December 31, 2008
Things to do Before Midnight Tonight to Save on Your 2008 Taxes
- ABC News: Year-End Tax Tips for 2008
- CBN News: Last Minute Tax Tips Before Midnight
- Don't Mess With Taxes: Tax Moves You Must Make Today
- MSNBC: It's Not Too Late for 2008 Tax Write-Offs
- Roth & Co.: Charge Those Deductions!
- New York Times: Ten Year-End Tax Tips
- Tax Girl:
11th Circuit Affirms Tax Conviction of Creation Science Evangelist
I previously blogged the criminal tax case of Kent Hovind, the self-styled Dr. Dino of Creation Science Evanfelism and owner of the defunct Dinosaur Adventure Land Theme Park, Science Center, and Museum. The Eleventh Circuit yesterday affirmed the conviction and sentence of Mr. Hovind (for failing to collect and pay employment withholding taxes, obstructing tax laws, and structuring transactions to avoid financial reporting laws) and of his wife (for structuring transactions to avoid reporting laws). United States v. Hovind, No. 07-10090 (11th Cir. Dec. 30, 2008).
Kaye: Tax Incentives in the US & EU
Tracy Kaye (Seton Hall) has published The Gentle Art of Corporate Seduction: Tax Incentives in the United States and the European Union, 57 U. Kan. L. Rev. 93 (2008). Here is the abstract:
Tax competition among the States, in particular the use of targeted tax incentives, is a compelling problem in our federal system. In order to attract corporations and the employment opportunities they represent, States engage in a "race to the bottom" through destructive bidding wars. This article discusses the considerably different approaches used by the U.S. and the European Union to temper the ability of their States and Member States to provide tax subsidies and concludes that lessons can be learned from the EU experience.
This article sets forth the current approaches to distinguishing between appropriate and inappropriate tax incentives. In the EU, the Member State bears the burden of proving that the proposed tax incentive does not distort the common market. Any new incentive is subject to a formal investigation by the Commission to determine whether it is compatible with the common market. The U.S. does not, however, have a governmental entity that is analogous to that of the European Commission. Furthermore, in the U.S. it appears that the standing doctrine effectively keeps most parties from challenging the various States' tax incentives. EU state aid policy enables Member States to resist protectionist pleas from companies such that the EU is experiencing a downward trend in the use of tax incentives and virtually no use of the targeted tax incentives utilized so widely by the American States.
This article recommends the formation of a group under the auspices of the Multistate Tax Commission to promulgate a State Code of Conduct for Business Taxation analogous to the EU's Code of Conduct. This Code of Conduct would prohibit States from offering targeted tax incentives.
Allocating Business Profits for Tax Purposes
Reuven S. Avi-Yonah (Michigan), Kimberly A. Clausing (Reed College, Department of Economics) & Michael C. Durst (Steptoe & Johnson, Washington, D.C.) have posted Allocating Business Profits for Tax Purposes: A Proposal to Adopt a Formulary Profit Split on SSRN. 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 shifting of income outside the U.S. tax base. 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 incomes. This fraction would be the sum of (1) a fixed return on their expenses in the United States and (2) the share of their worldwide sales that occur in the United States. This system is similar in significant respects to the current "residual profit split" method of the U.S. transfer pricing regulations and the OECD Guidelines, as well as to the current method that U.S. states use to allocate national income across states.
W&L Dean Sues NY Times Over Story Charging Lobbyist Had Affair With John McCain
Washington & Lee Dean Rodney A. Smolla is one of the two lawyers representing Washington, D.C. lobbyist Vicki L. Iseman in her lawsuit against the New York Times, alleging that the paper's Feb. 21 front-page article wrongly asserted that she an Sen. John McCain had an improper romantic relationship. (Hat Tip: Jack Bogdanski.)
What’s Wrong With Law School?
American Lawyer Daily: What’s Wrong With Law School?, by Susan Beck:
Law firms may not be known for innovation, but they look positively cutting edge next to law schools. That was the consensus at the two-day Leading Legal Innovation conference, which drew 30 law firm leaders, professors, and entrepreneurs.
Among the topics on the table: Law schools are great at teaching students how to read a court decision, but they don’t teach many of the skills needed to be a successful lawyer. They also don’t screen applicants for the qualities that make for good lawyers. High grades and test scores alone are not good predictors for success.
William Henderson, an associate professor at Indiana University's Maurer School of Law, suggests that a school like his, which doesn’t top many law firms’ recruiting lists, could indeed differentiate itself by teaching and screening for interpersonal skills. "If you can build a curriculum that teaches competencies like empathy, networking, and teamwork, a school could really change and be innovative,” says Henderson. Some additional adjunct faculty might be needed for those courses; however, Henderson admits that most law professors don’t have the skills to teach courses like this. (Henderson says his school is planning changes to address these gaps, but the school isn't ready to "share its playbook" at this point.)
Northwestern University School of Law is already aiming to differentiate itself by screening for more mature, experienced students. "This entering class had only three percent who came straight from college," says dean David Van Zandt. "More than 82% have two years experience, and I'm thinking more and more we need to increase that. I think it takes a while to learn the ability to work with others in teams and communicate effectively." ...
Several professors complained that the ABA--and its outdated accreditation standards--is the main bulwark against innovation. “The ABA is stifling law schools and preventing needed change,” says Northwestern dean Van Zandt. “Their regulation forces most of us to build an Acura instead of a Corolla, and that’s a real harm to society.” Van Zandt cited ABA rules requiring that a high percentage of a school’s faculty be full-time and tenured, rules limiting online courses, and burdensome and expensive requirements for law school libraries. “If you want to start a law school, you probably need 50-60,000 books in your library."
Benjamin Barton, an associate professor at the University of Tennessee College of Law, contrasted law schools with business schools. "Business schools are massively more innovative because no one has to go to business school," he says. "They're more interested in showing that they're giving you something of value." In addition, he says, business school professors are much more attuned to the real world. "At a business school, corporate executives pay $10,000 a week to talk to
Effect of Academic Superstars on Surviving Coauthors
Pierre Azoulay (MIT, Sloan School of Management), Joshua S. Graff Zivin (UC-San Diego, School of International Relations and Pacific Studies) & Jialan Wang (Ph.D. candidate, MIT, Sloan School of Management) have posted Superstar Extinction on NBER. Here is the abstract:
We estimate the magnitude of spillovers generated by 161 academic "superstars" onto their collaborators' research output. These life scientists died while still being actively engaged in science, thus providing an exogenous source of variation in the structure of their collaborators' coauthorship networks. Following the death of a superstar, we find that collaborators experience, on average, a lasting 5 to 10% decline in their quality-adjusted publication rates. By exploring interactions of the treatment effect with a wide range of star, coauthor and star/coauthor dyad characteristics, we seek to adjudicate between plausible mechanisms that might explain this finding. Taken together, our results suggest that spillovers are circumscribed in ideas space, but not in physical or social space. Superstar extinction reveals the boundaries of the scientific field to which the star contributes -- the "invisible college."
(Hat Tip: Danny Sokol.)
The Virtual Tax Library
Katherine Pratt, Jennifer M. Kowal & Daniel Martin (all of Loyola-L.A.) have published The Virtual Tax Library: A Comparison of Five Electronic Tax Research Platforms, 8 Fla. Tax Rev. 935 (2008). Here is the abstract:
Improved LexisNexis and Westlaw tax research platforms and new electronic tax research platforms offered by BNA (BNA Tax Management Library), CCH (CCH Tax Research NetWork), and RIA (RIA Checkpoint) constitute a virtual tax library that offers tax researchers much of the content and functionality of a physical tax library, as well as some useful functionality features (e.g., direct linking of primary and secondary sources) a physical tax library cannot provide. The new virtual tax library offers tax researchers numerous benefits, including the convenience of a portable library, more reliable and current research results, and increased research efficiency. Many tax researchers have not adapted their tax research techniques to effectively utilize the virtual tax library, however, because they are unfamiliar with the new and improved electronic tax research platforms.
To reduce tax researchers' costs of evaluating and comparing the five electronic platforms, this Article provides detailed comparisons of the content and functionality features offered by the platforms. This Article also explains how to access various types of primary and secondary tax sources on the platforms and provides detailed search pathways that will enable tax researchers to navigate around the electronic platforms.
Part I of this Article provides background information regarding the development of the new electronic tax research platforms and explains our project and methodology. Part II compares the primary and secondary source content offered on the five electronic platforms and compares various types of free tax information that are available on the internet. Part III compares the various functionality features offered on the five electronic platforms. Part IV illustrates the differences in search results obtained by using the various electronic platforms to research a topical tax research question. Part V discusses the factors that are relevant when designing an electronic tax research system and makes recommendations about combining the electronic tax research platforms to create a workable virtual tax library.
A chart in Appendix A provides a side-by-side comparison of the primary source content available on the five electronic tax research platforms. The chart includes search pathways and date restrictions for each type of content. A chart in Appendix B provides a side-by-side comparison of the functionality features offered by each platform. The chart includes quick reference guides for initiating various types of searches, as well as user support information for each platform.
The published version of this article includes new information (e.g., search pathways and date restrictions for the content information in Appendix A) that was not included in the draft version of this article. iar with the new and improved electronic tax research platforms.
December 30, 2008
Voting Ends Jan. 2 in ABA Journal's 2008 Top 100 Blawg Poll
Voting ends January 2 in the ABA Journal's 2008 Blawg 100 contest. In the 15-blog "professors" category, TaxProf Blog is currently in third place with 176 votes, trailing Jonathan Turley (531 votes) and Mirror of Justice (235 votes). To vote, go here.
Tax Court: IRS's Unclear Instructions No Excuse for Taxpayer's Mistake
Jellen v. Commissioner, T.C. Summ. Op. 2008-164 (Dec. 29, 2008):
Petitioner's only argument is that respondent's instructions and guidance to taxpayers as to the taxability of Social Security benefits are confusing and unclear and therefore that the Social Security disability benefits he received in 2004 and 2005 should not be subject to taxation under section 86(a).
We are sympathetic with petitioner's complaint about unclear guidance to taxpayers that occasionally appears in respondent's instructional publications, but petitioner is not thereby excused from paying required Federal income taxes on the Social Security benefits he received. We sustain respondent's adjustments to petitioner's Federal income taxes for 2004 and 2005.
More on Tax Planning for Madoff Victims
Kerik Pleads Not Guilty to Tax Fraud Charges
Bernard B. Kerik, the former New York City police commissioner who was President Bush’s choice to lead the Department of Homeland Security, pleaded not guilty on Monday in federal court to failing to report over $500,000 of income.
New Issue of Atax's eJournal of Tax Research
Volume 6, Issue 2 (Dec. 2008) of the eJournal of Tax Research, published by Atax (Australian Taxation Studies Program), University of New South Wales, Sydney, Australia, and edited by Binh Tran-Nam & Michael Walpole, is available on its web site:
- Paulo Reis Mourão, The Consequence of Fiscal Illusion on Economic Growth (pp. 82-89)
- Maurice Cashmere & Rodney Fisher, Defining Ordinary Income after McNeil (pp. 90-121)
- Clinton Alley & Duncan Bentley, The Increasing Imperative of Cross-Disciplinary Research in Tax (pp. 122-44)
- Wollela Abehodie Yesegat, Value Added Tax Administration in Ethiopia: A Reflection of Problems (pp. 145-68)
- Konstantinos Eleftheriou, Modelling the Effects of Corporate Taxation in the Underground Economy (pp. 169-94)
Dodge: What Federal Taxes Are Subject to Apportionment?
Joseph M. Dodge (Florida State) has posted What Federal Taxes Are Subject to the Rule of Apportionment Under the Constitution?, 11 U. Pa. J. Const. L. ___ (2009), on SSRN. Here is the abstract:
Under the U.S. Constitution as amended by the Sixteenth Amendment, any federal tax that is a "direct tax" (which is not an "income tax") must be apportioned among the states in accordance with the respective populations of the various states. The purpose of this Article to solve the riddle of what is a "direct tax" that is subject to the apportionment requirement. Since the apportionment requirement can only apply inequitably across the nation, the correct labeling of any federal tax (other than an income tax) as a "direct tax" amounts to the proverbial "kiss of death," as no such tax will be enacted.
Recent commentary has staked out positions on this issue that I consider to be incorrect. Bruce Ackerman argues that that the Thirteenth Amendment (abolishing slavery) effectively repealed the apportionment-of-direct-tax clauses. Calvin Johnson argues that "direct tax" means only a tax capable (without effort) of being fairly apportioned among the states in accordance with population, namely, a capitation tax or a tax on the states (a requisition). At the other end of the spectrum, Erik Jensen argues that "direct tax" means any personal tax other than an income tax. I argue, on the basis of constitutional text, the formation of the constitution, post-ratification history, function, historical evolution, and judicial doctrine that "direct tax" encompasses only (1) capitation (head) taxes, (2) requisitions, and (3) taxes on tangible property (real and personal). The apportionment requirement made "political" sense in the framing period by linking the representation of states with the taxation of states, and also appeared to serve some narrow instrumental concerns. However, the theory is skewed, mainly because states are not really taxed as states, and states (as states) are only tenuously represented in Congress. Also, apportionment didn't really effectively deal with any instrumental concern (with the possible exception of a slave tax). I conclude that (apart from requisitions and head taxes), apportionment makes sense only with respect to taxes on tangible property, which is the only subject that can be allocated among the states by reason of geographical location. This limitation of "direct tax" also happens to be compatible with a mild federalism position. I also conclude that property taxes cannot be bootstrapped into validity as an "income tax." Finally, it is doubtful that the federal government can lay unapportioned taxes on imputed income from property and on human-capital endowments.
Democrats Seek to Exempt Private Activity Bonds From AMT
Bloomberg: Democrats May Curtail Minimum Tax on Municipal Bonds, by Ryan J. Donmoyer:
Congressional Democrats are seeking to expand funding for airport runways, housing projects and sewage-treatment plants through a new tax break for municipal bondholders. The proposal is designed to make so-called private-activity bonds more attractive by exempting the interest on them from the AMT.
Richard Neal, chairman of the House Ways and Means subcommittee that drafts tax measures, wants to include the plan in economic recovery legislation that President-elect Barack Obama has made a top priority. “I am hopeful that my bill, which will increase demand and lower costs for state and local governments, will be a central feature of our stimulus bill next month,” said Neal, a Massachusetts Democrat.
Neal’s proposal would reverse 23 years of policy. It aims to increase demand for private-activity bonds by mutual funds and individual investors who often avoid them because of the higher taxes and complicated paperwork under the AMT.
December 29, 2008
Escape From New York (Residency)
Without question, the New York State Department of Taxation and Finance has the most advanced residency audit program in the nation. We would hazard to guess that the department, whether out of necessity -- because so many taxpayers in the New York region have, at least allegedly, questionable residency issues -- or sheer force of will, does more auditing of taxpayers on residency issues than does any other state, and perhaps more than all states combined. So, like it or not, that is an area with which practitioners have to be conversant. And given that this column is generally devoted to tax practice issues (with a focus on New York), We thought it a good time for a nuts-and-bolts discussion about what a residency audit is all about.
Of course, the focus here will be on New York's rules and procedures, but the department generally follows the outlines of the 1996 North Eastern State Tax Officials Association cooperative agreement regarding domicile, statutory residence, and allocation, in which 13 states pledged to focus on the same primary factors for considering a person's domicile status. So the analysis in this article will likely be helpful in addressing other states' residency audits as well.
Inside Higher Ed: Women Profs Spend More Time on Teaching, Less on Research
From today's Inside Higher Ed: The Teaching Paradox, by Scott Jaschik:
A new survey of faculty members in English and foreign languages will challenge some assumptions about how and why women and men are not promoted at the same levels or feel the same satisfaction in academe.
The Modern Language Association has yet to release its “associate professor survey,” which, notwithstanding its name, included both associate and full professors. But professors involved in the report, due out soon, revealed some of the key findings Sunday at the MLA’s annual meeting: ...
- Women work an average of 1.5 hours more per week than do men on grading student work.
- Men work an average of 2 hours more per week on research ...
Many women reported feeling hostility from many of their colleagues and a lack of support in research, even as many departments value it over teaching. This raises the potentially troubling question, she said, of whether women value teaching for the “magic” of the classroom or because “teaching can be a kind of refuge” in that the classroom is the place where women (and men) have the most control over their professional decisions. ...
Joycelyn K. Moody, the Sue E. Denman Distinguished Chair in American Literature at the University of Texas at San Antonio, said that what most troubled her about the responses was that women reported feeling shame about their interest and success in teaching. Women should be feeling pride in their success as teachers, she said, but are “perceiving themselves as performing below expectations,” because they aren’t doing more research. It’s time to “dismantle those institutional values,” Moody said, so that the shame disappears.
Moody also said that the survey results will show how some discussions that have been going on for years in higher education have missed a key element: gender. She noted that Ernest L. Boyer’s Scholarship Reconsidered in 1990 “paid no particular respect to gender,” even as it called for shifting the reward system in higher education to value research on teaching and to see curricular work as contributing to scholarship. To talk about “free floating anxiety” about the relative value of scholarship vs. teaching, without considering gender, she said, missed a key point.
Rosenzweig: Not All Carried Interests are Created Equal
Recently, a significant debate over the taxation of so-called "carried interest" in private equity funds has received much attention from scholars, the government, commentators and the media. This debate has focused on whether private equity fund managers who earn a percentage of the returns generated by the fund should be entitled to capital gain treatment on such returns. The primary concern in this debate revolves around whether managers are effectively being compensated for services while receiving the benefit of long-term capital gains preferential rates. Proponents of reform point to the services being performed by the managers, while proponents of the current system point to the investment exposure to the underlying assets of the fund. A problem with the framework of this debate, however, is that both sides are partially correct; carried interest is "blended" in that it represents, in part, both a return to services and a return on capital. Since carried interest is blended in this manner, an analogy to either proves less than satisfying.
The issue of blended labor/investment returns is not new to the tax laws, however. Historically, the law has attempted to address the issue not by deconstructing such returns into constituent parts, but instead by imposing a "holding period" requirement. Under this approach, not all investments are created equal; rather, only capital investments held for an arbitrary period of time while bearing the risk of loss qualify for preferential rates. The current debate over the taxation of carried interest in private equity has failed to incorporate this crucial element into the analysis, i.e., the role that holding period plays in denying preferential rates to blended labor/investment returns, such as carried interest. This Essay will do so, concluding that, to the extent any reform of the taxation of carried interest is appropriate, a better approach may be through the application of the holding period rules rather than through current proposals to either change the definition of capital gains or further complicate the partnership tax rules.
Lutz: The Connection Between House Price Appreciation and Property Tax Revenues
Byron F. Lutz (Federal Reserve Board, Washington, D.C.) has published The Connection Between House Price Appreciation and Property Tax Revenues, 61 Nat'l Tax J. 555 (2008). Here is the abstract:
This paper explores two aspects of the connection between property tax revenues and house prices. First, I estimate the elasticity of property tax revenues with respect to house prices. This elasticity does not necessarily equal one as governments may adjust effective tax rates to offset changes in property values. Second, I examine the timing of the relationship. Institutional features of the property tax make it unlikely that changes in house prices will immediately influence tax revenues. The results suggest that the elasticity eventually equals 0.4 and that it takes three years for house price changes to impact tax revenues.
Obama to Stick to Tax Policies He Campaigned On
- Associated Press: Obama Adviser: Slowing Economy Won't Halt Tax Cuts
- Bloomberg: Obama Plays Poker With Homeowners, Taxpayers
- L.A. Times: Obama Will Stick to Tax Promise, His Aides Say
- Washington Post: Obama Tax Cuts Likely Soon
The Tax Canon Redux
Among the permanent left sidebar resources on TaxProf Blog is Vic Fleischer's 2003 listing of the Tax Canon -- ten articles (and a couple of books) that comprise "essential reading for those interested in developing a cultural literacy about tax policy." On Saturday, The Tax Lawyer’s Blog announced "the Online Tax Canon, a compendium of the top 10 free online sources of tax law, advice and information," one of which is TaxProf Blog:
TaxProf Blog - The only blog in the Canon, Professor Paul Caron posts several times a day providing readers with links to popular tax articles and papers and analyses of recent tax developments. A great one-stop-shop of all things taxation.
Taller People Make More Money
In Making Sense of the Labor Market Height Premium: Evidence From the British Household Panel Survey (NBER Working Paper No. 14007), authors Anne Case, Christina Paxson, and Mahnaz Islam use nine waves of the British Household Panel Survey (BHPS) to investigate the large labor market height premium observed in the data, where each inch of height is associated with a 1.5% increase in wages, for both men and women. They find that half of the height premium can be explained by the association between height and educational attainment among BHPS participants. Of the remaining premium, half can be explained by taller individuals selecting into higher status occupations and industries. These effects are consistent with the authors' earlier findings that taller individuals on average have greater cognitive function, which manifests in greater educational attainment, and better labor market opportunities. ... Case and her co-authors also note that the height premium may be masked by looking within occupation if, as is apparent in the data, taller people sort into better paid occupations.
The findings in the NBER paper suggest that the association between height and earnings may be driven by the influence of early life health and nutrition on adult height, educational attainment, and occupational choice.
This provides support for the historical curiosity that the taller presidential candidate (beginning with 6' 2" George Washington (v. 5' 7" John Adams) through 6' 1" Barack Obama (v. 5' 6" John McCain) has won the popular vote 66% of the time:
ABA Journal: Northwestern Unapologetically Poaches 1Ls at Other Schools
Northwestern University Law School is actively—and unapologetically—recruiting top-performing law students from lower-ranked schools, a practice that some deans claim is becoming commonplace at elite institutions.
Each year, 150 or so of Northwestern’s 5,000 applicants turned down for first-year admission receive letters inviting them to apply again for “conditional acceptance” the following fall. “The acceptance would be contingent upon your achieving a certain GPA or class rank during your first year of law school elsewhere,” says the letter, which is signed by the school’s assistant dean of admissions.
Deans of lower-tier law schools argue that such recruiting is predatory, allowing elite schools to poach their best students. Moreover, they claim the practice helps top schools boost revenues in their second- and third-year classes, while keeping up their LSAT and GPA averages—both significant components of U.S. News & World Report’s law school rankings.
Northwestern Dean David Van Zandt says that he understands the poaching charge, and that it’s “probably true.” But top-performing students who have proved themselves “should be entitled to transfer, and there’s no harm in us facilitating that,” says Van Zandt. “Chrysler and General Motors don’t agree not to poach each other’s customers.”
During the 2006-2007 academic year, the Chicago-based school—which was listed ninth in the 2008 U.S. News law school rankings—added 43 transfers to its 238-student first-year class. Other top-ranked schools that year had similar gains. At 14th-ranked Georgetown University Law Center, 93 students transferred in. UCLA School of Law, which ranked 16th on the U.S. News list, netted 31 transfers to its 323-student first-year class. Fifth-ranked NYU Law added 38 transfers to a class of 447.
David Logan, dean of Roger Williams University School of Law in Bristol, R.I., says there’s been a drastic increase in transfer students in recent years. It suggests to him the schools are gaming the rankings, but he admits that would be hard to prove. “Because the ABA has only [collected] transfer numbers for the past couple of years, there can be no definitive proof of a trend over time,” Logan says. ...
While elite schools argue that transfer students benefit from “trading up,” Logan laments a ripple effect that begins with the brain drain on the original school, which reduces academic discussion and harms the bar passage rate. In addition, faculties lose research assistants, classmates lose friendships, and tuition increases are imposed to offset departing students. And at their new school, transfer students will find it tougher to forge relationships. “They’re just cash cows,” Logan says.
Northwestern’s Van Zandt disagrees: “I find that argument patronizing to a group of people who are going into a profession of judgment. These are smart people. Some transfers won’t work out, just like anything in life. But quite a few are advantaged.”
Clarification: In Transfers Bolster Elite Schools, ... Northwestern University School of Law said it extends conditional second-year acceptance to 150 of the 5,000 applicants turned down for first-year admission. A representative for the law school now says it extends only 15 to 25 such conditional acceptances each year.
(Hat Tip: Adam Steinman.)
SOI Issues Request for Tax Statistics Research Projects
Proposals are due to IRS Procurement by February 2. With this announcement the SOI’s outside research program begins its second year of operation, seeking outstanding research projects that require modest funding and no more than two years to complete. In addition to describing the research merit of a project that will result in a presentation/publication for professional conferences and journals, a proposal should specifically address the researcher’s familiarity with SOI, including related data and metadata. A proposal should also address how SOI’s human capital will be increased, through the researcher’s mentoring and/or collaborating with SOI staff, as well as his/her teaching SOI staff a related short course. All questions regarding this announcement, including requirements for proposals, should be addressed to Louis Campbell (202.283.1379 or firstname.lastname@example.org).
TaxProf Blog Holiday Weekend Roundup
- The Role of Taxes in the Birth of Christ
- In Hoc Anno Domini
- Single Mother Celebrates Christmas in New Habit for Humanity Home After Persevering Through Law School
- Tax Court Rejects TP's Argument That "Casinos Are Like 'Disneyland' to the Elderly"
- Batchelder: Estate Tax Reform: Issues and Options
- Usowski & Hollar: The Curious Case of the Low-Income Housing Tax Credit
- Smith Posts Tax Papers on SSRN
- NY Times on Abrupt Firing of Duquesne Law Dean
- Doran: Managers, Shareholders, and the Corporate Double Tax
- Borden: Workout-Driven Exchanges
- NY Times: Raise the Gas Tax
- State and Local Finances and the Macroeconomy
- The Taxation of Record-Setting Baseballs
- NBA Player Charities: "Pattern of Mismanagement"
- Top 5 Tax Paper Downloads
- President-Elect Obama, Don't Use the Tax Code to Implement Your Agenda
- The Crisis in State & Local Government Statistics
- Mauled Again Wins 2008 Blawggie
December 28, 2008
NBA Player Charities: "Pattern of Mismanagement"
The Salt Lake City Tribune examined the Form 990s of the charitable foundations established by 89 NBA players in a detailed investigative report, NBA Player Charities Often a Losing Game; Tax Records Reveal Pattern of Mismanagement Despite Some Success Stories:
Among the findings of The Tribune's analysis of 89 stand-alone NBA player charities:
- Together, they reported revenue of at least $31 million between 2005 and 2007, but only about 44 cents of every dollar raised - or $14 million of that $31 million - actually reached needy causes. The average NBA player foundation put just 51 cents of each dollar it spent toward charitable programs, well below the 65 cents most philanthropic watchdog groups view as acceptable. Tax records show budgets are quickly eaten up by poor planning and administrative costs.
- While a handful of player charities appear to be well-financed and tightly managed organizations that do good, a larger number are unimpressively funded and their activities poorly documented. Up to a quarter of NBA player charities analyzed lacked even basic documentation required by the IRS.
- In spite of their celebrity, NBA athletes seeking public donations often struggle for years before building a viable stream of donations. About a third of NBA player charities analyzed instead remain funded by the athletes' own wealth. Many close for lack of support or because athletes move on.
- Few player-run charities hire full-time directors to manage daily operations, and players commonly put family members, friends and former sports associates on their boards, despite IRS rules requiring that a majority of board members be nonrelatives.
- Some player charities hold lavish fundraising galas that cost tens of thousands of dollars but actually lose money.
- No official numbers exist, but The Tribune found at least 85 players who have filed with the IRS seeking tax-exempt status for one or more charities, although only 59 of those foundations have filed forms required by law for charities pulling in more than $25,000 yearly.
Here are examples of the Form 990 data of the charitable foundations of some NBA stars:
- Carmelo Anthony: Carmelo Anthony Foundation (2006):
- Revenue: $1,058,256
- Expenses: Charitable Program: $426,991; Administration: $143,755
- Revenue: $10,000
- Expenses: Charitable Program: $6,500; Administration: $250
- Revenue: $189,792
- Expenses: Charitable Program: $103,744; Administration: $111,972
- Revenue: $1,487,853
- Expenses: Charitable Program: $318,499; Administration: $916,531
- Revenue: $67,928
- Expenses: Charitable Program: 0; Administration: $8,042
Top 5 Tax Paper Downloads
There is a bit of movement in this week's list of the Top 5 Recent Tax Paper Downloads, with a new #1 paper and a new paper debuting on the list at #5:
4. [130 Downloads] Overcoming Overdisclosure: Toward Tax Shelter Detection, by Joshua D. Blank (Rutgers-Newark) [blogged here]
5. [129 Downloads] Take the Money and Run -- The Impact of the HEART Act on the Ultimate Estate Plan: Expatriation to Avoid U.S. Income, Estate and Gift Tax, by Kathleen Macaulay (Houston) [blogged here]
President-Elect Obama, Don't Use the Tax Code to Implement Your Agenda
L.A. Times: Contemplating a Bold Agenda, Mr. Obama? Don't Use the Tax Code as a Tool, by Kathy M. Kristof:
Maybe it's because tax season is looming ominously -- or maybe it was your long list of campaign promises -- but taxes are at the top of my mind when thinking about my financial wishes for 2009.
My one overriding hope: that you will show far greater courage than your three most recent predecessors when tinkering with the tax code.
What does courage have to do with taxes? At the moment, not a thing. The U.S. tax code is riddled with complexity ultimately caused by a lack of courage. And this complexity makes it virtually impossible for most Americans to file accurate tax returns -- with or without help. ...
Mr. President-elect, you have identified a number of worthy things you want the government to help pay for: child care, college, clean vehicles and healthcare. And you want to accomplish all that with new tax breaks.
These are popular ideas. But I'm asking you -- pleading, really -- not to do it. If you want to fund a social program, go for it. But have the courage to do it directly. ...
President-elect Obama, we taxpayers need you to be brave. We need you to stare down the forces of obfuscation and call social programs social programs. If you can justify them, fund them. But don't hide them in the tax code.
The Crisis in State & Local Government Statistics
Yolanda K. Kodrzycki (Federal Reserve Bank of Boston) has published The Crisis in State and Local Government Statistics, 61 Nat'l Tax J. 547 (2008). Here is the abstract:
This article provides an unofficial summary of the findings and recommendations of the Panel on Research and Development Priorities for the U.S. Census Bureau’s State and Local Government Statistics Program. The panel was convened by the Committee on National Statistics of the National Research Council, one of the four organizations that comprise the National Academies. The author served as a member of this panel.
Mauled Again Wins 2008 Blawggie
I always attempt to bridge that chasm between practicing lawyers and law professors (although realizing that a favorable mention of a law professor's blog outside academia might be disastrous for his or her tenure chances, I try to be careful). Jim Maule's Mauled Again is all about tax law developments and, as I've said before, it is so darned interesting that you won't believe you are reading a tax law blog by a tax law professor. I've found his coverage and insights into the current economic crisis to be invaluable.
December 27, 2008
NY Times: Raise the Gas Tax
Editorial in the New York Times: The Gas Tax:
There are several ways to tax gas. One would be to devise a variable consumption tax in such a way that a gallon of unleaded gasoline at the pump would never go below a floor of $4 or $5 (in 2008 dollars), fluctuating to accommodate changing oil prices and other costs. Robert Lawrence, an economist at Harvard, proposes a variable tariff on imported oil to achieve the same effect and also to stimulate the development of domestic energy sources. In both cases, the fuel taxes could be offset with tax credits to protect vulnerable segments of the population.
While oil prices are all but sure to rise again as the world emerges from recession, further tempering consumption with a gas tax would both slow the rise in the price of crude and steer more revenue from energy consumption to the United States budget, rather than that of oil-exporting countries.
A bitter recession is not the most opportune time to ratchet up the price of energy. But if the Obama administration is to meet its twin objectives of reducing the nation’s dependence on foreign oil and cutting its emissions of greenhouse gases, it needs to start thinking now about mechanisms to curb the nation’s demand for energy when the economy emerges from recession in the future.
This also would serve as a signal to American automakers and American drivers that the era of cheap gasoline is not going to last.
State and Local Finances and the Macroeconomy
Glenn Follette, Andrea Kusko & Byron Lutz (all of the Board of Governors, Federal Reserve System) have published State and Local Finances and the Macroeconomy: The High–Employment Budget and Fiscal Impetus, 61 Nat'l Tax J. 531 (2008). Here is the abstract:
We use two measures of fiscal policy—the high–employment budget and fiscal impetus—to examine the interplay of the macroeconomy and state and local government budgets. We find that each one percent increase in GDP raises state and local net saving (as measured in the NIPA) by 0.1 percent of GDP through the automatic cyclical response of taxes and expenditures. We also find that the sector’s budget policies have been modestly pro–cyclical: The direct contribution to growth in real GDP has been about 0.2 percentage points smaller, on average, following business cycle peaks than it was before the peaks.
The Taxation of Record-Setting Baseballs
Andrew D. Appleby (J.D. 2008, Wake Forest; Associate, Alston & Bird, Atlanta) has published Ball Busters: How the IRS Should Tax Record-Setting Baseballs and Other Found Property Under the Treasure Trove Regulation, 33 Vt. L. Rev. 43 (2008). Here is the abstract:
Currently, a vital debate has the country split in two-a debate that tears at the very fabric of America's tradition and culture: how should the IRS tax the catcher of a record-setting baseball? This question has raised the ire of Congress, confounded the IRS, and riled up tax geeks across the country. There are two prevalent conflicting views on the proper tax treatment when someone catches a record-setting baseball and does not immediately return it. The view that comports with the tax code requires the taxpayer to recognize gain on the record-setting ball, for its fair market value, in the year the taxpayer acquires undisputed possession. The taxpayer-friendly view is to allow the taxpayer to defer tax on the record-setting ball until (and only if) the taxpayer sells it.
Aside from the fact that this issue involves taxing America's pastime, taxing record-setting baseballs is important for two reasons. First, the principles behind taxing record-setting baseballs apply to all found property. Second, taxing record-setting baseballs is highly publicized, perhaps more than any other taxation issue. This issue reaches mainstream America and is largely on a level that the average taxpayer can comprehend. Thus, taxing record-setting baseballs is incredibly important for the IRS to maintain and manage taxpayer morale.
This Article begins in Part I with an overview of relevant income taxation fundamentals, focusing primarily on accession to wealth and realization of income. Part II discusses the potential tax consequences of catching a record-setting baseball. The discussion begins with the comparatively straightforward scenario whereby the person who catches the record-setting ball (the "catcher") returns it to the club or batter. The discussion then turns to the two primary taxation theories implicated when the catcher does not immediately return the ball: ignore the treasure trove regulation and tax only upon sale, or tax immediately because the ball is an accession to wealth and thus realized income. Additionally, this part will conclude by looking at several variations that could have significantly different tax consequences. Part III discusses the tax implications of destroying a record-setting ball. Part IV concludes with a proposed solution: tax the catcher of the record-setting ball immediately on the retail price of the baseball, then treat the increase in value as unrealized gain, and tax the catcher on that gain if the catcher sells the ball.
The article won second prize in the 2008 Tannenwald Writing Competition.
December 26, 2008
Batchelder: Estate Tax Reform: Issues and Options
The upcoming one-year repeal of the federal estate tax creates an opportunity to reconsider the taxation of wealth transfers. This paper argues that federal wealth transfer taxes should be retained and potentially expanded. The estate tax contributes importantly to the progressivity of the tax system as a whole by partially offsetting the tax advantages accorded to inherited income among high-income households. It also appears to be a relatively efficient source of revenue. Nevertheless, the estate tax system could be improved by adopting a package of simplification measures or, more fundamentally, by replacing it with an inheritance tax.
Usowski & Hollar: The Curious Case of the Low-Income Housing Tax Credit
Kurt Usowski & Mike Hollar (both of the U.S. Department of Housing and Urban Development) have published Social Policy and the U.S. Tax Code: The Curious Case of the Low-Income Housing Tax Credit, 61 Nat'l Tax J. 519 (2008). Here is the abstract:
The Low–Income Housing Tax Credit (LIHTC) is the federal government’s largest subsidy program for the production of affordable rental housing. The LIHTC is allocated in fixed amounts each year by state agencies, and provides an investment tax incentive for the production of rental housing with rents limited to percentages of HUD–specified Income Limits based on HUD–estimated area median family income. One inherent difficulty in the LIHTC not present in direct rental housing subsidy programs is that the subsidy amount is determined before the housing project begins operation, and there is no mechanism for ex–post adjustment to reflect, e.g., increasing operating cost, increasing tenant utility allowances (which reduce rent revenue) when energy costs spike relative to income, or declining area median income. Direct subsidy programs for rental housing, such as HUD’s Public Housing and Section 8 Housing Choice Voucher programs, adjust subsidy to changes in operating cost and tenant income either directly or indirectly (through connection to actual operating expenses or market rents). HUD uses a hold–harmless policy in setting its Income Limits for subsidy programs to accommodate this problem with the LIHTC, even though this tends to inflate the population eligible for HUD programs. Recent changes to HUD’s Income Limits methodology, however, show that the hold–harmless policy may not be enough to keep LIHTC projects operating. We discuss legislative policy options for ensuring LIHTC projects can continue to operate in these situations while maintaining affordability.
Smith Posts Tax Papers on SSRN
Andre L. Smith (Florida International) has posted several tax papers on SSRN:
- The Deliberative Stylings of Leading Tax Law Scholars, 61 Tax Law. 1 (2007)
- Formulaically Expressing 21st Century Supreme Court Tax Jurisprudence, 8 Hous. Bus. & Tax J. 38 (2008)
- Do NFL Signing Bonuses Carry a Substantial Risk of Forfeiture within the Meaning of Section 83 of the Internal Revenue Code?, 19 Seton Hall J. Ent. & Sport L. ___ (2008)
NY Times on Abrupt Firing of Duquesne Law Dean
The New York Times picks up the story (previously blogged here and here) of the abrupt firing of Duquesne's dean: Dean’s Firing Draws Protest at Duquesne Law School, by Sean D. Hamill:
The root of the tension between the two men, many at the university say, was [President] Dougherty’s desire to centralize the administration when he came to Duquesne in 2001, making sure that all major decisions and communication came through his office. Dr. Dougherty’s efforts included emphasizing a longstanding practice that none of the university’s deans could have any contact with board members — which Dr. Pearson told [Dean] Guter he had run afoul of when he sent postcards to the Duquesne community announcing a law professor’s new book, further straining his relationship with Dr. Dougherty.
The most difficult dispute — which many believe set the tone for everything thereafter — came during Mr. Guter’s first year, when Prof. John T. Rago sought tenure. The faculty and Mr. Guter approved of tenure, but Dr. Dougherty opposed it. “The president wanted me to align my stance with his, but I said I’d stand with Rago,” Mr. Guter recalled. “He wasn’t happy.” ...
Bruce Ledewitz, a professor at the school since 1980 who said he was not an early fan of Mr. Guter’s, said it was obvious that Mr. Guter simply “didn’t toe the president’s line.” Reading from a list of improvements he keeps on his desk, Professor Ledewitz said: “Bar scores are up. The moot court team won national titles. Alumni giving is up. The research and writing program was nationally ranked. Faculty scholarship is up. If you have a list like this, it isn’t rocket science; he’s good at what he does.”
But on a faculty that has long been broken into factions, not everyone sees it that way. “I’m relieved to see the change that has come to the law school,” said Robert S. Barker, a professor at the school for 26 years. “The folks under Guter have driven away two faculty members, marginalized another, and done serious damage to the academic programs, particularly for international students.”
Doran: Managers, Shareholders, and the Corporate Double Tax
Michael Doran (Virginia) has posted Managers, Shareholders, and the Corporate Double Tax, 95 Va. L. Rev. ___ (2009), on SSRN. Here is the abstract:
The United States generally imposes two levels of federal income tax on corporate profits. The first level taxes income to the corporation; the second level taxes dividends to the shareholders. Academics and policymakers have long considered this double tax to be "unusual, unfair, and inefficient." Legislators from both political parties have proposed integration of the corporate and individual income taxes on many occasions, but the proposals consistently fail. Prior academic analyses have struggled to explain the failure of integration. This paper demonstrates how certain managers, shareholders, and collateral interests rationally favor certain integration proposals and oppose other integration proposals, while other managers, shareholders, and collateral interests rationally adopt contrary positions. The substantial heterogeneity of interests among managers, shareholders, and collateral interests generally accounts for the stubborn persistence of the double tax. Close examination of the lobbying positions taken by managers, shareholders, and collateral interests in response to the Bush Administration's dividend-exclusion proposal establishes that the heterogeneity of interests directly shapes the legislative process and affects legislative outcomes. The argument presented here implies that, as a political matter, the corporate double tax is much more entrenched than most prior analyses assume.
Borden: Workout-Driven Exchanges
Market forces in a depressed real estate market often lead to foreclosures, which may generate taxable gain to the debtor. Some foreclosure sales may qualify for Section 1031 nonrecognition, if the debtor properly structures the disposition. This Article discusses structures that help foreclosure transactions qualify for Section 1031 nonrecogntion. The Article also discusses the application of Section 1038 to recquisitions of exchanger-financed relinquished property.
December 25, 2008
The Role of Taxes in the Birth of Christ
And it came to pass in those days, that there went out a decree from Caesar Augustus that all the world should be taxed. (And this taxing was first made when Cyrenius was governor of Syria.) And all went to be taxed, every one into his own city. And Joseph also went up from Galilee, out of the city of Nazareth, into Judaea, unto the city of David, which is called Bethlehem; (because he was of the house and lineage of David:) To be taxed with Mary his espoused wife, being great with child. And so it was, that, while they were there, the days were accomplished that she should be delivered. And she brought forth her firstborn son, and wrapped him in swaddling clothes, and laid him in a manger; because there was no room for them in the inn.
Luke 2:1-7 (KJV).
In Hoc Anno Domini
The Wall Street Journal has published this wonderful editorial each Christmas since 1949, In Hoc Anno Domini:
When Saul of Tarsus set out on his journey to Damascus the whole of the known world lay in bondage. There was one state, and it was Rome. There was one master for it all, and he was Tiberius Caesar.
Everywhere there was civil order, for the arm of the Roman law was long. Everywhere there was stability, in government and in society, for the centurions saw that it was so.
But everywhere there was something else, too. There was oppression -- for those who were not the friends of Tiberius Caesar. There was the tax gatherer to take the grain from the fields and the flax from the spindle to feed the legions or to fill the hungry treasury from which divine Caesar gave largess to the people. There was the impressor to find recruits for the circuses. There were executioners to quiet those whom the Emperor proscribed. What was a man for but to serve Caesar?
There was the persecution of men who dared think differently, who heard strange voices or read strange manuscripts. There was enslavement of men whose tribes came not from Rome, disdain for those who did not have the familiar visage. And most of all, there was everywhere a contempt for human life. What, to the strong, was one man more or less in a crowded world?
Then, of a sudden, there was a light in the world, and a man from Galilee saying, Render unto Caesar the things which are Caesar's and unto God the things that are God's.
And the voice from Galilee, which would defy Caesar, offered a new Kingdom in which each man could walk upright and bow to none but his God. Inasmuch as ye have done it unto one of the least of these my brethren, ye have done it unto me. And he sent this gospel of the Kingdom of Man into the uttermost ends of the earth.
Read the rest here.
Single Mother Celebrates Christmas in New Habit for Humanity Home After Persevering Through Law School
Here is an inspiring story from the Witchita Eagle about Latina Alston, a 30-year old single mother of three who overcame more obstacles than most of us will ever face to earn a law degree at Washburn and is now an assistant public defender. Single Mother Perseveres to Earn Law Degree, by Roy Wenzl:
In her first year at Washburn, in 2004, Latina cried in class all the time, sobbing quietly while she studied torts, contract law, criminal procedure. ... The teachers had warned her that the first year breaks a lot of people. ...
Latina struggled. She nearly failed a writing exam that would have sent her packing had she not passed.
During spring break, in March 2005, she had an emotional meltdown. ... Her car broke down. She spent $600 fixing it, and then collapsed.
When classes resumed, she failed to get out of bed. Stress, welfare, food stamps, guilt over living off her mother, and relentless study had wrecked her health. For two days, she took her kids to school and day care, but went back to bed instead of class. She was so depressed she could barely move. ... And then the phone rang.
It was another black student. There were only 12 in the first-year class. Are you OK? Why aren't you in class? Can I help you study? Do you need anything? Get your butt out of bed. And get back to class.
"At Washburn, the black students felt isolated, alone, except that we thought the white faculty and students were watching us, maybe waiting for us to fail," Latina said later. "So we'd pretty much made a vow that none of us were going to fail.... If I had not gotten up on my own, I think the others would have come in and dragged me out with their hands."
Her fellow black students pleaded with her not to let them down.
She got out of bed.
In early June Latina's car broke down again. She was crying in class again, facing failure. She needed a 2.0 GPA or she would wash out.
She passed. Barely. ...
She hung on, through the second year. Then the third.
The other black students helped her, as she helped them. All 12 graduated.
By the time she got her diploma in May 2007, Latina had made one of those mistakes she admits she's prone to. When she slipped into her cap and gown, she was four months pregnant, still unmarried. Dylan Wharton-Alston, her third child, was born in October 2007. ...
Latina was single, and for the next four months she studied to pass the bar exam, often with three children clinging to her, asking for help, pleading for attention. Helping her study, and cheering her on, were her African-American classmates.
She passed the Kansas bar in February 2008. ...
As Sedgwick County's newest public defender, Latina earns $45,000 a year. She owes more than $100,000 in student loans.
Her boss, Osburn, hearing her life story for the first time last week, expressed amazement that she got through law school. "I went to Washburn, too, and I had kids, but I had a wife... I had help. I can't imagine what it was like, what she did." He said Latina hadn't told him how hard it was for her to get through. ...
In the 19 months since she returned to Wichita, Latina has slept every night in one bedroom with her children. The room is at her mother's house, the same tiny, two-bedroom dwelling where Latina grew up. There are holes in the floor where rodents come in; the windows let in winter chill; a tree is growing through the back of the house.
But last week Latina signed the papers on a Habitat for Humanity house that she qualified for and helped build. In that house, Latina has given her mother a room to herself; Latina will sleep on the living room couch. ... They closed on the house on Wednesday.
"My mother has no retirement, no savings," Latina said last week. "She's given her whole life away, to her children, to her grandchildren. So yeah, she gets a room in the new house."
In that house this Thursday, the Alston family will celebrate Christmas.
On Legal Blog Watch, Carolyn Elefant blogs about the story in Law Student's Experience a Triumph Over Racism, or Typical?:
Alston's story comes across as a feel good Horatio Alger tale -- and yet as of this posting it has generated 152 comments [now 198], many of them negative. At least half of the commenters criticized Alston for her remarks about the racism she faced at Washburn, where she was one of only twelve black students in the entire class. ...
The article also focuses on how it was Alston's fellow black students who encouraged her to finish law school and cheered her on as she studied for -- and subsequently passed -- the bar.
For me, Alston's comments soured an otherwise uplifting story. Personally, I think the typical law school environment discourages all students equally, no matter their gender or race. Virtually every lawyer has a story of how they had at least one, if not more, arrogant Kingsfield-ian professor and put up with silly competitive antics (like stealing tests from the library or hiding books needed for an assignment) from cutthroat students willing to do anything to make law review and snag a job. But like so much else in life, all that nonsense serves as a rite of passage to get where you want to go.
Still, perhaps I'm wrong. Maybe the racism that Alston faced at her law school was far more pervasive, so much so that she felt compelled to include it as part of her story.
What do you think? Do law schools wait for black students to fail or intentionally isolate them from the student body? What was your experience?
Tax Court Rejects TP's Argument That "Casinos Are Like 'Disneyland' to the Elderly"
Sjoberg v. Commissioner, T.C. Summ. Op. 2008-162 (Dec. 23, 2008):
In 2004 petitioners were recreational gamblers. In 2004 petitioners received $19,995 in wage income, $1,439 in business income, $10,000 as an IRS distribution, and $20,154 in Social Security benefits. Also in 2004, petitioner Mary E. Sjoberg won a $4,000 slot machine jackpot, which was fully offset by her gambling expenses. The casino submitted to petitioners and respondent a Form W-2G, Certain Gambling Winnings, reporting the $4,000 jackpot.
On their 2004 joint Federal income tax return, petitioners did not include the $4,000 jackpot in income and they did not claim their offsetting gambling expenses. Rather, petitioners simply attached a handwritten note to their return disclosing the $4,000 jackpot. Petitioners also treated only $4,704 of their Social Security benefits as includable in income.
On audit respondent determined that petitioners must include the $4,000 jackpot in gross income, offset by a $4,000 gambling loss deduction but triggering a mechanical $2,494 increase in petitioners' taxable Social Security benefits and a $130 decrease in allowable miscellaneous itemized deductions. Respondent also determined a $132 accuracy-related penalty under § 6662(a).
Petitioners do not dispute that under the provisions of the Internal Revenue Code respondent's adjustment with respect to the Federal income tax treatment of their $4,000 gambling winnings and offsetting expenses is correct, including the effect thereof on the taxability of petitioners' Social Security benefits. Petitioners, however, contend that this treatment of gambling winnings and losses is discriminatory against the elderly and should not be enforced. Petitioners note that today's casinos are like "Disneyland" to the elderly, offering all sorts of freebies to entice the elderly into casinos to gamble. Petitioners contend that respondent needs to update the tax rules to take into account today's casino operators, casino operations, and customers.
Petitioners complain that it is just "too easy" for the elderly to gamble and therefore that the tax rules applicable thereto are outdated and should not be enforced -- particularly those rules that affect the taxability of Social Security benefits. Lastly, petitioners allege that some types of gambling winnings are not required to be reported to respondent by the casinos (generally poker and blackjack), and petitioners claim that such differences in the reporting of gambling winnings constitute discrimination.
Petitioners' arguments raise policy issues that do not relieve petitioners of their liability for the determined deficiency.
We sustain respondent's determination of the $660 deficiency in petitioners' Federal income tax and the $132 accuracy-related penalty under § 6662(a).
December 24, 2008
'Twas the Night Before Christmas, Legal Version
Christmas Gifts for that Special Tax Person
- Autograph of Former IRS Commissioner Mortimer Caplin
- Britney Spears/Fair Tax Button
- Form 1040 - Framed Replica of 1913 Return
- Form 1040 - Toilet Paper
- IRS Chocolate Bars
- IRS Coke Ad
- IRS Wrestler Action Figure
- "Hey Obama, Don't Tax Me Bro" Bumper Sticker
- Treasury Department Christmas Tree Ornaments, Postcards, and Notecards
- Willie Nelson's The IRS Tapes
NLJ: What We Can Learn the KPMG Tax Shelter Trial
Today's National Law Journal: A White-Collar Defender's Take on What Can be Learned from the KPMG Verdicts, by Pamela A. MacLean:
Douglas Whitney, a partner at McDermott Will & Emery, has represented national accounting companies and law firms accused of promotion of illegal tax shelters in Internal Revenue Service investigations and enforcement actions for six years. He litigates white-collar criminal defense cases from the firm's Chicago office. ...
NLJ: What has been learned from the KPMG prosecutions?
DW: It certainly has been an unusually long and tortured path from investigation to verdict. [The] verdict is a mixed one. All the defendants were acquitted on conspiracy, and Greenberg on tax evasion as well. The acquittals convey the idea that a criminal courtroom is not the appropriate place to define elusive contours of the economic substance doctrine. The economic substance doctrine is the long-recognized judicial doctrine that transactions be supported by economic substance and can't be motivated solely to generate a tax benefit. It has gotten a fair amount of attention in civil tax cases, about where to draw the line. I think the verdict suggests that reasonable minds can differ about where to draw the line, but that criminal court is no place to decide it.
Tax Court Denies Sperm Donor's Claimed Medical Expense Deduction
In Magdalin v. Commissioner, T.C. Memo. 2008-293 (Dec. 23, 2008), the Tax Court denied a sperm donor's claimed medical expense deduction, even though the Service allows (per Priv. Ltr. Rul. 2003-18-017 (Jan. 9, 2003)) the expenses of egg donation as deductible medical expenses:
Petitioner is a medical doctor licensed to practice medicine in Massachusetts. At all relevant times, his sperm count and motility were found to be within normal limits. He has twin sons from a marriage to his former spouse, Deborah Magdalin. The twins were born through natural processes and without the use of in vitro fertilization (IVF). ...
Petitioner ... deducted medical expenses of $34,050 for 2004 and $28,230 for 2005 [related to the costs he incurred in having his sperm combined with the eggs of anonymous donors with the rsulting two embryos impanted in two unrelated women who carried the babies to term for Petitioner]. ...
Petitioner argues that it was his civil right to reproduce, that he should have the freedom to choose the method of reproduction, and that it is sex discrimination to allow women but not men to choose how they will reproduce. [Petitioner] refers to Priv. Ltr. Rul. 2003-18-017 (Jan. 9, 2003) to show that "the expenses for egg donor, medical and legal costs are deductible medical expenses."
"Although respondent believes that amounts paid for procedures to mitigate infertility may qualify as deductible medical care," respondent argues that "Petitioner had no physical or mental defect or illness which prohibited him from procreating naturally", as he in fact has, and that "the procedures were not medically indicated." Respondent's position is that the expenses at issue are nondeductible under § 262 because "Petitioner's choice to undertake these procedures was an entirely personal/nonmedical decision."
The expenses at issue were not paid for medical care under the first portion of § 213(d)(1)(A) because the requisite causal relationship is absent. None of the expenses at issue was "incurred primarily for the prevention or alleviation of a physical or mental defect or illness." [Reg. §] 1.213-1(e)(1)(ii). In other words, petitioner had no medical condition or defect, such as, for example, infertility, that required treatment or mitigation through IVF procedures. We therefore need not answer lurking questions as to whether (and, if so, to what extent) expenditures for IVF procedures and associated costs (e.g., a taxpayer's legal fees and fees paid to, or on behalf of, a surrogate or gestational carrier) would be deductible in the presence of an underlying medical condition. We leave such questions for another day. Further, petitioner cannot deduct those expenses under the second portion of the statute because they did not affect a structure or function of his body.
[Fn.: In the PLR petitioner refers to, the IRS concluded that egg donor fees and expenses, including legal fees for preparing a contract between the taxpayer and the egg donor, were deductible medical expenses for purposes of § 213. Although petitioner raises that PLR in his brief, there are important differences between his situation and that of the taxpayer requesting the PLR. The requesting taxpayer had "unsuccessfully undergone repeated assisted reproductive technology procedures to enable * * * [her] to conceive a child using * * * [her] own eggs." Priv. Ltr. Rul. 2003-18-017 (Jan. 9, 2003). And, the procedures were going to be performed "in order to enable * * * [her] to obtain a donated egg for implantation into * * * [her] body." In addition, although IRS publications are not authoritative sources of Federal tax law, we note that IRS Publication 502, Medical and Dental Expenses (2008), provides that procedures such as in vitro fertilization are deductible under § 213 if such expenses are incurred "to overcome an inability to have children."]
Although petitioner at times attempts to frame the deductibility of the relevant expenses as an issue of constitutional dimensions, under the facts and circumstances of his case, it does not rise to that level. Petitioner's gender, marital status, and sexual orientation do not bear on whether he can deduct the expenses at issue. He cannot deduct those expenses because he has no medical condition or defect to which those expenses relate and because they did not affect a structure or function of his body. Expenses incurred in the absence of the requisite underlying medical condition or defect and that do not affect a structure or function of the taxpayer's body are nondeductible personal expenses within the meaning of § 262.
Historical Effective Tax Rates, 1979-2005
High-income households have a disproportionate share of comprehensive income and pay a disproportionate share of federal taxes. The half-percent of the population with the highest income received 14.7% of total household income before taxes and paid 22.6% of total federal taxes in 2005 (see Tables 2 and 3). People at the top 0.01% of the income scale received 4.2% of total income and paid 6.5%of total federal taxes in 2005. The half-percent of the population with the highest income paid 31.5% of federal individual income taxes, while the top 0.01% paid 8.0% of individual income taxes in 2005.
Perry Fleischer: Fair Shares and Charitable Giving
Miranda Perry Fleischer (Illinois) has published Generous to a Fault? Fair Shares and Charitable Giving, 93 Minn. L. Rev. 165 (2008). Here is the abstract:
Charities play a vital role in our society. In addition to enhancing pluralism, they meet many societal needs more efficiently, more creatively, and more effectively than government alone. Charities aid our poor, teach our youth, improve our health, comfort us spiritually, and enrich our cultural life. Given the charitable sector's importance and value, it is not surprising that the tax Code encourages philanthropy by allowing a deduction for charitable gifts. What is surprising is that it treats the most generous among us less favorably than those of average generosity. This mismatch stems from one of the most puzzling limits in the Code: the cap preventing an individual from claiming a charitable deduction greater than 50% of her income, even if she gives more than half her income to charity. As a result, someone who is generous enough to donate all her income to charity must still pay income tax.
Why limit generosity? Current literature exploring this question is scarce and shallow. The theoretical questions whether an individual who gives all her income to charity should also pay some income tax or whether the Code's current limits are an appropriate means of implementing that principle lack satisfactory answers. Only one explanation -- that precluding individuals from deducting large charitable gifts serves as a crude alternative minimum tax ensuring that everyone above a certain economic income pays some tax -- has gained any support at all. That explanation is insufficient. It does not answer the question of why an individual who keeps no income for herself and instead donates it all to a cause deemed worthy enough to merit a charitable deduction-- such as feeding the poor, supporting educational institutions, or funding the arts -- should still pay some tax.
This Article begins to answer the question -- "Why limit generosity?" -- by arguing that under the economic subsidy theory for the charitable deduction, internal constraints on the legislative process explain and justify a percentage-of-income limit. This Article's argument proceeds directly from the literature conceptualizing the charitable deduction as a way of overcoming market and government failure for various public goods by spurring non-profits to produce them. It suggests that limiting the charitable deduction to some portion of one's income reflects a bargain between individuals whose preferred public goods are fully funded by the government and those whose projects are only partially subsidized. This bargain is necessary to reconcile the private provision of public goods via charitable giving with our democratic legislative process.
December 23, 2008
Why Are We Bailing Out These Guys?
Stadnyk v. Commissioner, T.C. Memo. 2008-289 (Dec. 22, 2008):
On December 11, 1996, petitioners purchased a used 1990 Geo Storm from Nicholasville Road Auto Sales, Inc. (Nicholasville Auto), for their son for $3,430. Petitioner wife tendered two checks to Nicholasville Auto in partial payment for the car, check No. 1080 for $100 and check No. 1087 for $1,100, from a checking account with Bank One, Kentucky, N.A. (Bank One). Petitioner husband had visited Nicholasville Auto on multiple occasions to search for a used car for his son. On one visit to the dealership petitioner husband attempted to test drive the Geo Storm, but it was not running. Petitioner husband returned to the dealership, and a salesman informed him that the car had been repaired. Petitioner husband test drove the car around the lot, found that it was working, and decided to purchase the car. Unfortunately, the car broke down within minutes of leaving Nicholasville Auto, approximately 7 miles from the dealership. Petitioners had the car repaired at a cost of $479.78. Petitioners attempted to contact Nicholasville Auto about the Geo Storm. However, their calls were ignored, placed on hold for long periods of time, and not returned.
Because of their dissatisfaction with the car, petitioner wife contacted Bank One to place a stop payment order on the $1,100 check. The stop payment order indicated "dissatisfied purchase" as the reason for the stop payment order. After the stop payment order, Bank One incorrectly stamped the check "NSF" for insufficient funds and returned the check to Nicholasville Auto. On February 4, 1997, Nicholasville Auto filed a criminal complaint against petitioner wife for issuing and passing a worthless check in the amount of $1,100. At approximately 6 p.m. on February 23, 1997, officers of the Fayette County Sheriff's Department arrested petitioner wife at her home in the presence of her husband, her daughter, and a family friend. Petitioner wife was taken to the Fayette County Detention Center. She was handcuffed, photographed, and confined to a holding area. At approximately 11 p.m., petitioner wife was handcuffed and transferred to the Jessamine County Jail, where she was searched via pat-down and with the use of an electric wand. She was required to undress to her undergarments, remove her brassiere in the presence of police officers, and wear an orange jumpsuit. Petitioner wife was released on bail at approximately 2 a.m. on February 24, 1997. On April 23, 1997, petitioner wife was indicted for "theft by deception over $300.00" as a result of the returned check marked for insufficient funds. These charges were subsequently dropped....
On March 7, 2002, petitioner wife entered into a mediation agreement with Bank One, under which Bank One agreed to pay petitioner wife the sum of $49,000 in settlement of the complaint against it and to provide a letter of apology to petitioner wife. ...
During the mediation discussions, petitioner wife's attorney informed petitioners that the settlement proceeds would not be taxed. The mediator and the attorney for Bank One also stated that the settlement proceeds would not be subject to Federal income tax. ... Petitioners did not obtain any professional tax advice beyond the statements made by their attorney, the mediator, and the attorney for Bank One regarding whether or not the settlement proceeds were taxable. Petitioner wife received Form 1099-MISC, Miscellaneous Income, from Bank One reporting the payment of the $49,000 settlement for the 2002 tax year. Petitioners did not report the settlement proceeds on their 2002 tax return.
Respondent issued a notice of deficiency to petitioners on March 14, 2005, determining that for their 2002 tax year petitioners were liable for a tax deficiency of $13,119 and an accuracy-related penalty under section 6662(a) of $2,624. ...
Bank One agreed to pay the $49,000 settlement to compensate for the ordeal that petitioner wife suffered as a result of her arrest, detention, and indictment. The damages sought by petitioner wife against Bank One are stated in terms of recovery for nonphysical personal injuries: Emotional distress, mortification, humiliation, mental anguish, and damage to reputation. These types of injuries are not excludable under section 104(a)(2).
Petitioners further argue that section 104(a)(2) ... violates the Sixteenth Amendment to the extent that it taxes compensatory damages received for personal injuries. ... [P]etitioners' argument with respect to the unconstitutionality of section 104(a)(2) is without merit. ... In Murphy, the Court of Appeals examined at length the constitutionality of taxing damage awards for nonphysical personal injuries. The court held that the taxation of awards received for personal, nonphysical injury was within the power of Congress and that such a tax was not subject to the apportionment requirement and was uniform. We see no reason to revisit this issue here. ...
Petitioners received unsolicited advice from three separate and independent individuals that the settlement would not be taxed. At least two of those individuals were disinterested parties with no relationship with petitioners. This advice confirmed petitioners' previous understanding of the taxation of settlement awards. Although none of those individuals had specialized knowledge in tax law, they were experienced in personal injury lawsuits and settlements. Petitioners acted reasonably and in good faith when following their advice and preparing their own return as they have done for over 40 years. We find that reasonable persons could disagree as to whether additional advice was required in this instance. The receipt of Form 1099 should not preclude a finding of reasonable cause. ... Accordingly, we find that petitioners are not liable for the section 6662 penalty.