BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEW after tax), this loan has a value of $5.60 (8% X $70). This benefit is greater than the detriment arising from the conversion of capital gain to ordinary income. While this demonstrates the nature of the problem, the benefit rises sharply if the profit margin is significantly lower. Witnesses before the Ways and Means and Finance Committees suggest that profit margins are around 1 percent to 5 percent.108 Whether this is a percentage of the cost of sales or a return on capital investment is not clear. In many of the syndicated operations, cost of sales and capital investment may be nearly equal. The return on the interplay of the tax rules (deduction of raising costs leading to deferral of taxes in that year) is much greater than the tax on the economic profit (whether taxed as ordinary income or capital gains), and the relative value of the tax interplay return increases as the margin of profit declines because the tax payable on the profit declines. Taxing all livestock gains as ordinary income might be a step in the right direction, but it does nothing to reduce the net difference between the benefit of deferral and the detriment of the tax. But note that if, in the above example, the net profit were $1 (instead of $10), even ordinary income treatment would result in a tax detriment of $.70, which is much less than the $5.60 benefit of the interest free loan. Also, deferral permits the taxpayer to choose to some extent when the income will be realized. A taxpayer having a choice will, of course, attempt to structure realization so as to incur the least tax. Anything short of removal of the deferral benefit will be ineffective, and certainly EDA does nothing to impinge on the sanctity of current deduction. The Act also fails in another significant respect: it is limited to taxpayers who have a combination consisting of (a) farm losses of $25,000, and (b) nonfarm income of $50,000. The impact will thus be on just a few taxpayers. As has previously been noted,104 in 1964 there were about 3,000,000 farm tax returns filed by individual taxpayers. Over 1,100,000 of these returns showed farm losses. The EDA in the Act, however, apparently would affect only about 4,000 or 5,000 returns, and even this impact will be significantly reduced since only the loss over $25,000 will go into the excess deductions account. The long range estimate in gross revenue is about $20 million. Thus, the number of taxpayers affected will be small, and the amount of revenue miniscule in comparison with the amount funnelled into some farm investments to take advantage of tax law. The amount of revenue raised and the number of taxpayers af 103 See 1963 Tax Message 1541; Tax Reform 1969, 2035 (remarks of Claude Maer, Jr. on behalf of National Livestock Tax Committee). 104 See Davenport, supra note 72, at 51-52 for the figures discussed in text. FARM LOSSES fected are not, of course, the only criteria by which to measure a provision dealing with the farm loss problem. More importantly, one must ask if the Act will significantly reduce the federal subsidy going to taxpayers having both (a) certain kinds of farm investments and (b) substantial nonfarm income, so as to put them on an equal competitive basis with those farmers who do not have the nonfarm income. The overall purpose thus should be to discourage some investments in farm assets by improving the equity of the tax structure. On this ground, EDA fails. It will permit all comers to incur tax losses up to $25,000 each year. Thus, it seems to fail in reaching a significant number of taxpayers in a meaningful way. EDA may also be criticized on three other grounds. First, it is so complex as to be almost incomprehensible. Perhaps that degree of complexity could be justified or tolerated if some public purpose were served by it, but none appears. Instead the complexity arises from the application of a poor idea (recapture) to a simple problem (premature deduction of costs). In the area of application, the extent to which recapture should apply is impossible to determine because taxpayers are permitted the use of overly liberal accounting rules. The result is a congery of problems and rules. The problems defy rational solution in light of the accounting rules which farmers are allowed to use. The rules devised are not justifiable, although they are perhaps as rational as one could hope. The tax writing committees undoubtedly would justify the complexity on the ground that simplicity is thereby preserved for “legitimate" interests.105 Consequently, those who must deal with complexity are only "illegitimate" interests. In the abstract, this may appear reasonable. But the line between the two kinds of interests is arbitrary and cannot be explained on any rational grounds. Furthermore, many taxpayers who ultimately will prove to be "legitimate," in the sense that they are not subject to EDA, will incur the cost and bother of so ascertaining and, perhaps on audit, so demonstrating. Thus, the complexity has a broader sweep than the "illegitimate" farmer. Second, as with all recapture provisions, a penalty is exacted only when there is a disposition of property. Thus, one who disposes of property is put at a disadvantage to those who retain property. Similarly, one who sells early is harmed more by recapture than one who sells later. There does not appear to be any reason for so distinguishing between taxpayers. If the tax benefits of premature deduction are intended as a highly inequitable and costly subsidy which prefers 105 See Griffith and Joy, What the Act Does to the Farmer: Farm Parity or Class Discrimination, 23 The Tax Lawyer, 495 (1970). BOSTON COllege indUSTRIAL AND COMMERCIAL LAW REVIEW high income taxpayers over others,106 there is little reason to recapture the benefit when sale occurs. If the farm accounting rules which offer these benefits are not intended as a tax subsidy, then they should be repealed, not made more aberrational by recapture. Third, EDA may be accepted as reform, thereby lessening the demand for some effective change in this area. While this consequence may follow for some short period, we can hope that it is not an enduring result and that those who grew to know and question the farm loss loophole will soon realize that it still exists, almost without any change at all. V. CONCLUSION This discussion closes by recapitulation. There are two forward, but not very significant, steps: the application of section 1245 to livestock and the extension of livestock lives for section 1231 qualification. There are also two backward steps one of which is serious. The hobby loss provision is unwise and seemingly without any justification whatsoever. The special treatment accorded crop insurance proceeds is unwise also, but seemingly is a very minor provision possibly based on the hardship of requiring two years' income to be reported in one and offset by only one year's expenses. The other provisions are more difficult to evaluate. We could say that the citrus provision is definitely a significant step forward in one area of substantial abuse, but it is much too narrow to be strongly praised; that the recapture of section 175 and 182 expenditures is so small an improvement as to be at best an oblique step turned sharply to the side; and that EDA is at best oblique, and may be wholly to the side-nay, even obliquely backwards—because it seems to be structured so as to remove the matador from the path of the charging reformers, without goring the ox of those who have a somewhat greater than normal vested interest in the present farm tax accounting rules. In general, therefore, the best one can do is to claim a stand-off. An objective evaluation may result in the discovery of more minuses than pluses. But assuming a stand-off, is that really good enough for the much heralded tax reform? One would suppose not. 106 See Surrey, Tax Incentives as a Device for Implementing Government Policy: A Comparison with Direct Government Expenditures, 83 Harv. L. Rev. 705, 720-25 (1970). DAMMING THE WEST The Nader Task Force Report on the Bureau of Reclamation FOREWORD BY RALPH NADER BY: RICHARD L. BERKMAN Copyright November 1971 by Center for Study of Responsive Law Washington, D.C. FOREWORD by Ralph Nader 1 To most Americans, the Bureau of Reclamation is less familiar than the moon. To others, Bureau of Reclamation is an agency that specializes in getting water to land near and far. To a number of special economic interests, however, the Bureau is a determined sugar daddy with powerful Congressional allies. To all those who are not profiteering or being graphically bilked by Bureau's policies and discriminations, the agency, lodged in the Department of the Interior, is Dullsville incarnate. But dull subjects tend to be important subjects with their aura of ennui to the outsider serving a shielding function which dissuades inquiry and scrutiny. As this Report shows in detail, the Bureau of Reclamation has an impact on the West and on Indians, farmers, taxpayers and recreational users that is anything but dull, once those impacts are reduced from high level abstractions and slogans and brought down to earth in terms of Bureau generated resource use and cost, direct and indirect. As the editors and co-authors, Richard Berkman and Kip Viscusi, analyze the Bureau's benefit-cost calculations, its cost overruns, its tunnel-vision inattention to devastating ecological consequences of its works and the need of impoverished Indians for water, they conclude that many of |