Tax Court

What’s The Difference Between An Actuary And An Accountant?

An accountant looks at your shoes when he talks to you.  An actuary looks at his own shoes when he talks to you.

There is a difference between an actuary and a mathematician, too.  This difference is well illustrated in a Tax Court case published last week.

In Pizza Pro Equipment Leasing, Inc., the Tax Court was confronted with whether, under the law in effect at the time, excess contributions were made by an employer (having only one employee – the owner of the company) to a defined benefit plan and the consequences of making those excess contributions, if they existed.  The normal retirement age under the plan was 45 years of age.  The law and regulations require an adjustment to the maximum contribution to the plan where the normal retirement age under the plan is less than 62 years of age.  The adjustment is made to achieve “actuarial equivalence” in the amount of the maximum allowable and deductible contribution.

The taxpayer and the IRS each had its own expert.  The taxpayer used as its expert an obviously accomplished professor with a Ph.D in mathematics.  The IRS’s expert was one of its employees who had been an enrolled actuary since 1980. Before he “retired” and joined the IRS in 2009, this employee had worked for national actuarial consulting firms for his entire career.

The dueling experts focused on the term “actuarial equivalence.”  The professor discounted the age 62 limitation by the time value of money for 17 years (to age 45).  The actuary followed the regulations (which the mathematician seemed to not quite understand) and reduced the age 62 limitation (a) by the time value of money and (b) by a calculation reflecting the difference in the  mortality tables for age 62 versus age 45.  The second adjustment is illustrated by one of the factors in pricing an annuity:  on average, fewer 45 years-old persons will die sooner than 62 years-old persons will die, at a specific point in time.  The second adjustment made a big difference in the calculation.

I have to give kudos to Tax Court Senior Judge David Laro (and the law clerks assisting him).  Judge Laro waded through some deep technical actuarial concepts to come to a decision and to express his decision as clearly as one possibly could, even though the opinion is still a pretty difficult read.

Judge Laro acknowledged that the professor was smart and his numbers were precisely calculated.  However, those calculations were not answering the right question.  The IRS expert hit the nail on the head.

Judge Laro told Pizza Pro to pay tax on overstated deductions and to pay several types of penalties that the IRS had levied.

So, I guess that the moral to the story is that you need to be sure that, when you need actuarial expertise, you hire the guy that looks at his own shoes when he talks to you.

VKM

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Tax Policy

FEARLESS FORECASTS

Warning:  Take anything that I forecast with a grain of salt.  Along with most of the civilized world, I predicted wrongly the outcome of the 2016 presidential election.

Once I overcame the shock of the presidential election results, I began to watch, listen, discuss and read about possible tax changes that could occur.  For the first time, I read seriously President-elect Trump’s tax plan.  I dusted off my copy of the tax proposals in “A Better Way – Our Vision for a Confident America,” published by House Republicans this summer.  Here are a few fearless forecasts and related observations about possible Federal tax law changes.

  1. Sometime during the next two years – 2017 and 2018, expect the most drastic tax changes since 1986. They may be even more drastic than the 1986 tax reforms.  Republicans (at least, in name) control the White House, the Senate and the House of Representatives and will do so at least until 2019.  While the Senate majority is not filibuster-proof, Senate Republicans can use the budget reconciliation process to pass tax changes with their 52-48 majority.
  1. Obamacare is toast. However, there will be some kind of government-sponsored, government-enabled, government-encouraged, and/or government-subsidized health insurance solutions for people that can’t access healthcare through employers or Medicare or Medicaid.  You can’t just get rid of entitlements; they are sticky like fly paper.
  1. Individual and corporate tax rates will be reduced. The tax base will be increased somewhat.
  1. Related in part to item 3 above, 2016 may be one of the most significant years to follow closely and meaningfully the old tax planning strategy of accelerating deductions (into years with higher rates, it appears) and deferring income (into years with lower tax rates, it appears).
  1. The alternative minimum tax will go away. Yippee!!
  1. The Federal estate tax will most likely be repealed. However, there may be some fiscal counter-measures.  There could be no step-up (or limited step-up) in basis of property at death.  There may be continued gift taxes.
  1. The specter of massive increases in the Federal budget deficit will temper some of the Trump and Congressional tax cutting proposals. Indeed, fiscally conservative Republicans and Democrats may forge an uncomfortable alliance to rein in the total amount of tax cuts without revenue increases or spending cuts from someplace.
  1. Both proposals provide for immediate expensing of capital expenditures. The details differ, but not enough to derail the idea.
  1. There are many other tax law changes in both proposals. Some align, others do no.  Many will be enacted.
  1. While generally pointed in the same direction, the Trump campaign proposals and the House Republican proposals are different in a number of ways. The Trump proposals are very light on details.  While “A Better Way” is more comprehensive and cohesive, the authors concede that it is a policy “blueprint.”  Many details still must be developed.

Again:  I’ve been dead wrong before – recently.

VKM