Why the Taxman didn't come
Time Dollars ISBN 0-87857-985-0
by Edgar Cahn, Ph.D., J.D.
JCT: This is one of the most beautiful books on local currencies
ever written. I urge everyone to get it as it will be a valuable
addition to any monetary reform library.
Chapter 6
In 1830, John Marshall, then Chief Justice of the United States,
decided that it was time, once and for all, to put Missouri out of the
business of creating new kinds of money.
The case concerned a rather ingenious scheme that the state had
dreamed up to meet its fiscal needs. Missouri had issued "salt
certificates" in amounts ranging from 50 cents to $10, based on
expected revenues from the state-owned salt springs. The state tried
to characterize these as mere "salt coupons," like the ones people
clip out of the Sunday papers today. After all, they were ultimately
redeemable only in salt. In reality, however, the certificates
circulated as money. And the governor was authorized to pledge the
state's assets to acquire "a loan of silver or gold" in order to
redeem these certificates.
This was not the first time that Missouri had engaged in a monetary
experiment. Early in its history, the state had issued "wolf-scalp
certificates" and "crow certificates" as rewards for killing wolves
and crows in order to protect cattle herds and crops. The wolf-scalp
and crow certificates were legal tender in Missouri for purposes of
paying taxes.
Wolf scalps had escaped judicial scrutiny. But these salt
certificates were more than Chief Justice Marshall, the great
Federalist, could swallow. Marshall had authored the landmark decision
of Marbury vs. Madison, declaring the Constitution, as interpreted by
the Supreme Court, to be the final law of the land. He had reiterated
that declaration in a series of other decisions. Having presided over
the magnificent edifice of federal supremacy, he was not about to let
a puny state mock it with salt certificates.
The question of money was a touchy one to begin with in the early
days of the Republic. The Continental Congress that drafted the old
Articles of Confederation was run out of Philadelphia by soldiers who
had fought under George Washington only to be paid by state
governments in worthless IOUs. A major economic depression had
resulted from precipitate drops in the value of money that state-
chartered banks had issued. The Founding Fathers were understandably
leery of paper money, especially when issued by states.
And so, speaking for the court, Marshall reminded the state of
Missouri that Article I, Section 8 of the Constitution of the United
States gives Congress exclusive powers "to coin money and regulate the
value thereof."
MISSOURI LEADS THE WAY
One hundred and thirty five years later, Missouri is at it
again. IN the mid-1980s, the state enacted a law to use Time Dollars
to provide relief for people who take care of the elderly family
members at home. In a sense, Time Dollars are simply updated wolf-
scalp or crow certificates - a way of paying citizens for performing
a public service. So far, Missouri is the only state to commit its
"full faith and credit" to the Time Dollar: if no Time Dollar
participant is available to help a person who has earned this
currency, the state will provide this help at its own expense.
This time, Missouri went even further. The passage of time has
mooted Marshall's early decision: credit cards, state revenue bonds,
any number of other devices, have rendered antique the notion that
only the federal government can create money. That still leaves the
Internal Revenue Service (IRS), however. In 1985, Missouri had the
temerity to ask the agency to declare this money exempt from federal
income tax.
The IRS is not generally known for generosity where federal
revenues are concerned. It is especially wary of basing exemptions on
broad conceptual grounds, as opposed to narrow interpretations of the
statute. Yet, the IRS has concluded that credits earned under the
Missouri law will not be treated as taxable income. It did so not once
but three twice - first in a ruling by a regional office on a request
from the state of Missouri, the second time, in a "private ruling" by
the national office in response to a request from a settlement house
in St. Louis.
These rulings apply only to the particular cases involved and
might not hold in different circumstances. But they are highly
significant nevertheless. At a practical level, they help people
designing Time Dollar programs to avoid entanglements with the IRS.
(This has been a concern in some social service quarters.)
The reasoning behind the exemption is even more important.
Examining Time Dollars through the exacting lens of federal tax law,
the IRS lawyers saw some crucial deferences between these and ordinary
money that might elude the more casual mind. These differences, in
turn, illuminates well as anything that has come along the nature of
the social bonds that the Time Dollar movement is seeking to rebuild.
The IRS rulings are all the more remarkable if we recall the
economic climate of the early 1980s and the hostility of the IRS
toward barter. Unemployment and inflation had both reached
double digits. The economy was so low that some economists were
calling it a depression. The Federal Reserve had moved to curb
inflation by restricting the supply of money, thereby stifling the
economy even further. Federal spending on domestic programs was being
slashed by a new president, Ronald Reagan. And the United States
government was operating on a deficit of a mere $50 billion to $70
billion.
Back in the 1930s, when jobs and money were in short supply, many
discovered barter to meet their needs. In the early 1980s, the middle
class did the same. Paperbacks proliferated on drugstore counters
carrying titles like "The Barter Way to Beat Inflation" and "How to
Get on the Barter Bandwagon where CASH is a four-letter word." Barter
clubs arose in which members bought and sold services and wares
through computerized exchange pools. Several national barter
franchises prepared public offerings; Sears, Roebuck and Company
created Sears World Trade specializing among other things in barter
and countertrade. Magazine articles noted that nearly one-third of
international trade was done using barter rather than currency.
THEN THE IRS WOKE UP
Much of this happened because the IRS was asleep to the issue.
Then the agency woke up and spoiled the fun. New regulations expanded
the definition of barter and required full disclosure of all such
exchanges on one's annual tax return. Even worse, credits received
through a barter network were determined to be taxable income when
received rather than when spent. That is, if someone paid you 2,000
barter credits in exchange for your used car, you were taxed when the
credits were added to your account, even if you had not spent them.
That made good sense from an accounting standpoint. But it was
terrible news to anyone who held nothing except except some credits in
a soon-to-be-defunct barter club.
Yet, despite its "jihad" against barter-based tax avoidance, the
IRS made an exception for Time Dollars. In March 1985, the regional
IRS office in St. Louis ruled that volunteers in a state program who
qualified for hours of service by earning service credits would not be
taxed on the value of those services. The ruling focused primarily on
the charitable nature of the transaction and the public purpose it
embodies. PEOPLE WHO RECEIVED THESE SERVICES FROM TIME DOLLAR WORKERS
WOULD HAVE RECEIVED THEM FREE FROM THE STATE ANYWAY. This made the
transaction fundamentally different from commercial barter, which is
simply another form of a market transaction that might have occurred
for cash.
Then in June 1985, the national office of the IRS issued a
"private letter" ruling regarding the Time Dollar program in St.
Louis, which had been operating for several years. Grace Hill, a local
settlement house, had been using Time Dollars to provide housekeeping
and babysitting to residents of the community and also to provide more
skilled services such as house painting. The computerized bookkeeping
operated in the usual way. "When a volunteer performs a service" the
ruling noted, the "taxpayer (Grace Hill) credits the hours spent to
the volunteer's account and debits the hours to the service
recipient's account."
Despite the obvious value of the services and the extensive
record keeping involved, the IRS nonetheless concluded that these
credits "have no monetary value" and service recipients do not incur a
"contractual liability." The agency saw that these Time Dollars are
fundamentally different from money. They provide recognition and a
form of bonding, rather than a cash reward. "Credits posted to the
volunteers' accounts serve merely as a means to motivate the
volunteers," the IRS said. "The continued effectiveness of this
taxpayers' program depends on the volunteers perceiving the value of
their efforts to the community. Taxpayer hopes that knowledge of the
hours they provide... will instill pride in the volunteers."
WHY TIME DOLLARS WEREN'T TAXED
The Time Dollar networks are different from commercial barter,
the ruling said. They are simply a different form of the things
neighbors do for one another. Commercial barter, by contrast, "does
not include arrangements that provide solely for the informal exchange
of similar services on a non-commercial basis." In commercial barter,
the parties are bound by contract, and credits in a barter network are
a "cash substitute." Here, by contrast, people who receive a service
have no contractual - i.e., legal - obligation to repay. And people
who give service get no contractual right to compensation: "The
credits merely serve as a means to motivate the volunteers to continue
their community service."
This ruling cut through a lot of academic fog that has grown up
around the issue. A tax professor who authored one of the leading
casebooks on federal taxation, for example, could not fathom how the
IRS could deem Time Dollars not taxable. After all, he said, "benefit
is benefit."
But the IRS did, and the practical importance of the ruling cannot
be overstated. It is hard to imagine people lining up to volunteer,
knowing that come April 15th, Uncle Sam was going to tax the Time
Dollars they earned - even though they had gotten no money with which
to pay those taxes. Even if the IRS valued the credits at only $5 per
hour, a volunteer could easily owe several hundred dollars in taxes.
The conceptual basis of the rulings is even more important. The IRS
went right to the heart of the difference between Time Dollars and
money. The ruling that declared that these exchanges were not
commercial barter implicitly recognized a distinction between the
market and the nonmarket economy, with the important corollary that
exchanges in the nonmarket economy are beyond the scope of the federal
income tax laws. Not all exchanges among family members and neighbors
are exempt, of course; certain trust arrangements between parents and
children, for example, are blatant tax avoidance devices.
But the IRS did not see evidence of this in Missouri's Time Dollar
program. It pointed out that, to the contrary, the care in question
was charitable in motive and was openly reported to the state of
Missouri. There was little danger that respite care syndicates would
sweep the nation as a hot new form of tax avoidance.
TRUST RULES ALL EXPECTATIONS
The St. Louis ruling is even more impressive because it fleshes
out a distinction that seems to elude most tax lawyers. The ruling
noted that participants earning credits had no "contractual" rights to
anything in exchange for their efforts. (The St. Louis program was
not backed by the state.) Any expectations or increased sense of
security people feel rests on their trust in the program, and
particularly in their fellow members. They can't go to court to demand
service from anyone,no matter how many Time Dollars they hold, because
trust is all there is.
This goes to a fundamental different between contractual
obligations and dealings between friends and family. With the latter,
legal rights are of limited use. You have to choose between asserting
them and maintaining the underlying relationship. Resorting to the
courts means you are asserting the rights of a stranger against
strangers, and often, that you are operating in a context of monetary
values rather than ones of trust.
Shimone Bergman, regarded as the "father" of gerontology in
Israel, responded with a glimmer of recognition when he heard a
description of Time Dollars. Perhaps one of the earliest precedents,
he said, is found in the scriptural commandment "Honor thy father and
thy mother that they days may be long upon the land which the Lord thy
God Giveth thee." Considering that Moses's followers would wander 40
years in the desert before being permitted to enter that land, the
promised exchange was at best somewhat speculative in nature. A court
would have thrown it out for want of mutuality or on any number of
other grounds as altogether lacking in the requisite specificity.
Families and communities operate on a standard of reciprocity.
That is a moral norm, not a legal one; the mechanism of enforcement
is not the courts, but the sanctions that operate normally between
people. The person who takes and takes and takes becomes, at some
point, like the child who cried "wolf" once too often. Anthropologists
tell us that the ostracism practiced by "primitive" legal systems may
be more powerful than the forms of punishment to which "civilized"
society resorts when it puts miscreants in prison and turns them into
polished criminals.
THE GUARANTEE: GOD FAITH AND BEST EFFORT
Time Dollars draw from an ethical tradition, rather than the
legal and commercial tradition that lies behind the Internal Revenue
Code. The ethical norm was succinctly summed up centuries ago by Rabbi
Ben Azzai, who said: "The reward of a good deed is a good deed." The
only real guarantee is the good faith and best effort of the
individuals and organizations involved.
Indeed, there can be no "contractual remedy" that substitutes for
membership in family and community. These provide a kind of all-
purpose insurance and all-purpose safety net that no commercial
company would underwrite and no government could afford. That is the
measure of security we have lost; that is the measure of genuine
security that Time Dollars seeks to reestablish.
Income, said the IRS, belongs in the world of the market;
altruism, empathy, and reciprocity belong to another world, which
by and large is off-limits to the IRS. To be sure, IRS lawyers
would warn that these regional rulings are not binding precedent. The
possibility remains that as Time Dollar systems expand, and as the IRS
feels continuing pressure to increase federal revenues to avert the
need to raise tax rates, the agency could have a change of heart.
If the IRS really wants to decree that retirees will be taxed for
driving their neighbors to the doctor, one is tempted to respond
cheerily, "See you on Capitol Hill." But Congress wouldn't even have
to act. This do-it-yourself currency even includes a do-it-yourself
defence against the IRS.
People earning Time Dollars could simply give them to the tax-
exempt membership organization sponsoring the program. They would in
effect be saying, we trust the norm of reciprocity more than the world
of contract. Should we ever be in need, we would rather place our
trust in each other.
If you, the IRS, insist on distorting what we are doing by
perverting Time Dollars into a taxable quid pro quo transaction, then
we willingly surrender any "contractual right" valued by the market
mentality. That part we give to ourselves is not for sale. We have an
inalienable right to the private world of the family, of extended
family, of community. We will render unto Ceasar,what which is
Ceasar's. But no more. There is another domain you may not touch.
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