March 31, 2009
HHS Nominee Kathleen Sebelius Pays $7k in Back Taxes
In advance of her Senate confirmation hearing, Health and Human Services nominee Kathleen Sebelius has corrected three years of tax returns and paid more than $7,000 in back taxes after finding several "unintentional errors" involving deductions for charitable contributions, mortgage interest, and business expenses:
Interest: In July of 2006, my husband and I sold our home for an amount less than the outstanding balance on our mortgage. We continued paying off the loan, including interest we mistakenly believed continued to be deductible mortgage interest. Another loan for home improvements was treated similarly. These errors were corrected in our amended returns.
Business expenses: In reviewing our taxes, we discovered we had insufficient documentation required to claim some of our tax deductions for business expenses. While the amended returns reflect these changes, they did not affect the amount of taxes owed because we were subject to the Alternative Minimum Tax.
- Statement of Kathleen Sebelius
- Letter From Senate Finance Committee Chair Max Baucus and Ranking Member Charles Grassley
- Statement of Senate Finance Committee Chair Max Baucus
- ABC News
- Associated Press
- L.A. Times
- New York Times
- USA Today
- Washington Post
- Weekly Standard
Tax Freedom Day Is April 13
The Tax Foundation announced today that Tax Freedom Day -- the date on which Americans will have worked long enough to have earned enough money to pay this year's tax obligations at the federal, state and local levels -- will be April 13 this year:
Tax Freedom Day moves somewhat independently from an alternative calculation that adds the federal budget deficit to total taxes collected. In 2009, an unprecedented budget deficit over $1.5 trillion produces a date of May 29. This is the latest date in the year this deficit-inclusive measure has ever fallen. The only previous years when taxes and deficit spending comprised a similarly large share of national income were 1944 and 1945, at the peak of World War II. In the postwar era, this date had never fallen later than May 9 (in 1992). Figure 1 below shows Tax Freedom Day as traditionally presented and with the inclusion of the federal budget deficit, since 1967 (click to enlarge).
April 13 is the national average -- Tax Freedom Day in individual states range from the state with the highest tax burden -- Connecticut (April 30) -- to the state with the lowest tax burden -- Alaska (March 23).
Here are the ten states with the heaviest tax burdens and the latest Tax Freedom Days:
- Connecticut April 30)
- New Jersey (April 29)
- New York (April 25)
- California (April 20)
- Maryland (April 19)
- Virginia (April 16)
- Massachusetts (April 16)
- Washington (April 16)
- Minnesota (April 15)
- Rhode island (April 14)
Here are the ten states with the lowest tax burdens and the earliest Tax Freedom Days:
- Alaska (March 23)
- Louisiana (March 28)
- Mississippi (March 28)
- South Dakota (March 29)
- North Dakota (April 1)
- West Virginia (April 1)
- Alabama (April 2)
- New Mexico (April 2)
- Montana (April 3)
- Kentucky (April 3)
WSJ: IRS Challenges AIG-HP Tax Deal
Wall Street Journal: AIG-HP Tax Deal Challenged by IRS, by Jesse Drucker:
The dispute centers on yet another offshore tax-cutting deal set up by the AIG unit at the heart of the executive-bonus controversy.
The IRS is challenging the taxes saved by AIG through a series of offshore transactions entered into with several banks, including Crédit Agricole SA of France, Bank of Ireland and Bank of America Corp., according to an AIG lawsuit. AIG paid $61 million in disputed taxes and sued the U.S. government in federal court for a refund.
But a transaction sold to Hewlett-Packard shows that AIG's tax-cutting deals spread beyond the financial sector, filings in a case in U.S. Tax Court show. According to a person familiar with the business, AIG's tax-structuring operation was even bigger than the credit-default-swaps business that led to the company's meltdown.
Avi-Yonah's Testimony on Offshore Tax Havens
Following up on this morning's post on today's House hearing on Banking Secrecy Practices and Wealthy American Taxpayers: here is a 6-minute clip of the testimony by Reuven S. Avi-Yonah (Michigan):
Burke & McCouch: COBRA Strikes Back: Anatomy of a Tax Shelter
Contingent-liability tax shelters are a highly risky business. Mr. Daugerdas and others like him reaped enormous rewards for themselves and their clients, but some of the tax shelters they designed for credulous and wealthy clients have backfired spectacularly. Congress and the Treasury have taken remedial action to shut down abusive tax shelters, and several courts have invoked the longstanding judicial doctrines to strike down transactions that lack economic substance and have no real business or investment purpose, despite purported compliance with the literal terms of the tax laws. The proliferation of abusive tax shelters could never have gotten off the ground without the active participation of high-priced counsel. Upon discovering that the anticipated tax benefits failed to materialize, disgruntled clients have rushed to sue the lawyers, accountants, investment advisers, and banks that created and marketed defective shelters.
This article discusses several challenges faced by Congress, the Treasury, and the courts in dealing with contingent-liability tax shelters. The article examines the role of Daugerdas and his firm in creating and marketing contingent-liability shelters, against the broader background of the tax shelter industry. The article explains the basic structure of the offsetting option transaction and its attempt to manipulate the partnership tax provisions. The article analyzes the contrasting rationales of two recent judicial decisions involving defective tax shelters, and argues in favor of applying Treasury regulations retroactively to shut down contingent-liability tax shelters.
Desai: Taxing the Overseas Activities of Multinational Firms
Mihir A. Desai (Harvard Business School) has posted Securing Jobs or the New Protectionism?: Taxing the Overseas Activities of Multinational Firms on SSRN. Here is the abstract:
WSJ: Night of the Living Death Tax
Wall Street Journal editorial: Night of the Living Death Tax; Obama's Budget Quietly Resurrects It in 2010:
Lawrence Summers, President Obama's chief economic adviser, declared recently that "Let's be very clear: There are no, no tax increases this year. There are no, no tax increases next year." Oh yes, yes, there are. The President's budget calls for the largest increase in the death tax in U.S. history in 2010.
The announcement of this tax increase is buried in footnote 1 on page 127 of the President's budget. That note reads: "The estate tax is maintained at its 2009 parameters." This means the death tax won't fall to zero next year as scheduled under current law, but estates will be taxed instead at up to 45%, with an exemption level of $3.5 million (or $7 million for a couple). Better not plan on dying next year after all. ...
[B]y raising the estate tax in the name of fairness, Mr. Obama won't merely bring back from the dead one of the most despised of all federal taxes, and not merely splinter many family-owned enterprises. He will also forfeit half the jobs he hopes to gain from his $787 billion stimulus bill. Maybe that's why the news of this unwise tax increase was hidden in a footnote.
Annual Law Teaching Conference: Why Tax Rules -- Teaching Students About Clients’ Biggest Moments Through Tax
The annual Institute for Law Teaching & Learning Summer Conference takes place on June 23-24, 2009 at Gonzaga University School of Law in Spokane, Washington. The conference theme this year is Implementing Best Practices and Educating Lawyers: Teaching Skills and Professionalism Across the Curriculum. The conference will feature 40 workshops that explore techniques for teaching skills and professionalism across the law school curriculum.Readers of this blog may be particularly interested in this program:
House Holds Hearing Today on Banking Secrecy Practices and Wealthy American Taxpayers
The Subcommittee on Select Revenue Measures of the House Ways & Means Committee holds a hearing today on Banking Secrecy Practices and Wealthy American Taxpayers. From the hearing advisory:
Here are the witnesses statements:
- Douglas Shulman (IRS Commissioner)
- Stephen E. Shay (Ropes & Gray, Boston)
- Reuven S. Avi-Yonah (University of Michigan Law School)
- Peter H. Blessing (Shearman & Sterling, New York)
In connection with the hearing, the Joint Committee on Taxation has released Tax Compliance and Enforcement Issues With Respect to Offshore Accounts and Entities (JCX-23-09):
This document ... provides background on withholding and information reporting requirements applicable to payments of U.S.-source portfolio investment income to nonresidents, the IRS Qualified Intermediary program, the effect of bank secrecy laws and practices on U.S tax compliance and enforcement efforts involving offshore accounts, and information exchange procedures under U.S. income tax treaties and tax information exchange agreements.
March 30, 2009
Hickman: IRB Guidance: The No Man’s Land of Tax Code Interpretation
Kristin E. Hickman (Minnesota) has posted IRB Guidance: The No Man’s Land of Tax Code Interpretation, 2009 Mich. St. L. Rev. ___ (symposium), on SSRN. Here is the abstract:
Kahn: The Transfer of a Compensatory Partnership Interest
Douglas A. Kahn (Michigan) has published The Proper Tax Treatment of the Transfer of a Compensatory Partnership Interest, 62 Tax Law. 1 (2008). Here is the Introduction:
This Article does not address the question of how the profits interest of a manager of a private equity fund should be taxed. Rather, the focus of this Article is on the more general question of how the receipt of a compensatory partnership interest should be taxed. However, the analysis and conclusions of this Article are relevant to the resolution of the questions concerning the taxation of a manager of a private equity fund.
Partnership interests can be divided into two broad categories: a partnership capital interest and a partnership profits interest. Part II of this Article sets forth the history of the tax treatment of the receipt for services of those two types of partnership interests. The Article will first define those two terms and the categories they represent. Part III of this Article considers the question of what treatment should be applied to the transfer of a compensatory partnership interest. In that connection, the Article describes circumstances in which there is a principled reason not to tax the recipient of a compensatory partnership profits interest. Part III also discusses the manner in which a taxable compensatory partnership interest, whether a capital interest or a profits interest, should be valued. Part IV discusses the question of whether a taxable transfer of a compensatory partnership capital interest causes a constructive sale of part of the partnership’s assets. Part V sets forth the Article’s conclusions.
Kysar: Earmark Rules and Statutory Interpretation
Rebecca M. Kysar (Brooklyn) has published Listening to Congress: Earmark Rules and Statutory Interpretation, 94 Cornell L. Rev. 519 (2009). Here is the abstract:
This Article begins by describing various tactics legislators have used or will likely use to evade the new disclosure regime, as well as deficiencies in the regime's design. The piece then explores the value of enlisting a force external to Congress as a response to the inherent weakness of endogenous, procedural rules. It concludes that although direct judicial review of legislation for compliance with the rules likely raises constitutional difficulties, judicial involvement through statutory interpretation offers a potential solution. Specifically, when interpreting ambiguous legislation that falls within the ambit of the disclosure rules, judges should assume the rules have functioned correctly; in other words, if no special interest beneficiary has been disclosed, judges should assume that none was intended and interpret the ambiguous provisions accordingly. The proposal thus strengthens congressional adherence to the rules by imposing costs upon defecting lawmakers, as well as the special interests they support. It does so, however, without offending the constitutional mandate that lawmakers have purview over such rules. Hence it offers a counterpoint to the entrenched view that Congress cannot truly precommit itself through procedural rules. Furthermore, because this method of statutory interpretation is guided by Congress's own remedy to the problem of special interests, it differs in an important respect from prior scholarly proposals for narrow interpretation of special interest legislation, making it more resilient to the critique that the interpretive mode exceeds the judicial function.
Tax Lawyer Sings Ballad of Timothy Geithner
Law School 100 Ranking
With the law school world anxiously awaiting the April 23 release of the new U.S. News rankings, a reader sent along a link to the revised The Law School 100: The Best Law Schools in the United States (2009-2010). Although the site claims that the ranking is "based on qualitative, rather than quantitative, criteria," there is no further description of the criteria used in coming up with the ranking. In any event, here are the Top 48 schools, along with each school's rank in the 2009 U.S. News law school rankings:
- 1. Harvard (#2)
- 2. Stanford (#2)
- Yale (#1)
- 4. Chicago (#7)
- Columbia (#4)
- NYU (#5)
- 7. Cornell (#12)
- Georgetown (#14)
- Michigan (#9)
- Northwestern (#9)
- Penn (#7)
- UC-Berkeley (#6)
- Virginia (#9)
- 14. Duke (#12)
- UCLA (#16)
- USC (#18)
- Vanderbilt (#15)
- 18. Boston College (#26)
- Boston University (#21)
- George Washington (#20)
- Illinois (#27)
- Minnesota (#22)
- Texas (#16)
- Washington & Lee (#25)
- Washington University (#19)
- 26. Emory (#22)
- Fordham (#27)
- Iowa (#27)
- Notre Dame (#22)
- 30. Georgia (#32)
- North Carolina (#38)
- University of Washington (#30)
- William & Mary (#30)
- Wisconsin (#38)
- 35. George Mason (#38)
- Ohio State (#32)
- Tulane (#44)
- UC-Davis (#44)
- UC-Hastings (#38)
- Wake Forest (#42)
- 41. American (#46)
- Arizona (#38)
- Baylor (#55)
- Connecticut (#46)
- Florida (#46)
- Indiana (#36)
- Maryland (#42)
- 48. Alabama (#32)
- Arizona State (#52)
- BYU (#46)
- Cardozo (#55)
- Case Western (#63)
- Cincinnati (#52)
- Colorado (#32)
- Miami (#82)
- Pittsburgh (#73)
- Tennessee (#52)
- Utah (#51)
Tax Reform 2.0
Rosanne Altshuler (Rutgers University, Department of Economics; Co-director, Tax Policy Center) notes a curious aspect of President Obama's naming of the new tax reform task force chaired by Paul Volcker: the web site of President Bush's 2005 tax reform panel (on which Professor Altshuler served as Chief Economist) -- www.taxreformpanel.gov -- has disappeared:
President Obama would likely make different choices, but our simplified income tax plan would be a great starting point. In future blogs, I plan to highlight some of the ideas put forward by our panel. I hope Volcker & friends will keep our report in mind. To start, they could turn the website, www.taxreformpanel.gov, back on.
The website is a great teaching and research resource for law, economics, and accounting professors. It is now archived at http://govinfo.library.unt.edu/taxreformpanel.
Marion Barry Owes $277k in Back Taxes; Government Seeks Revocation of His Probation
In a scathing pretrial memorandum, U.S. Attorney Jeffrey A. Taylor alleges that former D.C. Mayor (and current D.C. Council member) Marion Barry owes more than $277,000 in unpaid federal taxes, penalties, and interest. In addition, the memorandum alleges that Barry did not file his 2007 tax return until February 17, 2009, four months after the due date (with the automatic four-month extension), and it showed additional taxes owed of $6,512. The U.S. Attorney is seeking revocation of Barry's three-year probation on his guilty plea to failing to file his federal and D.C. tax returns for 1999-2004:
The Court’s patience should be at an end. The defendant continues to flout the standards applicable to all persons who reside in the District of Columbia, who work for a living, and who pay a portion of their income to support his salary. In addition, the defendant has wasted the time of this Court, the probation office, and the government by his recalcitrance to file the tax returns required of every citizen. By adding yet an eighth year to his record of willfully failing to file tax returns (while serving a federal probationary sentence for that very crime), the defendant exposes his unworthiness to reap the benefits of a lenient sanction.
See below the fold for prior TaxProf Blog coverage
- Is Marion Barry Angling for a Cabinet Appointment? (2/11/09)
- Marion Barry Avoids Prison in Tax Case (6/22/07)
- Prosecutors Seek Revocation of Former D.C. Mayor Marion Barry's Probation for Failure to File 1999-2004 Tax Returns Because He Missed Deadlines for Filing 2005 Return (3/23/07)
- Marion Barry Gets 3 Years Probation for Tax Evasion (3/10/06)
- Judge Postpones Marion Barry's Tax Sentencing (2/9/06)
TaxProf Blog Weekend Roundup
- 10th Circuit Denies $300k Charitable Deduction Claimed by Timothy McVeigh's Lawyer for Donation of Work Papers to University of Texas
- NYSBA Issues Report on Remedying Documentary Noncompliance by § 409A Plans
- Sin Taxes Disproportionately Hurt Minorities
- Obama Names Elizabeth Garrett Assistant Secretary for Tax Policy
- Top 5 Tax Paper Downloads
- CRS: Bill of Attainder is Biggest Constitutional Hurdle for AIG Bonus Tax
- Wesley Snipes Responds to Government's Opposition to His Motion to Leave U.S. for 5 Months Pending Appeal of Tax Conviction
- The Tax Justice Digest
- IRS Releases 2007 Individual Income Tax Return Data
March 29, 2009
Obama Names Elizabeth Garrett Assistant Secretary for Tax Policy
- Tax Prof Elizabeth Garrett (University Vice President for Academic Planning and Budget; Sydney M. Irmas Professor of Public Interest Law, Legal Ethics, Political Science, and Policy, Planning, and Development, University of Southern California Law School; former member, President Bush's 2005 Advisory Panel on Federal Tax Reform), as Assistant Secretary for Tax Policy
- Michael S. Barr (Professor of Law, University of Michigan Law School; Senior Fellow, Center for American Progress and Brookings Institution; former adviser to Clinton administration Treasury Secretary Robert E. Rubin), as Assistant Secretary for Financial Institutions.
- George W. Madison (Partner, Mayer, Brown & Platt, New York; former Executive Vice President and General Counsel, TIAA-CREF), as General Counsel.
Top 5 Tax Paper Downloads
This week's list of the Top 5 Recent Tax Paper Downloads is the same as last week's:
2. [199 Downloads]: Combating Global Climate Change: Why a Carbon Tax is a Better Response to Global Warming than Cap and Trade, by Reuven S. Avi-Yonah (Michigan) & David M. Uhlmann (Michigan)
3. [159 Downloads]: Huford: Family Limited Partnership Practice Pointers, by Wendy C. Gerzog (Baltimore)
4. [127 Downloads]: The Case for the Carbon Tax: How to Overcome Politics and Find Our Green Destiny, by Roberta F. Mann (Oregon)
5. [118 Downloads]: The Corporate Income Tax and the Competitiveness of U.S. Industries, by Michael S. Knoll (Pennsylvania)
CRS: Bill of Attainder is Biggest Constitutional Hurdle for AIG Bonus Tax
The Congressional Research Service has issued a report on the AIG bonus tax, Retroactive Taxation of Executive Bonuses: Constitutionality of H.R. 1586 and S. 651 (R40466) (Mar. 25, 2009). Here is part of the Summary:
The two main criteria that the courts will look to in order to determine whether legislation is a bill of attainder are (1) whether specific individuals are affected by the statute (“specificity” prong), and (2) whether the legislation inflicts a punishment on those individuals (“punishment” prong). The Supreme Court has identified three types of legislation which would fulfill the “punishment” prong of the test: (1) where the burden is such as has “traditionally” been found to be punitive, (2) where the type and severity of burdens imposed cannot reasonably be said to further “nonpunitive legislative purposes,” and (3) where the legislative record evinces a “congressional intent to punish.”
Although the bills would apply both prospectively and retrospectively, they would both appear to meet the “specificity” prong. This is because each bill would apply, in part, to a specified group of people, identified by past conduct, who cannot meaningfully withdraw from that group. As to the “punishment” prong, confiscation of property has been found to be a “traditional” punishment. Thus, the closer that a tax rate gets to 100% on income already earned, the more likely that such a tax would be seen by a court as rising to the level of punishment. Also, the deterrence of granting or receiving future bonuses would not appear to be an applicable regulatory purpose where bonuses have already been paid. Thus, the most logical remaining nonpunitive regulatory purpose for the statute would appear to be revenue raising. A review of the legislative history established so far, however, seems to indicate that raising revenue is not a primary purpose behind the proposed bills. Rather, the legislative history seems to contain comments that would indicate the existence of a congressional intent to punish those individuals receiving bonuses. Consequently, while both of these bills may raise constitutional issues, H.R. 1586 raises the most serious constitutional concerns.
Wesley Snipes Responds to Government's Opposition to His Motion to Leave U.S. for 5 Months Pending Appeal of Tax Conviction
Last week, I blogged the Government's opposition to Wesley Snipes' motion seeking permission to travel to Nambia from April 5 to April 29 (to film the movie Gallowwalker) and to Italy from May 4 to August 15 (to film the movie Game of Death while the appeal of his conviction on three misdemeanor tax fraud counts is pending in the Eleventh Circuit. On Friday, Snipes filed his 7-page response:
Notwithstanding the questions raised by the government in its Opposition, the current requests for travel arise out of contractual obligations. Reshooting of scenes is not a discretionary decision that rests in the hands of any artist, including Mr. Snipes. These decisions are made by the producers, director and motion picture companies. The artist’s decision to commit to making a film gives rise to an obligation to comply -- in this case, Mr. Snipes’ agreement to appear in a leading role in Gallowwalker. Thus, his ongoing fulfillment of his contractual responsibilities is not a reason for rejecting the present request. Indeed, it is in the nature of the film business that decisions about shooting locations, schedules and the completion of filming and editing cannot be controlled by the artist. Allowing Mr. Snipes the ability to comply with those obligations by reshooting several scenes would be consistent with this Court’s exercise of discretion to permit him to appear in the film in the first place, and would facilitate his earning of income to assist in meeting his past obligations to the government.
Finally, the government has presented no reason to reject Mr. Snipes’ request to film his next project, The Game of Death, this spring and summer. ...
It hardly seems logical that the government would take the position that international travel for business reasons should be denied on the ground that, according to the prosecutors, bail pending appeal should not have been granted in the first place. ... To ask this Court to pre-judge the appeal at this stage, as the government seems to attempt, is utterly inappropriate. More to the point, the government does not now contend there is any reason, based on new evidence or otherwise, to say that Mr. Snipes is a danger to the community, that his appeal has been interposed for the purpose of delay, or that he is likely to flee. In short, the material on pages 3-11 of the Response does not support the government's conclusion that the motion for travel should be denied, any more than its mistaken claim of prior violations.
The Tax Justice Digest
- New Report from CTJ: Poor Pay More and Rich Pay Less Under House GOP Plan that Costs $300 Billion More Annually than the President's Plan
- Wrong Tool for the Job: The House Passes 90% Tax on Bonuses Paid by TARP Recipient
- International Developments and Congressional Action Turn Up the Heat on Tax Havens
- State Deductions for Federal Income Taxes: A Step Forward in Iowa, a Standstill in Alabama
- A Crack in the Granite? New Hampshire Moving Ahead on Progressive Tax Changes
- Michigan Governor Backs Graduated Rate Income Tax
- Two States Consider Offering Unproven Tax Breaks for Home Buyers
IRS Releases 2007 Individual Income Tax Return Data
The IRS on Friday released 2007 Individual Income Tax Returns Preliminary Data:
March 28, 2009
10th Circuit Denies $300k Charitable Deduction Claimed by Timothy McVeigh's Lawyer for Donation of Work Papers to University of Texas
I previously blogged the Tax Court's denial of a $300,000 charitable deduction claimed by Leslie Stephen Jones, lead counsel for the defense of Timothy McVeigh in the 1995 bombing of the Alfred P. Murrah Federal Building in Oklahoma City, for the donation of his papers in the case to the University of Texas. Jones v. Commissioner, 129 T.C. 146 (2007). The Tenth Circuit yesterday affirmed the Tax Court's decision. Jones v. Commissioner, No.08-9001 (10th Cir. Mar. 27, 2009):
[T]he tax court ruled that if Taxpayer owned the discovery material, it was excluded under the IRC’s definition of capital asset pursuant to § 1221(a)(3)(A). Specifically, the tax court held that the discovery material qualified as “letters, memoranda, or similar property created by the taxpayer’s own efforts.” The record, however, clearly demonstrates—and the Commissioner appears to concede—that the property which Taxpayer claimed as a charitable contribution was not created by his own personal efforts. Thus, we believe the tax court incorrectly applied § 1221(a)(3)(A) to the discovery material. Nevertheless, for the reasons articulated below, we hold that § 1221(a)(3)(B) encompasses the discovery material donated by Taxpayer, thereby excluding it from the IRC’s definition of capital asset. Accordingly, we affirm the tax court’s ruling, albeit on alternative grounds.
The items Taxpayer donated consisted of copies of FBI memoranda, lab reports, computer discs, and photographs—all containing information related to the investigation and prosecution of Timothy McVeigh. In addition, the discovery material included letters to Taxpayer from the FBI and the Department of Justice explaining the contents of the material. We have no trouble concluding, therefore, nor does Taxpayer seriously contest, that the discovery material is properly characterized as “letter[s], memorand[a], or similar property.” § 1221(a)(3)(B) .
We next consider whether the material was “prepared or produced” for Taxpayer. ... Taxpayer argues that the discovery material does not fall under § 1221(a)(3)(B) because it was not produced specifically for him. Admittedly, the discovery material was not originally created for Taxpayer’s benefit. Rather, the Government first compiled the material to assist in its investigation and prosecution of McVeigh. Nevertheless, we believe the discovery material falls under § 1221(a)(3)(B)’s plain language. The Government made numerous copies of memoranda, investigative reports, photographs, etc., specifically for Taxpayer. Subsequently, they organized and categorized all the material for the benefit of Taxpayer and his client. The Government then placed the discovery material in banker’s boxes and prepared letters for Taxpayer explaining the contents of each box. Clearly, the discovery material was “br[ought] into a suitable condition,” and “made ready” for Taxpayer’s future use. The Government then produced the discovery material for Taxpayer, i.e., the Government “offered,” or “present[ed]” the material to Taxpayer for his “view,” “consideration,” and “use” in representing McVeigh. ...
[W]e hold that the discovery material donated by Taxpayer falls within the plain language of § 1221(a)(3)(B)—thereby limiting the charitable deduction amount to Taxpayer’s basis in the property. See Morrison [v. Commissioner, 71 T.C. 683, 689 (1979)] (holding that a Congressman’s charitable contribution deduction for letters, memoranda, and similar property provided to him by third parties during the course of his legislative duties was limited to his basis in the property). Because Taxpayer had no basis in the discovery material, he is precluded from claiming any income tax deduction for his charitable donation.
(Hat Tip: How Appealing.)
NYSBA Issues Report on Remedying Documentary Noncompliance by § 409A Plans
The New York State Bar Association Tax Section has released a report on Remedying Documentary Noncompliance by Section 409A Plans in Response to Notice 2008-113 (No. 1180):
[W]e propose below a three-pronged program. The first would set out specific, narrowly targeted types of violations which may be viewed as presenting a low probability of abuse and which we therefore view as appropriate for inclusion in a list of correctable violations. The second would relate to those circumstances in which errors are quickly discovered and corrected. The third involves the establishment of a policy of prospective enforcement and liberal transitional relief to allow taxpayers to adapt to new authorities interpreting Section 409A or changes in enforcement approach. Our proposals are intended to facilitate the establishment of a program consistent with Treasury's and the IRS's two identified general principles, while also addressing over the course of our discussion below the seven issues specifically identified by Treasury and the IRS for comment.
Sin Taxes DIsproportionately Hurt Minorities
Rachel E. Morse (J.D. 2009, Boston College) has published Note, Resisting the Path of Least Resistance: Why the Texas “Pole Tax” and the New Class of Modern Sin Taxes are Bad Policy, 29 B.C. Third World L.J. 189 (2009). Here is the abstract:
March 27, 2009
Bartlett: Republican Tax Travesty
Forbes: Republican Tax Travesty, by Bruce Bartlett:
On March 19, the House of Representatives voted to impose a 90% tax on the incomes of certain executives of financial institutions receiving federal funds. What was remarkable about this vote is that 85 Republicans voted for this travesty. The consequences will be felt for years to come.
The history of tax policy is that it tends to go in one direction until there is a key event that establishes a new direction. ...
The only reason for the tax increase was outrage, stoked by faux populist right-wing talk radio hosts, over bonuses paid to executives of AIG, the insurance company at the heart of the financial crisis. That the Democrats, who traditionally support soak-the-rich policies, reacted with righteous anger against some fat cats is no surprise. That 85 Republicans joined them is remarkable and possibly unprecedented.
Particularly dismaying is the fact that supporters of the tax increase included senior members of the Republican leadership. ...
The worsening of the government's budget deficit virtually ensures that higher taxes will be required in the not too distant future. When that day comes, Republicans will undoubtedly claim that anti-tax purity prevents them from supporting such action. However, in the case of 85 House members this won't be the case. We already know what they are; it's just a question of negotiating the price.
Brown Presents International Tax Policy and Developing Countries Today at San Diego
Washburn Hosts Tax Law Colloquium Today
Washburn hosts its annual Tax Law Colloquium today with these papers and commentators:
- Thomas W. Henning (Loyola-L.A.), How Court Holding Should Apply to Partnerships
- Gregg Polsky (Florida State), Ruminations on the Substantiality Test
- Bradley T. Borden (Washburn University), Taxation of Shared Economies of Scale
- Walter D. Schwidetzky (Baltimore), The Cutting Edge: Series LLCs
- Joshua D. Blank (Rutgers-Newark), Overcoming Overdisclosure: Toward Tax Shelter Detection
- Adam Rosenzweig (Washington University), Not All Carried Interests Are Created Equal
Manasfi Presents Foreign Hedge Fund Lending in the U.S. at Loyola-L.A.
Feld: The Shrunken Power of the Purse
Shores: The Continuity of Business Enterprise Requirement
David F. Shores (Wake Forest) has posted Continuity of Business Enterprise -- A Concept Whose Time Has Passed on SSRN. Here is the abstract:
Survivor Winner Richard Hatch Files Habeas Petition to Get Out of Jail
Richard Hatch, the first winner of the CBS reality TV show "Survivor," has filed a habeas petition seeking to be released from prison where he is serving his conviction for failing to pay taxes on his $1 million prize. United States v. Hatch, No. 06-1902 (1st Cir. 2/1/08):
See prior TaxProf Blog coverage below the fold:
- Survivor Winner Richard Hatch Appeals Tax Evasion Conviction to Supreme Court (6/4/08)
- Survivor Winner Richard Hatch Loses Appeal of Tax Evasion Conviction in First Circuit (2/3/08)
- Prior TaxProf Blog coverage: "Fat Naked Guy" Gets 51 Months for "Survivor" Tax Dodge (5/16/06)
- Survivor Winner Hatch Blames Tax Troubles on Show's Producers (1/21/06)
- Jury Selection Begins in Survivor Winner Richard Hatch's Tax Evasion Trial (1/11/06)
- Survivor: Tax Evasion (12/26/05)
- Survivor Winner Richard Hatch Indicted for Tax Evasion for Failing to Report $1m Income (9/9/05)
- Survivor Winner Richard Hatch Blames CBS for His Tax Woes (3/13/05)
- Survivor Winner Richard Hatch Reneges on Plea Deal with IRS (3/7/05)
- Survivor Winner Richard Hatch Cannot Survive IRS (1/19/05)
Stimulus Bait-and-Switch: Federal Tax Changes Will Reduce State Tax Coffers
Associated Press: States Could Lose Billions in Taxes to Stimulus:
But while one hand of the federal government is offering Medicaid, education and other direct assistance to the states, the other hand could reduce state tax revenues by billions of dollars. That's because many states copy adjustments in the federal tax code into their own to make things less confusing for taxpayers — and the $787 billion stimulus package is heavily laden with federal tax breaks and incentives. ...
The total potential losses are hard to calculate nationwide, because many states are still figuring out how to spend their money from the recovery plan and haven't closely studied the fine print of the tax provisions. But 17 states performing essentially back-of-the-napkin calculations told The Associated Press they could lose at least a cumulative $1 billion in revenues through 2011 if their tax codes imitate the federal changes.
Across all 50 states, it's could be much higher: Tax experts interviewed by AP estimated the total losses anywhere from $4 billion to $60 billion over the next two years.
CB&PP: Obama's Tax Policy Will Not Hurt Small Business
The Center on Budget and Policy Priorities has published History Contradicts Claim That President's Budget Would Harm Small Business Job Creation, by Jason Levitis & Chuck Marr:
Critics have claimed that President Obama’s proposal to roll back tax cuts for families with incomes above $250,000 would kill job growth in the small business sector. But under the Clinton Administration, when the tax treatment of high-income families was very similar to what President Obama has proposed, small businesses generated jobs at twice the rate as under the Bush tax code.
"Don't Ask, Don't Tell" SAT Policy Results in Diversity Gains
Inside Higher Ed: The Impact of Dropping the SAT:
The finding is consistent with what admissions officers have reported at many colleges that have gone SAT-optional. But the basis of this new research goes well beyond the anecdotal information reported by colleges pleased with their shifts. Scholars at Princeton University's Office of Population Research obtained actual admissions data from seven selective colleges that require the SAT or ACT. Using the actual admissions patterns for these colleges, the scholars then ran statistical models showing the impact of either going SAT-optional or adopting what they called the "don't ask, don't tell" approach in which a college says that it won't look at standardized test scores.
These models suggest that any move away from the SAT or ACT in competitive colleges results in significant gains in ethnic and economic diversity. But the gains are greater for colleges that drop testing entirely, as opposed to just making it optional. (To date, only one institution -- Sarah Lawrence College -- has taken that step.)
Tax Problems of AIG Employees Who Repay Their Bonuses
Wall Street Journal: Give Back That Bonus! Oh, and By the Way, You Still Owe Taxes on It:
That means you won't be taxed at 90% on the money you held only briefly. But you will be taxed. As Belzer explains:
No. Because the recipient was entitled to receive the amount of the bonus, and actually received it, it cannot be excluded from gross income or AGI. ...
Add it all up, and the cost of returning your bonus is somewhere north of 130%. Suddenly that 90% rate doesn't sound so bad.
John Prebble (Victoria University of Wellington, New Zealand):
Tax people in other countries who are not familiar with the arcana of the U.S. Tax Code are intrigued. In most jurisdictions, a revenue receipt is derived when it accrues or, for employee remuneration and for some other receipts, when it is received in cash or banked. Derivation very rarely occurs at some undefined time after property has passed, especially if that property is money. Later actions may result in offsetting losses or deductions, but no subsequent transaction can cause a revenue receipt to cease to be a revenue receipt. The status of the receipt is fixed on derivation, not, for instance, at the end of the tax year or when one lodges a return. Is the position the same in the USA?
If so, Mr Poling's bonus would seem to have been taxable immediately he received it, though I expect that the U.S. system allows him a few months to pay, depending on when the tax year ends. Also, he may have losses or deductions to take into account.
As I understand it, if Mr Poling were a resident of New York City the aggregate tax rate would be 101.948% and the tax bill for the bonus would be $6,524,672.00. Let's hope that Mr. Poling's home town and home state, Fairfield, Conn, are less grasping.
Does the U.S. Internal Revenue Code allow people to undo transactions that they think better of? How long do taxpayers have for thinking? According to Compaq Computer v Commissioner, 277 F. 3d 778 (5th Cir. 2001) they have less than one hour. If I have understood it correctly (Prebble, Prebble & Postlewaite, 62 Bull. Int'l Tax'n 151, 165 (2008)) Compaq involved a pair of economically self-cancelling transactions separated in time by about an hour. The court held that for legal and tax purposes the transactions were independent. What duration separated Mr Poling's transactions?
On the basis of Compaq, Mr. Poling's transfer of $6.4 million to AIG appears to have been a new transaction. There was no legal obligation on Mr Poling to make the transfer: it was a gift from an employee to an employer. Does the U.S. tax code authorize deductions for gifts by employees to employers? If not, what saves Mr. Poling from tax on the $6.4 million?
Down here in the Southern Hemisphere we are wondering if Mr Poling's saviour is the generous U.S. exemption for gifts to charities. Clearly, well-disposed people, notably the handing-money-out branch of the United States Government, see AIG as a charity. But is the IRS, the taking-money-in branch of the United States Government, bound by other people's characterizations?
All this assumes that Mr Poling has in fact paid $6.4 million to AIG. If Ashby Jones was correct when he wrote, and if Mr Poling has so far only offered to pay the money to AIG, should Mr. Poling, as an experienced tax counsel, advise himself to hurry?
March 26, 2009
IRS Offers Amnesty to Those Who Evaded Tax Through Offshore Accounts
The IRS today announced reduced penalties for individuals who have evaded U.S. taxes though offshore accounts. The IRS will waive criminal prosecution for taxpayers who come forward over the next six months and pay back taxes, interest, and reduced penalties for the past six years.
- IRS Voluntary Disclosure Practice, Internal Revenue Manual § 188.8.131.52
- IRS Memorandum: Proper Development of Cases
- IRS Memorandum: Routing of Voluntary Disclosure Cases
- IRS Memorandum: Penalty Framework
- Associated Press
- New York Times
- Tax Policy Blog
- Wall Street Journal
Saez Presents Financial Incentives for Retirement Saving Today at NYU
Emmanuel Saez (UC-Berkeley, Department of Economics) presents Details Matter: The Impact of Presentation and Information on the Take-Up of Financial Incentives for Retirement Saving at NYU today as part of its Colloquium Series on Tax Policy and Public Finance. The co-convenors are Daniel Shaviro (NYU) & Alan Auerbach (UC-Berkeley, Department of Economics). Here is the abstract:
We examine the effects of presentation and information on the takeup of financial subsidies for retirement saving in a large randomized experiment carried out with H&R Block. The subsidies raise take-up and contributions with larger effects when the subsidy is characterized as a matching contribution rather than an equivalent-value tax credit (or cash back), and when filers are informed before the tax season about the subsidy. The results imply that both pure incentives and the presentation of those incentives affect consumer choices.
Buchanan Presents Responsible Government Spending for Future Prosperity Today at BC
Neil H. Buchanan (George Washington) presents The 'Growth Budget': Disciplined and Responsible Government Spending for Future Prosperity at Boston College today as part of its Tax Policy Workshop Series organized by James R. Repetti and Diane Ring. Here is the abstract:
Epstein: AIG Bonus Tax Shouldn't Be, But Probably Is, Constitutional
Thus any sensible system of limited government should consider the proposed bills unconstitutional. Special taxes on some forms of income (but not others) and retroactive taxes put in place after business transactions are complete both merit strong condemnation. The bills in Congress are rife with both elements.
Nevertheless, a constitutional attack against any such law that might emerge faces an uphill battle.
Peroni Presents Worse Than Exemption Today at SMU
Robert J. Peroni (Texas) Presents Worse Than Exemption (with J. Clifton Fleming, Jr. (BYU) & Stephen E. Shay (Ropes & Gray, Boston)) at SMU today as part of its Tax Policy Colloquium Series moderated by Christopher H. Hanna and Henry J. Lischer, Jr. Here is the Conclusion:
In this article, we discuss how various defects in the current U.S. international tax system—deferral, generous transfer pricing rules, defective income sourcing and expense allocation rules, generous cross-crediting, the export sales source rule, the effectively tax-exempt treatment of many types of foreign-source royalties, and the deduction of foreign losses against U.S. source income—can be combined to make the present U.S. system as generous as, and in some important respects more generous than, a properly designed exemption or territorial system for taxing foreign-source income of U.S. resident corporations. In other words, when judged from a public policy standpoint, the current U.S. system can produce worse-than-exemption results. Because of this, the U.S. multinational corporate community largely has shifted its lobbying efforts away from support for an exemption or territorial system and toward support for changes in the current incoherent international tax system that would further reduce the effective U.S. income tax rate on U.S. corporations’ foreign-source income by magnifying worse-than-exemption results. In our view, reform efforts in the international tax area should be directed toward comparing the strengths and weaknesses of a properly designed worldwide system with the strengths and weaknesses of a properly designed exemption system, and then proceeding to enact one of those two coherent systems for taxing the international income of U.S. persons. Based on our prior scholarly work in the international tax area, we believe that such an analysis will lead to a conclusion that a strengthened and properly designed worldwide system is superior to a properly designed territorial system and is definitely superior to our defective and incoherent current U.S. international tax system.
Is SSRN Spam?
Following up on Tuesday's post, Is Legal Scholarship Dead?: Dan Markel has a great post on The Schlagfest in Geo. L. J. and a Mild Defense of SSRN Emails...
In her essay on sex, law and consent, Professor West adverts our attention to the distinction between the unwanted and the unwelcome, a distinction arising out of the literature on sexual harrassment. Perhaps the SSRN emails are unwanted but welcome/tolerated (ie, occuring in a relationship where the sexual attention is welcomed or permitted more generally), and this stands in contrast to the emails selling viagra, which are both unwanted and unwelcome. If this distinction holds, we might wonder whether the legal scholarship Schlag derides is simply unwanted, or both unwanted and unwelcome.
Cadwalader Tax Memo: The Manny Ramirez Tax
In a humorous jibe at the AIG bonus tax, Steven D. Lofchie, co-chair of Cadwalader's Financial Services Department, has posted a "Clients & Friends" tax memo on the firm's web site: The Manny Ramirez Lightbulb: Also (2 Ideas in 1 Memo) Putting Pay in Perspective:
My Idea. Lightbulb! Goes off! A lightbulb in my mind shining for all the world see my brain's idea! Why not a tax! Because the BoSox receive State Aid (all MLB sports teams do), Massachusetts Secretary of State Galvin, whom I would bet is a huge BoSox fan, should drop a big tax like a bombshell on Manny's salary, which is basically Stolen Money from State Revenues. And I'm not talking about some lame 90% tax either that lets Manny walk all the way (the guy wouldn't even run there on his fake bad knees) laughing out loud to the bank with $2MM (10% of 20MM). Boston has no place for 90% ballplayers. I am looking for the big three digits (110%!).
A Lightbulb in New York. New York State may also use My Idea. Getting back some of that Stephon Marbury money would help the Knicks' salary cap and leave money on the side to pay to put solar panels in Madison Square Garden so as to cook "green" [environmentally conscious and friendly] hot dogs.
Alex, Meet Andrew. Can you just imagine next year, one Sunday morning, Alex Rodriguez, reading the New York Times, goes out in his bathrobe to pick up the newspapers, in his fuzzy Yankee Slippers and robe that he got either for free or at a big discount, and there is a tax lien on his illgotten McMansions in his mailbox. Because Alex somehow "forgot" to withhold to pay the taxes that Mr. Cuomo is going to impose on him for letting down the Yankees (who receive major funding from the City and can't even make the playoffs paying ten times more in salary and "bonuses" than Tampa Bay). You say Mr. A.G. Cuomo can not put a lien on Alex's houses because the tax bill hasn't been passed yet by our lame legislature. That is a lame excuse, kind of like Alex's hitting in the big games in a Stadium built with taxpayer money (your taxpayer money and mine). If Alex isn't getting himself prepared for the big tax bill, he needs to wake up and smell the coffee. (Maybe Madonna can brew him some.)
[T]he tax system is completely messed up. ...
A Good Offense. Also, if some team was coming to town that had a dirty player on it, or who talked too fast, or tried to show you up, hit them with the old 200% tax. I’m talking to you, Payton Manning. Double tax. Plus a tax on all products you advertise. And invalidate all the Master Cards.
Do you remember the time Arlen Specter, the Senator from the Steelers, tried to put a tax on the greatest Football Mind of all Time (“FMT”—it’s not you anymore, Vince), Bill Belichick? But Teddy Kennedy, my main man from South Boston,2 completely shot Arlen down. That should teach you a lesson, Arlen: Don’t try to legislate with the big dogs! ...
Earned Income Tax Credit. Should go to guys like Dustin Pedroia: Still on his rookie contract and he is both RoY and MVP. Also to Amir Sadollah, the best ultimate Fighting Champion, ever. Plus, to good art that is not boring. Give an EITC to Beavis and Butthead: Speaking Truth to Power!
As someone who grew up in Boston and had a Bruno Sammartino poster on my bedroom wall, I loved the closing footnote:
Government Opposes Wesley Snipes' Motion to Leave U.S. for 5 Months Pending Appeal of Tax Conviction
I previously blogged the federal district judge's order granting actor Wesley Snipes' motion to travel overseas while the appeal of his conviction on three misdemeanor tax fraud counts is pending in the Eleventh Circuit. The order permitted Snipes to travel to London in April (to help edit his new movie, Gallowwalker) and to Bangkok in May (to film the movie Chasing the Dragon), as well as the judge's subsequent order directing Snipes to turn in his passport after he was photographed in Dubai in the United Arab Emirates at the Nov. 20 grand opening of the $1.5 billion Atlantis hotel.
Last Friday, Snipes filed a motion seeking permission to travel to Nambia from April 5 to April 29 (for more filming on Gallowwalker) and to Italy from May 4 to August 15 (to film the movie Game of Death. The Government yesterday filed a motion opposing the request.
Senate Holds Hearing Today on Middle Income Tax Relief
The Senate Finance Committee holds a hearing today on The Middle Income Tax Relief Question: Extend, Modify, or Expire? Here are the witnesses scheduled to testify:
- Paul Taylor (Executive Vice President, Pew Research Center)
- George Yin (Edwin S. Cohen Distinguished Professor of Law & Taxation, University of Virginia)
- Robert Greenstein (Executive Director, Center on Budget and Policy Priorities)
- Alan Viard (Resident Scholar, American Enterprise Institute)
In connection with the hearing, the Joint Committee on Taxation has released Present Law Related to the Individual Income and Social Insurance Taxes as in Effect for 2009 and Background Data Related to the Distribution of Federal Taxes (JCX-21-09).
Maryland Faculty Shoots Down Post-Tenure Review
Inside Higher Ed: Defeating Post-Tenure Review:
Those issues are central to discussions of post-tenure review, a process that exists in some form at many colleges and can be controversial. The University of Maryland at College Park found that out this month when the faculty considered a proposal that would have required annual reviews of tenured faculty performance, and would have allowed sanctions, including pay cuts for some professors who receive three consecutive years of negative reviews. The faculty overwhelmingly rejected the plan, seeing it as unnecessary, unfair and a diminishment of tenure.
The leading public advocates for the plan were not administrators, but students. The leaders of both the undergraduate and graduate student governments both came out strongly for the plan.
The Maryland proposal -- developed by a joint faculty-administrator panel -- would have worked like this: Each department would create a committee to review annually the performance of tenured faculty members. Faculty members' work would not be judged solely on the previous year, but in the context of previous work as well, so that a single "slow year" would not create problems. Two consecutive reviews that represent outstanding work could qualify professors for extra recognition in various forms.
The controversy focused in large part on the opposite case. Tenured professors whose work is found "substantially below reasonable and equitable expectations" by the departmental committee and the department chair would have to develop, with the chair, a "one-year development plan outlining goals for improvement, suggesting ways that the improvement may be accomplished, and specifying the benchmarks whereby improvement can be assessed." Only after such a plan has failed to produce results could pay be cut.
In "a very small number of cases, when prior good-faith efforts to remedy performance have failed, and when other recommendations are deemed inappropriate or not considered likely to produce positive results, the recommendation may be a reduction of a faculty member’s base salary, if the faculty member's performance has declined to such an extent as to no longer to warrant the base salary that is attached to the position. The salary reduction may be permanent or for such time as the dean (or provost) believes appropriate." Faculty members could file a grievance about such decisions -- and also at other stages of the process. ...
Student leaders have been critical of the faculty vote.
Jonathan Sachs, president of the undergraduate student government, said ... he saw the faculty vote against the review plan as "arrogance," and said that they should be "accountable" for their performance.
Anupama K. Kothari, a Ph.D. student in business and president of the Graduate Student Government, said ... "Many graduate students were "shocked to see faculty shoot down" the proposal, Kothari said. She characterized the reviews proposed as "mild," and said that the professors' vote "made many of us suspicious of them." She added: "If you are doing a good job, why are you so scared of being reviewed?"
ABA Tax Section Offers Webcast Today on Tax Issues of the Madoff Scandal
The ABA Tax Section offers a teleconference and webcast today on Tax Issues of the Madoff Scandal: Advising Victims of Investment Fraud from 1:00 - 2:30 p.m. EST:
Fraudulent schemes by supposedly reputable investment advisors have left their investor-victims trying to determine what to do. These victims need guidance on the tax and other implications of their failed investments. Many decisions need to be made quickly to protect victims’ rights and options. Our panel will discuss implications of these investment losses, including:
- How to handle phantom income reported in prior years
- Claiming a theft loss
- Trust and estate income tax issues
- Implications for traditional and Roth IRAs that suffer losses
- Bankruptcy procedures and “clawback rules”
- Estate tax issues
- Robert S. Keebler (Virchow, Krause & Company, Appleton, WI)
- Susan I. Montgomery (Law Offices of Susan I. Montgomery, Los Angeles, CA)
- David Shechtman (Drinker Biddle, Philadelphia, PA)
- Mark E. Wilensky (Roberts & Holland, New York, NY)
March 25, 2009
1st Circuit Orders Rehearing En Banc in Textron Tax Accrual Work Papers Case
The First Circuit today granted the government's petition, and denied the taxpayer's petition, for rehearing en banc in United States v. Textron, No. 07-2631 (1st Cir. Jan. 21, 2009). The sharply divided (2-1) First Circuit panel had held that Textron's tax accrual work papers were protected under the work product investigation and thus did not need to be turned over to the IRS in its tax shelter investigation. The full First Circuit will hear oral argument on June 2, 2009. (Hat Tip: How Appealing.) Prior TaxProf Blog coverage:
- Commentary on Textron Tax Accrual Work Papers Case (1/23/09)
- Ventry: Textron Deals Blow to IRS's Anti-Tax Shelter Efforts (1/22/09)
- NLJ: Corporate Counsel Fight IRS in Key Work Product Protection Case (4/14/08)
- WSJ: Textron Battles DOJ on Access to Work Papers in SILO Tax Shelter Case (6/20/06)
Cain: In Defense of the Consensus on CCA 200911007
- I agree that spouses have always been treated as separate taxpayers (and I think they should be so treated as long s they both have income).
- I worried about the $1M limitation and the two home limitation when the 1987 amendment was first adopted creating these limits (and by parentheticals treating a married couple filing separately as one taxpayer).
- There is nothing in the statute that says a married couple filing jointly should be limited to $1M and only two homes.
- However, the IRS basically ruled that way in a 2001 FSA – see until FSA 200137033..
- The FSA seems to adopt the one limit per taxpayer rule but conclude that spouse (no matter how they file) should be treated as one taxpayer.
- I happen to think that makes no sense.
- I can see no reason for extending a bad rule as to jointly filing spouses to non-spouses who co-own property.
- One possible distinction is that spouses, because of 1041, can transfer property ownership back and forth with no tax consequences and so maybe taxing their ownership costs (including mortgages) are justifiably taxed differently from non-spouses.
- I can see no justification for telling partner A when he buys a house for more than $1 million acquisition debt that so long as he owns it alone he can deduct 100% of the interest, but if he gifts or sells a portion of it to another, he cannot – even though he is still paying interest on $1 million acq debt. (Even under the CCA analysis A could then incur additional, aggregate, acq debt on another property and deduct the interest on the new property. So if the purpose is to encourage home ownership up to $1M why should we in this instance only encourage such ownership if you acquire more than one home?)
- We do not treat non-spouses as spouses in other provisions of the Code with spouse specific rules – that is what causes the marriage penalty/bonus problem. If you want to take away the benefit from non-spouses here, why isn’t the same argument available for other provisions that distinguish between spouses and non-spouses.
- The provision requires a taxpayer (or taxpaying unit in the case of a joint return) to allocate interest paid to types of debt before we can determine deductibility. There is deductible business interest, partially deductible investment interest, fully deductible home mortgage interest, and non deductible home mortgage interest that is allocable to “excess” acquisition and home equity debt. Since it is the taxpayer’s payment of the interest that triggers the deduction, it seems to me that we should allocate those payments to the various types of debt and test the amount paid on excess home acq indebtedness at the taxpayer level. If the home mortgage is 1.5M and A pays interest on 2/3rds of the mortgage (because that is the agreement with his co-owner who owns only 1/3rd interest in the property) then isn’t that interest allocable to 2/3rds of the mortgage ($1M) and thus not an excess mortgage?
- I agree the statute could have been written more clearly.
- Bottom line, the deduction for mortgage interest is hard to justify in the first place – so it is particularly hard in this case to determine how much interest anyone should be allowed to deduct, But I can’t accept a rule that says unmarried co-owners must be treated the same as spouses (who may not even be co-owners) because of something called marriage neutrality – the Code is not based on marriage neutrality.