In US tax law, a ‘whipsaw’ effect is said to happen when the government gets it coming and going because two or more taxpayers treat a payment inconsistently. For example, if a buyer of a business allocates a portion of the purchase price to a covenant not to compete but the seller does not allocate any of the proceeds of the sale to same, the government is whipsawed, because the buyer can claim an ordinary deduction for the portion allocated to the covenant not to compete, but the seller does not have an equal and opposite ordinary inclusion. If a spouse in a divorce settlement allocates a payment to currently deductible alimony and the other spouse treats the same payment as excludible child support, that is also a whipsaw.
You can shoot your parents, the whipsaw doctrine goes. You just can’t shoot your parents and then say, ‘Take pity on me! I’m an orphan!’
Whipsaw-like effects can occur in cross-border and cross-regulatory contexts, too. Until the OECD took the punch bowl away with the BEPS project, taxpayers could engineer payments that were deductible in the payor’s jurisdiction (say the US) and excludible in the payee’s jurisdiction (say, France). Monthly Income Preferred Securities or MIPS, the instruments that took Enron down, were designed to be debt for tax purposes but equity for financial accounting purposes. That way, payments on the instruments could be currently deductible for tax purposes, without diluting the issuer’s equity capital for regulatory purposes.
Canadian tax lawyers don’t use the term ‘whipsaw’. Instead, they say, ‘Suck and blow’. If a Canadian tax lawyer tells you, ‘You’re trying to suck and blow at the same time, eh?’, they are not coming on to you in some overly polite, twee, passive aggressive manner. They are saying that you are trying to get away with a whipsaw.[1]
Frank Rolfe is a libertarian Reagan Republican. He thinks that the best thing the government can do to regulate the market is to get out of the way and let the market do its thing. I take exception to that in many contexts, but I agree with him in others. One of those contexts is the unintended consequences that bad regulation can have on market participants. When the government does a ham-handed job of regulation, the people who the regulation is intended to protect are often harmed.
Q: What happened when the Brits put a bounty on dead cobras, in an effort to reduce the cobra population of British India?
A: People started breeding and raising cobras, so they could collect the bounties.
Frank distributes an email list of articles about the manufactured housing industry every Friday, along with commentary. Many of the articles that he forwards demonize park owners. Complaints include rent increases, lack of services and park closures.
Lately, Frank’s leitmotif has been the unintended consequences of rent regulation. Whenever an article comes out that blames a park owner for shutting down a park in order to change its use, Frank says, ‘Well, [California, Oregon or Colorado], you have yourself to blame. Many mom-and-pop parks have below-market rents and deferred maintenance issues. Someone has to pay for capital expenditures. In order to do that, the owner needs to raise lot rents. If an owner who is an economically rational actor can’t raise lot rents in a crappy park in order to turn it around, she will shut the park down down and build luxury apartments that are not subject to rent regulation. The owner will get a higher yield, but people who need affordable housing will get hosed’.
This is where suck-and-blow comes in.
In 2019, New York State instituted rent regulation for manufactured housing communities. Each year, a park owner can raise lot rents three percent of right or six percent, if increased operating costs or capital improvements justify it. I have been slammed with capital costs in my park in northern New York this year. Mike, the manager of that park, has dug up and replaced about three football fields of water pipe. He has also replaced quite a bit of Orangeburg septic pipe. He installed a new septic field last year and another this year. When park residents ask me why lot rent has increased, I point at a hole in the ground.[2]
If you drive through New York State, you will see quite a few smaller parks that are very rough. They have rotting infrastructure and below market rents. Their current owners don’t do anything to fix them, and nobody wants to buy them because turning them around would be a money pit. I know, because I have considered buying some of them and could not make it work with rent regulation in place.
That’s the suck. Here’s the blow. When rent regulation was passed, another section of the law was added that imposed a burden on park owners who want to convert their property to something other than a park. If a park owner wants to use the land she owns to house, say, a Home Depot, or a marina, or a golf course, or stick built Section Eight apartments, she has to pay $15,000 to each resident in the park, to help that resident move their home. Assume a park with a hundred lots. Fifteen grand here, fifteen grand there – after a while, that’s real money. Most park owners can’t pay that kind of toll charge.
So – if you own an under-performing park in New York, you can’t operate your business profitably, but you can’t convert it to a different, profitable, business, either. I believe Yannis Ritsos wrote a short poem to the effect, ‘You can’t count beyond your fingers. Count your fingers. Something’s wrong. Ten are missing’. That is suck-and-blow.
The sorrow and the pity of suck-and-blow is not what the park owners will suffer. We have taken a hit, but we will be OK. The real victims are the people in the crappy parks that I drive through, diligence and decide not to buy. Nobody will buy those parks. Unless a buyer can raise lot rents or convert use, those parks will stay the way they are. I don’t know the people who live there, but I suspect that they deserve better.
The New York State manufactured housing industry group has not challenged the suck-and-blow law in court. A group of New York City landlord lobbying associations has challenged the 2019 New York City rent regulation law on constitutional grounds. The suit lost at the trial and appellate level, and it is currently being appealed to the Supreme Court. I loathe the current makeup of the Court, but it is as friendly to this type of appeal as it has been in generations. I wish CHIP, RSA and REBNY godspeed and best of luck. If I ever father a child again, I will name it CHIP, REBNY, or RSA. In any event, I wish that they may never need to interact with foreign tax lawyers from north of the Treaty of Ghent speaking in a twee, passive aggressive whinge.
[1] Since the Treaty of Ghent, ‘Suck and Blow’ has been a party game for American tweens who want an excuse to kiss each other. You can observe Rebecca Romijn teaching Conan O’Brien how to play here.
[2] In an old New Yorker cartoon, two big guys are digging a ditch in New York. One turns to the other and says, ‘There’s one thing makes me noivous – woims’. Mutatis mutandis, Mike would say that the only thing that makes him nervous is NYHCR.