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Thursday, June 29, 2006

Column: Death and This

Death and taxes are equally certain, but death is considerably less complicated.

Consider the tax season we’ve just survived. As if the usual jumble of forms, schedules, and receipts weren’t enough, thousands of taxpayers had to struggle with the government’s definition of a word that most people don’t even think of as a legal term: child.

Like Whitney Houston, the Internal Revenue Service no doubt believes that children are our future. But it has a hard time explaining exactly who those darn kids are.

Until recently, the IRS had at least five different tests for who counts as a “child.” The definition is crucial because various tax breaks are available only to adults with children. In 2004 Congress stepped in and created a streamlined definition of child, which took effect for the first time in the 2005 returns.

Under the new law, you might have more children than you realize. In addition to the usual suspects (sons, daughters, stepchildren), your “child” could be your brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendant of any one of them. It might have been easier for Congress to list who is not your child.

According to reports in the Wall Street Journal, the new definition has had some unintended consequences – adult “children” claiming their siblings as dependants, for example. One hopes this confusion has not prevented anyone from connecting with his or her inner deduction.

To be fair, children have had a muddled status in the law for many years. Historically, the common law considered you to be a child until you were 14. But then for other purposes the common law deemed every person under the age of 21 to be an infant (meaning the person had not reached the age of majority). Unless I’m missing something, from age 14 to 20, you are an infant at common law even though you are no longer a child.

And in case you’ve ever wondered why the plural is children rather than childs, it is a holdover from the Middle English period, when plurals could be expressed by adding –en to a word. In Chaucer’s day, one was just as likely to write housen as houses. Only a few of the “en” plurals have survived: brethren, oxen and, of course, children.

Tax law – even without the children – has greatly enriched our language, even if it occasionally impoverishes our citizens. The 1991 edition of Black’s Law Dictionary fairly gushes that taxes sometimes go by the name of “toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, [and] supply.”

Mind you, Mr. Black is being overly inclusive here. A tallage, for example, is a kind of tax that has not been collected since 1332. Why an American lawyer would need to carry this term around in his or her toolkit today is a mystery. Tallage is, however, an interesting word. It comes from the French tailler (to cut out part of the whole), deriving from the fact that debts were anciently recorded by cutting notches into rods. The word survives in English as tally, and its distant cousin, tailor.

Tax started out in Medieval England as a very specific type of revenue scheme. It was a royal tariff demanded from towns, not from individuals. Another term for this tariff was the Fifteenth, because taxation was fixed at 1/15 the assessed wealth of a town.

Money collected from individuals was called a subsidy. Whereas taxes on towns were a fixed amount, subsidies on individuals had to be specially calculated each time they were assessed. The 17th Century British jurist John Cowell noted that subsidies are difficult to calculate “because the estate of every several man is so ticklish and uncertain” – neatly summing up the need for an accounting profession.

The word tax comes from an Old French word (taxer) and, ultimately, from the Latin taxare meaning “to value or estimate” but curiously also meaning “to censure.” As one can see, the punitive undertone of taxation goes way, way back.

For centuries, the word tax was interchangeable with task, which also comes from taxare, but via the Norman dialect of French. Gradually, task took on its more general sense of “thing to be done” while tax kept its more specialized meaning. Both words, by the way, are related to taxi, which is an abbreviation of taximeter, a device used to measure the fare in a cab.

Despite the French origins of tax, the 17th Century English lawyer John Cowell proudly declared that tax “is a British word” and suggested that any talk about a French derivation was “frivolous.” No doubt Cowell was attempting to strike a patriotic chord (“we invented taxes!”) but the authorities were not impressed. Cowell was sent to prison because his discussion of subsidies displeased Parliament, although it is not clear what the politicians found so objectionable.

By the 18th Century, “tax” had become the generic term for all the various payments demanded by government. As everyone knows, King George slapped the colonies with a Stamp Tax and a Tea Tax and the founding fathers revolted against “taxation without representation.” In the early days of the Republic, Chief Justice Marshall memorably observed that “the power to tax is the power to destroy” (in McCulloch v. Maryland).

New forms of taxation do spring up with alarming regularity. Quite apart from such familiar friends as income tax, property tax, and estate tax, there is the jaunty amusement tax, which is imposed on tickets to sporting events and other diversions; the floor tax, which is based on all distilled spirits in (“on the floor of”) a warehouse; and the sin tax, a tax imposed on booze, cigarettes or other “sinful” products.

Somebody has to collect all these taxes. Nowadays, it’s usually the government, but historically, the job has often been outsourced to the private sector. The practice, generally known as tax farming, goes back to the Roman Empire. In 20th Century America, people started referring to tax farmers as tax ferrets, presumably because they “ferret out” money, but also conjuring up unsavory images of human weasels. The most famous tax ferret was Nicholas Panarella (who preferred to call himself the “tax commando”). In the 1990’s, Panarella collected millions of dollars on behalf of Philadelphia and other municipalities from which he deducted a contingency fee. Panarella’s career was cut short by his conviction for aiding and abetting a politician’s fraudulent scheme.

When a tax is imposed on imports or exports, it is known as a duty or customs duty. As in normal conversation, the word duty connotes that which is due (a related word). The word has been used to describe import taxes since 1474. The phrase duty-free is first recorded in 1958 and was soon applied to shops that sell tax free stuff. Of course, anybody who has trudged through an airport terminal weighted down with gifts of Scotch and perfume knows the paradoxical truth that duty-free shopping is terribly taxing.

It is a crime to evade taxes but not to avoid them. Tax evasion is the failure to pay taxes that are due. Tax avoidance, on the other hand, simply refers to arranging one’s affairs to reduce or even eliminate tax liability. For this, one may set up a tax shelter (a device that defers or reduces taxes), or decide to live in a tax haven (a nation with low or no taxes on foreigners), or exploit various loopholes (from Middle English loupe, or “opening in a wall”).

None of this is illegal, a fact that sometimes sticks in the craw of judges and other officials. As one British judge said, with a whiff of distaste, “the avoidance of taxes may be lawful, but it is not yet a virtue.”

The simplest tax around is a poll-tax, an equal sum demanded from each person regardless of income or property. It is, as one legal treatise puts it, “a tax on the privilege of being.” You can’t evade or avoid a tax on being, at least not without running into that other great certainty.

(This column first appeared in the June 2006 issue of New York Law Journal Magazine).