Hyperlexis and the Loophole

Abstract

In this article I would like to continue the discussion on the need to control "hyperlexis," the term coined two decades ago by Dean Manning to describe the "pathological condition caused by an overactive law-making gland." Unfortunately, Congress and its regulatory bodies have become hyperlexic to an extreme. As De Tocqueville noted, if we see a problem, we throw a law at it. Complexities are piled on top of complexities. Attempts to eliminate ambiguities rarely succeed; a law that resolves one ambiguity typically spawns many more. This whole process stems, I think, from the deluded belief that it is possible to have a perfect legal system. It is not. Humans are imperfect, and therefore so will be anything they create. Frederich Hayek hoped that "our generation may have learned that it has been perfectionism of one kind or another that has often destroyed whatever degree of decency societies have achieved." His hopes seem in vain.

Tax law is, of course, a case of hyperlexis run extraordinarily amok. Indeed, the Internal Revenue Code has gotten so out of hand that quite radical reform proposals are now on the table. Some commentators have suggested that we repeal the income tax law altogether and replace it with a value added tax or other substitute. It has been estimated that we spend $157 billion a year complying with the federal income tax laws, That amount of money is roughly equivalent to the value of the automobile output of Ford Motor Corporation and one-third of the output of Chrysler Corporation.

The discussion will focus on "my own area of interest, partnership taxation. Subchapter K (which contains most of the partnership tax provisions) has been the subject of numerous efforts to close supposed loopholes and thus provides fertile ground for this review. The areas I have chosen for analysis are the changes to the partnership contribution and distribution rules and rules governing payments to retiring partners.

Each of these areas plays an important role within subchapter K. The changes that have been made are of very recent origin and thus provide a good snapshot of the viability of hyperlexis principles today. Sections 704(c)(1)(B) and 737 reveal a particularly vivid demonstration of hyperlexis. The "reformers" have used a sledgehammer to kill a fly of a loophole. I recommend they be repealed. The amendments to I.R.C. § 736 illustrate how even when changes are needed, they are made in a way that needlessly complicates the law. I recommend a simpler approach.

Keywords: hyperlexis, Congress, tax law, Internal Revenue Code, partnership taxation, subchapter K, loopholes, value added tax

JEL Classification: H20, H21, H29, K19, K29, K34, K39, K49