TaxProf Blog

Editor: Paul L. Caron
Pepperdine University School of Law

A Member of the Law Professor Blogs Network

Thursday, June 24, 2010

UBS Tax Whistleblower Asks Obama to Commute His Sentence

Bloomberg, Banker Who Blew Whistle on Secrecy Over Tax Cheats Seeks Pardon:

Bradley Birkenfeld, once a UBS AG banker who handled a $200 million investment for a billionaire client, now makes 12 cents an hour mopping floors at the federal prison in Minersville, Pennsylvania.

Sleeping in a bunk bed in a dormitory-style building with 35 other inmates is far from the reward Birkenfeld says he deserves for exposing a massive tax-evasion scandal at UBS, the biggest Swiss bank. He told U.S. authorities how UBS bankers came to the U.S. to woo rich Americans, managed $20 billion of their assets, and helped them cheat the Internal Revenue Service.

Birkenfeld, 45, has asked President Barack Obama to commute a 40-month term he began in January at Schuylkill Federal Correctional Institution for his part in the conspiracy. He is seeking payment from the IRS whistleblower program and wants the U.S. Department of Justice to punish prosecutors who wouldn’t grant him immunity before his 2008 indictment and guilty plea.

His disclosures preceded UBS’s decision to pay $780 million to avoid prosecution, admit it fostered tax evasion from 2000 to 2007, and turn over data on 250 secret accounts to the IRS. UBS later agreed to reveal data on another 4,450 accounts, a transfer upheld last week by the Swiss Parliament. For lifting the veil on Swiss bank secrecy, Birkenfeld said, he’s a hero, not a criminal.

June 24, 2010 in News, Tax | Permalink | Comments (1) | TrackBack (0)

WSJ: Carried Interest Tax Hike Will Hit Family Partnerships

Wall Street Journal editorial, The Family Business Revenue Act: A Tax on the Wealthy Becomes a Tax on Mom and Pop:

Class-warfare politics has a way of doing damage well beyond its intended targets. Consider how the Democratic plan to raise taxes on "carried interest" will also sock it to a family business near you.

Democrats want to raise carried-interest taxes from the current 15% rate to the top income tax rate, scheduled to hit 39.6% on January 1. The sales pitch is that this will only whack hedge fund managers and other unsympathetic types. Yet Democrats wrote the law so broadly that it may sweep up millions of Americans in family partnerships.

This would be a huge hit to the estimated 6.5 million folks invested in real-estate partnerships, who own assets ranging from a local house to a commercial shopping center. The legislation also potentially hits any partnership invested in certain specified assets, including families who own, say, an auto dealership, fishing boat, construction company or securities.

These partnerships are at risk because of the logic Democrats have used to justify their tax hike. The taxers argue that fund managers receive carried interest as compensation for a service performed—managing other people's money—and so should be taxed at ordinary income rates. Never mind that Congress previously deemed carried interest to be investment income, at-risk capital that deserved to be taxed at a lower rate. ...

Mark this down as one more example of how the Democratic scramble for revenue will hurt millions of Americans who are far from wealthy. Democrats are rewriting a half century of partnership tax law with no hearings, no analysis and little debate. And they wonder why businesses are creating so few jobs.

June 24, 2010 in News, Tax | Permalink | Comments (2) | TrackBack (0)

Off to the CALI Conference on Reboot Legal Education

Reboot Although I hate to leave the paradise of San Diego (especially for Camden, New Jersey), I am spending the next three days at the 2010 CALI Conference for Law School Computing on Reboot Legal Education at Rutgers.  I will be attending many of the wonderful sessions, as well as a meeting of the CALI Board of Directors on Friday evening (on which I serve as Vice-President, along with my colleague Ken Hirsh).  CALI is doing wonderful work on a variety of projects for faculty, including Classcaster, eLangdell, InstaPoll, Lawdibles, Legal Education CommonsMediaNotes, and Webinars, in addition to their bread and butter CALI lessons for students (Jim Maule has produced over 250 tax lessons, which I highly recommend).  In many ways, this is my favorite conference of the year, as it is the only gathering of law school faculty, librarians, and IT folks.  I am looking forward to reconnecting and breaking bread with friends in all three spheres.

June 24, 2010 in Conferences, Legal Education | Permalink | Comments (0) | TrackBack (0)

Responsible Estate Estate Tax Act Includes $3.5m Exemption, 55% Top Rate & 10% Billionaire's Surtax

Senators Bernard Sanders (I-VT), Tom Harkin (D-IA), and Sheldon Whitehouse (D-RI) today plan to introduce the Responsible Estate Tax Act, which would provide a $3.5 million exemption, a progressive rate structure with a 55% top rate, and a 10% surtax on billionaires:
  • Exempts the first $3.5 million of an estate from federal taxation ($7 million for couples), the same exemption that existed in 2009. Doing this would mean that 99.75% of all estates would be exempted from the federal estate tax in 2011 alone.
  • Includes a progressive rate structure so that the super wealthy pay more. Under our bill, the rate for the value of the estate above $3.5 million and below $10 million would be 45%, the same as the 2009 level. The rate on the value of estates above $10 million and below $50 million would be 50%, and the rate on the value of estates above $50 million would be 55%.
  • Includes a billionaire's surtax of 10%. Our bill also imposes a 10% surtax on the value of an estate above $500 million ($1 billion for couples). According to Forbes Magazine, there are only 403 billionaires in the United States with a collective net worth of $1.3 trillion. Clearly, the heirs to these multi-billion fortunes should be paying a higher estate tax rate than others.
  • Closes all of the Estate and Gift Tax Loopholes requested in President Obama's Fiscal Year 2011 budget. These loophole closers include requiring consistent valuation for transfer and income tax purposes; a modification of rules on valuation discounts; and a required 10-year minimum term for Grantor Retained Annuity Trusts (GRATS). OMB has estimated that closing these loopholes that benefit the super-wealthy, would raise at least $23.7 billion in revenue over 10 years.
  • Protects family farmers by allowing them to lower the value of their farmland by up to $3 million for estate tax purposes. Under current law, the value of farmland can be reduced up to $1 million for estate tax purposes under § 2032(a) (Special Use Valuation). Our bill increases this level to $3 million and indexes it to inflation.
  • Benefits farmers and other landowners by providing estate tax relief for conservation easements. Our bill provides tax relief to farmers and other landowners by amending estate tax rules for conservation easements through an increase in the maximum exclusion amount to $2 million and increasing the base percentage to 60%.

Update:

June 24, 2010 in Congressional News, Tax | Permalink | Comments (6) | TrackBack (0)

Levi & Weiss on Nontraditional Deans

Board of Editors, Introduction: Essays by Dean David F. Levi and Chancellor Jack M. Weiss, 70 La. L. Rev. 911 (2010):

The following two essays address the recent trend in law schools throughout the country in selecting deans with “nonacademic” backgrounds. Law school deans traditionally are longtime members of the legal academy, often making the transition from tenured law school professor to law school administrator. But some law schools have departed from this custom by hiring individuals either from practice, government, or the bench to head their institutions. ... The two essays that follow are both authored by law school deans with [From Judge to Dean: Reflections on the Bench and the Academy] “non-traditional” backgrounds.

The first essay [From Judge to Dean: Reflections on the Bench and the Academy, 70 La. L. Rev. 913 (2010)] is by Dean David F. Levi, who became the fourteenth dean of Duke Law School on July 1, 2007. Prior to his appointment, he was the Chief United States District Judge for the EasternA Causerie on Selecting Law Deans in an Age of Entrepreneurial Deaning District of California. ...  

The second essay [A Causerie on Selecting Law Deans in an Age of Entrepreneurial Deaning, 70 La. L. Rev. 923 (2010)] is by LSU Law’s own Chancellor Jack M. Weiss, who was named chancellor of the Paul M. Hebert Law Center in May of 2007. “[Chancellor Weiss] practiced in New Orleans for [twenty-three] years before moving to New York in 1998 to become a partner of Gibson, Dunn and Crutcher,” where he worked for nine years before joining the Paul M. Hebert Law Center as its tenth dean or chancellor. ...

Through their essays, Dean Levi and Chancellor Weiss address the challenges facing law school deans today and how their “nontraditional” backgrounds have provided them with both challenges and advantages during their current tenures.

June 24, 2010 in Legal Education | Permalink | Comments (1) | TrackBack (0)

Faulhaber: Sovereignty, Integration, and Tax Avoidance in the European Union

Lilian V. Faulhaber (Harvard; moving to Boston University) has published Sovereignty, Integration and Tax Avoidance in the European Union: Striking the Proper Balance, 48 Colum. J. Transnat'l L. 117 (2010). Here is the abstract:

As the need to raise revenue becomes more pressing and public opposition to tax avoidance increases, the European Court of Justice has made it more difficult for the twenty-seven Member States of the European Union to prevent tax avoidance and shape fiscal policy. This article introduces the new anti-avoidance doctrine of the European Court of Justice and analyzes it from the perspective of taxpayers, Member States, and the European Union legal order as a whole. This doctrine is problematic because it has created a legislative vacuum in Europe. No European Union institution has the authority to regulate direct taxation without the unanimous support of all twenty-seven Member States. As the European Court of Justice strikes down Member State efforts to prevent tax avoidance, no institution can step in to replace these Member State provisions. Member States are thus losing sovereignty over policing tax avoidance, but no legislative move toward an integrated approach is possible without the support of Member States. This article proposes several solutions to the problems posed by the doctrine.

June 24, 2010 in Scholarship, Tax | Permalink | Comments (0) | TrackBack (0)

Lehavi: The Taking/Taxing Taxonomy

Amnon Lehavi (Radzyner School of Law, Israel) has published The Taking/Taxing Taxonomy, 88 Texas L. Rev. 1235 (2010). Here is the abstract:

Takings jurisprudence is engaged in a constant paradox. It is conventionally portrayed as chaotic and muddy, and yet attempts by the judiciary to create some sense of order in it by delineating this field into distinctive categories that apply to each a different set of rules are often criticized as analytically incoherent or normatively indefensible. In this Article, Professor Amnon Lehavi offers an innovative approach to the taxonomic enterprise in takings law by examining what is probably its starkest and most entrenched division: that between taking and taxing.

American courts have been nearly unanimous in refusing to scrutinize the power to tax, viewing this form of government action as falling outside the scope of the Takings Clause. Critics have argued that the presence of government coercion, loss of private value, and potential imbalances in burden sharing mandate that the two instances be conceptually synchronized and subject to similar doctrinal tests. Professor Lehavi argues that this dichotomy, and other types of legal line drawing in property, should be assessed not on the basis of a point-blank analysis of allegedly comparable specific instances, but rather on a broader view of the foundational principles of American property law and of the way in which takings taxonomies mesh with the broader social and jurisprudential understanding of what “property” is.

Identifying American property law as conforming to two fundamental principles—formalism of rights and strong market propensity—but at the same time as devoid of a constitutional undertaking to protect privately held value against potential losses as a self-standing strand in the property bundle, Professor Lehavi explains why prevailing forms of taxation do seem to be disparate from other forms of governmental interventions with private property. Focusing attention on property taxation, he shows why taxation is considered a lesser-evil type of government coercion, how the taking/taxing dichotomy better addresses the public–private interplay in property law, and why taxation is often viewed as actually empowering property rights and private control of assets.

June 24, 2010 in Scholarship, Tax | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 23, 2010

Tax Court Says Fisherman's Claimed Losses Were Bass-Ackwards

Dow Jones, Fish Tale Fails To Impress Tax Court, by Arden Dale:

The angler called them professional losses. The IRS tossed them back. Now, a U.S. Tax Court judge isn't biting, either. The judge this week upheld an IRS decision that a taxpayer's efforts to write off around $166,000 in losses from bass tournaments was just a fish story.  [Lowe v. Commissioner, T.C. Memo. 2010-129 (June 14, 2010).]

The man, married to the controller of a company and unemployed for a decade before he started reporting income and expenses from fishing, said he was a professional fisherman and claimed the losses over four years.

The case "gives new meaning to the phrase 'tax chutzpah,'" according to Paul L. Caron, a law professor at University of Cincinnati College of Law and editor of the popular TaxProf Blog.

Taxpayers often try to pass off hobbies as business to get the tax benefits. The bass-fishing case and others like it turn on deciding what is a hobby versus a professional business. Section 183 of the tax code, also known as the "hobby loss rule," limits the amount of losses that can be deducted from income on hobbies and other not-for-profit activities.

In the bass case, Steve Lacy Lowe, the angler, listed Professional Fishing on his Schedules C from 2003 through 2006. ...  In 2005, he fished in 26 tournaments and reported gross income of $4,241. The next year, he fished in 15 tournaments and reported $10,932 of gross income. ...His wife [was] a professional bookkeeper who earned an average of $180,000 a year from her job during the years at issue.

From the court's opinion:

Additionally we find that Mr. Lowe's competitive strategy was not fully consistent with an intent to make a profit. ...  All of the American Bass tournaments in which Mr. Lowe fished were team tournaments. Mr. Lowe would enter Mrs. Lowe as his partner and then fish the tournaments alone. This practice, while allowing him to share the activity with his spouse, doubled Mr. Lowe's entry fee. We assume that had he fished with a fishing partner, the partner would have paid his or her own share of the entry fee. By fishing alone, Mr. Lowe also at least halved and most likely much more than halved his chances of winning. Mr. Lowe, against very stiff competition, would have had to catch more fish, alone, than any of his competitors could catch with both competitors fishing, in order to win a tournament. We do not find this conduct consistent with the intent to make a profit. If Mr. Lowe had been truly engaged in the bass fishing activity for profit, he would have done everything in his power to increase his chances of winning and decrease his entry costs. We do note that under this strategy, had Mr. Lowe won, he would not have had to split the prize. Unfortunately, when you do not win, that does not matter. With such a large handicap we believe winning would have been extraordinarily difficult and extremely improbable.

This finally gives me a chance to show what adorned the living room wall in my late father's lake house:

June 23, 2010 in New Cases, News, Tax | Permalink | Comments (2) | TrackBack (0)

TIGTA Uncovers Widespread Fraud in First-Time Homebuyer Tax Credit Program, Including by Prisoners Serving Life Sentences

TIGTA The Treasury Inspector General for Tax Administration today released Additional Steps Are Needed to Prevent and Recover Erroneous Claims for the First-Time Homebuyer Credit (2010-41-069):

In its new report, TIGTA estimates that 14,132 individuals received erroneous credits totaling at least $26.7 million. These erroneous credits included:

  • 2,555 taxpayers receiving credits totaling $17.6 million for homes purchased prior to the dates allowed by law.
  • 1,295 prisoners receiving credits totaling $9.1 million who were incarcerated at the time they reported that they purchased their home. These prisoners did not file joint returns, so their claims could not have been the result of purchases made with or by their spouses. Further, TIGTA found that 241 prisoners were serving life sentences at the time they claimed that they bought new primary residences.
  • 10,282 taxpayers receiving credits for homes that were also used by other taxpayers to claim the credit. (In one case, TIGTA found that 67 taxpayers were using the same home to claim the credit.) TIGTA auditors have not fully quantified the total of these erroneous credits, but all indications are that the total will be in the tens of millions of dollars.

Some of the improper payments involve IRS employees, TIGTA found. At least 34 IRS employees claimed the Credit despite indications that they owned a home within the past three years. This is in addition to the 53 IRS employees that TIGTA identified in August 2009.

June 23, 2010 in IRS News, Tax | Permalink | Comments (5) | TrackBack (1)

The Tax Court, Tim Geithner, and Jack Webb

Following up on this morning's post, Tax Court Rejects Geithner/TurboTax Defense: from a reader

:

June 23, 2010 in Celebrity Tax Lore, New Cases, News, Tax | Permalink | Comments (0) | TrackBack (0)

Marian: The Discursive Failure in Comparative Tax Law

Omri Y. Marian (S.J.D. candidate, Michigan) has published The Discursive Failure in Comparative Tax Law, 58 Am. J. Comp. L. 415 (2010). Here is the abstract:

Tax comparatists tend to bemoan about the grim status of their chosen field of studies. Complaints are aimed both at the scarcity of decent comparative legal tax scholarship, as well as at the lack of theoretical foundation for the study of comparative tax law. The purpose of this article is to portray a more sanguine, yet critical, view of this field. Sanguine, since a sympathetic reading of contemporary comparative tax scholarship demonstrates that there is more than enough such scholarship that can (and should) generate a lively debate on comparative tax works and their methodologies. Critical, since all of these works fail to produce even the faintest form of paradigmatic discourse. The result is that contemporary academic literature in comparative tax law contains the simultaneous existence of bluntly conflicting arguments, taking parallel courses, yet never engaging each other. In this article I try to set a framework for a coherent academic discourse on comparative taxation, and to "force" such non-existent academic debate. I do so by placing existing comparative tax scholarship in the context of some pivotal debates in general comparative law, and demonstrate how contradicting arguments are abundant in the field of comparative tax law. One cannot help but wonder how is it that tax comparatists failed to engage each other positions. I further conclude that a possible reason for such disengagement is that it enables tax comparatists to comfortably rest in the warmth of their own scholarship without being bothered by questions regarding their methodological – and consequently their ideological – stances. Finally, I offer my own view in this currently imaginative debate by responding to a recent article authored by Carlo Garbarino.

June 23, 2010 in Scholarship, Tax | Permalink | Comments (1) | TrackBack (0)

Reggie Bush Can't Outrun the IRS

Reggie Bush The NCAA's University of Southern California Public Infractions Report (June 10, 2010) details over $300,000 in benefits from agents provided to former Trojan Heisman Trophy Winner (and current New Orleans Saint) Reggie Bush. FOX News reports that the IRS and California tax authorities may seek over $200,000 in back taxes, interest, and penalties from Mr. Bush:
Good thing Reggie Bush is a fast runner, because the IRS might be chasing him for back taxes, penalties and interest on the estimated $300,000 worth of luxury gifts he allegedly received while playing football at Southern California, FOXNews.com reported Monday. If they catch him, Bush could end up writing the government agency a check on the high side of $150,000.

"If the entire $300,000 is determined to be taxable," Los Angeles-based CPA Mark Greenberg said, "about 50 percent of that would go to the IRS and Franchise Tax Board. And with penalties and interest, it could go up to 60 percent since it's going back a few years." Greenberg estimates that Bush, now the star running back for the New Orleans Saints, "ultimately will wind up paying about $150,000," but "it could be up to $200,000" if his financial team can't get the penalties and interest waived.

June 23, 2010 in Celebrity Tax Lore, Tax | Permalink | Comments (0) | TrackBack (0)

Symposium on the Law of Philanthropy in the Twenty-First Century, Part I: Governance

Chicago-Kent The Chicago-Kent Law Review has published Symposium on the Law of Philanthropy in the Twenty-First Century, Part I: Governance, 85 Chi.-Kent. L. Rev. 469-717 (2010):
  • Anne-Marie Rhodes (Loyola-Chicago), The Law of Philanthropy in the Twenty-First Century: An Introduction to the Symposium, 85 Chi.-Kent L. Rev. 469 (2010)
  • Lloyd Hitoshi Mayer (Notre Dame) & Brendan M. Wilson (Akin Gump, Washington, D.C.), Regulating Charities in the Twenty-First Century: An Institutional Choice Analysis, 85 Chi.-Kent L. Rev. 479 (2010):  "For more than fifty years scholars, practitioners, and government officials have debated whether the federal government, the state governments, or the charitable sector itself can best ensure that charity leaders fulfill their fiduciary duties. The dramatic growth of this sector, recent highly publicized governance scandals, and a push in Congress and the IRS for more federal involvement in this area have now brought this issue to a head. This article lays a foundation for resolving the dispute by developing an institutional choice framework for considering and comparing the various available options. Applying that framework, the article concludes that the best regulators of charity governance would most likely be state-level government agencies that work with but have a limited degree of independence from the state attorneys general. The article also determines that the best way to ensure adoption of this institutional choice—and limit potential weaknesses—is for the federal government to provide dedicated funding for such agencies, which could be obtained through the already existing private foundation investment income tax."
  • Melanie B. Leslie (Cardozo), Helping Nonprofits Police Themselves: What Trust Law Can Teach Us About Conflicts of Interest, 85 Chi.-Kent L. Rev. 551 (2010):  "Fiduciary duty law seeks to minimize agency costs that occur when the interests of the agent and principal diverge. That law is context specific: the substance depends upon the objectives of the fiduciary relationship and the degree to which other forces, such as markets and social norms, help align the incentives of principal and fiduciary. Trust law has no business judgment rule, and prohibits even “fair” conflict of interest transactions unless they are approved by fully informed beneficiaries. Strict rules bolster norms against self-dealing and compensate for trust beneficiaries’ poor monitoring abilities and inability to exit or diversify. Corporate fiduciary duty law is more relaxed, and does not require the board to obtain advance approval prior to engaging in 'fair' transactions with board members. The standard is more generous because diversified shareholders want to encourage risk, and because market forces pressure corporate directors to avoid conflicts that are not in the corporation’s best interests. Neither monitors nor markets exert meaningful pressure on nonprofit fiduciaries. When nonprofit corporations function effectively it is because the most vocal directors have internalized fiduciary duties as social norms. Fiduciary duty law in the nonprofit context should therefore seek to support and reinforce fiduciary duties as social norms. Trust law teaches that clear rules are superior tools for generating and supporting social norms. That lesson has been lost on policy makers, who have transplanted fuzzy corporate law fiduciary duty standards to the nonprofit context. The result has been the erosion of the fiduciary duty of loyalty."
  • Evelyn Brody (Chicago-Kent) & John Tyler (Ewing Marion Kauffman Foundation, Kansas City, MO), Respecting Foundation and Charity Autonomy: How Public is Private Philanthropy?, 85 Chi.-Kent L. Rev. 571 (2010):  "Recent years have seen a disturbing increase in legal proposals by the public and government officials to interfere with the governance, missions, strategies, and decision-making of foundations and other charities. Underlying much of these debates is the premise—stated or merely presumed—that foundation and charity assets are “public money” and that such entities therefore are subject to various public mandates or standards about their structure, operations, and policies. The authors’ experiences and research reveal three “myths” that, singly or collectively, underlie claims that charitable assets are public money. The first myth conceives of charities as shadow governments due to the requirement that they have public purposes and are subject to attorney general parens patriae oversight. The second myth asserts that, because philanthropies exist under state charters, they are government agencies, “state actors,” or quasi-public bodies subject to constitutional constraints or accountable to the public in the same way as is government. The third myth asserts that revenue forgone on deductible charitable contributions and the tax exemption are a contribution from the state that entitles the state to a say in nonprofit governance structure, operations, and decision-making. In debunking these myths, this paper demonstrates the lack of legal support for the “public money” view of charitable assets."
  • Dana Brakman Reiser (Brooklyn), Governing and Financing Blended Enterprise, 85 Chi.-Kent L. Rev. 619 (2010):  "The image of nonprofit and for-profit as dual and exclusive categories is misleadingly simple. This blurring of the boundary between for-profit and nonprofit has gone on for years and appears only to be gaining steam. Yet, traditionally, the law has put to organizations a choice of either the nonprofit or for-profit form of organization. In the first decade of this century, organizational law is beginning to catch up with the boundary-blurring trend. In the United States and abroad, legislatures are creating new forms for blended enterprise, including several U.S. states’ low-profit limited liability company (the 'L3C') and the community interest company (the 'CIC ') in England and Wales. Along with these more formal efforts, at least one self-regulatory scheme provides a framework to fashion a blended form (the 'B Corporation') under traditional state for-profit corporation law. This article will describe and compare these forms and evaluate whether they can enhance the governance and finance of blended enterprise."
  • Mark Sidel (Iowa), Recent Developments in Community Foundation Law: The Quest for Endowment Building, 85 Chi.-Kent L. Rev. 657 (2010):  "Using legal and judicial means to build community foundation assets are the focus of some of the more interesting recent developments in community foundation law. This article discusses a recent state supreme court case that pitted a community foundation against a trustee bank for control over the management and investment of a trust for the benefit of the community foundation; state incentive programs for community foundations, including tax credits and the use of gambling revenues to build community foundation assets; the growth of community foundation self-regulation; and other new developments that converge on a key issue—building endowment—that faces the vast majority of America’s under-funded, under-endowed community foundations in a time of growing community and social needs."
  • The Kenneth M. Piper Lecture:  Richard B. Freeman (Harvard), Reforming the US Economic Model After the Failure of Unfettered Financial Capitalism, 85 Chi.-Kent L. Rev. 685 (2010):  "This Article is based on the 2009 Kenneth M. Piper Lecture at the Chicago-Kent College of Law. The 2008–2009 financial meltdown and ensuing economic developments have shown three things about modern capitalism: First, that unfettered financial markets remain the Achilles heel of capitalism with the capability of destroying economic stability and bringing misery to all. Second, that high-powered incentives paid to “talent” in finance are a fundamental cause of the excessive risk-taking, chicanery, and financial fraud that contributes to instability. Without a new compensation system that rewards banking and finance for contributing to sustainable economic progress rather than for economic rent-seeking and a renewed regulatory system that punishes chicanery and financial crime and near-crime, there is unlikely to be any change in the behavior of the financial world. And finally, that in the wake of the implosion of laissez faire finance, labor and allied groups have to participate in rewriting the rules and regulations governing banking and finance so that finance serves the real economy rather than the reverse. Accordingly, if Wall Street insiders continue to make the key policy decisions alone, banking and finance will remain a loose cannon on the good ship Capitalism, sure to crash the ship yet again."

June 23, 2010 in Scholarship, Tax | Permalink | Comments (0) | TrackBack (0)

Fleischer: Private Equity and the 'Enterprise Value Tax'

Vic Flesicher (Colorado) has revived A Taxing Blog -- the first academic tax blog that went on hiatus in October 2003. He has a detailed post on Private Equity and the So-called “Enterprise Value Tax":

The current version of the carried interest legislation contains no “enterprise value tax”. It merely applies longstanding principles of partnership tax law to allow selling partners of a service partnership to convert only a portion of their labor income into capital gain. While, from an academic point of view, I think the entire return on labor income should be taxed at ordinary rates, the 50/50 approach of the current bill is consistent with its blended rate approach.

June 23, 2010 in Congressional News, News, Tax | Permalink | Comments (0) | TrackBack (0)

Americans Are Suffering From Tax Break Fever

Dallas Morning News, Tax Breaks Americans Savor Are Costing Uncle Sam Big:

Almost all lawmakers support the mortgage interest deduction, which has been called "America's favorite tax shelter," and homebuilders and real estate agents say it's critical for promoting homeownership. But widespread concern about the federal indebtedness has focused attention on tax breaks that cost so much that some critics question whether America can afford them.

The mortgage interest deduction is the third-most- expensive tax break, estimated to cost only slightly less than the tax treatment of employer-sponsored health care ($110 billion) and 401(k) retirement plans ($106 billion), according to figures from the Congressional Joint Committee on Taxation.

Added together, the more than 200 tax breaks will cost the federal government about $1.1 trillion this year – about $200 billion less than the budget deficit. They are also known as tax expenditures, because they work just like other government expenditures. ...

"This country needs to come to grips with the reality that we have limited resources," said Edward D. Kleinbard, a former chief of staff to the Joint Committee on Taxation, which computes the cost of tax legislation for Congress. "We have to make hard choices, and tax expenditures are getting close to a free pass compared to explicit spending," Kleinbard said.

Yet tax expenditures are rarely mentioned when Congress discusses the path to fiscal discipline. Lawmakers from both parties regularly refer to tax expenditures as "tax relief," meaning attempts to repeal or change them can be painted as a tax increase.

Dallas Morning News, Tax Breaks Have Share of Critics, but Nothing Changes in Washington:

Congressional auditors and some senior lawmakers say many tax breaks aren't doing their job and should be overhauled. Yet most years, when Congress has a chance to review the provisions, it extends them instead. ...

Many of the most expensive tax breaks are permanent. But several dozen, including the research credit, must be reauthorized for a year or several years at a time.

Some tax experts think Congress should make most tax breaks temporary, so lawmakers would at least be forced to grapple with their cost. But others are skeptical, saying Congress has not shown itself willing to challenge the lobbying forces that demand annual renewal.

"Once it's in the [tax] code, it just sails on," said Edward D. Kleinbard, former chief of staff to the Congressional Joint Committee on Taxation. "Every one has a champion within Congress. The members find it desirable not to criticize other members' pet [tax] expenditures, so their pet expenditures are not criticized by the other fellow."

June 23, 2010 in News, Tax | Permalink | Comments (3) | TrackBack (0)

Tuesday, June 22, 2010

Tax Court Rejects Geithner/TurboTax Defense

The Tax Court on Monday again rejected the Geithner/TurboTax defense. Parker v. Commissioner, T.C. Summ. Op. 2010-78 (June 21, 2010):

It is petitioner's position that the accuracy-related penalties at issue "should be waived." In support of that position, petitioner asserts:

    During the period under question I worked as a contractual employee with the International Monetary Fund (IMF). Because I was a contractual employee, IMF provided a W2 to me but did not withhold any federal income or social security (FICA) taxes. * * *

    For tax years 2005 and 2006, I calculated my own taxes using the computer program TurboTax. I even paid extra for the opportunity to specifically ask TurboTax professionals if FICA taxes were included in the tax computations they did for me. These representatives assured me that all the taxes were included (Exhibit A).

    * * * Although I believed that I had paid all taxes due, because I had never filed in this capacity (self-employed), I was a little uncertain about whether TurboTax's calculations included the self employment taxes, so I entered the IRS settlement initiative in January, 2007.

    As it turned out, TurboTax representatives were wrong; the social security taxes were not included in the tax computations they did for me. Then, I engaged a tax specialist to examine and re-calculate my 2005 and 2006 income tax returns and determine any additional taxes due.

    * * * I then withdrew from the [IRS] settlement initiative and filed my amended returns along with payment of taxes and interest due. This resulted in total payments of $32,389 plus $1,808 interest for 2005 and $52,950 plus $828 interest for 2006.

    Because I had initiated contact with the IRS and voluntarily come forward with the problem, I respectfully requested that the IRS waive any additional penalties in conjunction with the underpayments. The IRS, despite my complete cooperation with all their information demands, refused my request and insisted on payment of penalties of $2,435.40 for 2005 and $3,655.40 [sic] for 2006.

    According to I.R.C. § 6664(c) the accuracy related penalty "will not apply where the taxpayer can show reasonable cause for the understatement and action in good faith". I voluntarily made the effort to comply with the tax laws; and paid all my federal taxes and interest due. I acted in good faith throughout this process and believe that I had reasonable cause for my understatement and actions.

We turn first to petitioner's claim that he "had reasonable cause" within the meaning of § 6664(c)(1) for his respective underpayments for his taxable years 2005 and 2006 because he relied on TurboTax. At the respective times petitioner filed his 2005 return and his 2006 return he knew that he was responsible for self-employment tax. Nonetheless, neither his 2005 return nor his 2006 return reported any self-employment tax. On the record before us, we reject petitioner's claimed reliance on TurboTax.

We turn next to petitioner's claim that he "had reasonable cause" within the meaning of § 6664(c)(1) for his respective underpayments for his taxable years 2005 and 2006 because he relied on certain unidentified "TurboTax experts". We do not find credible petitioner's claim that any such "experts" told him that self-employment tax was included in the computation of petitioner's tax in his 2006 return when that return itself did not report any self-employment tax. On the record before us, we reject petitioner's claimed reliance on certain unidentified "TurboTax experts". ...

On the record before us, we find that petitioner has failed to carry his burden of establishing that there was reasonable cause for, and that he acted in good faith with respect to, any portion of the underpayment for each of his taxable years 2005 and 2006. ...

Fn.15: We shall address briefly petitioner's contention that the IRS granted "favorable treatment" in a case involving U.S. Secretary of the Treasury Timothy Geithner, which petitioner described as "incredibly similar" to the instant case. According to petitioner, "there should not be different, or favorable rules for the well-connected". The record in this case does not establish any facts relating to the case to which petitioner refers involving U.S. Secretary of the Treasury Timothy Geithner. In any event, those facts would be irrelevant to our resolution of the issue presented here. Regardless of the facts and circumstances relating to the case to which petitioner refers involving U.S. Secretary of the Treasury Timothy Geithner, petitioner is required to establish on the basis of the facts and circumstances that are established by the record in his own case that there was reasonable cause for, and that he acted in good faith with respect to, the underpayment for each of his taxable years 2005 and 2006 that is attributable to his failure to report self-employment tax.

Update #1:  The Tax Court, Tim Geithner, and Jack Webb

Update #2:

June 22, 2010 in New Cases, Tax | Permalink | Comments (10) | TrackBack (1)

$20b Gulf Coast Disaster Payments: Income to Victims, Deductible by BP

Unless Congress enacts special tax legislation in response to the Gulf of Mexico oil spill, the $20b in disaster payments would be treated as income to the Gulf Coast residents compensated for their losses and as a deductible expense by BP:

[P]eople up and down the Gulf Coast reeling from the oil spill disaster ... are surprised — and frustrated — to find out the IRS may take a chunk of the payments BP PLC is providing to help them stay afloat. ...

Accountants have been trying to nail down the implications for thousands of taxpayers after President Barack Obama said BP would create a $20 billion disaster fund and provide another $100 million for oil workers who lose their jobs because of the six-month moratorium on deepwater drilling in the Gulf of Mexico. ...

Tax experts said generally all income is taxable under federal law unless specific exemptions are approved by Congress or the Treasury Department — and neither has acted yet on oil spill damage claims.

The IRS would not comment on whether exemptions would be made, citing a policy of not answering questions on specific tax issues. Adding to the confusion, Kenneth Feinberg, who was chosen by President Barack Obama and BP to oversee the Independent Claims Facility, said Friday it hasn't been determined if the payouts will be considered taxable income.

Some tax experts said they expected federal action soon to clarify the situation for Gulf Coast residents and business owners. ...

It's not the first time the region has dealt with whether disaster money should be taxed. In the aftermath of Hurricane Katrina, Louisiana and Mississippi residents received federal money to rebuild their homes after many claimed a casualty loss for the damage on the 2005 tax returns.

The IRS initially required people who received the money and took the deduction to add the value of the deduction to their 2007 returns as taxable income. That decision angered many residents, including some who were pushed into a higher tax bracket as a result. After residents and local leaders protested, Congress in 2008 voted to negate the IRS decision.

Without any such decision yet from federal authorities, tax experts are advising people getting BP payments to do a bit of advance planning and set aside some money. ...

BP likely will be able to deduct payments it has agreed to make to compensate those damaged by the oil spill in the Gulf of Mexico, according to a tax expert.

BP last week agreed to establish a $20 billion escrow account to compensate victims of the spill. In determining whether the fund is tax deductible, BP first must establish that it is an "ordinary and necessary" expense BP incurs as part of conducting its business, a hurdle it clears fairly easily, according to a report Monday from Robert Willens, a longtime Lehman Brothers tax expert who now heads his own consulting firm. ...

There is a question, though, about whether a BP deduction could be disallowed on public policy grounds. The IRS tried to disallow a tax deduction in one instance in which a taxpayer attempted to deduct legal fees he paid defending himself (unsuccessfully) against a criminal prosecution. In that instance, however, the Supreme Court ruled the deduction was allowable. Though the Court found that legislation could theoretically be crafted to disallow certain tax deductions on public policy grounds, absent such legislation, the Court stated it would admit such a disallowance in only "extremely limited circumstances" where the conduct was at odds with "sharply defined national or state policies," Willens states in his report.

In short, it would likely take an act of Congress to keep BP from deducting its payments, and while that can't be ruled out, given the mood of Congress toward BP, it would seem to be difficult from a legal point of view since it would likely be viewed as legislating ex post facto.

Further good news for BP is that if the payment causes BP to post a net operating loss, the oil giant would likely be able to use the loss to offset profits from the past two years.

(Hat Tip: Jeffrey Barry.)

June 22, 2010 in IRS News, News, Tax | Permalink | Comments (4) | TrackBack (0)

ABA Forms Group to Examine Domestic Partner Tax Issues

Tax AnalystsNicole Duarte, ABA Forms Group to Examiner Domestic Partner Community, 2010 TNT 118-6127 (June 21, 2010):

In response to questions raised by recent informal IRS guidance [blogged here], the ABA Section of Taxation Teaching Tax committee has begun a project to examine community property issues related to registered domestic partnerships and to submit to the IRS comments on the topic.

Santa Clara University School of Law professor Patricia Cain is heading the newly formed group, tentatively called the Community Property Comment Project, which will examine "substantive legal income, estate, and gift tax questions" related to registered domestic partnerships subject to community property (CP) rules.

Cain said the group will comprise 10 to 15 members from private practice and academia but will welcome comments and questions from the practitioner community at large, particularly those in CP states that allow registered domestic partnerships -- namely Washington, Nevada, and California.

From the ABA Tax Section Teaching Taxation Committee:

Proposed Topic: Clarification of tax rules that will be applied to Registered Domestic Partners and same-sex spouse in states that include such couples in their community property regimes. Recently the IRS has issued a PLR and two CCAs reversing an earlier position, and now holding that the analysis in Poe v Seaborn, 282 U.S. 101 (1930). Specifically, the combined rulings in these documents hold that: (1) Such couples will split all community income equally; (2) Such couples will also split tax payments such as withholding equally; (3) Such couples will have no gift tax consequences as a result of the IRS recognition of community property; and (4) The IRS will consider partner/spouse community earnings when reviewing a taxpayer’s request for offer in compromise.

Tax lawyers and return preparers in the three states that are most likely affected by these rulings (California, Washington, and Nevada) are in need of additional guidance on related questions. The purpose of this comment would be to suggest to the IRS specific questions that might be addressed by public rulings or similar publications.

Anyone interested in participatring should email Pat Cain.

Pat reports:

This project is on a fast-track pace. I have a committee and don’t necessarily need additional members but would appreciate comments from tax profs about issues they see – and if you think there is anyone that should be on the committee based on past interest in this project let me know. The tax profs who have signed up so far are:

  • Ellen Aprill (Loyola-L.A.)
  • Adam Chodorow (Arizona State)
  • Nancy Knauer (Temple)
  • Dennis Ventry (UC-Davis)

All Tax Analysts content is available through the LexisNexis® services.

June 22, 2010 in Tax, Tax Analysts | Permalink | Comments (0) | TrackBack (0)

Corn Products to Acquire National Starch

The companies behind two famous tax cases are in the business news:  Corn Products is acquring National Starch for $1.3 billion: (Hat Tip: Marty McMahon.)

June 22, 2010 in News, Tax | Permalink | Comments (0) | TrackBack (0)

Waggoner Posts Tax Papers on SSRN

NY Times on Law School Grade Inflation

New York Times, In Law Schools, Grades Go Up, Just Like That, by Catherine Rampell:

One day next month every student at Loyola Law School Los Angeles will awake to a higher grade point average. But it’s not because they are all working harder.

The school is retroactively inflating its grades, tacking on 0.333 to every grade recorded in the last few years. The goal is to make its students look more attractive in a competitive job market.

In the last two years, at least 10 law schools have deliberately changed their grading systems to make them more lenient. These include law schools like NYU and Georgetown, as well as Golden Gate and Tulane, which just announced the change this month. Some recruiters at law firms keep track of these changes and consider them when interviewing, and some do not.

Continue reading

June 22, 2010 in Legal Education | Permalink | Comments (1) | TrackBack (0)

SSRN Tax Professor Rankings

SSRN

SSRN has updated its monthly rankings of 650 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 June 18, 2010) 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:

All-Time Downloads

Recent Downloads

1

Reuven Avi-Yonah (Michigan)

15,610

Herwig Schlunk (Vanderbilt)

5549

2

Louis Kaplow (Harvard)

15,107

Paul Caron (Cincinnati)

5010

3

Vic Fleischer (Colorado)

13,793

Reuven Avi-Yonah (Michigan)

4439

4

James Hines (Michigan)

12,869

Carter Bishop (Suffolk)

3252

5

Paul Caron (Cincinnati)

12,244

Jennifer Kowal (Loyola-L.A.)

2740

6

Dennis Ventry (UC-Davis)

9749

Richard Kaplan (Illinois)

2566

7

Chris Sanchirico (Penn)

9607

Katherine Pratt (Loyola-L.A.)

2471

8

David Walker (BU)

9193

Dennis Ventry (UC-Davis)

2232

9

David Weisbach (Chicago)

9011

Bridget Crawford (Pace)

1893

10

Ed McCaffery (USC)

8710

James Hines (Michigan)

1822

11

Richard Kaplan (Illinois)

8242

Wendy Gerzog (Baltimore)

1718

12

Ted Seto (Loyola-L.A.)

 8195

Martin J. McMahon, Jr. (Florida)

1594

13

Robert Sitkoff (Harvard)

7752

Vic Fleischer (Colorado)

1548

14

Steven Bank (UCLA)

7163

Daniel Simmons (UC-Davis)

1538

15

Bradley Borden (Washburn)

6747

Bradley Borden (Washburn)

1532

16

Francine Lipman (Chapman)

6630

Allison Christians (Wisconsin)

1489

17

Herwig Schlunk (Vanderbilt)

6593

Louis Kaplow (Harvard)

1474

18

Carter Bishop (Suffolk)

6333

Francine Lipman (Chapman)

1474

19

Wendy Gerzog (Baltimore)

6157

Daniel Shaviro (NYU)

1451

20

David Schizer (Columbia)

6077

Lawrence Lokken (Florida)

1339

21

Daniel Shaviro (NYU)

6047

Karen Burke (San Diego)

1327

22

Michael Knoll (Penn)

5915

Ted Seto (Loyola-L.A.)

1324

23

Bridget Crawford (Pace)

5598

David Weisbach (Chicago)

1318

24

Ruth Mason (Connecticut)

4913

David Walker (BU)

1310

25

Katherine Pratt (Loyola-L.A.)

4785

Steven Bank (UCLA)

1241

Continue reading

June 22, 2010 in Legal Education, Tax, Tax Prof Rankings | Permalink | Comments (0) | TrackBack (0)

SOI Releases Estate and Gift Returns, 1917-1923

Winchester: Corporations That Weren't: The Taxation of Firm Profits in Historical Perspective

Richard Winchester (Thomas Jefferson) has published Corporations That Weren't: The Taxation of Firm Profits in Historical Perspective, 19 S. Cal. Interdisc. L.J. 501 (2010).  Here is the abstract:

This article examines the nation's earliest income tax laws, focusing on the provisions that tax business profits in a way that disregards a firm's state law business form. Broadly speaking, this practice dates back to the Civil War era, when a firm's state law business form made no difference in how its profits were taxed. After the adoption of the Sixteenth Amendment, however, Congress decided to give partial tax relief to undistributed corporate profits, largely on the theory that the firm could and would reinvest those profits in its business. But Congress denied that tax relief to a corporation in certain instances, and it also extended the relief to certain unincorporated firms in a narrow range of situations. This study of those provisions reveals how these measures implicitly reaffirmed the Congressional justification for the partial tax relief on undistributed corporate profits. The study also considers the extent to which each of these measures served the larger interests of equity.

June 22, 2010 in Scholarship, Tax | Permalink | Comments (0) | TrackBack (0)

Monday, June 21, 2010

Leiter's Student Quality Ranking v. U.S. News Overall Ranking

Brian Leiter (Chicago) has released Ranking of Top 40 Law Schools by Student (Numerical) Quality 2010.  These are the schools whose student quality ranking most exceeds their overall U.S. News rankings, as well as the schools whose overall U.S. News rankings most exceeds their student quality rankings:

School

Difference

Student Quality Rank

U.S. News Rank

Cardozo

+18

34

52

UC-Hastings

-13

29

42

Maryland

-13

35

48

Pepperdine

-12

40

52

Fordham

-10

24

34

Tulane

-10

38

48

UC-Davis

-9

28

37

BYU

-9

33

42

Boston College

-6

22

28

Duke

-4

7

11

Georgetown

-4

10

14

U. Washington

-3

31

34

Stanford

+3

6

3

Minnesota

+4

26

22

Alabama

+5

39

34

UC-Berkeley

+6

13

7

Washington U.

+6

25

19

Illinois

+6

27

21

June 21, 2010 in Law School Rankings, Legal Education | Permalink | Comments (1) | TrackBack (0)

Income Mobility Mitigates Income Inequality

The Tax Foundation today published Income Mobility and the Persistence of Millionaires, 1999 to 2007, by Robert Carroll:

Concern over the rising gap between the rich and poor has been the primary rationale for President Obama's redistributive policies. But one important aspect of the American economy that should lessen concerns about snapshots of income inequality is the mobility of people up and down the economic ladder.

If people move quickly up and down through the income spectrum, the position they occupy at any point in time may be less of a concern. Moreover, it is natural that people at different stages in their life cycle of earnings—just entering the work force, just retired, or midlife during their peak earnings years-would occupy different rungs of the economic ladder.

  • Concerns over increased income inequality should be tempered by the fact that a substantial number of households move up or down through the income distribution over time.
  • Nearly 60% of households in the bottom income quintile in 1999 were in a higher quintile in 2007, and roughly 40% of tax returns in the top quintile in 1999 were in a lower quintile in 2007.
  • Roughly half of millionaires during the1999 through 2007 period attained this status just once during those nine years. Only 6% of this group were millionaires in all nine years.
  • The volatile nature of capital gains realizations appears to be a major explanation for the transiency of millionaires.

Sr180_Page_05

Sr180_Page_06 

June 21, 2010 in Tax, Think Tank Reports | Permalink | Comments (1) | TrackBack (0)

ObamaCare Drives Tax Code to New (Seventh) Level of Complexity

Jim Maule (Villanova) today notes that ObamaCare has driven the Internal Revenue Code into new even more complicated terrain. Until now, each Code provision has required, at most, six levels:

Section

Subsection

Paragraph

Subparagraph

Clause

Subclause

E.g., § 132(f)(5)(B)(ii)(I):

Section 132

Subsection (f)

Paragraph (5)

Subparagraph (B)

Clause (ii)

Subclause (I)

ObamaCare has created a need for a seventh unit: § 4980I(b)(3)(C)(iii)(II)(aa):

§ 4980I. Excise tax on high cost employer-sponsored health coverage
* * * * *
(b) Excess benefit. For purposes of this section--
* * * * *
(3) Annual limitation. For purposes of this subsection--
* * * * *
(C) Applicable dollar limit.
* * * * *
(iii) Age and gender adjustment.
(I) In general. The amount determined under subclause (I) or (II) of clause (i), whichever is applicable, for any taxable period shall be increased by the amount determined under subclause (II).
(II) Amount determined. The amount determined under this subclause is an amount equal to the excess (if any) of--
(aa) the premium cost of the Blue Cross/Blue Shield standard benefit option under the Federal Employees Health Benefits Plan for the type of coverage provided such individual in such taxable period if priced for the age and gender characteristics of all employees of the individual's employer, over
(bb) that premium cost for the provision of such coverage under such option in such taxable period if priced for the age and gender characteristics of the national workforce.

Jim asks: what are we going to call the new (aa), (bb), etc. monster?

June 21, 2010 in Tax | Permalink | Comments (8) | TrackBack (0)

Why Does Obama Exclude Tax Expenditures From Proposed Presidential Rescission Authority?

Sima J. Gandhi (Center for American Progress), Rescission Decision: Tax Expenditures Belong on the Cutting Block:

The House Budget Committee will hold a hearing Thursday morning on a White House proposal to give the president authority to force reconsideration of items in spending bills that he concludes are not a good use of public resources. Under this rescission measure, the president could send recommended spending cuts back to Congress for an up-or-down vote.

Unfortunately, the Reduce Unnecessary Wasteful Spending Act of 2010 excludes from the presidential scalpel one of the largest categories of government spending: tax expenditures, or more simply, government subsidies that are doled out through the tax code. The failure to include tax expenditures in the president's spending-reduction measure leaves more than $1 trillion off the table.

Lawmakers should press administration officials at Thursday's hearing about this regrettable omission from the new proposal.

Expenditures

Sima J. Gandhi (Center for American Progress), Congressmen Join Chorus Calling for Tax Expenditure Scrutiny:

The House Budget Committee yesterday held a hearing on the president's most recent spending control measure, the Reduce Unnecessary Wasteful Spending Act of 2010. The hearing presented lawmakers with an opportunity to press the administration about why the bill—which would give the president greater flexibility in trimming appropriations packages—excludes one of the largest categories of government spending: tax expenditures.

Before the hearing, the Center for American Progress urged lawmakers to raise the issue—and they did.

House Ways and Means Budget Chairman, John Spratt (D-SC), flat out asked the administration why it had failed to include tax expenditures. And in a heated series of questions, committee member Lloyd Doggett (D-TX) derided the administration for subjecting tax expenditures and direct spending to different treatment. “If you were to come on behalf of the administration and ask us to write a check through the appropriations process for $38 million for this year only to NASCAR . . . you'd be laughed out of this room,” Doggett said, referring to a tax expenditure under consideration in the Senate.

June 21, 2010 in Tax, Think Tank Reports | Permalink | Comments (1) | TrackBack (0)

Lee: Tax TARP and Executive Bonuses

John W. Lee (William & Mary) has published Tax TARP Needed for Year One and Year Two Returns of Executive Bonus to TARP Recipient: A Case Study of Year One Rescission/Exclusion from Income and Year Two Deduction Under 1341, 1 Wm. & Mary Bus. L. Rev. 323 (2010). Here is the abstract:

This Article addresses the tax consequences to AIG Financial employees who repay their controversial retention bonuses in the year of receipt (Year 1) or in a subsequent year (Year 2). At the time the executives received their bonuses, the media and members of Congress raised challenges that might induce such repayment, thus justifying favorable tax treatment for repaying executives. Accordingly, bonuses repaid in year 1 should be excluded from gross income under the doctrine of Year 1 rescission. Bonuses repaid in Year 2 should result in an adjustment under Section 1341, which reduces the income taxes for Year 2 by the amount that the income taxes for Year 1 would have been reduced if the repaid bonus hypothetically had been excluded from income in Year 1.

This analysis is based upon a “balancing-entry approach” which backs out a Year 1 transaction when an assumption at the time of Year 1 receipt (that the employee would get to keep the bonus) later turns out to have been in error. This balancing-entry approach is traced across a number of case law and statutory doctrines including the claim of right doctrine, the Crane-Tufts doctrine, and rescission and cancellation in Year 1. Contrary interpretations exist, however, manifesting the need for Congressional or administrative clarification so as to encourage repayments of such controversial bonuses.

June 21, 2010 in Scholarship, Tax | Permalink | Comments (0) | TrackBack (0)

OLC: Federal Workers' TSP Accounts Are Subject to Tax Levy

TSP 3 The Department of Justice's Office of Legal Counsel has issued an opinion to the IRS Chief Counsel concluding that Thrift Savings Plan accounts (401k-like plans of federal employees) are subject to federal tax levies under I.R.C. §§ 6331 and 6334, even though 5 U.S.C. § 8437(e)(2) explicitly protects such accounts from levy.  The OLC concluded that because TSP accounts are not explicitly exempted in I.R.C. § 6334, the IRS's general levy power trumps federal workers rights under 5 U.S.C. § 8437(e)(2). (Hat Tip: Volokh Conspiracy, Ellen Aprill.)

June 21, 2010 in IRS News, News, Tax | Permalink | Comments (0) | TrackBack (0)

Johnston: MLPs -- Paying Other People's Taxes

Tax AnalystsDavid Cay Johnston has published Master Limited Partnerships: Paying Other People's Taxes, 127 Tax Notes 1393 (June 21, 2010):

Johnston reveals how the fine print of a federal regulation forces people to pay the individual income taxes of others and how this policy could easily be expanded to siphon billions of dollars per year from consumers.

TN Chart 

[Click on chart to enlarge.]  Taxes should not be hidden, as David Ricardo and Adam Smith taught. They should also not be shifted from those who gain to those who are captive customers of monopolies. But the trend in America under both parties is away from markets and toward a subtle expansion of corporate socialism, under which profits are concentrated through government action and losses are socialized through bailouts. Now we have income tax burdens forcibly shifted from the wealthy few to the many through regulation.
All Tax Analysts content is available through the LexisNexis® services.

June 21, 2010 in News, Scholarship, Tax, Tax Analysts | Permalink | Comments (0) | TrackBack (0)

Yung: Judges Who Attended Lower-Ranked Law Schools Are More Conservative

Corey Yung (John Marshall), Law School Rankings and Judicial Liberalism:

A common attack on elite law schools is that they are filled with with a bunch of loony liberals who hope to indoctrinate their law students with their left-wing beliefs. To my surprise, for federal appellate judges, [there] seems to be a kernel of truth to that belief.  The Ideology Scores of the 138 judges with sufficient sample size that I studied [Judged by the Company You Keep: An Empirical Study of the Ideologies of Judges on the United States Courts of Appeals, 51 B.C. L. Rev. ___ (2010)] had a statistically significant relationship with the ranking of the law school attended according to the US News and World Report Rankings from 2010. ... The figure below indicates that for each ten ranks lower in USNWR, a judge’s Ideology Score increased in a conservative direction by 27.9 points (on a scale of -100 to 100).

Someone might argue that Democratic Presidents (or really just President Clinton) valued law school credentials more than Republican Presidents. After all, it was President George W. Bush who had the audacity to nominate a SMU School of Law graduate to the Supreme Court. However, the observed correlation existed both for appointees of Democratic and Republican Presidents.

June 21, 2010 in Legal Education, Scholarship | Permalink | Comments (3) | TrackBack (0)

Average Family Federal Tax Rate: 20.4% (4.0% for Bottom 20%; 29.5% for Top 1%)

The Congressional Budget Office last week released Average Federal Tax Rates in 2007 [click on charts to enlarge]:

AverageFedTaxRates2007

Figure1_small

June 21, 2010 in Congressional News, Tax | Permalink | Comments (0) | TrackBack (0)

Sunday, June 20, 2010

TaxProf Blog Weekend Roundup

Top 5 Tax Paper Downloads

SSRNThere is a bit of movement in this week's list of the Top 5 Recent Tax Paper Downloads, with a new paper (which I highly recommend) debuting on the list at #5:

1.  [573 Downloads]  Pursuing a Tax LLM Degree: Where?, by Paul L. Caron (Cincinnati), Jennifer M. Kowal (Loyola-L.A.), Katherine Pratt (Loyola-L.A.) & Theodore P. Seto (Loyola-L.A.)

2.  [462 Downloads]  The Generation-Skipping Transfer Tax: A Quick Guide, by Mark Powell (Chapman)

3.  [350 Downloads]  Taxation and the Financial Sector, by Douglas A. Shackelford (University of North Carolina, Kenan-Flager Business School), Daniel Shaviro (NYU) & Joel B. Slemrod (University of Michigan, Ross School of Business)

4.  [327 Downloads]  An Overview of Tax Issues for Synagogues (and Other Religious Congregations), by Ellen P. Aprill (Loyola-L.A.)

5.  [227 Downloads]  The Costs of Estate Tax Dithering, by Paul L. Caron (Cincinnati)

June 20, 2010 in Legal Education, Tax, Top 5 Downloads | Permalink | Comments (0) | TrackBack (0)

Taxpayer Has Heart Attack While on Phone With Tax Man, Who Calls 911 and Saves Taxpayer's Life

Lexington Herald-Leader, Tax Worker Helps Save Taxpayer's Life:

They say death and taxes are inevitable. But in the case of Earl Phillips, taxes may have helped save the Adair County man's life.

When Phillips called the state Department of Revenue last month to get answers about his state income tax bill, the faceless Frankfort bureaucrat who called him back saved his life. ...

Phillips, an Adair County construction worker, received a tax notice in late May with [Natalie] Brown's name and phone number. When Brown returned the call he'd placed, she noticed that Phillips, 60, seemed out of sorts. "I noticed he was breathing really heavily," Brown said Friday. "I could tell something was wrong." ...

Phillips' breathing seemed to get worse as minutes ticked by, Brown said. ... So Brown verified she had the correct address for Phillips — which was on his tax forms — and called Adair County 911.

Shortly after that, emergency crews arrived and took Phillips, who was home alone, to a local hospital. He was later transferred to a Louisville hospital, where doctors put a stent, or tube, in his heart. He had a 90 percent blockage in one of his arteries, Phillips said. ...

Brown's boss, Bruce Nix, the Director of Individual Income Tax for the Department of Revenue, said this is the first time in his 21 years with the department of revenue that he can recall that a revenue employee may have saved the life of a taxpayer. ...

Oh, and did Phillips ever get that tax question answered? "Yes, I did," Phillips said Friday.

(Hat Tip: Jim Maule.)

June 20, 2010 in News, Tax | Permalink | Comments (9) | TrackBack (0)

Information Reporting of Online Sales and the Tax Gap

Maricel P. Montano (J.D. 2010, USC) has published Note, Can Widening the Scope of Information Reporting to Include Income Derived from Online Sales Help to Narrow the Expanding Tax Gap?, 83 S. Cal. L. Rev. 379 (2010). Here is the Conclusion:

Given the expansion of both the tax gap and e-commerce, it is imperative that tax policy be shaped to facilitate effective information reporting of the income derived from this increasingly important sector of our economy. The information reporting requirement included in the Housing and Recovery Act of 2008 appears to be an effective means of addressing the underreporting of income from online sales; the benefits of centralization of information and increased confidence among taxpayers that their fellow citizens are not circumventing their tax obligations will likely outweigh the additional administrative costs. In the next few years, before the provision is applied to annual tax returns, the IRS should continue to provide guidance for the terms used throughout the provision to ensure that any ambiguities discussed in this Note are addressed. As long as the guiding principles of traditional tax policy are integrated into the execution of this new provision, the expanding tax gap can be addressed without stunting the growth of e-commerce.

June 20, 2010 in Scholarship, Tax | Permalink | Comments (0) | TrackBack (0)

McGeorge Law Review Symposium on California Tax Legislation

The McGeorge Law Review has published Review of Selected 2009 California Legislation (Vol. 41, no. 3):

June 20, 2010 in Scholarship, Tax | Permalink | Comments (0) | TrackBack (0)

Saturday, June 19, 2010

Toy Story 3

We saw Toy Story 3 last night -- the critics are right: it is the best movie in years, especially for anyone who has had to (or will) send a child off to college. I teased my wife for sobbing at the end (while choking up myself).

Reviews:

June 19, 2010 | Permalink | Comments (3) | TrackBack (0)

Tax Court Denies Charitable Deduction for $200 Cash Given to Panhandlers & $29k of Stuff Donated to Goodwill

The Tax Court on Thursday denied a taxpayer's claimed charitable deductions for $200 cash given to panhandlers and $28,655 of household items donated to Goodwill. Roberts v. Commissioner, T.C. Summ. Op. 2010-76 (June 17, 2010):

For 2005 petitioner claimed, on Schedule A, Itemized Deductions, a $200 cash charitable contribution, which he described as donations to panhandlers and the Salvation Army, and $28,655 of noncash charitable contributions. Included with his 2005 Federal income tax return was a self-prepared substitute Form 8283, Noncash Charitable Contributions, in which petitioner claims to have contributed more than 450 items of property consisting primarily of used clothing, but also including, among other things, towels, bedsheets, books, costume jewelry, children's toys, and glass lamps. Petitioner's descriptions of the items of property allegedly contributed to charity are vague and include self-assigned estimates of their values. Petitioner also provided copies of five receipts from Goodwill Industries (Goodwill) dated January 9, April 13, May 18, September 16, and October 1, 2005. Only one of the receipts bears a signature indicating that the donated items were received by Goodwill, and the receipts provide nothing more than vague references to the items allegedly donated; e.g., "men's boots", "ladies' clothes", "men's clothes", "boy's clothes", "women's clothing", and "4 bags of clothes". ...

With respect to the claimed $200 of cash contributions to charity, petitioner has failed to offer anything more than his self-serving testimony that he made various donations to panhandlers and the Salvation Army. ...  Petitioner did not offer any canceled checks, receipts, or other reliable evidence to substantiate the claimed $200 of cash contributions to charity. Accordingly, we sustain respondent's determination to deny to petitioner a deduction for the claimed $200 of cash contributions to charity.

[P]etitioner has neither attached to his Federal income tax return nor proffered an appraisal summary to establish the values of the items allegedly donated. ... [T]he copies of the five receipts from Goodwill neither reconcile with petitioner's substitute Form 8283 nor provide anything more than vague descriptions of the items donated. Accordingly, we find that petitioner has failed to establish, by proper and adequate substantiation, entitlement to a charitable contribution deduction for the noncash items he claims to have donated to charity. We therefore sustain respondent's determination to deny petitioner a deduction for noncash contributions to charity.

June 19, 2010 in New Cases, Tax | Permalink | Comments (12) | TrackBack (0)

The Need for a Carbon Tax

Daniel E. Kwak (J.D. 2010, Oregon) has published Comment, Civilizing Society: The Need for a Carbon Tax in Light of Recent Changes to U.S. Energy Taxation Policy, 88 Or. L. Rev. 547 (2009). Here is part of the Conclusion:

Providing credits to taxpayers who invest in energy property has proven to be an effective way of encouraging energy property development. Allowing taxpayers to claim Treasury grants in lieu of these credits streamlines the process, further encouraging investments. Awarding credits for property financed by subsidized energy financing, however, amounts to a double-dip in federal funds and should not be allowed in an era during which the national debt increases every month.

In addition to reintroducing the section 48 limitation, Congress should pass a tax on carbon emissions. Rather than increasing taxation of income or other positive contributions to the economy, the government should shift its attention to environmentally harmful activities, and, with the recent passing of the American Recovery and Reinvestment Act of 2009, the timing may be right for a persuasive appeal to Congress. Political alliances and party promises will remain significant hurdles to gaining public support for a carbon tax. The bottom line, however, is clear: other countries have become savvy to the need for increased environmental taxation in energy policy, and it is time for the United States to follow suit.

June 19, 2010 in Scholarship, Tax | Permalink | Comments (6) | TrackBack (0)

Tax Justice and Same-Sex Domestic Partner Health Benefits

Michelle D. Layser has published Tax Justice and Same-Sex Domestic Partner Health Benefits: An Analysis of the Tax Equity For Health Plan Beneficiaries Act, 32 U. Haw. L. Rev. 73 (2009). Here is the abstract:

This article analyzes the recently proposed Tax Equity for Health Plan Beneficiaries Act of 2009. Under current law the marriages and domestic partnerships of same-sex couples are not recognized for federal tax purposes under the Defense of Marriage Act. As a result, same-sex couples who receive employer-provided health benefits for their partners pay over $1,000 more in federal income tax than similarly situated opposite-sex couples. This unequal tax treatment also results in an additional burden of $57 million per year in extra payroll taxes for employers. The proposed Act would eliminate this discrimination.

June 19, 2010 in Scholarship, Tax | Permalink | Comments (0) | TrackBack (0)

Friday, June 18, 2010

Companies Deducted $52b More for Stock Options in 2008 Than They Reported on Their Books

On Wednesday, Senate Permanent Subcommittee on Investigations Chair Carl Levin released new 2008 IRS data showing that corporations claimed $52 billion more in tax deductions for stick options issued to their executives than they reported as expenses on the company books:

“Current stock option accounting and tax rules are out of kilter, lead to corporations reporting inconsistent stock option expenses on their financial books versus their tax returns, and often produce huge tax windfalls for companies that pay their executives with large stock option grants,” said Levin. “The latest IRS data from 2008 shows that U.S. companies reduced their taxes by billions of dollars by claiming $52 billion more in stock option tax deductions than the stock option expenses shown on their books. The figures from prior years are $48 billion in excess stock option tax deductions in 2007; $61 billion in 2006; and $43 billion in 2005. The companies claiming these billions of dollars in tax deductions benefited from an outdated and overly generous stock option tax rule that produces tax deductions that often far exceed companies’ reported expenses. It’s a stock option tax break we can no longer afford and ought to end.”

June 18, 2010 in Congressional News, Tax | Permalink | Comments (1) | TrackBack (0)

IRS Releases Tax Whistleblower Guidelines

IRS Logo The IRS yesterday released on its website guidelines for handling tax whistleblower claims:

The Ferraro Law Firm (which has made $45 billion in submissions to the IRS Whistleblower Office) has issued this press release in response to the new rules, noting that "[a]t least one part of the I.R.M. is contrary to the law. The I.R.M. claims that criminal penalties are not subject to Tax Whistleblower awards. This is clearly contrary to section 7623(b)(1). To claim that ‘criminal fines’ are not the collected proceeds of the punishment of persons guilty of violating the internal revenue laws is just crazy. The Tax Court will kill this on the first case.”

Wall Street Journal, IRS Whistleblower Guidelines Spark Criticism, by Martin Vaughan:

New IRS guidelines on how to process and pay rewards to whistleblowers are drawing criticism from a leading U.S. senator, who says they don't do enough to encourage informants to come forward.

Sen. Charles Grassley (R., Iowa), was one of the main architects of a 2006 law that requires payouts to whistleblowers of 15% to 30% of the funds the IRS recovers based on their tips. "These changes appear to be limiting the scope of whistleblowers and the type of recoveries that would be eligible for an award," Grassley said in a statement Friday to Dow Jones Newswires. "The fewer people eligible for rewards, the fewer people coming forward with information that might check out as tax fraud," he said.

The IRS has yet to pay out any awards under the new program. But the guidelines to IRS employees bring closer to fruition the payment of tens of millions of dollars in claims, tax practitioners say.

June 18, 2010 in IRS News, Tax | Permalink | Comments (1) | TrackBack (0)

Eason: Motive, Duty, and the Management of Restricted Charitable Gifts

John K. Eason (Seattle) has published Motive, Duty, and the Management of Restricted Charitable Gifts, 45 Wake Forest L. Rev. 123 (2010). Here is part of the Conclusion:

By abandoning the notion of slavish adherence to a given donor’s subjective intentions, the analysis proposed in this Article provides a more structured and objective approach to dealing with donor-restricted gifts and the problems that such gifts often cause. This approach pays due homage to the foundational “donor intent” premise that underlies centuries of cy pres development while avoiding much of the variability wrought by that unsteady foundation in practical application. The resulting analytical framework better serves the modern managerial context in which restricted charitable gifts are so often put to use. The proposal set forth here achieves these ideals by asking, from a more general and categorical point of view, an essential question: why did the donor impose this restriction? ...

Inevitably, circumstances change and human beings find themselves time and again surprised by the course of what transpires. Logic therefore dictates that donor attempts to control the use of gifted property in perpetuity will often eventually conflict with the accomplishment of charitable objectives. When conflict does arise, donor intent matters, but such intent should not be allowed to run roughshod over evolving notions of service to the public good. Any approach to resolving problematic gift restrictions should keep such charitable considerations prominent in their own right and, indeed, primary to all that follow. The approach set forth in this Article proceeds just so, allowing “charity” to remain always central to defining the boundaries of what is possible and permissible by virtue of a donor’s generosity.

June 18, 2010 in Scholarship, Tax | Permalink | Comments (2) | TrackBack (0)

Do Law Students Want Curricular Reform?

ETAAC Releases 2010 Annual Report to Congress

P3415 The IRS announced today (IR-2010-75) that the Electronic Tax Administration Advisory Committee (ETAAC) has released its 2010 Annual Report to Congress:

We hope that our observations, assessments and recommendations will enable Congress and IRS to make the best decisions possible in service to American taxpayers and our nation. ...

[T]he overall e‐file rate for all major types of tax returns is projected to reach approximately 59% for the 2010 filing season. To achieve the 80% goal for these types of returns, an estimated forty million additional returns need to be e‐filed. We continue to believe the biggest opportunity to increase electronic filing over the next two years remains in the area of individual income tax returns. IRS continued to make steady progress advancing individual return electronic filing, which increased from about 69% of all individual returns to approximately 72% from 2009 to 2010. ...

As described in Section III, ETAAC believes that IRS is at, or certainly approaching, a strategic inflection point in performing its mission. That point will be reflected principally by increased IRS responsibilities, reduced federal budgets, and heightened taxpayer expectations. In this emerging environment, ETAAC believes that IRS will be able to achieve its mission only if it collaborates with industry and other stakeholders to achieve the following key strategies in connection with electronic tax administration:

  1. Continuously increasing the professionalism and capabilities of the electronic tax preparation and filing industry.
  2. Delivering those taxpayer services that only government can provide.
  3. Leveraging the capabilities and diversity of the electronic tax preparation and filing industry to deliver taxpayer services that can be better met through private sector innovation.

This effort will require the full support of all key stakeholders – Congress, Treasury, IRS, the electronic tax preparation and filing industry, and taxpayers.

June 18, 2010 in IRS News, Tax | Permalink | Comments (0) | TrackBack (0)

Americans Have 'Mere Hours' to Report UBS Accounts to IRS After Swiss Approval of Tax Deal

NYU Hosts 2nd Annual Tax Controversy Forum Today

NYU NYU hosts its 2nd Annual Tax Controversy Forum today at the Westin New York at Times Square:

The Tax Controversy Forum features interactive presentations by expert practitioners covering a broad range of issues and concerns arising in tax audits and tax litigation at all levels. Coverage encompasses the timeline of controversy work from anticipating and planning for the examination of a return through audit and administrative appeals processes to litigation techniques and strategies. Panelists representing both taxpayers and the government share views on the latest issues and perspectives on tax controversies. Attendees learn practical solutions and valuable insights from leading authorities throughout the profession. It's an opportunity for you to share ideas, exchange views, learn what others are doing, and obtain credit for continuing education.

The full program is here.

June 18, 2010 in Conferences, Tax | Permalink | Comments (0) | TrackBack (0)

Houston to Raise 1L Tuition 26.5%

University_of_Houston_Law_Center Above the Law, New Tuition Trend: Will 1Ls be Willing to Subsidize 3Ls?:

The Houston Chronicle reports that UH Law wants to charge like the University of Texas — despite the fact that it can’t produce jobs like the Austin powerhouse:

[Regents approved a 16.5% increase for tuition at the [University of Houston] law school, moving closer in cost to the South Texas College of Law and the University of Texas at Austin…

New students will pay most. Those who enroll next fall will pay 26.5% more — an increase of about $5,500 — while current students will see their tuition rise 12 percent, an increase of about $2,500.

The Chronicle managed to find some addled UH 3L who went on record supporting the tuition increase:

But Erin Ferris, a third-year law student, said students understand the reasons for the increase. “The overwhelming response from the student body is, we need to preserve the rankings and get better,” she said. ...

Look, if your law school tells you it has to raise tuition by 16.5% in order to maintain its underwhelming #60 U.S. News ranking and you believe it, then you kind of deserve all of the terrible things that are going to happen to you while you struggle to pay back your loans for the rest of your natural life. When you’ve got to increase your trick-turning output by 12% to cover the increased cost of your 3L year, remember you’re doing it to maintain the second tier status of your legal alma mater.

June 18, 2010 in Legal Education | Permalink | Comments (3) | TrackBack (0)