TaxProf Blog

The Legal Whiteboard

I am thrilled to welcome The Legal Whiteboard: Trends, Facts and Ideas on Law and Legal Education, edited by Bill Henderson (Indiana) and Andy Morriss (Alabama), to our Law Professor Blogs Network. From Bill's inaugural post:

According to a lot of reputable media outlets, the sky is falling for both legal education and legal services. I understand the basis for this conclusion. A lot of lawyers, young and old, are unemployed or underemployed. The debt loads of graduating students are staggering. The established “brand” law firms are doing something they have never done before—shrink, or at least not grow. This puts lawyers on edge and has a tendeny to spawn unhealthy, short-sighted behavior. The federal government, through the direct lending of the Department of Education, continues to fuel the lawyer production machine. So things may get worse before they get better.

Despite the fact that I am one of the go-to people on the speaker circuit when it comes time to talk about structural change, I am not in the sky-is-falling camp. Instead, I see a lot of opportunities for lawyers, law students and legal educators to do very important and creative work. What is most exciting about this work is that it will make society better off—law will become better, faster and cheaper. Many legal services will become more standardized, productized and commoditized. I realize that these words will rankle some of the old guard, particularly those still making a good living. But clients—including corporations, government and ordinary citizens—will love it. Professional ideals will remain the cornerstone of successful legal enterprises, but denying the exigencies of the marketplace is, to my mind, unprofessional.

Because clients and society want better, faster and cheaper law, I believe lawyers (including legal educators) have a professional duty to ardently pursue this goal. The hardest part of this assignment—and the most vexing and interesting—is how to parlay this transformation into a decent living. 

Many people assume that the new paradigm means lawyers working longer hours for lower wages. That is one future business model. But I think it utterly lacks imagination. Lawyers are problem solvers. To my mind, the growing price elasticity for legal services and legal education is just a very difficult problem. And whenever I am faced with a very difficult problem, I typically start writing out my thoughts on a massive whiteboard. (I am told it is quite a spectacle to behold.) I am also someone who loves to collaborate. With an outward facing Legal Whiteboard, I am hoping to elicit the genius of my fellow travelers.

Lederman Presents Measured Tax Enforcement Today at Miami

Leandra Lederman (Indiana-Bloomington) presents Measured Tax Enforcement (with Ted Sichelman (San Diego)) at Miami today as part of its Speaker Series:

Governments rely largely on tax revenues. Traditional economic models of tax compliance typically assume that it is in the government’s best interest to maximize the amount of tax due that it actually collects. In these models, enforcement is costly and imperfect, and the resulting “probabilistic” enforcement scheme is assumed to decrease social welfare by reducing overall tax revenues. More recent models suggest that the negative effects of imperfect enforcement may be less pernicious than previously believed. Yet, like the early models, the newer models often assume that perfect enforcement remains the ideal, and turn upon taxpayer risk-aversion or apply only in narrow circumstances. We show that even if perfect enforcement were costless, it would not always be socially optimal. Specifically, when uniform tax laws are suboptimal, and the legislative or regulatory costs of differentiated lawmaking are high, the enforcement agency can create de facto changes in the substantive law by raising or lowering (i.e., “measuring”) its overall level of enforcement in specific contexts. Importantly, by fostering a suitable level of noncompliance, measured enforcement can increase overall social welfare by reducing deadweight losses, while maintaining or increasing tax revenues in a wide variety of circumstances. This result does not depend on the risk profile of the taxpayer. Moreover, the benefits from measured enforcement cannot be easily replicated by traditional modifications to the tax laws, such as adjustments to the rate schedule or base of a given tax. As such, measured tax enforcement potentially offers substantial benefits that cannot be readily obtained otherwise.

Howard Abrams Named Dean Finalist at Emory

Tax Prof Howard Abrams has been named a Dean Finalist at Emory, along with Robert Schapiro and Frank Vandall. From The Faculty Lounge:

Emory Law announced its dean search on Jaunary 12, 2012 with a call for nominations of tenured Emory faculty. Based on the timeline set out in this document, it's not even clear the committee was considering outside candidates at all. Indeed, the committee has apparently already identified three finalists -- all from the existing Emory faculty and one the current interim dean. There's nothing wrong with doing an internal dean search; it's just unusual for a search committee to be so open about it.

When Higher Marginal Tax Rates Helped the Economy

Nicholas Paleveda (CEO, National Pension Partners; Adjunct Professor, Northeastern Graduate Tax Program), Professor Paleveda's Paradox: When Higher Marginal Tax Rates Helped the Economy:

This paper reviews the time where higher marginal tax rates actually helped the economy. In some cases lowering the marginal tax rate, the economy did not improve. An optimal tax rate is also suggested

Walker: A Tax Response to the Executive Pay Problem

David I. Walker (Boston University), A Tax Response to the Executive Pay Problem:

Many observers believe that that the public company executive labor market is deficient and results in systematically excessive compensation. This Article accepts that premise and considers potential regulatory responses. Specifically, this Article proposes and analyzes a two-pronged tax response to the problem of excessive executive pay – the imposition of a surtax on executive pay in excess of a threshold combined with investor tax relief. These two prongs respond to the chief concerns raised by excessive executive pay. The imposition of a surtax would reduce the after-tax income of executives, which would directly address the unfairness of excessive pay and the effect of excessive pay on inequality of resources. Investor tax relief would tend to reverse the inefficient distortion in capital allocation that results from excessive pay and would ensure that these distortions were not exacerbated by companies increasing executive pay to offset the surtax.

Kollman and the IRS's Power Over a Taxpayer's Method of Accounting

Deborah K. Jones & Albert D. Spalding Jr. (both of Wayne State University, School of Business Administration), Finding the Outer Limits of IRS Accounting Discretion: The Kollman Case, 4 Acc't & Tax'n 109 (2012):

The statutory language of the Internal Revenue Code gives cognizance to the methods of accounting used by taxpayers for their financial reporting. The 1979 U.S. Supreme Court opinion of Thor Power acceded to the IRS a significant amount of discretion in its attempt to require taxpayers to change and adapt their accounting methods to its satisfaction. In particular, the Commissioner's seemingly absolute authority to prohibit lower of cost or market inventory valuation was upheld. Until the recent Tax Court decision in the case of United States v. Kollman, in fact, there were few guidelines that helped to delineate the outer limits of the IRS’s discretion in demanding taxpayer adherence to its preferred tax accounting methods. This paper considers how the parameters for a taxpayers’ ability to challenge this discretion have been significantly clarified, if not changed, by the Kollman case. We discuss the clear reflection of income doctrine as it has evolved over time and examine the impact of recent judicial decisions – especially Kollman – on this standard and consider whether or not there is need for revision on the law in this area. We conclude that the Commissioner’s authority to arbitrarily require specific methods of accounting is in fact limited, and that the Kollman case serves as a helpful marker of the outer limits of such authority.

Olivas: Ask Not For Whom The Law School Bell Tolls

Michael Olivas (Houston; President, AALS), Ask Not For Whom The Law School Bell Tolls:

It is a fact universally acknowledged that law faculty are in want of purpose. It takes a lot to get us riled, and even more to call us to the barricades. But the current state of financing legal education is just such a burning theater, and we all should be troubled by the fast-churning events. Because most of us went to law school during the Golden Age, which I situate as having ended about five years ago at the top of the application apex and the height of the modern-day job markets for law graduates, most of us are blissfully unaware of recent developments that literally threaten the enterprise. I write to discuss these many moving parts and to call us to action as a community, for threats to the universe of legal education will affect us all to our collective detriment....

[A]ll of us similarly have a dog in this fight of cost containment and in making legal education accessible and affordable to our students. We cannot simply hope that the problems will resolve themselves. We have erected a substantial system of training lawyers, one that is a spectacular success by any measure, notwithstanding the cracks in the infrastructure. We all need to keep up with these developments, counter challenges to our existence, and work harder to explain why our system is worth saving at its core. We also need to do a better job of explaining the large role of lawyers in the world society, not only as technicians with attention to detail but as defenders of important core values and democratic principles. I do not view the migrating role of lawyers to civilian life across non-law fields as evidence of our declining competence, as some commentators have in analyzing legal employment figures, but rather this as robust evidence of the growing value of being a lawyer and applying our skills to the many societal problems in need of our multifaceted talents. It is no accident that a disproportionate number of lawyers serve in business enterprises, as well as in positions of governmental leadership and civic participation, giving generously of our time and talent.

Perhaps most importantly, we need to be cheerleaders for legal education writ large and our way of life, and to be critics that hold it to high standards. In many countries, law faculty are entirely part-time, and widespread student access is limited by a filter of counterproductive and inefficient attrition. This is not the path we have chosen, and it is our glory. At the least, we should not weaken our chosen profession by inattention, avarice, or acrimony. Speaking out against lawyers is an ugly habit, yet I have witnessed law teachers do it in public venues. Others will attempt to diminish both the rule of law and its means of transmission, so we need not add to this chorus. We should not belittle law’s accomplishments, just as we should not overlook its weaknesses or inefficiencies or inequities. The bell will toll for all of us, even if we do not always hear its loud peals.

Stone: Lessons From the Energy Crisis

In celebration of the 40th anniversary of the publication of its inaugural issue, Tax Notes is re-publishing memorable articles from its archives. Lawrence M. Stone (UC-Berkeley), Lessons From the Energy Crisis, 134 Tax Notes 431 (Jan. 23, 2012):

This article was originally published on July 22, 1974. Lawrence M. Stone was a professor at the University of California, Berkeley, a partner in the Los Angeles firm Irell & Manella LLP, and a member of the IRS commissioner's advisory group. During his career, he served as tax legislative counsel in Treasury's Office of Tax Policy and on the president's nominating commission for appointments to the U.S. Tax Court. Stone argued that tax policies regarding the oil and gas industry contributed heavily to the energy crisis of the early 1970s and he presented proposals for how Congress could pare back or eliminate some of those benefits.

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NY Times' David Segal: 'Business of Law Schools Is Crazy'

• Is Law School a Losing Game? (Jan. 9)
• Law Students Lose the Grant Game as Schools Win (May 1)
• Law School Economics: Ka-Ching! (July 17)
• What They Don’t Teach Law Students: Lawyering (Nov. 20)
• For Law Schools, a Price to Play the ABA's Way (Dec. 18)

(Hat Tip: Volokh Conspiracy.)

The Case Against the Tax Exception to the Six-Year Bar on Claims Against the Government

Adam R.F. Gustafson (Law Clerk, Judge Janice Rogers Brown, U.S. Court of Appeals for the D.C. Circuit), An “Outside Limit” for Refund Suits: The Case Against the Tax Exception to the Six-Year Bar on Claims Against the Government, 90 Or. L. Rev. 191 (2011):

Longstanding judicial precedent and the official position of the IRS agree that federal tax refund suits are limited only by the two-year statute of limitations of § 6532(a)(1) of the Internal Revenue Code, which is triggered only when the IRS mails the claimant a notice of disallowance. This Article contends that tax refund litigation is also governed by the six-year limitation of 28 U.S.C. § 2401(a) on “every civil action commenced against the United States,” which is triggered upon the accrual of a claim. The Supreme Court alluded to this dual- limitation scheme in 2008 in United States v. Clintwood Elkhorn Mining Co., stating in dicta that the six-year bar places an “outside limit” on the tax-specific limitation.

Applying the six-year bar as a backstop to tax refund suits would enforce its plain meaning, would accord with multiple canons of statutory construction, would promote timely resolution of tax refund claims, and would bring tax refund litigation into line with the rest of federal claims jurisprudence, thereby eliminating one manifestation of the tax exceptionalism that the Supreme Court criticized last term in Mayo Foundation for Medical Education & Research v. United States.

Even while abandoning its tax-exceptional doctrine, the IRS may be able to soften the blow to potential claimants’ reliance interests by systematically granting extensions of the limitation period pursuant to § 6532(a)(2). This would buy time for attentive taxpayers to file suit while putting future claimants on notice that they must pursue their claims in court within six years of accrual.

An Empirical Analysis of the Tax Gap

Richard Cebula (Jacksonville University, Davis College of Business) & Edgar L. Feige (University of Wisconsin), America’s Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S.:

This study empirically investigates the extent of non compliance with the tax code and the determinants of federal income tax evasion in the U.S. Employing the most recent data we find that 18-19% of total reportable income is not properly reported to the IRS, giving rise to a “tax gap” approaching $500 billion dollars. Three time periods are studied, 1960-2008, 1970-2008, and 1980-2008. It is found across study periods that income tax evasion is an increasing function of the average effective federal income tax rate, the unemployment rate, public dissatisfaction with government, and per capita real GDP (adopted as a measure of income), and a decreasing function of the Tax Reform Act of 1986 (during its first two years of being implemented). Modest evidence of a negative impact of IRS audit rates on tax evasion is also detected.

Barnes Presents Political Fragmentation and Taxation Today at Indiana

Lucy Barnes (Nuffield College, Oxford University) presents When Does Tax Reform Occur and What Shapes its Distributional Effects? Coalition Politics in the United States at Indiana-Bloomington today as part of its Tax Policy Colloquium Series hosted by Ajay Mehrotra:

What explains variation in the progressivity of taxation across countries andover time? Most existing explanations highlight the relationship between spending levels and the structure of tax- ation, arguing that the efficiency constraints associated with larger government size lead to less progressive tax structures. However, this literature overlooks the political determinants of tax policy choices. Thus I consider the role that political parties play in determining the progressiv- ity of taxation, testing the `conventional wisdom' that left parties should adopt more progressive stances than right against theories highlighting credible commitment which suggest the opposite (Timmons 2010). However, these results are inconsistent with the partisan evolution of tax structures within countries (rather than between them).

Given the systematic association of left governments with dierent electoral systems and thus types of government, I investigate whether it is these dierences driving the cross-national asso- ciations. Detailed case studies of the United States, United Kingdom and France at the origins of modern taxation (1890 - 1914) reveal that the degree of political fragmentation -- manifested in both multiparty parliamentary systems and coalition governments -- affects the structure of taxation. Greater political fragmentation leads to less progressive systems of taxation. Combined with the large literature on the eect of fragmentation in generating larger welfare states, this implies that in addition to the direct economic link between larger welfare states and regressive tax structures, there is also a link that stems from their common political causes.

WSJ: The Buffett Tax Ruse

Wall Street Journal editorial, The Buffett Ruse: Obama's Ploy Means the Highest Capital Gains Tax Rate Since 1978:

Remember the moment in 2008 when Charlie Gibson of ABC News asked Senator Barack Obama why he would support raising the capital gains tax even though "revenues from the tax increased" when the rate fell? Mr. Obama's famous reply: "I would look at raising the capital gains tax for purposes of fairness." Well, we were warned. ...

Here we are four years later, and President Obama on Tuesday night ... endorsed the political ruse he calls the Buffett rule, which asserts as a matter of moral principle that millionaires should not pay a lower tax rate than middle-class wage earners. Specifically, Mr. Obama is proposing that anyone earning more than $1 million pay at least 30% of that income to Uncle Barack.

The White House says that if a millionaire household's effective tax rate falls below 30%, it would have to pay a surcharge—in essence a new Super Alternative Minimum Tax—to bring the tax liability to 30%. For those facing this new Super AMT, all deductions and exemptions would be eliminated except for charity.

The Buffett rule is rooted in the fairy tale that taxes on the wealthy are lower than on the middle class. In fact, the Congressional Budget Office notes that the effective income tax rate of the richest 1% is about 29.5% when including all federal taxes such as the distribution of corporate taxes, or about twice the 15.1% paid by middle-class families. ...

[W]ealthy tax filers make most of their income from investments. Such income is taxed once at the corporate rate of 35% and again when it is passed through to the individual as a capital gain or dividend at 15%, for a highest marginal tax rate of about 44.75%.

This double taxation is one reason the U.S. has long had a differential tax rate for capital gains. Another reason is because while taxpayers must pay taxes on their gains, they aren't allowed to deduct capital losses (beyond $3,000 a year) except against gains in the current year. Capital gains also aren't indexed for inflation, so a lower rate is intended to offset the effect of inflated gains.

One implication of the Buffett rule is that all millionaire investment income would be taxed at the shareholder level at a minimum rate of 30%, up from 15% today. The tax rate on investment income from corporations would rise to 54.5% from 44.75%, a punitive tax on start-up or expanding businesses.

The new 30% capital gains rate would be the developed world's third highest behind only Denmark and Chile. ...

Mr. Obama isn't setting himself apart merely from conservatives with this Buffett ploy. He is rejecting 35 years of bipartisan tax policy that began with the passage of the Steiger Amendment by a Democratic Congress that cut the capital-gains rate to 28% from 35% in 1978. As the nearby chart shows, the rate has never since risen above 28%, and the last time it moved that high was in 1986 as part of the Reagan-Rostenkowski tax reform that also cut the top marginal income tax rate to 28% from 50%.

A decade later Bill Clinton agreed to cut the rate back to 20% as part of the balanced-budget deal with Newt Gingrich. Capital gains revenues soared, helping to balance the federal budget. Nearly every study estimates that the revenue-maximizing tax rate from the capital gains tax is between 15% and 28%. Doug Holtz-Eakin, the former director of the Congressional Budget Office, says that a 30% tax rate "is almost surely above the rate that maximizes tax revenues." So it's likely the Buffett trick would lose revenue for the government.

Yet in a time of the highest deficits since World War II, Mr. Obama wants to double the capital gains tax rate even as he raises the top income-tax rate to 42% or so. Mr. Obama really is taking us back to the worst habits of the 1970s. And not because he thinks higher rates will raise revenue, but merely so he can score points against Mitt Romney and stick it to the successful.

This isn't tax fairness. It's tax folly.

Morse: Important Developments in Federal Income Tax (2010-11)

Edward A. Morse (Creighton), Important Developments in Federal Income Tax (2010-11):

This outline covers significant developments in federal income taxation along with related topics that the author finds interesting, curious, or worthy of comment. It is not intended to provide exhaustive coverage, but it offers a selective treatment of items likely to interest practitioners and advisers within a broad range of professional practices. Information discussed includes events from the prior year through November 14, 2011.

Gutting: The Meaning of 'Limited Partner' in the Internal Revenue Code

Kristin Balding Gutting (Charleston), Keeping Pace with the Times: Exploring the Meaning of Limited Partner for Purposes of the Internal Revenue Code, 60 U. Kan. L. Rev. 89 (2011):

This article explores the use of the term “limited partner” within the passive loss rules of § 469 and the corresponding Treasury Regulations in light of the always changing business environment. The passive loss rules of § 469 turn on whether a taxpayer materially participated in the loss generating activity. The preferential nature of several Code provisions turns on whether a person is a limited partner, the majority of these references being codified within the Code prior to the creation of many new types of entities, including the LLLC, the LLP, and the LLLP (collectively referred to as a Limited Liability Entities). The term was placed in to the Code when the only entities taxed as partnerships were general partnerships and limited partnerships. At such time, a limited partner was essentially prohibited from participating if the limited partner wanted to maintain his limited liability status. However, this article asserts that in today’s business environment, a trend is developing where the distinctions between an individual’s ability to participate in Limited Liability Entities and maintain limited liability has become blurred. Under the special rule of § 469(h)(2), if a taxpayer is a limited partner, deducting certain losses is subject to more stringent rules. For almost twenty years, the IRS has been asserting in audits that an interest in Limited Liability Entities should be treated as a limited partner for applying § 469. In late 2009, however, the Tax Court held that an LLC member and an LLP partner were not limited partners for purposes of the passive loss rules. Shortly thereafter, the Court of Federal Claims reaffirmed that for purposes of the passive losses rules LLC members were not limited partners. The Court of Federal Claims, nevertheless, did not address the application of § 469(h)(2) to an LLP. Accordingly, it is still unclear whether under § 469(h)(2) a partner in an LLP and/or an LLLP is considered a limited partner. Essentially, this has led to the belief by scholars and practitioners that the issue is resolved concerning an LLC. Yet, in December 2010, the Service commented that it would issue guidance in this area. Furthermore, both the Tax Court and the Court of Federal Claims hinted that the Service could amend the Treasury Regulations to explicitly include Limited Liability Entities as being subject to the more stringent rule of § 469(h)(2). This article proposes that the Service should not amend the regulation, but, instead Congress should revoke § 469(h)(2), as in today’s business world there has been a change of circumstances, and the Code must advance to keep pace with the times.

Brown: An Equity-Based, Multilateral Approach for Sourcing Income Among Nations

Fred B. Brown (Baltimore), An Equity-Based, Multilateral Approach for Sourcing Income Among Nations, 11 Fla Tax Rev. 565 (2011):

The source of income rules used in the United States and elsewhere in large part establish the contours of tax jurisdiction exercised by countries. The source rules play a vital role in the foreign tax credit system applicable to U.S. persons with foreign investment or business activities. The source rules also play a central role in the United States’ exercise of source taxation over foreign persons with U.S. businesses or investments. Other countries likewise use source rules or their equivalent in applying foreign tax credit or territorial systems to their residents and exercising source taxation over nonresidents.

The current approach for sourcing income suffers from two related problems. First, the source rules lack coherence in that they fail to advance a consistent normative tax policy. More fundamentally, the rules fail to reflect the consistent application of the key principle appropriate for allocating nations’ primary taxing rights – namely, the benefits principle. The second problem is the variation in the source rules used worldwide. This may produce double taxation or non-taxation.

This article addresses both of these problems by offering an approach for sourcing income that has the potential for being adopted by countries on a multilateral basis. The article develops an equity-based standard for sourcing that would allow for the derivation of source rules for various types of income. The core idea underlying the proposed sourcing standard is the benefits principle: income should be sourced to the country that provides the taxpayer with significant governmental benefits related to the income. Specifically, the article develops a standard that would devise source rules by evaluating the source of income on the basis of three factors: the destination of the services, property or capital giving rise to income; the location(s) of the activities giving rise to income; and the residence of the person receiving income. Based on this evaluation, the rule for a given type of income may divide the source of the income among multiple locations. By basing the source rules on an equity-based standard that allows source to be divided when appropriate, this article seeks to rationalize and harmonize the provisions used to source income for purposes of taxing cross-border investment and business activities.

2012 Business Tax Climate: Chilliest in Blue States

The Tax Foundation yesterday released the 2012 State Business Tax Climate Index (9th ed.) which ranks the fifty states according to five indices: corporate tax, individual income tax, sales tax, unemployment insurance tax, and property tax. Here are the ten states with the best and worst business tax climates:

1	Wyoming	41	Iowa
2	South Dakota	42	Maryland
3	Nevada	43	Wisconsin
4	Alaska	44	North Carolina
5	Florida	45	Minnesota
6	New Hampshire	46	Rhode Island
7	Washington	47	Vermont
8	Montana	48	California
9	Texas	49	New York
10	Utah	50	New Jersey

Interestingly, all ten of the states with the worst business tax climates voted for Barack Obama in the 2008 presidential election, and five of the ten states with the best business tax climates voted for John McCain (and eight of the ten voted for George Bush in 2004).

Pew, TPC Analyze Graetz VAT Plan

The Pew Charitable Trusts and the Tax Policy Center yesterday released Using a VAT to Reform the Income Tax (Executive Summary):

A sweeping reform of the federal tax system has been proposed by Michael J. Graetz, Professor Emeritus of Law at Yale University and currently Professor of Law at Columbia University. The proposal is intended to simplify the tax system, improve economic incentives, and maintain fairness. To achieve these goals, Graetz’s plan would remove most current taxpayers from the income tax rolls, reform the corporate income tax, significantly reduce the top individual and corporate rates, and adopt a value-added tax (VAT) as the principal tax paid by most Americans. Payroll, estate and gift taxes would not change.

This paper describes the Graetz proposal in detail and analyzes its effects on federal revenues, spending and the deficit, the distribution of the tax burden, marginal tax rates and other incentives, and the tax system’s administrative and compliance costs. The proposal is analyzed relative to the Tax Policy Center Current Policy Baseline, which assumes permanent extension of the 2001, 2003, and 2010 tax cuts (except for the one-year payroll tax reduction), continuation of the 2011 AMT exemption amounts (indexed for inflation) and extension of the 2011 estate tax exemption of $5 million (indexed for inflation) and top rate of 35%. The analysis assumes the proposal will be effective in 2015 and be deficit neutral. ...

TPC found that fully implementing a VAT in 2015, with a corporate income tax rate of 15%, that leaves both the deficit and the distribution of the tax burden among income groups substantially unchanged would require:

• A broad-based VAT with a rate of 12.3%
• A marginal income tax rate of 16% for single filers making between $50,000 and $100,000 and joint filers with incomes between $100,000 and $200,000
• A marginal income tax rate of 25.5% for single filers earning more than $100,000 and joint filers with income greater than $200,000

Warren Buffett's Secretary Likely Makes Between $200,000 - $500,000/Year

Forbes, Warren Buffett's Secretary Likely Makes Between $200,000 And $500,000/Year:

Warren Buffet’s secretary, Debbie Bosanek, served as a stage prop for President Obama’s State of the Union speech. She was the President’s chief display of the alleged unfairness of our tax system – a little person paying a higher tax rate than her billionaire boss.

Bosanek’s prominent role in Obama’s “fairness” campaign piqued my curiosity, and I imagine the curiosity of others. How much does her boss pay this downtrodden woman? So far, no one has volunteered this information.

We can get an approximate answer by consulting IRS data on tax rates by adjusted gross income, which would approximate her salary, assuming she does not have significant dividend, interest or capital-gains income (like her boss). ... The IRS publishes detailed tax tables by income level. The latest results are for 2009. ... Taxpayers earning adjusted gross incomes of $200,000 to $500,000, pay an average tax rate of nineteen percent. Therefore Buffet must pay Debbie Bosanke a salary above two hundred thousand.

Senate Holds Hearing Today on Taxation of Mutual Fund Commodity Investments

The Senate Permanent Subcommittee on Investigations holds a hearing today on Taxation of Mutual Fund Commodity Investments to examine the issuance of over 70 private letter rulings by the IRS allowing mutual funds to make unlimited indirect investments in commodities through controlled foreign subsidiaries or commodity-linked notes, despite longstanding statutory restrictions on mutual fund investments in commodities. (For more, see press release and letter from Sens. Coburn and Levin to IRS.)

• Douglas H. Shulman (Commissioner, IRS)
• Emily McMahon (Acting Assistant Secretary for Tax Policy, U.S. Treasury Department)

Update:  Bloomberg, IRS Should End Commodity Mutual-Fund Runaround, Levin Says

Jensen: The Individual Mandate and the Taxing Power

Erik M. Jensen (Case Western), The Individual Mandate and the Taxing Power, 134 Tax Notes 97 (Jan. 2, 2012):

This article, prepared for a symposium at the Salmon P. Chase College of Law, Northern Kentucky University, considers whether the Taxing Clause provides an alternative constitutional basis, as some have recently argued, for the individual mandate in the Patient Protection and Affordable Care Act of 2010 - the requirement, going into effect in 2014, that most individuals acquire satisfactory health insurance or pay a penalty. The article concludes that the Taxing Clause arguments are misguided. At best, the Clause can provide authority for the penalty, not for the mandate as a whole. Furthermore, the article questions whether the penalty will be a tax at all - if not, the Taxing Clause is obviously irrelevant - or, if it will be a tax, whether constitutional limitations on the taxing power will be satisfied. In particular, the article takes seriously whether the penalty might be a capitation tax, a form of direct tax that would have to meet an onerous apportionment rule to be valid. And the article argues that the penalty will not be a “tax on incomes” exempted from apportionment by the Sixteenth Amendment. The bottom line is this: relying on the Taxing Clause makes the analysis of the individual mandate more complicated than it needs to be, and the focus of constitutional analysis should return to where it has always belonged: the Commerce Clause.

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Jon Stewart on Mitt Romney's Tax Returns

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Buchanan Presents Lessons From the 2011 Debt Ceiling Standoff Today at Duke

Neil H. Buchanan (George Washington) presents When Constitutional Obligations Conflict: Lessons of the 2011 Debt Ceiling Standoff (with Michael C. Dorf (Cornell)) at Duke today as part of its Tax Policy Seminar hosted by Lawrence A. Zelenak:

The current successor to a federal statute first enacted in 1917, and widely known as the “debt ceiling,” limits the face value of money that the United States may borrow. Congress has repeatedly raised the debt ceiling to authorize borrowing to fill the gap between revenue and spending, but in the summer of 2011, a political standoff nearly left the government unable to borrow funds to meet obligations that Congress had affirmed earlier that very year. Some commentators urged President Obama to ignore the debt ceiling and issue new bonds, in order to comply with Section 4 of the Fourteenth Amendment, which forbids “question[ing]” “[t]he validity of the public debt.” Others responded that such borrowing would violate the separation of powers and therefore that the President instead ought to refuse to spend funds that Congress had appropriated. In the end, eleventh-hour legislation averted the crisis, at least for the moment, but absent a substantial political realignment, there is reason to believe that a similar standoff could occur again.

This Article analyzes the choice the President nearly faced in summer 2011, and which he or a successor may face again, as a “trilemma” in which he had three unconstitutional options: Ignore the debt ceiling and unilaterally issue new bonds, thus usurping congressional power to borrow money; unilaterally raise taxes, thus usurping congressional power to tax; or unilaterally cut spending, thus usurping congressional power to make spending decisions and arguably violating Section 4 of the Fourteenth Amendment as well. We argue that faced with this choice among unconstitutional options, the President should choose the “least unconstitutional” course—here, ignoring the debt ceiling. We argue further, though more tentatively, that if the bond markets would render such debt inadequate to close the gap, the President should unilaterally raise taxes rather than unilaterally cut spending. We then use the debt ceiling impasse to develop general criteria for political actors to choose among unconstitutional options. Although we offer no algorithm, we emphasize three guiding principles: 1) Minimize the unconstitutional assumption of power; 2) preserve, to the extent possible, the ability to undo or remedy constitutional violations; and 3) minimize sub-constitutional harm.

Raskolnikov: Accepting the Limits of Tax Law and Economics

Alex Raskolnikov (Columbia), Accepting the Limits of Tax Law and Economics:

This Article explores the limits of tax law and economics. The inquiry is comparative. The Article argues that outside of the tax context two pivotal insights account for the general success of law and economics in explaining and possibly shaping the law. First, accepting just a few fairly simple and plausible assumptions yields clear, intuitive, powerful and widely applicable policy prescriptions. Second, the normative strand of law and economics benefits greatly from a substantial similarity between several theoretically optimal legal regimes and the corresponding actual systems of rules and sanctions. Neither insight applies in the tax setting because the tax optimization problem is uniquely complex. The optimal tax system must account for the impossibility of deterring socially undesirable behavior, provide for redistribution, and accomplish all of that on the basis of assumptions that are laden with deeply contested value judgments, pervasive empirical uncertainty, or both. Given these challenges, it is hardly surprising that the welfarist theory has a much weaker connection to the content of our tax laws and their enforcement than it does to the content and enforcement of many other legal regimes. This weakness has a profound effect on the debates about the fundamental features of our tax system. It affects many familiar arguments about anti-avoidance rules and sanctions. And it extends to evaluating outright tax evasion. In sum, every aspect of tax policy is affected by the limits of tax law and economics. At the same time, accepting these limits shifts focus to several broad research agendas where tax law and economics will continue to yield invaluable contributions to the project of improving our tax system.

Capital Gains Tax Rates: 2012 v. 2013

From TaxVox Blog:

 

More on Mitt Romney's Tax Returns

• Atlanta Journal-Constitution, Romney’s Tax Returns Show Extent, Complexity of Wealth
• Linda Beale (Wayne State), Obama's State of the Union vs Romney's Tax Returns
• Chris Bergin (Tax Analysts), Romney’s Returns: Wrong Point
• Beltway Confidential, Romney Needs No Apology on Tax Returns
• Don't Mess With Taxes, Romney Releases 2010, 2011 Tax Returns
• Going Concern, What Are People Saying About Mitt Romney's Tax Returns?
• David Cay Johnston (Reuters), Tax Advice for Those Who Want to be Like Mitt
• Dan Shaviro (NYU), Romney's 2010 and 2011 Tax Returns
• L.A. Times, Romney Tax Returns Highlight Tax Code's Breaks for Rich
• TaxGrrrl, Romney's Tax Returns are Remarkably... Unremarkable
• Tax Lawyer's Blog, Pro-Tax Candidate John Kerry’s Tax Rate Lower Than Anti-Tax Candidate Mitt Romney’s
• Tax Update Blog, Mitt's 203-Page Tax Return
• Wall Street Journal editorial, Romney's Fair Share:  The Candidate's Tax Return Is an Argument for Tax Reform
• WSJ Total Return Blog, Mitt Romney’s Tax Return: Yes, the Rich Are Different

Mullane: Tax-Based Congressional Regulation of Executive Compensation

Joy Sabino Mullane (Villanova), The Unlearning Curve: Tax-Based Congressional Regulation of Executive Compensation, 60 Cath. U. L. Rev. 1045 (2011):

Congress has repeatedly enacted tax penalties on executive compensation, and threatens to continue doing so. Congress’s stated goals in enacting the various tax penalties were to rein in and shape executive compensation packages. Although each of the tax penalty provisions is superficially different in numerous ways, they ultimately operate in fundamentally the same manner. In each instance, the relevant provision aims to increase the after-tax cost of engaging in the targeted conduct. In theory, the increased costs would deter companies and their executives from engaging in those practices. However, time and time again, companies and their executives have shown Congress that they are immune or indifferent to the increased cost.

This Article considers why Congress continues to enact the same types of tax penalties on executive compensation, when such provisions are ineffective, inefficient, and inequitable. It explores, in particular, whether such legislation serves a meaningful instrumental or expressive function, as a possible justification for the repeated use of the tax system to attempt to influence executive compensation practices. It reveals that none of the various tax penalty provisions has a meaningful instrumental or expressive effect. They have, however, generated significant negative consequences. Accordingly, the Article concludes that the tax code is a particularly poor legislative tool for trying to regulate executive compensation practices, something Congress has seemingly failed to learn from its experiences in using the tax code. If Congress wants to effectively alter corporate and executive behavior, it needs to do something different than what has already been tried and failed.

President Obama Calls for 30% AMT on 'Millionaires and Billionaires'

In last night's State of the Union Address and accompanying Blueprint for an America Built to Last, President Obama proposed to "make sure millionaires and billionaires follow the Buffett Rule by paying at least 30% in income taxes."

• Bruce Bartlett (Financial Times)
• Linda Beale (Wayne State)
• Bloomberg
• Forbes
• L.A. Times
• David Leonhardt (New York Times)
• New York Times
• Politico
• TaxTV
• Wall Street Journal

The Coming Crash in Legal Education

Richard W. Bourne (Baltimore), The Coming Crash in Legal Education: How We Got Here, and Where We Go Now, 45 Creighton L. Rev. ___ (2012):

This paper will first track the ways in which the legal services market has grown and changed over the past forty years. It will then track the major changes that have attended legal education during the same period and the increasing dependence of the legal education industry on student debt. The paper will then explore why, at long last, the boom-times may have run their course and why, at some point, painful changes will likely occur. Though they cannot be described in detail, the author will attempt to outline the likely nature of the changes that will occur. Finally, the paper will briefly explore how the predicted reckoning may yet lead to an improvement in the marketing of legal services and an enhanced role for law schools in preparing new attorneys for the new bar they will be joining.

Mitt Romney's True Tax Rate: 44.75%

Wall Street Journal op-ed, Romney and the Burden of Double Taxation, by John Berlau & Trey Kovacs (both of the Center for Investors and Entrepreneurs, Competitive Enterprise Institute):

When double taxation of investment income is taken into account, Mr. Romney most likely underestimated his effective tax rate on the campaign trail. The former Bain Capital CEO and Massachusetts governor caused a brouhaha last week when he estimated the tax rate on his investment income at 15%. "How unfair!" pundits exclaimed, noting that the top marginal rate for wage income is more than 30%.

The tax rate on investors is unfair, but for the opposite reason. Our tax code layers taxation of dividends and capital gains on top of a top corporate tax rate of 35%—which even President Obama acknowledges is one of the highest in the world.

This is ironically the embodiment of the "corporate personhood" legal doctrine otherwise so decried by the left. The law taxes corporations as if they were separate beings from the shareholders who own them and then levies a separate tax on shareholder payouts and gains. This double taxation brings the effective tax rate on investment income to as much as 44.75%.

In other words, after the combined top tax rates hit $100 of corporate income, $55.25 remains for the investor. And this figure doesn't even include various state and local taxes, or the death tax. ...If the traditional disclosure of tax returns is elevated into a "teachable moment" about the burdens of double taxation, all Americans could be winners.

Grad School Scam

(Hat Tip: Above the Law.)

NYSBA Tax Section Panel: Tax Reform -- What’s All the Noise About?

Several Tax Profs spoke at yesterday's NYSBA Tax Section Annual Meeting on a panel on Tax Reform: What’s All the Noise About?:

• Steven A. Dean (Brooklyn) (Panel Chair)
• Joseph Bankman (Stanford)
• Michael Graetz (Columbia)
• Stephen Shay (Harvard)

Lawsky Presents How Models Work Today at Toronto

Sarah B. Lawsky (UC-Irvine) presents How Models Work at Toronto today as part of its James Hausman Tax Law and Policy Workshop Series:

Unlike many social and physical sciences, including economics, biology, and physics, legal scholarship includes little or no discussion of what models mean, how they are connected to the real world of law and policy, or how models should and should not be used by legal scholars and policymakers. This void exists notwithstanding legal scholarship’s increasing reliance on explicit modeling, including, for example, work in law and economics. This article uses the example of economic modeling in tax scholarship to investigate how legal scholarship uses models, and how models in legal scholarship work.

The article lays out a path between two extremes. At one extreme is scholarship that employs models without either reflection or self-consciousness to make real-world recommendations; on the other, scholarship that rejects models because their assumptions are too far from reality. I argue that neither approach is correct. Models are useful and important for legal scholarship, but not in the way that both critics and proponents seem to believe.

Drawing from literature in the philosophy of science, the article argues that we reason from models the same way that we reason from common law cases: through a mix of deductive and inductive logic, through leaps, creativity, and intuition. Models cannot provide certainty about what the law should be; rather, economic models are one kind of voice in an ongoing, necessarily inconclusive conversation. The article then uses this deeper understanding of models and modeling to propose ways that legal scholarship can and should use models.

Why Does Citibank, But Not the IRS, Treat Frequent Flyer Miles as Taxable Income?

Los Angeles Times, Citibank Deems Frequent-Flier Miles Taxable, but Does the IRS?, by David Lazarus:

Frequent-flier miles clearly have value — why else would people want them? But do they also represent taxable income? Citibank seems to think so. It's sending tax forms to people who received thousands of miles as a reward for opening a checking or savings account. Those forms value each mile at about 2.5 cents and list the total dollar amount as miscellaneous income.

This is news to tax pros. "I've been practicing for 25 years and I've never had an instance where miles have been treated as taxable," said Gregg Wind, a West Los Angeles certified public accountant. But he said that because Citi is reporting this as people's income to the Internal Revenue Service, customers may be on the hook for paying the taxes. "Otherwise," Wind said, "your chances of being audited could go up." ...

Larry Fechter, 66, of Palm Springs was among numerous Citi customers who received a Form 1099 in recent days. He opened a checking and a savings account with the bank last summer after being promised 25,000 American Airlines miles. ... Fechter said it was a big surprise to get the form in the mail informing him that he has to pay taxes on $645 worth of miles. If he were in the 28% tax bracket, that would mean a payment of $180.60 owed to Uncle Sam. ...

In 2002, the IRS issued a policy brief [Announcement 2002-18,] noting that because there are "numerous technical and administrative issues" relating to miles, such as how they're valued and used, the agency "has not pursued a tax enforcement program with respect to promotional benefits such as frequent-flier miles." "Consistent with prior practice," it said, "the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent-flier miles or other in-kind promotional benefits attributable to the taxpayer's business or official travel." ...

Catherine Pulley, a Citi spokeswoman, cited the 2012 instructions for Form 1099-MISC, which state that income tax must be paid if at least $600 in "prizes and awards" is received.

For more, see The Tax Treatment of Frequent Flyer Miles: An Update.  (Hat Tip: Ann Murphy.)

Monahan Presents Will Employers Undermine ObamaCare by Dumping Sick Employees? Today at NYU

Amy Monahan (Minnesota) presents Will Employers Undermine Health Care Reform by Dumping Sick Employees?, 97 Va. L. Rev. 125 (2011), at NYU today as part of its Colloquium Series on Tax Policy and Public Finance convened by Daniel Shaviro (NYU):

This Article argues that federal health care reform may induce employers to redesign their health plans to encourage high-risk employees to opt out of employer-provided coverage and instead acquire coverage on the individual market. It shows that such a strategy can reduce employer health care expenditures without substantially harming either high-risk or low-risk employees. Although largely overlooked in public policy debates, employer dumping of high-risk employees may threaten the sustainability of health care reform. In particular, it potentially exposes individual insurance markets and insurance exchanges to adverse selection caused by the entrance of a disproportionately high-risk segment of the population. This risk, in turn, threatens to indirectly increase the cost to the federal government of subsidizing coverage for qualified individuals and to exempt more individuals from complying with the so-called individual mandate. The Article concludes by offering several potential solutions to the threat of employer dumping of high-risk employees.

Response:  David A. Hyman (Illinois), PPACA in Theory and Practice: The Perils of Parallelism, 97 Va. L. Rev. In Brief 83 (2011).

Best Use of Mitt Romney's Tax Return

Daniel B. Rodriguez (Dean, Northwestern), Tax at Northwestern Law:

On the day when candidate Mitt Romney releases his tax returns (well, OK, tis’ a stretch), I turn the spotlight on Northwestern Law’s terrific tax program.  Anchored by a prestigious graduate tax program and the valuable scholarly work of our distinguished tax faculty, Northwestern is a fertile home for cutting-edge teaching and research in the area of tax law and policy.

2d Circuit Rejects GE's $62 Million Castle Harbour Tax Shelter

TIFD III-E Inc. v. United States, No. 10-70-CV (S.D.N.Y. Jan. 24, 2012):

The United States appeals from a judgment of the United States District Court for the District of Connecticut (Underhill, J.) invalidating two notices of Final Partnership Administrative Adjustments issued by the Internal Revenue Service. The district court so ruled because it concluded that the taxpayer-plaintiff’s characterization of two tax-exempt Dutch banks as its partners in Castle Harbour LLC was proper under Internal Revenue Code § 704(e)(1). The district court also concluded that, even if the banks did not qualify as partners under § 704(e)(1), the government was not entitled to impose a penalty pursuant to § 6662. The Court of Appeals (Leval, J.) holds that the evidence compels the conclusion that the banks do not qualify as partners under § 704(e)(1), and that the government is entitled to impose a penalty on the taxpayer for substantial understatement of income. The judgment of the district court is REVERSED....

We appreciate and have benefitted from the District Court’s conscientious, thoughtful and comprehensive analysis on remand. Ultimately, however, the issue whether the term “capital interest” in § 704(e)(1) includes an interest that is overwhelmingly in the nature of debt is one of law, which of course we review de novo. We respectfully disagree with the district court’s analysis. As we now review the question arising under § 704(e)(1), we conclude that the same evidence which, on our last review, compelled the conclusion that the banks’ interest was so markedly in the nature of debt that it does not qualify as bona fide equity participation also compels the conclusion that the banks’ interest was not a capital interest under § 704(e)(1)....

The taxpayer has failed to point to substantial authority supporting its treatment of the banks as partners. We find that a penalty for substantial understatement of income was therefore properly assessed.

• Department of Justice Press Release

National Paralegal College Seeks to Hire Graduate Tax Director

National Paralegal College seeks to hire a tax instructor to help develop and administer a graduate-level tax program:

We are seeking a tax professional knowledgeable in federal income tax, corporate tax, and preferably other upper-level courses such as estate and gift tax, tax research, financial accounting, etc. JD required. LLM preferred. Significant teaching experience preferred. Significant professional experience preferred.

All qualified candidates are encouraged to apply. Arizona residents will be given priority.

National Paralegal College was founded in 2002 and introduced synchronous learning format to online schooling by running a real time audio/visual online platform to deliver instruction. The mission of National Paralegal College is to provide quality Internet-based education and training for students seeking careers in the paralegal field. NPC seeks to enable those students whose lifestyles lead them to opt for distance education to obtain comprehensive paralegal training and meet their educational goals without having to compromise on interactivity and academic quality.

Applicants should send a letter of introduction and curriculum vitae via email to Program Director Matthew Bycer or by mail to: National Paralegal College Attn: Matthew Bycer 6516 N. 7th Street, Suite 103 Phoenix, Arizona 85014.

Mitt Romney Releases 2010 Tax Return, 2011 Estimate

Year	AGI	Tax	Tax Rate	Char. Gifts	Charity/AGI
2011	20,901,075	3,226,623	15.4%	4,020,572	19.2%
2010	21,661,344	3,009,766	13.9%	2,983,974	13.8%

• Romney 2011 Tax Estimate
• Romney 2010 Tax Return
• Bloomberg
• CNN
• Future of Capitalism
• L.A. Times
• New York Times
• New York Times
• Wall Street Journal
• Washington Post

Update: New York Times, The Candidates' Tax Returns

Greece Publishes List of 4,000 Tax Scofflaws

New York Times, Greece Publishes List of 4,000 Tax Scofflaws:

In a name-and-shame campaign aimed at getting tax evaders to pay up, the Greek government published a list of more than 4,000 people, including several household names, who owe a total of $19 billion to the cash-strapped state. The list published late Sunday includes the veteran crooner Tolis Voskopoulos with debts of nearly $650,000; Pavlos Psomiadis, the owner of a defunct insurance firm, with arrears of nearly $2 million; and Giorgos Batatoudis, a former soccer club president who owes more than $3 million.

• The Guardian, Greece Names and Prosecutes Celebrity Tax Evaders
• Reuters, Greece Publishes Tax Dodger List to Name and Shame

(Hat Tip: Joshua Blank.)

Field: Experiential Learning in Tax Courses

Heather Field (UC-Hastings), Experiential Learning in a Lecture Class: Exposing Students to the Skill of Giving Useful Tax Advice, 9 Pitt. Tax Rev. ___ (2012):

As our students continue to enter a legal profession that is changing and as the models for the delivery of legal services continue to evolve, so should our pedagogy. Thus, the modest objective of this piece is to share my experience, and offer some thoughts, about developing and integrating practice-oriented experiential modules into tax lecture courses. This article explains and reflects upon two exercises that I have used to provide students with opportunities to play the role of a lawyer in transactional tax planning settings. Both exercises are intended to help students begin to see how they can turn their growing substantive knowledge into “useful tax advice.” By “useful tax advice,” I mean informative and understandable advice that comprehensively addresses the client’s economic objectives (including, but not limited to the client’s tax objectives) and that gives the client a clear appreciation of the benefits and risks of a tax-related business decision; as a result of this advice, the client should be able to make an educated choice.

I hope that others can use, and hopefully improve upon, the exercises discussed herein. Moreover, I hope that, when creating and implementing experiential modules in their classes, others can use my reflections to avoid my mistakes and build on my successes. Ultimately, I hope that I can make even a small contribution to the development of the professoriate and to our collective endeavor of helping law students become lawyers.

• Chris Brummer (Georgetown), Towards a Better Tax Law Student (and Professor)

OECD: Using Tax Policy to Reduce Income Inequality, Boost Economic Growth

OECD, Reducing Income Inequality While Boosting Economic Growth: Can It Be Done?:

[S]ome policy options that could promote growth and reduce inequality:

• Re-assess tax expenditures that benefit mainly high-income groups (e.g. tax relief on mortgage interest). Cutting back such tax expenditures is likely to be beneficial both for long-term GDP per capita, allowing a reduction in marginal tax rates, and for a more equitable distribution of income. Lowering tax expenditures would also reduce the complexity of the tax system, and thus tax compliance and collection costs.
• Reduce distortions in taxing capital income. Tax relief – such as reduced taxation for capital gains from the sale of a principal or secondary residence – often distorts resource allocation without boosting aggregate savings and growth, and benefits mainly high-income groups. Specific tax relief may also provide tax avoidance instruments for top-income earners. In particular, there is little justification for tax breaks for stock options and carried interest. Raising such taxes would increase equity and allow a growth-enhancing cut in marginal labour income tax rates.

Press and blogosphere coverage:

• Huffington Post, Income Inequality Can Be Fought With Policies That Simultaneously Spur Growth, Report Finds
• Wall Street Journal, OECD Targets Tax Relief on Mortgages
• WSJ Real Time Economics Blog, OECD Urges Tax Changes to Boost Growth, Reduce Inequality

Jaffke Posts Tax Papers on SSRN

Cheyanna Jaffke (Western State) has posted several of her tax papers on SSRN:

• Death, Taxes, and Now Divorce: The Unavoidable Dyad Expanded to a Trilogy: ERISA's Social Policy Harms Women's Rights, 35 U.S.F.L. Rev. 255 (2001).
• Stock Redemptions in the Marital Corporation: What Happens When The Love Is Gone?, 54 Rutgers L.J. 487 (2002).
• Sleeping with the Enemy? The IRS' Advanced Notice of Rule Making for Regulations on Capitalization, 32 U. Balt. L. Rev. 51 (2002)
• The "Existing Indian Family" Exception to the Indian Child Welfare Act: The States' Attempt to Slaughter Tribal Interest in Indian Children, 66 La. L. Rev. 733 (2006).
• Judicial Indifference: How Does the 'Existing Indian Family' Exception to the Indian Child Welfare Act Continue to Endure in the Age of Obama?, 38 W. St. U. L. Rev. 127 (2011)

Crane Presents Can Congress Retroactively Tax Distributions From Roth IRAs? Today at Case Western

Charlotte Crane (Northwestern) presents Legitimate Expectations in Tax Transitions: Are Roth IRA Conversions Different? at Case Western today as part of its Faculty Workshop Series:

Congress has rarely been tempted to test its power to adversely change tax treatments of investments in ways that would have substantial retroactive effects, despite the assurance from academia (most notably in the writings of Graetz and Kaplow) that there are few if any limits on such power beyond the limits of pragmatic politics. If, however, substantial numbers of high-wealth taxpayers have taken advantage of the ability to convert from traditional IRAs to Roth IRAs, future Congresses may feel pressure to reneg on the promises made to Roth converters, and make tax law changes that affect the exemption of distributions from such Roth IRAs. Roth converters may be especially vulnerable if it turns out that such high wealth converters were able to selectively transfer investments likely to have particularly high returns into Roth IRAs.

This paper explores whether Roth IRA converters have claims so qualitatively different from those of other investors in tax-affected positions that their expectations should be honored. It concludes with a caution against the deep entrenchment of tax exemptions, because of the obstacles such entrenchment creates for the evolution of the federal taxes. Roth converters will be among those with the highest interest in preserving the income tax, since it is that tax that they have pre-paid.

California, Other States Consider Tax Hikes on 'Millionaires'

• Wall Street Journal editorial, California's Millionaire Tax Mirage: A New Report Says Jerry Brown's Revenue Projections Are Fanciful:

Governor Jerry Brown insisted in his State of the State speech last week that California is "still the land of dreams." He's certainly right if he's referring to his latest fantasy that raising taxes on the upper middle-class will generate an additional $5 billion annually over the next five years, eliminate the state's chronic budget deficits and pay down a large portion of its debt. Fortunately, the state's Legislative Analyst's Office, of all unlikely Sacramento institutions, has checked in from realityville.

In a new report, the office warns that the initiative that Mr. Brown wants to put on the November ballot to raise taxes on top earners might not generate as much revenue as he projects because their income is extremely volatile. Mr. Brown wants to increase the rates on individuals making between $250,000 and $300,000 to 10.3% from 9.3% and to 10.8% for those earning up to $500,000. The "millionaires" earning more than $500,000 would pay 11.3%.

The top 1% of earners already pay about 40% of the state's income taxes, a large chunk of which is on capital gains that are taxed at the same rate as wages. In the past, changes in the economy and stock prices have caused huge fluctuations in capital gains income and tax revenue. ...

Mr. Brown's plan has little to do with economic reality. It's all about the politics of dreams, pretending that higher rates will produce more revenue in order to spend more, and hoping the economy booms again to bail him out. The Governor is also betting that his proposal to trigger $5 billion of education spending cuts if the tax hikes don't pass will scare the 99% enough to sock it to the 1%. If voters fall for it, they'll get the economy and deficits they deserve.

• California Legislative Affairs Office, Overview of the Governor's Budget:

We are concerned that the administration's current method of forecasting high–income filers' income—especially capital gains—tends to overestimate state revenue growth from the PIT over the next few years, including revenue growth that would result from the Governor's tax initiative. Figure 7 shows historical net capital gains of California resident tax filers, as well as both our office's November 2011 estimates and DOF's current estimates. ...

• Wall Street Journal, California's Brown Pushes Tax Boost:

On Wednesday, Mr. Brown briefly talked up his tax measure, which calls for increasing income taxes for people making $250,000 and up by as much as two percentage points from 2012 through 2017, and boosting the sales tax of 7.25% by half a percentage point from 2013 through 2017.

Mr. Brown described as "fair" a combination of tax increases and cuts in his proposed budget for the fiscal year ending in June 2013. The administration expects the tax changes to generate $6.9 billion by the end of the 2013 fiscal year to help close a budget gap of $9.2 billion.

• Los Angeles Times, In New Jersey, Chris Christie takes a shot at Jerry Brown:

Across the country in New Jersey, Gov. Chris Christie took shots at Brown’s tax hike proposal while pushing for a cut in his state’s income tax.

“California’s governor has proposed to raise the top rate, already among the highest in the nation, by up to two percentage points,” said Christie, a Republican. He added, “In this environment, the best way to compete is to show a different direction. Let others choose tax increases. We choose responsible tax cuts to give our overburdened citizens real relief.”

• Huffington Post, State Tax Hikes On Wealthy Proposed By California, Maryland Governors:

This week, a pair of governors called for something that just two years ago might have been politically untenable: permanent targeted state tax increases on the rich.

First, Maryland Gov. Martin O'Malley called on the state legislature Tuesday to approve a tax hike on individuals earning $100,000 or more and couples taking in above $150,000.

Then on Wednesday, California Gov. Jerry Brown said his administration will attempt to place on the ballot a measure that could raise income taxes on those earning more than $250,000.

The governors' proposals are still far from becoming state tax policy. But their pitches might mark a turn toward strategies to shore up state budgets by imposing new taxes rather than the drastic cuts or temporary surcharges on the well-to-do that were commonplace during the recession, state finance experts say.

"It's early, but there does seem to be a bit of an uptick in governors proposing tax increases on the rich," said Jon Schure, director of state fiscal strategies at the Center on Budget and Policy Priorities, a Washington think tank. "The public is more receptive to that idea now. They have seen a few years of what cuts look like. They know what college costs after budget cuts are made. They know that there are certain days of the week you can’t go to the library or ... how many kids are in their child's class at school. And they don’t like it."

• CNN, States Look to Hike Tax on Millionaires:

As the "tax the rich" debate rages in Washington D.C., some states are turning to their wealthiest residents to bring in much-needed revenue. The governors of the two largest Democratic states want rich folks to help close budget gaps. And Democratic lawmakers elsewhere are preparing to do battle with Republican leaders to blunt budget cuts by instituting a millionaire tax. This marks a shift from last year, when state leaders largely shied away from raising taxes in general. Several cash-strapped states, including Maryland, New Jersey and Oregon, let their millionaire taxes lapse.

• Bloomberg, California’s $500K Earners Dwindle
• Bloomberg, ‘Facebook Effect’ Could Boost California Budget Through Capital-Gains Tax
• Bloomberg, Millionaires Back Buffett Tax If They’re Exempt

Journal of Taxation of Investments Publishes New Issue

The Journal of Taxation of Investments has published its Winter 2012 Issue (Vol. 29, No. 2), with these articles:

• Yoram Keinan (Greenberg Traurig, New York), The Uneasy Case of Assignment of “Underwater” Derivative Positions, 29 J. Tax'n Inv. 3 (Winter 2012)
• Michael R. Pieczonka (Handler Thayer, Chicago), Catching the Wave: Reassessing Wealth Transfer Plans in Light of Current Economic Conditions, 29 J. Tax'n Inv. 23 (Winter 2012)
• Gerald R. Nowotny (Long Gray Line Consulting, New York), Private Placement Group Variable Annuity Contracts—A Market Overview for Tax-Exempt and Foreign Investors, 29 J. Tax'n Inv. 49 (Winter 2012)
• Robert N. Gordon (Twenty-First Securities Corp., New York), Trader or Investor? Massachusetts Weighs in and the After-Tax Return of Investing Hangs on the Answer, 29 J. Tax'n Inv. 69 (Winter 2012)
• Erik M. Jensen (Case Western), Business Versus Nonbusiness Bad Debts: Dagres v. Commissioner Presents New Variations on an Old Theme, 29 J. Tax'n Inv. 73 (Winter 2012)
• Michael McGowan, Nicolas de Boynes & Andrew Thomson (all of Sullivan & Cromwell, New York), The European Commission Draft Directive on Financial Transaction Tax and its Implications, 29 J. Tax'n Inv. 83 (Winter 2012)

Shaviro: The Financial Transactions Tax versus (?) the Financial Activities Tax

Daniel Shaviro (NYU), The Financial Transactions Tax versus (?) the Financial Activities Tax:

The 2008 financial crisis has provoked widespread interest in developing new taxes to apply to the financial sector. In particular, the Staff of the International Monetary Fund has suggested enactment of a financial activities tax (FAT), while the European Commission has proposed a financial transactions tax (FTT). This article discusses the FAT and FTT models that have featured in historical and more recent discussion, and evaluates them in light of the objectives stated by the European Commission, along with broader tax policy considerations. It concludes that there is a strong case for enacting an FAT, and that two alternative versions of this tax have competing pluses and minuses. With respect to the FTT, it concludes that the rationales advanced by the European Commission are unpersuasive, but that an argument could perhaps made for the tax – subject to concern about its clear inefficiency at certain margins – based on the goal of discouraging the socially excessive pursuit of trading profits (or if better instruments for raising revenue and increasing progressivity are politically unavailable).

For more, see here.

Bocconi University Seeks to Hire a Tax Prof

Bocconi University seeks to hire an Associate Professor in Tax Law:

The Department of Legal Studies invites applications from outstanding Associate Professors who can contribute to its growing School in the field of Tax Law. Successful candidates will be able to provide clear evidence of intellectual excellence and will have several important publications in the leading journals in their field; moreover, they will have a consolidated experience of teaching at undergraduate or postgraduate level.

Salaries, research funds and teaching loads are competitive with leading academic international institutions. Statement of interest and CV should be submitted via e-mail by writing in the subject line "Law - Senior Hiring". Applications will be considered until January 31st, 2012.

Newt Gingrich Used 'John Edwards Sub S Tax Shelter' to Save $50k in Medicare Taxes

Forbes, Gingrich Used Payroll Tax Ploy Often Attacked By IRS, by Janet Novack:

Newt Gingrich avoided tens of thousands of dollars in Medicare payroll taxes in 2010 by using a technique the IRS has consistently and successfully attacked. Republican Presidential candidate Gingrich and his wife, Callista, treated only $444,327 of what they got from Gingrich Holdings. Inc. and Gingrich Productions as compensation to them, while reporting a whopping $2.4 million of their earnings from these corporations as profits or dividends. Medicare taxes are levied at a rate of 2.9% on an unlimited amount of compensation and self-employment income (say, from a consulting contract, speeches or a book) but not on profits from a business.

“It appears that he is not paying his fair share of Medicare tax,’’ Robert E. McKenzie, a partner in the Chicago law firm of Arnstein & Lehr LLP concluded, in an email to Forbes, after reviewing Gingrich’s 2010 tax return. McKenzie, a past chairman of the Employment Tax Committee of the American Bar Association Tax Section and a member of the IRS’ Advisory Council, added:  “There are a multitude of cases where the IRS has successfully challenged the improper tax strategy of this candidate and his accountants. Service businesses are only allowed to distribute a fair return on investment from an S corp. as profits exempt from Medicare taxes. The remainder of profits must be paid as salary subject to a 2.9% Medicare tax levy.”

Since Gingrich released his 2010 tax return Thursday night during the Republican debate, news coverage has focused on his hefty income tax rate—he paid tax equal to 31.5% of his adjusted gross income of $3.14 million. By contrast, former Massachusetts Gov. Mitt Romney, who earned a fortune at Bain Capital and gets most  of his income from investments, acknowledged last week that he pays closer to 15%. ...

Neither a Gingrich spokesman nor his accountant returned requests for comment.

President Barack Obama reported all of his $1.4 million in 2010 book profits as subject to Medicare taxes. Still, Gingrich’s strategy, while frowned upon by the IRS, is hardly unusual. High-earning self-employed individuals have had an incentive to form S corps. and report big profits instead of big wages since 1993, when Congress lifted the cap on the amount of earnings subject to the 2.9% (combined employer and employee) Medicare tax. Back in 1998, when he was a trial lawyer, John Edwards, the former North Carolina Senator and Democratic presidential candidate who is now awaiting trial for alleged campaign violations, reported a salary of $360,000 and profits of $5 million from his S corp. law practice. Congress’ Government Accountability Office, in a report released two years ago, estimated that in 2003 and 2004, S corps. underpaid wages to their owners by $24 billion, skirting payroll taxes on that amount.

• Court Gives IRS Rare Win in 'John Edwards Sub S Tax Shelter' Case (Jan. 24, 2011)
• More on the 'John Edwards Sub S Tax Shelter' (Feb. 6, 2011)
• More on the 'John Edwards Sub S Tax Shelter' Case (June 5, 2011)
• Schwidetzky: Musings on Watson and the John Edwards Sub S Tax Shelter (June 5, 2011)

Sullivan: Romney's Other Tax Break

Martin A. Sullivan (Tax Analysts), Romney's Other Tax Break, 134 Tax Notes 267 (Jan. 23, 2012):

Was it creative destruction or vulture capitalism? Whatever you call what Mitt Romney did at Bain Capital, it is now a multi-pronged challenge to his presidential aspirations. Just the mention of investment shops like Bain can stir up resentment with the voters still looking for jobs and seething over the collapse of 2008.

Then there is the tax angle. When he left Bain in 1999, Romney negotiated a retirement package that gave him a share of the company's skyrocketing profits for at least a decade after his departure (Buyout Profits Keep Flowing to Romney, The New York Times, Dec. 18, 2011). The bulk of those profits were carried interest -- consulting fees paid to managing partners conditioned on upside gain for investors. The payouts were likely taxed at 15 percent. For a man with an estimated net worth of a quarter-billion dollars, a tax rate lower than middle-income families' does not sit well with voters who are daily reminded of increasing inequality, especially when Romney is proposing a plan that cuts taxes on the rich and raises taxes on the poor (Tax Policy Center, The Romney Tax Plan, Jan. 5, 2012).

Just as many Wall Streeters feared, Romney's rising presidential fortunes are threatening their monetary fortunes. The long-simmering debate about the tax treatment of carried interest is being reignited. On January 18 House Ways and Means Committee ranking minority member Sander M. Levin, D-Mich., announced his plans to reintroduce legislation to treat carried interest as ordinary income rather than capital gains. This is just the opening salvo. If Romney wins the Republican nomination, the president's populist reelection campaign will ensure that the carried interest controversy goes prime time.

Despite the media coverage of everything Romney and Bain, there is another significant tax policy issue concerning the business that has been left unmentioned. Like all investment houses that do leveraged buyouts, Bain created value for its investors by increasing debt levels and reducing taxes of its target companies. Bain profited from a dangerous flaw in our corporate tax that subsidizes destabilizing financial structures.

Distribution of $40 Million of Operating Income Before and After a Leveraged Buyout

Source: Example from Joint Committee on Taxation, Present Law and Background Relating to Tax Treatment of Business Debt, JCX-41-11, July 11, 2011, p. 70.

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