ataxingmatter

RS Report on Social Security Transition Costs

The Congressional Research Service has now released to the public its July 25, 2007 report on the costs of transitioning from a primarily "pay as you go" system of financing Social Security benefits to a "pre-funded" privatized, individual account system.  It's available at this link:  Laura Haltzel, Social Security: Transition Costs.

In any discussion of the merits or demerits of privatizing Social Security, these transition costs must be taken into account.  In essence, it would be necessary to fund concurrently both the current retirees' benefits and the set-aside for future retirees.  This CRS analysis suggests that the results over a 75-year period could be a worsening of the Social Security fiscal situation by as much as $4.6 trillion, or at best an improvement in the funding by about $0.8 trillion.   Under either a "carve-out" or an "add-on" system of permitting pre-funded accounts, additional revenues would have to be raised through additional taxes or borrowing, or reduced government spending elsewhere in the budget.

These calculations also involve some assumption about reductions in benefits to those who opt for an individual account under some system of privatization.  Benefit offsets occur because holders of individual accounts would not receive the full benefit of funds accruing to those accounts. These benefit offsets are not, the study shows, sufficient to offset the additional transitional costs during the 75 year period contemplated for the study; they might lessen the unfunded burden after 75 years.

Foreclosure Prevention Act of 2008

Foreclosures are up, and the economy is down.  Accordingly, the Fed is adjusting interest rates with an eye to easing the credit crunch (helped so far are mainly the big banks, since they are enjoying the lower rate borrowings but continuing to charge higher rates for lending money, keeping the spread for themselves), and Congress passed an "economic stimulus" package of tax breaks for businesses (even faster depreciation for business purchases than already allowed) and individuals (generous tax "prebates" from the government based on income and size of family).  Congress also passed earlier a bill that permits homeowners to exclude certain cancellation of indebtedness income in connection with settling mortgage loans.

Now Congress wants to do something further to deal with the expanding foreclosure crisis, including raising the cap on tax-exempt mortgage revenue bonds by $10 billion and allowing states to use the revenues from the bonds to help homeowners in danger of losing their homes refinance. The bill would even extend the ability of businesses to use losses they have incurred.  I'm not sure what I think of these provisions--I suspect that it is a good idea to let states become more directly involved in the foreclosure crisis, and creating a fund that can be used to refinance mortgages to ones that require more reasonable interest payments may make sense, if the aid is limited to those with low incomes and low mortgages.

Apparently, even the Republicans support the above package.  But Mr. Bush has threatened to veto it if passed.  The Senate tried to get to a vote today, but fell short of the 60 votes needed for cloture.

Who is against the bill?   The banks.  You see, the bill also includes a very reasonable provision permitting home mortgage loans to be modified in bankruptcy.  According to this story in CNN.Money, "lenders are furious" about this possibility and assert that "cram-downs" will add significant costs to mortgages for everyone.  Consumer groups like the Center for Responsible Lending and academicians say that the lenders are wrong and that it will help a number of borrowers without raising mortgage costs significantly for others.  The ability to seek modification in bankruptcy would also give borrowers somewhat more leverage in dealing with lenders prior to that point, which also would be an appropriate change.

Yacht loans and credit card debts can already be modified in bankruptcy.  It seems reasonable to allow home mortgages to be modified, too.  Not everybody's mortgage loan will be modified, but in many instances--especially when the mortgagor has been pushed into a subprime loan at very high and unreasonable rates--it seems appropriate that the loan be modified and the homeowner permitted to continue in the home.  The social costs of high rates of foreclosures are very high, and foreclosures in an area can bring everyone else's property values down.   Since lenders are likely to lose either way (whether there is a foreclosure and an unsalable house or a loan writedown), it seems preferable to have the possibility of allowing the workout and keeping homeowners in their homes. 

The bill also includes a provision that would permit state and local governments to use some funds received from the federal government to purchase foreclosed homes.  That provision makes sense as well to me--government can step in temporarily to fill the gap in the dysfunctional market.  As markets improve, government owned properties can be sold and the money available for more routine functions. 

According to the BNA Daily Tax RealTime for 2/28, the Republicans are so against those last two provisions--bankruptcy modifications and states' use of federal funds to purchase properties facing foreclosures-- that they have offered their own  stimulus.  Their proposal is to make the 2001 and 2003 tax cuts  and all the ones that expire in 2008 permanent, while providing a tax credit for the purchase of a new home or a home in foreclosure proceedings.

A New Listed Transaction: Notice 2008-34

The IRS has released Notice 2008-34, indicating that certain transfers to trusts are listed transactions that will be subject to the reportable transaction rules  of Reg. 1.6011-4 and also to the requirements in sections 6111 and 6112 as well as the stringent Circular 230 written opinion rules for listed transactions.  (The notice is available on BNA at this link for BNA subscribers; it is not yet available on the IRS governmental website.)

The transaction is one in which distressed assets with high basis and low value are transferred to a trust by a tax-indifferent party.  Such a party would include, for example, a non-US person who is not subject to US tax or a tax-exempt organization.  An interest in the trust is then sold to a US taxpayer.  The purpose of the "Distressed Asset Trust Transaction" is to provide the US taxpayer with a loss -i.e., to shift the loss in the assets to the US taxpayer who has not actually incurred an economic loss.

The trust transaction attempts to do in a grantor trust what has now been eliminated in partnerships through changes made in the 2004 tax legislation.  (Those changes ultimately require certain basis adjustments when built-in loss property is contributed to a partnership or distributed by a partnership, or when sales of partnerships with such property occur, in order to prevent shifting a built-in loss from an indifferent taxpayer to another partner who has not incurred the economic loss.  See Coordinated Issue Paper on Distressed Asset/Debt Tax Shelters, IRS (Apr. 18 2007) (further describing the partnership transactions).)  The trust is established by the tax-indifferent party, and the US taxpayer contributes cash or a note for the net value (ie, a very low amount).  The trustee then establishes a sub-trust for that beneficiary, claimed to be treated under the tax laws as a separately standing grantor trust because of the beneficiary's right to direct the trustee as to the corpus of the sub-trust, with the same high basis in the assets as the original grantor's basis.

The Service notes that it may use several arguments to defeat the taxpayer's claims: (i) that the transfer of cash or notes for the establishment of a sub-trust with the assets is a recognition exchange; (ii) that the main trust does not satisfy the requirements of a non business entity "trust" under 301.7701-4; (iii) that one or more of the trusts is a partnership for tax purposes (and therefore the 2004 amendments to the partnership rules apply here); (iv)that the loss is not a deductible loss in a transaction entered into for profit under section 165; (v) that where the assets are distressed debt, the debt was worthless at the time of contribution; and/or (v) one or more of the judicial doctrines.

Liechtenstein Redux: IRS Investigating

I recently noted here that Sen. Levin has called for investigation of the apparent use by US taxpayers of banks in Liechtenstein to hide assets and avoid tax.  In an IRS release today, IR 2008-26 (Feb. 26, 2008) (available on BNA; not yet available at the IRS newsroom), the IRS advised that it is "initiating enforcement action" with respect to more than 100 U.S. taxpayers in connection with Liechtenstein accounts.  The release quotes acting commissioner Linda Staff as follows.

“We are determined to protect the United States tax system from abuse and ensure that taxpayers pay what they owe. We will use all our authority to fairly and effectively enforce our tax laws. It should be clear from recent events that there is no safe hiding place for the proceeds of tax avoidance and evasion.”

Liechtenstein's Bank Secrecy: another way rich Americans are avoiding taxation?

Senator Levin has announced his intent to look into some Americans' use of Liechtenstein's banks as tax havens. See Allison Bennett, Tax Havens: Leving to Investigate Liechtenstein Scandal:  Says US Citizens Hid Assets in LGT Bank, 90 BNA Banking Report 364 (Feb. 25, 2008).

A whistleblower released records from the bank, and has called attention to the long-running tax haven's "wealth management" wealth.  See e.g., Liechtenstein's Friendly Bankers, Editorial, NY Times, Feb. 25, 2008; Eric Pfanner, Liechtenstein looks to move beyond bank fraud, NY Times, Feb. 23, 2008; Carter Dougherty, Tax Scandal in Germany Fans Complaints of Inequity, NY Times, Feb. 18, 2008.

Germany is tired of its citizens using the small nearby state to evade German taxes and may institute unilateral measures if the OECD isn't able to persuade Liechtenstein to become more transparent.

A confidential German finance ministry briefing paper supplied to The New York Times by a ministry official outlines several unilateral measures that it says would be “worth considering” against Liechtenstein. Those include eliminating tax deductions for business expenses incurred in Liechtenstein and imposing fees on money transfers to the principality, according to the paper.   Several experts said Germany could also impose a new legal requirement, known as reversing the burden of proof, on its own citizens who do business with Liechtenstein. Carter Daugherty, Germany Prods Liechtenstein on Fighting Fraud, NY Times, Feb. 21 2008.

The US should note the indignation that ordinary German citizens are feeling about the abuse of the country's trust by the elites who have socked their money away in Liechtenstein.

[There is] a new narrative in German politics: the betrayal of the elites, who have spent the last decade calling for a painful reform of the welfare state, even as they apparently avoided paying their fair share.  Carter Dougherty, Tax Scandal in Germany Fans Complaints of Inequity, NY Times, Feb. 18, 2008.

That "betrayal of the elites" is essentially what has been happening here since the marketarian fallacy and Reagan "revolution" began in the 1980s.  Elites have been trying to convince everyone that they will all be better off as the elites get richer, depending on "trickle down" to those who aren't in the income and wealth stratospher of the top quintile (and the top quintile of that quintile).  So they argue for tax cuts--or even better, they say, zero taxation on their capital gains, so that they can do the world a good turn with their continuing entrepreneurial activity (without explaining, as they seldom acknowledge, that owning capital assets is not really a creative entrepreneurial activity).  And they argue for welfare cuts--saying that the "entitlement" programs have to go because they are throttling growth. 

Neither tax cuts on capital gains nor elimination of programs that give the poor the opportunity to develop human capital make sense for broad-based growth that can sustain democracy.  The US seems to be waking up to this.  About time.

Chait's Review of Johnston's Free Lunch--snidely anti-populist

David Cay Johnston has a new book out--Free Lunch--about the growing inequality in America and the ability of the "wealthiest Americans" to do well from tax cuts and tax expenditures on their behalf.  I will review the book in a post shortly, but I intend to start backwards--with Jonathan Chait's review of Johnston's book and Johnston's response.

Jonathan Chait is a senior editor at The New Republic.  He reviewed Johnston's book in Other People's Money, Feb 3, 2008.  The review is snidely anti-populist in tone.  He casts liberals in America as being of two types--moderates who supported the Clinton presidency and anti-corporate populists who supported Nader.  The populists, he says, have mostly receded into the background during the Bush years, but he worries about them appearing again. 

But Chait paints too starkly, and therefore gets it wrong.  One can value the role of business enterprises in invigorating the economy (ie, not be anti-corporate) and yet view with alarm the increasing power of large multinational corporations that cross borders with ease and push sovereign nations to bend to their desires while minimizing the taxes they pay to any country.  One can think it is enormously important for the country to invest in its people rather than in its war machine (i.e., be a populist at heart) and yet recognize that there are limits to the individuation that is possible or desirable in a democracy--ie, that a radical libertarian approach can be equally harmful to the polity.

Chait complains about Johnston's depiction of the government acting on behalf of the rich to redistribute income up, saying instead that "the government's taxation disproportionately falls on the rich, and its spending disproportionately benefits the nonrich."  You hear this a lot.   Chait is, however, wrong here as well, since when you take all the federal taxes and benefits into account, our system is very close to flat rather than progressive.  If you attribute all of the tax expenditures in the system appropriately, the system may well be regressive.

Remember, for one thing, that much of the income of the rich doesn't get reported as taxable income--it's the rich who get tax free interest from investing in municipal bonds, for example, and the rich who have ample retirement plans far beyond the realms of ordinary taxpayers.  The rich are able to take huge mortgage deductions (most of us don't have homes that have million dollar mortgages, after all).  The rich are able to deduct the fair market value of the art work that they donate to musuems, even though they may have invested very little in the art when they purchased it --i.e., getting a deduction for fair market value rather than basis).  The rich, of course, pay income taxes on a good bit of their income at the preferential capital gains rate--much less than others pay on their wage income.  Social Security payments go to everyone, rich or poor, and the highest monthly checks go to those who made the most money while they worked.  Government expenditures to restore beaches after storms cost taxpayers an enormous amount--and much of it benefits directly the wealthiest Americans who have the most luxurious beachfront properties.  Roads tend to be much better maintained in wealthy neighborhoods than in poor ones (though that is mostly state and local tax monies rather than federal monies). 

The rich pay a good bit in taxes, but, after all, they own the lion's share of the assets and garner a disproportionate amount of the income.  They really don't pay as much as they ought to at this point--because the progressive rate scale doesn't take into account the astronomical incomes of some of those at the very top.  The top bracket starts at just over $300,000--but that means that the wealthiest Americans who earn half a million, $1 million, $6 million, or $15 million a year are all paying tax at the same rate, so that the progressivity at the lower scale of the income tax is no longer reflected at the upper scale.

I've said in this blog often that there are really just two choices for government policy:  redistribute upwards, on the assumption that the economy will expand most rapidly when the elite are preferred, and job growth and opportunities will then trickle down to the poorest at the bottom over time (the Reagan revolution); or redistribute downwards, on the assumption that the economy will expand most reapidly when the poor are preferred, and job growth and opportunities for the poor will create an expanding economy that benefits everyone (democratic egalitarianism and generally the liberal position).  There's not much to recommend the trickle down theory--somehow the rich just keep getting richer and the infrastructure and human capital needs of the country are neglected.  There's a good bit to recommend the growth from the bottom up theory--we had a great example of how well it works after World War II when soldiers came back to find money available for college educations and the economy boomed.

Johnston replies to Chait's review in a short letter at this link.   He defends his record as a Republican who values fiscal conservatism but is not anti-corporate, indicating that he thinks the problem is failure of the free markets that can 't be fixed by regulation.

Citizen McCain: reviewed by Citizens for Tax Justice

Now that John McCain is the presumptive Republican nominee for president, it behooves American taxpayers to understand what kinds of tax policies we might expect from him if elected.  Citizens for Tax Justice (CTJ) has done some historical research to see where he stands on the issues.  For those who have thought of McCain as a "straight talker", there may be not a little surprise in store. 

Here are excerpts from the CTJ analysis: John McCain: Straight Talk on Taxes?

McCain was the only Republican senator to vote against the 2001 and 2003 tax cuts. ...

... The key provision of the 2003 tax cut bill that he had opposed was the tax cut for capital gains and dividends. But In 2005 he voted for the budget reconciliation bill that extended that very gift to the wealthy for an additional two years.

McCain had earlier complained that "repeal of the estate tax would provide massive benefits solely to the wealthiest and highest-income taxpayers in the country," but in 2006 he decided that repealing most of the estate tax was just fine by him. ...

Now McCain has fully channeled his party’s orthodoxy against taxes on the wealthy. He says he wants to make the Bush tax cuts permanent. He wants to slash the corporate tax rate from 35 percent to 25 percent (even though the tax "burden" on corporations in the United States is already among the lowest in industrialized countries).

...

John McCain now says that he opposed the Bush tax cuts in 2001 and 2003 because he thought they needed to be accompanied by cuts in spending to keep the budget deficit under control. Actually, what he said in 2000 about then-Governor George W. Bush's tax plan was, "I don’t think the governor’s tax cut is too big—it’s just misplaced. Sixty percent of the benefits from his tax cuts go to the wealthiest 10% of Americans—and that’s not the kind of tax relief that Americans need."

Dealers Marking to Market under section 475: Is a safer harbor really needed?

In June of 2007, the IRS finalized regulations providing a "safe harbor" for valuation for dealers that mark their securities to market under section 475 for purposes of determining their taxable income.  I had written extensively about the issue to note my concerns with the industry's proposals for book-tax conformity--i.e., for using their financial accounting income and loss determinations as their tax determinations.  See Book-Tax Conformity and the corporate Tax Shelter Debate: Assessing the Proposed Section 475 Safe Harbor.  My concerns stem from the importance of a coherent interpretation of the tax code and worries about dealers' ability to manipulate values to achieve financial and tax goals.  Although the IRS did adopt regulations providing for a book-tax safe harbor, those final regulations did include a number of provisions that at least helped to counter those concerns.

Now, less than a year after the finalization of the safe harbor regulations, the securities industry is pressing for broadening of the safe harbor along the lines that the industry originally proposed (basically a "trust our business judgment" approach).  See Larkins et al, Safe Harbor or No Safe Harbor: A First Look at the Mark to Market Safe Harbor Regulations, 7 Journal of Taxation  57 (2008) (available on CCH at this link).  The authors assert review the workings of the regulatory safe harbor, and point out the verification and consistency requirements that impose limitations, asserting that the regulations "unduly limit" the kind of taxpayer, valuation methods and securities to which the safe harbor can apply.  They argue instead that the "compliance burdens" will only be addressed if the IRS makes the safe harbor "as broad as possible".

The article reiterates the old industry rationale of regulatory reliability in support of a broad safe harbor.  The claim is that the IRS need onlly look to a financial statement (selected according to priority criteria as already provided in the final regulations):  since the financial statement is (deemed) reliable for securities reporting, bank regulatory or other regulatory reasons, the IRS should treat it as appropriate for determining taxable income, without imposing any further limitations. 

Reliability may well be an insufficient criterion, however, as I argued in my article.  What is reliable for a particular regulatory purpose may nevertheless be inappropriate or manipulative for determining taxable income.  That is especially true if the regulatory purpose for which the statement is prepared encourages conservatism, deferral of inclusion until expenses can be booked, and other mechanisms that may understate the income as determined from the income tax's ability to pay concept.

The article also reasserts another rationale from the Securities Industry Association's original materials in support of book-tax conformity--that the "significant use" for a business purpose can insure that the right amount of taxable income would be reported.  The problem is that such "significant use for a business purpose" doesn't guarantee lack of distortion for tax purposes.  That is especially true in areas where businesses have proprietary software for making business determinations that permit very particularized determinations and where those determinations are adjusted further for different purposes.  Further, the many recent cases of financial statement manipulation (Enron, WorldCom, and various other earnings and stock option manipulation scandals) demonstrate that the numbers can be manipulated through various means in order to achieve a particular objective, even if that runs counter to the primary objective for which the numbers are intended.  Enron used off-balance-sheet vehicles and back-to-back arrangements to hide debt from those looking at its financial statements, so that it appeared to have more equity.  Managers' claims that these were activities of rogues personnel didn't wash.  The SIA claim that use of the mark-to-market valuations in a single activity--say, determining employee compensation for dealers--would be sufficient to ensure the appropriateness of the values is particularly suspect, since these valuations could be consistently marked down to defer income as long as the formula for determining compensation based on the numbers appropriately grossed the amount up for that purpose.

The industry complains about having to make one valuation determination for financial accounting purposes and another for tax purposes.  Yet the fact is that industries have often had to make separate determinations for various regulatory agencies that govern their activities.  It is not reasonable to insist that tax nonetheless is not entitled to an appropriate accounting but must follow whatever the financial accounting system allows.  This is perhaps even more true today than a year ago when the safe harbor was finalized, as the accounting standards boards are now very seriously considering convergence on an international standard that would be much more "standard" based rather than "rule" based and thus allow even more room for manipulation of the final numbers.

The article restates two other complaints lodged against the regulations when they were finalized--that subsidiaries of foreign banks are not allowed to use their valuations from their call reports to the Federal Reserve of the Comptroller of the Currency, and that businesses cannot use reports that are not filed in accord with U.S. GAAP.  There does not seem to be any new rationales offered against these reasonable limitations.

One thing has changed significantly since the regulations were finalized.  The current credit crunch stems from banks' taking on too much risk in the loans they issued and then securitized, and at least for some banks, failures in pricing the exotic derivatives that they held.  This experience suggests that the tax administration should be even more cautious about broadening the safe harbor to allow tax accounting to be tied, without limitation, to book valuations.   

The article comes back again and again to the goal of reducing compliance burdens.  While tax should not impose undue burdens on businesses, it is also not clear that reducing compliance burdens should drive these kinds of decisions.  That is a good secondary goal for tax administrators to bear in mind whenever rules are developed, but it is problematic when it becomes the primary goal.  No matter what relief is provided, taxpayers will always argue insatiably for more relief from compliance burdens, and any additional effort compared to their primary activity (satisfying other regulators, making money) will appear unreasonable to them.  Tax administrators, however, have a primary goal of facilitating collection of tax revenues appropriately and fairly from taxpayers.  They shouldn't turn a deaf ear to complaints about compliance burdens, but neither should they set aside reasonable constraints.

The result of the uncertainties, claim the authors, puts more importance on the outcome of the Bank One case.  The tax court's opinion ruled with the government that the taxpayer's methodology did not clearly reflect income,  but instead of then confirming the government's imposition of a methodology, as seems required under the section 446 provision, the court overruled the government and imposed its own valuation methodology.  The Seventh Circuit on appeal made clear that the government's method must be applied in the case of a taxpayer's failure to clearly reflect income, unless the government's method is arbitrary or unlawful, because of the statutory language that puts that decision at the discretion of the Secretary.

Budget considerations: transparency, budgets and the CBO report on the military

The White House has released a new budget and the Economic Report of the President this month, both painting still rosy pictures about the economy in spite of the credit crunch and strong worries of recession that have colored the last few months. 

The FY 2009 Budget proposal claimed to cover the full costs of the so-called "global war on terror" for 2008, but noted that the costs of continuing war spending in 2009 were left to be evaluated--ie, not included in the FY 2009 budget.  Similarly, the AMT was dealt with in a one-year patch, with no attempt at genuine reform. The budget proposed a significant increase in military spending for various unspecified threats, use with allies, and to "transform the military."  Id. at 17-18.  With these massive military increases (even without any specified supplemental amounts for the wars in Iraq and Afghanistan), the budget proposal promised a future balanced budget through massive cuts to Medicare and other domestic programs while retaining the 2001-2003 tax cuts for the wealthy and ignoring the growing concerns of huge numbers of Americans who are faced with considerable economic insecurity. 

The Economic Report begins with a statement lauding "the past 6 years of economic expansion" in which "the American economy has proven its strength and resilence" based on "sophisticated capital markets, flexible labor markets, low taxes, and open trade and investment policies."  If you look at the table of contents here you will not see one that is labeled "the costs of war and war-related activities" or "the amount we are spending on the military."   

The gap in information in these two documents about the supplemental war budgets has been filled, at least to some extent, by the Congressional Budget Office (CBO) in a report requested by Congress, Analysis of the Growth in Funding for Operations in Iraq, Afghanistan, and Elsewhere in the War on Terrorism, Feb. 14, 2008.  The report finds that a cumulative total of $752 billion will have been spent on the wars by the end of FY 2008 (assuming the Congress funds the administration's request as they stand).   

The report is especially interesting for what it shows about the lack of transparency in this funding and the gradual expansion of the requests by the military.  This supplemental war funding before 2005 was used for mobilization of troops, transport of supplies and troops, and purchase of various consumables (spare parts, oil, etc.).  But beginning in 2005, the military also requested funds as part of this process for use in "resetting" the military--i.e., for repair and replacement of equipment and even major overhauls or upgrades to equipment.  In 2006, the military expanded the use of funds to include buying new equipment.  In 2007, the expansion of use of funds continued; now, the military added new types of expenses to those that it wanted covered by these appropriations--not just the direct costs of the wars in Iraq and Afghanistan, but other costs as well.  in other words, these funds began to cover not only the current wars but preparations for future activities in the military's "war" on terrorism.  According to the CBO, these changes meant that procurement funding soared in 2007 and 2008, taking 35% of the requested funds.  As a result, annual war funding levels have increased by 155% since 2004.

The review of this funding is hampered by the lack of information provided by the military.  It customarily provided little information to support the supplemental war funding requests.  Even when it provides information, much of it is aggregated in a category that is labeled "operating forces, additional activities." The CBO noted that it could not, therefore, identify fully the causes of the growth in appropriations.

We should be aware of this information as we consider requests for tax policies that would result in revenue reductions.  We have spent $752 billion on six years of war.  It will likely continue to cost enormous sums, handled through short-term emergency appropriations rather than as part of the ongoing budget process.  Any demand for making the 2001-2003 tax cuts permanent has to be evaluated in light of these expenditures and the likely increasing demand for military funding to "reset" lost equipment and retool for other activities. 

We need to think about priorities in a way that we have not done in the past six years, when we have cut taxes while going to war, resulting in massive increases in borrowing.  What should we do in the next few years to meet our security needs while satisfying domestic requirements?  Making the 2001-2003 tax cuts permanent does not seem to make sense in this context.

LA Minister Calling for Death Prayers for Those Who Denounced Church's Political Activities to IRS

Buena Park Minister Wiley S. Drake has again asked for his followers to pray for the death of leaders of Americans United for Separation of Church and State because of its role in alerting the IRS to the church's endorsement of Huckabee for President. 

You can read the text of his original August 14 call for death prayers (notice that Drake calls for this action, which clearly seems to be a call for his congregation and others to take religious action, at the "key points of the parliamentary role"), and his renewed call for imprecatory prayer, and at this link, the complaint filed with the IRS by Americans for Separation of Church and State.  According to the complaint, Drake indicated that the press release "comes from my office, pastor" and also mentioned his role in the Southern Baptist Convention.

Paul Caron at TaxProf Blog, Pastor Again Asks Followers to Pray for Death of Critics, has a lengthy excerpt from the LA Times story and links to various other items discussing the matter.  See also McKibben, IRS Investigates Pastor's Huckabee endorsement, LA Times, Feb. 14, 2008. 

Wiley, a Southern Baptist Minister, first announced his endorsement of Huckabee on a press release on church letterhead, and then later repeated the endorsement on the church's radio program, the Wiley Drake Show.  See Flaccus, IRS Probes Huckabee Endorsement, AP, Feb. 13, 2008.  Drake claimed he was just making a personal endorsement within his free speech rights.  Id.   The Baptist Press reiterates that approach, claiming that the use of church letterhead and the statement in a program broadcast from the church basement are just personal statements and do not carry any church endorsement.  Kelly, IRS Probes Drake's Endorsement of Huckabee, Baptist Press, Feb. 15, 2008. 

Note that this isn't the first time Drake has done this--he created Southern Baptist Convention letterhead when he was an officer in that organization in 2006 and used that stationery to endorse Mountjoy for his Republican party bid for the U.S. Senate.  McKibben, IRS Investigates Pastor's Huckabee endorsement, LA Times, Feb. 14, 2008. Interestingly, when Drake created and used Southern Baptist letterhead to make a political endorsement, the Southern Baptist Convention wasn't so sure that it wasn't an improper religious rather than personal statement:  the Convention's executive committee general counsel August Boto sent him a stern warning not to do it again!  Kelly, IRS Probes Drake's Endorsement of Huckabee, Baptist Press, Feb. 15, 2008.   Drake even acknowledged, after the fact, that he shouldn't have done it.  See Warner, Reform-Minded Wiley Drake Won't Accept Traditional Obscurity of SBC's 2nd VP, ABPNews.com, Oct. 27, 2006.

Pardon me, but the idea that a pastor using church letterhead is simply making a personal endorsement is not realistic and not, in my experience, the way church congregations work.  The congregations that I was a part of (in Mississippi and Texas) viewed statements made by the pastor on public issues with church identification to be statements on behalf of the church congregation.  The pastor was the congregation's voice.

Obviously, the timid slaps on the wrist that the IRS gives to churches that violate the law to participate in political campaigns does nothing to change their courses of action.  The IRS needs to act by revoking tax exemption for organizations that violate the law.

Why is this important?  Churches are given tax-exempt status to permit them to pursue their religious aims without having to pay over taxes on their activities to government.  That is a special privilege and depends on a critical separation between church and state--no money to the government, no control by the government in the religion, and no interference by the religion in political and government activities.

Church participation in election campaigns is, quite simply, against the law.   Endorsement by a pastor in an official press release on church letterhead and then a few days later on a church-affiliated program seems very clearly to be the kind of activity that is attributable to the church and not a mere opinion of the person who happens to be a pastor.  This is one of those areas where the appearance of endorsement by the organization is a problem, and any representative, such as Drake, should take extra care not to give any cause for thinking that the church itself has endorsed a candidate.  Drake failed to do so.

This activity is inconsistent with the fundamental principles that underlie the constitutional guarantee of religious freedom.  Those constitutional guarantees amount to a pledge that the government will not impose a religion and that it will not interfere in religious practices.  But the use of tax-free financing by a church to intervene in an election through endorsements and other means of supporting political candidates violates that pledge by using the "tax expenditure" (foregone federal revenues) to support its religious intervention in politics.  Other taxpayers, who may disagree strongly with the particular religious viewpoint of that religious organization, must pay more in taxes because of the exemption, yet the churches benefiting from the tax exemption are using the funds made available to them because of the exemption to act against those other taxpayers' religious interests.