TaxProf Blog

Tax Prof Spotlight: Dan Sheaffer

This week's Tax Prof Spotlight of  Dan Sheaffer (Thomas Cooley) continues our series of profiles of folks starting their careers this fall as tenure-track tax professors at American law schools. We hope the profiles will help introduce our newest tax colleagues to the academic tax community.

I graduated from Thomas Cooley Law School and received my tax LL.M from Florida.  Before joining the Cooley faculty, I held three tax jobs: the only tax associate in a 50-person firm, Wishart Norris Henninger & Pittman, in Burlington, North Carolina; senior adviser for Ernst & Young LLP, in Grand Rapids, Michigan, working on international tax issues for a broad range of clients; and corporate tax counsel for Alticor Corp., in Ada, Michigan, where I had the lead role in tax planning and tax advice for Alticor's Asian affiliates.

I am currently working on an article that examines the impact of the check-the-box regulations on the foreign tax credit.  I also plan to write an article on the dual consolidated loss rules once the Treasury Department issues new consolidated loss regulations later this year. 

I am enjoying the intellectual freedom that teaching offers.  Teaching has always been my  long term goal; however, I was not planning to pursue this goal so early in my professional life.  With that said, I have no regrets about seizing the day when the opportunity to return to Cooley as a professor presented itself.   I have enjoyed every minute of serving as a professor to date.   I am  truly proud to part of the academic community.

On a personal note, I am married with four children (all under the age of ten).   We all love to travel.  When I have a spare moment, I try to spend it outside.  I enjoy almost any outdoor activity, especially kayaking and pheasant hunting.

Each Saturday, TaxProf Blog shines the spotlight on one of the 700+ tax professors in America's law schools. We hope to help bring the many individual stories of scholarly achievements, teaching innovations, public service, and career moves within the tax professorate to the attention of the broader tax community. Please email me suggestions for future Tax Prof Profiles, particularly for our series on new tax professors. For prior Tax Prof Profiles, see here.

New Web Site on Progressive Taxation

For an interesting new web site by James J. Kroeger committed to defending the progressive income tax, see taxwisdom.org. Here is the mission of the site:

Taxwidom.org's mission is to educate the public regarding the ultimate wisdom of the Progressive income tax.

The site is divided into these parts:

• Introduction
• Flawed Logic
• How Markets Respond To Income Tax Cuts
• How Income Tax Cuts Affect Production
• Income Tax Cuts & Investment
• What Tax Burden?
• The Ironic Results Of Misguided Tax Policy
• The Rich Get Richer...(really!)
• Changing The Tax Code

Snyder on Tax Law Discrimination Against Children

Lester Snyder (San Diego) has published Does the Tax Law Discriminate Against the Majority of American Children: The Downside of Our Progressive Rate Structure and Unbalanced Incentives for Higher Education?, 41 San Diego L. Rev. 1311 (2004). Here is the abstract:

Our graduated income tax structure provides an incentive to shift income to lower-bracket family members. However, some parents have much more latitude to shift income to their children than do others. Income derived from services and private business-by far the majority of American income-is less favored than income derived from publicly traded securities. The rationale given for this discrimination is that parents in services or private business, as opposed to those in securities, do not actually part with control of their property. This article explores these tax broader (yet subtle) tax benefits and their impact on the majority of children seeking a higher education. Proposed solutions to this lack of uniformity are discussed.

Tax Court: Indiana Professor Cannot Deduct Cost of Dinner

In Hammond v Commissioner, T.C. Summary Op. 2004-156 (11/10/04), the taxpayer earned $150,000 as a researcher at Eli Lilly & Co. and $5,000 for teaching a graduate level course at Indiana University (90 miles from his home and 60 miles from Eli Lilly) two evenings per week. The Tax Court denied the taxpayer's claimed $1,500 deduction for dinner expenses the evenings he taught at Indiana.

New Book: Taxing Ourselves

Joel Slemrod (Michigan, Business & Economics) & Jon Bakija (Williams College, Economics) have published Taxing Ourselves: A Citizen's Guide to the Debate over Taxes (MIT Press, 3rd ed. 2004).  Here is the publisher's description:

To follow the debate over tax reform, the interested citizen is forced to choose between misleading sound bites and academic treatises. Taxing Ourselves bridges the gap between the two by presenting in clear nontechnical language the key issues in tax reform: who should pay taxes, how taxes affect the economy, and whether to reform or replace the current tax system. The authors discuss various alternative proposals in detail, including the flat tax and the sales tax, but they are not advocates for any of them; instead, they provide readers with the knowledge and the tools -- including an informative overview of the U.S. tax system and an invaluable voter's guide to the tax policy debate -- to make their own informed choices about how we should tax ourselves.

R.I.P.: Glenshaw Glass

Press reports out of Pittsburgh indicate the the venerable Glenshaw Glass Company, known to generations of tax professors, lawyers, and students as the party in the seminal Supreme Court case on the definition of income, is on the verge of shutting its doors after 109 years in business. In the Introduction to our Tax Stories book, I summarize Joseph Dodge's wonderful description of why Glenshaw Glass is one of the ten most important cases in the tax law: 

 

Joseph M. Dodge’s opening chapter focuses on perhaps the central question in the nascent income tax: the nature of income subject to tax. Yet the the tax law struggled with this question for over forty years before the Supreme Court decided Commissioner v. Glenshaw Glass in 1955. The narrow holding in the case -- that punitive damages recovered by a plaintiff in commercial litigation constitutes gross income -- seems quite obvious to us with the benefit of hindsight. Indeed, the doctrine emerging from Glenshaw Glass –- that "windfall gains" are included in gross income -– also strikes us today as the only sensible outcome. But Professor Dodge unearths the great doctrinal and theoretical uncertainty faced by the parties in Glenshaw Glass as they struggled to give content to the Code's use of the phrase "gross income." The Court’s opinion established two enduring principles of the income tax: (1) that the Code, not language in judicial opinions, is the ultimate source of tax law; and (2) that the term "gross income" in the Code is a catch-all phrase that reaches all accessions to wealth, regardless of source, and not specifically excluded elsewhere in the Code. In addition, Glenshaw Glass set the income tax on a modern footing, "free of the clutter and distractions inherited from the nineteenth century and early twentieth century."

(Thanks to Myron Grauer (Capital) for the tip.)

Bank and Mehrotra Talk Tax History on Chicago Public Radio

Steven Bank (UCLA) and Ajay Mehrotra (Indiana-Bloomington) appeared yesterday on the Chicago Public Radio Show Odyssey to discuss an historical perspective on the politics of tax reform:

President Bush says overhauling the tax code is a top priority for his second administration. Major changes to the U.S. tax system have been rare, but when they have occurred, they've been profound.

To listen to the 52-minute broadcast, see here. (Thanks to Kirk Stark (UCLA) for the tip.)

National Tax Association's Annual Meeting Continues Today in Minneapolis

The National Tax Association's 97th Annual Conference on Taxation continues today in Minneapolis with sessions on:

• Low Income Workers
• Tax Enforcement
• Government Institutions and Fiscal Outcomes
• Gaming
• Frontiers of Public Finance
• State and Local Tax and Spending Policies
• International Taxation of Savings and Interest
• State Tax Policy and Economic Growth
• Minnesota Issues and National Perspectives
• New Perspectives on the Individual Income Tax
• Current Issues in International Taxation
• New Ideas About State Fiscal Stability
• A Federal Tax Policy Agenda from Former Tax Officials
• Comparative Case Studies in Tax Culture
• The Economics of Public Debt
• State Earned Income Tax Credits
• Income Taxes and Taxpayer Behavior

For full descriptions of these sessions, including the titles of individual papers and the presenters, see here.

McMahon on The Matthew Effect and Federal Taxation

Marty McMahon (Florida) has posted The Matthew Effect and Federal Taxation on SSRN.  Here is the abstract:

The term the "Matthew effect," was coined by sociologist Robert K. Merton in 1968 based on the passage from the Gospel of Matthew in the epigram. "Put in less stately language, the Matthew effect consists in the accruing of greater increments of recognition for particular scientific contributions to scientists of considerable repute and the withholding of such recognition from scientists who have not yet made their mark." The Matthew effect is not limited to the context in which Robert Merton first coined it. More generally, it is a synonym for the well known colloquial aphorism, "the rich get richer and the poor get poorer." This article is about the Matthew effect in the distribution of incomes in the United States, and the failure of the federal tax system to address the Matthew effect. . . .

This article first examines in detail the increasing concentration of income and wealth in the top one percent, and particularly within much narrower cohorts near the top of the top one percent, that has occurred over the past twenty-five years. It demonstrates the strong Matthew effect in incomes in the United States over that period. The super-rich are pulling away from everyone by so much and at a rate so fast that the fact that incomes of many households at the bottom and in the middle have stagnated, or even fallen in constant dollars, has been obscured by ever increasing per capita income.

The article then examines changing effective federal tax rates over the last two decades of the twentieth century. By the close of the twentieth century the tax system was not raising revenue as fairly and was doing less to mitigate inequality than it had in the middle of that century. Tax legislation in the twenty-first century continued this trend by providing tax cuts very disproportionately in favor of those at the top of the income pyramid with very small tax cuts going to everyone else.

The article then demonstrates that economic theory does not support the argument that the tax cuts were necessary to spur incentives to save and invest and to work, and that the empirical evidence of the effect of tax cuts on savings and investment clearly contradicts the claims made by supporters of the tax cuts. It examines the rapidly growing body of economic literature supporting the thesis that economic inequality impedes economic growth rather than fostering it, and concludes that because the tax cuts increase inequality, they probably impede economic growth.

After analyzing the economic issues, the article discusses the philosophical basis for a highly redistributive tax system, arguing that in a modern industrialized democracy, most of what everyone earns is attributable to infrastructure created by society acting as a whole, principally through government. The article then examines the paradox of public concern with increasing economic inequality, thinking it undesirable, and while simultaneously supporting tax cut legislation that in fact delivers vastly disproportionate benefits to the super-rich.

Finally, the article suggests that its time for the tax system to address these problems by substantially increasing progressivity at the top of the income pyramid. Future tax legislation ought to mitigate the Matthew effect, rather than enhance it.

"Tax on the Beach": Today is Deadline for ABA Student Tax Challenge

The ABA Tax Section's Young Lawyers Forum is sponsoring the Fourth Annual Law Student Tax Challenge. Two-person student teams will analyze and present the tax consequences of a complex business planning problem. Teams are intially evaluated on two criteria: a memorandum to a senior partner and a letter to the client explaining the result. Based on this written work product, six semi-finalist teams will receive a free trip to San Diego to defend their submissions before a panel of tax professionals at the ABA Tax Section's 2005 Midyear Meeting on January 20-22, 2005. The competition provides a unique learning -- and networking -- experience to law students who are interested in tax careers. Each member of the top 3 teams will receive cash and other prizes as well.

• Problem
• Rules
• Entry Form
• Oral Defense Compliance Certification Form

Today is the deadline for written submissions. Semi-finalists will be notified by December 17, 2004.

New "Baseball Tax" in D.C. Drawing Flack

Peter Gessing has posted Taxpayer-Financed Baseball in Our Nation's Capital: A Steal for Baseball, Reverse Commuter Tax for DC on the National Taxpayer's Union web site. Here is the Conclusion:

Rather than relying on government to “invest” tax dollars in a facility that ultimately provides a windfall to Major League Baseball and buying off various constituencies with a community slush fund, DC taxpayers – and the region as a whole – would be better off if the District demanded either that baseball play in a refurbished RFK stadium, or that private money is used to fund construction of the stadium. Baseball has been shopping for the best it could get and Mayor Williams came through. It is now up to DC’s City Council to do their best for DC taxpayers, by exploring alternatives to ensure that baseball pays to play.

For recent critical press coverage, see Some Say Baseball Tax Looks Too High and Hard, Washington Post. (Thanks to reader Steven Sholk for the tip.)

TaxProf Blog Crosses 250,000 Threshold

After less than 7 months in operation, TaxProf Blog has crossed the 250,000 visitor mark. We think the success of TaxProf Blog can be replicated in other areas of law and are in the process of putting together a Law Professor Blogs Network patterned after TaxProf Blog. Blogs in these subject areas are already up and running:

• Antitrust
• Contracts
• Criminal Law
• Health Law
• Labor Law
• Sentencing Law
• White Collar Crime

Please email me if you or a colleague might be interested in starting a blog in other areas of the law school curriculum as part of our Law Professor Blogs Network -- Blogs By Law Professors For Law Professors.

Zelenak Presents Risk-Bearing Under a Progressive Income Tax Today at Penn

Larry Zelenak (Duke) presents The Sometimes-Taxation of the Returns to Risk-Bearing Under a Progressive Income Tax today at 4:30 pm at Penn as part of their Tax Policy Workshop Series. Here is the part of the Introduction:

This paper examines the theoretical and practical arguments against the taxation of risk premium. It considers whether risk premium should be taxed in an ideal world, whether it can be taxed in a non-arbitrary manner by an administrable income tax, and whether it could and should be taxed by some regime separate from the income tax. The paper reaches no definitive policy conclusions; its goal is not so much to dispel confusion as to engender confusion on a higher level and about more important things.

National Tax Association's Annual Tax Conference Begins Today in Minneapolis

The National Tax Association's 97th Annual Conference on Taxation begins today in Minneapolis. Today's sessions are:

• The State of the Corporate Income Tax
• Taxes and Externalities
• Fiscal Federalism and Tax Competition
• Voluntary Compliance and Evasion
• Options for Dealing with State Revenue Instability
• Recent Developments in Land Value Taxation
• The Federal Estate Tax
• Taxes, Compensation, and Labor

For full descriptions of these sessions, including the titles of individual papers and the presenters, see here.

Blouin, Raedy & Shackleford on Increase in Dividends After 2003 Act

Jennifer Blouin (Penn, Wharton School), Jana Smith Raedy (North Carolina, Kenan-Flagler Business School) & Douglas Shackleford (North Carolina, Kenan-Flagler Business School) have posted Did Dividends Increase Immediately After the 2003 Reduction in Tax Rates? on SSRN. Here is the abstract:

The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduces the maximum statutory personal tax rate on dividends from 38.1% to 15%. This study analyzes dividend declarations in the quarter following passage. Aggregate dividends rose by 9% when boards of directors first met following enactment. Consistent with the dividend changes being tax-motivated, they are increasing in the percentage of the firm held by individuals. Dividend changes also increased with insider ownership, consistent with managers acting in their own interests. However, these results are limited primarily to firms that made large, special dividends. We find little evidence of an increase in regular, quarterly dividend payments

Breaking News . . . Surprise Choice to Replace Chief Justice Rehnquist

President Bush surprised observers with his choice to replace Chief Justice Rehnquist:

When asked to give an example of a recent Supreme Court decision with which he disagreed, the nominee replied, "One MILLION dollars punitive damages, that's cruel and unsual punishment, baby." (For the original source, see here. For other potential nominees, see here.)

Tax News Roundup

Wall Street Journal: Accounting Body Plans to Clarify Rules for Booking New Tax Break:

Accounting-rule makers will clarify how companies should book a huge tax break under the newly enacted tax law. The legislation, dubbed the "American Jobs Creation Act of 2004," cuts by three percentage points, to 32%, the top tax rate on American manufacturers that engage in "domestic production." The reduction will save an estimated 200,000 companies $76.5 billion over 10 years.

The Financial Accounting Standards Board, at a meeting today, will decide whether the tax break should be accounted for as "a special deduction" or as "a rate reduction," said Russell Golden, a senior technical adviser at the FASB. A special deduction would reduce companies' taxable income over time -- just as long as they perform, on a continuing basis, the manufacturing activity that qualifies them for the tax benefits. A rate reduction, by comparison, would require companies to immediately recalculate their deferred income-tax balances, resulting in a one-time effect on earnings. Specifically, the effect of "a tax rate reduction" on earnings would depend on whether a company carries on its balance sheet more in deferred tax liabilities or deferred tax assets.

Wall Street Journal: IRS Is Auditing Bank of America Over Pension, 401(k) Tax Returns:

The Internal Revenue Service is auditing the 1998 and 1999 tax returns of Bank of America Corp.'s pension plan and 401(k) plan in a review that is looking at whether it was legal for the bank's employees to transfer 401(k) assets to the company's pension plan.

The Charlotte, N.C., banking company disclosed the audit in its quarterly filing with the Securities and Exchange Commission. Bank of America's report didn't elaborate on the nature of the IRS review or the company's position on the legality of transferring 401(k) assets to the pension plan. The report of the audit comes on the heels of a lawsuit filed this summer by Bank of America employees. The suit asserts that the company used its cash-balance pension plan as part of an "arbitrage scheme" to boost the company's bottom line at the expense of plan participants.

According to that complaint, the bank, the nation's third largest in terms of assets, encouraged employees to transfer more than $2.7 billion of 401(k) assets into the bank's pension plan in 1998 and 2000. The employees' lawsuit, filed June 30 in a federal district court in Illinois, alleges that those transfers allowed Bank of America to invest the money for higher returns than what the bank would dole out to employees. The suit says the asset transfers violated the Employee Retirement Income Security Act, or Erisa. The bank has said that its cash-balance plans were designed and operated in accordance with applicable law and that it planned to defend itself against the claims in the lawsuit.

Wall Street Journal, Tom Herman: Know Your Optimal Year-End Tax Strategies:

There is a rash of new tax laws that millions of Americans will need to consider when mapping out their year-end tax-saving strategies:

• AMT
• Donating Cars to Charity
• Donating Stock to Charity
• Generating Capital Losses
• Sales Tax Deduction

Wall Street Journal: Russian Taxman Irks Investors:

In September, Procter & Gamble Co.'s Russian operation got a nasty shock. Tax inspectors showed up to audit its detergent factory in Novomoskovsk, south of Moscow, and soon after, P&G got a $1 million bill for back taxes. The inspectors had latched onto a recent court ruling on an arcane aspect of value-added tax. P&G insisted it was wrongly applied, but the matter was resolved only after the Cincinnati consumer-goods company raised the issue with senior government ministers. "No business likes taxes ... but we certainly weren't expecting this," says Andrei Bashkirov, P&G's tax manager in Moscow. Companies with less clout have been less fortunate, lawyers and executives say.

Overall, the government's newly toughened line on tax enforcement is creating deep uncertainty among investors, both foreign and domestic. Already worried about property rights and the rule of law in light of the Kremlin's pursuit of oil giant OAO Yukos companies now fear they could face huge bills -- or even criminal charges -- for using tax strategies that for years were perfectly legal. There is concern the new rigor may snare law-abiding companies along with cheats.

Wall Street Journal: HCA: IRS Claims Co Owes $397M More In Tax, Interest:

HCA Inc. (HCA) disclosed Tuesday that it is contesting U.S. Internal Revenue Service claims associated with an examination of the hospital operator's 1994 to 2000 federal income tax returns and other matters. Items under dispute between HCA and the IRS include the company's timing of patient-service revenue in 2000, the amount of insurance expense deducted in 1999 and 2000 and the amount of gain or loss recognized on the divestiture of certain non-core business units in 1998. The IRS is claiming an additional $397 million in income tax and interest through Sept. 30 associated with those items, HCA said in a quarterly filing with the Securities and Exchange Commission. HCA said it is appealing the IRS claims in the tax agency's appeals division, the U.S. Tax Court and the U.S. Court of Federal Claims.

Wall Street Journal: Cost of Divorce Just Went Up -- In Your 401(k):

It is getting more expensive to get a divorce -- and the extra bite is coming out of couples' retirement plans. A little-noticed change in federal policy means that a growing number of divorcing couples are being billed by employers for the legal and accounting costs associated with splitting up a retirement plan. That charge can reach as much as tens of thousands of dollars -- and in a period of low investment returns and high legal expenses for divorce, it is an unwelcome additional cost.

People are just starting to feel the impact of the barely noticed Labor Department policy change, which lets employers withdraw certain legal fees required for dividing up defined-contribution retirement plans such as 401(k)s from a divorcing employee's account. Previously, employers could choose between paying those costs themselves and splitting them among all plan participants. The fees surround a legal document called a qualified domestic relations order, or QDRO (pronounced QUA-dro), that a divorcing couple must submit to a plan sponsor in order to split retirement accounts and retain tax benefits. QDROs contain basic information about how the money should be divided. Under federal law, a QDRO doesn't technically become "qualified" until an employer makes sure it fits certain requirements of the tax code, processing that can run from hundreds to thousands of dollars, depending on how much legal advice a company needs.

Washington Post: Rouse Sale Clears Shareholder Vote, IRS:

A Chicago mall developer's plan to buy Rouse Co. cleared two major hurdles yesterday when the Columbia-based company won shareholder approval for the sale and resolved a tax issue with the Internal Revenue Service that threatened to sink the $12.6 billion deal.

To end its IRS problem, Rouse agreed to pay $23 million in interest, a $21 million penalty and an extra dividend to its shareholders, according to a document it filed with the Securities and Exchange Commission. Rouse executives could not be reached for further comment. The tax issue threatened Rouse's status as a real estate investment trust. Without REIT status, Rouse would not have been able to satisfy a condition of its sale to General Growth Properties Inc.

New Book: Social Security and Optimal Tax Theory

MIT Press will publish the paperback edition of Taxation, Incomplete Markets, and Social Security by Peter Diamond (MIT) in 2005.  Here is the publisher's description:

In this book Peter Diamond analyzes social security as a particular example of optimal taxation theory. Assuming a world of incomplete markets and asymmetric information, he uses a variety of simple models to illuminate the economic forces that bear on specific social security policy issues. The focus is on the degree of progressivity desirable in social security and the design of incentives to delay retirement beyond the earliest age of eligibility for benefits. Before analyzing these models, Diamond presents introductions to optimal income tax theory and the theory of incomplete markets. He incorporates recent theoretical developments such as time-inconsistent preferences into his analyses and shows that distorting taxes and a measure of progressivity in benefits are desirable. Diamond also discusses social security reform, with a focus on Germany.

Jewish Couple Back in Tax Court Seeking to Deduct Their Children's Tuition Under Scientology Precedent

After losing in both the Tax Court (T.C. Memo. 2000-118) and the Ninth Circuit (283 F.3d 610), Michael and Marla Sklar returned to Tax Court on Monday seeking to deduct their children's private school tuition. According to press reports:

A lawyer for an Orthodox Jewish couple claimed Monday that the Internal Revenue Service has violated the First Amendment by refusing to allow tax deductions for their children's religious schooling. The IRS should allow the deductions because it permits members of the Church of Scientology to write off the cost of spiritual counseling sessions, attorney Jeffrey Zuckerman said during the first day of a non-jury trial in U.S. Tax Court before Judge John O. Colvin. The First Amendment prohibits the IRS from discriminating on the basis of religion, Zuckerman said.

Michael and Marla Sklar of Los Angeles brought the lawsuit after the IRS ruled their deductions were invalid because Jewish school tuition was considered payment for a service, not a charitable contribution. Louis B. Jack, an attorney for the IRS, said during his opening statement that a ruling in the Sklars' favor would lead "millions of Americans to start deducting religious school tuition."...

Zuckerman said that during the trial he would show the similarities between Scientology's religious instruction and the religious instruction received by the Sklar children. "Every practitioner of every religion has the right to deduct religious instruction, if the Church of Scientology is allowed to do that," Zuckerman said. Colvin will not allow testimony in the case from the Church of Scientology, Zuckerman said.  The secret agreement between the IRS and Scientology also may or may not be admitted as evidence. Zuckerman submitted a copy of the agreement, which had been leaked to the Wall Street Journal, but Jack objected. The judge said he would consider if it could be admitted into the court record.

In his concurring opinion, Judge Silverman of the Ninth Circuit noted:

Why is Scientology training different from all other religious training? We should decline the invitation to answer that question. The sole issue before us is whether the Sklars' claimed deduction is valid, not whether members of the Church of Scientology have become the IRS's chosen people....[U]nder both the tax code and Supreme Court precedent, the Sklars are not entitled to the charitable deduction they claimed. ... If the IRS does, in fact, give preferential treatment to members of the Church of Scientology -- allowing them a special right to claim deductions that are contrary to law and rightly disallowed to everybody else -- then the proper course of action is a lawsuit to stop to that policy. The remedy is not to require the IRS to let others claim the improper deduction, too.

Heen on Financing Private Choice

Mary Heen (Richmond) has posted Congress, Public Values, and the Financing of Private Choice on SSRN. Here is the abstract:

This Article examines the financing dimension of private choice, with a focus on Congress's taxing and spending decision-making processes. The Article begins with an overview of the financing and performance dimensions of privatization decisions, followed by an analysis of how taxation relates to both dimensions. Private choice can be financed individually, that is, paid for by an individual's own resources, facilitated by general tax reduction. Alternatively, private choice can be financed collectively by using tax revenues (or borrowed funds) to pay for privately provided goods and services. The tendency in political debate to conflate those two forms of financing, as well as the failure to distinguish between financing and performance, obscures important decisions about private choice, and about the government's role in managing or monitoring collectively financed activities.

Congress coordinates its taxing and spending decisions through the budget process, collectively determining what will be financed and performed through government and what will be left to private choice. The courts generally defer to the tax and spending decisions made by Congress. Nevertheless, in the process of developing this highly deferential approach, the U.S. Supreme Court historically has drawn distinctions between taxes and other means of paying for or regulating the production of goods and services. Although it can be quite difficult to distinguish "taxes" or "revenue raising" from "user fees," "prices," or "penalties," they are not constitutionally interchangeable. When the Court has interpreted express limitations on Congress's taxing power, it has drawn distinctions similar to those drawn in the privatization literature between individual and collective financing. These doctrinal distinctions reflect the democratic values inhering in Congress's taxing and spending powers.

Next, drawing from tax scholarship on tax expenditures, the Article develops the argument that general tax reduction and targeted tax incentives differ in their approach to financing. Targeted tax incentives subsidize certain legislatively favored activities and, therefore, comport with the pattern of privatization typically followed in the United States of retaining collective financing but delegating performance to the private sector (as in government contracting or voucher programs). Collective financing keeps resources under some type of government control, with collectively defined goals achieved through the use of either public or private producers.

The Article concludes with a discussion of accountability issues with regard to both financing and performance. Administrative lawyers and scholars are engaged in studying new ways in which regulation, contracts, and contract monitoring may respond to the accountability problems created by increased "contracting out" or privatizing of government services. A parallel effort to study ways in which increased monitoring of tax incentives can be achieved needs to be undertaken. Tax incentives generally do not involve negotiated relationships between government and private contractors, but typically involve tax reporting to the Internal Revenue Service and oversight jurisdiction by the tax-writing committees. The delivery of subsidies through the tax system can mask governmental funding levels and allocations and obscure accountability for outcomes being funded. The use of tax incentives as an alternative to discretionary spending by government serves privatization goals through their use of market incentives and private choice. How to achieve greater political accountability for both the financing and performance of tax incentives remains a central challenge. The Article ends with suggestions for incremental ways to achieve such increased monitoring through budgetary and oversight reforms.

Sugin on The Bush Administration's Tax Policy

Linda Sugin (Fordham) has posted Comments on Assessing the Bush Administration's Tax Agenda on SSRN.  Here is the abstract:

This article, written as part of a symposium on "The State of the Federal Income Tax: Rates, Progressivity, and Budget Processes," discusses the legal issues raised by data presented by economists Drs. William Gale and Peter Orszag. It proposes the adoption of pay-go procedural rules for tax lawmaking that favor tax cuts that decrease income inequality, in response to biases in distributional tables and distortions in the political process. It suggests that the failure to use present value analysis in the budget process has had unfortunate, unintended consequences for progressivity, in particular, in encouraging a Congressional preference for a prepaid consumption tax. It argues that efforts to index the AMT should not deflect attention from the AMT's most fundamental distributional problem -- its failure to treat dividends and capital gains as preference items. It considers possible institutional advantages in global sunsets of important tax legislation, even when the legislation is not intended to expire.

Tax Photoshop Contest

The Tax Guru has posted several hilarious photographs from a News Photoshop Contest sponsored by FreakingNews.com on Bush Pledges To Make Changes To Tax Code. My favorites:

Bush Orders Demolition of IRS Headquarters:

IRS Clearing House:

IRS Lottery:

Kahn on Structural Change in Tax Deduction Classification

Jeffrey Kahn (Santa Clara) has posted Beyond the Little Dutch Boy: An Argument for Structural Change in Tax Deduction Classification on SSRN. Here is the abstract:

One of the most active disputes in tax law today is the question of the proper treatment of a plaintiff, a portion of whose taxable damage award is paid to his attorney pursuant to a contingent fee arrangement. At issue is whether the plaintiff is taxable on the portion of the award that is payable to the attorney. The dispute has attracted considerable attention, particularly because the effect of taxing the plaintiff for the attorney's portion of the award has been severe and patently inappropriate. Not only does that tax imposition contravene tax policy, but in the case of discrimination suits, it frustrated a major purpose of the civil rights legislation that authorized those causes of action. The civil rights aspect of this problem was resolved prospectively by the adoption of the American Jobs Creation Act of 2004 ("2004 Act"), but the problem continues to exist in other areas.

Prior to the enactment of the 2004 Act, the Supreme Court agreed to resolve a split in the Circuit Courts of Appeals with respect to this tax issue. The Supreme Court case is not mooted by the recent adoption of the 2004 Act for two separate reasons: first, because that provision of the 2004 Act does not apply to judgments and settlements made before the date on which the 2004 Act was enacted; and second, because one of the two consolidated cases being heard by the Supreme Court (the Banaitis case) does not involve discrimination, thus making the 2004 Act inapplicable.

Regardless of how the Supreme Court resolves the discrete issue that is before it, what is alarming is that the current dispute is just one small example of a much larger problem. Instead of dealing with the root cause of the problem, the focus (both in the courts and in Congress) has been on whether to provide a "fix" for the specific plight of the taxpayers who have raised the issue in the context of a suit for damages. The Supreme Court and Congress, like The Little Dutch Boy, may be willing to plug one hole, but the broader problem is a structural fault in the "dam" of the tax law system - namely, the improper classification of a significant number of expenditures as itemized deductions. This Article argues that, instead of plugging one hole at a time, it is time to replace the dam.

The thesis of this Article is that the current list of nonitemized deductions wrongly excludes a number of items, especially some that are directly connected to the production of income. This wrongful exclusion imposes an unwarranted and severe tax burden in far more circumstances than the attorney fee problem on which Congress exclusively focused. The harsh consequences resulting from the misclassification of a number of items are exacerbated by the stringent limitations currently imposed on many itemized deductions; but even the repeal of those limitations, which is unlikely to occur, will not cure all of the harm that a wrongful classification causes. The author hopes that highlighting several examples of misclassification will induce Congress to implement a commission to study the entire classification system rather than to rest on its laurels for solving one small part of the problem in the 2004 Act.

N.J. Judges Told: Just Say No to U.S. News Law School Survey

The New Jersey Administrative Office of the Courts has issued a directive to all New Jersey state court judges to refrain from filling out the reputational survey for the U.S. News & World Report law school rankings:

In Directive #33-65, issued July 8, 1966, Administrative Director McConnell advised the judges of the Supreme Court’s conclusion that it would be inappropriate for judges to participate in the rating of attorneys as part of Martindale-Hubbell’s attorney rating system. That Directive remains in effect.

This Directive is to advise judges that it would be similarly inappropriate to provide ratings of law schools as part of US News & World Report’s survey of "America’s Best Graduate Schools". Judges in your vicinage may have received a request this month to complete a questionnaire rating the various law schools throughout the United States, including New Jersey’s three law schools. Please advise the judges in your vicinages as to the inappropriateness of completing and submitting that survey.

It will be interesting to see if this directive affects the performance of Rutgers-Newark (# 78 in Assessment by Lawyers and Judges in 2004, # 72 overall), Rutgers-Camden (# 89 & # 72, respectively) and Seton Hall (# 89 & # 89, respectively) in the next U.S. News rankings. For prior TaxProf Blog coverage of law school rankings, including our forthcoming symposium on The Next Generation of Law School Rankings to be held at Indiana-Bloomington on April 15, 2005, see here and here.

Supreme Court Hears Oral Argument Today in Pasquantino v. U.S.

The Supreme Court hears oral argument today in Pasquantino v. United States (No. 03-725). Our sister blog, White Collar Crime Prof Blog, explains the importance of this case:

This is a wire fraud case emanting from the Fourth Circuit. The defendants "were convicted of using interstate wires for the purpose of executing a scheme to defraud Canada and the Province of Ontario of excise duties and tax revenues relating to the importation and sale of liquor." The issue before the Court is whether the wire fraud statute includes prosecutions where the alleged  scheme to defraud involves  taxes potentially owed to a foreign sovereign. The Court will be looking at the common law revenue rule and how far it should extend. It will also look at the definition of the term "property" in the fraud statutes to see if property includes schemes to defraud foreign governments. Because many of the fraud statutes operate the same, this case could have the potential to influence prosecutions that use the mail fraud statute, as the Court will be deciding if prosecutors can use fraud statutes when the scheme is to defraud a foreign government. 

The mail and wire fraud statutes provide prosecutors with enormous discretion in prosecuting fraud cases.  Will the Court allow them to use this discretion in prosecuting schemes that involve alleged deprivations of property outside the United States. Stay tuned.

See also the discussion on the Oyez web site, which includes links to the briefs of the parties and the lower court opinions.

Tax Talk Today Web Cast on Payroll Prep for the Year-End

The monthly Tax Talk Today program offers a free webcast today from 2:00 - 3:00 pm EST on Payroll Prep for the Year-End:

Moderator: Les Witmer, APR Communications Consultant

Panelists:
• Nora Daly, Senior Legislative Analyst, Oracle Corp.
• Chuck Liptz, Director for Employer Wage Reporting and Relations, Social Security Administration
• Jerri L.S. Langer, JLS Langer Consulting

SOI Releases New Estate Tax Data Set

The IRS Statistics of Income Division has released new data from Estate Tax Returns Filed in 2003, which include gross estate by type of property, deductions, taxable estate, estate tax and tax credits, by size of gross estate.

IRS Releases Filing Projections for 2004-2012

The IRS's Statistics of Income Division today released Calendar Year Projections of Information and Withholding Documents for the United States and IRS Service Centers, 2004-2012:

Office of Research staff within Research, Analysis and Statistics of Income organization provides calendar year projections of information and withholding documents on an annual basis to accommodate the most recent filing year experience. These projections of Information Reporting Program (IRP) documents incorporate current legislative and administrative initiatives, as well as relevant economic and demographic trends. Data series forecasts provided by Global Insight, Inc., are used by Research staff in projecting IRP documents. The information and withholding document projections contained within this document are used primarily by the IRS operational and resource planning functions to assist in the formulation of their budget submissions and staffing requirements, and to complete various other analyses. Enacted tax law changes and confirmed administrative plans are reflected in these projections. However, legislative or administrative initiatives simply under consideration are generally not used to adjust the projections due to the uncertain nature of their eventual outcome.

Call for Tax Panels at Law & Society Annual Meeting

Neil Buchanan (Rutgers-Newark) has repeated his call (previously blogged here) on the TaxProf Email Discussion Group for Tax Profs to join with him in organizing one or more tax panels for next year's Law & Society annual meeting in Las Vegas on June 2-5, 2005:

Now that the call for papers has arrived from the Law & Society Association with a deadline of December 15, 2004, I am reissuing my offer to coordinate one or more panels.  If you're interested, please contact me privately as soon as you can.  At this point, all I need is an indication of interest and a quick (one sentence) description of the project that you'd like to present.

Please email Neil for more information.

Musselman on Discharge of Indebtedness Income

James Musselman (South Texas) has published Is Income from Discharge of Indebtedness Really Income at All? A Proposal for a More Reasoned Analysis, 34 U. Mem. L. Rev. 607 (2004). Here is part of the Introduction:

This article traces the judicial history of the concept of income from discharge of indebtedness, identifying and discussing the opinions and rationale that the courts have so far offered for this concept. It then reviews and discusses relevant commentary regarding the theoretical basis and application of the concept. Next, the article proposes a more reasoned and logical approach to the determination of when and whether a discharge of indebtedness will result in inclusion in gross income, and the amount of any such inclusion. Specifically, the article suggests that the issue of income from discharge of indebtedness is no different from other gross income issues, requiring at the outset an inquiry into whether gross income conceptually exists pursuant to an analysis under section 61 of the Code. That inquiry, as this article proposes, simply requires a determination whether a discharge of indebtedness has resulted in a clearly realized accession to wealth and in what amount. Finally, the article discusses the application of this proposed approach to the factual situations identified in the cases previously discussed and to additional hypothetical factual situations yet to appear in reported cases.

Tax News Roundup

New York Times: Big Tax Plans, Big Tax Risks:

Hardly anybody likes the current tax system. But as President Bush undertakes the potentially historic task of coming up with something better, he is confronting an issue that is more ideologically explosive, politically risky and economically complex than he let on during the campaign. In the days since his re-election, Mr. Bush has signaled that he is serious about following through, highlighting the topic in both his victory speech on Wednesday and his news conference on Thursday.

He has been vague about what he has in mind, but Republican advisers to the administration say the White House is debating whether Mr. Bush should back ambitious, even radical proposals like a national sales tax or a flat tax on income. By doing so, he would blast away a philosophy that has governed tax policy since Woodrow Wilson was in the White House: that higher levels of income should be taxed at higher rates.

New York Times: Taxes and Consequences: The Second Term Begins:

President Bush began his first term with projections for $5.6 trillion in budget surpluses. Though he will start his second term facing at least $2.3 trillion in deficits, according to the Congressional Budget Office, his tax-cutting ambitions are even greater. Here are some of the initiatives that he's likely to push, and the unanswered questions that go with them:

• Privatization of Social Security
• Simplification of the Income Tax
• Making the 2001, 2002 and 2003 Tax Cuts Permanent
• Tax-Free Saving Accounts
• Abolishing the Tax on Dividends

New York Times: Lawsuit Over Tax Shelter May Derail a Settlement

A former director of America Online and a former senior AOL executive have sued the law firm of Jenkens & Gilchrist and two other entities, saying that they sold them aggressive tax shelters in 1999 and 2000 that were intended to shield $200 million in income from taxes but that were ruled invalid by the Internal Revenue Service. The lawsuit seeks at least $155 million and damages, and dims the prospects for a pending class-action settlement between Jenkens & Gilchrist and other wealthy investors who bought questionable tax shelters through the firm.

New York Times: A New York Tax Rule on Co-op-Sale Profits:

Under a New York State law passed this year, owners of co-op apartments in the state who are not state residents and who sell their apartments after Nov. 17 may have to pay tax on profits from the sale. And, if state taxes are due, the owners will be required to make an estimated tax payment within 15 days of the sale.

Wall Street Journal:  Bush Aims To Make Tax Cuts Permanent, Revamp Tax Laws:

Buoyed by a clear-cut election victory, President Bush is pledging to make permanent the sweeping tax cuts of his first term and to restructure the nation's tax laws. The price tag on making the tax cuts permanent is more than $1 trillion, a daunting number in an age of record budget deficits. At the same time, efforts to enact ambitious proposals to overhaul the tax system often fall victim to a ferocious assault from Washington lobbyists determined to protect special breaks for their clients. While not discounting the challenges ahead, Bush's supporters are betting that the president will end up getting much of what he wants with the help of bigger Republican majorities in both the House and the Senate.

Washington Post: How to Fix Taxes and Social Security:

With his reelection won, President Bush says he will move forward on two big domestic issues: the tax system and Social Security. Both are much in need of our attention; there was little serious discussion of either during the presidential campaign.

Washington Post: Giving a Car? Get It in Gear:

Thinking of donating your car or truck to charity? Hurry. At the end of the year, your tax-deductible coach turns into a pumpkin. After more than a year of listening to tales of abuse by taxpayers and charities alike, Congress last month changed the law on vehicle donations to make it much more difficult to get a big deduction for handing off your car or truck (or boat or airplane, if you have one of those) to a charity.

Washington Post: Consumption Tax

Weekend Roundup

This weekend's TaxProf Blog posts:

Saturday:

• Tax Prof Spotlight: Meredith Conway
• University of Washington Looking to Hire Tax Prof
• Wharton Faculty Discuss The Next Four Years with George Bush

Sunday:

• Top 5 Tax Paper Downloads
• A Bad Week: Libertarian Lost Race for Congress on Tuesday, Arrested for Tax Evasion on Friday
• Washington, D.C. Tax Attorney Lincoln Arnold Dead at 94

Top 5 Tax Paper Downloads

There again is some movement in this week's list of the Top 5 Tax Paper Downloads on SSRN, with the four pieces from last week's list jockeying for position this week, as well as a new paper debuting at #5:

1.  The Coming Accounting Revolution: Offshore Outsourcing of Tax Return Preparation, by Jesse Robertson (Alabama, School of Accountancy), Dan Stone (Kentucky, School of Accountancy), Liza Niederwanger (Deloitte & Touche LLP), Matthew Grocki (Kentucky, School of Accountancy), Erica Martin (Crowe Chizek & Co.) & Ed Smith (Kentucky, School of Accountancy)

2.  Does the "New Benefit Principle" (or the "Partnership Theory") of Income Taxation Mandate an Income Tax at Both the Individual and Corporate Levels?, by Joseph M. Dodge (Florida State)

3.  Book versus Taxable Income, by Frank Heflin (Northwestern, Kellogg School of Management) & William Kross (Purdue, Krannert School of Management)

4.  The Deemed Dividend Problem, by Reuven Avi-Yonah (Michigan)

5.  The Entrepreneurship Effect: An Accidental Externality in the Federal Income Tax, by Leandra Lederman (George Mason)

A Bad Week: Libertarian Lost Race for Congress on Tuesday, Arrested for Tax Evasion on Friday

Arthur Farnsworth, Treasurer of the Pennsylvania Libertarian Party, lost his race for Congress on Tuesday (after drawing 1.1% of the vote) and was arrested Friday for evading $87,000 in federal income taxes (after vowing on his web site that he would "never file an individual federal income-tax return again."). For the full story, see here.  Press reports note that Mr. Farnsworth has not paid any federal income tax since 1996.

Washington, D.C. Tax Attorney Lincoln Arnold Dead at 94

Lincoln Arnold, 94, a tax attorney in Washington, D.C. for more than 35 years, died November 3. Mr. Arnold had a long and distinguished tax career:

• Legislation and Regulations Division, Office of Chief Counsel, IRS (1943-46)
• Office of Legislative Counsel, U.S. House of Representatives (1946-51)
• Private Practice (1952-64)
• Deputy Chief of Staff, Joint Committee on Taxation (1964-75)
• Tax Counsel, House Ways and Means Committee (1975-76)
• Special Counsel, Joint Committee on Taxation (1976-81)
• Retired (1981-2004)

For the full obituary, see here.