COUPLE DUE REFUND BUT AMOUNT REMAINS IN DISPUTE, MAGISTRATE CONCLUDES.

[1] This cause came on for consideration without oral argument on the following motions filed herein:

[5] According to the government, during calendar year 2000, Plaintiffs made four estimated tax payments of $800.00 to the Internal Revenue Service ("the IRS"), an additional payment of $43,204.26 on August 24, 2000, and another payment of $43,204.26 on September 28, 2000. Certified Literal Transcript of Assessments and Payments, Doc. No. 21. As explained by Mr. Heatley:

[6] In February 2001, Mr. Heatley completed a Form 1040, listing taxable income of $37,512. (Deposition, Exhibit 4). Mr. Heatley calculated a tax of $5,629.00 and an amount owed of $209, which payment was included with the return. The Heatleys did not complete or return a schedule with respect to the Capital Gain. The IRS assessed the reported tax liability of $5,629 on April 30, 2001, and wrote the Heatleys that they were due a refund of $86,408.52. (Deposition, Exhibit 5). As stated by Mr. Heatley in his Complaint, "This was an obvious error as I did owe them at least $43,204.26 for my Capital Gains."

[7] The IRS requested that Plaintiffs complete and return an Amended U.S. Individual Income Tax return, Form 1040X, claim for refund. (Deposition, Exhibit 2). Mr. Heatley completed Parts I and II of Schedule D of the Form, reporting a long-term gain of $432,062.63, but did not complete Parts III and IV.

[8] Mr. Heatley will be 80 years old on October 2, 2002. (Id. at 7). He prepared and filed Plaintiffs' 2000 tax return without the assistance of an accountant or other tax professional (Id. at 40-41).

[9] According to the government's brief,² the IRS:

[11] Plaintiffs assert that due to the amount of non-capital gains income they reported in tax year 2000, they are in the 15% tax bracket and thus, the capital gain should have been taxed at a 10% rate, and not at the 20% rate applied by the IRS. Plaintiffs claim a refund of $43,206.26. While originally denying that Plaintiffs were due any refund, the government now asserts, without citation to the record, that "the IRS incorrectly calculated . . . the plaintiffs' liability for tax year 2000" and acknowledges that Plaintiffs³ are due a refund of $1.00, plus applicable interest. (Brief at 8).

h) Maximum capital gains rate. --

[13] In somewhat plainer English, with certain exceptions not applicable here, under the Taxpayer Relief Act of 1997, any net long- term capital gain which would otherwise be taxed at 15 percent is taxed at 10 percent. Individuals in higher tax brackets pay tax at a maximum rate of 20 percent on net capital gains. See Corpus Juris Secundum: Internal Revenue § 115 (2002 edition). There is no question that but for the sale of the Disney stock, Plaintiffs would remain within the 15% tax bracket. See Internal Revenue Code § 1(a). There is also no question that if the monies received from the sale of the stock are credited as income to the Plaintiffs, Plaintiffs move into the 39.6% marginal tax bracket.

[14] Plaintiffs argue that the gains should be taxed at 10%, as Plaintiffs are otherwise in the 15% tax bracket. The government contends that most of the gains should be taxed at the maximum rate of 20%, as Plaintiffs are in the higher tax bracket. Contrary to Plaintiffs' arguments, having total noncapital gain income within the 15% bracket does not allow a taxpayer to take advantage of the 10% capital gain rate for an unlimited amount of capital gains.⁴

[15] Section 61(a) of the Code states that gross income includes "all income from whatever source derived" (unless otherwise provided), and section 61(a)(3) expressly provides that gross income includes gains derived from dealings in property. Thus, as argued by the government, one must first include the gain as income, in order to carry out the calculations applicable to the capital gains portion of total income. Though the Court agrees with this aspect of the government's argument, the computation of Plaintiffs' actual tax liability and payment credits is not adequately supported on this record so as to allow entry of summary judgment.

[16] Commentators have noted that the calculation of capital gains liability involves a complex series of netting and layering. See, e.g., West Federal Taxation -- Individual Income Taxes, Chapter 16, Doc. 5 (2001 edition) (available online at 2001 WL 423759). According to the commentators, after computing tax on ordinary taxable income using the regular tax rates, a taxpayer is to compute tax on the capital gain by calculating the portion of the 10%/20% capital gain that is taxed at 10% (available only if ordinary taxable income plus 25% and 28% capital gain layers do not put taxpayer above the 15% bracket; 10% rate is no longer available once income including the portion of the gain taxed at 10% puts taxpayer out of the 15% bracket) plus the 20% long term capital gain (remaining portion of 10%/20% capital gain.) Id. Translated, this means that Plaintiffs' tax liability is computed by computing the tax on their ordinary taxable income plus the portion of their capital gain that is taxed at 10% up until that amount exceeds the 15% tax bracket, plus the remaining amount of the capital gain taxed at 20%. Thus, the applicable rate is not necessarily 10% or 20%, but will be a combination of the two. Because the 10% rate for capital gains lasts only to the point where the taxpayer continues to be in the 15% tax bracket, to the extent Plaintiffs contend that the entire capital gain of $432,062 should be taxed at 10%, this contention cannot stand.

[17] Although it is plain that Plaintiffs are not entitled to a 10% capital tax rate on the full amount of the capital gain, the government has not met its burden of proof with respect to the correct amount to be refunded to Plaintiffs. The government relies on the calculations set forth in Part IV of Schedule D, attached as Exhibit 7 to the Deposition, as evidence of the correct application of the Code. Unfortunately, however, the calculations in the exhibit are not properly before this Court as evidence as they have not been authenticated in any way. During the deposition of Mr. Heatley, defense counsel "introduced" the exhibit:

[18] There is no indication when some unnamed IRS employee completed the form, nor is there any indication that the form was used in order to determine Plaintiffs' tax liability. In fact, the conclusion of tax owed that appears on the form is different than the tax liability the IRS actually assessed, according to the government's brief. Thus, there is no evidence in the record of how the IRS arrived at the tax liability they ultimately imposed. Moreover, the government admits in its papers that the IRS miscalculated the tax liability of Plaintiffs and that Plaintiffs are owed a refund. Thus, while the Court concludes that there is no genuine issue of material fact that Plaintiffs are due a refund (due to the government's apparent stipulation as to this issue), there is no evidence sufficient to support a finding of the amount of that refund.

[19] A final word is in order. The tax code consists of more than 5.5 million words contained in over eight thousand pages in the United States Code. The provisions dealing with the appropriate taxation of capital gains are particularly complicated for the average taxpayer and, apparently, for the IRS itself. A tax system that makes it difficult for taxpayers in fairly ordinary circumstances to determine their liability is justifiably subject to criticism. While some of the complex maneuverings that are part of modern economic life may necessitate some degree of complexity in the tax code,⁵ the byzantine interaction of the various provisions devised by Congress and implemented by the IRS make calculation and payment of required taxes an onerous and uncertain chore, quite apart from the taxes themselves. As a result, it is difficult for even reasonably astute individual taxpayers (without professional advisors) to conduct their financial lives so as to be confident of the net tax impact of their conduct and circumstances.

[20] Plaintiffs in this case prepared their own tax returns and have represented themselves in this litigation. Doubtless, they would have been better off financially had they consulted with an attorney, accountant or financial planner is deciding how to deal with the appreciation in stock value created by their timely, patient and prescient investment strategy. While this state of affairs may be a sad commentary on the vagaries of the legislative process, the parties and the Court must deal with the Internal Revenue Code as they find it.

[21] As the record stands in this case, the proper amount of Plaintiffs' refund cannot be determined. If the parties continue to be unable to agree⁶ on the proper computation, a trial, with witnesses competent to apply the Code and do the necessary computations (including, if applicable, interest charges or credits), is the appropriate vehicle for resolving this issue.

[22] Failure to file written objections to the proposed findings and recommendations contained in this report within ten (10) days from the date of its filing shall bar an aggrieved party from attacking the factual findings on appeal.

[23] Recommended in Orlando, Florida this 18th day of September, 2002.

²Although the Brief cites to "Ex. C" for these assertions, the Court was unable to locate an "Ex. C" to either the brief or the Deposition. As such, these assertions are without record support, save for the ultimate conclusion of tax owed found in the Literal Transcript.

³Unaccountably, the government, in making this concession, refers to the Plaintiffs as "Debtor." (Doc. No. 19 at 8).

⁴Having a larger gross income also reduces or eliminates the availability of other tax advantages, such as deductions, exemptions and eligibility for various tax deferral accounts. This feature of the progressive tax system has grown considerably in complexity in recent years, well beyond applying higher marginal rates to higher income individuals. The potential unfairness created by recognizing all of a truly long term capital gain in a single year is a topic that tax theorists have debated for years. Ameliorating this effect is one justification for creating lower capital gains tax rates.

⁵See Michelle Arnopol Cecil, Toward Adding Further Complexity to the Internal Revenue Code: A New Paradigm for the Deductibility of Capital Losses, 99 U. Ill. L. Rev. 1083 (1999), citing numerous references, including congressional statements and commentators critical of the complexity of the Code.

⁶The Court may wish to consider directing the parties to engage in further mediation after action on this Report and Recommendation.