Saturday, January 21, 2006
Nancy C. Staudt has accepted an offer to join the faculty at Northwestern. She has been at Washington University (St. Louis) since 2000, after beginning her teaching career at SUNY-Buffalo in 1993. Nancy is one of the foremost empirical tax scholars in the country; her recent work includes:
- Redundant Tax and Spending, Northwestern L. Rev. ___ (forthcoming 2006)
- Judging Tax Statutes: Interpretive Regimes, Loyola L. Rev. (forthcoming 2006)
- Agenda Setting in Supreme Court Tax Cases: Lessons from the Blackmun Papers, 52 Buffalo L. Rev. 889 (2005)
- Modeling Taxpayer Standing, 79 NYU L. Rev. (2004)
- Taxpayers in Court: A Systematic Study of a Misunderstood Standing Doctrine, 51 Emory L.J. 771 (2003)
(Hat Tip: Our sister Leiter's Law School Reports.)
Survivor winner Richard Hatch has a novel defense in his tax evasion trial: the Associated Press reports that he claims the show's producers promised to pay the taxes on his $1 million prize if he kept quiet about cheating he observed by some of his fellow contestants. Of course, Hatch also is accused of failing to pay taxes on hundreds of thousands of dollars of other income and using money donated to a charity on himself.
Interesting Wall Street Journal editorial: Still Morning in America:
On tax policy, Reaganomics has also carried the day, if somewhat less completely. Tax rates in the U.S. are on average half as high now as they were in the 1970s, and almost every nation has followed the Reagan model of lower tax rates. Even Bill Clinton only dared to raise the top marginal income tax rate back to 39.5%, not 50% or 70%. Nonetheless, tax cuts still stand in disrepute among most of the media, academics and Democrats in Congress, albeit for shifting reasons....
The Gipper's critics have written an economic history of the 1990s that they portray as a repudiation of Reaganomics. In this telling -- known as Rubinomics -- the Clinton tax hikes of 1993 ended the budget deficit, which caused interest rates to fall, which produced the boom of the mid- to late-1990s. In fact, the budget deficit hardly fell at all in the immediate aftermath of the tax hike, and while long-term interest rates fell in 1993, they shot back up again in 1994 almost precisely through Election Day (rising by some 230 basis points from October 1993 to November 1994). On that day, voters repudiated the Clinton tax hikes and the specter of HillaryCare and gave Republicans control of Capitol Hill to govern on the Reaganite agenda of lowering taxes and shrinking runaway government. Both the stock and bond markets turned upward precisely on Election Day in 1994, beginning a whirlwind six-year rally. By 1998, growth and fiscal restraint delivered a budget surplus for the first time in nearly 30 years. In 1997 President Clinton signed a further reduction in the capital gains tax, which propelled investment and the stock market to even greater heights.
The latest chapter of this story is the 2003 income and investment tax cuts enacted by the current President Bush. As in 1981, opponents insisted those tax cuts would harm the economy by increasing the deficit and driving up interest rates. But in the two and a half years since those tax cuts passed, the economy and tax revenues have both surged....
Tobin Presents Political Intervention by Religious Organizations: Right or Wrong? Today at the Ohio Legal Scholarship Workshop
Donald Tobin (Ohio State) presents Political Intervention by Religious Organizations: Right or Wrong? today at the Ohio Legal Scholarship Workshop. Here is the abstract:
The project exams the election activities of 501(c)(3) organizations, and argues that the prohibition on intervening in a political campaign contained in 501(c)(3) should be strictly enforced. I argue that the use of taxpayer subsidized organizations to promote particular candidates is bad for democracy and places too much power in those organizations. I further argue that the existing framework for regulating political intervention by 501(c)(3)'s is insufficient and suggest an alternative test and an alternative structure for regulating and enforcing the prohibition.
Lee A. Sheppard (Contributing Editor, Tax Analysts) has published Swap Values Should Be Closer to Mid Than Bid, Government Insists, also available on the Tax Analysts web site as Doc 2006-1027, 2006 TNT 12-3 The article explains how Viva Hammer, an attorney-adviser in Treasury's Office of Tax Legislative Counsel, defended the requirement that mid-market value of swaps be used when she appeared in New York January 17 at a Foundation for Accounting Education conference on the taxation of financial instruments.
The Statistics of Income Division has released Tax Stats 2006-02, Exempt Organizations' Unrelated Business Income Tax, 2002 (1/18/06):
Seven tables presenting statistics for Tax Year 2002 from Forms 990-T, Exempt Organization Business Income Tax Returns, are now available. The tables include statistics for the number of returns, gross unrelated business income, deductions, unrelated business taxable income, and total tax of these organizations. The statistics are classified by Internal Revenue Code section, size of gross unrelated business income, size of unrelated business taxable income or deficit, primary unrelated business activity, and type of entity.
The New York State Bar Association Tax Section has submitted several letters and reports to the IRS on a variety of tax issues:
- Loss Importation and Duplication (No. 1101)
- Proposed Dual Consolidated Loss Regulations (No. 1100)
Friday, January 20, 2006
Dean on Attractive Complexity: Tax Deregulation, the Check-the-Box Election and the Future of Tax Simplification
Steven A. Dean (Brooklyn) has posted Attractive Complexity: Tax Deregulation, the Check-the-Box Election and the Future of Tax Simplification, 34 Hofstra L. Rev. ___ (forthcoming 2006), which he presented at the AALS Tax Section's Annual Meeting this month (blogged here), on SSRN. Here is the abstract:
Political failure has long been the scapegoat for the increasing complexity of the income tax. Over the last few decades, confusion over the meaning of the term "simplification" appears to have become a second important obstacle to creating simpler tax laws. Because some tax complexity is attractive to taxpayers, relying on taxpayer preferences to identify complexity and to guide simplification efforts has produced reforms and proposals that promise simplification but instead deliver pro-taxpayer deregulation that may cause more of society’s resources to be devoted to paying, minimizing and collecting taxes rather than less. The check-the-box election, which provided taxpayers with greater flexibility to choose and change the classification of business entities while having only an ambiguous impact on the tax law's complexity, offers a clear example of the misidentification of a deregulatory reform as a simplification reform. The simplification proposals offered by the bipartisan tax reform panel in 2005 would have done an equally poor job of simplifying the tax law.
A rational taxpayer will always embrace a complex tax rule when its economic costs (e.g. $100 in time and legal fees) are more than offset by tax benefits the rule facilitates (e.g. $101 in tax savings). Although that rule's complexity is attractive to taxpayers, it still consumes $100 of society's resources. To prevent attractive complexity from transforming tax simplification into tax deregulation, it is important to adopt an objective approach to identifying and measuring complexity. Recognizing that rational taxpayers will sometimes prefer complexity over simplicity will help prevent attractive complexity from undermining the success of efforts to simplify the tax law.
The Tax Foundation reports (Lottery Taxes Divert Income from Retirement Savings) that Americans who think that lotteries are good ways to save for retirement are sadly mistaken: Since lotteries on average return just 53 cents on the dollar, few players beat the odds," For the average investor returns on stock-market investing beat lotteries by more than 800% over a 40-year period."
Interestiung editorial in today's New York Times: Guilty Until Proven Innocent:
The taxpayer advocate at the IRS told Congress last week that since 2001, the IRS has labeled as fraudulent the tax returns of 1.6 million people and has frozen their refunds without notice, although most appear to have done nothing wrong [blogged here]. Overwhelmingly, the taxpayers are poor and are simply applying for a break created for them.
Members of the staff of the Senate Finance Committee, which oversees the IRS, met in private yesterday with crime investigators from the agency. The committee's chairman then issued a letter to the Treasury secretary with the right goal: correcting the IRS's apparent failure to balance the rights of taxpayers against the need to fight fraud. But the issues raised by the frozen refunds don't end there. Congress should hold public hearings....
The most stratospheric estimate for the questionable refunds sought by the poor is $9 billion a year, of which fraud is likely to be only a small part. And yet, as Ms. Olson pointed out, the IRS devotes vastly more resources to refund fraud than to the millions of people who fail to file returns or who underreport their incomes, at a cost to the Treasury of an estimated $100 billion a year. Audits of high-income individuals have increased recently, but little headway has been seen against the illegal offshore sheltering of personal wealth that the IRS, in 2002, said costs the Treasury an estimated $20 billion to $40 billion a year.
Tax policy during the Bush years has greatly favored rich taxpayers at the ultimate expense of the poor. Tax collection must not do the same.
Robert Willens (Managing Director, Lehman Brothers, New York) has published There's Room for Judgment in Assessing "Relatedness," 110 Tax Notes 281 (Jan. 16, 2006), also available on the Tax Analysts web site as Doc 2005-25317, 2006 TNT 11-24. The article discusses the extent of the room for judgment in determining whether persons are "related" for purposes of the § 318 attribution rules.
On Tuesday, we blogged the litigation between the two biggest tax preparation software programs -- TurboTax (Intuit) and TaxCut (H&R Block) -- over Intuit's remarks about H&R Block in a $25 million national advertising campaign. The Associated Press reports that Intuit has agreed to pull the ads which claimed that "more returns were prepared with TurboTax last year than at all the H&R Block stores."
The IRS has announced (IR-2006-16) that taxpayers who live in one of eleven states -- Colorado, Delaware, Kansas, Maryland, Mississippi, Nebraska, New Mexico, Ohio, South Dakota, Virginia, and West Virginia -- and the District of Columbia will need to file their 2005 tax returns in different service centers than they have filed returns in the past. Taxpayers should send:
- Returns from Delaware and Virginia to the IRS Center in Atlanta, Georgia
- Returns from the District of Columbia and Maryland to the IRS Center in Andover, Massachusetts
- Returns from Ohio to the IRS Center in Kansas City, Missouri
- Returns from Kansas, Mississippi and West Virginia to the IRS Center in Austin, Texas
- Returns from Colorado, Nebraska, New Mexico, and South Dakota to the IRS Center in Fresno, California
Thursday, January 19, 2006
Elizabeth Garrett (USC) presents The Final Report of the President's Advisory Panel on Federal Tax Reform today at UCLA as part of its Tax Policy and Public Finance Workshop Series, moderated by Eric Zolt & Victor Fleischer. Her discussion will center on:
- Statement Concerning the Release of the Final Report of the President's Panel on Tax Reform
- Chapter 5 of the Final Report
- Chapter 6 of the Final Report
(Beth was one of the members of the President's Advisory Panel on Federal Tax Reform that issued its Final Report on November 1, 2005.) The workshop will be held at UCLA School of Law, Room 2448, 4:00 - 6:00 p.m. PST.
Today's Chronicle of Higher Education reports on the brouhaha caused by UCLAProfs.com, a web site started by an alumni group to "expose UCLA’s most radical professors. " The article, Independent Alumni Group Offers $100 Bounties to UCLA Students Who Ferret Out Classroom Bias, notes that the group was founded by Andrew Jones, a 2003 UCLA graduate and former leader of the campus's Republican group.
Eight UCLA law profs are profiled on the site, which has generated commentary from some UCLA law profs:
- Stephen Bainbridge, The Power of Technology
- Jerry Kang, Blacklist
- Eugene Volokh, Hot News Just In!
- Eugene Volokh, Criticisms of UCLA Professors
For other commentary, see:
- Inside Higher Ed, The New Class Monitors
- L.A. Times, UCLA Alumni Group Is Tracking "Radical" Faculty
- Daily Kos, Students Being Paid by Right Wing Group to Report on UCLA Faculty
- Crooked Timber, Radical Professors Exposed, Woo
- Capitol Weekly, Bruin Alumni Association Targets "Radical" Faculty
- The Debate Link, The Radicals Exposing UCLA's "Radicals"
Special Prosecutor Accuses Clinton Administration of Blocking Investigation Into Whether Cisneros Dodged Taxes on Payments to Mistress
Interesting article in today's New York Times, Inquiry on Clinton Official Ends With Accusations of Cover-Up, by David Johnston & Neil A. Lewis:
After the longest independent counsel investigation in history, the prosecutor in the case of former Housing Secretary Henry G. Cisneros is finally closing his operation with a scathing report accusing Clinton administration officials of thwarting an inquiry into whether Mr. Cisneros evaded paying income taxes....
The final report, scheduled to be made public on Thursday, discusses in detail why the office remained in operation for so long: an intense behind-the-scenes clash between senior Justice Department officials and Mr. Barrett, who was trying to explore possible obstruction of justice within the Justice Department and the IRS....
The report reveals little new about the accusations that led to Mr. Barrett's appointment - that Mr. Cisneros misled investigators about payments to a former mistress. Those issues were the subject of news accounts during the 1990's. But it was not widely known that Mr. Barrett believed that Mr. Cisneros's handling of the payments to the former mistress might have violated tax laws or that he suspected Justice Department and IRS officials of criminal obstruction to help Mr. Cisneros avoid scrutiny. The New York Daily News reported on Wednesday that Mr. Barrett would issue a report alleging a Clinton administration cover-up of Mr. Cisneros's tax problems.
Mr. Barrett's 746-page report said that the tax and obstruction phase of the inquiry ended without a definitive conclusion, but it declared: "These agencies' treatment of possible charges against Cisneros was at best questionable and at worst represented serious wrongdoing. There seems to be no question that Cisneros was given special consideration and more limited scrutiny because of who he was - an important political appointee."...
Mr. Barrett said IRS officials in Washington took over a district-level inquiry in Texas into Mr. Cisneros's taxes and concluded that there was insufficient evidence to go ahead with a criminal investigation. But in a 1997 memorandum protesting the decision, an I.R.S. investigator in Texas said there was evidence that Mr. Cisneros had diverted substantial parts of his speaking fees in the early 1990's to the former mistress, without the knowledge of co-workers. But other IRS and Justice Department officials said that a fairly complete listing of Mr. Cisneros's income from various sources was available to his accountants, whom he relied on to prepare his tax returns. That would have made it impossible to sustain a prosecution, they said.
Interesting article in today's Wall Street Journal: Is Inequality Over Wages Worsening?, by David Wessel:
A distinguishing feature of the U.S. economy of the past quarter-century is a sharp increase in economic inequality. No matter how you slice the data, very well-paid folks have done better than the rest....
About 11% of income (and that's not counting capital gains) went to the best-off ½% of Americans in 2002; 25 years earlier, they got 5.25%, according to IRS data crunched by University of California at Berkeley economist Emmanuel Saez. Workers at the 90th percentile (those who earn more than 90% of all workers) earned 4.5 times as much as those in the 10th percentile in 2004; 25 years earlier, they were earning 3.5 times as much, according to Bureau of Labor Statistics data crunched by Harvard economist Lawrence Katz. Clearly, something continues to favor the fortunate: Although economic growth in the past few years has been robust and productivity has surged, wages of typical workers in the middle aren't rising. Where's the money going?...
[T]he only way to restrain inequality is to tamper with the market by raising the minimum wage or lifting taxes at the top...
Raskolnikov Presents An Economic Analysis of Tax Enforcement and the Self-Adjusting Penalty Today at NYU
Alex Raskolnikov (Columbia) presents An Economic Analysis of Tax Enforcement and the Self-Adjusting Penalty at NYU today as part of its Colloquium on Tax Policy and Public Finance series conducted by Alan Auerbach and Daniel Shaviro. Here is the abstract:
Avoidance and evasion continue to frustrate the government’s efforts to collect much needed tax revenues. This article articulates one of the reasons for this lack of success and proposes a new type of penalty that would strengthen tax enforcement while improving efficiency. The economic analysis of deterrence suggests that rational taxpayers choose among various avoidance or evasion strategies that are subject to identical statutory sanctions those that are more difficult for the government to find. I argue that many taxpayers do just that. Because probability of detection varies dramatically among different items on a tax return while nominal penalties do not take likelihood of detection into account, expected penalties for inconspicuous noncompliance are particularly low. Adjusting existing penalties will not solve the problem because what is (and is not) inconspicuous depends on a given tax return and, therefore, is not susceptible to the type of generalization on which the current penalties rely. This article proposes to complement the existing sanctions with a new penalty. Instead of defining it as a fixed dollar amount or a fixed percentage of a tax underpayment as we do today, I propose to set the new penalty equal to a fraction of the legitimate subtraction item (such as a deduction, credit, or loss) reported on the same line of a return that contains the illegitimate one. With this penalty in place, the harder it is for the government to find a given avoidance transaction, the higher is the statutory sanction if the transaction is detected. The proposed penalty adjusts itself. As a result, the differences in expected penalties for many types of avoidance and, to a lesser extent, evasion are reduced, the inefficient incentive to hide noncompliance is diminished, and the overall deterrence is improved.
The Colloquium will be held in Room 120 of Furman Hall from 4:00 - 6:00 p.m. EST. Although the public is invited to attend, due to heightened security throughout NYU Law, please contact Rosemary Simon so she can provide the Guard's desk with your name.
Staudt Presents Auditing the Court: Congressional Oversight of Supreme Court Decision-Making Today at Florida State
A post by Rosa Brooks (Virginia) on the new LawCulture Blog, Goodbye to Law Reviews?, has caused a kerfuffle in the law prof blogosphere for her suggestion that she may stop publishing law review articles now that she has tenure. For some of the reactions, see:
- Mark Fenster (Florida)
- Paul Horwitz (Southwestern)
- Orin Kerr (George Washington)
- Ethan Leib (Hastings)
- Jim Maule (Villanova)
- Larry Ribstein (Illinois)
- Dan Solove (George Washington)
For Professor Brooks' follow-up post, see here. (Professor Brooks also caused quite a stir recently by raising in an L.A. Times op-ed the possibility of impeaching President Bush for approving wiretaps of Americans with ties to al Qaeda.)
We previously have blogged scholarly (here, here, and here) and popular press (here) articles about the "fat tax," a/k/a "Twinkie tax" -- proposals to increase the tax burden on unhealthy foods. The latest example of the latter is from HealthDay News and reprinted in various media outlets: The Fat Tax: A Controversial Tool in War Against Obesity:
[S]ome legislators across the country are moving full-steam ahead to get food-related levies on the books. New York State Assemblyman Felix Ortiz, a Democrat from New York City, is one such proponent of the fat tax. For three years Ortiz has championed a bill that would ding any foods high in calories, fat or carbs -- including perennial favorites such as potato chips, candies and french fries. The bill would also add a one-cent surcharge on video games.
(Hat Tip: Ann Murphy (Gonzaga) .)
Joel S. Newman (Wake Forest) has published Rabbi Trusts for Indian Children: The Story of a Revenue Procedure, 110 Tax Notes 265 (Jan. 16, 2006), also available on the Tax Analysts web site as Doc 2005-25319, 2006 TNT 11-20. The article tells the story of Revenue Procedure 2003-14, designed as a safe harbor to allow Indian tribes to get rabbi trust treatment when they establish trusts to hold casino revenues for the benefit of Indian children.
United for a Fair Economy has posted on its web site Six Things You Can Do to Protest the Tax-Shift Agenda:
- Sign the Petition Against Estate Tax Repeal. Sign the Call to Preserve the Estate Tax, a national petition advocating for reforming the estate tax, but not repealing it. This will link you into action organizing around to oppose repeal of the estate tax when there are votes in Congress.
- Creative Action on Local Tax Cuts. Put up posters and stickers to Connect the Dots between local budget cuts and the Tax-Shift agenda. Get stickers and downloadable posters.
- Take the Tax Fairness Pledge. Did you get a tax cut that was good for you personally, but you feel it was bad for the country? Here’s a way to protest. You can take the Tax Fairness Pledge. You can register a statement and redirect all or part of your tax break to support organizing for fair taxation at the state and federal level.
- Join the Resolution Campaign. Get your organization and municipality to pass a resolution instructing your federal representatives to vote against tax breaks for multi-millionaires and for funding direct aid to the states. For more information, sample resolutions and a list of participating organizations and municipalities, see here.
- Join the Fair Taxes for All coalition. Get your local organization to join the national coalition working to stop the “Shrink, Shift & Shaft” tax agenda.
- Educate Yourself and Others About Tax Issues. Books about the current tax debate:
- Perfectly Legal:The Secret Campaign to Rig Our Tax System to Benefit the Super Rich — And Cheat Everybody Else, by David Cay Johnston (New York: Portfolio/Penguin Group, 2003).
- Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes, by William Gates Sr. and Chuck Collins (Boston: Beacon Press, 2003).
The Top 5 law school sources of Supreme Court clerks during this period were:
- Harvard (128)
- Yale (100)
- Chicago (65)
- Stanford (42)
- Columbia (32)
Some suprising schools in the Top 20: Notre Dame (#14; 6), George Washington (#15; 5); BYU (#18; 3); and Kansas (#18; 3).
Wednesday, January 18, 2006
More than 70% of the nation’s taxpayers [those with adjusted gross incomes of $50,000 or less] – more than 92 million people - qualify for Free File this year. A new agreement between the IRS and the Free File Alliance, the consortium of tax preparation software companies, means enhanced services and more information for taxpayers who use the free services.
For prior TaxProf Blog coverage of Free File, see here.
Last week, we continued our coverage of the issue of whether on-line gamers are taxable on gains from trading virtual property. Joe Bankman weighed in on the issue yesterday on CNet News (Are Virtual Assets Taxable?):
[S]ince the trafficking of virtual goods from games like "World of Warcraft," "City of Heroes" and "Star Wars Galaxies" on exchanges like eBay sets their fair market value, the millions of online game players are collectively holding tens or even hundreds of millions of dollars' worth of these digital assets at any one time. And some would say that's a target the IRS can't ignore forever, raising the tricky question of whether virtual goods that are frequently bartered and exchanged in the gaming world can be deemed a taxable possession before they are sold for real-world money.
While most online game publishers try to sidestep the issue by saying in their terms of service that players don't control the property rights to their game assets, some say there's no theoretical reason the government shouldn't come calling for its fair share.
"From the standpoint of economic theory...there's no fundamental distinction between selling euros and buying magic wands," said Ted Castronova, an expert on virtual economies and an associate professor of telecommunications at the University of Indiana at Bloomington. "They carry value with them. If you're going to tax exchanges in the real world, you've got to tax exchanges in the virtual world, in economic theory." The problem, said Castronova, is that it's not about economics. "It's about common sense," he said. "Common sense says that when people are playing a game of Monopoly, you don't tax (the properties they buy and sell)."
[Julian] Dibbell [author of an article on the subject in this month's Legal Affairs (blogged here)] isn't so sure. He said that while the IRS has ruled that some forms of goods with inherent value--such as then St. Louis Cardinals star Mark McGwire's record-breaking home run ball from 1998--are not taxable assets until they are sold, that may not always be true. "As the RMT (real money trading) markets get bigger and more normalized, how long are the tax agencies of the world going to forebear?" Dibbell asked during an interview with CNET News.com. "At a certain point, it will be less crazy-looking to everybody and therefore more palatable, and there will be more money involved."...
But observers of online games worry that the IRS doing so could be a disaster for online games. That's because it would require the constant tracking of the value of every kind of in-game asset and of all nonmonetary transactions. "That would be an apocalypse for developers," said Matt Mihaly, CEO of Iron Realms, which publishes such online games as "Imperian" and "Lusternia."...
To Joseph Bankman, a professor at Stanford Law School, the question is not one game players or publishers should worry too much about. "I think the common-sense answer is that the IRS wouldn't and shouldn't go after folks until they sell the assets," Bankman said. "The common sense reason for this is that for most folks, the 'assets' represent enjoyment value--what we call imputed income--that's not taxed. It's a little bit like getting an autograph of a baseball player or movie star. You could sell the autograph, and folks do, but we don't tax folks who get the autographs and don't sell them." For its part, the IRS would say only that it expects players to report any real-world earnings from the sale of virtual goods. But in his article, Dibbell said the agency had suggested it might consider at least some of the assets taxable barter goods.
For prior TaxProf Blog Coverage, see:
- Can the IRS Tax Virtual Profits in On-Line Gaming?
- Virtual Taxes: The Next Frontier in Virtual Property Rights in On-Line Gaming?
Interesting article in today's Chronicle of Higher Education: State Support for Higher Education Has "No Correlation" With College Quality, Report Says, by Anne K. Walters:
Public colleges in states that spend a lot of money on higher education aren't necessarily better than colleges in states that provide them with meager support, according to a report that ranks states based on an analysis of their higher-education budgets and the performance of their colleges. The report, which was prepared by the National Center for Higher Education Management Systems, attempts to answer the age-old question in debates over state financing of higher education: Does more money equal better quality? The report, A New Look at the Institutional Component of Higher Education Finance: A Guide for Evaluating Performance Relative to Financial Resources [by Patrick J. Kelly & Dennis P. Jones] compares state funds for higher education in each state with colleges' performance in a variety of areas, including graduation and participation rates. The report concludes that education can succeed even when state support falls.
Here are the Top 10 and Top 10 rankings for "performance relative to funding" for both state higher educations systems as a whole and public research institutions:
State Higher Education Systems
Public Research Institutions
Welcome (back) to the tax prof blogosphere: Allison Christians (Wisconsin). Allison is guest blogging for the second time at Conglomerate; she also previously guest blogged on TaxProf Blog. Her inaugural posts this time around are on:
Last Friday, we brought you the news of the death of Edwin S. Cohen, Undersecretary of the Treasury in the Nixon Administration and longtime tax professor at Virginia, at age 91. His obituary appears in yesterday's Washington Post and today's New York Times.
Interesting tax articles in today's Wall Street Journal:
- Low-Tax Tiger (op-ed), by Lawrence Kudlow:
A year ago Gov. George Pataki asked me to chair a commission on tax reform that would improve New York state's outlook for investment, job creation and economic prosperity. After numerous meetings, a review of the existing tax literature, and lengthy deliberation, we have come up with a statement of principles and a series of policy recommendations to promote an investment-friendly state tax structure that could, if implemented, restore New York to a preeminent economic position.
- Change in Law Offers Incentive To Settle With IRS on Shelters, by Tom Herman:
A recent tax-law change creates an additional incentive for thousands of taxpayers to accept an IRS offer to settle tax-shelter battles involving billions of dollars of taxes, penalties and interest. Monday is the deadline for deciding whether to take part in the IRS offer, which was made late last year as part of the government's crackdown on shelters and other transactions it considers questionable. The IRS says it already knows of more than 4,000 people and businesses that participated in 21 shelters covered by the offer, which allows taxpayers involved to pay reduced penalties.
Tax lawyers predict that many taxpayers will grab the IRS offer, in part because of a little-noticed tax change enacted just a few weeks ago that could sharply reduce the amount of interest many shelter users would have to pay. That provision -- buried in what is known as the Gulf Opportunity Zone Act of 2005, which was designed mainly to help the Gulf Coast recover from hurricane devastation -- changed the rules for calculating interest on tax debts owed by individuals. In essence, the new law means many taxpayers who accept the IRS settlement offer could save large amounts of interest.
- Bond Tax Haven May Be Closing, by Liz Rappaport:
It looks like the jig is up for some convertible-bond issuers. A provision in the Senate version of the pending tax-relief bill stipulates that companies that issue a certain type of convertible will likely have to pay up in the future, after enjoying four years of tax heaven. Convertible bonds are hybrid securities that pay some interest but allow investors to convert into the issuer's stock under certain conditions.
The tax law previously allowed these companies to deduct their comparable cost of borrowing in the traditional corporate-bond market, which is typically higher than that in the convertibles market. If the new tax law is enacted with the provision, any company that issues this type of security wouldn't receive such beneficial treatment....
Companies affected will be those who sell convertible bonds with a contingent-payment feature, meaning they pay different rates of interest at different points in the life of the security, depending on whether the bonds trade above or below a certain price, for example. Passage of the provision would be a death knell for this type of convertible, which was already waning in popularity. By some estimates, slightly less than 25% of the convertible-bond universe employs the contingent-interest payment feature.
Proving, yet again, that tax issues lurk in the strangest places, see this Associated Press story: Shatner Sells Kidney Stone for Charity:
An online casino has a piece of Capt. Kirk. Actor William Shatner has sold his kidney stone for $25,000, with the money going to a housing charity, it was announced Tuesday. Shatner reached agreement Monday to sell the stone to GoldenPalace.com....
The money will go to Habitat for Humanity, which builds houses for the needy. "This would be the first Habitat for Humanity house built out of stone," joked Darren Julien, president of Los Angeles-based Julien's Auctions, which handled the sale. Shatner, who played Kirk on the original "Star Trek" TV show and won an Emmy for his role on "Boston Legal," passed the stone last fall. The stone was so big, Shatner said, "you'd want to wear it on your finger."
Tax issues abound. Does Shatner have income on the sale of the kidney stone? If so, how much -- what is his basis in the kidney stone? Should he instead have donated the kidney stone directly to Habit for Humanity? If so, how would he have established the value of the charitable donation? Would Habitat for Humanity have had Unrelated Business Income on the sale of the kidney stone to the Golden Palace? Comments are open! (Hat Tip: Bryan Camp (Texas Tech).)
Last week, we blogged the motion filed by the Transactional Records Access Clearinghouse (TRAC) of Syracuse University claiming that the IRS has violated a longstanding court order by stopping to provide TRAC with detailed statistics about how the agency enforces the nation’s tax laws. Here are some updates:
- NY Times Editorial (1/17): What Is the I.R.S. Trying to Hide?:
The motion was filed by Prof. Susan Long, who teaches statistics at Syracuse University. In 1974, while writing her dissertation, Professor Long sued the I.R.S. for access to agency statistics. In 1976, she won an order entitling her to the audit data on an ongoing basis. Today, much of what the public knows about the I.R.S. is based on data she has gathered...
In May 2004, the I.R.S. refused to release figures Professor Long had requested. The timing was curious. A month earlier, she had posted data showing sharply fewer corporate audits in 2003 and had critically contrasted the data with public comments in early 2004 by the I.R.S. commissioner, Mark Everson, about cracking down on corporate wrongdoing. The I.R.S. says the events aren't connected.
First, the agency told Professor Long that it was under no obligation to provide the data. Reminded of the court order, the I.R.S. now says that Professor Long's requests have become excessive and could inadvertently reveal the identities of taxpayers. Professor Long simply asks the court to enforce its order. She deserves to prevail again.
- Boston Heald Editorial (1/15): Time to put IRS on the Hot Seat:
There is seemingly no end to the stupidities of the Internal Revenue Service. Congress ought to put the agency on the hot seat again.... Analyses like those of TRAC and the public advocate are essential for Congress and the public to judge whether the nation’s taxes are collected fairly and efficiently. Something produced by bureaucrats may start out sound but be subject to suppression or distortion up the chain of command. Only Congress can pry the data loose.
- Linda Beale (A Taxing Matter) (1/9): IRS Enforcement, Government Secrecy and the TRAC Lawsuit:
Government secrecy means that government actions are not accountable to the people. If statements by commissioners or agents cannot be verified by independent analysis, we may not be able to trust in the credibility of those statements. Yet trust is central to our voluntary compliance system. It behooves the IRS to be more forthcoming with information about its enforcement efforts. If it does not do so voluntarily, then it is important for organizations like TRAC to follow through in the courts as TRAC is doing in this instance.
- Alicia Korney (Web CPA): IRS Looks the Hypocrite in Data Case:
It was just two months ago that IRS Commissioner Mark W. Everson touted his agency's enforcement results for the 2005 fiscal year. In public remarks that ran mostly like a recitation of statistics, Everson said that at the mid-point of his five-year term heading up the agency, strong progress continued to be made on one of his three main goals -- the enhancement of enforcement activities.
Funnily enough, it was just a little more than a year into Everson's term, May 2004, that the newly enforcement-focused IRS made the decision to stop providing a Syracuse University professor detailed records of its audits of major corporations and individuals in the highest tax brackets. The agency added that after providing the records free of charge to Dr. Susan Long for nearly 30 years, if such data were to again be made available to the public in the future, the information would cost $12,000 a month for electronic copies....
The case could go to trial as early as this month. Here's hoping Long gets another courtroom win, because transparency isn't about the public listening to the recitation of a federal agency's highlights alone.
- Associated Press (Michael J. Sniffen) (1/8): IRS Said to Improperly Restrict Access.
Darryll K. Jones (Pittsburgh) has published Criminalizing Tax Shelters and the "Damn Well" Reflex, 110 Tax Notes 285 (Jan. 16, 2006), also available on the Tax Analysts web site as Doc 2005-25805, 2006 TNT 11-25. The article calls for calls for criminal penalties for tax shelter-related activity.
United for a Fair Economy has published Nothing to be Thankful For: Tax Cuts and the Deteriorating U.S. Job Market, by Anisha Desai, Scott Klinger, Gloribell Mota, & Liz Stanton (all of United for a Fair Economy). Here is the Executive Summary:
The Bush administration’s promise that tax cuts for the rich would trickle down to workers has been broken. And when tax cuts and more tax cuts haven’t succeeded in job creation or economic stimulus, how can we expect that still more tax cuts or permanent tax cuts somehow will? As another year of jobless recovery draws to a close, this report exposes the false claim that tax cuts have the power to create much-needed new jobs in our economy, and asks the question: “Have tax cuts given most of us anything to be thankful for?”
Cato Institute Releases Economic Amnesia: The Case against Oil Price Controls and Windfall Profit Taxes
The Cato Institute has published Economic Amnesia: The Case against Oil Price Controls and Windfall Profit Taxes, by Peter Van Doren & Jerry Taylor (both Senior Fellows, Cato Institute). Here is the Executive Summary:
The recent rise in gasoline prices has led many observers to call for government price controls and special taxes on oil companies. Yet policies that restrain prices result in less supply and conservation. Additional taxes reduce the incentive to invest in new supply. Because price controls and profit taxes can be levied only by the U.S. government on U.S.-based companies, such policies also increase the economic attractiveness of foreign relative to domestic oil. The U.S. experience with price controls from 1971 to 1980 and the Crude Oil Windfall Profit Tax from 1980 to 1988 amply demonstrates the problems.
There is no evidence to suggest that recently reported oil company profits are particularly large when contrasted with the profit margins of all public companies. Profits in the oil sector have historically been lower than profits in the rest of the U.S. economy, so profits would have to be quite large for some time before they equaled returns in other sectors of the economy. Restricting profit opportunities now would amount to a form of one-way capitalism in which meager profits are allowed but more robust profits are punished. Intervention under those conditions would certainly reduce the incentive to invest in the oil business.
Tuesday, January 17, 2006
After announcing (IR-2006-10) last Thursday (Jan. 12) that taxpayers could begin filing their 2005 tax returns electronically on January 13 (blogged here), the IRS today announced (IR-2006-14) that e-filing is not available until the end of this month for tax returns with any of these forms:
Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustments)
Form 8606, Nondeductible IRAs
Form 8863, Education Credits (Hope and Lifetime Learning Credits)
Form 8915, Qualified Hurricane Retirement Plan Distributions and Repayments
Form 3468, Investment Credit
Form 3800, General Business Credit
Form 5884-A, Credits for Employers Affected by Hurricane Katrina, Rita, or Wilma
General Tax Forms:
Form 8379, Injured Spouse Allocation
Form 8611, Recapture of Low Income Housing Credit
Form 8864, Biodiesel and Renewable Diesel Fuels Credit
Form 8896, Low Sulfur Diesel Fuel Production Credit
Form 8271, Investor Reporting of Tax Shelter Registration Number
Form 8886, Reportable Transaction Disclosure Statement
The IRS tried to put the best spin it could on the news:
13 forms will not be available for e-file until the end of January. None of the most commonly used forms are affected by the delay, and 114 other forms remain available for e-filing.
But the IRS also conceded:
Based on last year’s January filings, a few hundred thousand taxpayers could be affected by the delay, with the largest group involving people filing Form 8863, “Education Credits.”
The IRS offers this advice:
Affected taxpayers who e-file should wait until the end of January to submit their returns. They will be unable to file electronically these forms in the interim. Affected taxpayers can still file on paper from copies of the forms posted on the IRS.gov website, but the agency noted that waiting to e-file until the end of the month will still generally result in a faster refund because of the faster processing times for electronic returns. The IRS anticipates that all of the forms and related computer-programming changes will be complete by the end of January.
Louis Kaplow (Harvard) presents Taxation of Families at Chicago as part of the John M. Olin Program in Law & Economics Workshop Series. Here is the abstract:
Tax schedules and transfer programs can and often do depend on family structure, notably, on whether there are one or two adults and on the number of children. How taxes and transfers should depend on family characteristics has proved controversial, and treatment of different family types exhibits substantial variation among programs, across countries, and over time. This chapter (from a book manuscript, “Taxation and Redistribution”) analyzes taxation of families as an extension of the optimal income taxation framework. This chapter begins by considering a simplified setting in which only distribution across families is at issue. The latter portion of this chapter takes up incentive concerns, first, involving labor effort, the focus of most optimal income tax analysis, and, second, involving family structure.
The worskhop begins at 4:00 p.m. CST in Seminar Room F.
Histories of federal taxation typically treat the 1920s as a decade of huge tax cuts for the wealthy. The Twenties, we are told, mark a period of retrenchment between the crises of World War I and the Depression. According to the standard story, the First World War, the Great Depression, and the Second World War imposed unprecedented fiscal demands, which eventually transformed the income tax from a tiny, mostly symbolic levy into the fiscal workhorse of modern government. The Twenties, in contrast, typically appear as an era of tax cuts and conservatism in business and politics, overseen by a succession of undistinguished Republican presidents.
For example, Elliott Brownlee describes the unprecedented growth in federal spending during World War I, sustained by high and progressive federal income taxation on the rich. Brownlee treats the Twenties as a period of backlash, writing that the federal income tax in that decade merely survived Republican efforts to “attack the most redistributional parts of the wartime tax system.” According to Brownlee’s story, only the emergency of mass unemployment and the election of Franklin D. Roosevelt in 1932 revived federal fiscal ambition and progressive taxation....
This article adds to the work of other scholars who have emphasized progressive features of Twenties fiscal politics. We enrich Benjamin Rader’s 1971 account of the success of progressive forces in shaping tax legislation in 1924. Rader accurately depicts the political configurations that pulled tax policy leftward. But even Rader misses the connection between taxation and the bonus – a flammable mixture that Coolidge and Mellon mishandled. Our analysis also complements Susan Murnane’s work, which emphasizes the Treasury’s ambitions during the Twenties to enact “scientific taxation” and improve the administration of the tax system. Our data confirm that the income tax continued its expanded role in federal finance throughout the decade, and our account of 1924 highlights the progressive forces that succeeded in the mid-Twenties in both maintaining the progressivity of the income tax and improving its administration. Our story also adds evidence for Joseph Thorndike’s observation of the great irony of Twenties taxation: Mellon’s years at Treasury would help lay the income tax foundations for the New Deal.
Our analysis challenges and complements the foundational work of Elliott Brownlee. We dispute Brownlee’s depiction of Twenties tax cuts, but we also endorse and deepen one of his big ideas – that the World Wars helped reshape the tax system. By highlighting the bonus and its role in tax politics in 1924, we deepen Brownlee’s idea that wars transform tax politics, and we uncover another channel through which World War I lingered on in fiscal politics well into the Twenties.
The workshop begins at 4:30 p.m. EST in Gittis 1.
This sentencing appeal involves a creative tax protest by defendant James McBride. After his girlfriend was convicted of tax evasion, McBride used a checking account that he had already closed to pay the property taxes of the judge who presided over his girlfriend’s trial, her two lawyers, and the IRS agent who had investigated his girlfriend. McBride then filed involuntary bankruptcy petitions against each of these individuals, claiming that they owed him money for the tax payments. He also paid the filing fee for each petition with the bogus checks. Creative, yes, but also a violation of several criminal statutes, including presenting a false claim against the government, obstructing the administration of tax laws, and bankruptcy fraud. Here, the Sixth Circuit affirms his sentence of 78 months.
PC Magazine reviews the three leading tax software products:
Here is PC Magazine's overview:
Intuit's TurboTax and H&R Block's TaxCut are both incredibly mature applications. Each has its own strengths, and each is recommended highly by us. They ask questions and provide voluminous guidance, you provide the answers, and they do the calculations and spit out the correct forms and schedules. TaxACT is our program of choice for taxpayers who need minimal guidance and for those who want to save a buck. Here we review all three.
Here are PC Magazine's detailed ratings:
(Hat Tip: The Tax Guru, who cautions that "[m]y opinion on the foolishness of relying on do-it-yourself tax prep software for the actual returns that will be sent to IRS and State tax agencies hasn’t changed any.")
For other reviews of TaxACT, TaxCut, and TurboTax, see:
- PC World: Intuit's TurboTax Retains Its Crown--Barely: H&R Block's TaxCut for 2005 makes a strong showing as well, and 2nd Story Software's TaxAct continues to be an appealing option for people with simple returns.
- TopTenReviews: 2006 Tax Software Report
- Home Office Reports: Review of Tax Preparation Software
- About.com: Top 3 Picks: Tax Preparation Software
- About.com: Top 5 Tax Software
The X-tax and the Hybrid Approach took different paths to their overlapping recommendations for a progressive consumption tax. The X-tax reacted to the conventional VAT's lack of tax-rate progressivity; the Hybrid Approach addressed revenue, transition, and tax avoidance concerns under the traditional cash flow tax. Together, these two independent proposals reinforce the merits of implementing a consumption tax, in part, through a progressive wage tax. The further overlap between these two independent proposals underscores the importance of a supplementary tax on consumption less wages. In addition to raising revenue and protecting the wage tax base, such supplementary tax highlights the serious flaw in the traditional assumption that a consumption tax comparatively exempts all investment return.
Interesting article in this morning's New York Sun: Clinton Eligible, Once Again, To Practice Law, by Josh Gerstein:
After five years of banishment from the legal profession, President Clinton will be eligible this week to reclaim the law license he gave up as a consequence of the inaccurate responses he gave under oath to questions about his relationship with a White House intern.
Mr. Clinton's suspension from the Arkansas bar, which he formally agreed to a day before leaving office in 2001, expires on Thursday. It is unclear whether the former president will seek reinstatement to the bar, but officials in Arkansas have been preparing for such a request....
A professor of legal ethics at New York University, Stephen Gillers, said he expected Mr. Clinton would seek to reclaim his Arkansas bar membership. "It would just be personal vindication," the professor said. "If he is admitted, he may see it as confirmation of his claim that the original transgression was not as bad as some made it out to be." Mr. Gillers said a law license also could help Mr. Clinton financially, by allowing him to become a rainmaker at a New York or Washington law firm....
While there appears to be little standing in the way of Mr. Clinton's reinstatement to the Arkansas bar, rules for admission in New York and Washington could pose a challenge to him quickly joining those bars. Admission by reciprocity to the New York bar requires that an applicant show that he or she has spent five of the last seven years working as a lawyer....Mr. Gillers noted that at any point Mr. Clinton could try to gain admission to the New York or Washington bars by taking the bar examination. Like other bar applicants, he would also have to demonstrate good moral character.
Interesting article in this morning's Chronicle of Higher Education, Colorado Governor Proposes Standardizing the Tenure Process, a Possible Response to the Ward Churchill Controversy, by John Gravios:
Gov. Bill Owens of Colorado said in his State of the State address last week that he wants to establish statewide standards for granting tenure at public universities -- a move that some Colorado professors see as a response to the controversy over Ward Churchill.
Mr. Churchill, a professor of ethnic studies at the University of Colorado at Boulder, came to be seen in the national news media as the quintessential professor run amok after it came to light that he had called some victims of the September 11, 2001, terrorist attacks "little Eichmanns" in an essay. Investigations of Mr. Churchill have since revealed that he received tenure without going through the standard review process, and the university has hired a consulting company to revamp its tenure policies....
Timothy McGettigan, president of the Faculty Senate at Colorado State University at Pueblo, said he thought the governor's remarks were part of a larger effort to rein in academe in the state.... "Trying to develop statewide standards for tenure doesn't make a lot of sense in Colorado because of the extraordinary differences between the state higher-education institutions," Mr. McGettigan said. "The responsibilities of faculty at the small state colleges do not compare in any very clear way to the responsibilities of faculty at the larger, flagship institutions."
As this year's president of the AALS tax section, I am trying to pick a topic for next year's panel presentation. I can't think of any tax topic that correlates well with the overall topic for next year's conference ("Scholarship and Service"), and was thinking of going with a topic I am particularly interested in: "Can the Income Tax Survive in a Globalized Economy?" At the same time, I recognize that many tax profs know very little about international tax issues, and may wish to keep it that way! So -- I am looking for reactions. Would you be interested in seeing a panel on this topic or should I pick a thoroughly domestic tax topic? And if so, any suggestions? Also, of course, if you are interested in presenting a paper on the Globalized Economy topic, I would love to hear from you. Thanks for your help.
Please email Julie here with your suggestions.
The publishers of the two biggest tax preparation software programs -- TurboTax (Intuit) and TaxCut (H&R Block) -- are embroiled in dueling lawsuits over Intuit's remarks about H&R Block in a $25 million national advertising campaign:
H&R Block alleged in its complaint that TV ads for TurboTax contained statements that "are literally false, deceptive and misleading" and damaging to the H&R Block name. H&R Block, which makes the tax preparation software TaxCut, alleges that Intuit falsely stated in the television ad that "more returns were prepared with TurboTax last year than at all the H&R Block stores combined." H&R Block said the more than 26 million returns its stores prepared last year far exceeds the 21 million prepared with TurboTax.
For press reports, see:
(Hat Tip: The Tax Guru.)
Walter Hellerstein (Georgia) has published Green Light, Red Light or Blue Light? New Mexico Sends Mixed Signals with Kmart Decision, 39 State Tax Notes 141 (Jan. 16, 2006), also available on the Tax Analysts web site as Doc 2006-555, 2006 STT 10-32. The article examines the New Mexico Supreme Court's decision in Kmart Corp. v. Taxation & Revenue Dep't, No. 27,269 (N.M. Sup. Ct., Dec. 29, 2005), which involves state power to tax out-of-state intangible holding companies.
Christine Hurt blogged the gift card program offered by Mader's Restaurant in Madison, Wisconsin, as recounted in the Milwaukee Journal Sentinel: To mark its 100th anniversary, the restaurant is selling $20 cards that can be redeemed for $5,000 in 2103 (roughly an 8% interest). The restaurant sells $50,000 - $70,000 of the cards each year but is not setting aside any cash to pay the liability due in 97 years. When asked by the reporter whether the growth rate was realistic, the restaurant manager replied: "'What do we care? We'll both be dead anyway."
So, before I go out and buy a zillion of them, how will this play out? I assume that the cards were issued by some sort of entity, either a corporation, an LLC, or an LP. When Mr. Mader dies, I assume this 100-year-old restaurant, started by his grandfather, will continue. The restaurant (entity that owns the restaurant) may in fact last another 100 years. The restaurant entity will then seem to be liable for up a very large sum should these cards not be lost. If the restaurant entity tries to liquidate in any way, before 2103, these obligations would have to be accounted for in some way. And, should the cards be lost, that money should escheat to the state, with the restaurant entity writing a check to the state of Wisconsin. There seem to be a lot of issues here that Mr. Mader does not see. Perhaps his heirs should talk to him.
Of course, I was intrigued by the many unanswered tax (and securities) questions. Do the OID rules require buyers of the gift cards to report the accrued interest as income each year? Can the restaurant deduct the accrued interest obligation each year? Comments are open!