Friday, September 30, 2005
The Government Accountability Office has released Summary of Estimates of the Costs of the Federal Tax System (GAO-05-878) (32 pages). Here are the Results in Brief:
Complying with the federal tax system costs taxpayers time and money. Estimating total compliance costs is difficult because neither the government nor taxpayers maintain regular accounts of these costs and federal tax requirements often overlap with recordkeeping and reporting that taxpayers do for other purposes. Although available estimates are uncertain, taken together, they suggest that total compliance costs are large. For example, combining the lowest available estimates for the personal and corporate income tax yields a total of $107 billion (roughly 1% of GDP) per year. As noted, whether this is a definitive lower bound for compliance costs is uncertain.
The IRS announced today (IR-2005-113) that it has joined with a broad coalition of business and charitable associations in a partnership aimed at educating the nation’s employers about a Leave Donation Program benefiting Hurricane Katrina victims:
Benefit for Employees:
These programs provide employees with a way to help Hurricane Katrina victims without needing to make a cash contribution. The benefit is available regardless of whether an employee normally takes the standard deduction or itemizes. For employees who have extra vacation, sick or personal leave balances or who just simply want to provide more to the Hurricane Katrina relief effort, a leave program makes it easier for them to help the Hurricane Katrina victims go about the difficult task of rebuilding their lives.
Benefits to Employers:
The employer may take either a charitable or business deduction for the amount sent to the charity. The amounts contributed are not subject to employment taxes. Employers must follow the guidelines below and in the FAQs but no IRS approval is required. A leave donation program can be adopted and administered easily.
The cash contribution by the employer must be:
- Made to a qualified tax-exempt organization;
- Dedicated to Hurricane Katrina relief;
- Paid to the organization by Dec. 31, 2006
For more information about the Leave Donation Program, see:
National Center for Policy Analysis Releases Tax and Social Security Reform: Thinking Outside the Box
The National Center for Policy Analysis yesterday released Tax and Social Security Reform: Thinking Outside the Box, by Hans Fehr (University of Wuerzburg), John C. Goodman (National Center for Policy Analysis), Sabine Jokisch (University of Wuerzburg) & Laurence J. Kotlikoff (Boston University, National Center for Policy Analysis & National Bureau of Economic Research). Here is the Conclusion:
To remain competitive in the modern international economy and to avert the crushing burden of unfunded elderly entitlements, we need both tax reform and Social Security reform. Some have supposed that these are two completely separate endeavors. In fact, the two reforms may be easier to adopt and implement if they are combined.
Sad tale in today's New York Law Journal:
A retired partner at Paul, Weiss, Rifkind, Wharton & Garrison has been disbarred for stealing more than $500,000 from a family trust for which he was a trustee.
Allan L. Blumstein admitted he essentially depleted an account intended to benefit his elderly aunt, who was suffering from dementia and was confined to a nursing home. The former litigator said he took the money to maintain a lavish but unaffordable lifestyle, without which he feared his wife would leave him....
Blumstein testified that, during the time he was depleting both his and his aunt's accounts, his wife, Susan, was earning an income of between $100,000 and $150,000 as a fund-raiser for the Manhattan School of Music. But he said he never asked her to contribute to their expenses, nor did he ever tell her how dire their financial situation had become. "I never did what I should have done, which was to face up to the issue, which was to say to my wife, we can't go on this way, this is not the way we can live," Blumstein testified at the hearing last March. He and his wife, who were married in 1967, were divorced in 2003 after his conduct came to light....
The judge said he suspected Blumstein's longstanding career disappointment and his "dynamic, ambitious, aggressive" wife, whose work associated her with extremely wealthy people, created "tremendous pressure" on Blumstein "to provide more for his family consistent with Susan's expectations [and] desires than he could do given where he was professionally."
A follow up on yesterday's post about American University's embattled president, Benjamin Ladner, who blamed Sarbox and the Tax Code for the imbroglio over his lavish spending habits: today's Chronicle of Higher Education reports:
American University's Faculty Senate voted unanimously on Thursday for a resolution calling for the resignation of the university's suspended president, Benjamin Ladner, who is being investigated for his allegedly lavish spending. Also on Thursday, 13 members of the university's 25-member Board of Trustees released a statement praising Mr. Ladner and criticizing the board's leadership for its "lack of consultation with the full board" over the investigation.
See the Washington Post's coverage here.
Brian R. Lynn (Allen, Matkins, Gamble, Leck & Mallory, Irvine, CA) has published Tax Planning for Involuntary Conversions: How to Maximize Gain Deferral When a Disaster Strikes, also available on the Tax Analysts web site as Doc 2005-19701, 2005 TNT 186-25. Here is the Introduction:
You won't see many panel discussions titled "Tax Planning for Involuntary Conversions" at your next tax conference. After all, § 1033 is a relief provision normally used by individuals to defer their gain when their house burns down and they get insurance payments. In the business context, however, companies should think about that provision when planning for their worst-case scenario, because § 1033 can let companies avoid a large realized gain when property is taken or destroyed. And minor changes (for example, revising contract language, preparing appropriate substantiation documents) can determine whether a company must pay tax today, or years down the road. Tax advisers ignore those planning ideas because time is short and the tax savings are contingent. But as Hurricane Katrina recently reminded us, the losses from these disasters can be far too real.
This article does two things. First, it reviews the existing guidance on the question of when payments are made to compensate for lost property, and thus are eligible for § 1033 deferral. Second, it provides tax-planning ideas that can help taxpayers best position themselves to obtain § 1033 relief should their property be involuntarily converted. Those planning tools are easy to implement and generally involve simple steps, such as reviewing contracts to ensure that the language envisions lost-property damages (rather than lost profits or revenues). As such, this is one area where in-house and outside tax advisers can take a proactive approach and show their clients that they are thinking about their clients' larger tax picture before problems arise.
A Dutch actress training to be a witch is eligible for a tax deduction for her course fees, the tax authorities in the Netherlands have decided. They allowed the 39-year-old woman to claim 2,210 euros (£1,505) for the course that lasts a year and a day.
A tax official told Reuters news agency the woman used the course "to extend her professional knowledge." Students learn to cast spells, prepare herbs and potions and use crystal balls as well as other aspects of witchcraft. The course organiser, Margarita Roland, said she taught apprentices all they needed to know, using magic as a force for good.
(Thanks to Ann Murphy (Gonzaga) for the tip.)
Significant court decisions, rulings, and statutory and regulatory developments relating to federal trust and wealth transfer taxes.
For the full 5-day program, which lists all speakers and topics, see here.
Thursday, September 29, 2005
Mikita Brottman, Nutty Professors, Chronicle of Higher Education:
Ask anybody what adjective goes best with the word "professor," and the answer will almost certainly be "absent-minded," or possibly "nutty."...
It has often been observed that the more prodigious the intellect, the more it can compromise other aspects of the personality, such as self-awareness and social grace....
Talented thinkers with strange personalities often find a home in academe.On campuses, people are usually willing to overlook the odd behavior of their colleagues, or to accept it as part of the intellectual package; students generally find such characters quirky and lovable.
The absent-minded professor becomes more difficult to handle, however, when his behavior verges on the dysfunctional. All vocations attract certain personality types; academe appeals particularly to introspective, narcissistic, obsessive characters who occasionally suffer from mood disorders or other psychological problems. Often, these difficulties go untreated because they are closely tied to enhanced creativity, as can be the case with obsessive-compulsive disorder, major depression, bipolar disorder, and the kind of high-functioning autism known as Asperger's syndrome.
On Sunday, we blogged the New York Times story on American University President Benjamin Ladner, suspended by his board for his lavish spending habits. Ladner defends himself in today's Chronicle of Higher Education by blaming the Tax Code for his troubles:
Even as the embattled president of American University tries to save his own job amid a growing controversy over his spending habits, Benjamin Ladner has a warning for other college leaders: This could happen to you. The investigation by American's Board of Trustees, the suspended president said, is being driven partly by two federal laws that have changed the culture of accountability at nonprofit organizations.
Those laws are the Sarbanes-Oxley Act, which applies to publicly held corporations, and a section of the Internal Revenue Code that deals with compensation for officials of tax-exempt organizations.
Mr. Ladner has been suspended by the university, which is investigating accusations that he spent university money inappropriately. A preliminary audit questioned more than $600,000 in Mr. Ladner's expenditures, including travel and entertainment costs. Mr. Ladner has defended his actions, saying the few mistakes he made with expenditures were inadvertent.
In an interview with The Chronicle of Higher Education and The Chronicle of Philanthropy on Tuesday, Mr. Ladner said he was dismayed because, in his view, the university's Board of Trustees had not properly followed guidelines from the Internal Revenue Service designed to help tax-exempt organizations head off trouble over the compensation they pay. What's more, he said, the board also felt "legal pressure" from the Sarbanes-Oxley Act, a federal law designed to rein in rogue corporations.
Interesting article in today's The Legal Intelligencer about a recent administrative law decision applying the Chevron doctrine that has important tax implications : Federal Judge Affirms EEOC Proposed Regulation in Wake of High Court Decision:
Finding that a June decision by the U.S. Supreme Court has "dramatically altered" the way courts must analyze the validity of regulations issued by federal agencies, a federal judge has reversed herself and upheld a proposed regulation by the Equal Employment Opportunity Commission that would allow employers to reduce health care benefits for retirees as soon as they become eligible for Medicare.
In Tuesday's 41-page decision in AARP v. EEOC, U.S. District Judge Anita B. Brody vacated a decision she handed down in March in which she struck down the proposed regulation on the grounds that it directly conflicted with a 2000 decision by the 3rd U.S. Circuit Court of Appeals that explicitly barred such a practice.
The EEOC had appealed Brody's decision but returned to her court in June just two days after the U.S. Supreme Court handed down its decision in National Cable and Telecommunications Association v. Brand X Internet Services.
For TaxProf Blog coverage of the impact of Chevron in tax, see:
- Ellen Aprill, The Interpretive Voice
- Paul Caron, Tax Myopia
- Littriello v. United States
- Gregg Polsky, Can Treasury Overrule the Supreme Court
Foundation Press has published Environmental Law Stories, edited by Richard J. Lazarus (Georgetown) & Oliver A. Houck (Tulane). Other titles in the Law Stories Series (for which I serve as Series Editor) are:
- Business Tax Stories (2005), edited by Steven A. Bank (UCLA) & Kirk J. Stark (UCLA)
- Civil Procedure Stories (2004), edited by Kevin M. Clermont (Cornell)
- Constitutional Law Stories (2004), edited by Michael C. Dorf (Columbia)
- Immigration Stories (2005), edited by David A. Martin (Virginia) & Peter H. Schuck (Yale)
- Labor Law Stories (2005), edited by Laura J. Cooper (Minnesota) & Catherine L. Fisk (Duke)
- Property Stories (2004), edited by Gerald Korngold (Case Western) & Andrew P. Morriss (Case Western)
- Tax Stories (2003), edited by Paul L. Caron (Cincinnati)
- Torts Stories (2003), edited by Robert L. Rabin (Stanford) & Stephen D. Sugarman (UC-Berkeley)
Joshua D. Blank (Wachtell, Lipton, Rosen & Katz) has posted Confronting Continuity: A Tradition of Fiction in Corporate Reorganizations (forthcoming, 2006 Columbia Business Review) on SSRN. Here is the abstract:
The venerable “continuity of interest” doctrine has determined the tax treatment of corporate mergers for over seventy years. Under the doctrine, a corporate merger may qualify as a tax-free reorganization if an acquiror corporation pays shareholders of the target corporation aggregate consideration that consists of at least a minimum amount of acquiror corporation stock. The continuity of interest doctrine has endured an abundance of criticism on both policy and legal grounds. Over the last ten years, the administrative agencies of the federal government have steadily chipped away at the continuity of interest requirement in an attempt to make it workable in modern business transactions. Such an approach to remedying the doctrine, however, ignores a fundamental question. Congress, and the tax community at large, should confront the end that the continuity of interest doctrine currently serves, and question whether this end justifies the hardship that the doctrine causes. This article argues that the end that the continuity of interest requirement is intended to achieve – an aggregate group of former target corporation shareholders maintaining a “continuity of interest” in the acquiror corporation following a merger – is fiction. Today corporate mergers may technically satisfy the continuity of interest requirement even though target corporation shareholders ultimately may receive or retain little or even no meaningful proprietary interest in the acquiror corporation. By highlighting the fictional premise upon which the continuity of interest doctrine has come to rest, this article offers a new and different justification for the repeal of the doctrine.
Vic Fleischer (UCLA) offers his views on the paper:
Joshua Blank (Wachtell) has an interesting paper arguing that we do away with the continuity of interest doctrine for corporate tax reorganizations. His argument that the continuity of interest doctrine has no teeth is fairly persuasive, but I am less sure that making nonrecognition treatment explicitly elective is such a great idea. In the alternative, we could make the continuity of interest test an economic test rather than a formal test (which would make it harder to evade the test through hedging or through taking securities like redeemable preferred stock.)
The hard question, which I don't really have a good handle on, is exactly when, from a policy perspective, it is important to call something a sale (and thus a realization event) versus a reorg (merely shifting money from one pocket to another). There is some sort of subsidy at work here, but it may just be a subsidy for legal and investment banking fees.
Burgess J.W. Raby & William L. Raby have published Partnerships, Partners, and Statutes of Limitations, also available on the Tax Analysts web site as Doc 2005-19865, 2005 TNT 188-7. Here is the Introduction:
Taxpayers and tax practitioners both know that the "normal" statute of limitations for the IRS to assess a deficiency runs in three years. However, taxpayers may be only vaguely aware that some passthrough entities are treated differently from others for tax deficiency and statute of limitations purpose. Even tax practitioners may only dimly realize that partners in TEFRA partnerships may face added taxes on their partnership items even after the statute of limitations has run on all other items on their returns. How a partnership's statute of limitations interacts with its members' statute of limitations is the subject of AD Global Fund LLC v. United States, No. 04-336T, Doc 2005-19250, 2005 TNT 182- 10 (Fed. Cl. 2005), and of this article.
Wednesday, September 28, 2005
The new report presents fiscally responsible recommendations for overhauling the federal tax system and raising the revenues needed to combat mounting federal budget deficits and the fiscal demands presented by an aging society. The CED proposal calls for a new hybrid federal tax system featuring a phased-in 10% VAT to supplement a reformed and streamlined federal income tax. The report also provides guidance for eliminating, reducing and consolidating special tax preferences. In addition, the report calls for the elimination of the AMT and reform of the Estate Tax.
Dean Stephen Friedman (Pace) has an interesting op-ed in today's Legal Times, A Practical Manifesto for Legal Education. He argues that "legal education must be brought into closer alignment with the need of law students to hit the ground running when they begin to practice law."
Tax Prof Jim Maule (Villanova) goes further, in Legal Education and Legal Practice: Diverging?:
At the core of Dean Friedman's analysis is his conclusion that "the educational goal of an American law school should be to educate and train effective new lawyers." He addresses how law schools should attain this goal, but for me that's a matter of dealing with a symptom rather than the problem. The problem is that many law faculty do not agree with Dean Friedman. I do. Whenever I make an argument that rests on the premise that the goal of legal education is to educate law students so that they can become legal practitioners, I am met with disagreement from many of my colleagues, not only where I teach, but elsewhere. One colleague put it as succinctly and openly as possible. Law schools, she explained, exist to train legal philosophers. I am grateful she was so direct, because it spared me the effort frequently required to get past the slogans often used to mask that perspective.
My practical reaction is, "Who's going to hire legal philosophers?" Apparently the answer is, "Law schools." What has been happening in law school faculty hiring is a rush to find candidates with Ph.D. degrees. A debate is underway in the legal blogosphere on the question of whether a Ph.D. is "necessary" or "essential" for teaching interdisciplinary courses in law schools....
Blogosphere roundup on the value of Ph.Ds in law teaching and scholarship:
- Jack Balkin (Yale)
- Vic Fleischer (UCLA)
- Christine Hurt (Marquette)
- Orin Kerr (George Washington)
- Brian Leiter (Texas)
- Larry Ribstein (Illinois)
- Dan Solove (George Washington)
The Second Circuit yesterday upheld the imposition of penalties (20% for substantial understatement of income and 40% for gross valuation misstatement) on Long-Term Capital Management for its tax shelter activities. Long-Term Capital Management v. United States, No. 04-5687-cv (2d Cir. 9/28/05) [Interestingly, the Second Circuit's decision is marked "THIS SUMMARY ORDER WILL NOT BE PUBLISHED IN THE FEDERAL REPORTER AND MAY NOT BE CITED AS PRECEDENTIAL AUTHORITY TO THIS OR ANY OTHER COURT."] Joe Kristan has more here.
The Tax Court held yesterday, in Tribune Co. v. Commissioner, 125 T.C. No. 8 (9/27/05), that the divestiture of the Matthew Bender Publishing Co., and its 50% interest in Shepard's-McGraw Hill, was not a tax-free reorganization and instead was a taxable sale to Reed Elsevier for $1.375 billion:
The evidence compels the conclusion that Times Mirror intended a sale, assured that it would receive the proceeds of sale for use in its strategic plans, used the proceeds of sale in its strategic plans without limitation attributable to any continuing rights of Reed, and represented to shareholders and to the [SEC] that it had full rights to the proceeds of sale.
The L.A. Times quotes a tax expert: "You can be a bull or a bear but you can't be a pig." Tribune Co. (which acquired Times Mirror in 2000, inheriting the pre-existing tax dispute) announced plans to appeal the decision to the 7th Circuit. If affirmed, the judgment could cost Tribune Co. $1 billion in taxes and interest. For other press coverage, see:
(Thanks to Ellen Aprill (Loyola-L.A.) for the tip.)
Update: Joe Kristan has more here:
While I haven't had time to analyze the transaction, which apparently was structured by Price Waterhouse, the Tax Court ruled that the deal failed to qualify as a Sec. 368(a)(1)(E) reverse subsidiary merger. By failing to achieve tax-free reorganization status, the transaction ends up being a taxable stock sale similar to the pending Maytag deal.
Allison Christians (Wisconsin) presents Seventy Years is Enough: The Case for Aboloshing Tax Treaties in the United States at the University of Toronto today at 12:10 pm - 1:45 pm as part of the James Hausman Tax Law and Policy Workshop Series. Here is the abstract:
Treaties have been employed consistently over seven decades as the mechanism of choice for addressing matters of international income taxation, even though the past few decades have seen changes in the global commercial environment that make these agreements seem a relic of an earlier, less hurried, and more insular age. Yet some mechanism is arguably needed to achieve the international tax coordination currently addressed in tax treaties. One obvious alternative has always been the unilateral codification of treaty principles, either universally or in legislation conditioned on reciprocal treatment by foreign countries. For reasons perhaps less compelling today than when first considered, this alternative was rejected in favor of the bilateral treaty approach. Another alternative involves the use of statutes referred to as “executive agreements”—international compacts that function as treaties but that bypass the constitutional treaty-making procedure. Executive agreements have seen a marked rise in use in the international coordination of commercial matters, including tax matters, but generally have not been employed in the context of income taxation. This article explores why this has been so, discusses some of the reasons why tax treaties are a sub-optimal approach for global tax coordination today, and proposes that for reasons including the easing of administrative hurdles and the pursuit of more efficient and complete global coordination of tax matters, the historical framework should give way to the adoption of legislation in the form of both unilateral statutes, whether universal or reciprocal, and executive agreements.
Based on a program that was presented recently at the 2005 Joint Fall CLE Meeting co-sponsored by the Section of Taxation and Section of Real Property, Probate & Trust Law, this teleconference will discuss key aspects of splitting up a family business, giving special attention to corporate and partnership income tax issues, state law issues, estate planning, and special considerations for professional practices.
Annie H. Jeong (Wachtell, Lipton, Rosen & Katz, New York) has published The Need for a Qualified Debt Exception Under the Proposed Regulations Dealing with Disguised Sales, 108 Tax Notes 1555 (Sept. 26, 2005), also available on the Tax Analysts web site as Doc 2005-18749, 2005 TNT 186-26. Here is the abstract:
In this article, the author provides a brief overview of the current partnership regulations on disguised sales of property, particularly regarding the qualified liability exception, discusses the proposed regulations on disguised sales of partnership interests, and recommends that a qualified liability exception be included in the final regulations on disguised sales of partnership interests. Without such an exception, the author believes that the proposed regulations may be overreaching and produce unintended results.
Tuesday, September 27, 2005
Two updates on my earlier post on the results of today's Supreme Court certiorari conference:
1. In its order granting certiorari in Cuno v. DaimlerChrysler, Inc., 386 F.3d 738 (6th Cir. 2004) (04-1407, 04-1704, 04-1724), which held that Ohio's investment tax credit is unconstitutional because it grants preferential tax treatment to companies to expand within the state, the Court signaled that it may be considering disposing of the case on procedural grounds:
In addition to the questions presented by the petitions, the parties are directed to brief and argue the following question: Whether respondents have standing to challenge Ohio's investment tax credit, Ohio Rev. Code Ann. §5733.33.
2. Press and blogosphere accounts of the cases granted certiorari today focus not on this important tax case but instead on Marshall v. Marshall (No. 04-1544), involving Anna Nicole Smith's appeal of her share of her 90-year old late husband's estate (originally set at $474 million and then reduced to zero). The case raises the weighty issue (pun intended) of whether the probate exception to diversity jurisdiction bars federal courts from interferring in state court settlements of a decedent's estate.
I am not the first to put these two cases together: see What Do Tax Breaks and Anna Nicole Smith Have in Common? (For press reports, see here, here, here, and here; for blog reports, see here, here, and here.)
Update: law.com story on Anna Nicole Smith and the Supreme Court
It was August 2003 when Michael Fatale got a call from his friend Bruce Fort. It is the time of the year when most of us would be talking Sox, but not these guys: They are tax guys -- they love this stuff -- and they were talking taxes.
Fort, a lawyer for the New Mexico revenue department, wanted to know whether Fatale, a lawyer for the Massachusetts Revenue Department, had been following the giant MCI bankruptcy case. In particular, he said, the counsel for the unhappy bondholders committee had unearthed the fact that MCI (formerly WorldCom) had been avoiding state taxes by charging its subsidiaries billions for the ''foresight of top management." In short, MCI was claiming chief executive Bernie Ebbers' brain was worth billions!
New Mexico was not interested in pursuing the complicated case, Fort said, but Massachusetts, which had gone after two firms in recent years over the creative use of intangible assets, should. For Fatale it was a bolt of inspiration: ''I felt I was the right guy, in the right place, at the right time," he says. ''I knew we were going to get a big recovery out of these guys." Think home run. Think walk-off grand slam in the seventh game of the playoffs against the Yankees. What that call and the dogged persistence of Fatale and his colleagues helped produce is a massive settlement that eventually will return about $500 million to nearly 20 states.
New York Times:
Billionaire investor Warren Buffett testified Monday in the trial of his investment firm's two lawsuits accusing the Internal Revenue Service of making it pay more than $23 million in taxes and interest by disallowing certain deductions. The trial began in U.S. District Court after some three years of legal wrangling between Berkshire Hathaway Inc. and the IRS.
With a house here and a condo there, Dr. Daniel Scotti probably amassed more wealth buying real estate over the last two decades than he did in a career of practicing internal medicine. Now, two years after retiring to Northern California from Brooklyn, he is ready to divest himself of all his residential holdings and concentrate on commercial properties, which he believes are easier to manage.... But Dr. Scotti, who is 63, does not expect to relinquish a dime, at least for now. Using a once-obscure tax strategy, known as a 1031 exchange, he rolls the gains from the sale of one investment property into another of similar value. He can defer such taxes indefinitely and pass on the income-producing property to his heirs. As real estate prices have soared, more and more investors have been doing these like-kind exchanges
The Federal Election Commission filed suit Monday against the Club for Growth, a well-funded Republican group, in an effort to force the organization to comply with limits on political contributions. The suit is the first major enforcement case to involve a "527 committee," the independent political organizations that both Republicans and Democrats used to raise and spend hundreds of millions of dollars in the 2004 races. Commission officials describe it as a test case that could have a major impact on how future elections are financed.
Wall Street Journal:
- A Closer Look at the New Katrina Tax-Relief Bill (Tom Herman):
Wide-ranging tax relief designed to help Hurricane Katrina victims and to stimulate more charitable donations sailed through Congress this week. The new tax package, which will cost roughly $6 billion, comes on top of recent changes announced by the Internal Revenue Service. President Bush signed the bill into law Friday. Most of the new legislation is designed to address Katrina. But a few provisions may also be useful in the aftermath of Rita and other storms.
The IRS has announced (IR-2005-110) relief for taxpayers affected by Hurricane Rita:
The President issued major disaster declarations covering Texas and Louisiana, effective Sept. 23, 2005. Taxpayers affected by the hurricane may be eligible for relief. Deadlines for affected taxpayers to file returns, pay taxes and perform other time-sensitive acts have been postponed to Feb. 28, 2006, the same extended date that Congress granted to taxpayers affected by Hurricane Katrina. In the hardest-hit areas –– those counties designated by the Federal Emergency Management Agency (FEMA) as “individual assistance areas” –– the tax relief will be automatic, and taxpayers won’t need to do anything to get the extensions and other relief available.
For tax resources related to Hurricane Katrina, see here.
The Supreme Court announced today that it has granted certiorari in Cuno v. DaimlerChrysler, Inc., 386 F.3d 738 (6th Cir. 2004), which held that Ohio's investment tax credit is unconstitutional because it grants preferential tax treatment to companies to expand within the state.
Update II: For the story on how we scooped the MSM on this, see here.
Jim Maule (Villanova) has published KPMG, Education, Technology, and Values, 108 Tax Notes 1583 (Sept. 26, 2005), also available on the Tax Analysts web site as Doc 2005-19202, 2005 TNT 186-32. Here is the opening:
The letter from Rufus Rhoades in the September 12, 2005, issue of Tax Notes (p. 1332) resonated soundly as I made my way from the opening paragraph to the penultimate paragraph. But then two sentences struck a most discordant note. After asking a very important question, namely, "what went wrong?" Mr. Rhoades wrote, "For an answer, I look to our educational system. I muse if we are spending too much time on technology and not enough time on what it means to be a participant in the social contract."
Because Mr. Rhoades does not focus his criticism at any particular level of the education system, we are left to wonder if he is speaking of law school and business education, or education in general, including K-12 and undergraduate classes. Fortunately, my disagreement with his assignment of blame to "spending too much time on technology" does not require a specific identification of the "educational system" in question. My disagreement rests on seven points.
H.R. 1956 would create a bright-line physical presence nexus requirement in order for states to collect net income taxes or other business activity taxes (“BATs”) on multistate enterprises. This legislation would amend a Public Law enacted in 1959 which prohibits states from imposing taxes on the net income of interstate sellers of tangible personal property if the only business activity within the state consists of the solicitation of certain sales orders.
The hearing takes place at 1:00 pmin Room 2141 of the Rayburn Building. For a detailed examination of H.R. 1956, see The Tax Foundation's Paying for "Civilized Society" in the Global Marketplace: H.R. 1956's Physical Presence Rule Accurately Matches Taxes Paid and Benefits Received. Here is the Conclusion:
U.S. corporations should only pay business activity taxes in those states in which they are physically present. The physical presence rule is fair to businesses since it requires tax in exchange for government-provided benefits in every state where companies employ labor and capital. Physical presence is also more consistent with the language in U.S. tax treaties and thus creates more equity between U.S.-based and foreign-based corporations doing business in the U.S. The physical presence standard also has other benefits, including the promotion of a robust interstate market, maintenance of state tax competition and the reduction in the number of states in which corporations have to pay tax. For these reasons, Congress should consider moving ahead with the adoption of a physical presence standard for state business activity taxes.
Aaron S. Edlin (University of California, Berkeley) has published The Choose-Your-Charity Tax: A Way to Incentivize Greater Giving, The Economists Voice, Vol. 2: No. 3, Article 3 (Aug. 31, 2005) (Berkeley Electronic Press). Here is the abstract:
Why don’t people give more to charity? One reason is that the problems will be there whether individuals give or not. Here is a policy -- inspired by the matching grants that charities use so effectively -- that could actually make a real difference.
Monday, September 26, 2005
Welcome to the blogosphere: Law Spouses -- A Blog Community for Those Who Love a Law Student:
This blog is meant to not only relate my experiences as a law school widow -- what works and doesn't, fears and victories -- but to act as a venting place for other law school spouses who sometimes feel like they've earned the right to have that "Juris Doctor" tattoed on their behinds, as well.
(Hat Tip: Blawg Review #25.)
Hurray for the KPMG Indictments, by Calvin H. Johnson (Texas):
On the KPMG Shelter I know best, the FLIP or OPIS shelter, the law was fine, it was KPMG that was evil. KPMG sold $100 million tax deductions that did not exist. It was extraordinary how extraordinarily easy and profitable it was to do.
FLIP was a basis shift or defective redemption shelter. A Cayman Island entity borrowed $100 million from Swiss Bank, bought bank stock, sold the stock back to the bank a couple of weeks later and repaid the loan. KPMG claimed that the shell could not use the $100 basis (not that it mattered for any reason) and that the $100 thereby shifted to a related American taxpayer, who was made related so he could use the $100 million loss. KPMG was wrong. The Cayman Island redemption was in fact a sale or exchange, rather than essentially equivalent to a dividend under section 302(b)(1), notwithstanding the KPMG claim. Redemptions are sometimes dividends because the retained stock recaptures most of what was given up, when the remaining shares grow to equal 100% of outstanding shares. Even at $100 mil. the retained shares were less than 1/2% of outstanding stock, so that only 1/2% of the redeemed shares were recaptured. The rest or 99.5% of the redeemed stock was sold.
- Chris Atkins, Targeted Tax Relief for Katrina Rebuilding in a Cuno World
- Linda Beale, World Bank on Estate Taxes
- Andrew Chamberlain, The Case Against the Home Mortgage Interest Deduction
- Curtis Dubay, Death and Taxes: At Least One Is Certain
- Victor Fleischer, Taxing Capital Income
- Russ Fox, When You Don't Withhold
- Janell Grenier, One Good Reason To File Estimated Tax Payments Electronically
- Alicia Hansen, Small Countries Make It Big with Economic Freedom
- Kery Kerstetter, IRS Admits Losing Checks
- Joe Kristan, Tax Policy Blog Whiplash: Targeted Tax Breaks Are Harmful and Necessary
- Stuart Levine, Estate Tax Rationale
- Jim Maule, Tax Relief Quick on the Heels of Katrina
- Kreig Mitchell, TIGTA Audit Reveals A Few of the Deficiencies in IRS Procedures
- Gerald Prante, Average Taxpayer Spends 21 Hours Each Year Preparing for IRS
- Joel Schoenmeyer, The Estate Tax and Katrina
- Dan Shaviro, Budget Politics Then and Now
- Jonathan WIlliams, Tax Reform Anyone?
The Nelson A. Rockefeller Institute of Government has issued a 16-page report, State Revenue Growth Continues in Most States, detailing a 13.3% surge in state tax revenues in the second quarter of 2005 compared with 2004. The chart below lists the states with the five largest and the five smallest percentage increases:
Change in Second Quarter State Tax Revenues
Change from 2004
The increases in other large states were:
- California: 17.3%
- Florida: 9.1%
- Illinois: 10.2%
- New York: 17.0%
- Ohio: 9.0%
- Pennsylvania: 6.7%
State corporate income tax revenues had the biggest increase, rising 22.8% in the quarter (personal income tax revenues rose 18.4% and sales tax revenues increased 7.9%).
Frank Shafroth has published Meteorological Taxes -- Taxing Issues in Katrina's Wake, 37 State Tax Notes 955 (Sept. 26, 2005), also available on the Tax Analysts web site as Doc 2005-18833, 2005 STT 185-4. Here is the opening:
I would not live always: I ask not to stay. Where storm after storm rises dark o'er the way.
Hurricane Katrina struck an unprepared nation last month with a fury that will have short- and long-term effects on federal, state, and local taxes and tax policy, the economy, the national debt, federalism, and federal tax reform. The CBO projects the hurricane's effects will cut the nation's economic growth by 1% by the end of this year and add 400,000 to the unemployment rolls. Compounding the natural catastrophe was the inability of federal, state, and local governments to work together in the face of a disaster long foretold. The torrential winds swept away any claims that the energy bill so trumpeted in August was helpful. The Energy Information Agency now calculates that the U.S. will spend 18% more on energy this year than last -- a total of $1.03 trillion, or 8.3% of the nation's gross domestic product. The hurricane blew away Congress's September tax cut agenda and should impose a mortal blow on the so-called Fair Tax (a proposed national sales tax). It made discussion of federal tax reform unlikely anytime soon.
Significant court decisions, rulings and statutory and regulatory developments over the past twelve months, with particular focus on recent legislative changes.
For the full 5-day program, which lists all speakers and topics, see here.
The Government Accountability Office has released Tax Expenditures Represent a Substantial Federal Commitment and Need to Be Reexamined (GAO-05-690) (9/23/05) (135 pages). Here are the Results in Brief:
Whether gauged in absolute numbers and revenues forgone or in comparison to federal spending or the size of the economy, tax expenditures have represented a substantial commitment of federal support over the past three decades. Between 1974 and 2004, tax expenditures doubled in number from 67 to 146, and while some were repealed or allowed to expire, considerably more were added to Treasury’s list. Based on our analysis of Treasury’s estimates, the sum of revenue loss estimates associated with tax expenditures, adjusted for inflation, tripled from approximately $240 billion to nearly $730 billion over the period.5 The 14 largest tax expenditures, headed by the largest single tax expenditure— the income tax exclusion for employer-provided health care—accounted for 75 percent of the aggregate revenue loss in fiscal year 2004. The sum of the revenue loss estimates for tax expenditures that are used by individual taxpayers increased in real terms from approximately $190 billion to nearly $650 billion. Since 1981 when outlay-equivalent estimates were first available, the sum of the outlay-equivalent estimates for tax expenditures has been similar in magnitude to discretionary spending, and this sumexceeded total discretionary spending for most years during the last decade. As a share of the U.S. economy, the sum of tax expenditure outlayequivalent estimates remained relatively stable at about 7.5 percent of GDP since the last major tax reform legislation in 1986. Across budget functions, the size of tax expenditures varied, and for some budget functional areas, such as housing and education, tax expenditures were the same magnitude as, or larger than, federal spending
- Tax Prof Profile, New Professor Edition: Miranda Perry
- Republicans on Prowl for Victims of Both Estate Tax and Katrina
- NY Times: Bush Tax Cuts Offset by AMT
- Tax Analysts: Sheppard on Source Taxation v. Residence Taxation
- ABA Tax Section Submits Comments on Tax Technical Corrections Act
- CLEA Publishes Revised Draft of Best Practices for Legal Education
- Top 5 Tax Paper Downloads
- Kristan on the S Corp Basis Hokey Pokey
- Tax Analysts: Willens on Survival of "Historic" Business for NOL Purposes
- More on the Differences Between Faculty and Administrators
- Waggoner on Rev. Proc. 2005-24 and the UPC Elective Share
- I Can See Clearly Now
Sunday, September 25, 2005
1. [332 Downloads] Ranking Law Schools: Using SSRN to Measure Scholarly Performance, by Bernard S. Black (Texas) & Paul L. Caron (Cincinnati) [blogged here]
2. [257 Downloads] The Story of Limited Liability Company: Combining the Best Features of a Flawed Business Tax Structure, by Susan Pace Hamill (Alabama) [blogged here]
3. [180 Downloads] The Superiority of an Ideal Consumption Tax over an Ideal Income Tax, by Joseph Bankman (Stanford) & David A. Weisbach (Chicago) [blogged here]
4. [128 Downloads] The Abolition of Wealth Transfer Taxes: Lessons from Canada, Australia and New Zealand, by David G. Duff (Toronto) [blogged here]
5. [81 Downloads] All of a Piece Throughout: The Four Ages of U.S. International Taxation, by Reuven S. Avi-Yonah (Michigan) [blogged here]
We previously blogged the Tax Court's decision in Brooks v. Commissioner, T.C. Memo. 2005-204 (8/25/05), which permitted an S Corp shareholder to increase the basis of his stock with a year-end loan which was repaid three days later. We noted Joe Kristan's warning not to make too much of the result: "Notwithstanding the taxpayer victory here, we normally wouldn't advise taxpayers to put large amounts of cash into an S corporation right before year-end to take losses and then withdraw it right after year-end."
Joe's warning was prescient, as the Tax Court last week in Kaplan v. Commissioner, T.C. Memo. 2005-218 (9/20/05), rejected an S Corp shareholder's attempt to pump up his basis with a year-end loan. Joe notes:
It's not clear why the Tax Court decided the Brooks case differently; perhaps the shareholders loaned their own money to the corporation, rather than borrowed funds. Perhaps the IRS simply failed to raise the issue of whether there was substance to the loan.
THE MORAL? You put your basis in, you pull your basis out, you put your basis in and you spread it all about, you do the hokey pokey and you turn the cash around, that's what it's all about. Oh, and don't count on short-term advances at year-end for S corporation basis.
Robert Willens (Managing Director, Lehman Brothers, New York) has published For NOL Survival, "Historic" Business Must Be Continued, 108 Tax Notes 1452 (Sept. 19, 2005), also available on the Tax Analysts web site as Doc 2005-18313, 2005 TNT 181-41. The article discusses discusses one of the requirements for survival of a loss corporation's net operating losses following an ownership change -- the need for the corporation's "historic" businesses to continue.
Last week, we blogged The Faculty Salary Game, which noted that embedded faculty who feel they are underpaid but are unable to obtain a competing offer from another school have only one choice: enter the high-paying world of university administration. A recent New York Times article chronicles just how high-paying an administrative appointment can be:
In the next few weeks, the board of American University will decide the future of its longtime leader, Benjamin Ladner, who has become the latest college president to be investigated over the nature of his spending. Dr. Ladner, who earned $663,000 for the 2004-05 academic year, was suspended last month while investigators hired by the university began to examine recent financial records. Documents from the investigation obtained by The New York Times suggest that over the last three years he and his wife, Nancy, spent nearly $600,000 on airline tickets, hotels, limousines, food, a chef, a social secretary and household items - expenditures that were charged to American, but that lawyers for the university say have no apparent or documented business purpose.
Among the expenses at issue:
- $219,000 salary and benefits for their chef
- "Professional development" trips to France, Italy and Britain by the chef
- $101,000 salary and benefits for their social secretary
- $81,662 for food
- $67,877 for car services, fuel and repairs
- $37,408 for wine and liquor
(Thanks to Ann Murphy (Gonzaga) for the tip.)
Update: Sunday's Washington Post reports American U. Board Split On Keeping President:
A schism among American University trustees is widening over the future of suspended President Benjamin Ladner, with some beginning private negotiations with his attorneys for a new contract and others pressing for his ouster. "There have been discussions between a group of trustees and Dr. Ladner, which are designed, we understand and hope, to restore him as president, resolve all of the issues and establish a new contract under which he can go forward," said David Ogden, one of Ladner's attorneys. "We are hopeful those will succeed."
Complicating an already tangled process, Ladner supporters on the board have divided themselves into three strategy groups, according to two sources familiar with the negotiations. One group reviewed some of the more than $500,000 of the president's spending questioned in an independent report and determined that he should reimburse the university roughly $21,000. Another group is bringing in a tax expert for advice. And a third is putting together terms of a new contract for Ladner that would reduce his compensation while adding controls over his spending and other activities, the sources said.
Here is my favorite passage:
Since his private and business lives are so intertwined, he said, it doesn't make sense to separate out every single personal expense.... Ladner said his wife thought he had paid for such personal events as the birthday parties they had for one another, some costing well over $300 a person, with such things as hand-shucked Maine scallops and vintage Champagne. "I never thought about it," he said. "We don't go downstairs and look through the records."
See also Saturday's Washington Post, AU's Ladner Defends His Spending
This article discusses Revenue Procedure 2005-24, which came as a bombshell to the estate-planning bar. The Rev. Proc. requires a spousal waiver of elective-share rights in order for a charitable remainder annuity trust (CRAT) or a charitable remainder unitrust (CRUT) created on or after June 28, 2005, to qualify for a charitable deduction. The elective share is a statutory provision common to most probate codes in non-community-property states that protect a decedent’s surviving spouse against disinheritance.
Forgive the non-tax content, but I thought I would pass along a cool tip from Walter Mossberg, the Wall Street Journal's tech guru. You can dramatically improve the clarity of text on your computer by activating a hidden feature in Windows XP called "ClearType":
- Right-click and select "Properties"
- Select the tab "Appearance" and press the "Effects ..." button
- Check the box "Use the following method to smooth edges of screen fonts" and select "ClearType" in the drop-down list
- Click on "OK" and then press "Apply"
I made this change on both my desktop and laptop, and the results are stunning.
Update: For more, see our sister Law Librarian Blog.
Saturday, September 24, 2005
This week's Tax Prof Spotlight continues our series of profiles of folks starting their careers this fall as tax professors at American law schools. We hope the profiles will help introduce our newest colleagues to the tax community. [If you are, or know of someone who is, a beginning tax professor, please email me here to be included in the series.]
Miranda Perry (Colorado)
- B.A. 1993, Duke
- J.D. 1996, Chicago
- LL.M. (Taxation) 2003, NYU
Even back in high school, I was interested in the role of government and how our society’s benefits and burdens should be apportioned. I therefore attended the University of Chicago law school, with the hopes of becoming a con law/ad law professor. The notion that studying tax was really about studying those issues never crossed my mind, until I took basic income tax from Beth Garrett as a 3L. I immediately fell in love with tax and began kicking myself for not having taken it sooner!
Federal troops aren't the only ones looking for bodies on the Gulf Coast. On Sept. 9, Alabama Senator Jeff Sessions called his old law professor Harold Apolinsky, co-author of Sessions' legislation repealing the federal estate tax, which was encountering sudden resistance on the Hill. Sessions had an idea to revitalize their cause, which he left on Apolinsky's voice mail: "[Arizona Sen.] Jon Kyl and I were talking about the estate tax. If we knew anybody that owned a business that lost life in the storm, that would be something we could push back with."
If legislative ambulance chasing looks like a desperate measure, for the backers of repealing the estate tax, these are desperate times. Just three weeks ago, their long-sought goal of repeal seemed within reach, but Katrina dashed their hopes when Republican leaders put off an expected vote. After hearing from Sessions, Apolinsky, an estate tax lawyer who says his firm includes three multi-billionaires among its clients, mobilized the American Family Business Institute, a Washington-based group devoted to estate tax repeal. They reached out to members along the Gulf Coast to hunt for the dead.
It's been hard. Only a tiny percentage of people are affected by the estate tax—in 2001 only 534 Alabamans were subject to it. And for Hill backers of repeal, that's only part of the problem. Last year, the tax brought in $24.8 billion to the federal government. With Katrina's cost soaring, estate tax opponents need to find a way to make up the potential lost income. For now, getting repeal back on the agenda may depend on Apolinsky and his team of estate-sniffing sleuths, who are searching Internet obituaries among other places. Has he found any victims of both the hurricane and the estate tax? "Not yet," Apolinsky says. "But I'm still looking."
Tax Blog commentary:
- Stuart Levine (Tax and Business Law Commentary): "My advice to Sessions and Apolinsky: Don't give up. I understand that Mt. St. Helens has been somewhat active lately. Perhaps, if it perks up a bit more, you can sell the idea of appeasing the volcano gods by sacrificing a billionaire who will be allowed to pass on his or her estate without the imposition of the estate tax."
- Joel Schoenmeyer (Death and Taxes Blog): "Pity those "poor" folks pushing for repeal of the estate tax. They're up against a wall (so to speak), as Hurricane Katrina forces the nation to really look at and think about poverty."
Interesting article in today's New York Times by David Cay Johnston: Report Says Bush's Tax Cuts Will Cause Some to Pay More. Here is the opening:
Over the next 10 years, Americans will not receive nearly $750 billion in tax cuts sponsored by President Bush because the cuts will be offset by the alternative minimum tax, a new report by Congressional tax specialists shows. The report, prepared by the staff of the Congressional Joint Committee on Taxation, said that from 2006 to 2015, Americans would pay as much as $1.1 trillion more under the alternative minimum tax, partly as a result of the Bush tax cuts. The Bush tax cuts reduced the bill for millions of taxpayers to a level that will subject them to the alternative minimum tax instead of the standard tax rate. As a result, the report said, their tax savings would be reduced by a total of $739.2 billion over the 10 years. Congress has passed a modest adjustment to the alternative minimum tax to allow more taxpayers to take advantage of the Bush tax cuts, but that expires at the year-end. Even if it is extended, the report said, the alternative minimum tax would take away $628.5 million in tax savings, with $416.5 billion of that attributable to the Bush tax cuts over the 10 years. George K. Yin, the joint committee's chief of staff, wrote that the Bush tax cuts of 2001 and 2003 account for just under two-thirds of the increase in collections under the alternative tax. The report was prepared in response to a request from John Buckley, chief tax lawyer for Democrats on the House Ways and Means Committee. Families with children who own their homes will be hit hardest by the increased alternative tax.
(Thanks to Ann Murphy (Gonzaga) for the tip.)
Lee A. Sheppard (Contributing Editor, Tax Analysts) has published OECD Officials Make Annual Visit to IFA World Congress, also available on the Tax Analysts web site as Doc 2005-19508, 2005 TNT 184-6. Here is the opening:
Source taxation versus residence taxation was the theme of the International Fiscal Association's 2005 World Congress in Buenos Aires held September 12-16. Practitioners frequently found the discussion less than practical, but it was a breakthrough of sorts. The point was made more than once that developed, capital-exporting countries have stacked the accepted rules of the international tax system in their favor.