March 31, 2007
Christian Johnson (Loyola-Chicago)
- B.A. 1984, Utah
- M.Pr.A. 1985, Utah
- J.D. 1990, Columbia
I have always been interested in what tax does to a deal. After working for two years as a tax accountant at Price Waterhouse, however, I realized that tax lawyers did one hundred percent of the time, the work that I most enjoyed but only did twenty percent of the time. From there, it was an easy decision to attend Columbia Law School and practice tax law at Milbank Tweed in New York. Although I enjoyed the tax work, I was still fascinated, however, with the deal itself.
After moving to Chicago, I persuaded Mayer Brown that they should let me do deal work. I very much enjoyed banking and transaction work that I was doing at Mayer Brown, but found very little opportunity to apply and use my tax background. Fortunately, as I made the transition into teaching, I have been able to teach tax while at the same time pursue my scholarly interests in banking and corporate finance.
I have loved the mix of tax and corporate subjects during my twelve years at Loyola University Chicago. Because tax was a required course, Loyola has developed a very strong tax program. During my tenure, I have found myself teaching Federal Income Tax at least twice a year. I have also taught International Tax, Corporate Tax and Nonprofit Organizations, all of which have complimented my other teaching interests. I have found that my scholarship in corporate finance has only been improved and augmented by my continual teaching involvement in our tax program.
Although I love writing and discussing corporate finance, I realized from the beginning that the basic Federal Income Tax course was much more fun to teach than courses on banking and derivatives. Much to my student’s frequent surprise, Federal Income Tax is not the dry and deathly boring review of Internal Revenue Code that they anticipated, but instead a veritable smorgasbord of issues dealing with death, divorce, and home ownership, among others, that affects all aspects of their lives. Students that came to law to study child or criminal law will often approach me, and in an apologetic and conspiratorial manner, whisper that that they really like tax (although they appear terrified that one of their fellow students might overhear their confession).
Currently I am visiting at the University of Utah College of Law where I have been able to continue my love of teaching Federal Income Tax. I look forward, however, to returning in the Fall to Loyola and picking up with tax colleagues where I left off.
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Minnesota Senate Votes for Country's Highest Income Tax Rate -- 9.7%
The Minnesota Senate today voted to raise the state's top tax bracket to 9.7% (from the current 7.85%) on incomes in excess of $250,000 ($141,250 for single taxpayers), which would be the highest income rate in the country (topping Vermont's 9.5% and California's 9.3% (which has also has a 1% surtax on incomes over $1 million),
CBO Releases Utilization of Tax Incentives for Retirement Saving
The Congressional Budget Office has released Utilization of Tax Incentives for Retirement Saving: Update to 2003. Here is part of the Preface:
[This] paper examine[s] participation rates and contributions to employment-based retirement plans, individual retirement accounts (IRAs), and self-employed plans. ...Overall, participation in tax-favored retirement plans remained stable between 2000 and 2003. The slight increase in 401(k) participation was offset by a small dip in IRA participation. The EGTRRA provision that affected the largest number of IRA participants was the increase in the general contribution limit from $2,000 to $3,000, which allowed an additional 12 percent of participants—1% of all workers—to contribute as much as they wanted. The provision that affected the largest number of 401(k) participants was the introduction of $2,000 “catch-up” contributions for those age 50 and over.
SOI Releases 2002-05 Estate Tax Data
These tables have been updated to include all returns that were required to be filed and use new size of gross estate categories that mirror the estate filing thresholds created by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Because most estate tax returns are filed in the year following a decedent’s death, the original versions of these tables excluded returns below the prior year’s filing threshold. Two revised tables are available for each filing year. The first table includes data on gross estate, type of property, deductions, and tax items, by tax status and size of gross estate. The second table includes data on gross estate, allowable deductions, State death tax credit, and tax, by State of residence.
The Qualified Privilege Against Discovery of Federal Income Tax Returns
Charles S. Stein (J.D. 2007, Pittsburgh) has posted The Qualified Privilege Against Discovery of Federal Income Tax Returns on SSRN. Here is the abstract:
Federal courts have long struggled with the question of whether, and to what extent, they will grant the request of a litigant who is seeking the discovery of an opponent's income tax returns. A generation ago, William Edmunson traced the development of a “qualified privilege,” which provides some protection to taxpayers. Edmunson argued against this privilege, as the relation between taxpayer and IRS does not satisfy Wigmore's principle that Evidentiary Law should only recognize a privilege where the communications are intended to be confidential, as it is well-understood that the IRS may share tax information with other government agencies. Nevertheless, courts have continued to recognize and develop such a privilege, though a consensus for a precise test continues to elude the courts.
While an absolute privilege would violate Wigmore's principle, this Note suggests that a qualified privilege is not a new right so much as a combination of two rights the parties already had, as expressed in Federal Rules of Civil Procedure 26(b)(1) and 26(b)(2)(i): the policy of allowing broad discovery while protecting parties from abuse.
This Note provides a brief background of the development of the qualified privilege within Federal case law, analyzes several difficult cases, discusses whether there should be a mandate of uniformity among the judges of a given district court, and discusses whether any circuit court has established a standard. Of special value to litigators, the author reviews, tabulates, and summarizes the current practice of the 94 federal district and territorial courts.
March 30, 2007
Germain Critiques Taxpayer's Reply Brief in Murphy
On Wednesday, I blogged the Taxpayer's Reply Brief, filed in advance of the April 23 oral argument in the D.C. Circuit panel's rehearing in Murphy v. IRS, 460 F.3d 79 (D.C. Cir. 8/22/06). Gregory L. Germain (Syracuse) critiques the brief:
In a prior post, I criticized the government’s opposition brief for conceding that the word “income” in section 61 of the Internal Revenue Code – the provision that operates to impose a tax on “all income from whatever source derived” – has the same meaning as the term “income” in the 16th Amendment. There is no doubt, of course, that the language of the two provisions is similar, and that section 61 was derived from the 16th Amendment. But many people (possibly including a majority of the current Supreme Court, as well as the Chief Judge of the panel hearing the appeal) believe that constitutional terms like “income,” which do not inherently reflect evolving societal standards, had a meaning fixed at enactment. Indeed, the Murphy appellate panel previously held – on the basis of questionable historical evidence – that the enactors of the 16th Amendment did not think that compensatory personal injury awards were “income.” If that historical meaning applies to the word “income” used in the taxing statute, then Congress simply did not tax Ms. Murphy’s award. There would be no need to debate the niceties of Congress’s taxing power if Congress simply failed to exercise its power in a statutory enactment. By conceding that the word “income” has the same meaning in both the 16th Amendment and IRC section 61, the government has opened the door for the Court to hold that Congress failed to exercise its full constitutional power.
The government thus handed Murphy the club that she has effectively used in her reply brief to bludgeon the government’s head. The main argument in Murphy’s reply brief is that the government simply did not impose a tax on Ms. Murphy’s damages award in IRC section 61, because the award would not have been “income” in the minds of the enactors of the 16th Amendment in 1913, and thus would also not be “income” under Congress’s statutory enactment.
To support her argument that “make-whole” awards are not “income,” Murphy cites early interpretations of “income” adopted during the Macomber era (in which the Supreme Court had defined “income” as a gain from only capital or labor), and lower court opinions rationalizing Congress’s earlier decision to provide a broad exception for personal injury awards. Other than the narrow definition of “income” first used in pre-16th Amendment cases and adopted in Macomber, which definition the Supreme Court later in Glenshaw Glass rejected as a touchstone, there is no factual basis for the speculations about the 16th Amendment enactors’ intent. However, by focusing on the silent 1913 enactors’ imagined understandings of “income,” the parties have allowed the Court to paint on a blank canvas.
The taxpayer quotes at length from Professor Joseph Dodge’s recent law review article, available at SSRN, to support her argument that the direct/indirect Article I power issues are irrelevant. If, as the government conceded, the catch-all language in section 61 has the same fixed meaning as the catch-all language in the 16th Amendment, then Congress’s power under Article I has no relevance. According to Professor Dodge: “[I]f an item is potentially taxable only under the catch-all clause of section 61(a), then it must pass the income test [under the Sixteenth Amendment], and it cannot be bootstrapped into validity as being potentially the subject of a hypothetical (but nonexistent) provision that would be valid as an indirect tax.” See Joseph M. Dodge, The Constitutionality of Federal Taxes and Federal Tax Provisions, pp. 8-9 (Nov. 12, 2006).
The problem is the government’s concession that the 1913 meaning of “income” establishes the meaning of the word in the post-1996 statute. No one reading the Congress’s 1996 amendment to IRC section 104(a)(2) can doubt that Congress intended to make non-physical injury awards taxable as “income” under section 61. There is no other explanation for the amendment to the statute. Either the amendment is meaningless, or Congress intended to tax non-physical injury awards. By failing to argue that the meaning of the word “income” in IRC section 61 may have evolved as a result of the congressional intent manifested by the 1996 amendment to IRC Section 104(a)(2), if the word “income” had a more limited meaning in 1913, the government has made all of its Article I powers arguments irrelevant. After the government’s concession, the only thing that matters is the identical meaning of the word “income” in the 16th Amendment and IRC section 61. If “income” in 1913 included emotional injury awards, then the award was taxed in section 61 and was within Congress’s power under the 16th Amendment. If not, then Congress did not statutorily tax the award. There is simply no reason to consider whether Congress could have taxed the award as an indirect tax under its Article I powers. If, after the government’s concession, the Murphy panel wishes to continue to speculate that make-whole damages awards would not have been considered “income” by the silent 1913 enactors of the 16th Amendment, then the government will lose the case on statutory grounds.
The government should have argued that the meaning of “income” in section 61 is not fixed by the 16th Amendment. The 1996 amendment to IRC section 104(a)(2) manifests a clear intent by Congress to tax non-physical injury awards. The only reason Congress did not amend section 61 at the same time it amended section 104(a)(2) is because it thought that the word “income” was broad enough to cover emotional injury awards. Congress may have been wrong about the historical meaning of “income” in section 61, as Murphy argues, but, because Congress had the power to amend section 61, Congress’s intended meaning reflected in its amendment of the companion provision should apply prospectively. Otherwise, the congressional intent behind the amendment to section 104(a)(2) would be thwarted.
The entire Supreme Court, including the three strict constructionists (Justices Scalia, Thomas and Rehnquist), have recognized both the primacy of congressional intent, and that Congress’s intent would be thwarted if the meaning of ambiguous terms in a statute were fixed at enactment. In Franklin v. Gwinnett County Public Schools, 503 U.S. 60 (1992), the Court recognized that Congress’s intended meaning for an ambiguous term in one statute, as manifested by an amendment to another statute, should be applied prospectively. The question in Franklin was whether private parties could pursue a damages remedy for violation of Title IX. In 1979, the Supreme Court held that an implied a private right of action for Title IX violations existed. In 1986, Congress amended Title IX to abrogate the sovereign immunity of state governments for private suits “to the same extent . . . [as] any public or private entity other than a State.” Congress’s 1986 amendments implicitly validated the Supreme Court’s earlier ruling that a private right of action existed under Title IX. The majority opinion thus recognized that the 1986 Congress’s intent regarding the meaning of an earlier 1972 statute, as evidenced by statutory amendments made in 1986 to other related statutory provisions, was effective to define the meaning of the ambiguous 1972 statute.
Of most interest is the concurrence in Franklin written by Justice Scalia (joined by Justices Rehnquist and Thomas). Even though the trio of strict constructionists strongly disagreed both with the Court’s earlier 1979 decision inferring a private right of action under Title IX, they nevertheless concurred in the result because they recognized that Congress, in the 1986 amendments to Title IX, had ratified the Court’s earlier 1979 decision inferring a private right of action. As Justice Scalia stated: “The Rehabilitation Act Amendments of 1986 . . . must be read, in my view, not only ‘as a validation of Cannon's holding,’ but also as an implicit acknowledgment that damages are available.” All of the justices thus recognized the primacy of congressional intent, as manifested in later statutory enactments, in prospectively interpreting the meaning of other earlier statutory provisions.
The 1996 amendment to IRC section 104(a)(2) manifests Congress’s unequivocal intent for non-physical injury damages to be taxed as “income.” If the meaning of the post-1996 statute is broader than the 16th Amendment, the Court should properly consider whether Congress had the authority under Article I of the Constitution to tax the award.
The remaining arguments in Murphy’s reply brief were perfunctory. Murphy argued that her physical manifestations of emotional distress constitute a separate “personal physical injury” meeting the requirements for exclusion in IRC section 104(a)(2), but she did not address the compelling contrary legislative history or the numerous contrary decisions of other courts.
Similarly, Murphy’s concluding attempt to address the constitutional Article I issue was both short and weak. Murphy asserted that the only constitutional question concerns the scope of the 16th Amendment, because Congress only sought to tax the award under the 16th Amendment. This argument ignores the clear rule of constitutional law that requires the Court to “search the Constitution to ascertain whether or not the power is conferred,” regardless of the stated basis for enactment. United States v. Harris, 106 U.S. 629, 636 (1883), overruled on other grounds, Chimel v. California, 395 U.S. 752 (1969), but cited with approval in United States v. Morrison, 529 U.S. 598, 607 (2000). See also Madden v. Kentucky, 309 U.S. 83, 87-88 (1940), quoted with approval in Regan v. Taxation with Representation, 461 U.S. 540, 547 (1983) (“The burden is on the one attacking the legislative arrangement to negative every conceivable basis which might support it."). If the taxing statute was beyond the power conferred in the 16th Amendment but within the power conferred under Article I, the statute would be valid.
Murphy finally argues that ALL income taxes are direct taxes requiring apportionment (absent 16th Amendment authorization) because they are taxes imposed on people. Without taking sides in the debate between Professor Erik Jensen and Professor Calvin Johnson regarding the original intent of the enactors, this argument ignores the entire history of federal income taxation prior to the 16th Amendment, including importantly Pollock itself and the post-Pollock cases upholding the War Revenue Act of 1898 and the Corporate Income Tax Act of 1909.
I am confident that the Court of Appeals, previously chastened by the controversy over its earlier vacated decision in Murphy, will adopt neither Murphy’s argument that all “taxes on people” are direct taxes requiring apportionment, nor the government’s argument that the direct taxing clause was implicitly repealed by the abolition of slavery.
On balance, I think Murphy was smart not to engage the government’s battle over the scope of Congress’s Article I powers. After all, Murphy’s arguments are very weak. Instead, Murphy smartly accepted the government’s concession that the statute has the same meaning as the 16th Amendment, and focused her argument on an imagined understanding of the silent 16th Amendment enactors’ intent. Because of the way the government framed the statutory issue, Murphy has a good chance of winning.
What Can Brown Do For You? Can't Save Tax Court Petition Dropped Off at UPS on 91st Day
- July 7: IRS mails notice of deficiency to Taxpayer
- October 5 (last day to file petition in Tax Court): Taxpayer says he dropped petition off at local post office in the evening, but cannot produce a receipt
- October 6: Date typed on petition;
- October 6, 3:40 p.m.: Package received by UPS (per tracking record)
- October 10: Petition arrives at Tax Court via UPS
In Raczkowski v. Commissioner, T.C. Memo. 2007-72 (3/29/07), the Tax Court yesterday granted the IRS's motion to dismiss for lack of jurisdiction:
[T]he date on which an item is recorded electronically to the database of UPS is treated as the postmark date for purposes of section 7502.
Today is Deadline for Submitting Comments to Panel on the Nonprofit Sector
Today is the deadline for submitting comments to The Panel on the Nonprofit Sector on its Second Draft of the Principles for Effective Practice of 29 principles, plus two staff-deafted principles, arranged in the following five categories:
- Facilitating Legal Compliance and Public Disclosure—responsibilities and practices, such as implementing conflict of interest and whistleblower policies, that will assist charitable organizations in complying with their legal obligations and providing information to the public.
- Effective Governance—policies and procedures a board of directors should implement to fulfill its oversight and governance responsibilities effectively.
- Strong Financial Oversight—policies and procedures an organization should follow to ensure wise stewardship of charitable resources.
- Responsible Fundraising—policies and procedures organizations that solicit funds from the public should follow to build donor support and confidence.
- Staff Drafts of Additional Principles regarding risk management practices and adoption of a code of ethics.
See here for all 31 revised draft principles in a single document. The Panel will issue its final recommendations in late Spring 2007.
Halperin & Yale on Deferred Compensation Revisited
The tax rules governing deferred compensation, codified at section 409A, are harsh and complex. The rules are focused on the least important policy considerations and overlook the most important. Professors Halperin and Yale suggest a different approach, one that would make the law simpler, fairer, and more effective.
Polsky & Yale on Reforming the Taxation of Deferred Compensation
Executive pay is currently a topic of significant interest for policymakers, academics, and the popular press. Just weeks ago, in reaction to widespread press reports and academic criticism of extravagant executive perquisites, the SEC proposed new regulations designed to change fundamentally the manner in which executive compensation is reported to share-holders. Despite all of this attention, one significant aspect of executive deferred compensation has gone virtually unnoticed - the federal tax rules governing this form of compensation are fundamentally flawed and must be extensively over-hauled. These rules are flawed because they often create a significant incentive for companies and their executives to structure deferred, rather than current, compensation, thereby producing highly inefficient and inequitable results. This Article addresses potential legislative reforms that would remedy this problem by neutralizing the tax treatment of current and deferred compensation. While this neutrality goal, which was part of the recent proposals made by President Bush's Advisory Panel on Tax Reform, is easy to describe in general and conclusory terms, the devil is in the details. There has been little serious academic analysis of how to implement a set of tax rules that would create neutrality while avoiding undue complexity. This Article attempts to fill that void.
New 2008 U.S. News Tax Rankings
The new 2008 U.S. News Law School Tax Rankings are out and available on-line here. U.S. News ranked the Top 25 this year (with ties); here are the Top 10:
- 1. NYU (#1 last year)
- 2. Florida (#2)
- 3. Georgetown (#3)
- 4. Northwestern (#4)
- 5. Harvard (#5)
- 6. Miami (#5)
- 7. UCLA (#7)
- 8. Boston University (#7)
- 9. Texas (#15)
- 10. San Diego (#9)
- 10. Virginia (#11)
- 10. Yale (#11)
The biggest upward moves are:
- +6 Texas (#9)
- +3 Loyola-L.A. (#16)
The biggest downward moves are:
- -6 USC (#21)
- -5 U. Washington (#18)
- -4 Stanford (#13)
- -2 Denver (#21)
Last year, U.S. News ranked the Top 21 schools. Five schools that were unranked last year made this year's Top 25: Duke (#14), Penn (#18), Boston College (#21), Columbia (#21), and Florida State (#21).
One school that was in last year's Top 21 dropped out of the rankings this year: Chicago (#17 last year)
The 12 schools with graduate tax programs included in the rankings are the same as last year:
- 1. NYU (#1 last year)
- 2. Florida (#2)
- 3. Georgetown (#3)
- 4. Northwestern (#4)
- 5. Miami (#5)
- 6. Boston University (#6)
- 7. San Diego (#7)
- 8. Loyola-L.A. (#10)
- 9. SMU (#9)
- 10. U. Washington (#8)
- 11. Villanova (#10)
- 12. Denver (#10)
Loyola-L.A. is the only graduate tax program to move up (+2) in the rankings; Denver (-2), University of Washington (-2), and Villanova (-1) all moved down.
Fordham Hosts Conference Today on Nonprofit Law, Economic Challenges, and the Future of Charities
Fordham hosts a conference today on Nonprofit Law, Economic Challenges, and the Future of Charities:
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.
For the list of the panels, speakers, and topics, see below the fold.
9:00 a.m.: Introduction
- Linda Sugin (Fordham)
9:15 a.m.: Session I: Approaching Nonprofit Law
- Evelyn Brody (Chicago-Kent): The Board of Nonprofit Organizations: Puzzling Through the Gaps Between Law and Practice
- James Fishman (Pace): Wrong Way Corrigan and Recent Developments in the Nonprofit Landscape
- Marion Fremont-Smith (Harvard): Searching for Greater Accountability of Nonprofits: Recent Legal Developments and Proposals for Change
10:30 a.m.: Session II: Entrepreneurialism in Nonprofits
- Reynold Levy (President, Lincoln Center for the Performing Arts)
- Glenn Lowry (Director, The Museum of Modern Art)
- Robin Pogrebin (The New York Times), Moderator
1:00 p.m.: Session III: Making and Spending Money in Nonprofits
- John Colombo (Illinois): Commercial Activity by Exempt Charities: Making Tax Law Coherent
- John Eason (Tulane): The Roles of Mission, Mistrust, and "Dead Hand" Motive in Managing Troublesome Charitable Gifts
- Jill Manny (NYU): Nonprofit Payments to Insiders and Outsiders: Is the Sky the Limit?
- Burton Wesibrod (Northwestern): Law School "Mission and Business: The Nonprofit Dilemma"
2:30 p.m.: Session IV: The Increasing Resemblance of Nonprofit & Business Organizations Law
- Ellen Aprill (Loyola-L.A.): What Critiques of Sarbanes-Oxley Can Teach about Regulation of Nonprofit Governance
- Dana Brakman Reiser (Brooklyn): Independent Directors in Nonprofit Governance
- David Brennen (Georgia): The Commerciality Doctrine and "Charitable" Homes for the Aged—State & Local Tax Perspectives
- Michael Knoll (Pennsylvania): The UBIT—Leveling an Uneven Playing Field or Tilting a Level One?
3:45 p.m.: Session V: Nonprofit Governance In a Time of Institutional Growth and Transition
- Lesley Friedman Rosenthal (VP & General Counsel, Lincoln Center for the Performing Arts): Case Study of Lincoln Center
- Victoria Bjorklund (Simpson Thatcher & Bartlett)
- Harvey Goldschmid (Columbia)
- Margaret Morton (Deputy Commissioner, Department of Cultural Affairs, New York City)
IRS Lists Five Most Overlooked Items in 2006 Tax Returns
The IRS yesterday (IR-2007-72) listed the five most overlooked items by taxpayers on their 2006 tax returns:
Tax Policy Center Hosts Conference Today in D.C. on State and Local Finances After the Storm
The Tax Policy Center hosts a conference today in Washington, D.C. on State and Local Finances After the Storm: Is Smooth Sailing Ahead?:
The economy has recovered and most states are flush again with revenues. This is an ideal time to step back and examine how state (and local) governments responded to the fiscal crises that developed at the turn of the millennium and what pressures loom ahead for states. What contributed to the budget shortfalls and how can those pitfalls be avoided in the future? How did states balance their budgets? Did property tax revenues support state and local tax systems after stock market prices fell resulting in swings downward in income and sales taxes? Is the current tax system adequate to provide needed services? We will address these questions at this all-day conference.
For the list of panels, speakers, and their topics (with links to papers), see below the fold.
9:00 a.m.: Welcome and Opening Remarks
- Moderator: Kim Rueben
- Federal-State Partnership for Access to Affordable Health Coverage, by Katherine Baicker (Member, Council of Economic Advisers)
9:45 a.m.: Session #1: Steps Taken During the Recession of 2001
- Moderator: Nick Johnson (Center on Budget and Policy Priorities)
- Get Well Soon: Understanding States’ Fiscal Health after the 2001 Recession, by Elaine Maag (The Urban Institute) & David Merriman (Loyola-Chicago)
- State Business Tax Strategies in Response to the Revenue Performance of 2000-2003, by William F. Fox, LeAnn Luna & Matthew N. Murray (all of the University of Tennessee)
11:00 a.m.: Session #2: Pushing Down the Problem: Changes in the State-Local Relationship
- Moderator: Christopher Hoene (National League of Cities)
- Property Tax Responses to State Aid Cuts in the Recent Fiscal Crisis, by Richard F. Dye (Lake Forest College) & Andrew Reschovsky (University of Wisconsin-Madison)
- Responses of Local Governments in Minnesota to Changes in State Aid, Nathan B. Anderson (University of Illinois-Chicago)
- Fiscal Problems and Education Finance, by James Alm, David Sjoquist & Robert Buschman (all of Georgia State University)
1:30 p.m.: State and Local Finances and the Rating Agencies
- Moderator: Therese McGuire
- Speakers: Melanie Shaker & Laura Porter (both of Fitch Ratings)
2:30 p.m.: Session #3: Future Pressures Ahead: Likely Budget Busters Going Forward
- Moderator: C. Eugene Steuerle (The Urban Institute)
- Medicaid Expenditures and State Budgets: Past, Present and Future, by James Marton (University of Kentucky) & David E. Wildasin (both of University of Kentucky)
- State Spending on Education: Promises or Pitfalls Ahead?, by Sheila Murray (Texas A&M University) & Kim Rueben (The Urban Institute)
- Pension Funding and State Government Finances: Back in the Black or Trouble Ahead?, by J. Fred Giertz (University of Illinois at Urbana-Champaign) & Leslie E. Papke (Michigan State University).
The conference is being held at the Urban Institute, 2100 M Street, N.W, 5th Floor, Washington, D.C.
ABA Tax Section Offers Teleconference & Webcast Today on Tax Law 101
The ABA Center for Continuing Legal Education and its partners are pleased to announce the first installment in a series of programs for newly admitted Illinois attorneys. This first course “Tax Law 101” will provide the new attorney with the basics of tax law and tax practice. To meet the Illinois Basic Skills Course requirements, you must also sign up for a New Lawyer 101 session, which will be offered twice in the upcoming year. Tax Law 101 will cover:
- Individual and Family Tax Review
- IRS Procedure
- Managing Communications and Client Expectations
- Estate and Gift Tax Review
- Choice of Business Entity
- Adam Beckerink (Baker & McKenzie, Chicago)
- Robert E. “Bob” McKenzie (Arnstein & Lehr, Chicago)
- Anne-Marie Rhodes (Loyola-Chicago)
- Larry C. Smith (ABA Law Practice Management Section, Chicago)
- John B. Truskowski (Lord, Bissell & Brook, Chicago)
For more details, see the program brochure.
March 29, 2007
Jenkens & Gilchrist to Close its Doors Due to Tax Shelter Work
Jenkens & Gilchirst, the 56-year old Dallas-based law firm which in its heyday had 600+ attorneys, is shutting is doors and paying a $76 million fine after entering into a nonprosecution agreement with the U.S. government for its role in marketing tax shelters that generated more than $1 billion in phony tax losses.
Press and Blogosphere Coverage:
- Associated Press
- Dallas Morning News
- New York Law Journal
- New York Times
- Wall Street Journal
- WSJ Law Blog
An Inside Look at President Nixon's Charitable Deduction Imbroglio
On Tuesday, I blogged the Washington Post's obituary of Mary Livingston, a senior archivist in the Office of Presidential Libraries at the National Archives for 30 years who blew the whistle on President Nixon's attempted backdating of the donation of his papers in order to claim a charitable deduction for the donation. Shledon S. Cohen, IRS Comissioner under President Johnson (1964-69) and currently Director, Farr, Miller & Washington, Washington, D.C., has agreed to share his experience during this period:
Sen. John Williams of Delaware introduced a bill to cut off deductions for the gift of papers developed while the person was in government service. The bill had a effective date of April 1969 and applied to gifts after that date. It was aimed at then former President Johnson as a news story appeared that said he was planning a gift. President Johnson had used me as his tax lawyer after we left office ....I told him not to be concerned with the bill as the bill only covered income tax deduction and I planned to give his papers at his death and take an estate tax deduction (the marital deduction was then only 50%) and give the rest of the property to Mrs. Johnson free of tax.
Several months later President Johnson was asked to visit then President Nixon to discuss issues about the Vietnam war. He called me from Rose Mary Wood's desk when he came out of the Oval Office. He told me that Nixon had closed the meeting by saying they should work together to get the effective date of the Williams amendent changed to later in the year. Johnson agreed...he asked if I would represent him....of course I agreed. I asked who would handle it for Nixon and he told me Brice Harlow. I said I would call him....the President said wait as Nixon had not had time to tell him yet. I called Harlow later in the day and suggested that I would speak to the chairs of both tax committees as they were Democrats and to Larry Woodworth the chief of staff of the Joint Committee as he was my friend, he agreed to speak to the Republican leaders and get their assent. We spoke a day later and all seemed in order Woodworth told me it would be changed to the effective date of the 1969 Act, which should be sometime in the fall. A couple of days later Woodworth called me and said that Harlow had lost his nerve and was concerned for the pr of the issue. I said don't do it for President Johnson, as he did not need it. That is were it laid for a while.
Later the issue of Nixon using shelters and not paying tax arose. He was to release his returns for public viewing. The NY Times asked me to help their reporter, Eileen Shanahan, review the returns for issues. I asked for accounting help and requested we get Abe Briloff of Baruch College...a super accountant. Abe and I worked in the NY Times office here from 4 in the afternoon of the release date until 2 the next morning. We had by then identified the errors, including a suspicion that there had been a gift of papers, but we could not tell the date.
Later I was General Counsel of the DNC from late in 1972 to 1977. Williams & Connolly was handing the Watergate civil law suit for damages from the DNC offices break in. W&C resigned when the Post reporters were required to be deposed by the Republican defendants. I took over that litigation. In a deposition with Haldeman an Erlichman I asked a few questions about who had prepared the President's tax returns and related stuff. The answers aroused my suspicions. I figured that if I went to the Achives to look at the papers the White House lawyers would be called and there would be a hearing and lots of delays. I called a friend who was a reporter for the Washington Post, Nick Kotz. I suggested he go down to the Achieves and see Mary Livingston, who was the keeper of the Presidential papers. He should ask her for a copy of the receipt she gave for the deposit of the papers and on the gift of the papers. He was gone for a few hours but called me later and said I was on the mark. It was as if Mary Livingston had been waiting for someone to ask, as she was clear that the papers were not gifted until after April. This is a summary of my testimony before the Watergate Grand Jury....Woodworth told me he had said exactly the same thing as I did. The Assistant U.S. attorney who worked with the special prosecutor told me later that Harlow did not remember anything, but that Larry and I had agreed on all details. An interesting piece of my life.
Baillif & Reid on Income Recognition and Rev. Rul. 2003-10
Michael Baillif & Monique C. Reid (Ernst & Young, Washington, D.C.) have published Income Recognition and Revenue Ruling 2003-10: A Large Ship Steered by a Very Small Rudder, 60 Tax Law. 177 (2006). Here is the Introduction:
One of the most fundamental issues in tax law involves the timing of when an accrual basis taxpayer recognizes income under section 451. At the heart of this inquiry is a basic question: “What does it mean to have a fixed right to income?” The issue, which appears simple on its face, can be quite difficult in application, given that the answer depends on a myriad of factors, including the taxpayer’s business operations, contractual terms, and commercial practices. Over time, in addressing a wide range of fact patterns, the courts have articulated a variety of principles and established a number of precedents that provide a road map for analysis that most taxpayers find generally workable, albeit not always to their liking.
Unsurprisingly, however, the Service’s traditional view of income recognition has been substantially more expansive than that embraced by both taxpayers and the courts. In recent years, that divergent outlook has manifested itself in terms of the restrictive treatment accorded to taxpayers’ requests to change their accounting methods for recognizing income: these rulings are reviewable only under an abuse of discretion standard and are rarely challenged in the courts. Taxpayers hoped that this rigidity on the part of the Service would be alleviated somewhat through the publication of Revenue Ruling 2003-10. As it turned out, however, that ruling only provided two limited scenarios (clerical errors and same year disputes) that the Service was willing to conclude would not establish a fixed right to income. While in concept such a ruling might have been welcome, the Service’s subsequent interpretation and application of the ruling has been highly problematic. In practice, the Service has adopted the position that, barring one of the exceptions articulated in Revenue Ruling 2003-10, in a close case a taxpayer generally has a fixed right to income. Thus, the much anticipated guidance has failed to lend clarity to a broad range of situations. Instead, it has essentially become the sole touchstone for analysis, a circumstance that, in large part, has caused the Service’s decision making in this area to move with almost Byzantine complexity and, at times, glacial slowness.
This Article provides an examination of the well-established income recognition principles that have traditionally governed and should, in the authors’ opinion, continue to govern this area of the law. Further, this Article provides a number of scenarios that present many of the most current and difficult income recognition issues emerging from modern commercial practice, many of which account for the Service’s reluctance to move beyond the four corners of Revenue Ruling 2003-10. In this context, the Article considers ways in which well-established income recognition principles can be applied to such scenarios as a means of resolving them in a manner consistent with equity, administrability, and reasonable tax policy.
Further Developments in Biggest Tax Fraud Case in History
Developments since my blog post yesterday on Walter Anderson's sentencing in his tax fraud case: Biggest Tax Cheat in History Sentenced to 9 Years in Prison, But IRS Won't Be Repaid Because of Botched Plea Agreement:
Jack Townsend (Townsend & Jones, Houston) writes:
It appears that all that happened was that the plea agreement did not nail down restitution. Federal tax restitution is not generally allowed in tax cases unless it is provided in the plea agreement. Commonly, the resolution of the tax matter is not addressed by restitution in the plea agreement and is left to the ordinary civil processes that grind away after sentencing. The statute of limitations should stay open forever (e.g., by collateral estopple if an evasion conviction and by proof in other convictions). So, the IRS still has the ability to collect the taxes (assuming he has not frittered them away, but even if he has frittered them away a good restitution provision in the plea agreement would not help). It is not quite the disaster as a plain text reading of either your blog or the WaPo article. (Note, however, that the WaPo article does say: "IRS spokeswoman Peggy Thomas said the agency will "do everything in our power to get this money" from Anderson in civil proceedings;" that quote may not be intelligible to the average WaPo reader, but tax lawyers know that the mechanisms to collection the tax civilly are formidable indeed.)
- Associated Press: Error in Tax Case Keeps U.S. from Recovering Millions, by Matt Apuzzo
- Bloomberg: Anderson Gets Nine Year-Term in Biggest U.S. Tax Case, by Nadine Elsibai & Cary O'Reilly
- Don't Mess with Taxes: $100 Million Tax Repayment Down the Drain, by Kay Bell
TIGTA Gives High Marks to IRS's Private Debt Collection Program
The Treasury Inspector General for Tax Administration has released The Private Debt Collection Program Was Effectively Developed and Implemented, but Some Follow-up Actions Are Still Necessary. From the Audit Highlights:
To implement the Private Debt Collection program (Program), the IRS will use private collection agencies (PCAs or contractors) as an additional resource to help collect delinquent Federal taxes. In July 2004, the Department of the Treasury estimated the IRS will collect $1.4 billion through the Program in Fiscal Years 2006-2015. Balance-due cases were first placed with three PCAs on September 7, 2006. Overall, the IRS effectively developed and implemented several aspects of the Program, thus providing better assurance that taxpayer rights are protected and Federal tax information is secure. However, the IRS needs to follow up on computer security issues, update procedure guides, and update the application used to calculate projected revenue.
ABA Offers Teleconference & Webcast Today on GST Tax Traps for the Unwary
The ABA Section of Real Property, Probate and Trust Law offers a teleconference and webcast today on Generation Skipping Transfer Tax Traps for the Unwary from 1:00 - 2:30 p.m. EST:
The realm of GST tax compliance has undergone significant transformation in recent years, including: statutory changes under the Economic Growth and Tax Relief Reconciliation Act of 2001; final regulations governing elections into and out of treatment of a trust as a GST trust; proposed regulations governing qualified severances; and changes to federal Form 709.
This teleconference and live audio webcast will focus on the translation of theoretical GST tax rules into practice through a step-by-step examination of Form 709 and separate notice of allocation. Our experts will explore common errors and omissions and recommend best practices to help your client take advantage of the recent changes in GST tax law in allocating GST exemption or electing into/out of automatic allocations. This program also will review the procedure for obtaining Section 9100 relief for an extension of time to allocate GST exemption and how to report qualified severances of trusts. Our experts will review sample forms in detail during this program and strongly recommend that participants download the written materials before commencement of this program.
- Julie K. Kwon (McDermott Will & Emery, Chicago)
- Lloyd Leva Plaine (Sutherland Asbill & Brennan, Washington, D.C.)
- Diana S.C. Zeydel (Greenberg Traurig, Miami)
Court Gives Tax Break to Drug Runner
Interesting story from the Associated Press: Court Gives Tax Break to Drug Runner:
A Dutch court has added a new item to the list of activities eligible for tax relief — drug running. Judges in the central city of Arnhem recently declared that a professional fisherman convicted of smuggling drugs could deduct the cost of buying and shipping hashish to the Netherlands from his income on his tax return, national daily De Telegraaf reported Tuesday. ...
The Telegraaf reported that the smuggler, whose identity was not released, appealed to the Arnhem court after being slapped with a euro3.3 million ($4.4 million) tax bill. The court ruled that because he had only been convicted of drug running and not trading in drugs he could deduct the cost of buying and transporting the drugs on his tax form. That cut his tax bill to euro1.8 ($2.4 million) — a saving of euro1.5 million ($2 million). Under Dutch law, marijuana and hashish are illegal but police don't fine smokers for possession of less than five grams (one-sixth of an ounce) or prosecute for possession of less than 30 grams (one ounce). Authorities look the other way regarding the open sale of cannabis in designated "coffee shops." But growers are subject to raids and prosecution, meaning the officially tolerated shop owners have no legal way to purchase their best-selling product.
The case isn't the first time a court's ruling on taxes has raised Dutch eyebrows. In 2005, judges in the northern city of Leeuwarden ruled that witches can write off the cost of schooling in witchcraft against their tax bills if it increases the likelihood of employment and personal income [blogged here].
(Hat Tip: Jim Maule.)
Tax Prof Hair
Here is one issue I have not thought about in preparing to teach my class: how to wear my hair:
In my first three years, I never ever ever wore my hair down when I taught. Instead, I generally wore it pulled back in a low, neat ponytail. I associated wearing my hair pulled back with being older, more authoritative, and less sexy, and wearing my hair down with being younger, more carefree, and more "girly." As a young female prawf, I wanted my students, male and female alike, to view me as a professor and not a "girl their age." I never thought twice about my conclusion until Christine Hurt asked me incredulously if I "thought I looked more grown-up in a ponytail?"
Many cultures have norms concerning how women should wear their hair depending on age and marital status, so I don't think I'm completely crazy to ponder the hair up/hair down decision. On the other hand, I decided to test Christine's theory and start wearing my hair down occasionally to class. So far, my students still seem to respect me.
Lawyers in "The Zone" Feast on Tax Breaks
Interesting article in the Syracuse Post Standard: Law Firms Cash in Big on Empire Zone Tax Breaks, by Michelle Breidenbach & Mike McAndrew:
All over New York, clever lawyers have helped wealthy energy companies and shopping malls, century-old factories and even low-wage taverns win state tax breaks intended for someone else. The lawyers also helped themselves. Syracuse, Albany and Buffalo law firms some of Upstate New York's oldest, healthiest and most politically entrenched institutions erased their state tax bills with Empire Zone benefits, according to recently released records that provide the first public accounting of the program.
At least 70 law firms cost state taxpayers more than $6 million in 2005, records show. Gov. George Pataki and state legislators voted in 1999 to revive an underused set of tax breaks to bring new businesses into poor neighborhoods. They intended Empire Zones as a weapon to help New York compete with other states in the battle to attract new businesses. Instead, Bond, Schoeneck & King claimed $1.2 million in state tax credits in 2005 more than any other law firm. It is a 110-year-old firm that shuffled paperwork to make itself look new, qualifying it for a more lucrative set of tax breaks.
(Hat Tip: Ben Cunningham.)
IRS Wins Cemco Tax Shelter Case
The U.S. District Court for the Northern District of Illinois on Tuesday granted the Government's motion for summary judgment in yet another tax shelter case: Cemco Investors LLC v. United States, No. 04 C 8211 (N.D. Ill. 3/27/07). The particular shelter was a BLIPSS variant -- the goal was to increase the basis of a partnership through the purchase of offsetting foreign currency contracts. The judge did not buy it:
As detailed below, Cemco’s theory consists of several nuanced procedural steps. Ultimately, however, the argument amounts to little more than a house of cards, for if any of the steps fail (and several do), Cemco’s entire position collapses.
For more, see Joe Kristan.
Jurist Hosts Conference Today on Law as a Seamless Web/Site
In celebration of JURIST’s 10th anniversary, the University of Pittsburgh School of Law joins JURIST in presenting a provocative conference exploring issues at the intersections of law, war, rights and social justice that have figured prominently in JURIST’s coverage in recent years, while also taking an insightful look at how the media have been reporting legal news and how the Internet and technology are changing the conversation. Join us for a day of lively, informative exchange among leading lawyers, legal scholars, journalists, and technologists from across the United States. The conference features four all-star panels, with experts such as Jonathan Freiman, counsel to Jose Padilla; David M. Crane, former chief prosecutor for the UN war crimes court in West Africa; Edward A. Adams, editor of the ABA Journal; FindLaw founder Tim Stanley; and the featured keynote speaker, Emmy Award-winning former CNN Supreme Court and legal affairs correspondent Charles Bierbauer.
March 28, 2007
Katz on The Art of Taxation
Farley P. Katz (Partner, Strasburger & Price, San Antonio) has published The Art of Taxation: Joseph Hemard’s Illustrated Tax Code, 60 Tax Law. 163 (2006). Here is the Introduction:
Tax codes are notoriously dull reading. They are devoid of interest to anyone but professionals trained in the arcane language of the tax laws who, even then, never actually consult them except when required by a specific task at hand. The idea of a lengthy, commercially published tax code, profusely illustrated with humorous cartoon-like drawings full of puns and whimsy, with illustrations beautifully hand printed in color, seems almost unimaginable. But such an incredible book exists! Add to this the facts that the book was printed in occupied Paris near the end of World War II and that it contains numerous risqué and decidedly antiauthoritarian images, and one begins to appreciate how truly fantastic this book is.
The Code Général des Impôts Directs et Taxes Assimilées (General Code of Direct and Related Taxes) (Fig. 1), illustrated by the prolific book illustrator Joseph Hémard, was published on February 15, 1944, a mere six months before the liberation of Paris.
The book was a joint venture of two publishers, Éditions Littéraires et Artistiques and La Libraire “Le Tryptique” (The Triptych Bookshop), and printed by the company E. Desfossés. It is in octavo format, about 6.4 by 9.3 inches, and contains ten preliminary pages followed by 330 numbered pages and one unnumbered page with a “limitation notice” stating the number and types of copies issued, and was issued with printed paper covers as is typical of European books. The text consists of national, regional, and local tax laws of France, divided into three main divisions or “books,” containing a total of over 419 articles. At the end is a glossary of tax terms, with amusing definitions possibly written by Hémard himself. The tax laws included run the entire spectrum from income taxes on businesses and salaries of individuals, to property taxes on real and personal property, to taxes on mines and trade license fees, to taxes on mortmains (lands held by ecclesiastical and other entities), and even to municipal taxes on dogs. The text also includes administrative provisions and punishments.
2d Circuit Joins 3rd, 9th & 10th Circuits: Lump Sum Lottery Payments = Ordinary Income
- Prebola v. Commissioner, No. 05-6953-ag (2d Cir. 3/27/07), aff'g T.C. Memo. 2005-261 (11/8/05)
- Watkins v. Commissioner, 447 F.3d 1269 (10th Cir. 2006), aff'g T.C. Memo. 2004-244 (10/26/04)
- Lattera v. Commissioner, 437 F.3d 399 (3d Cir. 2006), aff'g T.C. Memo. 2004-216 (9/23/04)
- United States v. Maginnis, 356 F.3d 1179 (9th Cir. 2004)
- Womack v. Commissioner, T.C. Memo 2006-240 (11/7/06)
- Simpson v. Commissioner, T.C. Memo. 2003-155 (5/23/03)
- Davis v. Commissioner, 119 T.C. 1 (7/3/02)
Polito Posts Tax Papers on SSRN
Anthony P. Polito (Suffolk) has posted the following tax papers on SSRN:
- Advancing to Corporate Tax Integration: A Laissez Faire Approach, 55 S.C. L. Rev. 1 (2003)
- A Modest Proposal Regarding Debt-Like Preferred Stock, 20 Va. Tax Rev. 291 (2000)
- Useful Fictions: Debt and Equity Classification in Corporate Tax Law, 30 Ariz. St. L.J. 761 (1998)
- Borrowing, Return of Capital Conventions, and the Structure of the Income Tax: An Essay in Statutory Interpretation, 17 Va. Tax Rev. 467 (1998)
- Fiddlers on the Tax: Depreciation of Antique Musical Instruments Invites Reexamination of Broader Tax Policy, 13 Am. J. Tax Pol'y 87 (1996)
An Examination of Gender-Based Tax Reform in Light of New Data on Female Labor Supply
Lora Cicconi (J.D. 2007, UCLA) has published Comment, Competing Goals Amidst the "Opt-Out" Revolution: An Examination of Gender-Based Tax Reform in Light of New Data on Female Labor Supply, 42 Gonz. L. Rev. 257 (2007). Here is part of the Introduction:
The recent stagnation of women's labor force participation, in combination with new research suggesting a decline in women's labor elasticities, demands a fresh look at proposals for tax reform. In this paper, I first examine the new data on women's labor participation and elasticity and briefly explain aspects of the tax code that are viewed as distorting women's labor force decisions. I then look at the three arguments generally advanced in favor of tax reform to eliminate gender bias--equal treatment, efficiency, and fairness. I consider which reform proposals advance each goal, and question whether the new data strengthens or weakens the various proposals. I also examine the political viability of each reform in light of the history of changes to the tax code and debates surrounding the marriage penalty in the last twenty-five years. Ultimately, I argue that a combination secondary earner/childcare credit, while not ideal, is the most effective way to address the tax disincentives for married women, while still partially satisfying the competing goals of equal treatment, efficiency, fairness and political feasibility.
The paper received Honorable Mention in the 2006 Tannenwald Tax Competition.
Jensen on Taxation and Doing Business in Indian Country
Furthering investment in Indian country (a term that includes, but is not limited to, reservations) is an important goal, but potential investors are hesitant-and with reason. One disincentive to invest is uncertainty about tax liability. Understanding taxation in Indian country requires knowledge not only of traditional tax law, but also of American Indian law principles dating from the early nineteenth century, and not many practitioners are up to that task. This article tries to make sense, as much as is possible, of the doctrines that have developed over the centuries.
The article first discusses some basics: the concept of Indian country and various other doctrines of American Indian law that can affect the analysis of taxation (federal plenary power, the federal government's obligation to act as trustee for American Indian nations, tribal sovereignty, the nature of treaties between the U.S. and many tribes, and the Indian canons of construction). The article then discusses the power of various governments (federal, state, and tribal) to tax within Indian country. Among the subjects considered in depth are the federal government's power to tax tribes and tribal corporations; doctrines affecting state governments- taxing powers (including legal versus economic incidence, the infringement test, and the federal preemption doctrine); the limits on tribal power to tax non-Indians within Indian country; and doctrines affecting the ability of tribes to waive their taxing power in order to attract investors.
Taxpayer Files Reply Brief in Murphy
With the taxpayer's filing of its reply, the briefing is now complete in preparation for the April 23 oral argument in the D.C. Circuit panel's rehearing in Murphy v. IRS, 460 F.3d 79 (D.C. Cir. 8/22/06). In its now-vacated opinion, the panel held that § 104(a)(2) is unconstitutional under the 16th Amendment as applied to a recovery for a non-physical personal injury unrelated to lost wages or earnings.
- Taxpayer's Opening Brief (critiqued by Greg Germain here)
- Government's Brief (critiqued by Greg Germain here)
- Taxpayer's Reply Brief
New 2008 U.S. News & World Report Law School Rankings
The new 2008 U.S. News & World Report Law School Rankings, scheduled to be officially released on Friday, have apparently leaked (Concurring Opinions, Law School Discussion, Volokh Conspiracy). As Brian Leiter notes, "the 'overall' rank is a sheer nonsense number, most dramatically so outside the top 20-25." But folks do care (obsess) about the overall ranking, so here are the Top 25, and the change from last year's overall ranking [click on chart to enlarge]:
Here are the biggest moves among the Top 100 schools [click on chart to enlarge]:
Brian lists the Top 30 schools by academic and lawyer/judge reputation.
Biggest Tax Cheat in History Sentenced to 9 Years in Prison, But IRS Won't Be Repaid Because of Botched Plea Agreement
Interesting article in the Washington Post: Mogul Sentenced to 9 Years For Tax Evasion and Fraud, by Carol D. Leonnig:
Eccentric Washington telecommunications mogul Walter C. Anderson was sentenced yesterday to nine years in prison for failing to pay $200 million in taxes -- but a federal judge ruled the IRS won't be repaid for now because prosecutors botched the plea agreement. Anderson, the biggest convicted tax cheat in U.S. history, received the longest punishment ever given in a tax crime case for his admitted effort to hide $365 million in personal income in the 1990s. He avoided paying taxes by using aliases, shell companies, offshore tax havens and secret drop boxes abroad. ...
In a major embarrassment to the government's seven-year prosecution of Anderson, the judge ruled he could not order Anderson to make restitution to the IRS for an estimated $140 million of his unpaid federal income taxes. Friedman blamed prosecutors for making a sloppy plea agreement with Anderson.
CBPP: Half of States Tax Families Below Poverty Level
Poor families in many states face substantial state income tax liability for the 2006 tax year. In 19 of the 42 states that levy income taxes, two-parent families of four with incomes below the federal poverty line are liable for income tax. In 15 of the 42 states, poor single-parent families of three pay income tax. And 29 of these states collect taxes from families of four with incomes just above the poverty line.
Ways & Means Committee Marks Up Taxpayer Protection Act of 2007 Today
- Joint Committee on Taxation Description (JCX-18-07)
- Joint Committee on Taxation Estimated Revenue Effects (JCX-19-07)
Cincinnati Hosts Conference Today on Hot Issues in International Taxation
The University of Cincinnati College of Law hosts a two-day conference today and tomorrow on Hot Issues in International Taxation:
[A] seminar on the most relevant U.S. tax issues in cross-border tax planning from a corporate perspective. Learn about the hottest U.S. tax issues including a Washington tax update and the Treasury Department's ongoing efforts to issue regulatory guidance on a variety of international issues. Our experienced faculty ... will guide you through the recent IRS regulations, reporting requirements and show you practical strategies for reducing foreign and U.S. taxes.
ABA Tax Section Offers Teleconference & Webcast Today on New Transfer Pricing Regs
The ABA Tax Section offers a teleconference and webcast today on New Transfer Pricing Regulations on Services and Intangibles from 1:00 - 2:30 p.m. EST:
In recent years, two of the most critical issues in international taxation have involved the transfer pricing treatment of related party services and intangibles transactions. This program will focus on the recently promulgated Final and Temporary Regulations on related party services and intangible property transactions, including practical advice regarding the implementation of such regulations. Please join our distinguished panel as they discuss, among other issues, the new services cost method and the intangibles elements of the new regulations. The discussion will also include an economic analysis of the new regulations.
- A. Tracy Gomes (Property Economics, Dallas)
- Cym H. Lowell (Gardere Wynne Sewell, Dalls)
- Mark R. Martin (Gardere Wynne Sewell, Houston)
- Clisson S. Rexford (Akzo Nobel, Chicago)
March 27, 2007
Fleischer on Tax Considerations of Blackstone IPO
Vic Fleischer (Colorado; moving to Illinois) has a great series of posts on Conglomerate about the tax considerations underlying the Blackstone IPO:
- Blackstone IPO: Regulatory Arbitrage
- Blackstone IPO: The Tax Analysis
- The Politics of Taxing Blackstone
Peters & Miller on Apportionability in State Income Taxation
James H. Peters (Adjunct Professor, NYU Law School & Pace Business School) & Benjamin F. Miller (Counsel, Multistate Tax Affairs, California Franchise Tax Board) have published Apportionability in State Income Taxation: The Uniform Division of Income for Tax Purposes Act and Allied-Signal, 60 Tax Law. 57 (2006). Here is the Introduction:
In 1954 the National Conference of Commissioners on Uniform State Laws, at the request of the Section of Taxation of the American Bar Association, created a special committee to draft a uniform income tax apportionment act. The result was the Uniform Division of Income for Tax Purposes Act (UDITPA). With respect to interstate taxpayers (other than financial organizations, public utilities, and individuals rendering personal services), it provides for formula apportionment of “business income” and allocation to situs of “nonbusiness income.” It defines “business income” as “income arising from transactions and activity in the regular course of the taxpayer’s trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations.” All other income is classified as “nonbusiness income.”
To the extent that rents, capital gains, interest, dividends, and royalties constitute business income, they are subject to formula apportionment. Much of the controversy surrounding the interpretation of UDITPA concerns the treatment of income from property (as distinguished from manufacturing, processing, or selling) as business income. At the center of the debate is the meaning of the phrase: “if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations.” The differing interpretations placed on the phrase are most clearly illustrated in the treatment of capital gain or loss from the sale of business assets.
In Allied Signal, Inc. v. Director, Division of Taxation, the Supreme Court held that a state lacked the power to tax gain realized by a nondomiciliary corporation from the sale of its minority interest in another corporation. The Court firmly declared that the existence of a unitary relation between payee and payor is not the only justification for apportioning income from an investment. “What is required instead,” said the Court, “is that the capital transaction serve an operational rather than an investment function.” In regard to the definitions of business income and nonbusiness income in UDITPA, the Court acknowledged that “[i]n the abstract, these definitions may be quite compatible with the unitary business principle.”
This Article traces the history of the unitary business principle, the pre-UDITPA efforts to legislate a solution to the diverse treatment of income from interstate businesses, the origin of the business income definition in UDITPA, and its administration and judicial interpretation. It argues that the definition, properly understood, is a unitary test that is similar to the Supreme Court’s operational function test of apportionability in Allied-Signal. Throughout, California is used as the illustrative paradigm because its legislative, administrative, and decisional experience with apportionment is richer and more detailed than that of any other state.
Michigan Establishes Low-Income Tax Clinic
Michigan has established a low-income tax clinic and has secured a $35,000 matching grant from the IRS to fund its first year of operations. For more details, see the press release. (Hat Tip: David Hasen.)
Winchester on A New Tax Dodge for the Wealthy Magnifies Employment Tax Defects
Richard Winchester (Thomas Jefferson) has published Working for Free: A New Tax Dodge for the Wealthy Magnifies Employment Tax Defects, 76 Miss. L.J. 227 (2006). Here is the abstract:
Employment taxes account for an enormous share of federal tax receipts. And it is widely acknowledged that taxes on the self-employed are collected under a dysfunctional set of laws that is long overdue for repair. Yet, there is surprisingly little legal scholarship in the field. This article fills a portion of that gap. It examines some fundamental flaws that plague our nation’s employment tax laws, focusing on how President Bush’s dividend tax cut created an incentive for wealthy individuals to exploit those flaws at the government’s expense when they work for a corporation that they also own and control. Specifically, prior to the Bush tax cut the corporation would have (correctly) paid these employee-shareholders a salary for their labor. However, the corporation is now more likely to substitute a dividend for that compensation, preventing any employment tax from coming into play and shortchanging the social security trust fund at a time when its long term solvency is in jeopardy. The article proposes a new and practical framework for addressing the defects in the law in order to produce more sensible and equitable results while eliminating opportunities for abuse.
Zelinksy & Denning Debate Application of Dormant Commerce Clause to Discriminatory State Taxation
I previously have blogged (here, here, and here) the debate between Edward A. Zelinsky (Cardozo) and Brannon P. Denning (Cumberland) on the dormant commerce clause and disciminatory state taxation. They take their debate to PENNumbra, the University of Pennsylvania's new online journal, in The Future of the Dormant Commerce Clause: Abolishing the Prohibition on Discriminatory Taxation:
[Zelinsky] argues that “[i]t is time to abolish the dormant Commence Clause prohibition on discriminatory taxation.” This is so, he writes, because “the prohibition is today doctrinally incoherent and politically unnecessary.” The incoherence, Zelinsky maintains, stems from the disparate treatment by the United States Supreme Court of economically identical activities: “discriminatory taxation favoring local industries,” which the doctrine prohibits, and “direct expenditures subsidizing those same industries,” which it permits. It is unnecessary, Zelinsky argues, because Congress is able, and better suited, to police any state abuses. In short, “[l]ike a once-great champion who refuses to leave the ring, the dormant Commerce Clause prohibition on discriminatory taxation stumbles along well past its prime.” [Denning] finds in Zelinsky’s proposal a slippery slope. As Denning argues, taking Zelinsky’s argument on its own terms, “there is no reason to restrict his proposal to tax cases.” And yet, writes Denning, “if the antidiscrimination principle is to be jettisoned in nontax cases as well, then we might as well do away with the [dormant Commerce Clause doctrine (DCCD)] altogether, since the antidiscrimination principle is the DCCD’s most robust branch.” Pretty quickly, writes Denning, it appears that “Professor Zelinsky is really proposing nothing less than the abandonment of the DCCD in toto.”
Remembering Richard Nixon's Infamous Tax Evasion
The Washington Post's obituary of Mary Livingston recounts the role that she played in one of oddest chapters in the tax law:
Mary Walton McCandlish Livingston, 92, a federal archivist whose testimony before Congress revealed that President Richard M. Nixon's donated papers were improperly backdated, died March 23 ...
Mrs. Livingston, a senior archivist in the Office of Presidential Libraries at the National Archives for 30 years, supervised work on Nixon's early papers. In March 1970, while working with a manuscript dealer chosen by Nixon, she selected 1,176 boxes of personal papers that the president intended to donate to the nation. A change in federal tax law would have prevented Nixon from taking a deduction for the donation. But the dealer prepared an affidavit that said Nixon donated his vice presidential papers a year earlier than he actually did, which gave the president a $450,000 tax break. Public indignation at Nixon's nonpayment of federal taxes led to a hearing before the Joint Committee on Internal Revenue Taxation. Mrs. Livingston testified that the president could not have donated the papers in 1969 because the dealer asked her to select the papers a year later....
The dealer aroused her suspicions from the start, Mrs. Livingston told the committee, when he wanted her to keep their interaction from her supervisor. She promptly filed a memo to her boss. Three years later, when a newspaper story mentioned Nixon's tax deductions, she wrote another memo, suggesting that investigators seek out the original deed of donation. Her testimony before Congress resulted in a 1974 ruling that the deduction was improper. She was also an important witness in the 1975 fraud trial of the manuscript dealer, who was convicted. Mrs. Livingston received an award from the Society of American Archivists for her "conscientious performance of duty." ...
Koo on Legal Education and the Promise of Technology
Gen Koo (Fellow, Berkman Center for Internet & Society, Harvard Law School) of our Law School Innovation Blog has published his white paper, New Skills, New Learning: Legal Education and the Promise of Technology. Here is part of the Conclusion:
Law firms, continuing legal education providers, technology providers, and law schools all have a role to play in ensuring that attorneys are prepared for a technologically-mediated world. To meet this challenge, these organizations must understand what to teach and how to teach it. In many ways the opportunity demands an entrepreneurial approach: relentless experimentation to sharpen both practice and the pedagogy of practice. It also requires institutional awareness: understanding not just the divide between academy and practice and the divergent challenges facing global mega-firms versus local community lawyers, but also how to bridge those differences when necessary.
Law plays a foundational role in American society, and increasingly in articulating our global community. To teach the knowledge, skills, and values of legal practice is fundamentally to transmit the essence of justice to a new generation. We hope that this study will spark a new conversation about how every person responsible for educating attorneys – whether a professor at a national law school or a mentor at a local partnership – can meet that duty in an ever-changing world. We look forward to continuing the dialogue.
To correct, update, or extend the paper, you can contrbute to the wike version here.
Cardozo to Host LLC Conference
The Samuel and Ronnie Heyman Center on Corporate Governance at the Benjamin N. Cardozo School of Law is hosting a conference on Thursday, April 12 on Current Issues in the Use of Limited Liability Companies: Bankruptcy; Compensation; Mergers, Conversions and Reorganizations; and Tax.
Mann on How Tax Policy Drives Transportation Choice
Roberta F. Mann (Widener) has posted On the Road Again: How Tax Policy Drives Transportation Choice, 24 Va. Tax Rev. 587 (2005), on SSRN. Here is the abstract:
In the United States, approximately 80 percent of commuters drive to work alone. Why do United States commuters persist in driving alone when the evidence is clear that they are wasting time and money, exposing themselves to the risk of accidents, polluting their neighborhoods and damaging their health? Many commuters have no other practical choice. Years of government subsidizing a low density, petroleum intensive lifestyle have created this dilemma. Transportation choices are limited because of (1) the federal funding mechanism for transportation projects, (2) disparate treatment of employee fringe benefits for transit versus parking, (3) the home mortgage interest deduction which encourages low density housing, and (4) the preferential tax treatment of the oil and gas industry. Other federal tax provisions, such as expensing rules that encourage purchase of large sport utility vehicles and the deductibility of advertising expenses liberally used by the automotive industry, contribute to the problem. Changes to the federal tax system can help create a solution.
The federal tax system in the United States has pervasive influence over its citizens' lifestyles by creating economic incentives and disincentives for behavior. The federal tax system influences urban transportation choices by failing to account negative externality costs, and in some instances, actually subsidizing choices that result in significant environmental and social cost
In this article, I will first examine how driving alone became the dominant transportation mode for American commuters. Next, I will explore who bears the full cost of driving. After briefly describing urban transportation alternatives, I will discuss potential solutions, focusing on changes to the federal tax system, but also exploring regulatory alternatives. Finally, I will discuss the challenges such reforms will likely face, and strategies for overcoming those challenges, including comparisons of the solutions tried in other countries.
GAO Releases Report on Taxpayer Advocate Service
The Government Accountability Office yesterday released Taxpayer Advocate Service: Caseload Has Grown and Taxpayers Report Being Satisfied, But Additional Measures of Efficiency and Effectiveness Are Needed (GAO-07-156). Here is the abstract:
Congress created the Taxpayer Advocate Service (TAS) to assist taxpayers in resolving problems with the IRS and to propose changes to IRS's practices to mitigate problems affecting taxpayers in general. TAS uses case advocacy and systemic advocacy, respectively, to address these two goals. GAO was asked to address (1) why TAS's caseload has increased since 2004, (2) how well TAS conducted its case advocacy activities in terms of measures such as customer satisfaction and quality, and (3) how well TAS measures and reports its systemic advocacy efforts. GAO interviewed TAS and IRS managers and other staff, reviewed TAS and IRS documents, and analyzed TAS and IRS data.
The number of individual taxpayer cases opened by TAS increased substantially in fiscal years 2005 and 2006 and our analysis of TAS and IRS data shows that these increases correlated with increases in IRS enforcement activities both overall and in some specific IRS enforcement programs. For example, changes in the number of tax refunds frozen by IRS coincided with changes in the number of frozen refund cases at TAS. While TAS made changes after fiscal year 2004 to its guidance for accepting new taxpayer cases, this did not notably influence TAS's caseload increase in fiscal years 2005 and 2006. For example, TAS created two additional case acceptance criteria in fiscal year 2006 that resulted in a little more than 500 of the approximately 244,000 cases received that year. TAS measures customer satisfaction and found that the taxpayers TAS serves remained satisfied from fiscal years 2002 to 2006. TAS also measures the quality of its case advocacy and found that this improved from 2002 to 2004 and stayed about the same in 2005 and 2006. While these case advocacy measures are sound, there is important missing information in that TAS does not have meaningful measures of case advocacy efficiency or cost. A meaningful measure of efficiency would consider the ratio of cases closed to the time spent on them and take into account case complexity and the quality of the work, and unit cost information is needed to fully understand this information. TAS is developing the means to capture time per case, the key component of unit cost, and case complexity. TAS currently does not measure the effectiveness of its systemic advocacy efforts. TAS is piloting a program to study systemic advocacy effectiveness in a few areas, but not broadly. Also, it is difficult to determine what actions were taken to address systemic issues raised in the annual report to Congress, TAS's primary method for providing information to Congress and the public about its systemic advocacy efforts. For example, the report describes serious problems faced by the taxpayers but does not include the status of addressing those issues.
March 26, 2007
Joint Tax Committee Releases Description of Tax Provisions in President's Budget, Projects $333 Billion Tax Increase from Proposed Standard Deduction for Health Insurance
The Joint Committee on Taxation today released Description of Revenue Provisions Contained in the President's Fiscal Year 2008 Budget Proposal (JCS-2-07):
This document, prepared by the staff of the Joint Committee on Taxation, provides a description and analysis of the revenue provisions modifying the Internal Revenue Code of 1986 (the “Code”) that are contained in the President’s fiscal year 2008 budget proposal, as submitted to the Congress on February 5, 2007. The document generally follows the order of the proposals as included in the Department of the Treasury’s explanation of the President’s budget proposal. For each provision, there is a description of present law and the proposal (including effective date), a reference to relevant prior budget proposals or recent legislative action, and an analysis of policy issues related to the proposal.
On page 301, the Joint Committee projects that the President's proposed standard deduction for health insurance, coupled with repeal of the exclusion for employer-paid health insurance, self-employed health insurance deduction, and itemized medical deductions, would result in a $333 billion tax increase over 10 years.
IRS Names 16 Most Common Tax Return Mistakes
The IRS today issued Notice 2007-35, 2007-15 I.R.B. ___ (4/9/07), which lists the most common mistakes taxpayers make in preparing their tax returns:
- Choosing the wrong filing status
- Failing to include or using incorrect Social Security numbers
- Failing to use the correct forms and schedules
- Failing to sign and date the return
- Claiming ineligible dependents
- Failing to file for the Earned Income Credit
- Improperly claiming the Earned Income Credit
- Failing to report and pay domestic payroll taxes
- Failing to report income because it was not included on a Form W-2, Form 1099, or other information return
- Treating employees as independent contractors
- Failing to file a return when due a refund
- Failing to check liability for the alternative minimum tax
- Failing to request federal telephone excise tax
- Failing to accurately use or compute the Schedule D Tax Worksheet or Qualified Dividends and Capital Gain Tax Worksheet
- Failing to enter the correct amount of taxable Social Security benefits
- Mailing a return to the wrong address