Monday, November 10, 2008

Tax Breaks for the Big Guys, Changing Tax Law by Memo

A remarkable Washington Post story on how long-standing tax policy was changed by administrative notice hit the wires last Sunday.

It’s not every day that a popular press story deals with an obscure section of the tax code. But these aren’t regular times. Amit R. Paley does a good job explaining how, in the heat of financial chaos and the clamoring to do something, a tax policy of some 22 years was quietly reversed by a mere memo published by the Treasury Department.

In a nutshell, Congress passed Section 382 in the 1980s to attack certain kinds of tax shelters. The code had allowed corporations to buy companies that had a “net operating loss” or “built in loss” and then apply that loss to their books to reduce taxable income. The loss companies had no real value except for the tax benefit. Section 382 drastically limited the types and amounts of loss that the buying company could write off.

Although many business-oriented economists and tax policy experts (certainly not all) argued that the rule was too heavy-handed, Congress steadfastly refused to change it. This is consistent with Congress’s general power to set tax and fiscal policy.

Until Treasury, in the heat of the financial meltdown, decided to do away with it by an administrative notice.

The notice essentially does away with the limitations for institutions that participate in the “Capital Purchase Program (CPP) implemented by Treasury under the authority of the “Emergency Economic Stabilization Act of 2008 (aka Bailout Bill). The idea was to ease the tax consequences of bank mergers. The Washington Post article points out:

The Treasury notice suddenly made it much more attractive to acquire distressed banks, and Wells Fargo, which had been an earlier suitor for Wachovia, made a new and ultimately successful play to take it over.

But, apparently, Congress was surprised and not happy about what has come to be called “the Wells Fargo Ruling.” According to the article, estimates of the hit to federal revenue range from $105 billion to $140 billion.

Some commentators are very surprised as well. From the article:

Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no," said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. "They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks."

Reading the Notice, I can see why he said this. It is only 2 ½ pages long. The memo is written in technical terms that are incomprehensible to anyone not familiar with the operations of Section 382. However, under the “Background” header is a paragraph that insouciantly states the authority for the action:

Section 101(c)(5) of the Act provides that the Secretary is authorized to issue such regulations and other guidance as may be necessary or appropriate to carry out the purposes of the Act. Section 382(m) of the Code provides that the Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of sections 382 and 383.

Parse that a little. The first sentence says that “the Act” (aka Bailout Bill) gives the Treasury Secretary authority to issue regulations for the purpose of carrying out “the Act” (aka Bailout Bill). OK, nothing very controversial about that.

The next sentence says something similar about Section 382 of “the Code” (in Treasury lingo, this means the “Tax Code”). The Treasury Secretary is authorized to issue regulations “to carry out the purposes of section 382. . . .”

The problem is obvious. The “purposes of section 382” has nothing to do with the Bailout Bill. The purpose of 382 is to stop a certain kind of tax shelter.

And, as far as I know, the Bailout Bill did not grant the Treasury Secretary authority to amend the Tax Code. The Bailout Bill did deal with the tax code in three separate areas: capital gains, executive compensation, and help for homeowners. It does not give the Treasury Secretary authority to amend the Tax Code. (The Bailout Bill is a mere 451 pages long, maybe you can find something in there I have missed, but I doubt it.)

Yet the Secretary of Treasury did amend the tax code because, apparently, it seemed like a good idea. Certainly the merging banks are getting a huge break. And maybe it is a good idea, but this sort of sweeping change to tax policy, under cover of administrative ruling and in the heat of confusion, is decidedly unusual and ominous.

BTW, don't expect this change in the law to benefit any small companies that might want to buy out other struggling companies. It's only for the big kids, the "too big to fail finance companies," who have been able to sell their smoldering and nearly worthless instruments to the government.

(Post first appeared on Tax and Tribute blog.

Monday, September 01, 2008

Thumbnail water constants

This is not advanced physics, but I often find myself figuring things about water supply. Here are a few numbers that rattle around in my head (I've also verified them against my Thomas J. Glover Pocket Ref, which I carry in my briefcase with my Bible and pocket U.S. Constitution).

1 cubic foot of water weighs 62.4 lbs.

1 cubic foot equals approximately 7.5 gallons. (Glover says 7.48052)

A gallon of water weighs 8.3 lbs.

An inch of rain on a square foot is 1/12 of a cubic foot which equals 0.62 gallons.

An acre-inch is 0.62 X 43560 sq ft/acre = 27,007 gallons.

I knew a guy who was panicking about Y2k back in 1999. He bought a whole bunch of MRE food and 8 or 10 barrels, 50 gallons each, to store water. He spent thousands of dollars.

He stopped by one day and asked me what I was doing to prepare for water. I pointed to a 20 X 25 tarp. He looked confused. I showed him how I could lay out the tarp on our sloped lawn so that a rain would wash into a natural trough that could easily drain into buckets. We live in the Pacific Northwest, where you can count on a 1/2 inch rain easily in a month, and more in the winter.

1/2 inch on 500 square feet yields 155 gallons. I knew from sailing provisioning that a gallon per day per person is plenty if you are not exerting hard. Even if you only collected half of this in a month, you could keep two people going with minimal effort. If need be, I could dump the water in our extra bathtub for storage.

And the tarp was cheap.

I wasn't really worried even about the tarp. There were fresh water streams nearby. A bit of filtration and maybe boiling would be sufficient for water in an emergency.

Y2k was a bust, of course. I understand that there are bargains on those water barrels.

The tarp principle is useful for arid climates. 19 mil pond liner goes for around $0.50 a square foot. I saw a 1000 square feet of visqueen for around $100. I think of people in desert climates without decent supplies of water. But a region that gets a downpour once or twice a year could collect a lot of water inexpensively. I once did it experimentally on a small scale (300 square feet) in an area that received 9 inches of precipitation per year. After one good rainstorm I collected 120 gallons. Multiply that by 10 or 20 and you can maintain a family.

Sunday, August 31, 2008

Useful snippets from "Household Arithmetic" (1920)

Here is a book every home should have:

Household Arithmetic, Katherine F. Ball, M.A., Vocational Adviser (sic) for Women, University of Minnesota; Miriam E. West, M.A. Girls Vocational High School, Minneapolis. J.B. Lippincott Co., Philadelphia & London (1920).

I ran across the book specifically looking for the calorie content of various foods. It is useful to know these things if you are trying to figure out how long you can survive if the grocery store closes for some reason.

Some factoids I noted:

Calories burned per pound of body weight per hour (p. 131):

Sleeping 0.4
Sitting quietly 0.6
Light muscular exercise 1.0
Active muscular exercise 2.0
Severe muscular exercise 3.0

The book gives a handy little example (p. 132):

Problem.-Estimate the probable energy requirement of a stenographer, 28 years old, weighing 125 pounds, whose time is divided each day about as follows: Sleeping, 8 hours; sitting quietly at meals, reading, taking dictation, etc., 8 hours; at light muscular exercise, dressing, standing, walking, typing, etc., 6 hours; at active muscular exercise, playing tennis, etc., 2 hours. Use Table I.

8 X 0.4 Calories =3.2 Resting
8 X 0.6 Calories =4.8 sitting quitely
6 X 1.0 Calories =6.0 light activity
2 X 2.0 Calories =4.0 active

Total Calories per pound per day =18.

125 X 18=2250=total Calories per day.

Pages 135 and following give the energy value of various foods. I've saved the entire book simply for this information. Page 146 gives a thumbnail sketch:

Food Calories per lb.
1. Smoked ham 1635
2. Corned beef 1245
3. Oysters 225
4. Butter 3410
5. Entire wheat flour 1650
6. Rice 1620
7. Cheddar cheese 2075
8. Milk, whole 310
9. Buttermilk 160
10. Peanuts 1775

So our normal stenographer, who needs 2250 calories per day, could get by in a pinch with a quarter pound of pork and a bit over a pound of rice a day. Sure, it's spartan fare, but not too hard to store.

I'd suggest the book as a wonderful, free, resource.


I've been fairly occupied for the last four months. School is done, but Summer had many projects.

I'm coming back here from time to put record my random thoughts and observations. I put obscure notes into a little marble note pad, and it fills too quickly.

When I was around 13, my Dad gave me a large book called "The Everyman's University." Published in the 30s, it contained a whole range of important information. Things like the schematic for wiring a two-way switch, the proper sequence for slaughtering hogs, how to get a tractor unstuck from a bog, how to make soap, and the proper technique for using dynamite.

Such compendia are uncommon in our internet era. Specialized knowledge encourages provincial scope. And being innundated by specialists from all points only exacerbates the matter. The phrase "too much information," while useful for embarrasing information, is even more apt for our time. A numb sort of paralysis follows.

But I've always been a generalist. Somehow, I'd like to get it all down somewhere. So the series begins and the blog resumes.

Wednesday, January 30, 2008

Drug felons must be the worst of all

If you are spending money on tuition for college, there is a "Hope Credit" available to reduce your taxes. I looked through the instructions of IRS Form 8863, which is what you file to get this credit. A curious qualification shows up in the instructions:

The student has not been convicted of a felony for possessing or distributing a controlled substance.

Form 8863

So convicted murderers, rapists, sex offenders, terrorists, etc., are all OK, as long as they weren't involved in drugs.

It seems to be an odd social policy. Maybe we think drug convicts are the worst of the worst and shouldn't be encouraged to improve themselves.