TaxProf Blog

Tax Preparation Software Review: TurboTax #1, Tax Cut #2

Top 10 Reviews has published its review of the Top 10 Tax Preparation Software Programs for 2007.  The winners:

1. TurboTax
2. TaxCut
3. TaxAct

WSJ: Counterintuitive Tax Planning

Interesting article in today's Wall Street Journal:  When Flouting Convention Is Your Best Tax Bet; New Laws, AMT May Call For a Contrarian Approach; A Child, but Not a Dependent, by Tom Herman:

When you're working on your taxes, sometimes it pays to be illogical. Taking actions that seem to make no sense, such as passing up a juicy deduction, can be smart because of the growing complexity of our nation's tax laws -- and recent tax-law changes offer even more incentive to be a contrarian this year.

Counterintuitive strategies are becoming increasingly common as growing numbers of people are ensnared by the alternative minimum tax, or AMT. Some tax maneuvers that would make sense under the regular system can backfire if you're subject to the AMT, a parallel tax system designed decades ago to prevent a small number of high-income people from avoiding paying tax. Since the AMT wasn't indexed for inflation, it's now hitting rapidly growing numbers of Americans. Unless Congress changes the law, more than 23 million people will be caught in the AMT's web for 2007, up from about 3.5 million for 2006.

Here are a few examples of where upside-down thinking may help:

• Filing Separately
• Don't Claim Dependents
• Working Abroad
• Deduct Sales Taxes (even if lower than state and local income taxes)
• Itemizing Deductions (even if lower than standard deduction)

New Study: State & Local Business Taxes Rose 10.2% in 2006

The Council on State Taxation has released their annual study prepared with Ernst & Young, Total State and Local Business Taxes:  50-State Estimates for FY 2006.  Among the study's findings:

• State and local business taxes increased by 10.2% to $554 billion in FY2006
• State and local taxes have risen faster than taxes on non-businesses
• Businesses paid 49% of the additional state and local taxes collected from FY2002 - FY2006
• Property taxes on business property totaled $205 billion in FY 2006, equal to 37% of the total state and local business taxes

Bloomberg: Bush Health Plan Raises Taxes by $526 Billion

Interesting article on Bloomberg today:  Bush Health Plan Raises Taxes by $526 Billion, Report Says, by Ryan J. Donmoyer:

President George W. Bush's plan to revamp the health-care system would increase taxes on Americans by $526.2 billion over the next decade, according to a congressional estimate that calls into question administration claims of cost and tax savings. A "very preliminary" unreleased report by the staff of the non-partisan congressional Joint Committee on Taxation estimates that Bush's proposal would begin imposing higher taxes by 2011. Bush's plan, outlined in January, would replace incentives for employers to provide insurance for their workers with a tax deduction for individuals.

Fordham to Host Conference on Nonprofit Law, Economic Challenges, and the Future of Charities

Fordham hosts a conference on Nonprofit Law, Economic Challenges, and the Future of Charities on Friday, March 30:

This conference brings together academics and nonprofit leaders for an interdisciplinary discussion about the future of charities governance and law. Speakers will discuss the direction that nonprofit law and governance have been taking, considering whether there are gaps within the law itself and between law and practice, and whether the evolving legal regulation of nonprofit organizations is a force for innovation and growth or an impediment to creativity and efficiency. The nonprofit sector is concurrently criticized and applauded for emulating the for-profit world, and prominent issues for business corporations, such as accountability, executive compensation, and board independence have taken center stage in the discussion about nonprofit organizations. Conference participants will consider whether the questions and answers are the same for nonprofits as for business corporations on these issues, and how useful the business model is for both governance and regulation of nonprofit organizations. The centerpiece of the conference will be a moderated discussion between Glenn Lowry, Director of the Museum of Modern Art, New York, and Reynold Levy, President of Lincoln Center for the Performing Arts, about entrepreneurialism in nonprofit organizations, and the future direction of arts organizations.

ABA Tax Section Offers Teleconference & Webcast Today on Zero Basis

The ABA Tax Section offers a teleconference and webcast today on Zero Basis - Alive or Dead? from 1:00 - 2:30 p.m. EST:

This teleconference will address the recent revocation of Rev. Rul. 74-503 [in Rev. Rul. 2006-2] and whether an issuing corporation does or should have a zero basis in its stock or debt. Join our distinguished panelists as they discuss the history of the zero basis doctrine and explore alternative approaches to the issue.

Faculty:

• Bill Alexander (Associate Chief Counsel (Corporate), IRS)
• Jerred G. Blanchard, Jr. (Ernst & Young, Washington, D.C.)
• Audrey Nacamuli (General Electric Corp.)

An Inconvenient Truth: "Green" Replacement for Oscar Gift Bags Poses Tax Problems for Academy and Hollywood Stars

After multiple posts (collected here) on the tax consequences of the gift bags given to celebrities at the Oscars, I can't resist the new tax wrinkle posed by Sunday night's show:

From the New York Post:

Hollywood's wealthy liberals can now avoid any guilt they might feel for consuming so much non-renewable fossil fuel in their private jets, their SUVs, and their multiple air-conditioned mansions. This year's Oscar goodie bag contained gift certificates representing 100,000 pounds of greenhouse gas reductions from TerraPass, which describes itself as a "carbon offset retailer." The 100,000 pounds "are enough to balance out an average year in the life of an Academy Award presenter," a press release from TerraPass asserts. "For example, 100,000 pounds is the total amount of carbon dioxide created by 20,000 miles of driving, 40,000 miles on commercial airlines, 20 hours in a private jet and a large house in Los Angeles. The greenhouse gas reductions will be accomplished through TerraPass' [program] of verified wind energy, cow power [collecting methane from manure] and efficiency projects." Voila, guilt-free consumption! It reminds us of the era when rich Catholics paid the church for "dispensations" that would shorten their terms in Purgatory.

TerraPass has more details on its blog:

As the value of the gift bags — stuffed with offers of exotic vacations, jewelry, cars, and the like — approached $100,000, the IRS took notice as well.

The Academy decided this year to get rid of the gift bags. They had outlived their usefulness as a means of expressing gratitude — nothing says thank you like a massive tax bill.

This is where TerraPass comes in. Looking for a more restrained token of appreciation in keeping with the spirit of the evening, the Academy decided to give each presenter and performer a year of carbon neutral living. The gift consists of a glass sculpture from designer Simon Pearce and 100,000 lbs of CO2 reductions from TerraPass.

Carter Wood notes that the Academy may have generated a tax problem for itself and for the recipeints since the value of the green replacement for the gift bags may well exceed the $600 information return threshold:

The Simon Pearce sculpture retails for $650 (although that price includes 30 metric tons of carbon dioxide reductions), and TerraPass sells 20,000 lbs. of CO2 reductions for $79.95, so 100,000 lbs. would go for $399.75. We're not accountants, but that combination looks taxable to us.

Perhaps the IRS will update its Gift Bag Questions and Answers page to address the tax consequences of the receipt of the sculpture and carbon certificates.

Update:  Adam Stein, a co-founder of TerraPass, comments that the Academy planned around any tax problems:

The Academy was very well aware of the $600 gift limit. The total cost of the sculpture and carbon came to $575 per recipient. As you note, the sculpture retails for $650. You'd have to raise the price to about $785 if you also wanted the full 100,000 lbs of CO2 reductions. This figure is close to what the Academy paid, but is obviously a bit higher. Why the discrepancy? The answer is probably pretty obvious, but you always get a better deal on something when you buy wholesale in bulk. If you're in the market for 100 glass sculptures and 10 million lbs of CO2, please give us a call. I'm sure we can work something out.

No word on how the various stars plan to report the transaction.

Seto on Understanding the U.S. News Law School Rankings

Theodore P. Seto (Loyola-L.A.) has posted a revised version of his Understanding the U.S. News Law School Rankings (previously blogged here) on SSRN.  Here is the abstract:

This Article explores in detail the U.S. News & World Report law school rankings. Its descriptions, analyses, and conclusions are based primarily on U.S. News' published descriptions of its 2006 computations, telephone conversations with U.S. News' staff clarifying those descriptions, and a spreadsheet I have written that approximately replicates those computations. The Article's goals are relatively modest: to help prospective students, employers, and other law school stakeholders read the U.S. News rankings more critically and to help law school administrators get a better handle on how to manage their schools' rankings. In addition, the Article suggests ways in which U.S. News methodology might be improved. It does not, however, purport to offer a systematic critique of either the U.S. News rankings or ranking in general.

Part I describes both U.S. News' 2006 methodology and problems involved in replicating it. Part II is intended to help prospective students, employers, and other law school stakeholders read U.S. News' results intelligently. Prospective students and others trying to understand how to use U.S. News' rankings in their decision-making may wish to focus on this part, although a reading of Part I may also be necessary to understand some of the technical details. Part III addresses the problem of managing rankings. Part IV, finally, suggests ways in which the rankings might be improved.

Law School Rankings, Faculty Scholarship, and Associate Deans for Faculty Research

Richard Buckingham, Diane D'Angelo & Susan Vaughn (all of Suffolk) have posted Law School Rankings, Faculty Scholarship, and Associate Deans for Faculty Research on SSRN.  Here is the abstract:

The authors contend that a boom in law school rankings has encouraged many U.S. law schools to take new measures to encourage and publicize faculty scholarship. The establishment of associate deans for faculty research is one such measure. The authors conducted a study to determine the number of law schools that have these dean-level positions. They argue that many law schools have established these positions as part of their efforts to improve their standing in the increasingly important rankings.

The authors begin with a historical overview of the original law school model and discuss how that model evolved over time. They focus on how those changes led to a competitive law school market that helped lay the groundwork for U.S. News & World Report and other law school rankings. They then explore numerous alternative ranking methodologies and conclude with a study of ABA-accredited law schools that have appointed associate deans for faculty research.

JEC Holds Hearing Today on Meeting the Challenge of Income Instability

The Joint Economic Committee holds a hearing today on Meeting the Challenge of Income Instability:

Panel I:

• Peter Orszag (Director, Congressional Budget Office)

Panel II: 

• Lael Brainard (Vice President and Director, Global Economy and Development, The Brookings Institution)
• Maurice Emsellem (Public Policy Director, National Employment Law Project)
• Lily L. Batchelder (Assistant Professor, NYU)
• Bradley Schiller (Professor, School of Public Affairs, American University)

The hearing takes place at 9:30 a.m. in 562 Dirksen Senate Office Building

House Holds Hearing Today on Energy and Tax Policy

The House Ways & Means Committee holds a a hearing today on Energy and Tax Policy.  From the announcement:

For the past decade, there has been significant debate regarding the topic of global warming. Recent scientific evidence indicates that our dependence on fossil fuels as a source of energy is having an adverse impact on the environment. In his State of the Union address, President Bush asked Congress to work with him to reduce American dependence on gasoline and to increase the supply of alternative fuels. Numerous bills have already been introduced this Congress by members of both parties that would create new tax incentives or extend existing tax incentives for the development of renewable resources and increased energy efficiency.

The hearing will be held at 10:30 a.m. in 1100 Longworth House Office Building.

TP & Government Debate Application of Murphy in 4th Circuit § 104 Case

The taxpayer and the Government have filed briefs on the application of Murphy v. IRS, 460 F.3d 79 (D.C. Cir. 8/22/06), vacated & reh'g granted (12/22/06), in a 4th Circuit § 104(a)(2) case.  Clayton v. United States, No. 06-1976 (4th Cir.), on appeal from No. 5:04CV143 (N.D. W.Va. 7/31/06).  See below the fold for the excerpts from the parties' briefs.

Taxpayer's Brief (2/2/07):

Statement of the Issues

1. Whether settlement funds obtained by plaintiffs constituted restoration of capital?
2. Whether 26 U.S.C. § 104(a)(2) is unconstitutional because compensation for a non-physical personal injury is not income under the Sixteenth Amendment? Murphy v. IRS, 460 F.3d 79 (D.C. Cir. 2006).

Argument

II. The district court erred in granting summary judgment in favor of defendant because settlement funds constituted restoration of capital.

Congress may "tax all gains" or "accessions to wealth". Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430-31 (1955). Broad though this power is, the Supreme Court has long recognized "the principle that a restoration of capital [i]s not income; hence it [falls] outside the definition of 'income' upon which the law impose[s] tax." O'Gilvie v. United States, 519 U.S. 79, 84, (1996). ... The underlying tort case should be viewed as though the court awarded $3,400,000 to Denise Clayton and LeAnn Harris and their brothers. The settlement included $900,000 due to malfeasance by some of the defendants in the underlying case. The trust was not properly funded and the settlement money was deposited in the trust to replace what should have already been there. If the trust had been funded properly, there would have been other assets to pay the $3,400,000. JA 45. ...

III. After the district court granted summary judgment, Murphy v. IRS, 460 F.3d 79 (D.C. Cir. 2006) was decided finding § 104(a)(2) unconstitutional, and this Court should also so find.

Congress' power to tax income is explicitly found in the Sixteenth Amendment ... § 104(a)(2) excludes from gross income "the amount of any damage (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness." In Murphy v. I.R.S., 460 F.3d 79 (D.C. Cir. 2006), the court held that § 104(a)(2) is unconstitutional insofar as it permits the taxation of compensation for a personal injury, which is unrelated to lost wages or earnings. In Murphy, the taxpayer received a settlement for emotional distress, mental anguish and injury to her professional reputation. None of the award was for lost wages. The court first held that because the taxpayer's settlement was not "received ...on account of personal physical injuries", the settlement was taxable. The court went on to find § 104(a)(2) unconstitutional as applied to the taxpayer's settlement because compensation for a non-physical personal injury is not income under the Sixteenth Amendment. The court traced the history of the Amendment and concluded:

In sum, every indication is that damages received solely in compensation for a personal injury are not income within the meaning of that term in the Sixteenth Amendment. First, as compensation for the loss of a personal attribute, such as well-being or a good reputation, the damages are not received in lieu of income. Second, the framers of the Sixteenth Amendment would not have understood compensation for a personal injury - including a nonphysical injury - to be income. Therefore, we hold § 104(a)(2) unconstitutional insofar as it permits the taxation of an award of damages for mental distress and loss of reputation.

Id. at 92.

In the event this Court finds that plaintiffs' settlement is not restoration of capital, then this Court should join with the D.C. Court of Appeals' holding in Murphy and find § 104(a)(2) unconstitutional because compensation for a non-physical personal injury is not income under the Sixteenth Amendment.

DOJ's Brief (2/9/07):

A. The District Court correctly concluded that taxpayers could not exclude the relevant settlement proceeds from their gross income under I.R.C. § 102(a) because these proceeds compensated taxpayers for tortious wrongs rather than restored the missing inheritance ...

B. The District Court correctly held that taxpayers could not qualify to exclude the relevant settlement proceeds under I.R.C. § 104(a)(2) as compensation on account of personal physical injuries or sickness. ...

Taxpayers challenge the constitutionality of I.R.C. § 104(a)(2) based solely on Murphy v. I.R.S., 460 F.3d 79 (D.C. Cir. 2006), vacated, 2006 U.S. App. LEXIS 32293, at *1 (D.C. Cir. Dec. 22, 2006). To begin with, Murphy is no longer good law in any court, including the one that issued it. On December 22, 2006, the United States Court of Appeals for the District of Columbia Circuit granted rehearing in Murphy, expressly vacating the judgment on which taxpayers attempt to rely. See Murphy, 2006 U.S. App. LEXIS 32293, at *1. Taxpayers fail to give any reason, independent of this vacated decision, for this Court to disregard I.R.C. § 104(a)(2) as unconstitutional.

In any event, taxpayers have completely failed to explain how the constitutionality of this section, or lack thereof, would have any effect in their case. The vacated Murphy decision, on which taxpayers rely, explored the question of whether "a damage award for personal injuries - including nonphysical injuries - is not income but simply a return of capital." Murphy, 460 F.3d at 85. In the instant case, however, *29 taxpayers failed to establish the very starting point for Murphy's (now-withdrawn) analysis: a damage award on account of personal physical injuries or sickness. As the District Court noted, "[a]lthough plaintiffs provided testimony that they each suffered from physical sickness around the time of the proceedings, they have failed to show a direct link between the personal injuries and the settlement recovery." (JA 195.) While taxpayers mentioned in their depositions some nausea and headaches during the pendency of the state court suit (JA 166, 170), neither connected the relevant settlement funds to these symptoms.

Nor does the underlying complaint provide any support to taxpayers. While the complaint alleges mental and physical harm stemming from each of the first six charged torts, such contentions only apply to Joseph Tankovits, the named plaintiff. "Plaintiff has suffered mental and physical harm and anguish, humiliation and inconvenience." (JA 98, 100, 102, 104, 106, 110) (emphasis added). These are the only allegations of mental or physical harm in the complaint, and they relate exclusively to the named plaintiff. Further, taxpayers cannot argue that this language implicitly included them, as the complaint contained *30 a different, consistent refrain about the harms the beneficiaries as a whole suffered, to wit, "Plaintiff, similarly situated beneficiaries under the Estate and trusts, and the Estate and trusts themselves have suffered economic losses." (JA 98, 100, 102, 104, 106, 110-12) (emphasis added). As the claims in the complaint that relate to taxpayers seek to remedy solely economic harms, the $900,000, which settled these claims, cannot have been received on account of personal physical injuries or sickness.

Showing that the settlement proceeds were paid because of injuries or sickness is a sine qua non for Murphy's analysis. By failing in this regard, taxpayers' contentions are rendered meaningless.

New Tax Blog: Visual Tax

Welcome to the tax blogosphere:  Visual Tax, dedicated to "visualizing how tax works by applying engineering methods."  From the inaugural post:

This blog wants to apply mathematical concepts to give visual explanations of tax rules and to show that their form does (or sometimes doesn't) make sense.

Judging by the most recent post, I guess I'm a text man:

Four Tax Lawyers Leave Dechert for Reed Smith

Law.com reports that three tax partners (Lee Zoeller, Kyle Sollie & David Kraus) and one tax counsel (Frank Gallo) have left Dechert for Reed Smith.  According to the Reed Smith press release, all four will be tax partners at their new firm.

Raft on Imagining a Progressive and Comprehensive Consumption Tax

Sean Raft (Santa Clara) has posted Imagining a Progressive and Comprehensive Consumption Tax on SSRN.  Here is the abstract:

The income tax system has become quite a mess. Unfortunately, the brunt of that mess falls primarily on the backs of the individual taxpayers, who are required to sift through the tens of thousands of pages of instructions and tax rules just to calculate, file, and pay what they owe. The filing burden and costs of compliance are already exorbitant, but they are only increasing.

Designed primarily to relieve individual taxpayers of their filing burdens, the graduated consumption tax seeks to progressively generate revenue comparable to the income tax system at reasonable tax rates. The purpose of this article is not to offer proof, but simply to introduce the graduated consumption tax model as a possible alternative to the income tax system. This article anticipates both the potential benefits and weaknesses of implementing such a model and attempts to set the stage for further exploration and debate.

Professor-in-Residence Applications Due March 1

We previously have extolled the virtues of the IRS Chief Counsel's Professor-in-Residence Program, recently reinstituted by Donald Korb with the selection of Calvin Johnson (Texas) to serve in the post from January 1, 2007 - June 30, 2007.  Applications for those who would like to serve in the position from September 1, 2007 - June 30, 2008 are due this Thursday, March 1. 

From the ABA Tax Section:

The Professor in Residence Program at the IRS Office of Chief Counsel is designed to achieve greater understanding of the academic and governmental perspectives on the development of tax law and policy. The program provides one law school professor per year the opportunity to apply his or her scholarly experience, research and writing in tax law to the full range of technical legal work and litigation handled by the Office of Chief Counsel by serving full-time on the Chief Counsel’s immediate staff for a full academic year. This prestigious position will enhance the professor’s stature within the tax bar and provide him or her the ability to serve the public and the law by meaningfully contributing to the development of tax policy, as well as to attain a comprehensive understanding of the Office of Chief Counsel.

For further details on the Professor-in-Residence Progrtam and the application process, see here.

Rep. Markey Wants Action Against Phony IRS Web Sites

Rep. Edward J. Markey (D-Mass), Chair of the House Subcommittee on Telecommunications and the Internet, sent a letter yesterday to Treasury Secretary Henry Paulson, Federal Trade Commission Chair Deborah Majoras, and IRS Commissioner Mark Everson requesting that they take action to prevent taxpayers from being misled into disclosing important data to phony IRS web sites such as www.irs.com, www.irs.net, and www.irs.org:

I am concerned these sites may be confusing to consumers, who may believe them to be an official IRS Website. I am concerned that consumers who visit these sites may provide the operators with personally identifiable information and tax return information, enabling the operators to either market or sell this information to others, or to sell and market all manner of products and services to these taxpayers. Since the taxpayers who provide personal information to these sites may do so under the misimpression that they were dealing with an official government website subject to applicable federal privacy protections, there is a serious potential for consumer confusion, deception, and abuse....

Please describe any actions you are taking to intervene and put an immediate stop to this threat to the public interest, now, in the current tax season, before any other taxpayers are victimized

• Markey Press Release
• Markey Letter
• Commputer & Communications Industry Association  Letter to IRS

U.S. News: What's Worse, the AMT or a Recession?

Interesting article in this week's U.S. News & World Report:  What's Worse, the AMT or a Recession?, by James Pethokoukis:

Now this would hurt. If the politicians in Washington do nothing, 23 million Americans will get hit by the AMT next year, up from 4 million this year. A temporary fix to the AMT will cost some $45 billion to $50 billion. Repealing the AMT, according to the CBO, would cost more than $600 billion over 10 years. Now under new pay-as-you-go rules in Congress, any fixes or repeals will have to be paid for through higher taxes or budget cuts. One payment possibility suggested by some on the left is to repeal the Bush 2001 and 2003 tax cuts, under the logic that many taxpayers will get caught by the AMT because the Bush tax cuts lowered their tax bill. (The biggest problem, though, is that the AMT is not indexed for inflation.)

According to the static economic models of the CBO, repealing the Bush tax cuts would bring in hundreds of billions in new tax receipts every year with scant effect on economic growth. But, you might ask, wouldn't the accompanying huge tax increase dramatically slow the economy, thus hurting tax collections to some degree? Not if you look at the CBO numbers, which show the economy barely slowing after the tax cuts expire in 2010.

But is that how the real-world economy would actually react? Not according to a study by Goldman Sachs. Using the highly regarded Washington University Macro Model, Goldman ran a simulation that assumed all the Bush tax cuts expired in 2010. According to the WUMM model, the economy fell 3 percentage points below what it would have been otherwise–even assuming massive Federal Reserve rate cuts. "Absent a tailwind to growth from some other source," the analysis concludes, "this would almost surely mark the onset of a recession."

Monday at the IRS

• T.D. 9314:  Final Regs on Depreciating Property Acquired in § 1031 Like-Kind Exchanges and § 1033 Involuntary Conversions
• Announcement 2007-31:  Annual Report on Advance Pricing Agreement Program
• Information Release 2007-41:  Eileen Mayer to Lead IRS's Criminal Investigations Division

Articles Published in Medium-Ranked Scholarly Journals May be More Influential Than Those Published in Top-Ranked Journals

I previously blogged the draft of a paper by Andrew J. Oswald (University of Warwick), An Examination of the Reliability of Prestigious Scholarly Journals: Evidence and Implications for Decision-Makers.  The paper has now been published at 74 Economica 21 (2007).  Here is the abstract:

Scientific-funding bodies are increasingly under pressure to use journal rankings to measure research quality. Hiring and promotion committees routinely hear an equivalent argument: ‘this is important work because it is to be published in prestigious journal X’. But how persuasive is such an argument? This paper examines data on citations to articles published 25 years ago. It finds that it is better to write the best article published in an issue of a medium quality journal such as the OBES than all four of the worst four articles published in an issue of an elite journal like the AER. Decision-makers need to understand this.

From the Introduction:

The paper collects data on the accumulated lifetime citations to papers published 25 years ago. It uses these to construct a simple test. The data come from issues of six economics journals of varying levels of reputation. These data show the expected ranking. However, and more interestingly, they also reveal that the best article in an issue of a good to medium-quality journal routinely goes on to have much more citations impact than a "poor" article published in an issue of a more prestigious journal.

Update:  My colleague Michael Solimine pointed me to Ian Ayres & Frederick E. Vars, Determinations of Citations to Articles in Elite Law Reviews, 29 J. Legal Stud. 427 (2000), which analyzes the most, and least, cited articles in the Harvard Law Review and Yale Law Journal in 1980-95 and urges "extreme modesty" in citation analysis.

IRS Investigates American University Over Pay and Perks of Ousted President

American University announced on Friday that the IRS is investigating the pay and perks controversy surrounding its ousted former President Benjamin Ladner:

On behalf of the Board of Trustees, I want to inform the AU community that the Internal Revenue Service (IRS) has notified us that it is conducting an examination of the university’s returns (form 990) for tax years ending April 30, 2004, April 30, 2005, and April 30, 2006. We are cooperating with the IRS and will provide all information requested. This review was anticipated in light of the prior issues related to executive compensation matters. The Board of Trustees is committed to continuing to work in the best interest of the university and looks forward to this matter coming to closure. We will update the campus on this issue when there is something to report.

Prior TaxProf Blog coverage:

• More on the Differences Between Faculty and Administrators (9/25/05)
• Embattled American University President Blames Tax Code for Controversy Over His Spending (9/29/05)
• More on Embattled American University President (9/30/05)
• American University President Under Fire for Lavish Spending, Failing to Pay Tax on Perks (10/10/05)
• American University Board Fires President for Lavish Spending, Failing to Pay Tax on Perks (10/11/05)
• American University & President Ladner: The Final Chapter (10/27/05)
• Senate Finance Committee to Investigate American University & President Ladner (10/31/05)
• Peregrine & Louthian on American University: Significant Implications for Nonprofits (12/12/05)

Book on Delivery of Benefits to the Working Poor through the Tax System

Leslie M. Book (Villanova) has published Preventing the Hybrid From Backfiring: Delivery of Benefits to the Working Poor through the Tax System, 2006 Wisc. L. Rev. 1103.  Here is the abstract:

This article analyzes the government’s increased use of the tax system to deliver benefits to the working poor. The hybrid in this article is the earned income tax credit (EITC), one of the country’s largest anti-poverty programs. The EITC is hybrid in that it is administered in the tax system but is increasingly redistributive, like traditional welfare programs. It reveals that the hybrid tax and welfare nature of the delivery of benefits to the working poor through the tax system results in some significant benefits, such as higher participation and lower administrative costs, but also a weakness in the form of increased errors and fraud. With the EITC’s error rate up to five times as high as other benefits’ programs, the IRS has undertaken radical efforts at reducing error, efforts that are alien to the tax system, like precertifying eligibility before receipt of a tax benefit, and indefinite freezes of refunds without sufficient notice or hearing that are alien to traditional due process protections. The backfire risk is that the continued high error rates will weaken support for the EITC, and threaten its continued existence.

The article provides a framework for the government to reduce errors through shifting additional costs to third parties, as well as to reduce the incentives for individuals themselves to attempt to game the system and cheat. The article builds on my prior scholarship that integrated a sociological typology of noncompliance, and continues with my focus on presenting policymakers with an opportunity to evaluate efforts to reduce errors based upon an understanding as to what drives cheating and errors in the tax system.

The EITC’s hybrid status in and of itself does not reveal policy options to reduce cheating or error; rather, the unique characteristics of the tax system’s eligibility and delivery process present opportunities to reduce error and eliminate cheating without eliminating the EITC’s low administrative cost and high participation benefits. In particular, the government should impose additional costs on return preparers, third parties that benefit from the EITC’s placement in the tax system. In addition, the article reveals how reducing structural incentives for taxpayers themselves to game the system can materially reduce error rates without sacrificing other policy goals.

IRS Helps Locate Missing Children

The Treasury Inspector General for Tax Administration has released The IRS Provides Valuable Assistance in Locating Missing Children (2007-40-029) (2/20/07):

• Highlights
• Report

ABA Tax Section Names 2007 Nolan Fellows

The ABA Tax Section has named its 2007 Nolan Fellows:

• Jennifer Alexander (Deloitte Tax, Washington, D.C.)
• Adam Cohen (Sutherland Asbill & Brennan, Washington, D.C.)
• Christopher D’Amico (Dean, Mead, Egerton, Bloodworth, Capouano & Bozarth, Orlando, FL)
• Thomas Greenaway (IRS Office of Chief Counsel, Boston, MA)
• Pete Lowy (Shell Oil, Houston TX)
• Brandee Tilman (Disney Corp., Glendale CA)

Named for the late Jack Nolan, these Fellowships are awarded to young lawyers who are actively involved in the Tax Section and have shown leadership qualities.  Each one-year fellowship includes waived meeting registration fees and assistance with travel to some Section meetings.

Stetson Seeks Tax Visitor, Offers Sabbatical Visitors Program

Stetson University College of Law in St. Petersburg, Florida seeks a tax visitor for 2007-08.  For more information, or to apply, please email Darryll Jones. 

Stetson also has a Sabbatial Visitors Program for faculty who would like to spend part or all of their sabbatial in Florida.  Upcoming deadlines are:

• Summer 2007:  March 1
• Fall 2007:  May 1
• Spring 2008:  November 1

Jackson & Anderson on Can States Tax National Banks to Educate Consumers About Predatory Lending Practices?

Howell E. Jackson (Harvard) & Stacy A. Anderson (Harvard J.D., 2006) have posted Can States Tax National Banks to Educate Consumers About Predatory Lending Practices? on SSRN.  Here is the abstract:

Over the past quarter century, consumer lending markets in the United States have become increasingly national in scope with large national banks and other federally chartered institutions playing an ever important role in many sectors, including credit card lending and home mortgages. At the same time, a series of court decisions have ruled that a wide range of state laws regulating credit card abuses and predatory mortgage lending practices are preempted at least as applied to national banks and other federally chartered institutions. Given the dominant role of federal institutions in our country's lending markets, these rulings have narrowed the capacity of states to police local lending transactions. As an alternative to direct regulation, the California Assembly recently considered legislation designed to improve consumer understanding of financial transactions through educational efforts to be financed by a new state tax on income from certain problematic loans made to California residents by financial institutions, including national banks and other federally chartered institutions. In this Article, we consider whether a tax of the sort proposed in California could survive a preemption challenge under recent court rulings as well as other potential constitutional attacks. While the States have quite limited powers to regulate federally chartered financial institutions, Congress in 12 U.S.C. Section 548 explicitly authorizes states to tax national banks. We explore the scope of state taxing authority that Section 548 and the relationship between that authority and recent preemption rulings After reviewing a range of legal precedents, we conclude that a state tax of the sort considered in California - which impose modest levies on federally chartered entities but do not prevent these from engaging in otherwise authorized activities - should qualify as a legitimate exercise of state taxing powers under 12 U.S.C. Section 548 and also should withstand scrutiny under the Due Process and Commerce Clauses to the extent the tax is imposed on out-of-state banks.

Saturday:

• Tax Prof Profile:  Stephen Mazza
• WSJ Tax Articles
• Borden & Keator on Tax Opinions in TIC Offerings and Reverse TIC Exchanges
• Friday at the IRS

Sunday:

• Top 5 Tax Paper Downloads
• Mankiw's Advice to Junior Faculty: Do Not Blog
• Gerzog on Davis and Whiting: QTIP Income Interests and Intent
• ABA Tax Section Comments

Top 5 Tax Paper Downloads

There is a bit of movement on this week's list of the Top 5 Recent Tax Paper Downloads on SSRN, with a paper debuting on the list at #4:

1.  [229 Downloads]  Celebrating Life (Chai) and Taxes: Lessons Learned, Francine J. Lipman (Chapman)  [blogged here]

2.  [147 Downloads]  Which Countries Become Tax Havens?, by Dhammika Dharmapala (University of Connecticut, Department of Economics) & James R. Hines Jr. (Michigan)  [blogged here]

3.  [126 Downloads]  Tax Expenditures as Foreign Aid, by David Pozen (J.D. 2007, Yale)  [blogged here]

4.  [119 Downloads]  Tax Competition, Tax Arbitrage, and the International Tax Regime, by Reuven S. Avi-Yonah (Michigan)  [blogged here]

5.  [116 Downloads]  Tax Shelters and the Code: Navigating Between Text and Intent, by Steven Dean (Brooklyn) & Lawrence M. Solan (Brooklyn)  [blogged here]

Mankiw's Advice to Junior Faculty: Do Not Blog

Among the ten pieces of advice for new junior faculty from Greg Mankiw (Professor of Economics at Harvard):

Avoid activities that will distract you from research. Whatever you do, do not start a blog. That will only establish your lack of seriousness as a scholar.

(Hat Tip:  Mike Rappaport.)  But see Christine Hurt (Illinois) & Tung Yin (Iowa), Blogging While Untenured and Other Extreme Sports, 84 Wash. U. L. Rev. ___ (2006), part of our Symposium on Bloggership: How Blogs Are Transforming Legal Scholarship held at Harvard Law School on April 28, 2006.

Gerzog on Davis and Whiting: QTIP Income Interests and Intent

Wendy C. Gerzog (Baltimore) has posted  Davis and Whiting: QTIP Income Interests and Intent, 106 Tax Notes 1597 (Mar. 28, 2005), on SSRN.  Here is the abstract:

It is somewhat difficult to anticipate when a court will reform a trust to conform to a testator's intent to qualify for the marital deduction. With this in mind, the author compares the recent Ninth Circuit case Davis to the recent Tax court opinion in Whiting.    

ABA Tax Section Comments

The ABA Tax Section has submitted a number of comments to Congress and the IRS recently, including:

• Comments on Proposed Regs under § 1221(a)(4) (2/22/07)
• Comments on Patented Tax Strategies (2/21/07)
• Letter to Senate Finance Committee on New Revenue Provisions in Minimum Wage Bill (2/6/07)
• Comments on § 4965 (2/5/07)
• Letter on Legislative Process (2/2/07)
• Letter to Appropriations Committees in the Senate on IRS Funding (1/19/07)
• Letter to Appropriations Committees in the House on IRS Funding (1/19/07)
• Comments on Temporary and Proposed Regs on Application of Separate Limitations to Dividends From Noncontrolled § 902 Corporations (1/16/07)

Stephen W. Mazza (Kansas)

• B.S. 1989, Samford
• J.D. 1992, Alabama
• LL.M. (Tax) 1993, NYU

                  

   

It’s four degrees in Lawrence, Kansas as I write this: Four (4) degrees! For someone who spent the first 20-odd years of his life in Alabama, this is a shock. My people aren’t used to these sorts of temperatures. Momma’s folk are from Mississippi and Dad’s people come from the hills in central Italy. As the story goes, my great uncle arrived in New York in the late 1800s and was conned into traveling to Chicago with the promise of work. Abandoned in Chicago, he started walking south and didn’t stop until he found an area that reminded him of his farm in Italy: Huntsville, Alabama.

He started a grocery store, went into real estate development, and eventually became a slumlord. Grandad inherited the slum and Dad took it over in the 1950s. By the mid-1980s, the City of Huntsville had had enough and they acquired the property by eminent domain. With my career as a slumlord cut off before it began, I decided to go to law school.

I can’t think of anything in my background that triggered an interest in tax, so I guess I have to blame Jim Bryce and Norman Stein at Alabama for getting me started. Norm (as the students called him behind his back) carried on lively policy discussions with himself during the basic tax class and I soaked it all up. Jim was the perfect example of what I thought a tax lawyer should be (smart, detail oriented) and with his encouragement I decided to spend a year at NYU getting my tax LL.M.

The best part of my experience at NYU was working on the Tax Law Review with Deborah Schenk and Lily Khang, who was an Acting Assistant Professor at the time. Lily mentioned one day that I should consider applying for the AAP position. Having already accepted a job in Atlanta, I decided it was best to honor my commitment to the firm. While law firm life was fine, I’d often daydream about the life of a law professor. A few years later I contacted Deborah to see if NYU had an AAP position open. They did, and to my surprise and delight, I got it.

Those two years teaching at NYU were some of the best of my life. Getting to work with people like Deborah, Noel Cunningham, and Paul McDaniel was an honor. After filling in for Leandra Lederman (she and I were on the Tax Law Review together while at NYU) at Mercer Law School for a year while she visited at George Mason, I went in the market and found a position at KU Law School. I’ve been here ten years and couldn’t be happier. Martin Dickinson is one of the finest mentors and colleagues a person could have. The students, as well, are top notch, although occasionally they write some frightfully hurtful and inane things on my class evaluations: I know I’m a smartass, you don’t have to tell me; and why do you care whether I wear a blue oxford shirt to class everyday?

My decision to write a casebook early in my career turned out, I think, to be the right one. If anything, it gave me a chance to develop a wonderful professional relationship with Leandra. Although the annual supplements are a pain and the new editions are worse, it seems worth it. My scholarship focuses mostly on tax compliance, but at times it seems to be written primarily to offend Nina Olsen, the National Taxpayer Advocate. Over the past several years I’ve spend a portion of my summer teaching in KU Law’s Summer Abroad Program in Istanbul, Turkey, and this summer I’m off to China. The new dean at KU has also talked me into being the associate dean for academic affairs. I hope she knows what she’s getting herself into, because I don’t.

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

WSJ Tax Articles

• A New Trick For Avoiding Estate Taxes:  529 Plans, by Ron Lieber
• Citigroup: SEC Probing Tax Issues Tied To 2000 Acquisition, by David Enrich
• IRA Withdrawals Can Affect Your Tax Strategy, by Kelly Greene
• IRS, Treasury Revamp Overseas Housing Tax Formula
• Nice Tax Season Boost for Intuit, Maybe the Stock Sleeps Till May, by Tiernan Ray
• Time Warner: AOL Unit Gets EUR34M Tax Assessment From France
• US, Bulgaria Sign Treaty To Reduce Cross-Border Taxes
• US Tax Refunds Up, But Many Aren't Seeking Phone Tax Payback

Borden & Keator on Tax Opinions in TIC Offerings and Reverse TIC Exchanges

Bradley T. Borden (Washburn) & Todd D. Keator (Thompson & Knight, Dallas) have posted Tax Opinions in TIC Offerings and Reverse TIC Exchanges, 48 Tax Mgmt. Mem. ___ (2007), on SSRN.  Here is the abstract:

Property owners often acquire tenancy-in-common (TIC) interests as replacement property in section 1031 exchanges. Generally, TIC interests are sold as securities under federal and state securities laws, and their offering materials include a tax opinion addressing whether the TIC offering is a tax partnership. This Article explains that opinion writers consider whether the TIC offering satisfies the conditions of Rev. Proc. 2002-22 when writing tax opinions. If a TIC offering satisfies all of the Rev. Proc. 2002-22 conditions, the opinion writer will most likely write a should opinion. If the TIC offering does not satisfy all of the conditions, the opinion writer may or may not write a should opinion, depending upon which conditions the offering fails to satisfy. The Article explains the affect failing to satisfy the conditions has on tax opinions.

Several issues arise when an exchanger attempts to acquire a TIC interest as part of a title-parking reverse exchange. The Article explains that a TIC interest's status as a security often makes parking title to the interest difficult. To avoid such difficulties, the Article recommends structuring title-parking reverse exchanges as exchange-first transactions, if the exchanger is attempting to acquire a TIC interest as replacement property.

Friday at the IRS

• 10 Million Taxpayers Miss Out on Telephone Tax Refunds; IRS Urges People to Check before Filing
• Calendar Year Return Projections by State (2006-2013)
• Notice 2007-24 (requesting comments on draft forms issued to collect information from charities with respect to certain structured insurance transactions)
• Notice 2007-25 (limitations on housing expense for purposes of § 911)

Tax Prof Fashion Warrior?

In blogging the various first-hand accounts of last Friday's Symposium at New York Law School on Writing About the Law: From Bluebook to Blogs and Beyond, I took good-natured umbrage at David Lat's critique of my fashion sense:

Professors Lindgren and Caron: We don't like shirts with button-down collars to be worn with suits. We wear button-down shirts sometimes ... But we never wear our button-downs with suits.

David redeemed himself today when, in posting 12 new pictures from the conference (including two of me (pictures # 4 and #5 as you scroll down the post)), he noted:

We commend Professor Caron for the nice cap-toe shoes and handsome briefcase.

Update:  Although I appreciate David noting the tax consequences of the gift bags given to all of the presenters at the conference, a younger colleague explained this comment about the picture of me chatting with another tax professor:

Speaking of asking people out, have you ever seen a tax law professor bust a move? Well, now you have.

Note to my wife:  I most assuredly was not "busting a move"!

WebCPA Applauds IRS's Recruiting Efforts

Earlier this month, we aided IRS Chief Counsel Donald Korb's efforts to recuit law students to begin their tax careers at the IRS by posting a variety of recruiting items, including a slick promotional video on YouTube.    The IRS Office of Chief Counsel -- A Great Place to Start Your Tax Career (2/9/07).  Our efforts caught the attention of Alicia Korney, Editor of WebCPA:  The IRS and the Talent Hunt (2/21/07):

Donald Korb, chief counsel of the Internal Revenue Service, is getting a ton of good press these days for his efforts to get the agency into the game of recruiting young tax attorney talent. ...

I start a lot of my days checking out the blog of Cincinnati tax professor Paul Caron, whose site is run under the moniker of the TaxProf. The items on Caron’s site often have an academic bent, and among the regular features are updates on positions with the Internal Revenue Service. So it wasn’t surprising to recently stumble across a number of the recruiting materials from the IRS's marketing campaign on Caron’s site earlier this month.

CBO Releases 65 Revenue Options

The Congressional Budget Office today released Budget Options:

This volume ... presents more than 250 options for altering federal spending and revenues. The volume aims to help policymakers in their annual tasks of making budgetary choices, setting priorities, and adapting to changing circumstances.

The options discussed in this report stem from a variety of sources, such as legislative proposals, the President’s budget, Congressional and CBO staff, other government agencies, and private groups. The options are intended to reflect a range of possibilities rather than a ranking or a comprehensive list. The inclusion or exclusion of a particular policy change does not represent an endorsement or rejection by CBO. In keeping with CBO’s mandate to provide objective and impartial analysis, the report makes no recommendations, and the discussion of each option summarizes the arguments for and against it. ...

Chapter 3 discusses 65 revenue options, listed below the fold:

1. [Marginal tax rates]  Increase Individual Income Tax Rates
2. Permanently Extend the Individual Income Tax Provisions of EGTRRA
3. Permanently Extend the Zero and 15 Percent Tax Rates for Capital Gains and Dividends
4. Replace Multiple Tax Rates on Long-Term Capital Gains with a Deduction of 45 Percent of Net Realized Gains
5. Provide Relief from the Individual Alternative Minimum Tax
6. [Individual Tax Base]  Use an Alternative Measure of Inflation to Index Tax Parameters
7. Reduce the Mortgage Interest Deduction or Replace It with a Tax Credit
8. Eliminate or Limit the Deduction of State and Local Taxes
9. Limit the Tax Benefit of Itemized Deductions to 15 Percent
10. Limit Deductions for Charitable Giving to the Amount Exceeding 2 Percent of Adjusted Gross Income
11. Create an Above-the-Line Deduction for Charitable Giving
12. Eliminate Tax Subsidies for Child and Dependent Care
13. Include Employer-Paid Premiums for Income-Replacement Insurance in Employees’ Taxable Income
14. Eliminate the Tax Exclusion for Employer-Paid Life Insurance
15. Reduce the Tax Exclusion for Employer-Paid Health Insurance
16. Include Investment Income from Life Insurance and Annuities in Taxable Income
17. Include All Income Earned Abroad by U.S. Citizens in Taxable Income
18. Tax Social Security and Railroad Retirement Benefits Like Defined-Benefit Pensions
19. End the Preferential Treatment of Dividends Paid on Stock Held in Employee Stock Ownership Plans
20. [Individual Tax Credits]  Include Social Security Benefits in Calculating the Phaseout of the Earned Income Tax Credit
21. Replace the Tax Exclusion for Interest Income on State and Local Bonds with a Tax Credit
22. Consolidate Tax Credits and Deductions for Education Expenses
23. Eliminate or Limit Eligibility for the Child Tax Credit
24. [Business Taxes]  Set the Corporate Tax Rate at 35 Percent for All Corporations
25. Integrate Corporate and Individual Income Taxes Using the Dividend-Exclusion Method
26. Repeal the “Lower of Cost or Market” Inventory Valuation Method
27. Tax Large Credit Unions in the Same Way as Other Thrift Institutions
28. Repeal the Expensing of Exploration and Development Costs for Extractive Industries
29. Tax the Income Earned by Public Electric Power Utilities
30. Repeal Tax-Free Conversions of Large C Corporations to S Corporations
31. Repeal the Low-Income Housing Credit
32. Extend the Period for Recovering the Cost of Equipment Purchases
33. Eliminate or Limit Tax-Exempt Private-Activity Bonds
34. Cap Nonprofit Organizations’ Outstanding Stock of Tax-Exempt Bonds
35. Repeal the Deduction for Domestic Production Activities
36. Permanently Extend the Research and Experimentation Tax Credit
37. Tax the Federal Home Loan Banks Under the Corporate Income Tax
38. [Payroll Taxes]  Expand the Medicare Payroll Tax to Include All State and Local Government Employees
39. Increase the Maximum Taxable Earnings for the Social Security Payroll Tax
40. Calculate Taxable Wages in the Same Way for Self-Employed People and Employees
41. Increase Federal Employees’ Contributions to Pension Plans
42. [Taxation of Wealth]  Modify the Estate and Gift Tax Provisions of EGTRRA
43. [Income from Worldwide Activity]  Eliminate the Source-Rules Exception for Exports
44. Tax the Worldwide Income of U.S. Corporations as It Is Earned
45. Exempt Active Foreign Dividends from U.S. Taxation
46. [Excise Taxes]  Increase the Excise Tax on Cigarettes by 50 Cents per Pack
47. Increase All Taxes on Alcoholic Beverages to $16 per Proof Gallon
48. Increase Excise Taxes on Motor Fuels by 50 Cents per Gallon
49. Repeal the Partial Exemption for Alcohol Fuels from Excise Taxes
50. Eliminate the Federal Communications Excise Tax and Universal Service Fund Fees
51. [Environmental Taxes]  Impose a Tax on Sulfur Dioxide Emissions
52. Impose a Tax on Nitrogen Oxide Emissions
53. Impose an “Upstream” Tax on Carbon Emissions
54. Reinstate the Superfund Taxes
55. Extend the Gas-Guzzler Tax to Vehicles with a Gross Weight of 6,000 to10,000 Pounds
56. Eliminate Tax Credits for Producing Unconventional Fuels and Generating Electricity from Renewable Energy Resources
57. [Miscelaneous Fees]  Impose Fees on Users of the Inland Waterway System
58. Impose Fees That Recover the Environmental Protection Agency’s Costs Related to Pesticides and New Chemicals
59. Charge for Examinations of State-Chartered Banks
60. Fund the Commodity Futures Trading Commission Through Fees
61. Impose Fees to Help Fund the Federal Railroad Administration’s Rail-Safety Activities
62. Increase Fees for Certificates and Registrations Issued by the Federal Aviation Administration
63. Finance the Food Safety and Inspection Service Solely Through Fees
64. Establish New Fees for the Food and Drug Administration
65. Impose Fees on the Investment Portfolios of Government-Sponsored Enterprises

WSJ Blames Bill Clinton for AMT Mess

Interesting editorial in today's Wall Street Journal:  Bill Clinton's AMT Bomb: Why Millions in the Middle Class May See Their Tax Bill Explode:

As tax season nears, Democrats in Congress are discovering they have an urgent political bomb to defuse--the AMT. The AMT already hits four million Americans, and without new legislation this year it will explode in the pocketbooks of 23 million taxpayers come April 15, 2008.

What's amazing is that many Democrats and reporters are trying to blame this looming tax increase on the 2001-2003 tax cuts. See if you can follow their argument: Taxpayers are obliged to pay the higher of their tax bill under either the regular IRS code or the AMT. And because the tax cuts reduced the regular income tax of the average family by $2,000 a year, more middle-class families are being bounced to the AMT system. Ergo, it's all President Bush's fault.

This logic requires overlooking that a taxpayer's bill under the AMT is still lower than it would have been without the tax cuts. But never mind: The political game here is to use the AMT as an excuse to justify repealing the Bush tax cuts.

In reality, the AMT is one more liberal monster that was created in the name of soaking the rich but has now come back to swallow the middle class. Democrats created the AMT in 1969, amid a political frenzy to capture a mere 21 millionaires who had paid nothing. And the politician most responsible for the AMT's relentless expansion in recent years is none other than William Jefferson Clinton.

Remember the 1993 tax hike that was supposed to fall only on the rich? In addition to raising gas taxes and Medicare payroll taxes and income tax rates, the Democratic Congress that year also raised the AMT: from a 24% flat rate to a dual tax rate of 26% on AMT income up to $175,000 and 28% on AMT income above that amount. It's true that the 1993 bill slightly increased the AMT's family income exemption, but Democrats refused to index those exemptions for inflation. So the combination of the higher rates and the failure to index for inflation has caught more and more middle-class taxpayers in the AMT's maw. From 1992 to 2002, this Clinton stealth tax hike increased sixfold the number of filers paying the AMT, to nearly two million from 300,000.

Split Tax Court Allows Taxpayer Incarcerated on Murder Charge to Claim EITC

A splintered Tax Court yesterday held that a taxpayer could claim an earned income tax credit (EITC) even though she was incarcerated (after shooting her brother-in-law in the head) and thus did not live with her children for more than half of the tax year in question as required by § 32(c)(3) of the Code. Rowe v. Commissioner, 128 T.C. No. 3 (2/22/07).

The issue that split the Tax Court was whether the taxpayer's incarceration should be treated as a "temporary" absence from the home and thus allow her to satisfy the six-month rule.  (In the following year, the taxpayer she was convicted of first degree murder and sentenced to life imprisonment).

• Five judges joined the majority opinion -- Kroupa, Cohen, Swift, Wells & Vasquez)
• Five judges concurred in the result only -- Laro, Foley, Gale, Thornton & Goeke, with two separate concurring opinions:
  • Gale & Thornton
  • Goeke, Cohen, Laro & Thornton
• Six judges dissented -- Halpern, Colvin, Marvel, Haines, Wherry & Holmes

Update:  Joe Kristan, Mommy's Going Away, But the Tax Court Says It's Temporary for Now

Loyola-L.A. Seeks Tax Visitor

Loyola-L.A. seeks a tax visitor for 2007-08, as either:

• A one-semester visitor
• A non-tenure-track (entry level) Acting Assistant Professor for two semesters

The course package is negotiable but partnership tax is preferred. If interested, please email Katie Pratt.

Applying Moneyball Principles to Law Schools

Bill Henderson (Indiana) seeks a "theoretically coherent basis for how Moneyball ... principles can produce a more successful law school franchise" (a subject I took a preliminary look at in What Law Schools Can Learn from Billy Beane and the Oakland Athletics, 82 Tex. L. Rev. 1483 (2004)) :

Since we don't have wins and losses or a World Series title, the most obvious theoretical shortcoming is how success is measured, both in the short and long term. (In an earlier post, I suggested money as the best longterm metric.) Once this theoretical work is in place, empirical methods can be brought to bear to generate the appropriate chess moves.

So I was quite surprised to receive a phone call the other day from an administrator at a non-Tier 1 school whose primary charge is identifying data-driven ways to improve the functioning of the school. For the past several years, the law school has paid for this administrator to acquire sophisticated statistical training and build the requisite datasets. ... The approach is pretty simple: pick an outcome that matters and generate an inductive theory through data mining. ... So what outcomes matter? Here are a few suggestions, some borrowed from the Moneyball/Moneylaw administrator:

1. Bar passage (LSSSE adds a whole new layer of variables), including factors that reduce or eliminate any minority passage gap
2. Employment at graduation /Employed at 9 months (regressions published here)
3. Credentials of incoming students (regressions published here)
4. Annual giving (rate, average amount)
5. Career satisfaction of graduates
6. Satisfaction of major employers of graduates
7. Faculty participation in law reform/participation in successful law reform
8. Pro bono commitment of graduates

American Hosts Janet R. Spragens Memorial Symposium: Low-Income Workers and the Federal Tax System

American University's Washington College of Law today hosts The Janet R. Spragens Memorial Symposium:  Low-Income Workers and the Federal Tax System:    

9:15 - 9:30 a.m.:   Short Tributes to Professor Janet Spragens

9:30 ‐ 11:45 a.m.:  Panel I ‐‐ Current Tax Policy Issues and Low Income Workers

• Andrew Pike (American) (moderator)
• Donald Alexander (Akin, Gump, Strauss, Hauer & Feld)
• Nancy Altman (Pension Rights Center)
• Dean Yoseph M. Edrey (Ramat Gan Law School)
• Lawrence Gibbs (Miller & Chevalier)
• Daniel Halperin (Harvard)
• Eugene Steuerle (Urban Insitute)
• Dennis Ventry (American)

Noon - 1:30 p.m.:  Luncheon Remarks by Eileen J. OʹConnor (Assistant Attorney General, U.S. Department of Justice Tax Division) 

1:30 ‐ 2:45 p.m.:   Panel II — Current Issues of Tax Procedure and Administration and Low Income Workers

• Peter Panuthos (Chief Special Trial Judge, U.S. Tax Court) (moderator)
• Leslie Book (Villanova)
• Nina Olson (IRS National Taxpayer Advocate)
• Pamela Olson (Skadden, Arps, Slate, Meagher & Flom)

3:00 ‐ 4:30 p.m.:  Panel III — State of the Low Income Taxpayer Clinic Program

• Nancy Abramowitz (American) (moderator)
• Armando Gomez (Skadden, Arps, Slate, Meagher & Flom)
• Salvador Gonzalez (Midwest Tax Clinic, Center for Economic Progress)
• Elliott Milstein (American)

For the full brochure, see here.

GW Hosts Conference on The Use of Tax Policy to Shift Responsibility to the Individual

The Corporate & Business Law Society at The George Washington University Law School is hosting a conference today on Health & Wealth: The Use of Tax Policy to Shift Responsibility to the Individual.  Among the panels and the speakers are:

Keynote Address:  George Yin (Edwin S. Cohen Distinguished Professor of Law & Taxation Class of 1966 Research Professor University of Virginia Law School)

Using the Tax Code to Implement Health & Retirement Policy

• Cheryl Block (Professor of Law The George Washington University Law School)
• Regina T. Jefferson (Professor, Catholic University of America Columbus School of Law)
• Joseph Cordes (PhD Director, School of Public Policy and Public Administration, George Washington University)

Seto on Inside Zarin

Theodore P. Seto (Loyola-L.A.) has published Inside Zarin, 59 SMU L. Rev. 1761 (2006). Here is the abstract:

An account and analysis of Zarin v. Commissioner, based on the complete public record, by the principal author of taxpayer’s briefs before the Third Circuit. Anyone who teaches Zarin is likely to find the account useful. The paper is written with the intention that it be accessible to students as well. Ultimately, the paper is an essay on how tax law works – and how it sometimes fails.

Stanford Reduces Amount of Home Equity Taken into Account in Determining Financial Aid

Stanford announced yesterday a major change in how it will take into account parents' equity in their homes in determining student eligibility for financial aid:

Stanford will reduce the amount of home equity assessed in the calculation of a parental contribution by capping the amount of equity considered at 1.5 times the family income [rather than 2 times under the prior policy]. The policy is expected to reduce parent contributions for families with significant home equity by, on average, $2,000. An allowance also will be made for renters

For example, consider a family of four from California with annual income of $103,000. They purchased their home 15 years ago and have accumulated $480,000 in equity. Under the old policies, the parents would have been expected to contribute more than $25,000, and the student would have been expected to borrow $3,500 annually. A scholarship of $14,000 would have been granted to make up the shortfall. When the new policies are fully implemented next fall, the expected parent contribution will be reduced to $22,000, and the amount the student is expected to borrow will be reduced to $2,000. To make up the difference, the student's scholarship will be increased to $19,000.

For commentary on how other elite colleges are reacting to Stanford's move, see:

• Chronicle of Higher Education
• Inside Higher Ed

Gordon Presents Budget Tradeoffs in California Government Today at UCLA

Tracy Gordon (Public Policy Institute of California) presents Fiscal Realities: Budget Tradeoffs in California Government (with Jaime Calleja Alderete, Patrick J. Murphy, Jon Sonstelie & Ping Zhang) at UCLA today as part of its Tax Policy and Public Finance Workshop Series, Here is the abstract:

The authors examine California’s entire revenue and spending picture in a way different from traditional, program-based analyses. Through a broad budgetary lens, and by looking at years of public opinion surveys, they evaluate what it would take to make Californians’ stated desires for their state a reality. In many cases, doing so would be extremely expensive. Reducing class size so that teacher-student ratios match ratios in other states would cost California governments an additional $15 billion per year. What services would Californians be willing to forego to pay for this? The report should help spark a broad public conversation about the tradeoffs Californians make now and those they might have to make to attain the kind of California they want.

Logue Presents Optimal Income Tax Penalties When the Law is Uncertain Today at NYU

Kyle D. Logue (Michigan) presents Optimal Income Tax Penalties When the Law is Uncertain at NYU today as part of its Colloquium on Tax Policy and Public Finance Series. Here is the abstract:

This Article examines the optimal level of tax compliance and the optimal penalty for noncompliance in circumstances in which the tax law is substantively uncertain – that is, when the precise application of the Internal Revenue Code to a particular situation is not clear. In such situations, two interesting questions arise: First, as a normative matter, how certain should a taxpayer be before she relies on a particular interpretation of a substantively uncertain tax rule? That is, if a particular position is not clearly prohibited, but neither is it clearly allowed, under the tax law, what is the appropriate threshold of confidence that the taxpayer ought to have before engaging in the transaction? Second, what penalty regime would give the taxpayer the right incentive with respect to relying on substantively uncertain tax law?

With these questions in mind, the Article shows that, applying standard assumptions from the economic literature on deterrence, the optimal tax penalty regime – the one that would induce the optimal reliance (or non-reliance) on uncertain tax laws depending on the circumstances – would involve (a) a rule of strict liability with respect to taxes owed as well as to the penalty, and (b) a penalty that roughly approximates the famous Bentham-Becker punitive fine, calculated by dividing the harm (here, the underpaid tax) by the ex ante probability that the harm would be detected. The Article also explains why a fault-based approach to tax penalties, under the standard assumptions of the classical deterrence model, would not work as well as the strict-liability approach. This is because the fault-based approach has comparatively high administrative costs, cannot properly regulate “activity levels,” and has relatively unattractive distributional consequences. The Article concludes, however, that if Bentham-Becker level penalties or if wide-spread use of tax liability insurance are not feasible, there is a good argument for the use of a fault-based penalty regime, a regime not entirely unlike the one currently in force. The analysis of this Article may have implications for any area of law where the substantive law is uncertain.

Bloomberg: Professional Gambler's Losing Streak Extended by IRS

Bloomberg News picked up on yesterday's post on Tschetschot v. Commissioner, T.C. Memo. 2007-38 (Tax Court: Tournament Poker Is Gambling Subject to § 165(d), Not a Sport) in an article by Ryan J. Donmoyer, Professional Gambler's Losing Streak Extended by IRS:

Professional gambler Gloria Tschetschot, enduring a run of bad luck at the poker table, can't get a break from the federal tax collector either. ...

Gamblers are now "saying, 'I'm a TV star,'" said John Battaglia, director of private client advisers at Deloitte & Touche LLP in New York.  "'That's how I make my money -- by going on TV rather than being a gambler.'" ...

Paul Caron, a University of Cincinnati law professor who first reported on the case in his TaxProf Blog, said the case is significant because "in our increasingly celebrity-obsessed culture, where more and more ordinary people are reveling in their 15-minutes of fame, a version of the taxpayer's argument may ultimately prevail."

Caron said the judge's decision appeared "hesitant" because the tax code section that deals with the losses is somewhat arbitrary. "Why do we treat 'gamblers' like poker players and casino regulars different from others who partake in equally risky investments, such as day traders?"

Avi-Yonah Presents Formulary Apportionment for Corporate Income Taxation Today at Penn

Reuven S. Avi Yonah (Michigan) presents A Proposal to Adopt Formulary Apportionment for Corporate Income Taxation at Penn today as part of its Tax Policy Workshop Series.  Here is the abstract:

The current system of taxing the income of multinational firms in the United States is flawed across multiple dimensions. The system provides an artificial tax incentive to earn income in low-tax countries, rewards aggressive tax planning, and is not compatible with any common metrics of efficiency. The U.S. system is also notoriously complex; observers are nearly unanimous in lamenting the heavy compliance burdens and the impracticality of coherent enforcement. Further, despite a corporate tax rate one standard deviation above that of other OECD countries, the U.S. corporate tax system raises relatively little revenue, due in part to the tax avoidance activities of multinational firms. In this proposal, we advocate moving to a system of formulary apportionment for taxing the corporate income of multinational firms. Under our proposal, the U.S. tax base for multinational corporations would be calculated based on a fraction of their worldwide income. This fraction would simply be the share of their worldwide sales that occur in the United States. This system is similar to the current method that U.S. states use to allocate national income across states. The state system arose due to the widespread belief that it was impractical to account separately for what income is earned in each state when states are highly integrated economically. Similarly, in an increasingly global world economy, it is difficult to assign profits to individual countries, and attempts to do so are fraught with opportunities for tax avoidance.