Washington, D.C. — The IRS has reportedly announced a new enforcement initiative targeting Americans with multiple sclerosis, after investigators questioned why some individuals apparently possess multiple scleroses while millions of Americans have none. The agency, which describes the situation as “a deeply unequal distribution of sclerosis,” has stressed that having sclerosis remains legal, and that its concern begins only when one person accumulates, in the words of a spokesperson, “multiple.” No mechanism has been identified by which sclerosis can be transferred from a person who has it to a person who does not, and officials have confirmed that the absence of such a mechanism will be addressed by a working group, once the working group is formed, once the question of who should form it has been referred to a second working group.
CLASSIFICATION: THE SCLEROSIS REDISTRIBUTION ENFORCEMENT EDITION — INVOLUNTARY HOLDINGS DISCLOSURE ANALYSIS
DISTRIBUTION: Taxpayers Holding More Than One Sclerosis, Taxpayers Holding Exactly One and Feeling Watched, The Neurologist Who Provided the Textbook, The Auditor Who Escalated, Anyone Who Has Ever Read the Word “Multiple” and Assumed It Was a Number
PREPARED BY: The Externality Fiscal Desk, in consultation with the Office of Involuntary Asset Redistribution and the Bureau of Things People Did Not Ask To Have
DATE: Enforcement letters to begin arriving next year.
An IRS spokesperson opened the briefing by describing the matter as one of fairness. Some Americans, the spokesperson noted, have several. Others have none. The government, the spokesperson said, was not in the business of telling people what to feel about that, only in the business of taxing it.
“We’re simply asking why one person needs multiple sclerosis.”
A reporter asked whether the person needed it. The spokesperson said that was precisely the question the initiative was designed to answer, and that the taxpayer would have an opportunity to explain the need on a form.
The Investigation
The crackdown reportedly began when an auditor encountered the term multiple sclerosis while reviewing an unrelated deduction and immediately escalated the matter to a supervisor.
“Multiple? How many are we talking about?”
The supervisor, according to a person familiar with the meeting, asked the same question of a second supervisor, who asked it of a third, until the question had ascended far enough that no one remaining in the room had ever met a patient, at which altitude it was reclassified from a question into a policy priority.
Medical professionals were consulted. A neurologist attempted to explain that multiple sclerosis is the name of a single neurological disease, that the word multiple describes the several sites within one nervous system where scarring occurs, and that no patient has ever possessed more than one multiple sclerosis, because there is only one to possess.
The IRS reportedly requested documentation.
The neurologist provided a textbook.
The IRS reportedly noted that the textbook had been published by a party with a direct financial interest in the sale of textbooks, and asked whether an independent source could be located that did not stand to profit from the claim that the disease was singular. The neurologist offered a second textbook, by a different author, at a different press. The IRS noted that this, too, was a textbook.
Asked what form of evidence the agency would accept, an official said the agency would accept a taxpayer’s holdings as reported on the form, cross-referenced against the taxpayer’s prior-year holdings as reported on the form, reconciled against any discrepancy identified on the form. The neurologist observed that the form did not yet exist. The official agreed that this was the current bottleneck.
A second neurologist, brought in to corroborate the first, made the mistake of using the word “lesions.” The auditor reportedly wrote down LESIONS — ADDITIONAL ASSETS? and asked whether lesions were reported separately or rolled into the sclerosis figure. The neurologist explained that the lesions were the sclerosis — that the sclerosis was the scarring and the scarring was the lesions and there was no third thing underneath. The auditor thanked her and noted that the taxpayer appeared, on this account, to be holding both the asset and a description of the asset, and that the agency would need to determine whether the description was itself taxable.
The Legal Theory
Central to the initiative is the position, developed by the agency’s Office of Chief Counsel, that a sclerosis is property.
The reasoning, laid out in an internal memorandum, proceeds in three steps. First, the taxpayer has a sclerosis; the verb to have denotes possession; possession is the defining feature of property. Second, the taxpayer cannot be made to give it up without process, which the memorandum treats not as a fact about disease but as evidence of a robust ownership interest. Third, the sclerosis persists across tax years, satisfying the durability requirement that distinguishes an asset from an expense.
A staff attorney reportedly asked whether an asset the owner would pay any amount to be rid of could sensibly be called an asset. The memorandum addresses this in a footnote, which states that the owner’s eagerness to dispose of the property speaks only to the property’s condition, not to its status as property, and notes that many assets are unwanted, citing timeshares.
The same footnote introduces the concept of a negative-yield holding — an asset that costs the holder money, energy, and mobility every year it is held, and which therefore, the memorandum reasons, must be generating value somewhere, since value is conserved, and if the value is not accruing to the holder it must be accruing to the estate, the system, or the public, none of which can be located but all of which can be taxed.
Asked to whom the value accrued, the Office of Chief Counsel said this was a question of first impression. Asked what a question of first impression was, the office said it was a question no court had answered, which it offered as a reason to proceed rather than a reason to wait. The office added that the initiative had been carefully designed to create the case that would eventually settle the question, so that the agency could learn, from the outcome, whether it had been permitted to do the thing it was already doing.
New Reporting Requirements
Under the proposed Sclerosis Fairness and Accountability Act, Americans possessing more than one sclerosis would be required to disclose their holdings annually. Officials are reportedly developing Form 1040-MS, the Multiple Sclerosis Holdings and Reconciliation Schedule, a draft of which reads as follows.
| Line | Item | Amount |
|---|---|---|
| 1 | Total sclerosis held at beginning of year | ____ |
| 2 | Additional sclerosis acquired during the year | ____ |
| 3 | Sclerosis disposed of during the year | ____ |
| 4 | Sclerosis received by gift, inheritance, or transfer | ____ |
| 5 | Sclerosis lost, misplaced, or otherwise unaccounted for | ____ |
| 6 | Adjusted sclerosis balance (add lines 1, 2, and 4; subtract 3 and 5) | ____ |
| 7 | Portion of line 6 held for investment purposes | ____ |
| 8 | Portion of line 6 held involuntarily (attach explanation) | ____ |
| 9 | Reasonable need for holdings on line 6 (see instructions) | ____ |
Patients reportedly asked how they were supposed to answer any of this.
The IRS responded: “To the best of your knowledge.”
A patient asked what happens if the number is wrong.
The IRS explained that penalties apply to underreporting.
The patient asked what happens if she overreports.
The IRS explained that this would be unusual.
A patient asked how a person could hold, on Line 1, a quantity of a thing there is only one of. The IRS explained that Line 1 was a starting figure and that most taxpayers would enter one. The patient asked why, if most taxpayers would enter one, the form was called Multiple Sclerosis. The IRS explained that the form was named for the population it served, not for the figure it expected, and that a taxpayer entering one on Line 1 was still, for administrative purposes, a person with multiple sclerosis, and therefore in scope, and therefore required to file, to attest that they had one, on a form that existed to identify the people with more than one.
Line 5 — sclerosis lost, misplaced, or otherwise unaccounted for — drew particular attention during the comment period. A taxpayer asked how one would misplace a sclerosis. The agency clarified that Line 5 was included for completeness and that a taxpayer who had not misplaced any sclerosis should enter zero, but should retain documentation establishing that the zero was accurate, in the event the agency later determined that a sclerosis had gone missing and the taxpayer had failed to report the loss.
Instructions for Form 1040-MS
The draft instruction booklet accompanying Form 1040-MS runs to forty-one pages, of which the first thirty-eight are definitions.
The booklet defines a sclerosis as “a sclerosis,” and defines multiple as “more than one, where applicable.” A note advises the taxpayer that the phrase “where applicable” has been the subject of ongoing interpretive guidance and that the taxpayer should consult Publication 1040-MS-A, which was not enclosed and has not been written.
Under the heading Who Must File, the booklet states that a taxpayer must file if the taxpayer holds one or more scleroses, has held one or more scleroses at any point during the tax year, expects to hold one or more scleroses, or has been informed by a physician that the taxpayer holds a condition the name of which contains a number.
Under When Not To File, the booklet states that a taxpayer need not file if the taxpayer holds no scleroses and has never held any, but adds that such a taxpayer may wish to file anyway, to establish a record of the zero, which the agency describes as “the strongest possible position” and “difficult to audit.”
The section titled Rounding instructs the taxpayer to round each figure to the nearest whole sclerosis. A taxpayer who believes they hold a fractional sclerosis — the booklet notes that at least one research program contends this is possible — is instructed to round up, on the conservative principle that the government should never be the party surprised by the existence of an additional sclerosis.
The final substantive instruction, on page thirty-nine, reads: “If you are unsure how many scleroses you hold, enter your best estimate. The Service will assist you in correcting it.” A footnote clarifies that the assistance referred to is the penalty.
The Reconciliation Worksheet
Taxpayers whose beginning and ending balances differ are required to complete the Reconciliation Worksheet, which explains the change. The worksheet asks the taxpayer to account for each sclerosis that entered or left the taxpayer’s holdings during the year and to attach, for each, a brief narrative.
A taxpayer whose balance increased must explain the acquisition. Acceptable explanations, per the draft, include purchase, gift, inheritance, and “found.” A taxpayer selecting “found” must state where. The agency has confirmed that “inside my own body, apparently, over a period of years, without my consent” is a permissible entry, though it has flagged the phrasing as “argumentative” and reserved the right to request clarification.
A taxpayer whose balance decreased must explain the disposition, and here the worksheet becomes, in the words of one preparer, “metaphysically demanding.” The taxpayer must certify that any sclerosis no longer held was disposed of in a qualifying transaction, and must supply the identity of the recipient. A taxpayer whose sclerosis went into remission is instructed to report the remission as a disposition and to name the party who received it.
A patient asked who receives a sclerosis that goes into remission. The agency said the worksheet required the name. The patient said there was no name; the sclerosis had not gone to anyone; it had simply become less active. The agency said that an asset that leaves a taxpayer’s holdings and cannot be shown to have arrived anywhere is presumed to have been transferred to a related party in an unreported transaction, and that the burden was on the taxpayer to prove otherwise. The patient asked how she would prove the whereabouts of a thing that no longer existed. The agency said this was exactly the kind of ambiguity the reconciliation process was designed to surface.
Government Concern
Treasury officials say the goal is not punishment.
“We’re simply asking why one person needs multiple sclerosis.”
One official continued:
“There are Americans walking around with zero sclerosis.”
A neurologist responded: “That’s good.”
The official reportedly wrote something down.
The neurologist asked what he had written.
The official said it was for the file.
The neurologist asked to see the file. The official explained that the file was internal. The neurologist asked whether she was in the file. The official said everyone consulted was in the file, that being in the file was not an accusation, and that she should not read anything into the file beyond the fact that she was now in it. The neurologist asked what the file was for. The official said the file was for the initiative. The neurologist asked what the initiative was for. The official said the initiative was the reason there was a file.
Later in the same session, the official offered what he described as a clarifying analogy. Suppose, he said, that one household on a street owned nine cars and eleven households owned none. Would that not, he asked, be worth a conversation? The neurologist agreed that it might. The official said that this was all the agency was proposing: a conversation. The neurologist noted that cars can be driven from one household to another and that no comparable operation exists for sclerosis. The official said that logistics were downstream of principle and that the agency preferred to establish the principle first and discover the logistics later, in the field.
The Sclerosis Hoarding Tax
Lawmakers are reportedly considering an annual Sclerosis Hoarding Tax for individuals whose holdings exceed the proposed federal limit of one sclerosis per person. The policy would encourage affected Americans to, in the words of a draft summary, “put excess sclerosis back into circulation.”
Doctors again attempted to explain that nobody wants the sclerosis.
Officials described this as “a demand-side problem.”
Asked what mechanism exists for transferring sclerosis from one person to another, officials said the market would determine that. Asked what market, officials said they were glad the question had been raised and would be forming a working group. Asked whether the tax could be levied before the market that would relieve it existed, officials said that the tax was in fact how the market would be summoned, on the reasoning that a sufficiently unpleasant holding cost causes markets to appear, and that the appearance of the market could be treated as a lagging indicator of the tax working.
The proposed rate structure is graduated. A taxpayer holding one sclerosis owes nothing, the first sclerosis being within the personal exemption. A taxpayer holding two owes the standard rate on the second. A taxpayer holding three or more is deemed a concentrated holder and is subject to the concentrated-holder surcharge, an additional levy justified by the “systemic risk” a large private stockpile of sclerosis is said to pose to the orderly functioning of the sclerosis market, which does not exist, and which the surcharge is designed to protect.
A Joint Committee estimate projected that the tax would raise a certain amount of revenue in its first year, contingent on the number of taxpayers found to hold more than one sclerosis, a number the Committee acknowledged was, on the medical evidence available to it, zero, but which it declined to treat as final on the grounds that the evidence had been provided by textbooks.
Valuation and Appraisal
To assess the tax, the agency must first determine what a sclerosis is worth. This has fallen to the newly established Office of Sclerosis Valuation, which has issued preliminary guidance running to several hundred pages and reaching no conclusion.
The guidance identifies three permissible valuation methods. Under the cost method, a sclerosis is valued at the cost to acquire it, which the guidance concedes is difficult to determine, the typical acquisition having involved no transaction, no counterparty, and no consent. Under the income method, a sclerosis is valued at the present value of the income it produces, which the guidance concedes is negative, the asset producing only expense. Under the market method, a sclerosis is valued by reference to comparable sales, of which the guidance concedes there are none, no sclerosis ever having been sold.
Confronted with three methods each yielding either no number or a negative one, the Office of Sclerosis Valuation proposed a fourth, the administrative method, under which a sclerosis is worth whatever figure allows the tax to be assessed. Asked how this figure was derived, the office said it was derived from the need for a figure. Asked whether that was circular, the office said it preferred the term “self-consistent.”
A taxpayer who disputes the administrative value may request an independent appraisal, at the taxpayer’s expense, from an appraiser certified in sclerosis valuation. The agency has confirmed that no such appraisers exist, that a certification program is being developed, and that until it is complete the taxpayer’s remedy is to accept the administrative value, which the agency describes as “the appraisal you would have received.”
Fair Market Value
The valuation guidance leans heavily on the concept of fair market value, defined, per longstanding practice, as the price at which property would change hands between a willing buyer and a willing seller, neither under compulsion, both reasonably informed.
The Office of Sclerosis Valuation applied this standard and encountered difficulty at each term. There is no willing buyer, no person having ever sought to acquire a sclerosis. There is no willing seller, every holder wishing to be rid of theirs at any price, which the guidance notes technically establishes a seller under compulsion, disqualifying the transaction. There is no price, no exchange having occurred. And both parties, being hypothetical, are described in the guidance as “reasonably informed only in the sense that they do not exist and therefore cannot be misinformed.”
The guidance resolves the difficulty by positing a hypothetical market populated by hypothetical participants transacting at a hypothetical price, and then instructing the appraiser to determine what that price would be if any of it were real. The resulting figure, the guidance states, is “the fair market value,” and any taxpayer who objects that no such market exists is reminded that fair market value has always been a legal fiction and that the fiction has merely, in this instance, run out of things to attach itself to.
A tax attorney asked how a court would review a valuation with no market, no sale, and no comparable. The Office said the court would apply an abuse-of-discretion standard, under which the agency’s figure is upheld unless it is arbitrary. Asked whether a figure conjured from a market that does not exist was arbitrary, the Office said no, because the method by which it had been conjured was documented, and a documented method, however arbitrary its inputs, is by definition not arbitrary, arbitrariness being a property of procedure rather than of result.
The Secondary Market
Because the tax is designed to encourage holders to “put excess sclerosis back into circulation,” the agency has assumed the existence of a secondary market in which sclerosis is bought, sold, and transferred. No such market exists. The agency has confirmed that it is “monitoring” it.
Asked what the agency was monitoring, an official said price movements. Asked what prices, the official said the prices the market would generate once it formed. Asked whether the agency could monitor prices that did not yet exist, the official said the agency was monitoring for their appearance, and that the day a price appeared the agency would already be watching, which the official described as “forward-deployed oversight.”
Several firms have reportedly registered as sclerosis brokers in anticipation. None has completed a transaction. One, describing itself as a market maker, has published a bid and an ask. The bid, the price at which it will buy a sclerosis, is listed as “no.” The ask, the price at which it will sell one, is listed as “please.” The spread between them the firm characterizes as “the widest in any market we are aware of, reflecting a total and mutual absence of interest on both sides.”
A patient contacted the broker to ask whether she could sell hers. The broker explained that it was a market maker, not a buyer, and that it stood ready to match her with a counterparty as soon as a counterparty expressed a wish to hold a sclerosis. The patient asked how long that might take. The broker said it maintained a waiting list. The patient asked how many were on it. The broker said the list was for sellers.
The Working Group
The working group promised to address the transfer mechanism has reportedly been formed. It consists of eleven members, none of whom is a physician, on the stated ground that the question is fiscal rather than medical, and one of whom is a physician, added later, over objection, and asked mainly to confirm points the group had already decided.
The group met and produced an interim report. The report identifies the central obstacle to redistribution as “the current inability to move a sclerosis from one person to another,” which it classifies as a “near-term implementation challenge” rather than a “fundamental barrier,” on the reasoning that fundamental barriers are the ones the group is not funded to solve, and this one it is.
The report proposes three candidate mechanisms. The first is a voluntary transfer regime, under which a holder would donate excess sclerosis to a recipient; the report notes that no recipient has been identified and recommends a public awareness campaign to “build the demand side.” The second is a clearinghouse, which would hold sclerosis in escrow between sellers and buyers; the report notes that the clearinghouse would, at present, hold everything and distribute nothing, and characterizes this as a phased rollout. The third mechanism is described in the report only as “the medical component, to be determined by others,” and is footnoted to the single physician, who has attached a dissent.
The physician’s dissent, reproduced in an appendix, reads in full: “There is no transfer mechanism. There will be no transfer mechanism. The disease is not a quantity and cannot be moved. I have said this at every meeting. I am attaching it in writing so that it is somewhere the group cannot describe as having been resolved.” The report describes the dissent, in its executive summary, as “a productive contribution to an ongoing dialogue.”
The Transfer Problem
The transfer problem — the fact that sclerosis cannot be conveyed from one person to another — has been the subject of increasingly elaborate treatment as the initiative has matured, on the principle that a problem acknowledged early enough can be reclassified before it becomes disqualifying.
Officials now describe the impossibility of transfer not as a defect in the policy but as a feature of the market the policy will eventually correct. A holder cannot currently move a sclerosis, officials concede, but this is precisely because the incentives are wrong; once the holding cost is high enough, officials expect that “solutions will emerge,” a phrase the agency has used in fourteen separate documents without in any of them naming a solution or a party from whom one might emerge.
Pressed on the biology, a spokesperson offered that the agency was “technology-neutral” and “did not wish to prejudge the form the eventual transfer mechanism would take.” Asked whether the eventual transfer mechanism might take no form, on the ground that no such thing was physically possible, the spokesperson said the agency remained “optimistic” and noted that many things once thought impossible had later been taxed.
A taxpayer asked what she was expected to do in the meantime, holding a sclerosis she could not transfer and being taxed for failing to transfer it. The agency explained that the tax was not a penalty for failing to transfer but an incentive to transfer, and that the distinction, while subtle, was “the entire basis of the program.” The taxpayer asked what the practical difference was, to her, between an incentive she could not act on and a penalty. The agency said the difference was that one of them was constitutional.
The Strategic Sclerosis Reserve
Anticipating that holders would seek to divest, and that no buyers would exist to receive the divested sclerosis, the Treasury has reportedly proposed a Strategic Sclerosis Reserve, a federal facility that would purchase excess sclerosis at a floor price to prevent the market from collapsing before it opens.
The Reserve would, under the proposal, hold the acquired sclerosis “in trust for the public,” releasing it back into circulation only in the event of a shortage. Asked what a shortage of sclerosis would look like, an official said it would be a situation in which demand for sclerosis exceeded supply. Asked whether such a situation had ever occurred or could occur, the official said the Reserve existed precisely to ensure that the nation was not caught unprepared if it did.
The mechanics of the Reserve remain, per the proposal, “under development.” The facility would need to physically take custody of the sclerosis it purchased; the proposal notes that this is “pending resolution of the transfer question,” which has been referred to the working group, which has referred it to the physician, who has attached a dissent. In the interim, the Reserve would hold each purchased sclerosis “constructively,” meaning that the holder would continue to physically retain it while legally no longer owning it, an arrangement the proposal describes as “economically equivalent to a transfer” and the holder describes as “identical to before, except now I am also storing it for the government.”
A budget line for the Reserve lists the cost of storage as zero, the sclerosis remaining, at all times, inside the person who came in with it. An analyst flagged this as the program’s single efficiency: it had discovered a federal reserve asset that requires no warehouse, no security, and no transport, because it never leaves the citizen, who bears the full cost of its custody and is taxed on it besides.
Exemptions
The draft legislation reportedly includes a hardship exemption for individuals who can demonstrate that their sclerosis was:
- Acquired involuntarily
- Not held for investment purposes
- Unlikely to appreciate
Patients noted that all three conditions apply to every case that has ever existed. Officials described the exemption as “generous.”
The application for the exemption requires a physician’s signature, a notarized statement of intent, and documentation of the date each sclerosis was acquired. A patient asked how she was supposed to know the date. The IRS reportedly suggested she consult her records.
The statement of intent has proven the most contested requirement. The applicant must attest that they did not intend to acquire the sclerosis and do not intend to retain it for gain. A patient asked how one demonstrates the absence of an intention. The agency said the notary would witness the attestation. The patient asked what the notary was witnessing, given that the notary could not see into her mind. The agency said the notary was witnessing that she had signed, which the agency treated as strong evidence of the state of mind described in the document she had signed.
A further difficulty is that the exemption, once granted, must be renewed annually, on the theory that a taxpayer’s intent may change and that a sclerosis acquired involuntarily in one year might, in a subsequent year, be retained for investment. A patient asked why anyone would hold a sclerosis as an investment. The agency said that this was exactly the kind of behavior the annual renewal was designed to detect, and that the rarity of the behavior was not evidence of its impossibility but of the deterrent’s success.
The Basis Problem
Beyond the exemption, the requirement to document “the date each sclerosis was acquired” has generated a body of subsidiary guidance addressing what the agency calls basis — the taxpayer’s cost in the asset, against which any future gain or loss is measured.
The difficulty is that a sclerosis has no acquisition date in the ordinary sense. It does not arrive on a day. It accumulates over years, is noticed later, is diagnosed later still, and by the time it has a name it has no birthday. The guidance acknowledges this and instructs the taxpayer to use the “date of diagnosis” as a proxy, while cautioning that the date of diagnosis is “the date the asset was discovered, not the date it was acquired,” and that a taxpayer who acquired the asset years before discovering it may owe tax for the intervening years, in which the asset was held but unreported because it was unknown.
A patient asked whether she owed back tax for years in which she did not know she had it. The agency said that ignorance of a holding is not a defense to the reporting requirement, and that the prudent taxpayer, upon diagnosis, should file amended returns for all open years, reporting the sclerosis retroactively to the earliest date it could plausibly have been present, which the agency described as “conservative” and the patient described as “paying rent on a room I didn’t know was in the house.”
For taxpayers unable to establish a date, the guidance provides a default rule: the sclerosis is presumed to have been acquired on the first day it could have been acquired, which for a human taxpayer is the date of birth. Under this rule, a taxpayer diagnosed at forty is presumed, absent proof otherwise, to have held the asset for forty years, and to have failed to report it for thirty-nine of them, a failure the agency stands ready to help the taxpayer correct.
Local Scientist Offers Solution
The announcement has reportedly renewed interest in a controversial research program, previously covered in these pages, seeking to reduce Multiple Sclerosis into Single Sclerosis. IRS officials praised the initiative as “exactly the kind of voluntary compliance we’re looking for.”
The scientist reportedly clarified that his ultimate objective remains: Multiple Sclerosis → Single Sclerosis → Zero Sclerosis.
The IRS reportedly supports the first transition but has concerns about the second, due to the potential collapse of the domestic sclerosis tax base. An official explained that a taxpayer reducing from multiple to single would move into a lower bracket, which the agency welcomed as evidence the incentive was working, but that a taxpayer reducing from single to zero would exit the tax entirely, and that a population of former holders paying nothing represented, in the agency’s modeling, “base erosion of the most complete kind.”
The scientist proposed that the agency should be pleased, since zero sclerosis was the outcome the redistribution program claimed to want — an even distribution, in which everyone held the same amount, namely none. The agency said that an even distribution at zero was “technically compliant” but “fiscally indistinguishable from having no program,” and that the purpose of redistribution was not to eliminate the asset but to circulate it, so that it might be taxed in transit, and that an asset reduced to zero could not be circulated and therefore could not be taxed and therefore, from the standpoint of the program, might as well never have been unequally distributed in the first place.
The scientist asked whether the agency was saying it preferred the disease to persist. The agency said it was saying it preferred the asset to persist. The scientist asked what the difference was. The agency said the difference was jurisdictional.
Best Case Medically, Worst Case Fiscally
A Treasury analyst described full remission as: “Best case medically. Worst case fiscally.”
The scientist asked whether that was a joke.
The analyst asked him to repeat the question.
The exchange has since been cited, within the agency, as a model of the tension the program is designed to hold. A memorandum prepared for senior staff formalizes it as the Remission Paradox: the outcome most desired by the patient is the outcome most costly to the fisc, and a program that succeeds in improving the health of its subjects will, to precisely that extent, fail to raise the revenue that justified it. The memorandum offers no resolution, noting only that the paradox “should be managed rather than solved,” and recommending that the agency avoid publicizing recoveries.
The same memorandum introduces the concept of a revenue-neutral remission, in which a taxpayer’s sclerosis resolves medically while the taxpayer continues to report and be taxed on it, preserving the base. The mechanism by which a resolved sclerosis continues to be reported is described as “an area for future guidance.” The physician on the working group, shown the memorandum, is understood to have attached a further dissent, which the agency has logged as a second productive contribution.
Enforcement Priorities
Asked how the agency intends to verify holdings, an IRS official confirmed that field audits are under consideration.
Asked what a field audit for sclerosis would consist of, the official said auditors would be trained.
Asked by whom, the official said the agency was in discussions with the medical community.
The medical community confirmed it had received one email.
The email, a copy of which was reviewed, requested that the medical community “provide any materials that would assist an auditor in independently counting a patient’s scleroses in a field setting without reliance on the patient’s self-report.” The medical community replied that scleroses cannot be counted in a field setting, that their assessment requires imaging, that the count is not a count of separate diseases but a description of a single one, and that in any case the number of lesions is not the number of scleroses because the number of scleroses is one.
The agency thanked the medical community for the materials and asked whether the imaging equipment could be made portable, so that an auditor could bring it to the taxpayer’s home. The medical community explained that the equipment weighs several tons, requires shielding, and is operated by trained technicians. The agency asked whether auditors could be trained as technicians. The medical community said this would take years. The agency said it would build the timeline into the initiative and asked the medical community to hold the date.
Training the Auditors
A draft curriculum for the sclerosis audit certification has reportedly been circulated. It runs to a single module, titled “Identifying Sclerosis in the Field,” and consists largely of the instruction that auditors should “ask the taxpayer how many they have and record the answer, then determine independently whether the answer is correct.”
The curriculum does not specify how the auditor is to determine independently whether the answer is correct. A note in the margin of the draft, apparently added by a reviewer, reads: “How.” A second note, apparently in response, reads: “Training.” The two notes are not further elaborated and appear, in the current draft, on the same page, unresolved, as though in conversation.
The curriculum advises auditors to be alert for indicators of underreporting, including a taxpayer who is “visibly unwell” but reports a low sclerosis balance, and a taxpayer who reports one sclerosis but exhibits symptoms the auditor associates, from the module, with more than one. Auditors are cautioned that the module provides no way to associate symptoms with a number of scleroses, no such association existing, and that they should exercise judgment, judgment being defined in the glossary as “the auditor’s determination, which is presumed correct.”
A trainee reportedly asked the instructor what an auditor should do if the taxpayer’s physician contradicts the auditor’s count. The instructor said the physician was an interested party, the physician’s livelihood depending on the continued diagnosis of disease. The trainee asked whether the auditor was also an interested party, the auditor’s performance being measured by assessments collected. The instructor said this was a good question and moved to the next slide, which was the last slide, and which read “Questions?”
Penalties
The IRS has confirmed that penalties apply to underreporting. A taxpayer who reports fewer scleroses than the taxpayer holds is subject to an accuracy-related penalty, computed as a percentage of the tax attributable to the understated sclerosis, plus interest running from the date the understated sclerosis is deemed to have been acquired, which under the default rule is the date of birth.
The patient who earlier asked what happens if she overreports has been the subject of continued internal discussion. The agency confirmed that overreporting — claiming to hold more scleroses than one holds — is not penalized, because it results in the taxpayer paying more tax, which the agency has no incentive to discourage. Asked whether a taxpayer could therefore protect herself by reporting a very large number of scleroses and paying the corresponding tax, the agency said this would be “unusual,” and confirmed it would be accepted.
A tax adviser reportedly built a planning strategy on this asymmetry, counseling clients to overreport modestly to avoid any risk of the far costlier underreporting penalty. The agency responded with a notice clarifying that systematic overreporting undertaken to avoid the underreporting penalty would be recharacterized as “abusive,” despite resulting in higher payments, on the ground that the taxpayer’s motive was to achieve certainty, and that certainty obtained at the taxpayer’s own expense nonetheless deprived the agency of the taxpayer’s uncertainty, which the agency described as “a thing of value.”
The penalty for a good-faith error is reduced if the taxpayer establishes reasonable cause. The guidance offers, as an example of reasonable cause, a taxpayer who relied on a physician’s statement that they held one sclerosis. The guidance offers, as an example of unreasonable cause, a taxpayer who relied on a physician’s statement that they held one sclerosis, in a case where the auditor determined they held more, the physician’s statement being, in that instance, wrong, and reliance on a wrong statement being, by definition, unreasonable, however reasonable it appeared at the time.
The Appeals Process
A taxpayer who disputes an assessment may appeal, first to the agency’s independent Office of Appeals, and then, if unsatisfied, to the Tax Court. The agency has emphasized that the Office of Appeals is independent, meaning it reports to a different part of the same agency.
The first case to reach the Office of Appeals reportedly involved a taxpayer assessed on three scleroses who contended she held one. Appeals reviewed the file and proposed a settlement of two, describing it as “splitting the difference” and “a reasonable resolution that avoids the cost and uncertainty of litigation.” The taxpayer declined, noting that she did not hold two scleroses any more than she held three, and that a compromise between a true number and a false one is not a smaller falsehood but a negotiated one. Appeals recorded her position as “unwilling to settle.”
Before the Tax Court, the taxpayer bears the burden of proving that the agency’s determination is incorrect. Her physician testified that she held one sclerosis. The agency’s auditor testified that the number was three, derived, on cross-examination, from a method the auditor described as “trained judgment” and declined to specify, judgment being, per the glossary, presumed correct. The court, applying the standard of review, noted that it could set aside the agency’s figure only if it was arbitrary, and that a figure produced by a documented method, however opaque, was not arbitrary, and upheld the assessment at three, while observing, in a footnote, that the medical evidence “strongly suggested one,” and that the footnote was not part of the holding.
The taxpayer has appealed. The appeal turns on whether “trained judgment” that cannot be described is a method or merely the name for a number the agency wished to reach. The agency has argued that this distinction, if adopted, would “imperil the administrability of the entire tax system,” a system that, it noted, frequently reaches numbers the way the auditor did.
The Taxpayer Advocate
The agency’s internal watchdog, the Taxpayer Advocate, has reportedly identified the sclerosis initiative as a “most serious problem” in its annual report to Congress, a designation reserved for the agency’s most significant failures to serve taxpayers, and one the agency has confirmed it takes “very seriously,” in the sense of noting it and continuing.
The Advocate’s report observes that the initiative taxes an asset that cannot be sold, transferred, valued, or counted, held by taxpayers who did not acquire it voluntarily and cannot dispose of it at any price, under a reporting regime that penalizes a wrong answer to a question that has no verifiable answer. The report recommends that the initiative be suspended pending resolution of, at minimum, whether the asset exists in the quantities the agency assumes.
The agency’s formal response, appended to the report, thanks the Advocate for the recommendation and declines it, noting that suspension would create uncertainty for taxpayers who had already begun to comply, and that the fairest course, having asked some taxpayers to report their scleroses, was to ask all of them, so that no taxpayer’s compliance was rendered pointless by another’s relief.
The Advocate has reportedly asked to be shown a single taxpayer who has successfully complied — who has counted their scleroses, valued them, and paid the correct tax. The agency has said it is compiling a list. The Advocate has asked how long the list is. The agency has said the list is being validated. The Advocate has asked what validating the list consists of. The agency has said it consists of determining whether anyone is on it.
Congressional Testimony
The Commissioner appeared before a congressional committee to answer questions about the initiative. A member asked the Commissioner to state, for the record, how many scleroses a typical patient holds. The Commissioner said the agency did not wish to prejudge the outcome of individual determinations. The member asked whether the Commissioner personally believed the number was one. The Commissioner said the Commissioner was not a doctor. The member noted that the agency had built an entire program on the assumption that the number was greater than one, and asked on whose medical judgment that assumption rested. The Commissioner said the assumption rested on the name of the disease.
A second member asked the Commissioner to describe the transfer mechanism by which a taxpayer could reduce their holdings. The Commissioner said the mechanism was under development by a working group. The member asked what the taxpayer should do in the meantime. The Commissioner said the taxpayer should file. The member asked whether it was fair to tax a person for failing to do a thing no person could do. The Commissioner said the tax was not for failing to do it but for not yet having done it, and that the two were different in a way that mattered to the agency’s lawyers.
A third member, from the party that had proposed the enabling legislation, used the member’s time to praise the initiative’s projected revenue and to ask the Commissioner to confirm that the wealthy holders of large sclerosis stockpiles would finally pay their fair share. The Commissioner confirmed that any holder found to possess a large stockpile would be assessed accordingly. The member asked how many such holders there were. The Commissioner said the agency was compiling a list. The member said the list was surely long. The Commissioner said the list was being validated.
The hearing concluded with the committee chair thanking the Commissioner and announcing that the committee would request a follow-up briefing once the working group had reported, the list had been validated, the market had formed, the appraisers had been certified, and the transfer mechanism had been developed — a set of conditions the chair described as “the near term.”
The Public Comment Period
The proposed regulations were published for public comment, and the agency received a large volume of responses, which it has summarized in the preamble to the final rule, a document that restates each objection and then declines it.
Numerous commenters, the preamble notes, objected that no patient holds more than one sclerosis. The agency “appreciates these comments” and “has considered them,” and responds that the commenters, being patients and physicians, are the parties the rule regulates, and that a regulated party’s belief that it holds less of the taxed thing than the agency supposes is “the ordinary posture of a regulated party” and “not a basis for withdrawing the rule.”
Several commenters, the preamble continues, objected that the asset cannot be transferred and that the tax therefore penalizes an inability rather than a choice. The agency responds that it “declines to assume the transfer mechanism will not be developed,” and that regulating in anticipation of a mechanism that does not yet exist is “a well-established feature of forward-looking policy.”
One commenter, identified in the preamble only as “a patient,” submitted a comment consisting of a single sentence: “I have one, I have always had one, and I would give it to any of you who wants it.” The agency responds that it “thanks the commenter for the offer,” that the offer “illustrates the demand-side challenge the rule is designed to address,” and that the commenter, having expressed a willingness to transfer, “demonstrates that the voluntary transfer regime enjoys support among affected taxpayers.” The comment is logged, in the agency’s index, under “Stakeholder Endorsements.”
State and International Response
Several states have reportedly moved to conform their own tax codes to the federal treatment, on the standard ground that conformity reduces compliance burden, and one state, seeking additional revenue, has proposed a surtax on sclerosis held within its borders, raising the question of where a sclerosis is located for tax purposes. The state has taken the position that a sclerosis is located where the taxpayer resides. A neighboring state, into which some taxpayers commute, has taken the position that a sclerosis is located where the taxpayer works, on the days the taxpayer is there. A taxpayer who lives in one state and works in the other has been assessed by both, each state taxing the same single sclerosis as though it were present within its borders in its entirety, which, the taxpayer noted, it was, there being only one of it and it going wherever she went.
Internationally, an intergovernmental body has convened a workstream on the treatment of cross-border sclerosis, addressing the risk that a taxpayer might relocate to a jurisdiction that does not tax sclerosis in order to avoid the tax — a maneuver the body has labeled sclerosis inversion. The body has proposed an exit charge, under which a taxpayer emigrating with a sclerosis is deemed to have transferred it abroad and is taxed on the deemed transfer, notwithstanding that the sclerosis, like the taxpayer, simply left, and arrived nowhere, and was received by no one, and remains exactly where it has always been, which is inside the person who has it.
The Estate Tax Question
A question that has consumed a disproportionate share of the agency’s guidance is what becomes of a sclerosis when its holder dies. The estate tax reaches property owned at death, and the agency, having taken the position that a sclerosis is property, has been unable to avoid the conclusion that a sclerosis is property owned at death, and therefore includable in the gross estate, and therefore subject to tax, payable by the estate, in cash, on an asset the estate cannot locate, sell, or in any respect find.
The estate of a decedent who held one sclerosis must, under the draft guidance, report that sclerosis on the estate tax return at its date-of-death fair market value, determined under the administrative method, and pay the resulting tax from other assets, there being no way to satisfy the liability from the sclerosis itself, which does not survive the decedent, and which the guidance concedes “ceases to exist at the moment it becomes taxable,” a timing the guidance describes as “unfortunate” and “not a basis for exclusion.”
An executor asked how she was to value, at the date of death, an asset that ended at the date of death. The agency said she should value it as of the instant before. The executor asked how one values an asset an instant before it vanishes, knowing it is about to. The agency said she should disregard the impending vanishing, valuation being performed as though the asset would continue, even where it is known that it will not, a convention the agency called “the going-concern assumption” and the executor called “pretending.”
The guidance does provide a benefit: the heirs receive a stepped-up basis in the inherited sclerosis, equal to its date-of-death value, so that a beneficiary who later disposes of the inherited sclerosis recognizes gain only above that figure. Asked which beneficiary inherits a sclerosis, the agency confirmed that no beneficiary inherits a sclerosis, the asset having ceased to exist, but noted that the stepped-up basis “remains available should the situation change,” and that the agency did not wish to foreclose the possibility of an inherited sclerosis merely because none had ever occurred.
The Charitable Contribution
Given the agency’s repeated encouragement that holders “put excess sclerosis back into circulation,” tax advisers have asked whether a holder who donates a sclerosis to a qualified charity may claim a charitable deduction equal to its fair market value. The agency has confirmed, in principle, that a donated sclerosis is deductible, and has declined, in practice, to identify a qualified charity that accepts sclerosis, no such charity existing, and no charity having applied for the necessary designation, the application requiring the charity to describe the charitable purpose served by receiving sclerosis, which no charity has been able to articulate.
A donor who does locate a willing charity must, for a donation above a threshold amount, obtain a qualified appraisal, from a qualified appraiser, of the donated sclerosis. The agency has confirmed that no qualified sclerosis appraisers exist, that the certification program remains under development, and that a donor who obtains an appraisal from an uncertified appraiser will have the deduction disallowed for lack of a qualified appraisal, while a donor who obtains no appraisal, none being available, will have the deduction disallowed for lack of any appraisal, the two outcomes differing, the agency noted, in their reasoning but not their result.
One donor reportedly attempted the transaction end to end: located a charity willing to accept the sclerosis, obtained the best appraisal available, and executed the deed of gift. The charity, upon accepting the gift, discovered that it now held a sclerosis, which it could not use, sell, or dispose of, and which it was obliged to report on its own information return as an asset of the organization, valued under the administrative method, and against which, being a concentrated holder for having accepted even one, it was assessed the concentrated-holder surcharge. The charity has returned the gift. The donor has reported the return as a re-acquisition on Line 4 and is now, the agency notes, back to where he started, plus a filing.
Sclerosis-Backed Securities
The prospect of a taxable, valued, transferable asset — even a purely notional one — has attracted the attention of the financial sector, which has proposed pooling scleroses into a security that could be sold to investors, distributing the holding cost across a diversified base and, in the industry’s framing, “bringing liquidity to a historically illiquid asset class.”
A structuring bank has reportedly circulated a term sheet for a sclerosis-backed security, in which the scleroses of many holders would be aggregated into a pool, tranched by severity, and sold to investors seeking exposure to what the term sheet calls “the negative-yield space.” The senior tranche, the term sheet explains, would bear the first losses, which, since the underlying asset produces only losses, means the senior tranche bears all of them, a feature the bank has relabeled, after investor feedback, as “enhanced downside participation.”
A ratings agency asked to rate the security declined, on the ground that it could not model the cash flows of an instrument whose every cash flow ran in the wrong direction, and whose underlying assets could not be repossessed on default, being located inside the borrowers, who were also the disease. The bank has characterized the refusal as “a gap in the ratings framework rather than a defect in the structure,” and has proceeded to market the security as unrated, to investors who, the term sheet notes, “understand the space.”
The agency, asked how a sclerosis-backed security would be taxed, said it was studying the question, and observed that if the security proved that scleroses could, after all, be pooled and sold, it would establish both the market the program had assumed and the transfer mechanism the working group had been unable to find, and that the agency therefore regarded the financial sector’s efforts with “cautious encouragement,” the caution reflecting the possibility that the securities were, like everything else in the program, describing an asset that was not there.
External Commentary
Asked to assess the initiative from outside the American frame, Haitian economist Henry Gutenberg, of the Port-au-Prince Institute for Market Dysfunction — who has for over a decade tracked what he calls “the quiet conversion of conditions into holdings” — declined to describe the program as a mistake. He described it, instead, as unusually candid.
The category error at the center of the program, Gutenberg argued, is not a flaw the system committed and failed to notice. It is the system operating exactly as designed, having discovered that a description, if read as a quantity, becomes an asset, and that an asset, however imaginary, can be reported, valued, taxed, and — the word the agency prefers — redistributed. What is being taxed, he noted, is not a disease. It is the grammar of the word that names it.
“A state that can tax the plural in a disease name has solved the last problem of extractive finance, which is that suffering, historically, produced nothing it could book. It produces something now. It produces a form.”
— Dr. Henry Gutenberg, Port-au-Prince Institute for Market Dysfunction
He was most interested in the language of redistribution. Ordinarily, he observed, a government redistributes what everyone wants and too few possess. Here the same machinery has been aimed at a thing no one wants and everyone who holds it would surrender for nothing. The agency’s term for the resulting absence of buyers — “a demand-side problem” — Gutenberg described as the first time in his career he had watched a state classify the universal human wish to be well as a market failure, and propose to correct it.
The Strategic Sclerosis Reserve drew from him the closest thing to admiration. A reserve that takes legal custody of an asset while the asset never leaves the citizen, he said, is not an accounting trick but a confession rendered in infrastructure. The citizen is made both the vault and its contents, storing at his own expense a thing the state now owns and will never see, taxed for the storage and taxed again for the holding.
“They have built a vault around the patient and called the patient the vault. In my country we are accused of lacking institutions. I would like to report that I have finally seen one that is entirely institution and nothing else — no asset inside it, only the person, holding what was done to him, and a lien.”
— Dr. Henry Gutenberg, Port-au-Prince Institute for Market Dysfunction
He was careful, as is his habit, to distinguish his account from a complaint. He was not, he said, objecting; he was describing. The program would proceed, he predicted, not because anyone in it believed the patient held more than one sclerosis, but because every institution that might have said so had been offered, in exchange for its silence, the same thing: a role in the program, a line in the file, a productive contribution to an ongoing dialogue. The only parties left outside the arrangement, he noted, were the neurologist, who was in the file, and the patient, who was on hold.
The IRS FAQ
To assist taxpayers, the agency has published a set of frequently asked questions, which it has stressed are “for informational purposes only” and “may not be relied upon,” meaning that a taxpayer who follows them and is later penalized may not cite them in defense, the answers being provided as a courtesy rather than as a commitment.
Q: How many scleroses do I have? A: The agency cannot determine this for you. Consult your records.
Q: My doctor says I have one. Is that my answer? A: Your physician’s statement is a factor. The agency will weigh it against other factors, including the agency’s determination.
Q: How do I transfer a sclerosis I no longer wish to hold? A: Guidance on transfer mechanisms is forthcoming. In the interim, retain the sclerosis and report it.
Q: There is no one who wants my sclerosis. What do I do? A: The agency is working to develop the demand side. In the interim, retain the sclerosis and report it.
Q: What if my sclerosis goes into remission? A: Report the remission as a disposition and identify the recipient. If there is no recipient, see the guidance on unreported transfers to related parties.
Q: I have zero scleroses and have never had any. Do I need to do anything? A: No. You may wish to file to establish a record of the zero. The agency notes that a documented zero is the strongest position and the one it is least able to question.
Closing Statement
The IRS says enforcement letters will begin arriving next year. Americans diagnosed with multiple sclerosis are advised to maintain accurate records documenting where their scleroses came from and why they continue to possess more than one.
At press time, one patient reportedly called the IRS seeking clarification.
After two hours on hold, an agent answered:
“Thank you for calling. Is this regarding personal sclerosis or business sclerosis?”
She said personal.
The agent transferred her to a different line.
The line rang for forty minutes and disconnected.
She called back. After a further wait, a second agent answered and asked whether she was calling about a notice. She said she was calling about the first call. The agent explained that the agency could not discuss a prior call without the reference number generated by that call. She said the first call had not generated a reference number; it had disconnected. The agent explained that a disconnected call is treated as resolved, resolution being inferred from the absence of a continued complaint, and that to reopen the matter she would need to place a new call, which would generate a new reference number, which she should retain in the event this call also disconnected. She asked whether this call would also disconnect. The agent said the agency did not have visibility into that. The call disconnected.
Bottom Line
- What Happened: The IRS, having encountered the phrase multiple sclerosis and read the word multiple as a quantity of separate assets rather than what it is — a plural of location, describing scarring at several sites within one patient’s central nervous system — announced an enforcement initiative treating sclerosis as taxable property, unequally distributed, and subject to redistribution.
- Why It Matters: Every safeguard positioned to catch the error — the neurologist, the working group’s lone physician, the Taxpayer Advocate, the Tax Court’s own footnote, thousands of public commenters — identified it plainly, and each was thanked, logged, and routed past, because a program already built is easier to defend than a sentence is to read.
- The Complication: The taxed asset cannot be sold, because no one will buy it; cannot be transferred, because no mechanism exists; cannot be valued, because there is no market; and cannot be counted, because there is only ever one — yet it is reported on a form, assessed by a tax, appealed to a court, and held, the entire time, inside a person who never asked for it and would give it away for nothing.
- What Happens Next: A working group refers the impossible part to its one physician, who attaches a dissent; a Strategic Reserve takes constructive custody of an asset it will never touch; enforcement letters go out next year; and the patient who called for clarification is on hold, holding the one sclerosis she has always had, waiting for the part of the system that was ever going to help her.
Corrections
A previous edition reported that the IRS was “investigating” multiple sclerosis. The agency has clarified that it is not investigating the disease, only the people who have it.
THE EXTERNALITY reported that no comment was received from HHS. HHS has since responded, asking to be removed from this list.
A previous edition stated that the sclerosis market had not yet formed. The agency has asked us to note that it prefers the phrasing “is forming,” and that our correction “implies a permanence the data do not support.”
A previous edition described the Strategic Sclerosis Reserve as holding no sclerosis. The Reserve has clarified that it holds a great deal of sclerosis, constructively, inside the taxpayers who came in with it, and that its holdings are among the largest of any federal reserve, by weight, none of which it has ever seen.
A previous edition reported that one patient had been disconnected after forty minutes. She was disconnected after forty minutes on the second call. On the first call she was disconnected after two hours. We regret the undercount and have brought it up to the true figure, which the agency has asked us to bring back down.
Editorial Footnotes
- Multiple sclerosis is a real disease, and a serious one. The multiple in its name is a plural of location: it denotes lesions — areas of scarring, or sclerosis — at several sites within a single patient’s central nervous system. It has never denoted a quantity of separate illnesses, and no patient has ever held more than one multiple sclerosis, because there is only one condition to hold. The term dates to Jean-Martin Charcot, who described the disease in the 1860s. Nothing about it is a matter of accumulation, distribution, or wealth.
- The IRS, the Treasury, the Office of Chief Counsel, the Office of Sclerosis Valuation, Form 1040-MS, the Sclerosis Hoarding Tax, the Strategic Sclerosis Reserve, the working group, the broker, the Commissioner, the Taxpayer Advocate’s exchange, the Tax Court case, the congressional hearing, the public comments, the external commentary, Dr. Henry Gutenberg and the Port-au-Prince Institute for Market Dysfunction, and every quotation herein are fictional and invented for satire. The disease is real; the meaning of its name is real; the fact that it describes location rather than count is real; and the ease with which a large institution can be shown mistaking the second thing for the first is, the Externality submits, at least plausible.
- The joke of this edition is a category error — treating a description as a holding, a plural of place as a plural of property — and the target is not the patient but the machinery that, having made the error, would sooner build a form, a tax, a reserve, a market, a court case, and a working group on top of it than read the word again. At every step the correct answer was available, spoken aloud, and written down. It was filed.
- The Externality notes that the patient who called for clarification is the only party in this account who understood, from the first sentence, what she had: one, involuntarily, and would part with it gladly, to anyone, at any price, if there were anyone to take it and any way to give it. There is not. That is the disease. The rest is administration.