Reilly's Laws Of Tax Planning, Practice And Policy

One of the running jokes of my tax blogs has been my enunciation of "Laws of Tax Planning".  They are conclusions that I have reached from my experience both in practice and from extensive reading.  I think I have probably been inconsistent in the numbering sometimes stating the First Law as being the Second Law.  I recently defined the Fourth Law and a commenter asked what the Third Law was and I had trouble remembering it.  So I have decided to put forth a definitive compilation.  Reilly's Code of Laws, so to speak.  Here then are Reilly's Laws of Tax Planning.  I am planning to add commentary and am open to suggestions for new laws.

I have also supplemented my Laws of Tax Planning with Laws of Tax Practice to help other practitioners and I am now starting my Laws of Tax Policy to lay out principles I think should be used in making and enforcing the tax laws.  That third group is the height of arrogance on my part, but it's my blog and I'll be grandiose if I want to.


Laws Of Tax Planning

The Prime Directive

If you don't have documentation, at least have a plausible story.

This is my restatement of the Cohan Rule.  At Joseph B Cohan and associates, young staff accountants thought the rule was named for our eponymous founder, who still came into the office from time to time, or his son Herb who was our managing partner.  Actually it is named for George M Cohan who appealed a Board of Tax Appeals decision to the Second Circuit.  The 1930 decision the court noted
  In the production of his plays Cohan was obliged to be free-handed in entertaining actors, employees, and, as he naively adds dramatic critics. He had also to travel much, at times with his attorney. These expenses amounted to substantial sums, but he kept no account and probably could not have done so.   ......
Absolute certainty in such matters is usually impossible and is not necessary; the Board should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making. But to allow nothing at all appears to us inconsistent with saying that something was spent.
The reason this is the prime directive rather than one of the laws is that even though I use it as a kind of motto, it only occurred for me to include it here recently and it is too significant to be the seventeenth law.

Legislation on various topics has eroded the Cohan rule (See the 16th law), but it still has life in it.


1. It is what it is.  Deal with it.

This law originates with a response I used to have to less experienced staff and sometimes clients when one of them would say about a particular tax rule "That doesn't make sense".  My response was "That's not a requirement".

I expanded the applicability of the law more broadly to accepting the way clients, staff, bosses etc are.  It's not that people never change, but if you have observed them not change enough, you should just live with them being the way they are.  An article I read once summed it up nicely when it said that accountants must learn to accept that most clients are crazy. The accountant shared an anecdote of a very successful client who kept a car and driver at the office at all times in case he needed to go somewhere, but rarely went anywhere.  The same client would walk through the office searching for stray paper clips which he would return to their boxes.

Doug Spiker becomes the first outside contributor to this project with a restatement of the First Law.

I can tell you what. I can't tell you why!

He expanded on the thought writing  me: After years of trying to answer my clients when reasonably asking "Why?", I finally gave up.  I can't explain the logic of an illogical tax code.  I can't explain the rationale of a Congress that has lost all reason.


2. Sometimes it's better to just pay the taxes.

If you are trying to maximize your life style or build wealth, looking at ways to save taxes is helpful.  Mainly this law is derived from reading case law of bad schemes gone awry, but the application is broader.

An example of an application of this law is the rage by owners of real estate whose ship comes in who no longer want to own real estate to exchange into a Walgreens to avoid capital gains tax. Imagine someone has had their real estate ship come in and they have sold a property with negligible basis for $5,000,000.  An alternative to having $4,000,000 in after tax dollars to do with as you please is to exchange into a Walgreens.  Then you have a property with a long lease that yields a cap rate in the 5% vicinity.  On a per square foot basis it is worth maybe $2,500,000.  You need to ask yourself if what you had was $4,000,000, would you buy what is, in effect, a Walgreens bond with some downside protection.  If not, it is better to pay the taxes.


3. Any clever idea that pops into your head probably has a corresponding rule that makes it not work.

Tax planning, particularly at the more ethereal level is something of an arms race between clever people coming up with cute ideas and legislators and regulators cleaning up behind them or sometimes anticipating their villainy. When something pops into your head, there is a good chance that yours is not the first head into which it has popped.


4.  Execution isn't everything but it's a lot.

I derived this law mainly from reading cases, but also from some real life experience.  One batch of cases where it shows up a lot is family limited partnerships.  The ones that get blown up usually have people showing no respect for the entities that they established.  A classic remark in one of the cases was by one of the partners saying "I just could not wrap my head around the fact that it was not my money".  Accountants have a delusion that they can fix all the problems with journal entries.  When it goes to court, journal entries mean nothing.

If a structure calls for different entities, they should all be actually formed and each should execute its own transactions.


5. A tax plan that ignores AMT or SALT is not much of a tax plan.

The alternative minimum tax although presented as a possible add on to the regular tax is actually an entire parallel system with generally fewer deductions and a lower rate. It is relevant not only because of the tax itself, but also because it can serve as a limit on tax credits.

SALT is state and local income tax.  It is not unusual to have people who do planning based on federal tax principles get nasty state and local surprises.  Talk to Robert Redford about his New York problems.

6. Don't do the math in your head.

This is something of a corollary of the fifth law, but it is more than AMT that makes it relevant.  There are such a host of thresholds and phase-outs that really the only way to answer a question about the tax effect of a transaction is to run pro-forma returns.

7. RTFI

This was my favorite review note.  You could argue that it is more of a compliance thing, but planning and compliance must be integrated.  It stands for Read The Instructions.  The "F" has been silent since the Clarence Thomas hearings.

8. Both Before And After Thinking Outside The Box Take A Good Look Inside The Box

9. Tell The Preparer What The Plan Is

10. Once The Tax Is More Than You Can Pay It Might Not Matter How Much More

Determining the "correct tax" and determining how much of the "correct tax" you have to pay if you cannot pay all are two entirely distinct and separate fields of tax practice.  If your tax is far and away above your reasonable collection potential, time and energy spent lowering the "correct tax" is time and energy wasted.

11. Pigs Get Fed - Hogs Get Slaughtered

The short version is "Don't be a chazzer".

12.  Any New Business Concept Will Be Pitched As A Tax Dodge

13.  When An Idea Makes You Think Of A Seinfeld Episode, It Is Not Going To End Well.

14. If something is a listed transaction, just don't do it.

15.  If somebody calls you up to talk about your unpaid federal taxes, just hang up.

16.  Being right without substantiation can be as bad as being wrong.

17.  Don't be a "last minute Louie" make your deadline ten days early.

There are quite a few Tax Court petitions that get kicked out for being a day late or require complicated arguments about postmarks and the like.  It is also possible to misunderstand what the precise deadline is. It also reflects pleasant memories of, after a long tax hard tax season, playing bridge and going drinking at 5:30 on April 15.

--------------------------------------------------------------------------------------------------------


I was started to think that this list was getting to long.  I mean Yahweh was content with Ten Commandments and Woodrow Wilson with Fourteen Points.  Then I remembered the Ferengi Rules of Acquistion.  There are 285 of those.  I'll probably stop before I get there.



Laws Of Tax Practice

1. Bring Back A Check

This was Herb Cohan's instruction whenever someone was going out "into the field". A corollary of this enunciated by a consultant is that somebody who has not paid in you two years is not really a client.  Bruce Carlin, God rest his soul, used to say that receivables do not improve with age.

2.  When The Prospect Tells You His Last Two Accountants Were Assholes It Won't Be Long Before You Become The Next Asshole

The ideal prospect is one whose accountant died.

3. Any reasonably complex tax matter involving significant dollars, regardless of whatever else it might be, is a white collar jobs program. 

Laws Of Tax Policy

1. Make tax policy the Switzerland of the culture war.

Having sensible tax laws is pretty challenging.  Injecting issues from the culture wars particularly those concerning gender and sexual morality creates needless drama and complexity.  Examples of this was the IRS postion on gender reassignment surgery being cosmetic and the Kansas law denying deductibility for abortions.  The dispute about the contraception requirement in the Affordable Care Act is a particularly egregious example.

There are plenty of venues to argue about these issues without mucking up tax administration.

2. Anything worth giving a tax incentive for should be worth spending money on.





45 comments:

  1. your blog is worth it. I got a lot of info that we can use also for investing a property. Thanks for sharing this information it is really helping
    Tax Planning in Essex

    ReplyDelete
  2. Impressive! I really like your blog.
    Thanks for the post.
    Tax Planning

    ReplyDelete
  3. Nice Information!!

    It is very helpful information about Income Tax.

    Thanks for sharing
    Tax and financial planning

    ReplyDelete

  4. Impressive! Your blog is amazing.
    Thanks for giving the information.
    Tax and financial planning

    ReplyDelete
  5. Thank you for taking the time to provide us with your valuable information.

    VAT Planning in UAE

    ReplyDelete
  6. it have remarkable article said to be Reilly's Laws Of Tax Planning, Practice And Policy. thanks for provide knowledge.





    Professional Tax adviser in the UK

    Professional Tax specialist in the UK

    ReplyDelete
  7. There seems to be an interesting "transmission trail" moment.

    7. RTFI [...] It stands for Read The Instructions. The "F" has been silent since the Clarence Thomas hearings.

    As fas as I am aware, the "F" is originally "field". RTFM was Read The Field Manual, and a field manual is a military instruction document outlining procedures.

    Then it passed on to IT, and that is where the F acquired the meaning that is now silent.

    So I guess it can be Financial in your case at the end of the day...

    ReplyDelete

  8. Actually I picked it up from an instructor who said he picked it up in the Army from a sergeant who when they were taking an exam would write RTFQ on the board.

    ReplyDelete
  9. You have defined all the Law of Tax Planning Texas - Assured Bats by which i provide you an expert tax consultant for the whole month.

    ReplyDelete
  10. Brilliant post! I should thank you for this enlightening read. I trust you will post again soon.
    Health Insurance | Tax Planning | Stocks – MoneyUncle

    ReplyDelete
  11. Mashreq Bank UAE is provide the best islamic bank credit card. That is you for all online and all type of payments.

    ReplyDelete
  12. Brilliant post! I should thank you for this enlightening read. I trust you will post again soon.
    tax return service in barking

    ReplyDelete
  13. This comment has been removed by the author.

    ReplyDelete
  14. Small or big size business owners get ready to consult with CPA Firm Long Island Or also can consult your accounting needs here Accounting Firm New Jersey.

    ReplyDelete
  15. Nice. You know, Auditing adds value to financial statements by boosting their legitimacy, which promotes investor confidence in developed markets. The Best accounting and auditing companies in Dubai provides you exemplary services on accounting, auditing and taxation services.

    ReplyDelete
  16. Our Services: Excise Tax Registration in Dubai Vat | Deregistration in Dubai | Vat voluntary Registration in Dubai | vat audit in UAE | vat compliance in Dubai | VAT Penalty Reconsideration in Dubai Accounting Outsourcing Services in Dubai. | Accounting Services in Dubai, Website url: | https://petra-uae.com

    ReplyDelete
  17. Leading conference organizing companies in Dubai, offering custom-made and innovative arrangements based on the client's preferred theme. Our experienced staff will give you a preview of what to anticipate during the event and would be delighted to welcome your valuable input. Customize your events creatively.

    ReplyDelete
  18. Really I enjoy your site with effective and useful information. It is included very nice post with a lot of our resources.thanks for share. i enjoy this post.
    tax return service in barking

    ReplyDelete
  19. Wattek, as one of the best suppliers of water and wastewater treatment plant in UAE, uses cutting-edge technology to provide services such as water and waste water treatment, electrical and automation controls system, bulk material handling system, mechanical and instrumentation equipment, detection and alarm handling system, testing and analytical lab equipment, and many more at an affordable and reliable price.

    ReplyDelete
  20. Thank you for sharing your tips! This is very helpful and informative! I’m looking forward to seeing more updates from you.
    tax return service in barking,,

    ReplyDelete
  21. First You got a great blog.I will certainly have an interest in more similar subjects. i see you obtained really extremely useful subjects, i will certainly be constantly checking your blog site thanks.
    business consulting firms
    coaching plan template

    ReplyDelete
  22. Thanks for sharing this information with this. If anyone is looking for tax planner then contact Gulla CPA

    ReplyDelete
  23. Great Post , We Provide Tax Planning Service in Dubai

    ReplyDelete
  24. Its really appealing and approaching content for reading and implementation purpose.
    accounting software uae

    ReplyDelete
  25. Accounts Payable (AP) is one of the most challenging tasks for businesses to perform in today's competitive environment.

    ReplyDelete
  26. Nice blog. Very interesting topic. Looking for the accounting, Book keeping, VAT, TAX Services, Assurance and Auditing services for your Business Visit Here

    ReplyDelete

  27. I am really enjoying reading your well written articles.
    read more about best erp software in Dubai

    ReplyDelete
  28. I read your article well. That's very helpful. I will visit you again to read your article.smtp relay services visit here.

    ReplyDelete
  29. This comment has been removed by the author.

    ReplyDelete
  30. Thanks for this informative blog. Ask for recommendations from your friends, classmates, or colleagues who have used matlab assignment help services before. Look for a company with a good reputation and years of experience in providing MATLAB assignment help services. Check if they have a team of qualified MATLAB experts who can handle complex assignments.

    ReplyDelete
  31. Found it informative and suitable stuff. Get to know about: Business Setup in Dubai and Accounting Firms in Dubai

    ReplyDelete
  32. Found the blog informative and valuable stuff. James Cargo provides Livestock Transportation Services, Dogs Movers, Cats Carriers and Animals Shipment to all over the UK and around the Globe.

    ReplyDelete
  33. Found it informative one.
    United Arab Emirates Government introduced Golden Visa UAE for skilled workers and investors like UAE Golden Visa for Engineers, Students, Celebrities, Doctors and Real Estate Investors. There are number of other categories too to obtain Golden Visa.

    ReplyDelete
  34. The points you made in the article are well-supported and logical. I liked how you addressed the potential challenges and offered practical solutions. Keep up the great work and if anyone is facing problem while writing an accounting assignment, I found taking Accounting Assignment Help from professional experts really supportive as they provide high-quality assignment writing services online.

    ReplyDelete