September 30, 2009
Top 100 Most Influential People in Tax and Accounting
I am honored to be included on the list of Accounting Today's Top 100 Most Influential People for the fourth year in a row. The magazine contains one-sentence explanations of why each of the folks made the list; here is mine:
Caron has built the leading tax blog on the Internet, with over 10 million page views since he created it in 2004.
I am flattered to be on the list with such high-powered people in the tax and accounting worlds, including:
Government and Industry Group Officials:
- Robert Attmore (Chair, GASB)
- Ben Bernanke (Chair, Federal Reserve System)
- Timothy Geithner (Secretary of the Treasury)
- J. Russell George (Treasury Inspector General for Tax Administration)
- Robert Harris (Incoming Chair, AICPA)
- Karen Hawkins (Director, IRS Office of Professional Responsibility)
- Robert Herz (Chair, FASB)
- James Kroeker (Chief Accountant, SEC)
- Barry Melancon (President & CEO, AICPA)
- Nina Olson (National Taxpayer Advocate, IRS)
- Thomas Sadler (Chair, NASBA)
- Mary Schapiro (Chair, SEC)
- Douglas Shulman (Commissioner, IRS)
- David Tweedie (Chair, IASB)
- Edward Yingling (Chair, ABA)
CEOs of Major Accounting Firms:
- Timothy Flynn & John Veihmeyer (KPMG)
- Robert Moritz & Dennis Nally (PriceWaterhouseCoopers)
- Edward Nusbaum (Grant Thornton)
- James Quigley & Barry Salzberg (Deloitte)
- James Turley (Ernst & Young)
CEOs of Tax & Accounting Companies & Publishers:
- Jonathan Baron (Thomson Reuters Tax & Accounting)
- Kevin Robert (Wolters Kluwer)
- Mike Sabbatis (CCH)
- Brad Smith (Intuit)
- Russ Smyth (H&R Block)
California Commission Proposes Dramatic Tax Reform
- Reduce Personal Income Tax (PIT) for every taxpayer – Reduce the number of tax brackets from six to two. The new tax rate would be 2.75% for taxable income up to $56,000 for joint filers ($28,000 for single) and 6.5% for taxable income above that amount. These changes would retain the PIT’s progressive nature but reduce income tax rates for all taxpayers. The proposal would reduce the amount of income tax paid by 29%.
- Eliminate the corporation tax and minimum tax – Eliminate the corporate tax, which is currently at 8.84%. The $800 minimum franchise tax should also be eliminated.
- Eliminate the state general purpose sales tax – Eliminate the current 5% state sales tax, with the exception of the sales tax on gas and diesel fuels which would continue to be dedicated to transportation. Elimination of the sales tax would phase in over five years.
- Establish a business net receipts tax (BNRT) – Establish a new tax, not to exceed 4%, applied to the net receipts of businesses. Small businesses with less than $500,000 in gross annual receipts would be exempt from this tax. This tax would have a much broader base than the sales tax (since it would apply not only to goods but also to services and to sales into the state from businesses located outside the state) and, unlike the sales tax, be deductible against federal taxes.
- Create an independent tax dispute forum – This forum would provide taxpayers with a forum for resolving disputes with the state.
- Strengthen the state’s Rainy Day Reserve Fund – Increase the target for the reserve from 5% of revenues to 12.5% and restrict the government's ability to use reserve assets so that the reserve is available to help fund services during recessionary periods.
Press and blogosphere coverage:
- Americans for Tax Reform, California's Special Tax Commission Proposes Significant Reform
- Associated Press, Schwarzenegger Wants Fast Action on Tax Overhaul
- Bloomberg, California Panel Eyes Income Tax Cut, New Company Tax
- Los Angeles Times, Schwarzenegger Seeks Overhaul of State Tax System
- Sacramento Bee, Q&A: How Schwarzenegger-Backed Tax Plan Would Affect Californians
- San Francisco Chronicle, Commissioner Proposes Dramatic State Tax Overhaul
- Tax.com: A California VAT: Sweeping Reform for a Troubled State, by Martin A. Sullivan
- Wall Street Journal editorial, A California Quake
- Wall Street Journal op-ed, How California Can Get Its Groove Back, by Michael J. Boskin & John F. Cogan (both of the Hoover Institution)
A Seating Chart Tee Shirt
As one who has difficulty learning my students' names each year, I may follow the approach Jack Bogdanski (Lewis & Clark) has taken this fall with his Income Tax class:
State Tax Revenues Plummet 17%
Wall Street Journal, Falling Tax Revenues Slam States, by Conor Dougherty:
State tax revenues in the second quarter plunged 17% from a year earlier as rising unemployment and reduced spending hurt sales- and income-tax collections, according to Census Bureau figures released Tuesday.
The decline was the sharpest since at least the 1960s. The biggest drop among major revenue sources was in state income taxes, which were down 28% from a year ago. Sales-tax revenues fell 9%. About two-thirds of state revenues are derived from sales and income taxes. The numbers aren't adjusted for inflation or changes in tax rates. ...
States across the country saw big declines in personal income taxes, the largest single source of state funding, representing about a third of states' overall revenues. Eleven states -- including California, New York and Wisconsin -- saw personal income taxes fall more than 30%.
Schwidetzky: Integrating Subchapters K and S
The Code contains two “pass-through” tax regimes for business entities. One is contained in Subchapter K, which applies to partnerships, the other in Subchapter S, which, unsurprisingly, applies to S corporations. In the main, both Subchapters tax the owners of the entities rather than the entities themselves. Having two pass-through tax regimes creates obvious administrative and other inefficiencies. There was a time when S corporations served a valuable purpose, particularly when taxpayers needed a fairly simple and foolproof pass-through entity that provided a liability shield. But limited liability companies (LLCs), which are usually taxed as partnerships, in most contexts make S corporations obsolete. LLCs too can be fairly simple and foolproof, while providing the superior tax benefits of the partnership provisions of Subchapter K. The advent and popularity of LLCs means that the inefficiency created by two separate pass-through tax regimes can no longer be justified. I propose that a new pass-through regime be created that retains Subchapter K and incorporates the best parts of Subchapter S, with the balance of Subchapter S repealed. Integrating these two pass-through regimes requires that some changes be made to the C corporation provisions of Subchapter C as well. I also make Subchapter K available to most nonpublic C corporations, putting most closely held businesses on a level playing field.
Taxes and Health Care Reform
FactCheck.org, RNC Tax Attack Goes Too Far:
The Republican National Committee claims in a new Web ad that Democratic health care plans propose taxes on "charities and small businesses. A doctor’s tax. Taxes on your health insurance. Even a tax on medical supplies."
It’s perfectly true, as the ad says, that "hundreds of billions" in taxes are being proposed – spread over 10 years. But the ad exaggerates and misleads in a number of ways:
- It makes a downright false claim that ordinary wheelchairs would be among "medical supplies" subject to a proposed tax on manufacturers and importers. That’s not true: Wheelchairs and roughly half of all other medical devices would be exempt. (When we pointed this out, an RNC official said the ad would be modified, however.)
- It features a proposed tax on medical laboratory services that has already been dropped.
- The alleged tax on "charities" is actually a proposed limit on federal income tax deductions for charitable gifts by individual taxpayers in the highest brackets, not a tax levied directly on the charities themselves.
- Similarly, the "small business" tax also refers to a proposed tax increase on individuals making more than $280,000 a year ($350,000 for families), only some of whom own small businesses. The vast majority of small-business owners don’t bring in enough to be affected.
Live Webcast of Today's Volcker Tax Reform Panel Meeting
The Administration wanted a report on options for tax reform from an outside group so they asked the PERAB to take on the role. The PERAB is comprised of industry and labor representatives, and academic experts and is chaired by Paul Volcker. It is made up of voices from outside the government. The tax subgroup's focus is on gathering as many ideas and options as possible and identifying the pros and cons of each option in three specific areas:
- Tax code simplification
- Corporate tax reform
The materials gathered and compiled by the tax group will be presented to the full PERAB board and discussed at a future PERAB meeting. The final report that the board puts forward in December will not be a recommendation of a specific direction in tax policy. It will present a view of the pros and cons of different options. It will be an important step in the process of studying the many ways we can reform and improve our tax code.
It will not represent the view of the administration. The PERAB is an advisory group representing a wide range of viewpoints from outside the administration and we expect the options it presents to represent a range of views and opinions on tax reform.
Everyone knows that tax reform is a complicated undertaking. In preparation for this series of public meetings, the members of the tax subgroup have spent the last several months familiarizing themselves with the options already out there, through individual conversations with experts from academia and the tax field, members of Congress and members of the Administration.
The PERAB and the administration both want the public to provide their insight, ideas and comments to help educate the group and they invite anyone to visit the webpage and submit their own ideas or comment on other proposals. We will also post the tax presentations made by the attendees following the meeting.
I look forward to providing updates on future meetings and seeing the work on various tax reform options that comes out of the PERAB in December.
Does IRS Enforcement Make Health Care Mandate a 'Tax'?
Wall Street Journal editorial, Rhetorical Tax Evasion:
The IRS says it will fine or jail you for not paying Obama's mandate levy.
President Obama's effort to deny that his mandate to buy insurance is a tax has taken another thumping, this time from fellow Democrats in the Senate Finance Committee.
Chairman Max Baucus's bill includes the so-called individual mandate, along with what he calls a $1,900 "excise tax" if you don't buy health insurance. (It had been as much as $3,800 but Democrats reduced the amount last week to minimize the political sticker shock.) And, lo, it turns out that if you don't pay that tax, the IRS could punish you with a $25,000 fine or up to a year in jail, or both.
Under questioning last week, Tom Barthold, the chief of staff of the Joint Committee on Taxation, admitted that the individual mandate would become a part of the Internal Revenue Code and that failing to comply "could be criminal, yes, if it were considered an attempt to defraud." Mr. Barthold noted in a follow-up letter that the willful failure to file would be a simple misdemeanor, punishable by the $25,000 fine or jail time under Section 7203.
So failure to pay the mandate would be enforced like tax evasion, but Mr. Obama still claims it isn't a tax. ... Too bad Mr. Obama's rhetorical tax evasion can't be punished by the IRS.
As the Senate Finance Committee took up its version of health care legislation, conservatives ramped up their opposition to a variety of provisions in the bill. One of them touches two hot buttons for conservatives: taxes and the long arm of the federal government.
On Sept. 29, 2009, a subsidiary of the conservative group Americans for Prosperity sent out an e-mail headlined, "Health Care Mandate Will Require Imprisonment and Fines for Americans Who Can’t Afford to Purchase Insurance or Pay Hefty Government Penalties."
The group was referring to an exchange in the Senate Finance Committee between Sen. John Ensign, R-Nev., and Joint Committee on Taxation chief of staff Thomas Barthold on Sept. 24, 2009. ...
It is a significant exaggeration to say that the Baucus bill's "health care mandate will require imprisonment and fines for Americans who can’t afford to purchase insurance or pay hefty government penalties." It won't "require imprisonment and fines" -- those are simply two of the options for enforcement, and experts say that neither a prison term nor a fine anywhere near that high is likely to be used.
The official responsible for the Patients First release acknowledges that his headline overstated what the Joint Committee on Taxation chief of staff said, but the release does accurately report the penalties in the body of the text. The notion that one could go to prison for not buying insurance is certainly attention-grabbing, but based on past patterns of prosecution, the likelihood of it happening is extremely small. So while the fear seems to us to be overheated, the possibility exists, so we rate the statement Barely True.
- IRS The New Health Care Enforcer (8/14/09)
- Taxing Your Mere Existence (8/17/09)
- Health Care Tax Insanity Chronicles, Part 3 (IRS To Decide Amount of Taxation) (8/18/09)
Business Groups Seek Estate Tax Compromise
Following up on last week's post, The Estate Tax Legislative Battle: forty-six business associations joined in a letter to Congress yesterday, abandoning their goal of repealing the estate and instead offering their support for Senator Kyl's proposal for a $5 million exemption ($10 million for married couples) and a 35% rate. President Obama has proposed making this year's law permanent -- a $3.5 million exemption ($7 million for married couples) and a 45% rate.
Waller: Dynamic Taxation, Private Information and Money
The objective of this paper is to study optimal fiscal and monetary policy in a dynamic Mirrlees model where the frictions giving rise to money as a medium of exchange are explicitly modeled. The framework is a three period OLG model where agents are born every other period. The young and old trade in perfectly competitive centralized markets. In middle age, agents receive preference shocks and trade amongst them- selves in an anonymous manner. Since preference shocks are private information, in a record-keeping economy, the planner’s constrained allocation trades off efficient risk sharing against production efficiency in the search market. In the absence of record-keeping, the government uses flat money as a substitute for dynamic contracts to induce truthful revelation of preferences. Inflation affects agents’ incentive constraints and so distortionary taxation of money may be needed as part of the optimal policy even if lump-sum taxes are available.
ABA Tax Section Webcast Today on Tax-Exempt Bonds & Green Energy
The ABA Tax Section offers a teleconference and webcast today on Public and Private Municipal Financing of Renewable Energy Projects and Green Expenditures from 1:00 - 2:30 p.m. EST:
This teleconference will explore the various ways municipal bonds can be utilized in connection with the public and private development of new energy technologies and renewable energy projects. Our panel will identify and discuss the panoply of municipal bonds available to finance the different types of energy facilities including Qualified Energy Conservation Bonds, Qualified School Construction Bonds, Solid Waste Exempt Facility Bonds, Build America Bonds, Recovery Zone Facility Bonds, Cogeneration Exempt Facility Bonds and Recovery Zone Economic Development Bonds etc.
To be complete, the panel will highlight the other tax incentives which may be considered in combination with municipal financing including the production tax credit, investment tax credit, depreciation and expense deductions, as well as guarantee and grant programs.
Our panel will then examine and critically discuss the general tax policy themes behind taxable Build America and Recovery Zone Economic Development Bonds and the various types of tax-credit bonds. Hear our panel further address what municipal finance may likely look like in the future. Will Internal Revenue Code Section 103 be gradually replaced by Code Sections 54 and 54AA?
- Jeremy A. Spector (Partner, Mintz Levin, New York) (moderator)
- Gary W. Bornholdt (Counsel, Nixon Peabody, Washington, D.C.)
- John Buckley (Chief Democratic Tax Counsel, House Ways & Means Committee)
- John J. Cross, III (Associate Tax Legislative Counsel, Office of Tax Policy, U.S. Department of the Treasury)
- Laura Ellen Jones (Partner, Hunton & Williams, Richmond)
- Stanley Langbein (Professor, University of Miami School of Law)
September 29, 2009
Stanford Law Grad-Call Girl Sentenced to Home Confinement Following Guilty Plea in Tax Evasion Case
I previously blogged (here, here, and here) the case of 2001 Stanford Law Grad Cristina Warthen, who pled guilty in January 2009 in California federal district court to failing to pay taxes on $133,717 she earned as a prostitute in 2003 (United States v. Warthen, No. CR-08-682). From today's New York Daily News, Law School Grad Turned Call Girl Cristina Warthen Under House Arrest After Cheating the Government:
Stanford Law School grad turned escort Cristina Warthen, previously Christina Shultz, continues to strut her stuff on the web, despite house arrest after cheating on her taxes. ...
In a plea deal with the government, Warthen has been fitted with an electronic monitoring device while sentenced to one year of home detention, as well as three years' probation. ... In a San Jose, Calif., federal court, U.S. District Judge James Ware forced restrictions on Warthen’s escort advertisements while on probation. According to Mercury News, the restriction on advertisements occurred once Assistant U.S. Attorney David Callaway told Ware that the former escort had posted Internet ads claiming "companionship" for $2,000 a night.
Chorvat Presents The Effect of the Taxation of Risky Income on Investment Behavior Today at Toronto
Terrence Chorvat (George Mason) presents The Effect of the Taxation of Risky Income on Investment Behavior at the University of Toronto today as part of the James Hausman Tax Law and Policy Workshop Series. Here is the abstract:
Domar and Musgrave’s article concerning the effects of a full-loss-offset income tax has been a staple of the public finance literature since 1944. Their model of investor behavior with a full-loss-offset income tax predicts that if a variety of conditions are met, investors should shift their portfolios to higher-risk assets since the government is sharing the risk. Their model assumes that taxpayers are capable of calculating their risk preference under a risk-altering tax structure. Despite the model’s prominent role in the literature, the extent to which its predictions match actual economic behavior has yet to be directly empirically examined. In this paper, we use a laboratory experiment to test the hypothesis that individuals are willing to accept more risk when faced with a full-lossoffset income tax. Preliminary data in this experiment indicate that a symmetrical income tax has either no affect on portfolio allocation or might reduce an investor’s willingness to take on risk. These results imply that the model’s predictions may be reliant on unreasonable assumptions of human behavior.
Tax Court: CPA's Google Search Does Not Constitute Reasonable Cause to Avoid Penalty
The Tax Court yesterday held that a Google search did not constitute reasonable cause to excuse a Harvard MBA/ CPA's failure to properly rollover a $150,000 IRA distribution. Woodard v. Commissioner, T.C. Summ. Op. 2009-150 (Sept. 28, 2009):
Mr. Woodard asks the Court to accept that his research on the Internet using the Google search engine provided him with reasonable cause for the position he took when filing his 2004 Federal income tax return; to wit, not reporting IRA distributions he commingled with other funds by depositing the distributions into his checking account because he later invested those funds in private mortgages. Mr. Woodard has not provided the Court with any information about the sources of the information he found on the Internet.
Good-faith reliance on advice from an independent, competent professional as to the tax treatment of an item may meet the reasonable cause requirement. ... Mr. Woodard claims that he relied on information found on unspecified Web sites written by unidentified individuals or organizations. From the record, it is not clear that he questioned the provenance or accuracy of the information he found through the Google search engine.FN.
FN: We recognize that petitioner had not worked as an accountant for years before filing the 2004 return, but his accounting degree, M.B.A., and C.P.A. training, no matter how stale, undoubtedly taught him what sources could be relied upon as definitive; such as, for example, the Internal Revenue Code and the income tax regulations, both of which are readily available on the Internet.
Without knowing the sources of the information, it is impossible for the Court to determine that those sources were competent to provide tax advice. Accordingly, we cannot conclude that Mr. Woodard exercised ordinary business care and prudence in selecting and relying upon the information he found on line. As a result, we find that he has not shown reasonable cause for failing to report the distributions from his IRA on the 2004 Federal income tax return.
For more, see Joe Kristan.
Larson: Evidence Rules in the Tax Court
Joni Larson (Thomas Cooley) has published Tax Evidence III: A Primer on the Federal Rules of Evidence as Applied by the Tax Court, 62 Tax Law. 555 (2009). Here is part of the Introduction:
This Article surveys the Tax Court’s interpretation and application of the [Federal Rules of Evidence]. The Article does not discuss the application of the Rules by federal district courts, the Court of Federal Claims, or the federal circuit courts of appeals, except to the extent that there is a split of authority in the circuit courts. Appendix A identifies those Rules that have not been addressed or interpreted by the Tax Court in its opinions. Appendix B provides a tabular summary of the Rules most commonly used in the Tax Court and their various foundational requirements.
Judge Drops Charges Against Cop for Oral Sex With Five Calves
Nontax, but too weird to be ignored -- from the Philadelphia Daily News:
[A] Superior Court judge dismissed animal-cruelty charges against a Moorestown police officer accused of sticking his penis into the mouths of five calves in rural Southampton in 2006, claiming a grand jury couldn't infer whether the cows had been "tormented" or "puzzled" by the situation or even irritated that they'd been duped out of a meal
"If the cow had the cognitive ability to form thought and speak, would it say, 'Where's the milk? I'm not getting any milk,' " Judge James J. Morley asked.
Children, Morley said, seemed "comforted" when given pacifiers, but there's no way to know what bovine minds thought of Robert Melia Jr. substituting his member for a cow's teat.
50 State Ranking of Median Real Estate Tax/Median Home Value
Following up on last week's post, 50 State Ranking of Median Real Estate Taxes Paid: several readers commented that they would like to see a 50 state ranking of median real estate taxes paid as a percentge of median home values. From the Tax Foundation [click on chart to enlarge]:
Leviner & Richison: The Role of Paid Preparers in Taxpayer Compliance
Sagit Leviner (Ono Academic College, Israel) & Kyle Richison (IRS Office of Research, Analysis, and Statistics) have posted The Role Paid Preparers Play in Taxpayer Compliance in the United States: An Empirical Investigation with Policy Implications on SSRN. Here is the abstract:
This paper underscores the growing need to shed better light on paid preparers and their effect on the tax system and its administration. The paper undertakes an empirical analysis of U.S. individual tax returns based on (1) tax return characteristics (by line item and type of return), and (2) preparation mode (self or paid prepared return; if paid - whether by lawyer, CPA, enrolled agent or other) as the independent variables. The dependent variable applied is the compliance or noncompliance of these returns. In a second stage of the analysis where noncompliance is found, a taxonomy of the errors identified will be explored to examine whether certain types of errors are associated with the independent factors. By offering a taxonomy of errors and forming a web of associations between these errors and the independent variables, the paper seeks to explore both the motivations behind and facilitators of tax noncompliance as well as the strategies to curb them so as to more effectively foster taxpayer compliance. The analysis draws from 3,457 returns where the taxpayer claimed an Earned Income Tax Credit (EITC) for Tax Year 1999. These returns have all been subject to either face-to-face or correspondence audit and provide a uniquely thorough pool of raw data that is presently unavailable for the general population.
SSRN Tax Professor Rankings
SSRN has updated its monthly rankings of 609 American and international law school faculties and 1,500 law professors by (among other things) the number of paper downloads from the SSRN data base. Here is the new list (through September 18, 2009) of the Top 25 U.S. Tax Professors in two of the SSRN categories: all-time downloads and recent downloads (within the past 12 months):
Note that this ranking includes full-time tax professors with at least one tax paper on SSRN, and all papers (including non-tax papers) by these tax professors are included in the SSRN data.
The other SSRN ranking categories are:
These rankings, of course, are imperfect measures of faculty scholarly performance -- as are the existing ranking methodologies of reputation surveys, productivity counts, and citation counts. Our modest claim in our article, Ranking Law Schools: Using SSRN to Measure Scholarly Performance, 81 Ind. L.J. 83 (2006) (Symposium on The Next Generation of Law School Rankings), is that the SSRN data can play a role in faculty rankings along with these other measures. Bill Henderson (Indiana) thinks we are too modest, and that SSRN may provide a better measure of faculty performance than these other methodologies.
For my recent articles on what SSRN downloads can tell us about the current state and future of legal scholarship, and about the relationship between scholarship and blogging, see:
- The Long Tail of Legal Scholarship, 116 Yale L.J. Pocket Part 38 (2006)
- Are Scholars Better Bloggers? -- Bloggership: How Blogs are Transforming Legal Scholarship, 84 Wash. U. L. Rev. 1025 (2006)
For Ted Seto's faculty-wide (and metropolitan area-wide) analysis of these SSRN tax rankings, see:
Students Save Law Prof's Life
Buffalo News, Compassionate Law Students Overrule Judge and Save His Life:
Seven University at Buffalo Law School students get high grades from State Supreme Court Justice Richard C. Kloch Sr., their professor, not necessarily for legal knowledge but compassion.
Kloch was teaching the students in his trial technique class on an evening about two weeks ago at the Amherst Campus when his left knee started acting up from recent surgery to repair the damaged joint. Unexpectedly, a wave of weakness overtook him and he sat at his desk, hoping to carry on with the class. “I called the class to a halt because of the pain. It was overwhelming. I tried to get up and I couldn’t move. The knee swelled easily to three times its size and got concrete hard,” Kloch said. ...
The judge had wanted to drive himself to the nearest emergency room. “So these students picked me up and carried me outside, commandeered a shuttle bus to drive me to my car on the opposite side of campus,” Kloch recalled during an interview from his bed at Kenmore Mercy Hospital. ...
“But the bus driver said, ‘This man is in no shape to drive himself.’ Then they summoned security and security called an ambulance and I was taken to DeGraff Memorial Hospital,” Kloch, 58, said. At the North Tonawanda facility, doctors sedated him and drained the knee, which was stricken with a fast-moving infection that included a massive clot which could have had catastrophic consequences had it shifted to another section of his body. ...
“I would have never had a chance if it wasn’t for those seven law school students,” said Kloch, overcome with emotion. “Lawyers are supposed to be compassionate, and these future lawyers were compassionate. They did the greatest job for me when they could have walked right out the door.”
(Hat Tip: ABA Journal.)
Galle: The Role of Charity in a Federal System
Brian D. Galle (Florida State) has posted Foundation or Empire? The Role of Charity in a Federal System. Here is the abstract:
This Article critiques the prevailing justification for subsidies for the charitable sector, and suggests a new alternative. According to contemporary accounts, charity corrects the failure of the private market to provide public goods, and further corrects the failure of government to provide goods other than those demanded by the median voter.
However, the claim that government can meet the needs only of a single “median voter” neglects both federalism and public choice theory. Citizens dissatisfied with the services of one government can move to or even create another. Alternatively, they may use the threat of exit to lobby for local change. Subsidies for charity inefficiently distort the operation of these markets for legal rules.
Nonetheless, there remains a strong case for subsidizing charity, albeit on grounds new to the literature. Charity serves as gap-filler when federalism mechanisms break down. For example, frictions on exit produce too little jurisdictional competition, and excessively easy exit produces too much competition -- a race to the bottom. At the same time, competition from government constrains inefficient charities. Thus, charity and government each perform best as complements to the other.
Finally, this Article sketches the normative legal consequences of these claims. Most significantly, I respond to the claims by Malani and Posner that for-profit charity would be superior to current arrangements. That suggestion would fatally weaken competition between charity and government, defeating the only persuasive purpose for charitable subsidies.
NYSBA Releases Tax Reports
The New York State Bar Association Tax Section has issued tax reports on:
- Qualified Intermediary and Related Withholding and Information Reporting Legislation Proposed by the Administration (No. 1089)
- Proposed Modifications to § 6662 Penalty in America's Affordable Health Choices Act of 2009 (No. 1090)
- Temporary and Proposed Regulations Regarding All-Cash Acquisitive D Reorganizations (No. 1091)
Lefcoe: Curbing TIF-Driven Economic Development After Kelo
George Lefcoe (USC) has posted After Kelo, Curbing Opportunistic TIF-Driven Economic Development: Forgoing Ineffectual Blight Tests, Empowering Property Owners and School Districts, 83 Tul. L. Rev. 1 (2008), on SSRN. Here is the abstract:
When economic development or urban redevelopment is funded by tax increment financing (TIF), local government officials, in their haste to pump up local tax receipts, may become overzealous in displacing some private land users to make way for private developers They are also tempted to hog property tax revenues collected from the project area and use it to repay redevelopment agency debt. These tax proceeds would previously have been divided among cities, counties, school districts and other taxing entities. This paper is about the legal solutions afoot to deal with these controversial aspects of TIF funded economic development -- displacement of private owners for private development projects and diversion of the property tax base from other taxing entities.
Most states require findings of blight as a pre-condition to economic development or redevelopment projects. They hope their blight tests will meet "public use" challenges and steer local governments away from economic development projects of questionable value. But blight definitions vary greatly. Some are so expansive and vague as to be virtually meaningless as constraints. Also, the same definition of blight cannot fulfill both these functions adequately because a blight definition protective of property owners must shield unblighted properties from the threat of condemnation while a blight norm meant to limit economic development to areas that desperately need rejuvenation must be predicated on an area wide basis, and include unblighted properties necessary for a successful economic development effort.
This paper recounts the measures that most states have enacted to complement or replace blight tests. Among these, states have enacted outright prohibitions on economic development takings, approved more generous compensation standards, instituted reforms in the planning process favoring citizen participation, and mandated condemnor’s to negotiate acquisition prices fairly. States have also legislated to safeguard school districts and other taxing entities from having their tax bases raided by opportunistic economic development projects. These enactments are described briefly here as well.
At the same time, state courts have been responding to ‘public use’ challenges to economic development takings in the wake of Kelo v. City of New London. Local governments undertake economic development projects to spike local tax and job rolls, enhance urban infrastructure (street improvements, ball parks, affordable housing), and advance planning norms, such as those favoring increased urban densities to facilitate the use of public transit. Many courts seem sensitive to the purposes of economic development projects and are more sympathetic to projects offering traditional ‘public goods’ such as infrastructure and planning improvements than they are to projects with no apparent ‘public use’ other than to increase the redeveloping jurisdiction’s tax rolls.
September 28, 2009
Tax Lawyers Sued for Botched Tax Shelter
National Law Journal, First Client Files Suit, Now Insurer Says No:
Tax lawyers Jonathon Moore and Charles Bruce already had their hands full defending themselves from allegations that they botched a client's matter, resulting in millions of dollars in IRS back taxes and penalties. Now the lawyers' insurance company has come forward saying it no longer wants to cover the malpractice case.
The two lawyers, name partners in Washington-based Moore & Bruce, are being sued, along with their firm, in the U.S. District Court for the District of Columbia. The complaint, filed in May 2008 by cellphone entrepreneur James De May, claims the firm made mistakes while setting up a tax shelter, such as sending certain forms to the IRS late, that cost De May $7.5 million. All the while, the firm was racking up excessive fees, the complaint alleges. De May is seeking $10 million in damages.
This month, Moore & Bruce's malpractice insurer filed its own suit, arguing that the firm's $2 million policy does not cover the De May litigation because the lawyers did not warn the insurer about problems with the De May matter when they applied for coverage. ...
According to court documents, the two lawyers met De May in the summer of 1995. An American-born mathematician and physicist, De May had pioneered critical software used in cellphone networks. But his company, Optimay GmbH, had run into a financial dead end: He needed to find new investors or sell it.
De May hired Moore & Bruce and incorporated Optimay in Delaware. By 1996, he began preparing to find a buyer. Meanwhile, Moore & Bruce devised a way to offset the U.S. taxes such a sale would generate. They created two offshore trusts, as well as a nonprofit foundation, into which De May transferred his own Optimay stock. When it came time for a deal, the trusts and the foundation would be the ones to sell the stock, theoretically reducing De May's tax burden, while directing assets to be distributed among his family members down the line.
In 1998, a subsidiary of Lucent Technologies Inc. bought Optimay for $65 million. De May's share was roughly $20 million. But according to the complaint, there was a hitch: Bruce purportedly tried to alter the legal status of two of the trusts, from "grantor" to "nongrantor" status, just a week before the sale was finalized. Ultimately, the last-minute change would not meet with IRS approval.
In 1999, the IRS informed De May that it planned to audit his finances. Three years later, it issued the first of five position statements concluding that De May owed back taxes on the Optimay sale. ... In a lengthy 2004 advisory memo, the IRS Office of Chief Counsel identified several problems with the De May trusts. Among other things, the IRS said Bruce had tried to change their status too late and had not succeeded in eliminating all the U.S. beneficiaries, a crucial step in making sure that De May would not need to pay taxes on the trusts' capital gains. Bruce also waited until 1999, well after the Optimay sale, to file the form requesting tax-exempt status for the nonprofit foundation.
The final figure, including penalties, came to $12 million in income tax and $3 million in gift tax. By 2005, De May opted to settle the case for $6 million. The family has yet to pay off the debt, which has grown to $7.5 million. ...
The IRS' findings serve as the basis for much of De May's malpractice suit. But the suit also accuses Bruce of breaching his fiduciary duty as trustee of two trusts. The complaint alleges that Bruce was making "decisions which benefitted himself, his law firm and his business colleagues, and harmed beneficiaries" — in particular by approving "unnecessary" and "excessive" fees for himself and his colleagues. ...
In court papers, Moore & Bruce argued it was not responsible for De May's debt to the IRS, because he still would have owed the taxes had they never tried to set up the tax shelters.
The Next Federal Bailout: 'Great' Public Universities?
Robert J. Birgeneau and Frank D. Yeary, the Chancellor and Vice Chancellor of the University of California at Berkeley, published an op-ed in Sunday's Washington Post calling for a federal bailout of "great" public universities, Rescuing Our Public Universities:
Almost 150 years ago, in an effort to better serve a growing nation, President Abraham Lincoln signed the Morrill Land Grant Act, which gave struggling states federal land with which they could generate revenue to build colleges. The result of that bold action is a national resource: a structure for higher education that is admired, and copied, around the globe in places such as Japan, Germany and Canada. We are the only country to have both private and public universities of world renown. Sadly, this amalgam of great public and private research and teaching universities is at risk as economically struggling states progressively disinvest in public higher education. ...
[O]over several decades there has been a material and progressive disinvestment by states in higher education. The economic crisis has made this a countrywide phenomenon, with devastating cuts in some states, including California. Historically acclaimed public institutions are struggling to remain true to their mission as tuitions rise and in-state students from middle- and low-income families are displaced by out-of-state students from higher socioeconomic brackets who pay steeper fees. While America is fortunate to have many great private universities, we do not need to add to the list by privatizing Berkeley, Illinois, Rutgers, etc. On the contrary, we need to keep our public research and teaching universities excellent and accessible to the vast majority of Americans.
Given the precarious condition of state finances, we propose that President Obama emulate President Lincoln by creating a 21st-century version of the Morrill Act.
Specifically, the federal government should create a hybrid model in which a limited number of our great public research and teaching universities receive basic operating support from the federal government and their respective state governments. Washington might initially choose a representative set of schools, perhaps based on their research achievements, their success in graduating students, commitment to public service and their record in having a student body that is broadly representative of society.
Washington would provide sufficient additional funding for operations and student support to ensure broad access and continued excellence at these universities. A portion of these resources would ensure that out-of-state and in-state students pay the same tuition and have access to the same financial aid packages. The combined federal-state funding must be sufficient for these universities to maintain their preeminence as well as charge moderate fees to all U.S. citizens and permanent residents.
Philanthropy must continue to be an important resource. To ensure stability, the federal government should agree to match, at a rate of 2-to-1, and the state government at 1-to-1, private endowment funds raised by these public universities for 10 years. If such a public-private partnership raised private philanthropy of $150 million per year, the university would have $6 billion contributed toward a new endowment at the end of 10 years. The payout from this new federal-state endowment would provide operating and other support such as need-based scholarships and would essentially secure excellence and access for a generation.
Halperin Pubishes 2009 Erwin N. Griswold Lecture
Daniel Halperin (Harvard) has published 2009 Erwin N. Griswold Lecture Before the American College of Tax Counsel: Rethinking the Advantage of Tax Deferral, 62 Tax Law. 535 (2009). Here is part of the Introduction:
It has been more than ten years since I last spoke to a group of tax lawyers. In 1997 when I delivered the Woodworth Lecture in the Ways and Means Committee room, my theme was that it was “increasingly difficult to maintain that the tax base for capital income is even an approximate measure of true economic income from capital.” In an overly dramatic flourish, my title, Saving the Income Tax, made clear my belief that it was imperative that “realization plays a less important role in the timing of both income and loss.”
I suggested that the first step to achieving an approximate match between taxable and economic income was to require mark-to-market for tradable securities, most debt instruments, and their derivatives. I recognized such a proposal, particularly if accompanied by elimination of the special treatment for capital gains, would not in itself engender a great deal of support or even interest. I believe, however, that mark-to-market would make it more feasible to modify those elements of our income tax which lead to over taxation of income from capital. Thus, full loss offsets, elimination of the corporate level tax for publicly traded companies, and inflation indexing should be easier to achieve in a mark-to-market system. If so, the tax treatment of income from capital would certainly be fairer and more efficient and not necessarily any more burdensome overall.
Treasury Department to Examine ACORN's Compliance With Tax Laws
You requested that the Treasury Inspector General for Tax Administration (TIGTA) review the Internal Revenue Service (IRS) Criminal Investigations Division's enforcement efforts with respect to taxable nonprofit corporations engaging in political activities that go unreported. In addition, you asked that TIGTA review whether ACORN or its affiliates used Section 501 (c)(3) resources for impermissible partisan work, or engaged in lobbying or made political expenditures or contributions without reporting these activities to the IRS.
In response to your request, TIGTA is initiating a review of the IRS's oversight of tax-exempt Section 501 (c)(3) organizations and Section 527 organizations and will review internal IRS referral processes with regard to nonprofit fraud investigations. This review will be conducted by our Office of Inspections and Evaluations, with assistance from our Office of Audit and our Office of Investigations.
Davis Polk Publishes Financial Crisis Manual
The Financial Crisis Manual is a comprehensive review of financial crisis laws as they apply to US financial institutions, covering the major Federal Reserve programs, Treasury's capital investments and warrants, the FDIC's debt guarantees, the public-private investment program, the enforcement landscape and executive compensation. The Manual, which was written by lawyers from across Davis Polk's practice, is also a reference work gathering in one place the scattered primary sources of financial crisis laws, regulations and contracts. Here is the Table of Contents:
- Federal Reserve Emergency Intervention Authority: Old Tools Used in New Ways
- Emergency Economic Stabilization Act: The Original Vision
- The Capital Twist
- Warrants: Upside for the Taxpayer…
- The FDIC’s Temporary Liquidity Guarantee Program
- The Term Asset-Backed Securities Loan Facility
- The Public-Private Investment Program
- Chapter 8: Investigations and Enforcement
- Executive and Employee Compensation
Kahn: Sotomayor Was Wrong in Rudkin Testamentary Trust/Knight
Douglas A. Kahn (Michigan) has posted Rudkin Testamentary Trust -- A Response to Prof. Cohen, 124 Tax Notes 1263 (Sept. 21, 2009), on SSRN. Here is the abstract:
In the August 3 issue of Tax Notes, Professor Stephen Cohen [Georgetown)] wrote an article about Justice Sonia Sotomayor’s opinions in three tax cases [Judge Sonia Sotomayor's Tax Opinions, 124 Tax Notes 474 (Aug. 3, 2009),]. Of those three cases, only the opinion she wrote in William L. Rudkin Testamentary Trust v. Commissioner is worthy of comment. Although the Second Circuit’s decision in that case was affirmed by the Supreme Court under the name Knight v. Commissioner, the construction of the critical statutory language that Justice Sotomayor adopted was rejected and criticized by Chief Justice Roberts, writing for a unanimous court. Cohen concluded that Justice Sotomayor’s construction of the statutory language is ‘‘at least as valid as, and probably preferable to, the construction adopted by the Supreme Court’’ and that Chief Justice Roberts’s criticism of Justice Sotomayor’s rationale is ‘‘logically flawed.’’ Cohen also said that Chief Justice Roberts’s criticism of Justice Sotomayor’s opinion is ‘‘unpersuasive and overstated.’’ In my view, the construction adopted by Justice Sotomayor was incorrect, and Chief Justice Roberts’s criticism was persuasive and accurately stated. Moreover, based on policy considerations, a plausible case can be made that the courts could have construed the statute differently, resulting in a decision for the taxpayer.
CTJ: Six Progressive Tax Options to Finance Health Care Reform
This report compares the revenue impact and distributional effects of six progressive revenue measures that have been discussed by members of Congress in recent months as options for financing health care reform. Several of the revenue measures analyzed here are the subjects of previous reports from Citizens for Tax Justice, while others are variations on those options that have been put forward by lawmakers during the ongoing debate over health care reform.
All of the six revenue measures examined here would make our tax system fairer, which is badly needed after the regressive tax cuts enacted over the past several years.
Gerzog: Miller -- Effective FLP Line Drawing
Miller [Estate of Miller v. Commissioner, T.C. Memo. 2009-119] is a decision on family limited partnerships (FLPs) with effective line drawing. The case is particularly helpful to distinguish the types of investment activities that constitute an acceptable nontax purpose under the Bongard criteria. The opinion further provides some guidelines on the factors of age, health, and FLP payment of estate tax liabilities to determine the applicability of section 2036 and its bona fide sales exception.
Call for Tax Papers: Michigan Law Review
The Michigan Law Review has relaunched its website and created a new format for its online companion, First Impressions. First Impressions no longer publishes in symposium format, and instead accepts submissions of essays on timely legal topics and responses to articles published in the printed journal. For submission guidelines, see here. For more information, contact Dean Baxtresser, Executive Editor of First Impressions.
TaxProf Blog Weekend Roundup
- IRS Denies Deduction for Homes Donated to Fire Departments and Burned Down
- CBO: Changes in Federal Revenues and Tax Rates on Capital Gains
- ABA Tax Section Fall Meeting
- Nonprofits: Are You at Risk of Losing Your Tax-Exempt Status?
- Top 5 Tax Paper Downloads
- Bartlett: Fiscal Responsibility Requires Higher Taxes
- Criminal Tax Violations
- Fleming Posts Tax Papers on SSRN
September 27, 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. [322 Downloads] A Tale of Two Codes: An Empirical Analysis of the Jurisprudence of the United States Tax Court (1990-2008), by Lilian V. Faulhaber (Harvard), Daniel Martin Katz (Michigan) & Michael James Bommarito (Michigan)
2. [299 Downloads] The Big, Bad FBAR: Reporting Foreign Bank Accounts to the U.S. IRS, by Lawrence Lokken (Florida)
3. [256 Downloads] Retirees at Risk: The Precarious Promise of Post-Employment Health Benefits, by Richard L. Kaplan (Illinois), Jordan Zucker (DLA Piper) & Nicholas J. Powers
5. [160 Downloads] The 2008-09 Financial Crisis: Implications for Income Tax Reform, by Daniel Shaviro (NYU)
Bartlett: Fiscal Responsibility Requires Higher Taxes
Throughout most of our nation's history, political conservatives really only had one thing in common: They all believed in a balanced federal budget. They might disagree on religion, foreign policy and any number of other issues, but everyone who thought of themselves as a conservative believed absolutely in the necessity of balancing the budget on an annual basis.
Today, the notion seems quaint. Republicans pay lip service to balancing the budget, but only when Democrats are in office. When they were in power under George W. Bush, they all agreed with Vice President Dick Cheney when he told Treasury Secretary Paul O'Neill, "Reagan proved deficits don't matter." ...
This reversal of the historical conservative position has had enormous implications for our national finances. By effectively taking taxes off the table, conservatives unwittingly opened the flood gates of spending. ...
This reversal of the long-held conservative position proved to be extremely popular, politically, and had a lot to do with the Republican takeover of Congress in 1994. It is now Republican dogma that taxes must never be increased no matter how big the deficit. The last Republican to do that, Bush 41, got thrown out of the White House on his ear for doing so, Republicans believe.
Such a fate is not going to befall any congressional Republican today. Their mantra is that all tax increases must be opposed with every fiber of their being, and there is no problem that can't be cured by tax cuts. ...
Everyone knows that fiscal discipline must be restored eventually, or we will face truly horrifying consequences--defaulting on the debt, nonpayment of Social Security benefits, a collapsing dollar, and double-digit inflation and interest rates. Everyone also knows that this will involve a combination of higher revenues and lower spending. The idea that we can restore fiscal health only with spending cuts is childish ...
At some point, taxes have to be back on the table as the price that must be paid for profligate spending. Only then will the American people realize that they can't have their cake and eat it too, as Republicans have preached for the last decade. Only when the American people go back to believing that spending must be paid for will they stop demanding something for nothing and put the country back on the path to fiscal sanity.
Criminal Tax Violations
Suneel J. Nelson & Rollo C. Baker have published Tax Violations, 46 Am. Crim. L. Rev. 1099 (2009). Here is the Introduction:
This Article outlines the elements, defenses, and sentencing consequences of various criminal tax violations under the I.R.C. §§ 7201, 7202, 7203, 7206, and 7212(a).
Section II of this Article examines the policies and procedures of IRS investigations, as well as the applicable punishments set forth in the United States Sentencing Guidelines. Section II also addresses the basic elements of and defenses to the following crimes: tax evasion under § 7201, failure to collect tax under § 7202, willful failure to file taxes under § 7203, “tax perjury” and “aiding and assisting” tax fraud under § 7206, and interference with the administration of internal revenue laws under § 7212(a). Finally, Section III details criminal investigations of conspiracy to violate the tax laws under the defraud clause of 18 U.S.C. § 371.
Fleming Posts Tax Papers on SSRN
J. Clifton Fleming, Jr. (BYU) has posted several of his tax papers on SSRN:
- Some Perspectives from the United States on the Worldwide Taxation vs. Territorial Taxation Debate, 3 J. Australasian Tax Teachers Ass'n 35 (2008) (with Robert J. Peroni (Texas) & Stephen E. Shay (Deputy Assistant Secretary for International Tax Affairs))
- Eviscerating the Foreign Tax Credit Limitations and Cutting the Repatriation Tax - What's ETI Repeal Got to Do with It, 104 Tax Notes 1393 (2004) (with Robert J. Peroni (Texas))
- Reform and Simplification of the U.S. Foreign Tax Credit Rules, 101 Tax Notes 103 (2003) (with Robert J. Peroni (Texas) & Stephen E. Shay (Deputy Assistant Secretary for International Tax Affairs))
- Electronic Commerce and the State and Federal Tax Bases, 2000 BYU L. Rev. 1
- The Deceptively Disparate Treatment of Business and Investment Interest Expense Under a Cash-Flow Consumption Tax and a Schanz-Haig-Simons Income Tax, 3 Fla. Tax Rev. 544 (1997)
September 26, 2009
IRS Denies Deduction for Homes Donated to Fire Departments and Burned Down
Following up on my prior post, IRS Burns Kirk Herbstreit's Donation of Home to Fire Department: the Associated Press picks up on the story in Burning Down the House? IRS Nixes Tax Deductions:
Lured by the prospect of free demolition, homeowners around the country sometimes offer their houses to the local fire department for training purposes. The department burns down the house, clearing the way for the owner to build a bigger and better home.
In court cases in Ohio and Wisconsin, the IRS is arguing that because such houses are already slated for demolition, donating them for fire training isn't an act of charity. ...
Steven Willis, a professor at the University of Florida who studies income tax law, said a charitable deduction can be no greater than the value of whatever was donated, and a house given to a fire department has negative value, since the owner was going to have to pay somebody to get rid of it.
"The whole idea of a charitable deduction is that you give something to charity and you don't get anything back, right?" said Paul Caron, a tax scholar at the University of Cincinnati. "When you give $100 to the Catholic Church, you don't get anything for that $100."
The IRS maintains in court papers in the Wisconsin case that the homeowners do not qualify for a deduction because they are donating only a "partial interest" in their home, rather than the entire property. The agency also says homeowners are letting firefighters only use the property, not donating it in full.
The story has been picked up by over 100 media outlets and newspapers, including
- Atlanta Journal Constitution
- Chicago Tribune
- Cleveland Plain Dealer
- Houston Chronicle
- Los Angeles Times
- Miami Herald
- New York Times
- Philadelphia Inquirer
- San Diego Union-Tribune
- Seattle Times
- Washington Times
CBO: Changes in Federal Revenues and Tax Rates on Capital Gains
The Congressional Budget Office yesterday released a letter on Changes in Federal Revenues and Tax Rates on Capital Gains:
As a result of the economic downturn, CBO expects revenues from individual and corporate income taxes in 2009 to account for about 50% of total revenue, below the average of about 57% over the past five years. ... CBO expects that when complete information for the year is available, it will show that receipts from corporate income taxes fell substantially in 2009, to about 1.0% of GDP, less than half of the 2.1% of GDP in 2008. The decline stems from a sharp drop in taxable corporate profits. ...
In answering your questions about how the pending changes in the taxation of capital gains tax will affect revenues and behavior, it is useful to consider how the pending increase compares with previous changes. The top tax rate on most long-term gains was reduced from around 35% to 28% in 1978 and 1979, and was reduced to 20% in 1981. It was raised to 28% in 1987, reduced to 20% again in 1997, and reduced to 15% in 2003. The increase pending in 2011 is to 18% for some gains held over five years and to 20% for most other long-term gains. Thus, the pending tax change is well within the range of changes experienced in the last 30 years, and we have incorporated the impacts from those historical changes into our modeling of the effects of the upcoming law change.
ABA Tax Section Fall Meeting
- Low Income Taxpayers -- Keith Fogg (Villanova), Kathryn Sedo (Minnesota), George Willis (Chapman)
- Luncheon Plenary Session: IRS Regulation of Tax Return Preparers -- Les Book (Villanova)
- Representing Pro Se Taxpayers at Tax Court Calendar Call -- Keith Fogg (Villanova), Kathryn Sedo (Minnesota), George Willis (Chapman)
- Sales, Exchanges & Basis -- Brad Borden (Washburn), Erik Jensen (Case Western)
- Unholy Matrimony: Tax & Planning Aspects of Divorce -- John McCaffrey (NYU)
Nonprofits: Are You at Risk of Losing Your Tax-Exempt Status?
Gina M. Lavarda (J.D. 2010, Iowa) has published Note, Nonprofits: Are You at Risk of Losing Your Tax-Exempt Status?, 94 Iowa L. Rev. 1473 (2009). Here is the abstract:
In 2004, the IRS studied 110 § 501(c)(3) organizations and found that seventy-five percent of them had violated federal tax law by engaging in political-campaign activities during the 2004 campaign period. The IRS learned that many of these organizations did not understand the broad scope of the political-campaign prohibition and that organizations’ leaders mistakenly spoke on behalf of their organizations rather than in their personal capacities separate from their organizations. Following the study, the IRS stated that any § 501(c)(3) organization that did not comply with federal tax law’s statutory requirements and restrictions risked losing its tax-exempt status.
As the 2008 campaign was in full swing, the IRS promised to step up its enforcement of § 501(c)(3) requirements. As a result, courts likely will face increased litigation related to § 501(c)(3) organization violations. This Note reviews the requirements and restrictions that are placed on § 501(c)(3) organizations, including the political-campaign prohibition. In addition, this Note proposes a test to assist courts, § 501(c)(3) organizations, and leaders of § 501(c)(3) organizations in determining when organizations’ leaders are acting or speaking on behalf of their organizations and when they are speaking in their personal capacities, exercising their First Amendment free-speech rights.
September 25, 2009
Senate Committee Accuses ACORN of Tax Violations
The Senate Finance Committee Republican tax staff issued a devastating critique of ACORN, alleging that the organization funneled money from its tax-exempt entities into impermissible lobbying and political activity.
- Staff Memo
- Sen. Grassley Letter to IRS
- Sen. Grassley Letter to Office of Personnel Management
- ACORN's Non-Exempt Entities
- ACORN’s Tax-Exempt Entities (1 of 4)
- ACORN’s Tax-Exempt Entities (2 of 4)
- ACORN’s Tax-Exempt Entities (3 of 4)
- ACORN’s Tax-Exempt Entities (4 of 4)
- Associated Press
- Chronicle of Philanthropy
- Human Events
- New York Post
- Washington Post
Northwestern Private Equity Symposium
The Northwestern Journal of International Law & Business has published a symposium issue on The Globalization of Private Equity: Changes in the International Market and the Impact on Private Equity Investments (29 Nw. J. Int'l L. & Bus. 601 (2009)), with three tax articles:
- Darryll K Jones, Sophistry, Situational Ethics, and the Taxation of the Carried Interest, 29 Nw. J. Int'l L. & Bus. 675 (2009).
- Adam H. Rosenzweig, Not All Carried Interests Are Created Equal, 29 Nw. J. Int'l L. & Bus. 713 (2009).
- Philip F. Postlewaite, The Taxation of Compensatory Profits Interests: The Blind Men and the Elephant, 29 Nw. J. Int'l L. & Bus. 763 (2009).
What's in a (Law School) Name?
Stan Chess breaks down the names of the 199 ABA-approved law schools:
- 112: School of Law
- 39: College of Law
- 37: Law School
- 8: Law Center
- 3: Law (Berkeley Law, Carolina Law, New England Law)
Knoll: The Tax Advantages and Disadvantages of S ESOPs
Michael S. Knoll (Penn) has published Samuel Zell, the Chicago Tribune, and the Emergence of the S ESOP: Understanding the Tax Advantages and Disadvantages of S ESOPs, 70 Ohio St. L.J. 519 (2009). Here is the abstract:
Samuel Zell's acquisition of the Chicago Tribune in December 2007 using a little-known type of ESOP made headlines. In a complicated transaction, which took nearly a year to complete, the Tribune converted from a subchapter C corporation to a subchapter S corporation, established an ESOP that purchased 100 percent of the company's equity, and sold Zell a call option giving him the right to purchase 40 percent of the company's equity. Press reports claim that Zell's novel structure enabled Zell to outbid other suitors. And financial commentators predict that many acquirers will employ that same structure as soon as acquisition activity picks up. Zell's Tribune transaction also caught the eye of legislators, including Congressman Charles Rangel, who introduced a bill that would increase the tax on indirect claims -- such as the one owned by Zell -- on the equity of an S corporation held by an ESOP (synthetic equity).
Although ESOPs are more than 30 years old, until 1998, an S corporation could not sponsor an ESOP. Over the last ten years, so-called S ESOPs have grown rapidly, but largely outside of public view. The Tribune transaction has focused a bright light on S ESOPs and there are some who believe that their current tax treatment is too favorable. Yet, there has been little in-depth analysis of the tax treatment of S ESOPs. Accordingly, this paper attempts to fill that gap by presenting a systematic economic evaluation of the tax consequences of using an S ESOP. It seeks to describe both qualitatively and quantitatively the tax advantages and disadvantages of using an S ESOP (with or without synthetic equity) relative to alternative available structures. This paper also estimates by how much the S ESOP structure likely allowed Zell to increase his bid for the Tribune.
President Obama Wants Your Tax Reform Ideas
President Obama has asked the President's Economic Recovery Advisory Board (PERAB) to develop options for tax reform. The members of the tax subcommittee are preparing ideas to be considered by the board and would like to give anyone a chance to have input into the process on this important issue. Anyone wanting to share ideas and opinions for consideration by the subcommittee can do so here. The deadline for submissions is October 15th, 2009.
Note: The mandate to the PERAB is NOT to recommend a new tax system. They are to consider ideas on tax simplification, better enforcement of tax law, and reforming corporate taxes and to present the pros and cons of potential tax options. They were instructed not to consider options that involve raising taxes on families making less than $250,000 per year. So be mindful of their constraints when submitting ideas.
In general, the tax subcommittee will post all comments online for others to examine and those suggestions may spur other people's ideas. All statements, including attachments and other supporting materials, received are part of the public record and subject to public disclosure. You should submit only information that you wish to make available publicly. Please do not submit materials exceeding five single-spaced pages of text. If submitting via e-mail, please send to email@example.com. Please also include a cover sheet including the submitter's name and organization, type of organization (individual, business, government, non-profit organization, or association), submission date, and contact information.
Hopefully, the task force will seriously consider Toward Tax Reform: Recommendations for President Obama's Task Force (Tan Analysts, 2009).
IRS Issues Temporary Regs Applying 6-Year SOL to Overstatement of Basis
The Treasury Depatment yesterday issued temporary (T.D. 9466) and proposed regulations defining an omission from gross income for purposes of the six-year limitations period for assessing tax attributable to partnership items, taking a position contrary to that of the Federal Circuit and Ninth Circuit that an overstatement of basis results in an omission from gross income:
Section 6501(e)(1)(A) provides that if the taxpayer omits from gross income an amount properly includible therein that is in excess of 25 percent of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 6 years after the return was filed. Subsection (i) of this provision provides that, in the case of a trade or business, the term gross income means the total of the amounts received or accrued from the sale of goods or services (if such amounts are required to be shown on the return) prior to diminution by the cost of such sales or services.
These temporary regulations clarify that, outside of the trade or business context, gross income for purposes of sections 6501(e)(1)(A) and 6229(c)(2) has the same meaning as gross income as defined in section 61(a). Under section 61(a), gross income includes "gains derived from dealings in property" and the regulations under section 61(a) further explain that gain equals "the excess of the amount realized over the unrecovered cost or other basis for the property sold or exchanged." Accordingly, outside the context of a trade or business, any basis overstatement that leads to an understatement of gross income under section 61(a) constitutes an omission from gross income for purposes of sections 6501(e)(1)(A) and 6229(c)(2).
Relying on the Supreme Court's opinion in Colony v. Commissioner, 357 U.S. 28 (1958), which dealt with an omission from gross income in the context of a trade or business, the United States Courts of Appeals for the Ninth Circuit and Federal Circuit recently construed section 6501(e)(1)(A) in cases outside the trade or business context contrary to the interpretation provided in these temporary regulations, holding that an "omission" does not occur by an overstatement of basis. Bakersfield Energy Partners v. Commissioner, 568 F.3d 767 (9th Cir. 2009); Salman Ranch Ltd v. United States, 573 F.3d 1362 (Fed. Cir. 2009). The Treasury Department and the Internal Revenue Service disagree with these courts that the Supreme Court's reading of the predecessor to section 6501(e) in Colony applies to sections 6501(e)(1)(A) and 6229(c)(2). ... In this regard, the Treasury Department and the Internal Revenue Service agree with the opinions in Home Concrete & Supply, LLC v. United States, 599 F.Supp.2d 678, 690 (E.D.N.C. 2008) (overstatement of basis can constitute an omission from gross income for purposes of the six-year period of limitations) and Brandon Ridge Partners v. United States, 2007-2 U.S.T.C. (CCH) ¶ 50,573, 100 A.F.T.R.2d (RIA) 5347, 5351-53 (M.D. Fla. 2007) (same).
Consistent with the Ninth Circuit's suggestion in Bakersfield, these temporary regulations clarify what constitutes an "omission from gross income" under sections 6501(e)(1)(A) and 6229(c)(2), as amended in connection with the enactment of the 1954 Internal Revenue Code and continuing in effect under the 1986 Internal Revenue Code. The reasonable interpretation of the provisions of sections 6501(e)(1)(A) and 6229(c)(2) provided in these temporary regulations, acknowledged by both the Ninth and Federal Circuits to be ambiguous, is entitled to deference even if the agency's interpretation may run contrary to the opinions in Bakersfield and Salman Ranch. See Nat'l Cable & Telecomms. Ass'n v. Brand X Internet Servs., 545 U.S. 967, 982-83 (2005); Swallows Holding, Ltd. v. Commissioner, 515 F.3d 162, 170 (3rd Cir. 2008). Because these temporary regulations are a clarification of the period of limitations provided in sections 6501(e)(1)(A) and 6229(c)(2) and are consistent with the Secretary's application of those provisions both with respect to a trade or business (that is, gross income means gross receipts), as well as outside of the trade or business context (that is, section 61 definition of gross income applies), they are applicable to all cases with respect to which the period for assessing tax under the applicable provisions has not expired before the date of filing of these regulations with the Federal Register.
Stetson Seeks to Hire a Tax VAP
Stetson University College of Law seeks to hire two visiting assistant professors among several subject areas, including tax:
The program, named in honor of Dean Emeritus Bruce R. Jacob, is designed for individuals who seek the opportunity to enter academia by gaining full-time teaching experience and developing their scholarly agenda. Jacob Fellows normally will serve two years, but may, in exceptional circumstances, be extended for a third. Jacob Fellows will teach one course in their first semester, then two courses in subsequent semesters. Fellows will be eligible to apply for a research grant payable during the summer between the first and second years, and will be expected to produce at least one significant piece of scholarship. The College of Law commits to provide Jacob Fellows with considerable assistance and guidance in developing their academic careers. Among other things, Fellows will be mentored by experienced members of the tenured faculty and will receive several benefits of full-time professors, such as research assistants and a budget for professional travel. Fellows will have opportunities to become fully integrated into the life of the College of Law.
Although we will consider a wide range of subjects, we are especially interested in receiving applications from those interested in trial advocacy and other advocacy skills (appellate advocacy, ADR, interviewing, etc.), legal research and writing, legal drafting, property, corporate law, and taxation.
For more information, or to apply, see here.
ABA Tax Section Fall Meeting
- Affiliated & Related Corporations -- Don Leatherman (Tennessee)
- Employee Benefits Distributions Update -- Kathryn Kennedy (John Marshall)
- Exempt Organizations Subcommittee on Political and Lobbying Organizations and Activities -- Miriam Galston (George Washington)
- Foreign Activities of U.S. Taxpayers -- Robert Peroni (Texas)
- Individual & Family Taxation -- Christopher Pietruszkiewicz (LSU)
- Standards of Tax Practice -- Linda Beale (Wayne State)
- Task Force on Patenting Tax Strategies -- Ellen Aprill (Loyola-L.A.)
- Tax Practice Management Committee -- Rosalie Sanderson (New York Law School), Ann Thomas (New York Law School)
- Teaching Taxation -- Leonard Burman (Syracuse), Diane Fahey (New York Law School), Tracy Kaye (Seton Hall), Amy Monahan (Minnesota), Katherine Pratt (Loyola-L.A.)
- Young Lawyers Forum & Diversity -- Frederick Royal (Western New England)
BBC: Curvy Students 'Perk of the Job'
BBC, Curvy Students "Perk of the Job," by Katherine Sellgren:
Terence Kealey, of the University of Buckingham, said lecturers were aware of females who "flaunted their curves".
In a tongue-in-cheek article for Times Higher Education Magazine on the seven deadly sins of the academy, he advised academics to "look but not touch".
The National Union of Students condemned the comments as insulting and disrespectful to women.
Dr Kealey, a clinical bio-chemist and vice-chancellor of Buckingham University, likened the classroom to a lap dancing club and said admiring the curves of attractive students could help "spice up" marital sex.
In his article about the sin of lust, Dr Kealey wrote: "Most male lecturers know that, most years, there will be a girl in class who flashes her admiration and who asks for advice on her essays. "What to do? Enjoy her! She's a perk."