TaxProf Blog

The IRS and the Ambiguities of Tax Accounting

Luke Roosevelt Hornblower (J.D. 2012, Loyola-L.A.), The Empire Strikes Out: The IRS & the Ambiguities of Tax Accounting, 135 Tax Notes 1045 (May 21, 2012):

This article surveys the rare cases in which the IRS has unsuccessfully challenged a taxpayer’s method of accounting as not clearly reflecting income. Those cases together shed light on when tax accounting methods may reflect income just clearly enough to pass judicial muster.

All Tax Analysts content is available through the LexisNexis® services.

Massachusetts Bar's Advice to Law Schools: Reinvent 3L Year, Be More Like Medical Schools

Massachusetts Bar Association Task Force on Law, the Economy and Underemployment, Beginning the Conversation (May 17, 2012):

The MBA Task Force on Law, the Economy and Underemployment began its work in November of 2011 with a mission to study factors contributing to the problem of underemployment among recent law school graduates in Massachusetts. ...

In an effort to achieve its mission, the task force members were divided into four sub-committees, assigned to explore and report on: (1) law school curriculum reformation and the creation of a legal residency program; (2) fair disclosure of data by law schools and reasonable expectations by prospective law students; (3) structural obstacles to employment; and (4) avenues to utilize the resource of new law graduates while enhancing their skills for employment. While these topics are by no means an exhaustive list of factors contributing to the current employment picture, the task force used them as a launching point for what it hopes will be a more extended conversation.

The task force initially examined two non-legal professions currently experiencing little to no unemployment among its recent graduates, and compared their teaching methodologies to that of a typical modern law school. The task force found that both the medical and dental school teaching models place considerable emphasis on providing the kinds of hands-on practical training that more fully equips students to begin practicing soon after graduation. In contrast, while law schools offer a certain amount of practical training, largely at the election of the student, the primary concentration of offerings continues to be highly theoretical. The task force recommends that the MBA encourage Massachusetts law schools to reinvent the third year so as to provide greater opportunities for law students to gain practical legal experience and expand opportunities to hone their legal writing skills, beyond that offered through traditional first year legal writing programs.

In order to incentivize law schools to make such a shift, while remaining responsive to the needs of its readers, U.S. News & World Report should be pressed to incorporate a new criterion into its ranking system, based on how well each law school prepared its graduates for actual practice. Finally, the task force recommends that the MBA further explore the concept of a highly supervised legal residency program, which would provide practice-area specific training (such as civil trial law, criminal defense or probate practice training) to third year students and/or recent graduates in their chosen area of legal concentration.

The task force also considered the highly publicized issue of law schools misreporting admissions and employment data. While there have only been two recent examples of law schools supplying false admissions data [Illinois, Villanova], the task force considered whether the sanctions for misreporting are sufficient to deter other law schools from doing the same. As one suggestion to ensure better compliance, the task force recommends that the MBA support legislation, similar in concept to the goals of the Sarbanes-Oxley Act, requiring law school deans and trustees to certify that the data provided by the law school is fair and accurate. With respect to employment data, because of significant changes made recently by the American Bar Association in collecting data from the law schools, it is premature to determine if more must still be done. However, the task force recommends that the MBA further explore alternative sources — rather than the law schools themselves — to provide the critical data upon which prospective law students rely when choosing a law school. At the same time, the task force members did feel that prospective law students bear some responsibility to conduct adequate investigation and adjust their expectations to the economic realities of the legal job market.

It is important to note that the task force did not limit its focus solely to law schools as it explored root causes of underemployment among new lawyers. It also examined existing barriers to employment in Massachusetts, including the oversupply of lawyers caused by the virtual open door bar admission policies existing in Massachusetts. In an effort to reduce these barriers, the task force recommends that the MBA pass a resolution to better regulate the bar passage rate in Massachusetts by tying it to the national average. The task force further recommends that Massachusetts limit reciprocity with lawyers admitted in foreign states and initiate reciprocal pro hac vice rules, particularly with its border states. The task force further suggests that Massachusetts law schools provide incentives for their students to practice in other states, to further expand the footprint of employment opportunities for graduates of the nine existing Massachusetts law schools.

Finally, the task force catalogued a number of resources and opportunities already available to unemployed and underemployed lawyers in Massachusetts in order to fill gaps in legal services’ needs, and to provide recent graduates with experience necessary to increase marketable skills and thereby employment opportunities. While the task force made a number of recommendations to expand existing programs, the task force also supports the creation of certain new programs, including postgraduate clinics and the law school law firm, first proposed by [Tax Prof] Bradley T. Borden and Robert J. Rhee [The Law School Firm, 63 S.C. L. Rev. 1 (2011)].

Together, this report and the recommendations contained herein, represent the beginning of an important conversation to address the dynamic employment prospects faced by current and future law school graduates. Perhaps the most significant of the task force’s recommendations is that the MBA establish a permanent committee to study these and other factors contributing to underemployment among law school graduates with the goal of more closely monitoring evolving employment trends and developing strategies designed to overcome identified obstacles to employment.

• ABA Journal, Mass. Bar Task Force: Legal Education Could Take a Page from Medical Education’s Book
• Boston Business Journal, Report: Law School Should be More Like Medical School 
• JD Journal, Massachusetts Bar Task Force Releases Report
• Legal Skills Prof Blog, Massachusetts Bar Task Force Says Third Year of Law School Should Focus More on Practical Training

It's Time to Investigate the IRS

Following up on my prior posts (links below):  Fox News: It's Time to Investigate the IRS:

Richard Nixon ordered the IRS to conduct tax audits of those on his infamous “Enemies List.” Now, a spate of investigations and leaks coming out of President Obama’s IRS raises concerns that this administration may also be using the power of the nation’s most feared agency to silence its political opponents.

Today, more than six dozen grassroots citizens groups seeking to gain 501(c)(4) -- and in some cases 501(c)(3) -- tax status today find themselves facing unexpectedly invasive investigations and onerous procedural hurdles. All these groups have received non-profit recognition at the state level. Yet their requests for IRS recognition have been left in bureaucratic limbo for months -- in some cases, for more than two years. ...

In a separate instance of bureaucratic malfeasance, it appears that some within today’s IRS are even willing to break federal law to publicly disclose the private donor information of conservative non-profits.

Somehow, the Human Rights Campaign (HRC), a gay advocacy group, got its hands on Schedule B of the tax return filed by the National Organization for Marriage (NOM) -- a conservative values organization that has sparred with the administration and liberal groups over homosexual marriage. The HRC -- soon followed by scores of left-leaning publications, magazines, and blogs like the Huffington Post and Mother Jones -- published the confidential document that revealed the names, contact information, and donation amounts of anyone who had given over $5,000 to NOM.

NOM has called for immediate investigations by the Justice Department and the Treasury Department’s Inspector General to determine how HRC gained possession of this document. ...

The IG and the DOJ need to undertake their investigations with utmost seriousness, swiftness and impartiality. And they should bring criminal indictments against anyone inside or outside of the IRS found to be responsible for these abuses of federal tax power. This kind of behavior is simply unacceptable, for it threatens the liberty and freedom of Americans who want to participate in the political process.

Prior TaxProf Blog coverage:

• Senate Candidate Calls for Investigation of IRS 'Assault' on Tea Party (Feb. 24, 2012)
• IRS May Out Donors to Tea Party, Other 501(c)(4) Groups (Mar. 9, 2012)
• NY Times Backs IRS Efforts to Out Donors to Tea Party, Other 501(c)(4) Groups (Mar. 10, 2012)
• Why Is The IRS Asking Tea Party Groups If They Know Me? (Mar. 16, 2012)
• More on IRS, Tea Party Groups, and § 501(c)(4) Tax-Exempt Status (Mar. 24, 2012)
• House Demands IRS Documents on Alleged Harassment of Tea Party Groups (Apr. 12, 2012)
• National Organization of Marriage Demands Investigation of IRS's Leak of Mitt Romney's Contribution (Apr. 13, 2012)
• Sen. Hatch Demands Investigation of IRS's Leak of Mitt Romney's Contribution to Pro-Marriage Group (May 11, 2012)

Luke & Abramovsky: A Tax System Approach to Flood Insurance

Charlene Davis Luke (Florida) & Aviva Abramovsky (Syracuse), Managing the Next Deluge: A Tax System Approach to Flood Insurance, 18 Conn. Ins. L.J. 1 (2011):

This Article critiques the National Flood Insurance Program and proposes an alternative insurance plan that would use the strengths of the federal tax system to address the complexities of flood loss and provide basic coverage for all individuals. The Article also discusses the current tax rules applicable to flood loss and proposes methods for harmonizing such rules with the proposed program.

Kalsem: 19th Century Women, Law, and Literature

My Cincinnati colleague Kristin Kalsem has published In Contempt: Nineteenth-Century Women, Law, and Literature (Ohio State University Press, 2012):

In Contempt: Nineteenth-Century Women, Law, and Literature, by Kristin Kalsem, explores the legal advocacy performed by nineteenth-century women writers in publications of nonfiction and fiction, as well as in real-life courtrooms and in the legal forum provided by the novel form.

The nineteenth century was a period of unprecedented reform in laws affecting married women’s property, child support and custody, lunacy, divorce, birth control, domestic violence, and women in the legal profession. Women’s contributions to these changes in the law, however, have been largely ignored because their work, stories, and perspectives are not recorded in authoritative legal texts; rather, evidence of their arguments and views are recorded in writings of a different kind. This book examines lesser-known works of nonfiction and fiction by legal reformers such as Annie Besant and Georgina Weldon and novelists such as Frances Trollope, Jane Hume Clapperton, George Paston, and Florence Dixie.

In Contempt brings to light new connections between Victorian law and literature, not only with its analysis of many “lost” novels but also with its new legal readings of old ones such as Emily Brontë’s Wuthering Heights (1847), George Eliot’s Adam Bede (1859), Lewis Carroll’s Alice’s Adventures in Wonderland (1865), Rider Haggard’s She (1887), and Thomas Hardy’s Jude the Obscure (1895). This study reexamines the cultural and political roles of the novel in light of “new evidence” that many nineteenth-century novels were “lawless—showing contempt for, rather than policing, the law.

“Kristin Kalsem’s In Contempt makes a significant contribution to scholarship on the history of feminist jurisprudence. She covers thorny legal issues including married women’s property, infanticide, and lunacy law, as well as birth control, imperialism, and women’s admission to the bar. In her afterword she urges scholars to engage the ‘new evidence’ she has brought to light—and I have no doubt that this evidence will be welcomed enthusiastically.” -- Christine L. Krueger, professor of English, Marquette University

Deborah Jones Merritt: Law School Tuition, Monopoly Rents, and Law Prof Professional Responsibility

Deborah Jones Merritt (Ohio State), Price Sensitivity:

"Our consumers are not very price sensitive." I've heard that sentiment repeatedly during the last year, as colleagues across the nation respond to criticisms of law school tuition. ...

I wonder, in fact, how much of the tuition collected by law schools represents monopoly rents from the guild restrictions of the legal profession itself. To practice law, individuals must surmount significant barriers to entry: They must complete a four-year college degree, score decently on the LSAT, attend (and pay for) law school, and pass the bar examination (which often entails paying still more tuition for a bar review course). Increasingly, these individuals must also take a series of low-paying or volunteer positions to obtain practical experience and establish their credibility as lawyers. ... [L]aw school represents the single largest--and by far most expensive--barrier to entry. Potential lawyers don't get to choose their pipers: They must dance to our tune at whatever price we charge. ...

[L]aw schools are triply shielded from the free market: first by rules that restrict law practice to licensed lawyers; second by bar admission regulations that require applicants to graduate from accredited law schools; and third by self-designed accreditation standards. When we take advantage of these restrictions to escalate tuition far beyond inflation, we're not just stifling our graduates with debt; we're abandoning our professional responsibilities.

If you have a fetish for footnotes, DCM and I published a more academic version of these ideas last year (Responsibility-Rights in the Legal Profession).

Treasury Department: Distributing the Corporate Income Tax

The Treasury Department's Office of Tax Analysis has released Distributing the Corporate Income Tax: Revised U.S. Treasury Methodology (Technical Paper 5, May 2012):

The purpose of this analysis is to improve the U.S. Treasury Department’s distributional model and methodology by defining new model parameters. We compute the percentage of capital income attributable to normal versus supernormal return, the percentage of normal return attributable to a cash flow tax versus a “burdensome” capital tax, and the portion of the burdensome tax on normal return to capital to distribute to capital income versus to labor income. In summary, 82% of the corporate income tax burden is distributed to capital income and 18% is distributed to labor income.

Garon: Technology and Legal Education Disruption

Jon Garon (NKU Chase College of Law), Legal Education in Disruption: The Headwinds and Tailwinds of Technology:

Part one of the article tracks the changes that automation is bringing to the legal profession from self-help online tools to predictive document drafting and other innovations. It analyzes the potential of the virtual law firm, unbundled (or specialized) legal services and the development of virtual law firm networks that will grow into the standard for small firm practice.

Part two translates these changes for legal education. While much of the core subjects taught in law school today will remain the same (i.e. Contracts, Torts, Property, Civil Procedure, Constitutional Law, Evidence, Corporation, Tax, etc.) much else needs to change.

• Like the other advocates for skills training, the article emphasizes clinical and field placement education for students.
• Like advocates for better instructional design, it calls for law school to each subject like logic and communication skills explicitly rather than hoping that students will glean these skills from the first year classroom discourse.
• It changes the focus on professionalism by recognizing that law is also a business, requiring law schools to prepare graduates with courses and training on the business of lawyering (including accounting, human resources, business development, legal business ethics, marketing, leadership and management training).
• It also emphasizes that 64% of law practice is done for business entities and an additional 10% of attorneys work in-house. So the emphasis of law schools should better reflect the kinds of lawyering that are actual taking place. While this does not suggest abandoning litigation or the teaching of how to serve individuals, it requires a more accurate balance so graduates are less surprised by the environment in which they practice law.
• Finally, it highlights that the nature of business has become global and technical so courses on international business, intellectual property and other fields relevant to the success of one’s clients should comprise the electives. Moreover, the proposal recognizes that many of these courses are better learned from the disciplines where the clients are trained, so interdisciplinary programs with certificates and even joint degrees should be encouraged.
• The trade-off means that fewer credits and course hours are expended on the core subject matter law school teaches. This will not be a problem since the measure of seat time is a poor approximation of a student’s learning or competency. Instead, competency testing for both skills and knowledge should be integrated throughout the curriculum, allowing students to move at their own pace and demonstrate readiness to leave law school using something more precise than a six-semester schedule.

Walsh: The Puzzle of the Pre-enforcement Challenge to the Individual Mandate of § 5000A of the Tax Code

Kevin C. Walsh (Richmond), The Anti-Injunction Act, Congressional Inactivity, and Pre-Enforcement Challenges to Section 5000A of the Tax Code, 46 U. Rich. L. Rev. 823 (2012):

There is a puzzle surrounding the Supreme Court’s consideration in March 2012 of a pre-enforcement challenge to the “individual mandate,” the provision of the Patient Protection and Affordable Care Act codified at § 5000A of the federal tax code. Republicans and Democrats alike claim to want a prompt, definitive ruling from the Supreme Court about the constitutionality of § 5000A. But the federal tax Anti-Injunction Act (“AIA”) presents a serious potential obstacle to the Supreme Court’s ability to reach the merits of the present pre-enforcement challenges. The AIA is a rule that Congress made. And it is not too late for Congress to make an exception to that rule. The puzzle, then, is this: If there is a congressionally created obstacle to getting a ruling that everyone in Congress seems to want, and Congress can remove that obstacle, then why has it not done so? This contribution to the Everything but the Merits symposium held on November 11, 2011 at the University of Richmond School of Law examines various aspects of this puzzle.

A combination of inertia, ignorance, and uncertainty about how the Supreme Court will rule if it reaches the merits may explain Congress’s failure to act in the face of the serious jurisdictional problem that the AIA may present. Partisans on both sides of the constitutional debate obviously want to win, but only one side can, and both sides prefer a jurisdictional loss to a loss on the merits. It could be, also, that there really is no AIA problem. One seeking an exhaustive analysis of the arguments can look to the briefs filed in the litigation. This symposium contribution presents one simple argument for the applicability of the AIA from the text of § 5000A itself that should be enough to demonstrate why those who want a prompt ruling should have cause for concern.

The costs to delayed review of the AIA’s constitutionality are, at this point, sufficient to justify Congress in acting to avoid it. But if Congress and the Obama Administration do not act, then neither should the Supreme Court strain one way or the other in deciding whether the AIA bars the present pre-enforcement challenges.

Cui: Foreign Administrative Law and International Tax -- Treaty Implementation in China

Wei Cui (China University of Political Science and Law), Foreign Administrative Law and International Taxation: a Case Study of Treaty Implementation in China, 64 Admin. L. Rev. 191 (2012):

U.S. tax specialists and the U.S. government increasingly have to take into account the interactions between U.S. and foreign tax laws, but to date, they have paid little attention to the administrative law backgrounds of foreign tax laws. In a growing range of cases, especially in the tax treaty and foreign tax credit (FTC) areas, the need for such attention is urgent. This Article describes a novel class of cases encountered by U.S. taxpayers that emanate from recent tax treaty implementation in China. In these cases, U.S. (and other foreign) investors face certain rules that conflict with common interpretations of tax treaties, and that, at the same time, are not legally binding under Chinese domestic law. The questions arise as to (1) whether U.S. taxpayers should still treat such rules as binding, and (2) what the consequences are of their doing so in terms of their ability to claim U.S. foreign tax credits. Equally, the U.S. government faces the question of what to do with these cases of errant treaty interpretation.

This Article shows that these questions for U.S. tax law and policy cannot be answered without an understanding of the Chinese administrative law approach to treaty implementation. An examination of this background suggests that affected U.S. taxpayers cannot simultaneously avoid contesting the applications of the Chinese rules and to claim, for FTC purposes, that they have taken “all practical and effective remedies” to reduce their tax liabilities. It also suggests that the U.S. FTC rules on what qualifies a compulsory tax payment constitute a way of “exporting” U.S. concepts of the rule of law. But most fundamentally, it highlights the inadequacy of the traditional leap of faith undertaken by both the signers and users of tax treaties—the belief that treaties should be expected to be implemented by other countries regardless of their domestic laws. Instead of making such a leap of faith, this Article argues that U.S. taxpayers and the U.S. government should recognize that the observation of treaty obligations can be ensured only if the signatories embrace the rule of law. To protect their rights and expectations under tax treaties, they must tap unfamiliar mechanisms that enhance the rule of law, such as legislative, judicial, and executive oversight.

Herzig: Exchange Funds

David J. Herzig (Valparaiso), Exchange Funds: A Proposal for Regulations, Finally, 135 Tax Notes 865 (May 14, 2012):

The economic downturn has created an investment market in which some tax-advantaged strategies have become favored. To avoid taxable diversification, taxpayers have turned to exchange funds. Through the rules in sections 351, 721, and 368, taxpayers can diversify a single stock position without recognition. Exchange funds have existed in one form or another since the 1930s. However, after 50 years of IRS acquiescence and minimal public discourse, the debate surrounding the technical rules has been renewed. This report discusses the basics of exchange funds and the regulation and legislative proposals the New York State Bar Association Tax Section submitted to Treasury. The author then explores those recommendations and makes a proposal of his own.

All Tax Analysts content is available through the LexisNexis® services.

Bankruptcy Court Finds Undue Hardship, Discharges $340,000 Student Loan Debt of Former Law Student With Asperger Syndrome

National Law Journal, Asperger Syndrome Prompts Court to Forgive Former Law Student's Debt:

A former law student has won a bid in bankruptcy court to discharge nearly $340,000 in education debt because her diagnosis of Asperger Syndrome rendered her unable to repay the loans. The U.S. Bankruptcy Court for the District of Maryland on May 17 found that Carol Todd, who attended the University of Baltimore School of Law, met the difficult burden of showing that she would suffer undue hardship if forced to repay her debt.

Todd, who received her high school general equivalency diploma during the late 1980s, at the age of 39, began attending law school in 1992 but did not finish, according to the opinion. She went on to obtain a master's degree from Towson University and a Ph.D. from an unaccredited online school in 2007. She filed for Chapter 7 bankruptcy in 2009. At the time of her trial, she was 63 and owed $339,361 to three student loan creditors.

Haneman: Court-Ordered Mediation in Will Contests

Victoria J. Haneman (La Verne), The Inappropriate Imposition of Court-Ordered Mediation in Will Contests, 59 Clev. St. L. Rev. 513 (2011):

Following the successful implementation of court-ordered mediation programs in divorce and family law cases, similar programs are being adopted to mandate the use of mediation in other areas of litigation. Complex emotional and personal issues can easily transform inheritance into a destructive process, and an increasing number of courts are ordering probate disputes and will contests to mediation.

The freedom of the individual to designate his heirs is a foundational norm that permeates doctrine in the law of wills, and as a result, the idea of testator intent has reached near-mythical stature. Conversely, mediation shapes settlement without rigid deference to legal rules and often marginalizes the intent of the testator as an impediment to reaching agreement. Because the approach taken in mediation directly conflicts with the legal rules applied by the courts adjudicating those same cases, a legitimate question is raised as to whether or not instituting court-ordered mediation programs that mandate mediation in will contest cases is appropriate. The contention of this Article is not that mediation is inappropriately used by the parties to a will contest case, but instead that court-ordered mediation is inappropriate. Mandatory mediation imposes an obstruction on the right of access to the courts that is inappropriately imposed when the process contravenes the substantive law of the case. This Article proposes an easily-implemented legislative solution that resolves the conflict between law and process.

The Proposed § 356 Regulations

Terri Guinn (J.D. 2012, San Diego), Comment, Proposed 2009 Regulations Dealing With Section 356 Nonrecognition Rules Should be Given the Boot, 48 San Diego L. Rev. 1397 (2011):

“Fire, Aim, Ready!” Could this be the approach taken by the Internal Revenue Service (the Service) in its attempt to finalize regulations, proposed more than two years ago, that would specify a new method for determining a shareholder’s taxable gains and losses in certain reorganization transactions? Has the Service decided to elevate theory over practicality without thinking through all of the ramifications of these regulations? Finalizing these proposed regulations in their current form may have serious unintended consequences. As drafted, they miss their intended mark by inadvertently creating a loophole whereby some shareholders could take immediate losses on some of their shares when, in reality, they have an overall gain. This Comment will explain why the proposed 2009 regulations set poor policy and are inconsistent with congressional intent.

Former University of Georgia Prof (and CNN President) Leaves Present for Neighbor

Giegerich: The Monetization of Business Tax Credits

Thomas W. Giegerich (McDermott, Will & Emery, New York), The Monetization of Business Tax Credits, 12 Fla Tax Rev. 629 (2012):

This Article examines the history of the development of federal incentive tax credits, from the enactment of the investment credit in 1962 to the cash grant in lieu of credits regime introduced as part of the American Recovery and Reinvestment Act of 2009, and methods for "monetizing" tax credits developed in the context of state tax credits as well as federal tax credits (and associated taxation issues). The principal thesis of the Article is that (1) the current array of federal business tax credits addressed in the Article are in the nature of subsidies rather than structural components of the computation of a "correct" tax; and (2) therefore constraining the monetization of these tax credits through the imposition of normative-based substantive requirements is inappropriate. As the Article states in conclusion, if the judgment is that tax expenditures of this kind play a useful role (i.e., they should not simply be repealed), then the articulation of the underlying goals and intended beneficiaries of current tax-based subsidies should be sharpened and our existing "delivery mechanism" closely examined and possibly overhauled.

Lazear: 2013 Tax Increases Are to be Feared, Not Spending Cuts

Wall Street Journal op-ed, Three Views of the 'Fiscal Cliff', by Edward P. Lazear (Stanford University, Graduate School of Business):

Discussion of the so-called fiscal cliff—the combination of tax increases and spending cuts that will come in 2013 if Congress and the president don't act—confuses a number of different issues. The evidence suggests that we should fear the tax hikes, but not necessarily the spending cuts.

Anyone who uses the term "fiscal cliff" accepts a Keynesian view of the economy, knowingly or not. Both tax increases and constrained spending are assumed to be bad for the economy.

But there are two other views: that of the budget balancer and that of the supply-sider. Rather than term the impending changes that will occur in 2013 a "fiscal cliff," the budget balancer thinks of this as "fiscal consolidation." Tax increases reduce the deficit, as do cuts in government spending. Both are austerity measures that make the government more responsible and, therefore, both are conducive to long-run economic growth. Those who support the Simpson-Bowles plan subscribe, at least in part, to this view. ... The budget balancer regards both tax increases and spending cuts as moves in the right direction.

The supply-sider has a different view from both the Keynesian and the budget balancer. Fundamentally, supply-side advocates focus on the harmful effects of tax increases. Raising tax rates hurts the economy directly because tax hikes reduce incentives to invest and because they punish hard work. As such, tax increases slow growth. But budget cuts work in the right direction by making lower tax revenues sustainable. If spending exceeds revenues, then the government must borrow and this commits future governments to raising taxes in order to service the debt. ...

Which of the three views is correct?

On the tax side, there is strong evidence that supports the supply-siders. Christina Romer, President Obama's first chairwoman of the President's Council of Economic Advisers, and David Romer document the strong unfavorable effect of increasing tax rates on economic growth [The Macroeconomic Effects of Tax Changes]. They report that an increase in taxes of 1% of gross domestic product lowers GDP by almost 3%. The evidence on government spending also suggests that high spending means lower growth.

The evidence on government spending also suggests that high spending means lower growth. For example, Swedish economists Andreas Bergh and Magnus Henrekson survey a large literature and conclude that an increase in government size by 10 percentage points of GDP is associated with a half to one percentage point lower annual growth rate [Government Size and Growth: A Survey and Interpretation of the Evidence].

The evidence suggests that we should move away from worry over the impending "fiscal cliff" and focus more heavily on concern about raising taxes. And although some Keynesians may view this as not the best time to control spending growth, promising to change our ways in the future is as credible as Wimpy's promise to pay on Tuesday for the hamburger that he eats today.

How Much Are You Worth to Facebook?

Check out this online tool to calculate your worth to Facebook:  at today's market price, I am supposedly worth $1,537 to Facebook ($1,876 if I start playing Zynga games).  As the saying goes, If you're not paying for something, then you're not the customer—you're the product being sold.  See also Forbes, Post Facebook IPO, Your Brain and its Data Are Worth $91.44 to Mark Zuckerberg:

Now that the dust has settled and Facebook has traded on NASDAQ for a day, it’s possible to gauge more precisely than ever before how much the company is worth, and with that number, how much of its value derives from its relationship with each of the 900 million people who visit the site on a regular basis, gaze at and click on its ads, and feed its databases with some of their most private bits of information.

Expatriation and Tax Treaties

Oz Halabi (S.J.D. 2012, Michigan), Expatriation Tax – Renouncing a Tax Treaty:

Exit Tax (known as expatriation in the U.S.) is a tax rule (and a tool) used by governments to prevent taxpayers from changing their country of domicile solely for tax benefits. A person is usually subject to taxation in his country of domicile on his worldwide income. Since there is a broad variety of tax systems in the world, in which some countries impose higher income tax rates on its residents and others impose lower rates or even no tax on certain classes of income, people might choose to change their country of domicile to a more favorable jurisdiction when they expect a big taxable gain.

Continue reading "Expatriation and Tax Treaties"

The Tax Consequences of Mark Zuckerberg's Marriage

• Forbes:  How Mark Zuckerberg's Taxes Change Now That He's Married, by Robert W. Wood (Wood LLP, San Francisco):

What a week! First an unprecedented IPO, then marriage. Yes, Facebook’s Zuckerberg Marries His Longtime Girlfriend Priscilla Chan. ... [W]hat does this latest one-two development mean for the Zuckerberg family tax return?

• Joint v. Separate?
• Separate v. Community?
• Business and Investment Management?
• Gifts During Marriage?
• Divorce Rules

• New York Daily News, Facebook Founder Mark Zuckerberg Put IPO Before ‘I Do’s’:

Facebook founder Mark Zuckerberg displayed perfect timing in uttering two simple words — “I do” — while still cleverly safeguarding his $20 billion fortune, divorce lawyers say. By wedding college sweetheart Priscilla Chan just 24 hours after taking his social media powerhouse public Friday, he’s protecting his wealth, top lawyers say. Zuckerberg can now say his billions were minted before he took the plunge — dramatically lessening Chan’s share in any divorce settlement from the world’s 26th-richest man.

“If they married the day before, it would have made a huge difference,” said Manhattan divorce lawyer Bonnie Rabin. That’s because Zuckerberg’s holdings in Facebook — 533 million shares and an undisputed control of voting rights — could have been considered marital assets if the nuptials had taken place before the company’s initial public offering.

• Don't Mess With Taxes, Mr. and Mrs. Mark Zuckerberg and Their Community Property Taxes, by Kay Bell
• Forbes, Mark Zuckerberg Ties the Knot, But It Isn't All Love And Roses, by Deborah L Jacobs

Sullivan: Are You Ready for Taxmageddon ($5.8 Trillion in Tax Increases Over 10 Years, Starting Jan. 1, 2013)?

Martin A. Sullivan (Tax Analysts), Are You Ready for Taxmageddon?, 135 Tax Notes 931 (May 20, 2012):

A combination of spending cuts and tax increases could bring the economy to its knees at the end of 2012. By our count, the economy must deal with nine significant fiscal events that will be automatically triggered by current law if Congress and the president take no action. Together these events create a perfect storm of contractionary tax and spending policies that could push the already fragile American economy back into recession. Fed Chair Ben Bernanke dubbed it a "fiscal cliff." The media calls it Taxmageddon.  [Click on chart to enlarge.]

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LST Calls for Resignation of Rutgers Dean and ABA Investigation of Improper Recruiting of Law Students

LST Calls for Dean’s Resignation and ABA Investigation:

Last week we became aware of an ongoing recruiting campaign by Rutgers – Camden School of Law that targets students who were not considering law school. As a part of this campaign, Camille Andrews, Associate Dean of Enrollment, sent students an email with bold statements about the employment outcomes achieved by the class of 2011. When compared to the school’s self-published employment data, we see Dean Andrew’s statements range from misleading to plainly false. Because the statements made in this email are demonstrably deceptive and are in clear violation of ABA Standard 509, Dean Andrews should resign immediately from her administrative appointment.

There are two important layers to this story. First, Dean Andrews made unfair statements about the employment outcomes of Camden graduates. These statements exaggerate the successful outcomes of Camden graduates and attempt to influence student behavior. The realities of Camden’s placement are far different from what Dean Andrews discloses. (More on this below.)

Second, Camden has extended a special offer for people who haven’t followed the normal application process and haven’t expressed an interest in law school or legal practice. (The email recipients had taken the GMAT, not the LSAT.) The Camden Special allows the students to avoid delay and enroll this August. By portraying Camden as some down-economy safe haven that leads to status and riches, Dean Andrews is attempting to enroll the exact students who ought not to attend law school: people who have not had time to carefully weigh the pros and cons of this significant investment.

• Above the Law, Law School Sales Pitch Doubles Down on the Getting Rich Rationale For Law School
• Paul Campos (Colorado), Rutgers-Camden Goes Old School 
• LSAT Blog, Rutgers Law School Takes GMAT Scores
• Deborah Jones Merritt (Ohio State), Update on Rutgers-Camden

TPC Hosts Conference Today on The Charitable Property Tax Exemption

The Tax Policy Center hosts a conference today on State and Local Budget Pressures: The Charitable Property-Tax Exemption and PILOTs:

The Current Landscape:  Who wins and who loses from exemption?:

• Moderator: Elizabeth Boris (Urban Institute)
• Evelyn Brody (Chicago-Kent)
• Joseph Cordes (George Washington)
• Rick Cohen (Nonprofit Quarterly)
• Thomas Longoria (Texas State University)

Focus on Eds and Meds:  A focus on the current major pressure points: nonprofit hospitals and colleges and universities.

• Moderator:  Roger Colinvaux (Catholic)
• Matt Hamill (National Association of College and University Business Officers)
• Keith Hearle (Verite Healthcare Consulting)
• Woods Bowman (DePaul)

Negotiated Payments in Lieu of Taxes as Wave of the Future?  Will global solutions remain elusive?  Will we see more use of “voluntary” PILOTs?  What should a well-designed PILOT program look like, and how should it be created?

• Moderator:  Kim Rueben (Urban Institute)
• Ron Rakow (City of Boston)
• Daphne Kenyon (Lincoln Institute of Land Policy)
• David Thompson (National Council of Nonprofits)
• David Brunori (State Tax Notes)
• G. Reynolds “Renny” Clark (Pittsburgh)

TaxProf Blog Weekend Roundup

Saturday:

• Estate & Gift Tax Savings From Facebook Co-Founder's Renunciation of U.S. Citizenship Dwarf Income Tax Savings
• 64% of Recent Law Grads Do Not Work as Lawyers
• Tax Exceptionalism and Tax Reform
• The Tax Treatment of Carried Interest

Sunday:

• Should You Renounce Your U.S. Citizenship Like Facebook Co-Founder Eduardo Saverin?
• David Cay Johnston v. Grover Norquist on HBO's Real Time with Bill Maher
• Top 5 Tax Paper Downloads
• California and the Amazon Tax

Should You Renounce Your U.S. Citizenship Like Facebook Co-Founder Eduardo Saverin?

Wall Street Journal:  Should You Renounce Your U.S. Citizenship?, by Laura Saunders:

For some people, the best tax strategy is simply to pack up and leave. That is the lesson from the disclosure that Eduardo Saverin, the 30-year-old billionaire who helped found Facebook, has renounced his U.S. citizenship to become a resident of Singapore.

Singapore offers huge tax advantages for people like Mr. Saverin, whose wealth is primarily in the form of capital gains. The Southeast Asian city-state has no capital-gains tax and its top income-tax rate is 20%—compared with rates of 15% and 35%, respectively, in the U.S. ...

Should you follow Mr. Saverin's lead and high-tail it to a lower-tax country? While it might seem tempting, renouncing one's citizenship has many drawbacks. ... Here are some considerations.

• Get ready for questions.  Expatriation involves an exit interview with a U.S. official...
  
• You need somewhere to go.  How to find a new home? ... 
• You might owe an exit tax.  U.S. citizens who expatriate are treated as though they sold all of their property the day before they renounce, even if they will continue to own it and pay property or other taxes. Capital gains (net of losses) are taxed at the current top rate of 15%, after an exemption of $651,000. The tax on some assets, such as an individual retirement account, will be at ordinary income rates up to 35%. ... tax applies to U.S. taxpayers whose net worth is greater than $2 million or whose average annual income tax for the past five years is $151,000 (adjusted for inflation). ... 
• You will have to certify that you have been tax-compliant for the last five years. ...  
• Your heirs could get a big tax bill. The U.S. heirs of wealthy taxpayers who renounce their citizenship usually owe inheritance tax equal to the U.S. estate tax on assets left to them by the expatriate. (This doesn't apply to spouses who are U.S. citizens.) ...
• You might find travel more complicated. ...

There is more: Under the "Reed amendment," named after a Democratic senator from Rhode Island, U.S. officials may bar entry to any person who renounced citizenship for tax reasons. This provision is rarely, if ever, invoked—Ms. Weintraub has never heard of a case—but it is on the books. Experts say the attention surrounding Mr. Saverin's case could revive it, and recently lawmakers proposed raising the exit tax.

Is all this hassle really worth a tax savings? You be the judge.

Prior TaxProf Blog Posts:

• Facebook Co-Founder Renounces U.S. Citizenship in Advance of IPO, Saving Millions in U.S. Taxes (May 11, 2012)
• Will Facebook Co-Founder's Renunciation of U.S. Citizenship Increase His U.S. Tax Bill? (May 12, 2012)
• Seto, Kleinbard Explain Tax Consequences of Facebook Co-Founder's Renunciation of U.S. Citizenship (May 13, 2012)
• Tax Savings From Facebook Co-Founder's Renunciation of U.S. Citizenship:  $67 Million (May 16, 2012)
• Sen. Schumer Proposes 30% Tax on Facebook Co-Founder, Others Who Renounce U.S. Citizenship for Tax Purposes (May 17, 2012)
• WSJ:  New Ex-Patriot Tax on Facebook Co-Founder 'Isn't Worthy of America' (May 18, 2012)
• Estate & Gift Tax Savings From Facebook Co-Founder's Renunciation of U.S. Citizenship Dwarf Income Tax Savings (May 19, 2012)

David Cay Johnston v. Grover Norquist on HBO's Real Time with Bill Maher

Top 5 Tax Paper Downloads

There is a bit of movement in this week's list of the Top 5 Recent Tax Paper Downloads, with new papers debuting on the list at #2 and #5. The #1 paper is now #29 in all-time downloads among 8334 tax papers:

1.  [1784 Downloads]  There’s No There There: Low Tax Rates and Economic Growth, by Filip Spagnoli (National Bank of Belgium)

2.  [231 Downloads]  Corporate Shams, by Joshua D. Blank (NYU) & Nancy C. Staudt (USC)

3.  [224 Downloads]  Recent Developments in Federal Income Taxation: The Year 2011, by Martin J. McMahon, Jr. (Florida), Ira B. Shepard (Houston) & Daniel L. Simmons (UC-Davis)

4.  [209 Downloads]  Guide to the Internal Revenue Service Decision-Making Process Under Section 501(c)(3) for Journalism and Publishing Non-Profit Organizations, by Jeffrey P. Hermes (Berkman Center for Internet & Society)

5.  [179 Downloads]  Zotero -- A Manual for Electronic Legal Referencing, by John Prebble & Julia Caldwell (both of Victoria University of Wellington, Faculty of Law)

California and the Amazon Tax

Andrew T. Cannon (J.D. 2012, UC-Hastings), Note, Where California Went Wrong With the Amazon Tax: Application of Due Process and Commerce Clause Jurisprudence to State Use Tax Collection Requirements Imposed on Out-of-State Internet Retailers, 39 Hastings Const. L.Q. 691 (2012):

Part I of this Note answers questions about the use tax including the following: What is it, why do we have it, and what problems are encountered when states enforce use tax collection requirements on out-of-state internet retailers. Part II focuses on the historical developments of Due Process and Commerce Clause jurisprudence in the area of state use tax collection. Part III explains the application of this jurisprudence in Scripto v. Carson, and recent state court decisions upholding use tax collection requirements where in-state independent contractors actively solicit sales for out-of-state retailers. Part IV explains the Google advertising model, and details the relationship between internet retailers and Google. Lastly, Part V argues that California made a mistake when exempting internet retailers doing business with Google from collecting use taxes on California sales.

Estate & Gift Tax Savings From Facebook Co-Founder's Renunciation of U.S. Citizenship Dwarf Income Tax Savings

Following up on my prior post, Tax Savings From Facebook Co-Founder's Renunciation of U.S. Citizenship: $67 Million: Wall Street Journal:  So How Much Did He Really Save?, by Laura Saunders:

Eduardo Saverin renounced his U.S. citizenship last year and now is a resident of Singapore. How much did he save on his taxes by making the switch then? ... [B]ased on financial filings, experts say, it was likely tens of millions in income tax and far more in estate tax -- at least $700 million at current values and tax rates.

Here is why: The Facebook co-founder holds 2% of the company's stock, worth more than $2 billion at $38 a share. By renouncing his citizenship last September, before the public offering, he limited his 15% "exit tax" to the gains in his shares and other assets up to that point. Appreciation in the shares after that escapes the tax. Depending on how Mr. Saverin valued his holdings, which were illiquid at the time, he might have lowered his bill even more. If those two moves shaved even $10 a share from the IPO price of $38, then Mr. Saverin's early exit saved him more than $80 million; likely it was more, says independent tax expert Robert Willens.

[David Miller (Cadwalader, New York)] says the Facebook co-founder's real tax worry should have been estate and gift taxes -- even though Mr. Saverin is only 30 years old. That's because the top rate is 35% and is set to rise next year to 55%, more than twice the 15% exit tax on appreciation. On a net worth of $2 billion, that tax would amount to $700 million. Singapore has no estate tax. "On wealth that great, it's far harder to avoid U.S. estate and gift tax than to avoid income tax, especially if you are unmarried," Mr. Miller says.

64% of Recent Law Grads Do Not Work as Lawyers

The Legal Whiteboard:  Graduates Shun Legal Profession, by William Henderson (Indiana):

That's the headline of a story in the Sunday edition of The Age, one of Australia's leading daily newspapers.  Here is the nut:

Almost two-thirds of Australia's law graduates are not working as lawyers four months after they have completed their degrees, according to a study.

The Graduate Careers Australia survey of 1313 recent graduates from all over the country found that 64% were not practising law between 2010 and 2011.

There was ''no way'' law firms could accommodate all the graduates from Australia's 31 law schools, La Trobe University's director of undergraduate studies, Heather King, said. ''It's a well-acknowledged fact that 40-50 per cent will not end up in a traditional law practice.''

These statistics may seem even bleaker than those that describe the U.S. legal market.  Yet, for two key reasons, these Australian students are far better off. First, the Australias follow the LLB model, which has some substantial advantages.  According to my Australian colleagues, a law undergraduate degree is often combined with a major in another field or discipline, such as business, accounting, sociology, or literature.  So a student's commitment to law as career is often tentative and, in many cases, hedged by another career interest.  Second, higher education in Australia enjoys a large national subsidy.  So law graduates typically graduate wiht little or no debt.

Tax Exceptionalism and Tax Reform

Gene Magidenko (J.D. 2012, Michigan) has published two notes in the University of Michigan Journal of Law Reform Online:

• Tax Exceptionalism: Wanted Dead or Alive (Mar. 12, 2012):  "Tax law has just not been the same since January 2011. Did Congress pass earthshaking legislation affecting the Internal Revenue Code? Did the IRS dramatically change regulations? If only it were that exciting. Instead, eight jurists sitting at One First Street in our nation’s capital transformed tax law in a less bloody, but no less profound, way. The thought must have gone through many a tax mind – is tax exceptionalism dead?"
• Reforming the Tax Code: A Tale of Two Purposes and Paralysis (Mar. 28, 2012):  "Though the presidential election of 2012 is still some time away, national politics have been in the thick of one for several months now. One of the top issues being debated is the tax code. Most agree that the tax code should be simplified, but to say that the proposals to do this are various is an understatement. This perennial question of reform has been a fixture of the national debate for a long time, so little of what can be said about it is particularly novel. All the same, a brief overview of the purposes behind our system of taxation and how they inform the present debate about tax reform is useful. The ultimate conclusion, unsatisfying as it may be, is that there are serious systemic obstacles to any substantive changes to the tax code."

The Tax Treatment of Carried Interest

Jason A. Sacks (J.D. 2012, Washington University), Note, Effective Taxation of Carried Interest: A Comprehensive Pass-through Approach, 89 Wash. U. L. Rev. 449 (2012):

Taxation of “carried interest” has been the subject of much recent scholarship. Articles have discussed the unfairness of taxing carried interest differently than other compensation for services, and addressed the dangers inherent in subjecting an intrinsically mobile tax base to rates higher than those presently applied to carried interest by the Internal Revenue Code. Most of this scholarship, however, erroneously ignores that fund managers who receive carried interest income are often in a position to significantly impact the U.S. economy. Ignoring this fact thereby forecloses an opportunity for Congress to utilize an efficient carried interest taxation regime as an instrument to promote its general economic goals, by means of rate differentials associated with policy objectives.

This Note will briefly discuss what constitutes carried interest and general tax policies and considerations. It will then discuss carried interest tax legislation recently proposed by Congress, address the legislation’s shortcomings, and propose an alternative carried interest taxation regime. Lastly, it will address opportunities available to Congress for utilizing carried interest tax legislation as a means to obtain policy objectives.

McCaffery: What Sports Can Teach Tax Policymakers

Edward J. McCaffery (USC), What Sports Can Teach Tax Policymakers: Lessons from the Luxury Tax:

Luxury taxes are increasingly used by major sports leagues, such as Major League Baseball and the National Basketball Association, to raise revenue and affect behavior. This brief article lists three lessons that general tax policy can take from the sport world’s taxes, helping to make the case for a progressive spending tax on a national scale.

Tax Court: TP Can't Deduct $23k Contribution to Church That Failed to Include No Property/Service Statement in Acknowledgment

The Tax Court yesterday again reiterated that a taxpayer cannot deduct a charitable contribution without complying with the § 170(f)(8)(A) substantiation requirements. Durden v. Commissioner, T.C. Memo. 2012-140 (May 17, 2012).

Mr. & Mrs. Durden contributed $22,517 to their church in 2007. Although the church provided them with a timely statement acknoweldging the $22,517 contribution, it did not state whether they had received any goods or services as required by § 170(f)(8)(A) (the “first acknowledgment”). After being notified by the IRS of this deficiency, the Durdens obtained another statement from the church acknowledging the $22,517 contribution and stating that they received no goods or services (the “second acknowedgment”)..

The Tax Court accepted the IRS’s position that both acknowledgments failed § 170(f)(8)(A): (1) the first acknowledgment did not include the required goods or services statement; and (2) the second acknowledgment was not contemporaneous within the meaning of Reg. § 1.170A-13(f)(2) because it was not received by the Durdens before they filed their 2007 return. The Durdens conceded that they did not strictly comply with the statute, and the Tax Court rejected their attempt to prove substantial compliance.

Indiana Tech Breaks Ground on New $15 Million Law School In Fort Wayne

Following up on my prior post:  National Law Journal, Indiana Tech Breaks Ground on New Law School:

Indiana Tech is one step closer to opening its new law school. The Fort Wayne, Ind., university planned to break ground on May 18 on the $15 million, 70,000-square-foot building that will house its law school, which is projected to open in the fall of 2013. ... [T]he plans call for 100 students to enroll during the first year, with a five-student increase during each of the next four years. ...

Indiana Tech will be the fifth law school in the state [joining Indiana-Bloomington, Indiana-Indianapolis, Notre Dame, and Valparaiso] and the seventh within a three-hour drive of Fort Wayne. However, university officials say a feasibility study concluded that Indiana is underserved by lawyers.

[M]any local attorneys and other interested parties have warmed to the law school after learning more about its educational approach. For one thing, tuition for the 2013-14 year will be a relatively low $29,500, ... The curriculum will highlight collaborative learning ... and incorporate a significant amount of experiential learning; at least half of every upper-level course will comprise "real world" instruction such as simulations. ... The program is loosely modeled after existing programs at Northeastern and Drexel. ... J.D. students at Indiana Tech will also have the option to concentrate in one of four areas of the law: advocacy and dispute resolution, intellectual property, transactional law, and global law and leadership,

Samahon: Freytag and the President's Authority to Remove Tax Court Judges

Tuan Samahon (Villanova), Blackmun (and Scalia) at the Bat: The Court's Separation-of-Powers Strike Out in Freytag, 12 Nev. L.J. 691 (2012):

This contribution to the "worst Supreme Court cases" symposium examines Erwin Griswold's role in the litigation of Freytag v. Commissioner [501 U.S. 868 (1991)] and the majority's holding that the U.S. Tax Court is a part of "the Courts of Law." The Author concludes that the Freytag majority created the risk of a further separation-of-powers challenge to the Tax Court predicated on the President's qualified power to remove tax court judges (§ 7443(f)), officers who per Freytag exercise "the judicial power of the United States." Assuming, arguendo, the Tax Court judges do exercise "the judicial power of the United States" (and not executive power), Congress impermissibly granted to the President a cross-branch power to remove these judges. The Author argues that even a qualified power to remove affords a degree of control, and an executive's qualified power to remove a judicial officer represents an executive's power to control to some degree the exercise of judicial power. In this context, the article considers newly released presidential archival sources on the non-transparent "resignation" of Judge Albert Fletcher of the U.S. Court of Military Appeals as, in effect, a precipitated but disguised removal "for cause."

The Author also offers a critique of Scalia's concurring opinion. It suggests that although an officer's attributes are necessary for the proper characterization of the exercise of power (whether legislative, executive or judicial), they are not alone sufficient to characterize the same. Instead, some resort must be made to some definition or conception of what is encompassed within the scope of "the judicial power of the United States."

WSJ: New Ex-Patriot Tax on Facebook Co-Founder 'Isn't Worthy of America'

Wall Street Journal editoiral:  The Saverin Lesson : A Punitive Exit Tax on the Facebook Expat Isn't Worthy of America:

Facebook on Thursday priced the IPO it expects to launch Friday at $38 a share, valuing the social media company at $104 billion. But so much for that welcome sign of confidence in American entrepreneurship and capital markets. This being the age of envy, the bigger story in some circles seems to be the decision by Facebook co-founder Eduardo Saverin to renounce his U.S. citizenship in favor of Singapore.

Democratic Senators Chuck Schumer and Bob Casey, a pair of envy specialists, pounced on the news by announcing Thursday that they will introduce a plan to tax capital gains at 30% for any wealthy Americans who try to escape from U.S. shores. No doubt they hope to score political points by punishing the fleeing rich who will strike most Americans as unpatriotic, but the Senators are doing far more harm than Mr. Saverin is to the U.S. and its global reputation.

Not that we have any sympathy for Mr. Saverin, whose citizenship decision is a remarkable act of ingratitude toward the country that welcomed him as a child from Brazil. America's rule of law and relatively open markets have allowed him to take $30,000 in savings and turn it into Facebook shares that after Friday may be worth more than $2 billion. ...

Singapore has no capital gains tax, while President Obama wants to raise America's rate to nearly 24%—and 30% if his Buffett Rule becomes law. Then there is Mr. Obama's plan for a 44% dividend tax and 45% estate tax.

Whatever Mr. Saverin's motivation, the more important point is that it is his decision, however misguided. America was built on millions of similar individual decisions to come to our shores. It is precisely that ability to decide for oneself that has made America such a magnet for two centuries.

The way to continue to be a magnet for the best and brightest is not to impose Soviet-style exit taxes to punish people who want to leave the country. That is what oppressive and demagogic regimes do, and it's humiliating to see U.S. Senators posture in such fashion. The way to punish Mr. Saverin is to make the U.S. so appealing and dynamic again that he'll be sorry he ever left.

• The Atlantic, Why the Ex-Patriot Act Is a Creepy Law
• CNBC, Chasing Saverin's Winnings Is a Losing Battle
• Forbes, Expats Face Steep Exit Tax Courtesy of Facebook

Prior TaxProf Blog posts:

• Facebook Co-Founder Renounces U.S. Citizenship in Advance of IPO, Saving Millions in U.S. Taxes (May 11, 2012)
• Will Facebook Co-Founder's Renunciation of U.S. Citizenship Increase His U.S. Tax Bill? (May 12, 2012)
• Seto, Kleinbard Explain Tax Consequences of Facebook Co-Founder's Renunciation of U.S. Citizenship (May 13, 2012)
• Sen. Schumer Proposes 30% Tax on Facebook Co-Founder, Others Who Renounce U.S. Citizenship for Tax Purposes (May 17, 2012)

Farewell (But Not Goodbye), Malibu

I am heading back to Cincinnati today after spending the spring semester at Pepperdine University School of Law. My wife and I (and dog) had a wonderful time in Malibu and are grateful to Dean Deanell Tacha and the Pepperdine faculty, staff, and students for making our stay so enjoyable. The highlight of our stay was hosting fifteen Southern Califoria Tax Profs for a wonderful dinner. I am looking forward to rejoining my Cincinnati faculty colleagues for the Fall 2012 semester and teaching Introduction to Law to the incoming 1L class and Federal Income Tax and Federal Estate & Gift Tax to the returning 2Ls and 3Ls, before returning to Pepperdine for the Spring 2013 Semester for my fourth stint as the D & L Straus Distinguished Visiting Professor of Law.

The Facebook IPO: Taxing Mark Zuckerberg's Stock

In honor of today's Facebook IPO:

• Victor Fleischer (Colorado), Taxing Founders' Stock, 59 UCLA L. Rev. 60 (2011)
• Gregg Polsky (North Carolina) & Brant Hellwig (South Carolina), Examining the Tax Advantage of Founders’ Stock, 97 Iowa L. Rev. 1085 (2012)

For more, see:

• Tax Aspects of Facebook's IPO (Feb. 6, 2012)
• The Zuckerberg Tax: A Progressive Mark-to-Market System (Feb. 9, 2012)
• More on Facebook, Zuckerberg, and Taxes (Feb. 10, 2012)
• Senators Propose Closing 'Facebook Tax Loophole' (Mar. 2, 2012)
• The Inequality Obsession: Mark Zuckerberg and the EITC (Apr. 23, 2012)

TPC Hosts Making Wall Street Pay: The Pros and Cons of Financial Taxes

The Tax Policy Center hosts a program today on Making Wall Street Pay: The Pros and Cons of Financial Taxes (webcast here):

The global financial crisis drained government coffers and rocked public confidence around the world. Many leaders now believe taxes on financial transactions and/or financial activities could relieve these shortfalls and shore up the public’s faith in the workings of economies near and far. Some policymakers and observers want to coordinate these new taxes internationally to avoid the flight of financial markets. But can financial taxes raise substantial revenue? And who would bear the taxes: the financial sector or the small investor? Will these taxes reduce risky financial activities or impede healthy market operations? Our panel of experts will discuss these and other timely questions

• Michael Keen (Deputy Director, International Monetary Fund)
• Steve Rosenthal (Visiting Fellow, Urban-Brookings Tax Policy Center (moderator))
• Daniel Shaviro (Professor, NYU)
• Lee Sheppard (Contributing Editor, Tax Notes)
• Damon Silvers (Director of Policy & Special Counsel, AFL-CIO)

Food Taxes as a Solution to the Obesity Epidemic

Adriana Badilas (J.D. 2011, McGeorge), Food Taxes: A Palatable Solution to the Obesity Epidemic?, 23 Pac. McGeorge Global Bus. & Dev. L.J. 255 (2011):

Change comes from action, not from mere talk. Now more than ever, our government must do something to counteract the growth of obesity and overweight in children and adults. The purpose of this Comment has been to analyze the benefits of invoking a VAT as a means to decrease costs associated with overweight and obesity. A successful VAT must meet two purposes: the tax must deter consumption of unhealthy foods and its revenue must be used to promote subsidies for healthy foods and fund health care initiatives. Although the VAT has been regarded as a regressive tax, expanding benefit programs can offset these concerns. Invoking an unhealthy food VAT in the U.S. will result in a decisive reduction in the rates of overweight and obesity and save the U.S. billions of dollars each year.

The First Circuit Was Right in U.S. v. Textron

Ned Hillenbrand (J.D. 2012, Washington & Lee), Note, United States v. Textron: The Right Answer to a Billion-Dollar Question, 68 Wash. & Lee L. Rev. 1973 (2011):

This Note discusses the use of a public corporation’s tax accrual workpapers to (1) shrink the IRS-taxpayer disclosure gap and (2) hold those corporations accountable for knowingly taking unsustainable positions on their tax returns. Further, this Note addresses criticisms and concerns regarding the use of these materials as a resource during an IRS audit investigation.

Sen. Schumer Proposes 30% Tax on Facebook Co-Founder, Others Who Renounce U.S. Citizenship for Tax Purposes

Bloomberg:  Schumer Proposes Tax on People Like Facebook’s Saverin:

U.S. Senator Charles Schumer proposed legislation that would impose a 30% capital gains tax on people like Facebook co-founder Eduardo Saverin unless they show they didn’t renounce their U.S. citizenship to avoid taxes. News that Saverin, 30, the billionaire co-founder of Facebook had renounced his U.S. citizenship was reported earlier this month in advance of tomorrow’s initial public offering that now values the social network at as much as $104 billion. He will save at least $67 million in federal income taxes by dropping his citizenship, according to a Bloomberg analysis of the company’s stock price.

“Eduardo Saverin wants to de-friend the United States of America just to avoid paying taxes,” Schumer, a New York Democrat, told reporters today. “We aren’t going to let him get away with it.” Schumer’s proposal would empower the IRS to impose a 30% capital gains tax on future investment gains of wealthy individuals who the agency decides renounced their citizenship for tax-avoidance purposes. It also would bar such people from re-entering this country. He said he will move the legislation “as quickly as possible.” ...

Schumer’s proposal requires the IRS to determine whether individuals with a net worth of at least $2 million, or who have an average income-tax liability of at least $148,000, renounced their citizenship for tax-avoidance purposes. If the IRS determines that tax avoidance was a main reason for renouncing citizenship, that person “will be barred from any type of re-entry into the United States,” according to a summary of the legislation provided by Schumer’s office.

• ABC News
• CBS News
• CNN
• Fox News
• New York Post
• Politico
• Reuters
• Wall Street Journal
• Washington Post
• WSJ Deal Journal

Prior TaxProf Blog posts:

• Facebook Co-Founder Renounces U.S. Citizenship in Advance of IPO, Saving Millions in U.S. Taxes (May 11, 2012)
• Will Facebook Co-Founder's Renunciation of U.S. Citizenship Increase His U.S. Tax Bill? (May 12, 2012)
• Seto, Kleinbard Explain Tax Consequences of Facebook Co-Founder's Renunciation of U.S. Citizenship (May 13, 2012)
• Tax Savings From Facebook Co-Founder's Renunciation of U.S. Citizenship: $67 Million (May 16, 2012)

Federal Recognition of California Registered Domestic Partners and Tax Equity

Rebecca J. Kipper (J.D. 2013, Chapman), Comment, Just a Matter of Fairness: What the Federal Recognition of California Registered Domestic Partners Means in the Fight for Tax Equity, 15 Chapman L. Rev. 613 (2012):

This Comment will show that, as a direct result of the strength of California's domestic partnership laws, the IRS, for the first time, is willing to recognize California RDPs and tax them in a manner similar to opposite-sex married couples. As a result, RDPs in California are more equal to opposite-sex married couples for tax purposes than same-sex couples in many other states. Although a common solution to the problem of tax inequity in the gay community is to call for a repeal of DOMA, this Comment will take a different approach. It will argue that the IRS's change of position regarding the community income taxation of California RDPs should be viewed as a roadmap in the struggle for tax equality because it marks the first time that the federal government is willing to recognize same-sex relationships for tax purposes. By crafting stronger domestic partnership laws, while simultaneously calling attention to the geographic disparity the new rules reintroduce into the tax system, advocates can use the 2010 CCA to achieve more tax equity for all families.

 Part I will provide a history of the IRS advisories in the context of community property and domestic partnership law while illustrating how the evolution of the tax treatment of families in the United States is a direct result of judicial and legislative reactions to outcries over perceived discriminatory, geographic disparities. Part II will discuss the practical implications of the IRS advisory for California RDPs and any other taxpayers to whom it applies. Part III will examine the geographic disparity that the advisory reintroduces into the tax system. Finally, Part IV will conclude that even though the IRS's new position results in marked geographic disparity and confusion, the advisory should be viewed as an extremely important step towards achieving tax equity because it marks the first time that the federal government has been willing to recognize same-sex couples for federal tax purposes. In addition, when viewed in light of the history of the federal income taxation of families and the fight for domestic partnerships in California, the advisory is a road-map for making even greater strides toward tax equity.

A New Method for Valuing NOL Limitations

Daniel Tavakoli (J.D. 2012, Georgetown), Protecting the Unknown: The Impact of the Liberalization of NOL Carrybacks in Acquisitions:

This paper explores the impact of section 382 of the Code and its limitations on Net Operating Losses (NOLs) and advocates for new method for valuing NOL limitations.

Source Rule for Capital Gains from Stock Sales

Xunjie Shi (Harvard), Source Rule for Capital Gains from Stock Sales: History and Evolution:

Despite the importance of a source rule for capital gains from stock sales in the international tax context, there is no generally accepted approach to allocating the right to tax such income between source countries and resident countries properly. A historical study helps elucidate the basis of source rule for capital gains from stock sales, which should influence future source rule design. Based on the historical study and current development trends of the source rule, this paper argues that a substantive approach, instead of a formal one, to the source rule of capital gains from stock sales should be adopted. This paper first explores the history of the source rule for capital gains from stock sales, as well as its evolution in model tax conventions proposed by the League of Nations, the OECD, and the United Nations. Sales of stock that represents a fraction of an ownership interest in a real property, a portfolio investment or a direct investment should be distinguished. If a stock sale represents a direct or indirect change of a significant participation in a resident company, i.e. foreign direct investment, source countries should be given the right to tax the capital gains. The capital gains provisions of the U.N. Model Taxation Convention have evidenced this substantive approach to source rule since the 1980s. In conclusion, this paper also proposes an amendment on the capital gains provisions of the 2010 OECD Model Taxation Convention.

2012 Law School Commencement Speakers

• Akron:  Solomon Oliver (Chief Judge, U.S. District Court for the Northern District of Ohio)
• Albany:  Victoria Graffeo (Judge, New York Court of Appeals)
• American:  Valerie Jarrett (Senior Advisor to President Barack Obama)
• Appalachian:  Beverly Perdue (Governor, North Carolina)
• Arizona State:  Sandra Day O'Connor (Retired Justice, U.S. Supreme Court)
• Arkansas-Fayetteville:  Jeffrey Gearhart (Vice President & General Counsel, Wal-Mart)
• Arkansas-Little Rock:  Dustin McDaniel (Attorney General, Arkansas)
• Ave Maria:  Robert George (Professor, Princeton University)
• Barry:  Jose Rodriguez (Judge, Ninth Judicial Circuit Court of Florida)
• Boston College:  Victoria Kennedy (widow of former Sen. Edward Kennedy)
• Boston University:  Roderick Ireland (Chief Justice, Massachusetts Supreme Judicial Court)
• Brooklyn:  Carol Bagley Amon (Chief Judge, U.S. District Court, Eastern District of New York)
• BYU:  Thomas Griffith (Judge. U.S. Court of Appeals for the D.C. Circuit)
• Campbell:  William Suter (Clerk, U.S. Supreme Court)
• Capital:  Robert Schottenstein (Chairman & CEO, M/I Homes)
• Cardozo:  Jonathan Lippman (Chief Judge, New York Court of Appeals)
• Case Western:  Leila Vespoli (Vice President & General Counsel, FirstEnergy Corp.)
• Catholic:  Daniel Gappagher (Commissioner, SEC)
• Chapman:  Tani Gorre Cantil-Sakauye (Chief Justice, California Supreme Court)
• Charleston:  Hulett "Bucky" Askew (Consultant on Legal Education, ABA)
• Charlotte:  Anthony Foxx (Mayor, Charlotte)
• Chicago-Kent:  Bajrakitiyabha Mahidol (Princess, Thailand), Laurel Bellows (President-elect, ABA)
• Cincinnati:  William Robinson (President, ABA)
• Cleveland State:  Yvette McGee Brown (Justice, Ohio Supreme Court)
• Colorado:  Neil Gorsuch (Judge, U.S. Court of Appeals for the Tenth Circuit)
• Columbia:  Donald Verrilli (Solicitor General, United States)
• Connecticut:  John Lewis (Member, U.S. House of Representatives)
• CUNY:  Ronald Ellis (Magistrate Judge, U.S. District Court for the Southern District of New York)
• Dayton:  Elizabeth A. McClanahan (Justice, Virginia Supreme Court)
• DePaul:  John Simon (Partner, Jenner & Block, Chicago)
• Drexel:  Anthony Scirica (Judge, U.S. Court of Appeals for the Third Circuit)
• Duke:  John Paul Stevens (Retired Justice, U.S. Supreme Court)
• Elon:  James Wynn, Jr. (Judge, U.S. Court of Appeals for the Fourth Circuit)
  
• Emory:  Della Wager Wells (Partner, Alston & Baird, Atlanta)
• Florida Coastal:  Deanell Tacha (Dean, Pepperdine University School of Law)
• Florida State:  Charles Canady (Chief Justice, Florida Supreme Court)
• Fordham:  Michelle DePass (Assistant Administrator, Office of International & Tribal Affairs, EPA)
• George Washington:  Carmen Ortiz (U.S. Attorney, Massachusetts)
• Georgetown:  Gay McDougall (Visiting Professor, Georgetown University Law Center)
• Georgia State:  Bobby Lee Cook (Defense Attorney, Summerville, GA)
• Georgia:  Richard Story (Judge, U.S. District Court, Northern District of Georgia)
• Golden Gate:  Morgan Christen (Judge, U.S. Court of Appeals for the Ninth Circuit)
• Gonzaga:  Debra Stephens (Justice, Washington Supreme Court)
• Hamline:  Lucinda Jesson (Commissioner, Minnesota Department of Human Services)
• Harvard:  Eric Holder (Attorney General, United States)
• Hawaii:  David A. Ezra (Judge, U.S. District Court for the District of Hawaii)
• Houston:  Alan Crain (Vice President & General Counsel, Baker Hughes)
• Idaho:  Roger Burdick (Chief Justice, Idaho Supreme Court)
• Illinois:  Edward Walters (CEO, Fastcase)
• Indiana-Bloomington:  David Carden (U.S. Ambassador, Association of Southeast Asian Nations)
• Indiana-Indianapolis:  Patricia McGowan Wald (Former Chief Judge, U.S. Court of Appeals for the D.C. Circuit)
• Iowa:  Donald Verrilli (Solicitor General, United States)
• John Marshall (Atlanta):  Lawrence Lessig (Professor, Harvard Law School)
• Kentucky:  William Robinson (President, ABA)
• Lewis & Clark:  Neal Katyal (Professor, Georgetown University Law Center)
• Louisville:  Lisabeth Hughes Abramson (Justice, Kenntucky Supreme Court)
• Loyola-L.A.:  Margaret McKeown (Judge, U.S. Court of Appeals for the Ninth Circuit)
• LSU:  Bennett Johnston (Former Member, U.S. Senate)
• Maryland:  Thomas Sager (Vice President & General Counsel, DuPont)
• Mercer:  Jim Petro (Chancellor, Ohio Board of Regents)
• Michigan:  Eric Holder (Attorney General, United States)
• Michigan State:  Richard Cordray (Director, U.S. Consumer Financial Protection Bureau)
• Minnesota:  Al Franken (Member, U.S. Senate)
• Mississippi:  William Winter (Governor, Mississippi)
• Montana:  William Neukom (Former Chief Legal Officer, Microsoft; Founder, World Justice Project)
• Nebraska:  Jeffrey Toobin (Analyst, CNN)
• New England:  Howard Dean (Former Governor, Vermont) 
• New Hampshire:  John Lewis (Member, U.S. House of Representatives)
• New York:  Kenneth Feinberg (Founder & Managing Partner, Feinberg Rozen, New York)
• North Carolina:  Eric Holder (Attorney General, United States)
• North Carolina Central:  Warren Ballentine (Radio Talk Show Host)
• North Dakota:  Gerald VandeWalle (Chief Justice, North Dakota Supreme Court)
• Notre Dame:  G. Robert Blakey (Professor, Notre Dame Law School)
• Northeastern:  Jacqueline Berrien (Chair, U.S. Equal Employment Opportunity Commission)
• Northwestern:  Jerry Reinsdorf (Owner, Chicago Bulls and Chicago White Sox)
• NYU:  Anthony Foxx (Mayor, Charlotte, North Carolina)
• Ohio Northern:  Yvette McGee Brown (Justice, Ohio Supreme Court)
• Oklahoma:  James Gallogly (CEO & President, LyondellBasell Industries)
• Oklahoma City:  John Norman (Partner, Norman & Edem, Oklahoma City)
• Oregon:  Garrett Epps (Professor, University of Baltimore School of Law)
• Pace:  Andrew Carter, Jr., (Judge, U.S. District Judge for the Southern District of New York)
• Pennsylvania:  Rudy Giuliani (Mayor, New York)
• Penn State:  Thomas Vanaskie (Judge, U.S. Court of Appeals for the Third Circuit)
• Pepperdine:  Tim Perrin (Vice Dean, Pepperdine University School of Law; Incoming President, Lubbock Christian University)
• Quinnipiac:  Lubbie Harper Jr. (Justice, Connecticut Supreme Court)
• Regent:  Michele Bachmann (Member, U.S. House of Representatives)
• Richmond:  Roger Gregory (Judge, U.S. Court of Appeals for the Fourth Circuit)
• Roger Williams:  Jack Weinstein (Judge, U.S. District Court for the Eastern District of New York)
• Rutgers-Camden:  Theodore McKee (Chief Judge, U.S. Court of Appeals for the Third Circuit)
• Rutgers-Newark:  Paul Fishman (U.S. Attorney, New Jersey)
• San Diego:  David Camp (Member, U.S. House of Representatives)
• San Francisco:  Goodwin Liu (Justice, California Supreme Court)
• Seton Hall:  Ryan Crocker (U.S. Ambassador to Afghanistan)
• SMU:  Robert H. Dedman, Jr., (Founder & CEO, ClubCorp)
• South Dakota:  Judith Meierhenry (Retired Justice, South Dakota Supreme Court)
• Southern Illinois:  Sheila Simon (Lieutenant Governor, Illinois)
• St. John's:  Eugene Orza (former Chief Operating Officer, Major League Baseball Players Association)
• St. Mary's:  Nelson Wolff (Judge, Bexar County, Texas)
• Stetson:  Nieva Brock (Staff Judge Advocate, Naval Criminal Investigative Service)
• SUNY-Buffalo:  Martha Minow (Dean, Harvard Law School)
• Syracuse:  Dan Quayle (Former Vice President, United States)
• Texas:  Joseph Jamail (Founding Partner, Jamail & Kolius, Houston)
• Tennessee:  Ray Mabus (Secretary, U.S. Navy)
• Texas Tech:  Robert Black (President, Texas Bar Association)
• Thomas Jefferson:  Barry Hill (Senior Counsel, EPA)
• Tulane:  Reginald Davis (Vice President & General Counsel, Zynga Gaming Network)
• Tulsa:  Steadman Upham (President, Tulsa University)
• UC-Berkeley:  Kamala Harris (Attorney General, California)
• UC-Davis:  Goodwin Liu (Justice, California Supreme Court)
• UC-Hastings:  Jeff Adachi (Public Defender, San Francisco)
• UC-Irving:  Harry T. Edwards (Judge, U.S. Court of Appeals for the District of Columbia Circuit)
• UCLA:  Chai Feldblum (Commissioner, U.S. Equal Employment Opportunity Commission)
• USC:  Goodwin Liu (Justice, California Supreme Court)
• Utah:  Deborah Dugan (CEO, (RED))
• Valparaiso:  Roberta Lang (General Counsel & Global Vice President of Legal Affairs, Whole Foods)
• Vermont:  Paul Reiber (Justice, Vermont Supreme Court)
• Villanova:  Seth Williams (District Attorney, Philadelphia)
• Virginia:  Neal Katyal (Professor, Georgetown University Law Center)
• Washington & Lee:  Linda Klein (Chair, ABA House of Delegates)
• Washington U.:  Mike Peters (Editorial Cartoonist, Mother Goose & Grimm)
• Western New England:  Barbara Lenk (Justice, Massachusetts Supreme Judicial Court)
• Whittier:  Stephen Zack (Former President, ABA)
• Widener:  Christopher Coons (Member, U.S. Senate), William Nettles (U.S. Attorney, South Carolina)
• William & Mary:  John Charles Thomas (Former Justice, Virginia Supreme Court)
• William Mitchell:  Stephen Bonner (President & CEO, Cancer Treatment Centers of America)
• Willamette:  Carlos Moreno (Former Justice, California Supreme Court)

The Tax Treatment of Computer Software

Jeffrey A. Maine (Maine) & Xuan-Thao Nguyen (SMU), Taxing Facebook Code: Debugging the Tax Code and Software, 60 Buff. L. Rev. 1 (2012):

This article sets out to analyze both intellectual property laws and tax systems as applied to computer software. It analyzes software within intellectual property's established doctrinal framework, a difficult task due to the fact that software can encompass some combination of the traits of copyrights, trade dress, patents, and trade secrets. It then examines both the federal and state tax systems governing software. It shows that fitting software within current tax schemes presents unique challenges, as software contains both tangible and intangible elements, is subject to varying intellectual property protections, and can be delivered through various media. The article argues that there are a number of incongruous tax distinctions for software that are theoretically and analytically unsatisfactory. The article also points out certain flaws in the design of several tax preferences for software.

The § 162(m) Compensation Deduction Cap

Cristopher D. Jones (LL.M. (Tax) 2012, Georgetown), The Million-Dollar Question: Has Congress Missed the Mark with I.R.C. § 162(m) Compensation Deduction Caps?:

Between 1980 and 2010, chief executives went from earning forty-two times what blue-collar employees earned to 343 times median workers’ pay. In that same period, the median American household income increased only modestly, from $44,616 in 1980 to $49,445 in 2010. Theories abound as to why the disparity between executive and worker pay has grown so dramatically and whether that growth is justified. But Americans of all stripes have called for Congress to address the disparities between executive and worker pay.

In 1993, Congress partly addressed this issue by enacting a tax provision, § 162(m), that limits to $1 million the tax deductions that publicly-traded companies can get when they pay certain executives. This was not Congress’s first, or last, word on the subject. In fact, Congress enacted new restrictions in response to the more recent financial and healthcare crises. But § 162(m) has been Congress’s clearest effort to actually cap executive compensation using the Internal Revenue Code.

Sixteen years after its enactment, can we say that the $1 million deduction limitation works and that the Code is the best vehicle for Congress’s efforts to control executive pay? Drawing from a wide range of sources, this paper examines the § 162(m) limitation and explore whether the law achieves its intended result. To add context, it surveys other tax laws that restrict compensation deductions, like the § 286G tax deduction limits for “Golden Parachute” payments, the $500,000 deduction limit on compensation paid to executives at companies that received the largest Troubled Asset Relief Program (TARP) bailouts, and the Patient Protection and Affordable Care Act's (PPACA's) $500,000 deduction limit on compensation payments. It also examines the Dodd–Frank Wall Street Reform and Consumer Protection Act disclosure requirements and Congress's retreat from that regime in the Jumpstart Our Business Startups (JOBS) Act. Upon closer examination, it becomes clear that § 162(m) is less effective than letting shareholders have a binding say over how much companies pay their executives.

Dodge: Deconstructing Haig-Simons Income

Joseph M. Dodge (Florida State), Deconstructing Haig-Simons Income and Reconstructing It as Objective Ability-to-Pay Income:

The Haig-Simons concept of income has for roughly fifty years been a gold standard of income tax theory and policy discussion. This article argues that the classic Haig-Simons formulation of personal income, which consists of an individual’s consumption plus net increases in wealth for the taxable year, could not be maintained by Simons himself, is contrary to fundamental political values, is unnecessary, and is inferior to an objective ability-to-pay realization personal income tax. Specifically, the Haig-Simons concept simply gets it wrong insofar as it posits that consumption is an independent category of income. That leaves “consumption” as a deduction-disallowance principle, but in that respect the concept is ambiguous and insufficient. Finally, the notion of “changes in wealth” hasn’t made headway, due to the persistence of the realization principle. The problems attending the Haig-Simons income concept, as well as Simons’ goal of designing a redistributive tax, are resolved under an objective ability-to-pay personal income concept.

Part I uncovers the basic ambiguity as to the role of “consumption” under the Haig-Simons concept of income, and demonstrates that consumption under the Haig-Simons concept should not be interpreted as a gross income principle. Thus, imputed income (and other intangible benefits received) are not properly viewed as gross income in the tax sense. Instead, consumption is merely a deduction-disallowance principle, and an insufficient (or incomplete) one at that. Part II discusses normative criteria underlying an income tax that point towards an objective ability-to-pay realization personal income tax. The notion of objective ability to pay is an internal-to-tax tax fairness norm that is constructed from the ground up by considering the role of taxation (in a liberal society) to raise cash revenue in an annual budget cycle. It also happens that an ability-to-pay personal income tax can, itself perform a mildly redistributive function. (Incidentally, it is argued in this part that indexing of basis is improper from a tax fairness perspective.) Part III follows with an outline of basic features of such a tax. Some controversial points raised in Part III include abolition of the accrual method of tax accounting, disallowing depreciation deductions, and a thorough revamping of the tax treatment of borrowing.