July 31, 2009
Getting California Off the Tax Rollercoaster
San Diego Newsroom, Getting Off the Roller-Coaster: California’s Volatile Tax Base:
As the governor signed California’s belabored budget this week and sleep-deprived Legislators agreed to cuts that would have previously been unthinkable, finger-pointing was in full force. Politicians on both sides of the aisle, however, agree that the state’s volatile tax base is particularly to blame for the boom-or-bust cycle that keeps California’s budget from holding steady. In September Gov. Arnold Schwarzenegger will call legislators into a special session to overhaul what he calls a “broken tax system.”
Gov. Arnold Schwarzenegger set up a bipartisan, 14-member Commission on the 21st Century Economy last year to end the state’s dependence on volatile revenues and modernize the tax system. The commission’s recommendations will factor heavily into the September special session.
“What the governor is hoping might come out of this exercise is a dramatic alternative that people can get excited about and perhaps overcome the inertia of special interests,” said Paul L. Caron, a visiting taxation professor at University San Diego School of Law and editor of the TaxProf law blog. Caron cites President George W. Bush’s failed attempt to overhaul taxes with his Tax Reform Commission as “not dramatic enough to galvanize folks.”
“It’s hard to enact small changes,” he said. ...
“Because we have a personal income tax, in strong economic times there’s a bump in revenue,” said Daniel Simmons, a professor of tax law at UC Davis. “Also, in the 1990s and early-2000s, a lot of people in high-tech industries were being compensated in capital gains.” California heavily relies on personal income taxes and capital-gains taxes paid by the rich. Those revenues soar in good years and plummet in bad, much more so than property or gas taxes. ...
“A flat tax (on personal income) has some real appeal as an economic matter,” Caron said. “Experience in other states and federally has shown that it really works… you read about how businesses and high-income individuals are fleeing the state, and you want to keep those people here.” ...
Caron notes that the commission may not significantly change the amount of taxes Californians pay, but more likely restructure the way they are paid. “The governor wanted it to be revenue-neutral and just reallocate the tax burden,” he said. “Of course, I subscribe to the view that there is a window for dramatic reform… there’s the hope that doing something big might be possible.” Come September, “something big” might be the only option California has left.
U.S., UBS Settle Tax Shelter Case
- Associated Press
- Business Week
- New York Times
- Wall Street Journal
- WSJ Law Blog
Ex-BDO Partner Pleads Guilty in Tax Shelter Case
Fat Tax to Finance Health Care Reform?
Forbes: Fat Tax Could Be Panacea For Health Reform, by Brian Wingfield:
One of the ways President Barack Obama hopes to reduce soaring health care costs is through the promotion of overall wellness. There's a related idea cooking in Washington: a fat tax.
According to a study released Monday by experts at the Urban Institute and the University of Virginia [Reducing Obesity: Policy Strategies from the Tobacco Wars, by Carolyn L. Engelhard (Virginia), Arthur Garson, Jr. (Virginia) & Stan Dorn (Urban Institute)], a 10% excise or sales tax on fattening foods could raise $522 billion over the next 10 years. A 20% tax could raise $937 billion. Among its other uses (like paying down the deficit), that money could be used to defray the costs of health care reform or to curb the rise in obesity.
Federal Tax Policies and Farm Households
Significant changes in Federal individual income and estate tax policies have occurred over the last 10 years. Analysis suggests that changes in Federal tax provisions affecting both individual and business income taxes have reduced average tax rates for all farm households, resulting in the lowest tax burden on farm income and investment in a decade. Similarly, an analysis of the changes to Federal estate tax policies suggests that increases in the value of property that can be transferred to the next generation free of the estate tax, combined with special provisions for farmers and other small businesses, have greatly reduced the number of farm estates subject to the tax and the amount owed. While nearly 10 percent of commercial farm estates could owe tax in 2009, only 1 to 2 percent of all farm estates are estimated to be subject to the Federal estate tax this year.
The Top 1% Pays More Income Tax Than the Bottom 95%
The Tax Foundation's Tax Policy Blog: Tax Burden of Top 1% Now Exceeds That of Bottom 95%, by Scott A. Hodge:
Remarkably, the share of the tax burden borne by the top 1% now exceeds the share paid by the bottom 95% of taxpayers combined. In 2007, the bottom 95 percent paid 39.4% of the income tax burden. This is down from the 58% of the total income tax burden they paid twenty years ago. To put this in perspective, the top 1 percent is comprised of just 1.4 million taxpayers and they pay a larger share of the income tax burden now than the bottom 134 million taxpayers combined.
- IRS Tax Stats 2009-16: Tax Years 1986-2007 -- Individual Income Tax Return Statistics by Selected Descending and Ascending Cumulative Percentiles
- Greg Mankiw's Blog
- The Tax Lawyer's Blog
$1.6b Tax Break for Trial Lawyers
A pending bill in Congress would permit plaintiffs' lawyers to immediately deduct loans to clients to cover litigation expenses (rather than at the conclusion of the litigation), at a cost of $1.6 billion
- A Bill to Amend the Internal Revenue Code of 1986 to Allow the Deduction of Attorney-Advanced Expenses and Court Costs in Contingency Fee Cases (S.437; H,R. 2519)
- Jonathan Adler (The Volokh Conspiracy), A Tax Break for Trial Lawyers
- Walter Olson (Point of Law), AAJ Looking to Quietly Pass Plaintiff Lawyer Tax Break
- Chris Rizo (Legal Newsline), Lobbyist: AAJ Looking to Quietly Pass Plaintiff Lawyer Tax Break
- Victor E. Schwartz & Christopher E. Appel (Legal Opinion Letter), Federal Government Bailout for Trial Lawyers
- Carter Wood (Shop Floor), A $1.6 Billion Tax Break for Lawyers
Fed. Cir. Rejects Application of 6-Year SOL to Overstatement of Basis in Tax Shelter
The Government suffered a major tax shelter setback yesterday when a divided (2-1) Federal Circuit reversed the Court of Federal Claims and held that the extended six-year statute of limitations for issuing a final partnership administrative adjustment under § 6501(e)(1)(A) did not apply to the omission of more than 25% of gross income from the return of a Son of BOSS tax shelter partnership. Salman Ranch Ltd. v. United States, No. 2008-5053 (Fed. Cir. July 30, 2009):
[W]e conclude that the Supreme Court’s interpretation of the language “omits from gross income an amount properly includible therein” in § 275(c) [Colony, Inc. v. Commissioner, 357 U.S. 28 (1958).] controls the interpretation of the identical language in § 6501(e)(1)(A). For this reason, we hold that the alleged overstatement of the basis of Salman Ranch by the Partnership did not constitute an omission from gross income under § 6501(e)(1)(A). Accordingly, the IRS is not entitled to the benefit of the six-year statute of limitations set forth in § 6501(e)(1)(A). The three-year limitations period of § 6501(e)(1)(A) controls, which means that the FPAA was untimely and therefore invalid. Our holding today is consistent with the June 17, 2007 decision of the Ninth Circuit in Bakersfield Energy Partners, 568 F.3d at 778.
Judge Newman filed a 12-page dissent, concluding:
Colony was not a broad exoneration of inquiry, after three years, into items simply because they are denominated as “basis.” The Court of Federal Claims gave correct effect to the full text of § 6501(e)(1)(A), and nothing in its decision misconstrues the Court’s holding in Colony. The taxpayers herein omitted over 25% of their gross income, but did not provide sufficient information to apprise the Commissioner of the nature and amount of the omission. It seems clear that the criteria of § 6501(e)(1)(A) were met, extending the limitations period to six years. From my colleagues’ contrary ruling, I respectfully dissent.
Rhode Island Threatens to Close 1,200 Businesses for Nonpayment of Taxes
Providence Journal: 1,200 R.I. Businesses Face Closure Over Sales Tax:
State tax officials have put more than 1,200 businesses across the state on notice this week that they are out of business unless they pay their overdue sales taxes immediately. For most, that action came in the form of a personal visit from the state Division of Taxation, ordering business owners to lock their doors at once.
By Wednesday, a line of people had queued up inside the Department of Administration building on Smith Hill, waiting their turn to plead their case to a state revenue agent. Some were angry. Others frustrated. ...
Initially, 3,949 letters went out which, in turn, precipitated the payment of $3,072,500 in delinquent sales tax payments .... By the time the final notices went out, the holders of all but 1,248 had paid their overdue taxes, or settled their cases in some other way. The officials would not disclose who received the in-person visits this week, but said they reached every conceivable kind of retail business in Rhode Island, including small mom-and-pop stores, restaurants and bars.
By 4 p.m., as Division of Taxation employees worked their way down the list, tensions were on the rise. A few in the 50-person queue made frantic calls to explain to vendors why their restaurants were closed for the day. Others ran out to feed expiring parking meters, while sweating over the lost revenue and embarrassment that appeared on their doorsteps Wednesday morning.
(Hat Tip: Andrew Morse.)
July 30, 2009
Tax Cheats Flock to IRS to Confess Their Sins
In today's Wall Street Journal: Tax Evaders Flock to IRS to Confess Their Sins, by Laura Saunders & Carrick Mollenkamp:
Wealthy taxpayers have inundated the IRS in recent weeks with requests to come clean for past tax evasion, amid a government crackdown on undeclared income from overseas accounts.
The volume has been so great that Wednesday, the IRS issued a streamlined, three-page form for taxpayers seeking entry into its temporary voluntary-disclosure program.
"Last week we had 400 [applicants] -- four times as many as in all of last year," said IRS spokesman Frank Keith, who declined to provide more detailed figures.
Two main factors appear to be driving the clemency-seeking spree. The IRS disclosure program, which began in March and is set to end Sept. 23, offers Americans the possibility that they may face civil charges, which can carry lower penalties than criminal charges, for volunteering details of tax evasion.
At the same time, the IRS and the U.S. Justice Department are pressing ahead with efforts to investigate taxpayers who failed to report income earned from undeclared accounts with Swiss bank UBS AG.
- Bloomberg, Rich Americans Reveal UBS Accounts Amid Negotiations
- New York Times, UBS and Justice Department Disagree on Progress of Case
- USA Today, IRS and UBS Still at Odds on List of Possible Tax Cheats
- Wall Street Journal, US Judge Seen Keeping Heat On UBS, IRS To Settle Pre-Trial
- Wall Street Journal Law Blog, How Common Is Offshore Tax Evasion?
- Web CPA, Toy Exec Pleads Guilty in UBS Tax Case
W-K9: Pet Tax Return
Check out the Form W-K9, Individual Pet Tax Return:
(Hat Tip: Lisa Milot.)
Update: Leandra Lederman passed along Form 1040-DOG.
Mehran & Suher: The Impact of Tax Law Changes on Banks
Hamid Mehran & Michael Suher (both of the Federal Reserve Bank of New York) have posted The Impact of Tax Law Changes on Bank Dividend Policy, Sell-Offs, Organizational Form and Industry Structure on SSRN. Here is the abstract:
This paper investigates the effect at the bank and industry level of a 1996 tax law change allowing commercial banks to elect S-corporation status. By the end of 2007, roughly one in three commercial banks had either opted for or converted to the S-corporation form of organization. Our study analyzes the effect of this conversion on bank dividend payouts. It also examines the effect S-corporation status has on a community bank’s likelihood of sell-off and measures a firm’s sensitivity to tax rates based on its choice of organizational form. We document that dividend payouts increase substantially after a bank’s conversion to S status. Moreover, community banks that convert are significantly less likely to be sold than their C-corporation peers. We estimate a tax rate elasticity of conversion in the range of 2 to 3 percent for every 1-percentage-point change in relative tax rates. Overall, our results provide evidence that Subchapter S status has significant effects on bank conduct and industry structure.
Michigan Grad Files Complaint With ABA Over Wolverine Program's LSAT-Free Admissions Policy
David Boyle has filed this 24-page complaint with the ABA, alleging that Michigan's Wolverine Scholars Program for admitting Michigan undergrads with a minimum 3.80 GPA if they agree to not take the LSAT violates several law school accreditation standards. The complaint has an extensive discussion of the coverage of these new LSAT-free law school admissions programs in the legal blogosphere. For prior TaxProf Blog coverage, see:
- LSAT-Free Law School Admissions Can Goose U.S. News Ranking (9/25/08)
- Illinois Offers LSAT-Free Admission to Undergrads With 3.0 GPA (10/10/08)
Update: Above the Law has more here.
Gingrich's Tax Reform Plan
- Cut the Payroll Tax in Half for 2 Years. Every single working American pays the payroll tax. In this economy, many people may not get a pay raise, but this would immediately give every working American a take home pay raise. This would also immediately increase the liquidity of every small business, because there would be more money available to put back into the business and create more jobs. So that Social Security and Medicare funds are not affected, we would pay for this proposal by redirecting all the TARP and $787 billion stimulus money that has been allocated but not yet spent.
- Abolish Taxes on Capital Gains. If we want to compete with China and have the most productive factories in the world, the best jobs, and the highest take home pay, we should match China's capital gains rate of zero. This would dramatically increase investment in America.
- Reduce the Corporate Tax Rate. When you combine state and federal taxes, America has the highest corporate tax structure in the world. We believe that by matching the Irish corporate tax rate of 12.5%, America would be the most desirable economy in the world to open a factory, create a new job, and develop a new product.
- Abolish the Death Tax. If we want to be pro-work, pro-savings, and pro-family, we should not punish, but instead reward people who have worked, saved and created wealth all their life.
Cain: DOMA and the Internal Revenue Code
The Defense of Marriage Act (DOMA) prohibits the recognition of same-sex marriages for any purpose under federal tax law. The primary justification for this rule is that tax benefits should be preserved for opposite-sex married couples. This article points out the absurdity of such a rule, given that tax law is not intended to privilege married couples, but instead is intended to measure their taxable income fairly on the basis of their status as related parties. Because the justification fails, DOMA as applied to federal tax law is unconstitutional.
DePaul Accreditation Report
DePaul's accreditation report from the ABA is here. This is the portion of the report dealing with the disputed margin agreement between the law school and the university:
July 29, 2009
NY Times: Taxing Face Lifts and Abortions to Pay for Health Reform
New York Times: Taxing Face Lifts and Abortions to Pay for Health Reform, by Catherine Rampell:
Some members of Congress are reportedly considering a cosmetic surgery tax to help pay for health reform (a.k.a. the “Botax”).
Such a tax could be a big revenue-raiser, since Americans spend billions of dollars on cosmetic surgeries each year. It may also discourage more people from getting plastic surgery (which mothers of teenage girls everywhere might consider a good thing, I suppose).
It might also lead to a slippery slope — and a tax on a significantly more controversial medical procedure. If Congress can tax cosmetic surgeries, asks the libertarian law professor Glenn Reynolds, what about abortion?
Both are performed by doctors, and both are often done on an elective basis. Taxes on both types of procedures have been proposed before, as Paul L. Caron, a tax professor at the University of Cincinnati College of Law, notes on his TaxProf blog.
Professor Caron cites several tax cases with similar constitutional undertones. In 1983, for example, the Supreme Court ruled that a Minnesota use-tax on paper and ink products violated a newspaper’s first amendment rights.
Somin: Can Moneyball Strategies Still Work for Law Schools?
As regular readers of this blog know, I have long been intrigued by the application of Moneyball principles to law schools, beginning with my article, What Law Schools Can Learn from Billy Beane and the Oakland Athletics, 82 Tex. L. Rev. 1483 (2004). Ilya Somin (George Mason) has a great post on the The Volokh Conspiracy, Do the Recent Failures of the Oakland A's Discredit Moneyball Strategies in Baseball and Academia?:
Like many academics, I have praised the "Moneyball" strategies adopted by Oakland A's GM Billy Beane. Beane's innovative use of statistical methods for evaluating player performance built the small-market A's into a powerhouse that posted records as good as those of top teams with much higher payrolls, including the Red Sox and Yankees. Meanwhile, in the academic world, my employer, the George Mason University School of Law, used similar strategies to identify and hire undervalued scholars, an approach that enabled the school to rise rapidly in the US News rankings (from around 90th or so in the late 90s, to a peak of 34th in 2007 and 41st today). GMU's moneyball approach also enjoyed impressive successes on measures of faculty quality, such as Brian Leiter's citation count study, in which we ranked 21st in 2007. Like the A's, GMU has outperformed competitors with much greater financial resources (we charge lower tuition and have a much smaller endowment than most of our peer schools).
However, as ESPN writer Howard Bryant explains in this article, the A's poor performance over the last three years has led many people to doubt the effectiveness of Beane's approach. Although GMU's rankings haven't fallen anywhere near as much as the A's place in the American League standings, we have fallen a few slots in US News over the last two years.
In my view, the the A's recent problems in no way discredit Moneyball strategies. In both baseball and academia, Moneyball hiring is still a success. And, while the A's may not have a bright future, I am cautiously optimistic that GMU does.
I. The A's Problems are Caused by Moneyball's Success. As Daniel Drezner explains, the A's have slipped not because Moneyball strategies stopped working, but because other teams with bigger payrolls (most notably, my beloved Red Sox) successfully copied them. ...
II. Implications for GMU and Legal Academia. Nonetheless, the recent decline of the A's does raise the question of whether GMU will suffer a similar decline as better-funded competitors mimic some of our hiring strategies. It certainly could happen, but I am guardedly optimistic that it won't. Competitive pressure in academia is much weaker than in professional sports, where losing GMs tend to get fired and owners of losing teams suffer big financial losses. In the academic world, faculty who perform poorly relative to their competitors are unlikely to lose either funding or tenure. Even law school deans are unlikely to lose their jobs merely because the school's ranking stagnates or declines.
Thus, GMU's innovations are less likely to be copied widely than those of the A's. Even so, some have spread. The three undervalued faculty assets that GMU has historically pursued include 1) law and economics scholars, 2) conservative and libertarian academics who might have gone to higher-ranked schools but for ideological discrimination, and 3) academics with strong publication records who were overlooked by higher-ranked schools because they didn't have a prestigious clerkship or didn't get their JDs at a top-5 school. I think it's clear that law and econ scholars are no longer undervalued by most of our competitors. Ideological discrimination and school/clerkship snobbery persist, but both are less intense than ten years ago. In particular, our rivals are beginning to realize that past publication record is a better predictor of the quality of future scholarship than who you clerked for or where you got your JD (this is similar to Beane's famous insistence on evaluating prospects based on minor league and college stats rather than whether they looked good to tradition-minded scouts).
Why Dwayne Wade Won't Sign With the Chicago Bulls: State Taxes
Taxing Dilemma for NBA's 2010 Free Agents, by Sam Smith:
(Hat Tip: Sean Gosselin.)
With increasing taxes geared to the wealthy and the Bush tax cuts also coming off the books, it may be that the low tax states like Florida and Texas begin to have a big advantage over higher tax states when it comes to NBA free agents.
Could, in the end, the biggest barrier to the Bulls attracting a major free agent next summer like Dwyane Wade be the health care legislation now being debated in Washington?
I contacted a tax expert in Chicago, Noel Wilner, president of CBIZ MHM, an accounting and tax advisory company, and asked him to do some calculations. ... The total tax for a salary of $17,000,000 will be $8,088,412. That is made up of $6,696,412 of federal income tax, $882,000 of health care tax and $510,000 of Illinois tax. A Florida resident will have all the same tax except no state tax ($510,000). In addition, Wilner notes, there is typically an allocation to other states where the games are actually played. But there should be at least a savings of 50% of the state tax for being a Florida resident as 50% of the games are home games.
Accounting Degrees at All-Time High
The AICPA yesterday released 2009 Trends in the Supply of Accounting Graduates and the Demand for Public Accounting Recruits. From the press release:
The number of students who graduated with accounting degrees in the 2007-08 school year surpassed the previous year's record level, according to a new report by the American Institute of Certified Public Accountants. More than 66,000 achieved bachelor's and master's degrees in accounting, 3.5 percent higher than in 2006-07.
This represents the largest number of graduates since 1972, the year the AICPA began tracking the data ... The gender ratio is 51 percent female, 49 percent male, a 1 percent uptick in the male cohort. ...
"Students clearly recognize the attractiveness of accounting as a rewarding and fulfilling career path." 2007-08 enrollments in undergraduate, graduate and doctoral programs achieved a 4.7 percent boost over the previous year, with an aggregate total of 213,000 students.
UBS Tax Shelter Case Update
- Associated Press: Deal Far From Done in UBS Tax Evasion Case
- Bloomberg: UBS Client Chernick Admits Filing False Tax Return
- Reuters: U.S. Government Says No Deal Yet in UBS Tax Case
- WSJ Law Blog: In UBS Tax Case, U.S. Continues To Wage War, While Talking Peace
In response to my post yesterday, Congress Considers "Botax" -- 10% Tax on Plastic Surgery to Fund Health Care Reform, Glenn Reynolds asks: "If Congress can tax plastic surgery, can it tax abortion?" Although there have been various suggestions to tax abortion, a colleague tells me that such a tax would raise serious constitutional concerns. In Minneapolis Star & Tribune Co. v. Minnesota Commissioner of Revenue, 460 U.S. 575 (1983), the Supreme Court held that a Minnesota use tax on the cost of paper and ink products violated a newspaper's First Amendment rights. Although the precise contours of this doctrine are much debated, a tax singling out the exercise of the constitutional right of abortion would likely face special scrutiny. But a general tax on elective cosmetic surgery that also reached elective abortions may be permissible under the Minneapolis Star doctrine.
On the one hand, Susan R. Estrich and Kathleen M. Sullivan have stated: "Whatever position one takes on the decision to [publicly fund abortions], it is surely different than a state policy which seeks to 'encourage childbirth' by taxing abortion. Even assuming that rewards may be appropriate to secure the end of childbirth, punishments should not." Abortion Politics: Writing for an Audience of One, 138 U. Pa. L. Rev. 119, 150 (1989). On the other hand, Yvette Marie Barksdale has noted:
[FN172]. An exception here might be where the government intentionally used this more general category as a way of targeting abortion. In such a case, the government's hostility to the woman's right to an abortion links the funding decision to the right and thus would implicate the right. See Minneapolis Star Tribune & Company v. Minnesota Comm'r of Revenue, 460 U.S. 575, 579-580 (1983) (discussing Grosjean v. American Press, 297 U.S. 233, 250 (1936), which invalidated a general Louisiana tax on large newspapers where all but one of the newspapers had “ganged up” on Huey Long and in which the Governor had advocated a general tax as a tax on “lying” newspapers; the Court in Grosjean further stated that the tax was a “deliberate” and “calculated” device in the form of a tax to limit the circulation of information to which the public was constitutionally entitled).
And the Poor Have Children: A Harm-Based Analysis of Family Caps and the Hollow Procreative Rights of Welfare Beneficiaries, 14 Law & Ineq. 1, 54 (1995). Cf. Andrew Koppelman, Forced Labor: A Thirteenth Amendment Defense of Abortion, 84 Nw. U. L. Rev. 480, 531 (1990) ("Measures that increase the cost of abortions, such as an abortion tax, present a trickier problem.).
Update #1: Jonathan Adler responds on The Volokh Conspiracy, Could Congress Tax Abortion?:
My own view is that, under current law, a tax targeted at abortions would be difficult to sustain. Under Casey, states may not impose regulations that place an "undue burden" on a woman's constitutional right to terminate her pregnancy. A law creates an "undue burden" where it has "the purpose or effect of placing a substantial obstacle in the path of a woman seeking an abortion of a nonviable fetus." Any abortion tax large enough to raise a meaningful amount of revenue would likely increase the cost of abortions sufficiently to constitute an "undue burden" under this test.
Update #2: Eugene Volokh has weighed in with Targeted Taxes on Getting Abortions, Buying Guns, and Exercising Other Constitutional Rights.
More Turmoil at DePaul
Three developments following yesterday's post, ABA Dismisses Complaints Over DePaul's Funding of Law School, Firing of Dean:
1. A DePaul faculty member shared with me a memo that ousted Dean Glen Weissenberger sent to the faculty in response to the ABA's action:
It was reported today in the Chicago Daily Law Bulletin that the "ABA clears DePaul in funding flap."
You will recall the most recent episode concerning this matter involved a letter I wrote to the ABA on June 18th, which resulted in my termination within 48 hours. I have previously shared this letter with the faculty. In this letter I pointed out that, contrary to previous representations made to the ABA, the University and the College of Law did not appear to have an agreement as to the so-called Margin Agreement which governed the law school's budget.
Subsequent to my removal, the University corresponded on two occasions with the ABA, apparently about finances. Because I was no longer dean, I was not provided with copies of those letters, and to this day I do not know what the ABA was told. I also believe that no one representing the faculty has been provided with a copy of this correspondence. Consequently, no one responded to the two letters.
I received the ABA Report this morning. I can infer from the contents of the ABA report, however, that the University may have yet again changed its position in these two pieces of correspondence.
There are several points worth making here:
First, it is heavy handed, perhaps even desperate, to silence an opposing viewpoint by firing the representative of that position.
Second, it is the antithesis of fair play to communicate unilaterally with an accrediting body and then to refuse to disclose contents of the communication to interested parties.
Third, my correspondence to the ABA that resulted in my termination was not inflammatory in any way. I did not accuse the University of anything improper. I merely pointed out that if the ABA was relying on a bilateral agreement in determining our compliance with the standard on financial support, information about that agreement that had been previously reported to the ABA, appeared to be inaccurate. I was told by the ABA that I had a duty to report this information.
Fourth, the standard applicable to finances, Standard 201, makes reference to "adequate" resources, i.e. the minimal resources necessary to sustain a program. This issue was never addressed by a representative of the faculty because of my termination, Nevertheless, it has never been my position that we lacked this minimal level of support for accreditation purposes. My position was and remains that we have needed a higher level of support, reflected in the original Margin Agreement, to achieve our greater goals.
Finally, the ABA in its July 23rd Report has required a report back on Standard 203. This Standard applies to strategic planning and the "means" to achieve the goals identified by the planning. It is here that the matter of financial resources moves to the forefront. Unlike Standard 201, which addresses the issues of adequacy, Standard 203 addresses how a law school plans to achieve a level of support to achieve its goals. While I was dean, it was never my aspiration to be dean of an adequate law school, but rather I always sought to lead a superior law school of which we all could be proud. It is for that reason that the Margin Agreement is critically important to our law school's ability to achieve the greatness we have shared in creating.
2. A DePaul faculty member shared with me a memo to the provost from tenured faculty member Stephen Siegel (who earlier resigned his position as DePaul's Associate Dean for Research, Scholarship & Faculty in protest of the unviersity's actions). The memo is in response to the provost's decision to give Interim Dean (76 year old Illinois state appellate judge Warren Wolfson) a three-year faculty contract to follow his two-year term as Interim Dean:
Dear Provost Epp,
Once again, these days, I find myself in the unenviable position of having to differ about matters of great importance.
Of course, when you say about Judge Wolfson's three additional years as a faculty member - "it is part of the agreement that brought the Judge to DePaul in the first place" -- that is true as a matter of brute fact. But the departure from collegial norms, University standards, and ABA rules, is revealed to be that much the greater now that we learn -- not from you but from a newspaper - about the additional three year, post-deanship, stint on the faculty.
Admittedly, I am saying "you" because you took responsiblity for replying to my note, something which I appreciate. I really should be saying "you all" - for the President and Trustees Simon and Dempsey (and perhaps others) were fully part of the decisions. I am writing this to them as well; for they have the ultimate responsiblity for the disregard and disrespect shown to the faculty of the law school.
As one of you has said: your #1 job is to protect the University. It is most unfortunate that you all proceeded on the unwarranted assumption that it was necessary to protect the University from the faculty.
3. Brian Leiter asks, in DePaul Deanship Scandal Gets Worse: "Will the ABA be as passive in the face of DePaul's violation of ABA rules on decanal and faculty appointments?"
The Impact of Preparer Penalty Provisions on Tax Preparer Aggressiveness
Richard A. White & Victoria J. Glackin (both of the University of South Carolina, Moore School of Business) have posted An Investigation of the Impact of Preparer Penalty Provisions on Tax Preparer Aggressiveness on SSRN. Here is the abstract:
Public and government outrage over recent tax fraud and tax shelter cases led to significant changes in the preparer penalty laws under the Small Business Work Opportunity Act of 2007. This study experimentally examines the effectiveness of the revised preparer penalty provisions at reducing tax preparer aggressiveness. Specifically, we examine the impact of two significant components of the changes to the preparer penalty provisions -- the increase in penalty amount and the increase in the likelihood of sustaining the tax position required to avoid penalty imposition (required likelihood threshold) - on tax preparers’ willingness to (1) recommend an uncertain position and (2) sign a tax return containing an aggressive position. The results suggest that both the increase in penalty amount and the increase in required likelihood threshold reduce tax preparers’ willingness to recommend an uncertain position and/or sign a tax return containing an aggressive position. Of the two components, the results indicate that the increase in required likelihood threshold is more effective at reducing tax preparer aggressiveness than the increase in penalty amount. Congress may want to rethink its recent decision to reduce the required likelihood threshold for many of the decisions that tax preparers make with their clients.
July 28, 2009
More Celebrity Tax Woes
The Detroit News recounts current tax troubles of various celebrities:
- Steve Austin (former wrestler): California $22k tax lien
- David Brenner (comedian): IRS $68k tax lien
- P. Diddy (rapper): IRS $7k tax lien
- Anna Kournikova (tennis player): California $6k tax lien
- Lea Thompson (actress): California $9k tax lien
- Chris Tucker (actor): California $3.6 million tax lien
Congress Considers "Botax" -- 10% Tax on Plastic Surgery to Fund Health Care Reform
ABA Dismisses Complaints Over DePaul's Funding of Law School, Firing of Dean
In today's Chicago Tribune: DePaul Law School Complaints Fall Flat With ABA; Tiff Over Dean's Firing, Funding Goes Nowhere:
Concerns over the financial affairs at DePaul University's law school -- first raised by the law-school dean who was later fired -- will not affect its status as an accredited institution. The university released a report Monday from the ABA, the accreditation agency for law schools, that concluded the central administration provides sufficient funds to the law school. ...
DePaul spokeswoman Denise Mattson said the ABA came to the "conclusions we anticipated." She added: "It should put to rest any issues that distract from the excellent work of our faculty, students and specialty centers and institutes for which DePaul is so well respected." ...
The ABA's standard on finances broadly states that the resources of a law school shall be adequate to sustain a "sound program." The accreditation committee found that the law school is in compliance with its standard and that Weissenberger's letter had not raised any additional issues, according to its report dated July 23.
Hat Tip: Law School Headlines, ABA Shrugs at Former DePaul Law School Dean’s Complaint.
Cooper: Ghosts of 1932 -- The Lost History of Estate and Gift Taxation
Jeffrey A. Cooper (Quinnipiac) has posted Ghosts of 1932: The Lost History of Estate and Gift Taxation on SSRN. Here is the abstract:
In 1932, the United States confronted a bleak economic landscape. Amid the financial carnage caused by the 1929 stock market crash and the ensuing Great Depression, economic activity had ground to a halt, tax revenues had plunged, and the nation’s debt had soared. The declining government revenues and soaring debt threatened both the viability of American industry and the nation’s credit rating. Congress took bold action that year, enacting a massive tax bill (“the Revenue Act of 1932”) designed to balance the federal budget without further stifling economic growth.
As has been true through nearly a century of tax legislation, Congress included estate and gift taxes as a component of the Revenue Act of 1932. The architects of these estate and gift tax provisions made a number of crucial legislative choices, implicating issues of tax policy that remain as relevant today as they were some eighty years ago. Yet, histories of American taxation typically devote frustratingly little analysis to the specific estate and gift tax provisions included in the Revenue Act of 1932. As such, despite their continued relevance, the details of key decisions, and the motivations of those who made them, effectively have been lost to history.
In this paper, I seek to reclaim this lost history of estate and gift taxation. While the ensuing analysis certainly will enable us to more fully appreciate the events of 1932 and evaluate the actions Congress took in that fateful year, my inquiry is not of mere historical interest. Rather, the choices made in 1932 have helped shape the fundamental structure of U.S. estate and gift taxation for nearly eight decades, including our modern estate and gift tax code. As such, understanding the events of 1932 can help us to understand why our estate and gift taxes operate the way they do as well as help inform future debate about the optimal structure of our wealth transfer tax system.
The Political Economy of Sin Taxes
Markus Haavio (University of Helsinki, Department of Economics) & Kaisa Kotakorpi (University of Tampere, Department of Economics) have posted The Political Economy of Sin Taxes on SSRN. Here is the abstract:
We analyse the determination of taxes on harmful goods when consumers have self-control problems. We show that under reasonable assumptions, the socially optimal corrective tax exceeds the average distortion caused by self-control problems. Further, we analyse how individuals with self-control problems would vote on taxes on the consumption of harmful goods, and show that the equilibrium tax is typically below the socially optimal level. When the redistributive effects of sin taxes are taken into account, the difference between the social optimum and equilibrium is small at low levels of harm, but becomes more pronounced when consumption is more harmful.
Henry Louis Gates' Tax Problem
From Inside Higher Ed:
A foundation created and led by Henry Louis Gates Jr. is amending its federal tax form after questions were raised about $11,000 paid to foundation officers -- funds that the original tax form called research grants, but that should have been classified as compensation, ProPublica reported. When the payments are accounted for accurately, the foundation's administrative expenses will account for 40% of its spending in 2007, not 1% as originally reported to the IRS. Gates created the Inkwell Foundation with the goal of supporting work on African and African-American literature, history and culture, the article said. The report by ProPublica also noted that some of the actual grants went to people close to Gates. Gates told ProPublica that the foundation's second-largest grant, for $6,000, went to his fiancée, Angela DeLeon,. DeLeon was formerly on the foundation board and Gates said he recused himself from a vote on the grant. A grant of $500 went to Evelyn Higginbotham, chair of the foundation's board and chair of Harvard University's Department of African and African-American studies. Gates said she didn't vote on the grant. ProPublica is an organization that conducts investigative journalism. The article noted that Gates -- the Harvard scholar who is a leading figure in African-American studies whose arrest at his home has set off a national debate about the way black men are treated by law enforcement -- also serves on ProPublica's board.
2010 Princeton Review's Best 371 Colleges
The Princeton Review yesterday released The Best 371 Colleges – 2010 Edition. According to the press release, the book contains 62 rankings based on surveys completed by 122,000 students at the 371 schools (325 per school), including these ten categories
- Best (Pomona) classroom experience
- Best (Davidson) and worst (U.S. Merchant Marine Academy) professors
- Most (Brown) and least (U.S. Merchant Marine Academy) happy students
- Students study the most (Cal-Tech) and least (West Virginia)
- Most (Swarthmore) and least (NYU) financial aid
- Most (CUNY-Baruch) and least (Providence) diverse student body
- Most (NYU) and least (Wheaton) accepting of alternative lifestyles
- Most (Thomas Aquinas) and least (Bennington) religious
- Biggest (Penn State) and least (BYU) party schools
- Most (UC-Santa Cruz) and least (BYU) marijuana on campus
- Most (Mississippi) and least (BYU) hard liquor on campus
- Most (Penn State) and least (BYU) beer on campus
- Most liberal (Warren Wilson) and most conservative (Texas A&M) schools
- Best (Harvard) and worst (Clarkson) library
- Best (Virginia Tech) and worst (U.S. Merchant Marine Academy) food
- Best (Smith) and worst (Hampton) dorms
- Jock Schools (Clemson) and Dodgeball Targets (Sarah Lawrence)
Markel & Polsky: Taxing Punitive Damages
In this article, we address the important but astonishingly under-examined issues associated with the taxation law and policy related to punitive damages. For the most part, the tax consequences of punitive damages are not on anyone’s minds, and as a result of this blind spot, plaintiffs and their lawyers are likely leaving enormous amounts of money on the table in every case involving punitive damages against defendants whose torts occurred in the context of business operations. Of course, even if we assumed that decision-makers regarding punitive damages were aware of the relevant tax effects, there are still a number of other important issues affecting whether a jurisdiction should make punitive damages a) deductible from defendants’ gross income or non-deductible, and b) taxable gains to the plaintiff.
This Article examines those issues, and by doing so, spotlights the policy difficulties associated with trying to use tax law to help achieve the goals of current punitive damages law. Contrary to a number of scholars who have flatly endorsed the move to a non-deductibility rule to simply increase the putative “sting” of punitive damages, we explain what that change in taxation would augur for a broad array of policy concerns including federalism, settlement incentives, collusion against third parties, and administrative oversight. Although it is not without its own problems, we suggest that a tax-aware decision-maker might better gross-up the damages to take account of one’s marginal tax rate rather than simply make the punitive damages non-deductible. Moreover, because we think a lot of the difficulties associated with the taxation of punitive damages cannot be readily fixed simply by tweaking tax law, we sketch out in the last two parts of the Article a vision for what a more attractive punitive damages regime would look like, and how the tax rules would correspond appropriately.
Tennessee Supreme Court Holds "Crack Tax" Unconstitutional
I previously blogged the Tennessee Court of Appeals' decision invalidating the state's "Crack Tax" (an excise tax on marijuana and cocaine dealers, not on plumbers). A divided (3-2) Tennessee Supreme Court on Thursday affirmed the decision, thus holding the law unconstitutional as applied to Steven Waters who was found with 1,000 grams of cocaine. Waters v. Farr, No. E2006-2225 (Tenn. July 24, 2009).
- Supreme Court Majority Decision
- Supreme Court Dissenting Opinion
- Supreme Court Press Release
- Associated Press
- Sentencing Law & Policy
Senate Committee Unanimously Approves Wilkins Nomination to be IRS Chief Counsel
William J. Wilkins of Washington, DC has been a partner in the Tax Practice Group of Wilmer Cutler Pickering Hale and Dorr LLP (also known as WilmerHale) since 1988. He has a broad tax practice that includes counseling nonprofit organizations, business entities, and investment funds on tax compliance, business transactions, and government investigations. Prior to joining WilmerHale, Wilkins was Staff Director and Chief Counsel of the United States Senate Committee on Finance. Wilkins joined the Democratic staff of the Committee in 1981 and served as tax counsel before becoming Staff Director and Chief Counsel in 1987. Prior to joining the Finance Committee staff, Wilkins was an associate with King & Spalding in Atlanta, GA. Wilkins is Chair of the Section of Taxation of the American Bar Association, the nation’s largest association of tax lawyers. He has been active in the Section for many years, having previously served as Section Vice-Chair and as Chair of two Section Committees. He has previously served on the governing boards of the American College of Tax Counsel and the American Tax Policy Institute. Wilkins is a graduate of Yale University and Harvard Law School.
July 27, 2009
$2m Tax Malpractice Suit Filed Against Buchanan Ingersoll
Bainbridge: Kill UC-Irvine Law School
From Stephen Bainbridge (UCLA):
The University of California's budget problems are well documented. The system has to cut $813 million. The administration and Regents have decided to do so by a draconian combination of faculty and staff furloughs, programs cuts ...
The California Postsecondary Education Commission did an exhaustive review of the proposal to open the UCI law school. They concluded that a law school at Irvine was not necessary... Unfortunately, the proposal was nevertheless approved back in 2006 by the regents and the legislature. ...
In 2006, California did not need a fifth public law school. We certainly didn't need one in Irvine, when much of the growth in UC admissions is in places like Riverside. Today, ... we simply can't afford Irvine's law school.
Odds are, with the California economy doing even worse than the nation as a whole, we have even less need for extra lawyers than we did when the Commission rejected the Irvine proposal back in 2006. I'm firmly convinced that UC Berkeley and UCLA will come out of the current troubles in excellent shape. We have great alumni whose support continues to grow despite the economy. But I see no reason for the state to spend a dime on Irvine. Kill it now and put the money to better use, such as helping reverse some of the cuts to undergraduate education.
CRS: Tax Havens
Open CRS has released a new Congressional Research Service report, Tax Havens: International Tax Avoidance and Evasion (R40623) (July 9, 2009). Here is the summary:
The federal government loses both individual and corporate income tax revenue from the shifting of profits and income into low-tax countries, often referred to as tax havens. The revenue losses from this tax avoidance and evasion are difficult to estimate, but some have suggested that the annual cost of offshore tax abuses may be around $100 billion per year. International tax avoidance can arise from large multinational corporations who shift profits into low-tax foreign subsidiaries or wealthy individual investors who set up secret bank accounts in tax haven countries. Recent actions by the Organization for Economic Cooperation and Development (OECD) and the G-20 industrialized nations have targeted tax haven countries, focusing primarily on evasion issues. There are also a number of legislative proposals that address these issues including the Stop Tax Haven Abuse Act (S. 506, H.R. 1265); draft proposals by the Senate Finance Committee; two other related bills, S. 386 and S. 569; and a proposal by President Obama. Multinational firms can artificially shift profits from high-tax to low-tax jurisdictions using a variety of techniques, such as shifting debt to high-tax jurisdictions. Since tax on the income of foreign subsidiaries (except for certain passive income) is deferred until repatriated, this income can avoid current U.S. taxes and perhaps do so indefinitely. The taxation of passive income (called Subpart F income) has been reduced, perhaps significantly, through the use of hybrid entities that are treated differently in different jurisdictions. The use of hybrid entities was greatly expanding by a new regulation (termed check-the-box) introduced in the late 1990s that had unintended consequences for foreign firms. In addition, earnings from income that is taxed can often be shielded by foreign tax credits on other income. On average very little tax is paid on the foreign source income of U.S. firms. Ample evidence of a significant amount of profit shifting exists, but the revenue cost estimates vary from about $10 billion to $60 billion per year. Individuals can evade taxes on passive income, such as interest, dividends, and capital gains, by not reporting income earned abroad. In addition, since interest paid to foreign recipients is not taxed, individuals can also evade taxes on U.S. source income by setting up shell corporations and trusts in foreign haven countries to channel funds. There is no general third party reporting of income as is the case for ordinary passive income earned domestically; the IRS relies on qualified intermediaries (QIs)who certify nationality without revealing the beneficial owners. Estimates of the cost of individual evasion have ranged from $40 billion to $70 billion. Most provisions to address profit shifting by multinational firms would involve changing the tax law: repealing or limiting deferral, limiting the ability of the foreign tax credit to offset income, addressing check-the-box, or even formula apportionment. President Obamas proposals include a proposal to disallow overall deductions and foreign tax credits for deferred income and restrictions on the use of hybrid entities. Provisions to address individual evasion include increased information reporting, and provisions to increase enforcement, such as shifting the burden of proof to the taxpayer, increased penalties, and increased resources. Individual tax evasion is the main target of the proposed Stop Tax Haven Abuse Act and the Senate Finance Committee proposals; some revisions are also included in President Obamas plan.
Morality and Charlie Rangel’s Taxes: It’s Much Easier to Raise Taxes If You Don’t Pay Them
Editorial in today's Wall Street Journal: Morality and Charlie Rangel’s Taxes: It’s Much Easier to Raise Taxes If You Don’t Pay Them:
Ever notice that those who endorse high taxes and those who actually pay them aren’t the same people? Consider the curious case of Ways and Means Chairman Charlie Rangel, who is leading the charge for a new 5.4-percentage point income tax surcharge and recently called it “the moral thing to do.” About his own tax liability he seems less, well, fervent. ...
The House Ethics Committee is investigating Mr. Rangel on no fewer than six separate issues, including his failure to report the no-interest loan on his Punta Cana villa and his use of rent-stabilized apartments. It is also investigating his fund raising for the Charles B. Rangel Center for Public Service at City College of New York. New York labor attorney Theodore Kheel, one of the principal owners of the Punta Cana resort, is an important donor to the Rangel Center. ... We thought we’d summarize it now for readers who are confronted with the prospect of much higher tax bills, and who might like to know how a leading Democrat defines “moral” behavior when the taxes hit close to his homes.
Call for Tax Papers: Central States Law Schools Association
The Central States Law Schools Association has issued a call for papers for its Annual Conference on October 23-24, 2009 at Capital University Law School in Columbus, Ohio:
The purpose of CSLSA is to foster scholarly exchanges among law faculty across legal disciplines. The annual CSLSA conference is a forum for legal scholars, especially more junior scholars, to present working papers or finished articles on any law-related topic in a relaxed and supportive setting where junior and senior scholars from various disciplines are available to comment. More mature scholars have an opportunity to test new ideas in a less formal setting than is generally available for their work.
It is anticipated that the conference will be organized into topical panels on a variety of subjects. For those who are interested, we hope to expand the mentorship program started last year, pairing interested junior scholars with more senior mentors in their fields of expertise to provide feedback on their presentations or papers. Although CSLSA is a regional association, faculty from other law schools also have participated in the annual conference from as far away as Boston, Florida and Oregon.
In keeping with tradition, CSLSA is able to pay for one night’s lodging and meals for presenters from member schools. There is no registration fee. This year’s program will also include a panel discussion for those who are interested on Furthering Your Scholarly Agenda Through Nontraditional Means – Getting Your Ideas Out of the Ivory Tower. Bradley A. Smith (Capital), former Chairman of the Federal Election Commission, will provide the keynote address.
A block of rooms has been reserved for the conference at the Renaissance Hotel in Downtown Columbus, three blocks from the hotel under the group name of Central States Law Schools, group number 1-WJT84T.
If you have any questions about this conference, contact any of our officers:
- President (and Tax Prof) Danshera Cords (Capital)
- Vice President Gregory Gordon (North Dakota)
- Secretary Jelani Jefferson Exum (Kansas)
- Treasurer (and Tax Prof) Carolyn Dessin (Akron)
To allow scheduling of the conference, please send abstract or précis of no more than 500 words to Danshera Cords by August 31, 2009; earlier statements of interest would be helpful. Every effort will be made to accommodate all interested participants.
Livingston: Rahm Emanuel and the Future of Law Schools
Rahm Emanuel has said that one should never waste a crisis, and the powers that be in American law schools appear to be taking this to heart. Every day or two, there is a new comment to the effect that the "gravy train" is over for law professors, who will hereon out have to earn their keep like everyone else in an increasingly harsh society. Paul Caron, the author of TaxProf blog, talks about the need to apply "MoneyBall" principles to law professors. JoAnne Epps, dean at Temple, says they need to reduce theory and focus on practical training. Students, understandably frustrated by an awful job market, are if anything more hostile.
Since I teach at a middle- (OK, upper middle-) range law school, and make less money than anyone I went to law school with, I'm not quite sure what gravy train people are talking about. But I have a strong feeling of deja vu, together with a sneaking suspicion that--as Mr. Emanuel's remark suggests--a lot of people are using the economic crisis to push policies that they would have supported in any event. More specifically:
- I simply don't buy, and have never bought, the "practical lawyering" argument. At least 90% of law school is devoted to teaching practical subjects, with pure theory relegated to a few advanced seminars. The difference is that the better law schools, like the better schools in any profession, try to emphasize difficult, cutting edge issues rather than easy or safe ones, and to hire professors who are cutting-edge thinkers rather than local practitioners looking for an easier life....
- The American university, for all its faults, remains unquestionably the world leader, precisely because of its intellectual creativity and willingness to invest resources in long-term projects. By contrast, American law firms (and much of American business) have adopted a short-term, "eat what you kill" philosophy that has come close to bankrupting the country on a financial and a moral level. For the law firms to tell the universities "Be more like us" is at best unconvincing and at work incredible chutzpah.
- The actual policies that result from the hard-nosed, "moneyball" approach to law school--i.e., more centralized management, the increasing reliance on adjuncts and other nontenured faculty (why pay someone $150,000 a year when you can cover their classes with part-timers at one third the cost?), and eventually a full-blown assault on the tenure system and the concept of faculty independence/faculty governance altogether--are, conveniently, precisely what university managers have been trying to implement for several years before the crisis, anyway. ... What I think is really happening is that the crisis is re-dividing American law schools--not to say the entire country--into "have" and "have not" categories, with the "haves" continuing to operate on the research-driven, independent-faculty concept and the "have nots" facing increasing pressure to adopt a low-wage, centrally managed, essentially trade school model. The none-too-thinly-disguised message to students at these latter schools is to give up on asking difficult questions and accept their role as cogs in a soulless money-making, or at this point money-losing, machine. The economic crisis will eventually pass, but that damage resulting from this conformist and mediocre view of legal education may be more difficult to clean up.
Maule: Student Focus
I am going to share the portion of my first-day overview in all of the courses I teach that I call "student focus." In short, it is my explanation to students of what I expect from them, and why I expect from them what I expect. It is not limited to tax courses, and I know that because I have taught courses other than tax courses. With some modification, it ought to be beneficial in any law course, or, for that matter, in any course in any discipline.
I break the student focus explanation into five parts. First, I talk about pre-class preparation. Second, I discuss what happens, or should happen, during class. Third, I talk about post-class assimilation. Fourth, I discuss how their efforts will be scored and graded. Fifth, I share some ideas about ways in which they can make their responsibilities easier to meet, and in an efficient manner. Each of these segments addresses several points, and I intend to work through these as this series of posts progresses.
- Pre-class Preparation
- How the Inherent Flaw in the Law School Learning Process Makes Preparation More Difficult
- In-class Learning Methods
- Discouraging the Transcription Game
- Post-class Assimilation
- Helping Students Assimilate
- Describing the Examination
- The Other 1/3 of the Final Course Grade
- Hints for Students
- Breaking Down the Course and the Analysis
- Hammering Home the Conclusion
Rosenzweig: Imperfect Financial Markets and the Hidden Costs of a Modern Income Tax
Adam H. Rosenzweig (Washington University) has published Imperfect Financial Markets and the Hidden Costs of a Modern Income Tax, 62 SMU L. Rev. 239 (2009). Here is the abstract:
The news has been filled with stories of meltdowns in the financial world, with the government, independent agencies, and politicians all devoting significant time and energy to coping with the consequences. As investment banks, hedge funds, and mortgage lenders continue to suffer massive losses, the government and its agents are left to try to pick up the pieces. Among other options being discussed, the government has proposed buying up illiquid assets of such investors, in effect betting on the price of illiquid mortgage securities. But what if, in addition to these more transparent problems, additional hidden costs from the financial crisis were being borne by the government in some other way? Even worse, what if the government had implicitly underwritten some of them in the first place? Building on insights from recent finance literature, this article contends that the government could in fact bear such hidden costs, through the interaction of a unique and underappreciated aspect of publicly traded financial derivatives -- the ability to "decouple" the economic return of a risky asset from direct ownership of the underlying asset itself - and an income tax on risky investments. Under relatively conservative assumptions, such an analytical approach can produce a surprising result: the imposition of a facially neutral income tax can actually serve to subsidize speculators in financial derivatives, both in the model and as extrapolated to the real world. More specifically, an income tax in a world with imperfect financial markets can result in incentives to speculators to impose excessive amounts of liquidity risk on the markets, and the economy as a whole, with the government ultimately bearing the cost.
These conclusions demonstrate the urgent need for a more comprehensive approach to financial derivative markets than has traditionally been undertaken, expanding the analysis beyond particular transactions to incorporate markets, traders, speculators, and investors more broadly. This article does so by proposing the adoption of a derivatives trading tax, not as a supplement to or replacement for, but rather as an integral part of, the income tax regime. Such a tax would not only offset the costs of imperfect financial markets borne by the government through the income tax, but could also ameliorate the suboptimal excess risk in the financial markets in the first place. Addressing such problems in this manner falls distinctly to the legal community, precisely because crafting the institutions and mechanisms necessary to equitably and efficiently allocate the costs and benefits of society is itself an inherently legal undertaking. Doing so may prove challenging, but it is a challenge to which the legal academy must rise for a comprehensive solution to be achieved.
TaxProf Blog Weekend Roundup
- Back Home in Cincinnati
- IRS Agent Indicted for Steering Delinquent Taxpayers to Mortgage Company for Refinancing
- Costanza and the Tax Treatment of SCINs Canceled by Death
- Top 5 Tax Paper Downloads
- Going Concern: A New Accounting/Finance Blog
- How Tax Abuse Threatens Land Conservation
July 26, 2009
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:
1. [297 Downloads] The Obama International Tax Plan: A Major Step Forward, by Reuven S. Avi-Yonah (Michigan)
2. [215 Downloads] Recent Developments in Federal Income Taxation: The Year 2008, by Martin J. McMahon, Jr., (Florida), Ira B. Shepard (Houston) & Daniel L. Simmons (UC-Davis)
5. [100 Downloads] Review of Federal Income Taxation of Estates and Beneficiaries, by Ronald H. Jensen (Pace)
Going Concern: A New Accounting/Finance Blog
Going Concern is an online tabloid covering the worlds of accounting and business finance. The site provides original news and insider analysis of the culture, people, and firms that shape the industry.
Judging by the success of its sister blog Above the Law, Going Concern promises to be an important voice in the accounting/finance blogosphere. Check out their coverage of a recent TaxProf Blog post, IRS Burns Kirk Herbstreit's Donation of Home to Fire Department, in IRS Doesn’t Care for Kirk Herbstreit Burning Down His Own House.
How Tax Abuse Threatens Land Conservation
Erin B. Gisler (J.D. 2009, Santa Clara) has published Comment, Land Trusts in the Twenty-First Century: How Tax Abuse and Corporate Governance Threaten the Integrity of Charitable Land Preservation, 49 Santa Clara L. Rev. 1123 (2009). Here is part of the Introduction:
This comment explores the pivotal role of land trusts in the conservation boom and in upholding the integrity of land conservation. Part II provides a background of land trusts and their functions; it also reviews how land conservation and land trusts became popular as a result of statutory changes in federal tax law, and how such popularity has encouraged even more pro-conservation legislation. Part III presents one of the major threats to the conservation movement: tax abuse. Part IV analyzes this problem from the viewpoint of individual landowners seeking hefty income tax deductions and discusses how land trusts, and The Nature Conservancy in particular, can lose sight of their missions to conserve by engaging in unethical, profit-motivated behavior. Part V's proposal suggests a number of methods all parties involved in land conservation can implement to adhere to ethical and responsible standards.
July 25, 2009
Back Home in Cincinnati
Although I loved my seven weeks in San Diego, it's wonderful to be back home with my family in Cincinnati. I feel blessed to have the opportunity to teach at two great law schools -- the University of Cincinnati and the University of San Diego are very different (small, public, secular v. large, private, Catholic), but they are remarkably similar in having terrific deans, superb faculties, talented students, fantastic staffs, and excellent libraries. In addition, San Diego has a well-deserved reputation as "America's Finest City," and Cincinnati is a fantastic place to live and raise a family. We knew we were called to be here when my wife found out she was pregnant with our first child the morning of my interview with Cincinnati at the meat market. It was cool to return this week to a recent New York Times profile of Cincinnati, along with our church's great message (God Loves Cincinnati), video (What We Love), and song (I Love My City).
IRS Agent Indicted for Steering Delinquent Taxpayers to Mortgage Company for Refinancing
Mark Claybrooks, 41, an IRS agent in Walnut Creek, California, has been indicted on charges that he urged delinquent taxpayers to get the money needed to pay their tax bills by refinancing their home mortgages with a mortgage company. Mr. Claybooks is alleged to have received $20,000 from the mortgage company for two referrals.
Costanza and the Tax Treatment of SCINs Canceled by Death
Gadi Zohar (J.D. 2010, Santa Clara) has posted Got Premium? Costanza v. C.I.R. and the Tax Treatment of Intrafamily SCINs Canceled by Death on SSRN. Here is the abstract:
In 2003, the Sixth Circuit overturned a Tax Court determination that the self-canceling installment note (SCIN) created by Duilio Costanza and his son, Michael, was a gift because it lacked the features of an arms-length transaction. It is the author's assertion that 1) the Sixth Circuit overstepped its standard of review, and 2) both courts were lacking in an analysis of the most important evidence of a bona fide transaction: the consideration. Consideration for the transaction should have included a premium accounting for the risk that Duilio would die before the term of the note expired, and that was lacking from the Costanzas' SCIN. Thus, the major theme of this paper is that the premium paid for intrafamily SCINs should be the crux of a court's investigation of such matter. Risk premiums should be jurisdictional, not just suggested as they have been in a number of opinions.
This paper further touches on the tax treatment of SCINs canceled by death, including those incidents when the note is considered a gift due to the absence of a bona fide transaction or adequate and full consideration as well as the income tax treatment of the note when the transaction is considered legitimate, but canceled by death nevertheless. Lastly, this paper evaluates scenarios when SCINs may be contraindicated, including some possible forthcoming changes in tax law.
July 24, 2009
Farewell, San Diego!
This is a bittersweet day for me, as I leave San Diego after seven weeks to return home to Cincinnati. This was my sixth summer teaching at the University of San Diego School of Law, my first as the Herzog Summer Visiting Professor in Taxation. My thanks to the kind folks at USD for having me back again, and to my 65 Tax I students who worked so hard (and explained to me who Lady Gaga is). San Diego is truly "America's Finest City". But even more enjoyable has been renewing acquaintances with the many friends we have made over the years here.