If you “forget” to report a significant percentage of your gross income (25%), they get an extra three years. I think the idea is that it is easier to spot phony deductions than missing income.

When you sell something your income is only the gain from what you sold. So what happens if instead of “forgetting” to report the sale you “make a mistake” about your basis ? The IRS argued that they had six years in that case also. They issued a regulation to that effect and applied the regulation retroactively. There were numerous circuit and Tax Court decisions that either invalidated the regulation, said it could not be applied retroactively, was just fine and could be applied retroactively and I think there was one that said it wasn’t even needed, but I have not gone back and reviewed them all.

The Supreme Court said that they answered the question in 1958 and even though the language in the 1954 Code was a little different than the 1939 Code, that their decision was based on, the answer was the same. An overstatement of basis is not an omission from income. I like that clarity.  There is a lot more lawyerly procedural stuff in the decision and it is a 5/4 decision with Antonin Scalia writing his own opinion because he thinks the four he voted with were right for the wrong reasons.  So the lawyers willhave a lot of fun with it.

I did not like the decision, because it lets the clients of the Big Four get away with murder.  The taxpayers affected by these cases did not “make a mistake” about their basis. They hired Big Four firms to create basis out of thin air. What is particularly egrigous about the schemes is that they were based on one sided entries.  I called it “Debit by the Window – Credit out the Window“.  Richard Egan’s attorney talked about how some schemes used basis rather than creating losses, which was less likely to be noticed by the IRS.  If the price of EMC stock had not collapsed, there would have been no big ugly negative numbers on his return, just lower gains.  No tax shelter here – just a hard working high tech billionaire paying more taxes than most people.  So we have the Supreme Court blessing people who did a better job gaming the system than KPMG and McGladrey did for Mr. Egan, who was caught before three years were up.

Robert McKenzie commented extensively on my first piece on the casestarting out quite diplomatically by observing “Peter misses the point of the ruling”.  He actually did have a good point (which I had not missed):

It should also be noted that had the IRS prevailed in this case it would been allowed to audit most capital transactions for 6 years not 3. Every person who sold a rental property or a significant amount of stock would have been subject to an IRS financial proctolgy exam for up to 6 years. If Congress dislikes the results the results of this case it can amend the law but in so doing it will subject many of the 99% who lack to the resources to hire talented tax lawyers to IRS intrusion into their finances for more than 3 years. In my 40 years as a tax lawyer there is one certainty, every time Congress grants the IRS more power some of its agents will abuse that power.

Actually it would be not most capital transactions.  It would be large, relative to gross income, capital transactions where there was significant reported basis relative to proceeds.  At any rate if the IRS had prevailed it would have been worrisome for people who were not trying to get away with anything.  Three years should really be enough for somebody who is confused about their basis in all those AT&T subsidiaries or had to reconstruct the record on improvements they made to a vacation home they sold.

Robert Wood in his piece noted:

Robert McKenzie, tax lawyer with Chicago’s Arnstein & Lehr LLP said four clients of his firm with similar issues would likely reap tax savings approaching $40 million. Indeed, some reports say the case calls into question up to $1 billion in tax revenues. The IRS was hoping to collect this huge amount in about 30 related cases involving “Son of Boss” tax shelters.

Mr. McKenzie’s clients were probably people who got confused about their basis in AT&T stock or sold vacation homes and had to estimate how much they had put in improvements not people who had collectively reaped $200,000,ooo in capital gains and hired the Big Four to rig up transactions that would fly below the radar and allow them to pay nothing – except big fees.  If they were my clients, I would be glad about it too.  In a little e-mail exchange about the case he noted “Everybody benefits when the courts restrain the IRS from making its own rules.”    I don’t know about everybody, but it is true you do have these situations where basis documentation is on the sketchy side and it is comforting to know that you can rest easy after three years.

There is still that billion dollars though.  Does the IRS have to retreat from trying to fix what Jack Townsend calls a “raid on the fisc” now that the Supreme Court has taken away their ammunition?  It almost feels like Joshua Chamberlain on Little Round Top:

Jack questions why the IRS bothered trying to extend the scope of the six year statute to apply to these cases, when they had, and in some of the cases may still have, another weapon available – an unlimited statute for fraud:

But there is a glaring candidate for the presence of fraud in these cases.  In most, if not all, a condition of the hokey but foggy tax opinions that were rendered was that the taxpayer personally represent to the opinion writerthat the taxpayer had a profit motive apart from the tax benefits for entering the transaction(s) which generated the imagined tax benefits.  In truth, there was little economic substance in these deals and the taxpayer was really motivated by the hokey tax savings.  So, the taxpayer was not really telling the truth in many — probably most, if not all — of these shelters when the taxpayer made that representation about his or her profit motive.  Without that untruth, the hokey tax opinion would not have been uttered and the hokey shelter claims would not have been made and the fisc would not have been raided.  So the question has to be asked why the IRS did not pursue civil fraud in at least some of these cases — to get the unlimited statute and a civil penalty more fitting to the egregious conduct being punished.

Would using the unlimited statute for fraud give the Service the advantage of moving down the hill ? It might, because instead of a 40% penalty, there is a 75% penalty.  As I have often, said I usually root for the taxpayers, but this one is an exception.  I really hope that the Son of Boss swat team has just heard somebody say “Fix Bayonets” and that all winning this case had done for the Son of Boss guys is add another 35% to the penalty.

You can follow me on twitter @peterreillycpa.