August 31, 2011
Jon Huntsman's Tax PlanRepublican presidential candidate Jon Huntsman today released a 12-page jobs plan with these tax components:
- Simplify The Personal Income Tax Code And Lower Rates. Rather than nibble around the edges of the existing tax code, Gov. Huntsman will introduce a revenue-neutral tax plan that eliminates all deductions and credits in favor of three drastically lower rates of 8%, 14% and 23%. Eliminating deductions and credits in favor of lower marginal rates will yield a simpler and more efficient tax code, decreasing the burden on taxpayers.
- Eliminate The Alternative Minimum Tax. Under the new simplified plan, Gov. Huntsman will eliminate the Alternative Minimum Tax, which is not indexed for inflation and is penalizing an increasing number of families and small businesses.
- Eliminate The Taxes On Capital Gains And Dividends In Order To Eliminate The Double Taxation On Investment. Capital gains and dividend taxes amount to a double-taxation on individuals who choose to invest. Because dollars invested had to first be earned, they have already been subject to the income tax. Taxing these same dollars again when capital gains are realized serves to deter productive and much-needed investment in our economy.
- Reduce The Corporate Rate From 35% To 25%. The United States cannot compete while burdened with the second-highest corporate tax rate in the developed world; American companies and our workers deserve a level playing field. With high unemployment, it is important that we not push corporations and capital overseas. We need employers to be based in America if they're going to provide jobs to Americans.
Press and blogosphere coverage:
- ataxingmatter (1)
- ataxingmatter (2)
- Going Concern
- The Hill
- Los Angeles Times
- National Journal
- New York Times
- USA Today
- Wall Street Journal
- Wall Street Journal editorial
- Washington Post
Fiscal Times: Who Pays No Taxes – and Why They’re No Pot of GoldFiscal Times, Who Pays No Taxes – and Why They’re No Pot of Gold:
Nearly half of American households won’t pay any federal income tax this year. That doesn’t mean there’s a big pot of revenue waiting to be tapped.
Decades of tax policy decisions have created a complicated system that vulnerable populations have grown to depend upon. The lowest-earning Americans have been taken off income tax rolls completely, and the tax bills of low-income workers, the elderly, and families raising children have been reduced through a series of tax credits, deductions and exclusions that have crept into the code and grown more generous with time. Only a small portion of the non-taxpayers are in the upper income brackets with lots of tax breaks.
This puts politicians on both sides of the aisle in a tight spot. While they promise not to raise taxes and to shrink government, the leading Republican contenders for the 2012 presidential nomination cite the recent report from the nonpartisan Tax Policy Center that 46 % of American households won’t pay federal income taxes in 2011 to argue that more Americans should help pay for government programs. ...
“It’s wrong to rail on the 46% of people who don't pay income tax,” said Paul Caron, a tax professor at the University of Cincinnati College of Law. “A fairer analysis takes into account all taxes paid—and by this measure, everyone has tax skin in the game,” he said.
Tax Court: Adjunct Prof Is Employee, Cannot Deduct Expenses on Schedule CThe Tax Court decided yesterday that an adjunct professor (who was paid $20,000) was an employee of Nova Southeastern University. As a result, he could not deduct the claimed $2,785.63 of business expenses on Schedule C and instead had to report them as employee expenses on Schedule A subject to the 2% floor on miscellaneous itemized deductions. Schramm v. Commissioner, T.C. Memo. 2011-212 (Aug. 30, 2011).
ABA Responds (Again) to Sen. Grassley on Law School AccreditationABA Press Release, ABA Responds to U.S. Senator Charles Grassley Regarding Legal Education Issues:
The ABA Section of Legal Education and Admissions to the Bar has responded to an Aug. 8 letter from U.S. Senator Charles Grassley (R-IA) requesting information about law school accreditation and student lending. The section’s detailed response, including an offer to meet with the senator at his convenience, is accompanied by a letter from ABA President Wm. T. (Bill) Robinson III.
The response addresses Sen. Grassley’s questions on the issues of law student loan default rates, scholarship retention and employment in the legal job market.
Regarding student loan default rates, the response notes that current ABA accreditation standards require law schools to “take reasonable steps to minimize student loan defaults, including provision of debt counseling at the inception of a student’s loan obligations and prior to graduation.”
The section will be considering in the near future a recommendation that law schools be required to publish scholarship retention rates.
With regard to the legal job market, the section describes current accreditation standards that take job placement information into account as a key measure of a law school’s educational program, and also require that law schools provide career counseling services. Recently implemented changes to the section’s annual questionnaire ask law schools for more detailed reporting of employment data, including types of employment, whether employment is long-term or short-term, whether the position is funded by the law school or associated university, and other additional data points.
- ABA Journal, Law Schools Would Have to Disclose Scholarship Retention Rates Online Under ABA Section Proposal
- Law Librarian Blog, The ABA's Latest Response To Senator Grassley
- Los Angeles Examiner, ABA Responds to Senator Grassley on Legal Education Issues
- National Law Journal, In Letter to Senator, ABA Insists It's Serious About Law School Oversight
- WSJ Law Blog, ABA Proposes Closer Scrutiny of Law School Scholarship Data
Prior TaxProf Blog coverage:
- Sen. Grassley Gives ABA Two Weeks to Address Law School Accreditation (July 13, 2011)
- ABA Responds to Sen. Grassley's Concerns About Law School Accreditation (July 21, 2011)
- Sen. Grassley Is Unhappy With ABA's Response to Accreditation Concerns (Aug. 12, 2011)
NY Times: The Republican Tax War on the PoorNew York Times editorial, The New Resentment of the Poor:
In a decade of frenzied tax-cutting for the rich, the Republican Party just happened to lower tax rates for the poor, as well. Now several of the party’s most prominent presidential candidates and lawmakers want to correct that oversight and raise taxes on the poor and the working class, while protecting the rich, of course. ...
Until fairly recently, Republicans, at least, have been fairly consistent in their position that tax cuts should benefit everyone. ...[Republicans argue] that “everyone needs to have some skin in the game.” This is factually wrong, economically wrong and morally wrong.
First, the facts: a vast majority of Americans have skin in the tax game. Even if they earn too little to qualify for the income tax, they pay payroll taxes (which Republicans want to raise), gasoline excise taxes and state and local taxes. Only 14 percent of households pay neither income nor payroll taxes, according to the Tax Policy Center at the Brookings Institution. The poorest fifth paid an average of 16.3 percent of income in taxes in 2010.
Economically, reducing the earned income tax credit and the child tax credit — which would be required if everyone paid income taxes — makes no sense at a time of high unemployment. The credits, which only go to working people, have always been a strong incentive to work, as even some conservative economists say, and have increased the labor force while reducing the welfare rolls.
The moral argument would have been obvious before this polarized year. Nearly 90% of the families that paid no income tax make less than $40,000, most much less. The real problem is that so many Americans are struggling on such a small income, not whether they pay taxes. ...
At a time when high-income households are paying their lowest share of federal taxes in decades, when corporations frequently avoid paying any tax, it is clear who should bear a larger burden and who should not.
(Hat Tip: Ann Murphy.)
Cincinnati Seeks to Hire a Tax ProfThe University of Cincinnati College of Law seeks to hire an entry-level or lateral tax professor. I am of course not impartial, but this is a fantastic opportunity to join a law school blessed with a great dean and university president (a former law school dean), an outstanding, collegial, and supportive faculty (including my wonderful tax colleague Stephanie McMahon) and staff, and a top-notch student body, located in a vibrant, affordable city. Although many law schools, especially public law schools, are retrenching in the face of challenging economic times, we are thrilled that the University is providing additional resources to hire several new faculty. To learn more about our law school and its bright future, check out our strategic plan. Please email or call me or Chris Bryant, the Chair of our Faculty Appointments Committee, if you would like more information or to apply for the position.
Zolt: Tax Reform -- Reduce the Corporate Income Tax Rate and MoreEric M. Zolt (UCLA), Tax Reform: Reduce the Corporate Income Tax Rate and More, 132 Tax Notes 923 (Aug. 29, 2011):
A potential reduction in corporate income tax rates could be a catalyst for fundamental changes in the tax regime for business income and the relative contribution of tax revenue from different types of taxes.
All Tax Analysts content is available through the LexisNexis® services.
SC Johnson Responds to David Cay JohnstonFollowing up on Thursday's post, Johnston: SC Johnson Cleans Up by Dodging Wisconsin Taxes: SC Johnson press release:
Late last week, Reuters editorial writer David Cay Johnston released a sensationalist piece about SC Johnson’s tax practices. Using questionable sources and twisting facts, he delivered a completely misleading article designed to persuade readers that SC Johnson is acting unethically and illegally.
The company reached out to Reuters immediately, and Reuters indicated that they “cannot and will not offer a retraction or any corrections.” And of course, as all stories on the Internet do, this unfounded and irresponsible piece is spreading widely and causing further unwarranted damage to SC Johnson.
Mr. Johnston launched an attack on SC Johnson to drag us through the mud. He lacks the facts to draw the conclusion that he wants readers to make. This journalistic irresponsibility should not be tolerated, and I want to set the record straight. ...
There is important dialogue that should be happening in our country about taxes. But rather than discussing important tax issues – or even reporting facts – Mr. Johnston and his publishers appear to simply want a sensationalist and inaccurate “gotcha” story that will drive media traffic.
There is no “gotcha” here. SC Johnson is a law-abiding corporate citizen. To suggest anything else – particularly on the merits of the completely unsubstantiated argument that Mr. Johnston has put together – is dangerously lacking in integrity and responsibility.
Norms, Mandatory Pro Bono, and Charitable BehaviorBrian Sheppard (Seton Hall) & Fiery Cushman (Harvard), Evaluating Norms: An Empirical Analysis of the Relationship between Norm-Content, Operator, and Charitable Behavior, 63 Vand. L. Rev. 55 (2010):
There are several kinds of norms, and this variety can lead to spirited debate about the best norm to employ for the regulation of a particular activity. Should the norm be mandatory or aspirational? A rule or a standard? One important area in which norm-choice has come to the fore is the ABA’s oversight of pro bono work. Currently, the organization utilizes an aspirational norm recommending that lawyers perform at least fifty pro bono hours annually, but there is pressure to adopt some sort of mandatory rubric. Inspired by this debate, we have designed and implemented an experiment that provides some insight into the effective design of norms for charitable giving. Our results challenge the conventional wisdom that the implementation of a mandatory framework will result in an overall increase in giving. These findings may be applicable not only to the pro bono debate but also to general legislative strategy with respect to inducement of charitable behavior.
Prior empirical studies that have analyzed the effect of norm characteristics on behavior have typically pitted rules against standards. We placed these two norm-content classes in combination with two kinds of operators: aspirational and mandatory. Thus, we tested four norm combinations, each one representative of norms in important rubrics such as legal systems and codes of ethics. Through this more complex model, our results contribute to the literature on two psychological phenomena, motivation crowding and anchoring, that affect the way people respond to norms.
We found that, in the context of inducing charitable behavior, it is more effective to use an aspirational rather than a mandatory operator when the operator is conjoined with moral norm-content. Additionally, we found that the effectiveness of norms that utilize mandatory operators is contingent upon the kind of norm-content that they employ, whether moral or bright-line, and that this is not true with norms utilizing aspirational operators. Lastly, the deficit in effectiveness that arises from using mandatory operators in conjunction with moral norm-content can be overcome by switching to bright-line norm-content, but only if the minimums are set very high. Our results support the view that norms can induce crowding out, leading to less charitable conduct than would have occurred under an aspirational system. They also illustrate a context in which aspirational norms are resistant to anchoring effects.
Latin America Tax Policy and Foreign Direct InvestmentHugo A. Hurtado (Universidad Diego Portales, Santiago, Chile), Is Latin America Taxation Policy Appropriate for Promoting Foreign Direct Investment in the Region?, 31 Nw. J. Int'l L. & Bus. 313 (2011):
Adoption of an appropriate international tax policy in Latin America can promote greater foreign direct investment. Latin American countries should work together on a tax integration process to give foreign direct investment a more regional approach rather than each country competing to attract its own foreign direct investment. Such intraregional competition results in lost tax revenues with no proven effect on foreign direct investment. A tax integration process would reduce the use of advanced tax planning techniques by multinational companies to take advantage of loopholes created by disparities between tax systems; however, it would also provide the foreign investor with a homogeneous set of rules throughout the region, which would result in decreased administrative and compliance expenses. Nevertheless, prior to enacting a determined regional tax policy, an analysis of tax expenditures and legal consequences must be examined by a multidisciplinary body with presence in the whole region. Successful implementation should be lead by larger regional players such as Argentina, Brazil, Chile and Mexico with other countries gradually following suit and would require the creation of a supranational tax court whose decisions would be directly applied in the respective countries.
August 30, 2011
More on Warren Buffett’s Tax HypocrisyFollowing up on Friday's post, Warren Buffett’s Tax Hypocrisy:
- Wall Street Journal editorial, Buffett's Latest Tax Break: Once Again He Foils the IRS:
For a guy who spends a lot of time advocating for higher taxes, Warren Buffett does a remarkably good job of minimizing his own corporate tax bill. This is all to the good for Mr. Buffett and his fellow Berkshire Hathaway shareholders, who no doubt can invest the money more wisely than the federal government is likely to do.
Mr. Buffett's recent decision to invest in Bank of America represents another tax-avoidance triumph for the Berkshire chief executive. U.S. corporations are subject to a top federal income tax rate of 35%, the second highest in the world. But the Journal's Erik Holm notes that Mr. Buffett and the Berkshire bunch won't pay anything close to that on their investment in BofA preferred shares.
That's because corporations can exclude from taxation 70% of the dividends they receive from an investment in another corporation. This exclusion is intended to prevent double- or even triple-taxation as money is earned by one company, paid to another company and then ultimately paid out to shareholders. The policy makes sense; we only wonder why the exclusion isn't 100%.
With the 70% exclusion for Mr. Buffett and his fellow shareholders, Berkshire will enjoy an effective tax rate of 10.5% on the $300 million in dividends it will receive each year from Bank of America.
We're tempted to suggest that Mr. Buffett should do what he might call the patriotic thing and volunteer Berkshire to pay the full 35% rate as a good corporate citizen. But even if Mr. Buffett won't say it, most Americans know that more jobs will be created if the money is deployed by the Berkshire bunch than by the Beltway boys.
An editorial in today’s Wall Street Journal says that “Berkshire Hathaway will enjoy an effective tax rate of 10.5% on the $300 million in dividends it will receive each year from Bank of America.” That statement is incorrect.
Virtually all of the stocks that Berkshire owns are held in its property-casualty subsidiaries, and that will be the case with the Bank of America preferred.
The tax treatment for dividends paid by U.S. corporations to property-casualty insurance companies was materially changed by a law passed in 1986. The changes were described in detail in the chairman’s letter included in Berkshire’s 1986 annual report.
A minor change in rate was made in 1993. Since that time dividends that insurers receive from U.S. companies incur an effective tax rate of 14.175%. For Berkshire, that rate will apply to dividends it receives from Bank of America.
- The Blaze, How Much is Buffett’s Berkshire Hathaway Back-Tax Bill Exactly? About $1 Billion
- Bloomberg, Walsh Says Buffett Call to Tax Rich ‘Disingenuous’
- Chicago Now, Warren Buffett: Tax Shirker and Hypocrite
- CNN, Buffett: WSJ Wrong About BoA Dividends
- Forbes, Warren Buffett Gets Special Tax Breaks And So Does Your Grandma
- Going Concern, Berkshire Hathaway: Wall St. Journal Is Wrong About Our Taxes on BoA Deal
- Huffington Post, Warren Buffett's Berkshire Hathaway Owes Taxes Going Back to 2002
- Huffington Post, Why Wait to be Taxed?
- New York Post editorial, Warren Buffett, Hypocrite
- NewsBusters, Warren Buffett's Company Hasn't Paid All Taxes Owed In Years, Media Mum
- The Street, Buffett Denies Tax Dodge on BofA Deal
- WSJ Dealbook, Warren Buffett’s Bank of America Deal Comes With Tax Break
Galle: Economics and Politics in the Choice of Price InstrumentsBrian D. Galle (Boston College), The Tragedy of the Carrots: Economics & Politics in the Choice of Price Instruments, 64 Stan. L. Rev. ___ (2011):
Externalities are one of the most fundamental market-failure justifications for government action, and pigouvian taxes and subsidies are standard tools for correcting them. Even so, neither the legal nor economic literatures offer any comprehensive account of when policy makers should prefer one to the other. This Article takes up that task. Prior efforts to distinguish between “carrots” and “sticks” have generally been limited to the context of pollution regulation, and I show here that even those are incomplete. I also extend the analysis to the case of positive externalities, where there is no prior literature to speak of. Overall I find that sticks are usually superior to carrots, but that there are some interesting exceptions.
Nonetheless, carrots are rampant in modern lawmaking, especially carrots in the form of tax expenditures. I identify features of modern politics and law that contribute to the current inefficient over-production of carrots. Among others, I find that federalism contributes to political preferences for carrots. That implies an until-now unrecognized reason to centralize certain forms of government regulation.
Finally, I take issue with the claims of the environmental literature that carrots, even if the inferior policy choice, should be used when politics would be likely otherwise to frustrate any regulation. Using carrots in critical and closely-contested situations only contributes to externality producers’ incentives to raise the political stakes, by either cranking out more negative.
DePaul Symposium: Uncertain Tax Positions and Schedule UTPDePaul Business & Commercial Law Journal Symposium, Uncertain Tax Positions and Schedule UTP: An Introduction and Recent Developments:
- John H. Sitell (Editor-in-Chief), Foreword, 9 DePaul Bus. & Com. L.J. 319 (2011)
- Cheryl A.Kettler (DePaul), Mirror, Mirror on the Wall, What's Transparency After All?, 9 DePaul Bus. & Com. L.J. 321 (2011)
- R. Richard (Dick) Harvey (Villanova), Schedule UTP: An Insider's Summary of the Background, Key Concepts, and Major Issues, 9 DePaul Bus. & Com. L.J. 349 (2011)
- Kathryn J. Kennedy (John Marshall), The IRS's Recent Tax Positions Initiative: A Tangle of Accounting, Tax and Privilege Issues, 9 DePaul Bus. & Com. L.J. 401 (2011)
- Julia Ushakova (J.D. 2011, UC-Berkeley), Seeking Privileged Information Under Schedule UTP: Protections and Privileges for Taxpayers, 9 DePaul Bus. & Com. L.J. 445 (2011)
Capital Structure and Operating Performance After LBOsJonathan B. Cohn, Lillian F. Mills & Erin Towery (all of University of Texas, McCombs School of Business), The Evolution of Capital Structure and Operating Performance after Leveraged Buyouts: Evidence from U.S. Corporate Tax Returns:
This study uses U.S. corporate tax return data to examine the evolution of firms' financial structure and performance after leveraged buyouts for a comprehensive sample of 317 LBOs taking place between 1995 and 2007. We find that improvements in operating performance subsequent to an LBO are small and are concentrated among firms that performed poorly pre-LBO. We also find that firms, on average, do not reduce their leverage after an LBO, even if they generate cash flow in excess of their investment needs. Our results suggest that private equity firms use debt in LBOs primarily to effect one-time changes in the target firm's capital structure rather than simply as an efficient means of financing transactions.
Effect of Experience, Information, and Risk on Tax Professionals’ JudgmentsMichael L. Roberts (University of Colorado) & George F. Klersey (Piedmont College), Effects of Experience, Task Specific Information, and Risk on Tax Professionals’ Judgments:
This research examines whether (1) less experienced tax accountants exhibit a pro-client bias (a tendency to conclude a client-favorable [unfavorable] outcome is more [less] likely as compared to more experienced tax accountants’ judgments), (2) whether task-specific declarative information (a summary of relevant IRC and Congressional intent) can reduce this bias, and (3) whether tax seniors and managers can make judgments similar to partner experts in a closed-cue judgment situation as suggested by prior research in medical decision making. The results show tax seniors judge taxability significantly less likely when the facts are against the client or neutral than both tax managers and partners. This pro-client bias is significantly reduced when the seniors are provided with relevant declarative information. In contrast, tax managers are able to make taxability judgments similar to the partner experts across all three risk conditions. I discuss implications for training, practice management, and future research.
Foundation Press Publishes 2011 Supplement to Federal Wealth Transfer TaxationThe late Paul McDaniel (Florida), Jim Repetti (Boston College), and I have published a 2011 Supplement (111 pages) to our two Federal Wealth Transfer Taxation (Foundation Press, 6th ed. 2009) books: our casebook and study problems book. Faculty, students, and other interested readers are welcome to download a free copy. Here is the Preface:
This supplement is designed to update our Casebook and accompanying Study problems book: Federal Wealth Transfer Taxation: Cases and Materials (6th ed. 2009), and Federal Wealth Transfer Taxation: Study Problems (6th ed. 2010). We hereby grant permission to users of Federal Wealth Transfer Taxation to distribute copies of this supplement to students, either in hard copy or in electronic form.
This supplement is current through July 15, 2011 and incorporates The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Pub. L. No. 111-312, 124 Stat. 3296 (2010)), passed by Congress on December 16, 2010, and signed into law by President Obama on December 17, 2010. We want to thank Jack Bogdanski (Lewis & Clark) for his detailed comments on the prior edition of these books.
This is the first update to Federal Wealth Transfer Taxation since the July 16, 2010 death of our lead author, mentor, and dear friend, Paul McDaniel [blogged here and here]. Paul was a co-author of the original edition of this book in 1977, with Hank Gutman, Stanley Surrey, and Bill Warren, and remained as co-author of the five subsequent editions of the book. Being asked to join Paul as a co-author on this book was one of the proudest (and most intimidating) moments of our careers. In working with Paul through the years, we have been repeatedly struck by his encyclopedic knowledge of the tax law, clear yet elegant prose, and organizational genius. But what stands out most for us has been Paulʹs incredible grace and patience in nurturing two junior co-authors. In this supplement and in future new editions, we will do our best to match the high standards he set. To recognize the continuing influence of Paul’s work, we have listed him as co-author.
We also have published a 2011 Supplement (66 pages) to our teacher's manual accompanying our Federal Wealth Transfer Taxation casebook and study problems book. The 2011 Supplement provides detailed answers to the new and revised study problems, as well as commentary on new and revised material in the casebook. Faculty who would like a free copy of the 2011 Supplement to our Teacher's Manual can email Jim or me.
Joint Tax Committee Posts All 1926-2011 PublicationsThe Joint Committee on Taxation yesterday announced that it has posted to its website copies of most known Joint Committee publications from 1926, when the Joint Committee was created, through the present:
The postings provide Congressional offices and the general public with a more complete and searchable set of documents relevant to the evolution of the Internal Revenue Code, than the Joint Committee previously had made available on its website. The Joint Committee staff recognizes former Chiefs of Staff, George Yin and Edward Kleinbard, for initiating the project and former staffers, Catherine Moran and David Miller, for cataloguing and compiling the documents.
Johnston: SC Johnson Cleans Up by Dodging Wisconsin TaxesReuters, Wiping Out Wisconsin Taxes, by David Cay Johnston:
The heirs of the SC Johnson fortune, the richest family in Wisconsin with four multi-billionaires according to Forbes, paid not a penny of Wisconsin corporate income tax on profits from their global household products business and two smaller companies from 2000 through 2008, public records show.
"How did the Johnson companies pull in such profits without having a penny of Wisconsin taxable income?" asked Jack Norman, research director for the Institute for Wisconsin's Future in the August issue of its Who Does Not Pay Taxes? newsletter [SC Johnson and Sister Firms Pay No State Income Tax; State’s Wealthiest Family Is a Master of Corporate Tax Avoidance].
Now thanks to a 15-page document prepared in April 2008 by PricewaterhouseCoopers we have an answer -- at least for the family's main holding, SC Johnson & Son, Inc, makers of world famous household products ranging from Raid bug spray to Ziploc bags.
Reuters received the document unsolicited. Besides making suggestions for the future, it describes how the company avoided taxes in the past.
The conclusion? That Wisconsin taxable profits could well have been converted into tax-deductible expenses by paying royalties and interest to family-owned subsidiaries in low-tax and no-tax jurisdictions.
The state tax court held in 2009 that such accounting alchemy was improper when done by Hormel Food Corporation because the transactions had no purpose except to make state taxes go away. [Hormel Foods Corp. v. Wisconsin Dep't of Rev., No. 07-I-17 (Mar. 29, 2010)]The question the PwC document raises is whether the Johnsons will be held to the same standard by the Wisconsin tax authorities as Hormel Food. Why must ordinary Wisconsin businesses and individuals bear the burden of state government while the richest family in the state runs tax-free enterprises? ...
The PwC document offers powerful evidence that tax avoidance, not economic substance, enabled the main family business to escape Wisconsin state taxes. Without economic substance, companies can just move symbols around on paper and manufacture unlimited tax deductions.
Entitled "State and Local Tax Observations and Considerations," the document shows how the Johnson family escaped all Wisconsin corporate income tax on its SC Johnson & Son, Inc business and shows how to shield future profits from tax. ...All of this is significant in the context of what the Wisconsin Tax Appeals Commission held in Hormel Foods: "Reducing taxes is a perfectly legitimate business goal so long as it is not the primary purpose for a transaction. In this case, the evidence shows that Hormel's other alleged purposes for engaging in the challenged transactions were a mere 'fig leaf' covering its real purpose, which was tax avoidance."
So, will SC Johnson be held to the same standard as Hormel and, at a minimum, face a thorough audit by the state and the IRS? Or will the richest family in Wisconsin get favored treatment while everyone else bears the burden of state government?
Prior TaxProf Blog coverage: Johnston: Whistleblower Accuses SC Johnson of Tax Fraud (Dec. 6, 2010)
Vatican Warns Against Higher Taxes to Address Economic WoesL'Osservatore Romano editorial, Noah's Horizon:
During a prolonged crisis, inheritance taxes, new forms of taxation or similar alternatives reduce or wipe out resources for investments, discouraging the trust of investors, penalizing the cost of the public debt and the possibilities of its renewal at its expiration. In this context, imposing taxes on property and on income is equivalent to a suicidal anti-subsidiarity of the state to the citizen. Those who legally possess assets, on which they have paid the proper taxes, have contributed to creating wealth and, thanks precisely to these assets, continue to produce them with investments and consumption.
Further forms of taxation would not be synonymous with solidarity but only with greater public spending and, perhaps, a higher debt and more widespread poverty. High taxes penalize saving, generate distrust in the ability to stimulate recovery, hit families and prevent the formation of new ones, as well as creating uncertainty and precariousness in employment. In short, they lay the foundations for another phase of unsustainable development.
This is the situation to explain, avoiding -- to borrow Einstein's words -- deceptive simplifications. Every important action, to obtain success, must be clear in its context, in its objectives, clear in assessing the necessary resources and about their organization. Authentic global solutions to the crisis must therefore take into account what gave rise to it, its extent and the time and means required to resolve it. In other words it is necessary to reach a broader horizon. As Noah did when he raised his gaze and succeeded in going beyond himself and in saving humanity.
(Hat Tip: Edward Afield.)
Judicial Deference to Regs In Conflict with Court Decisions and the APADonald T. Williamson (American University, Kogod School of Business) & Blair Staley (Bloomsburg University of Pennsylvania, College of Business), Judicial Deference to Regulations In Conflict with Court Decisions and the Administrative Procedures Act: Intermountain Insurance Service of Vail, LLC v. Commissioner:
The Tax Court's recent decision in Intermountain Insurance Service of Vail, LLC v. Commissioner addresses the validity of temporary regulations under §§ 6229 and 6501 extending the statute of limitations on assessment to six years when the taxpayer overstates basis resulting in an understatement of gross income by more than 25%. The case raises significant issues regarding whether temporary regulations can overturn long standing judicial precedent and whether such regulations meet the public notice and comment requirements of the Administrative Procedure Act generally governing the promulgation of all federal agency rules. Resolution of these issues by appellate courts, and ultimately the Supreme Court, will have enormous impact on the ability of the IRS to issue timely, binding guidance to taxpayers.
August 29, 2011
Enron's Ken Lay Wins Posthumous $3.9 Million Tax Court VictoryThe late former Enron CEO Kenneth Lay won a posthumous $3.9 million victory over the IRS today in the Tax Court in a case argued by ABA Tax Section Chair President Charles H. Egerton (Dean Mead, Orlando). Estate of Lay v. Commissioner, T.C. Memo. 2011-208 (Aug. 29, 2011):
This case involves a deficiency of $3,910,000 determined by respondent in the 2001 Federal income tax of Kenneth L. Lay and Linda P. Lay (the Lays). The deficiency is based upon respondent’s determination that the Lays received income as a result of the sale of two annuity contracts to Enron Corp. (Enron). For the reasons stated herein, we find that they did not receive the income determined by respondent and are not liable for the deficiency. ...
Enron paid Mr. and Mrs. Lay $10 million in exchange for the annuity contracts. Enron intended for the full amount of its payment to be consideration for the annuity contracts. The annuities transaction is well documented, and all actions of the parties to the transaction reflect that Enron purchased the annuity contracts for $10 million. The Lays properly reported the transaction on their 2001 tax return as a sale of their annuity contracts.
(Hat Tip: Bob Kamman.)
Update: Bloomberg, Enron CEO Kenneth Lay Bests IRS in Tax Court
Carr Ferguson: How to Save the Corporate Income Tax
An abbreviated version of this address was delivered on April 8 at the University of San Diego School of Law as the second annual Richard C. Pugh Lecture on Tax Law & Policy.
All Tax Analysts content is available through the LexisNexis® services.
Soled & Gans: Related Parties and the Income Tax-Transfer Tax System GapJay A. Soled (Rutgers Business School) & Mitchell Gans (Hofstra), Related Parties and the Need to Bridge the Gap Between the Income Tax and Transfer Tax Systems. 62 Ala. L. Rev. 405 (2011):
Related parties can readily manipulate transactions in ways that unfairly reduce their tax burdens relative to unrelated taxpayers. In the income tax arena, Congress has instituted numerous legislative measures to safeguard the tax base from related-taxpayer manipulations; yet, the same developed system of related-party safeguards does not extend to protect the transfer tax base. This analysis points out that this disparity has had a corrosive effect on the integrity of the transfer tax system. Indeed, insofar as the treatment of related parties is concerned, Congress should employ the same level of scrutiny and circumspection in the realm of transfer taxes as it does in the income tax. Reform of the transfer tax system is accordingly in order.
McMahon: Joint Returns Are Still Preferable to an Individual-Based Tax SystemStephanie Hunter McMahon (Cincinnati), To Have and To Hold: What Does Love (of Money) Have to do with Joint Tax Filing?, 11 Nev. L.J. 718 (2011):
Wealthy taxpayers have always attempted to reduce their federal income taxes. Before 1948, one popular method was to shift income between spouses so that more of a husband’s income could be reported by, and taxed to, his lower-income, and thus lower tax bracket, wife. In 1948 Congress removed married couples’ incentive to engage in this tax avoidance behavior by adding nationalized income-splitting to the joint return. This effectively gave those filing joint returns tax brackets that were twice as wide as those of single taxpayers, and, as a result, married couples with a single or primary income-earner paid relatively less income tax than their single counterparts. Today there is debate over returning to an individual-based income tax system, similar to that which operated before 1948. Evaluating that proposal, this paper first explores the development of the income-splitting joint return to evaluate the potential costs and consequences of a return to an individual system. Individual-filing incentivized avoidance behavior, reducing the progressiveness of the income tax while giving tax advantages to those who engaged in tax-planning and an increased relative tax burden to those who did not. Second, the paper considers the prospect of the Internal Revenue Service reining in a renewal of this type of tax avoidance today. Returning to a system of individual filing will increase complexity in the tax code and add incentives and opportunities for tax avoidance at a time when the IRS is already struggling under the burden of non-compliance. Finally, in case practical concerns are not persuasive enough, this paper examines how best to evaluate married couples’ ability to pay taxes on a theoretical basis. Calculations on a unitary basis, it contends, remain more accurate for comparing married taxpayers to other taxpayers and it is that comparison, between couples as opposed to within couples, which reflects relative abilities to pay. As a result of these considerations, this paper concludes that joint filing remains the best filing unit.
Investor Valuation of Tax Avoidance Through Uncertain Tax PositionsAllison Koester (U. Washington), Investor Valuation of Tax Avoidance Through Uncertain Tax Positions:
This paper examines equity investor valuation of tax avoidance achieved through uncertain tax positions. New financial reporting standards require firms to separately disclose their contingent liabilities for tax positions that may be disallowed upon tax return audit. This disclosure provides investors with information about the magnitude of firms' tax avoidance activity through uncertain tax positions, or uncertain tax avoidance. I find evidence consistent with investors on average positively valuing uncertain tax avoidance, suggesting that tax-related contingent liabilities are viewed very differently from other liabilities. Additional analysis reveals that uncertain tax avoidance that gives rise to permanent (as opposed to temporary) tax savings in firms more likely to retain their uncertain tax positions is driving this positive relation. My findings are consistent with investors interpreting managers' past uncertain tax avoidance as an indicator of future uncertain tax avoidance where the economic benefit of avoidance (i.e., cash tax savings) is expected to be retained, and/or a positive reputation effect associated with uncertain tax avoidance activity.
Tax Profs and Oreo CookiesIndyWeek.com, The Story of William A. Turnier, the Man Who Designed the Oreo Cookie:
Twelve billion times a year, a disc of vanilla cream is stamped between two chocolate wafers to produce the Oreo, the world's most popular manufactured cookie....
"Who Made that Oreo Emboss?" read a recent headline on a New York Times blog.
"Bill, Chapel Hill, NC," answered: "My father is William A. Turnier. He worked for the entire 49 years of his working life at Nabisco. In 19 he was assigned the task of producing a new design for the Oreo."
It turns out Bill Turnier of Chapel Hill really is the son of the man who, by nearly all accounts, designed the modern Oreo. ... Bill Turnier has those details—stories and memories of his dad, a former mail boy-turned-design guru who also put his imprint on the Nutter Butter and the Milk-Bone. And he has the proof: High above a closet door in Turnier's tidy brick home in east Chapel Hill hangs a framed copy of the blueprint for the Oreo's most enduring design, unchanged for nearly 60 years. In the corner, the printed name: "W.A. Turnier" ...
Turnier eventually traded letters for blueprints, moving up the ranks to become a member of the engineering department. Once there, Bill Turnier says his father put his touch on some of Nabisco's better-known products. He created the waffled pattern on the peanut butter snack sandwich known as the Nutter Butter, which launched in 1969, and a delicate, vine-like design on the creamy Cameo cookie, which debuted in 1954. Bill Turnier believes that his father also tweaked the classic, buttery Ritz, added grass to the bottom of one of Nabisco's Barnum animal crackers, and—to many a dog's delight—worked on the Milk-Bone. The latter, Bill Turnier proudly notes, bears his father's distinct penmanship. "I can be walking down the dog food aisle and choke up," he says. ...
Turnier, who died in 2004, encouraged his children to get the education that he'd wished for himself. And though a young Bill Turnier spent summers in New York loading trucks and cleaning equipment for Nabisco, he eventually fulfilled his father's wish, earning degrees from Fordham University, Pennsylvania State University and the University of Virginia. After graduating from law school at the latter, he took a job at New York's venerable Cravath, Swaine & Moore, the second-oldest firm in the nation.
Bill Turnier eventually left New York for Chapel Hill. He claims to have no artistic talent, but he definitely has his father's knack for detail. For more than 30 years, he has taught tax law at UNC, which he loves, but admits is tedious at times. "Every once in a while when things are getting boring or something, I'll tell them about the dollar sign and where that came from," he says of his classes. "It doesn't come like you used to think, from Scrooge McDuck with a U and an S on it from the Donald Duck cartoons."
And for times that get really drab, Bill Turnier pulls out another line: My father drew the Oreo.
(Hat Tip: Al Brophy, Gregg Polsky.)
Tax Profs Survive Hurricane Irene
- Bridget Crawford (Pace), Hurricane Aftermath in Lower Manhattan
- Dan Shaviro (NYU), A Calm Perspective on Irene
At Law Schools, Age Bias Co-exists with Outdated PracticesFollowing up on last month's post, Former AG Sues Michigan State, Files EEOC Complaints Against 100 Law Schools, for Age Discrimination in Hiring: the plaintiff, Nicholas J. Spaeth (age 61), has published an op-ed in the National Law Journal, At Law Schools, Age Bias Co-exists with Outdated Practices:
The alarming decline in recent law school graduate placement has received much attention lately, including an instructive July 11 article in The Wall Street Journal, Law Schools Get Practical, noting that more than twice as many people passed the bar exam in 2010 (54,000) as there were legal job openings in the United States. Perversely, at the same time, law schools are prospering financially on the backs of their students by substantially increasing both tuition and enrollment, as The New York Times found in a July 17 article, Law School Economics: Ka-Ching!
The current recession is, of course, a prime reason for the diminution in available jobs. But The Wall Street Journal article also correctly focuses on another major issue — the disconnect between contemporary law school education and the skills needed to be an effective, and therefore employable, lawyer. Unlike other professional schools, such as medicine and business, law schools continue to teach primarily based on a 19th century theoretical model that is good at developing critical legal thinking but severely lacking in teaching practical skills. That void is particularly acute in the business and corporate area.
I should know. For the 25 years I have spent the vast majority of my career as the attorney general of a state (North Dakota) or the chief legal officer of Fortune 500 companies (including H&R Block and Intuit). In that capacity I have supervised the hiring of scores of young lawyers and discovered that it is very difficult to hire someone straight out of law school and find anyone adequately prepared to step in and be effective. ...
Beginning last year I decided that, in a small way, I would try to do something about it. I accepted a one-year visiting professorship at the University of Missouri at Columbia to teach business-related classes with a skills component embedded in them. ... Because the experiment was by all accounts highly successful, I decided to try to continue teaching. In order to do so I had to enter the gauntlet of the AALS annual hiring conference. ...
I was aware that the usual ticket to law school faculty positions includes graduation from a top law school and other academic credentials — law review editorship, prestigious clerkships and perhaps some publication. I had all that — Stanford undergraduate, Rhodes scholar with first class honors, Stanford Law School and law review editor, clerkships in a U.S. court of appeals and the U.S. Supreme Court (for Byron White) and some publication. I also had a rich professional life that I believed would be helpful to teaching ...
To my chagrin, however, what I do not have is the ability to roll my age back. ... [O]nly a single school offered an interview, and needless to say, no job offers were forthcoming. While the AALS and its members proudly boast of their nondiscriminatory policies — including those against age discrimination — the truth of the matter is that they do discriminate, and pervasively so, on the basis of age. ...
The globalization of our economic and regulatory structure has put a premium on lawyers who have sophisticated skills and training that enable them to operate in an increasingly nuanced environment. This requires a changed curriculum to prepare students for an increasingly competitive and global practice. ... [A]n increasingly imperative need is for skilled and experienced practitioners teaching transaction-based classes. ...
In short, law schools must change their model of instruction if they expect to see an increase in hiring of their graduates. ... Finally, law schools either need to live up to their stated ideals and confront the practical implications of their hiring practices or else abandon the charade that they do not discriminate on the basis of age.
Steve Johnson Posts Tax Articles on SSRNSteve Johnson (Florida State) has posted a fifth tranche (Part 1, Part 2, Part 3, Part 4) of his tax articles on SSRN:
- The Taxpayer’s Duty of Consistency, 46 Tax L. Rev. (1991)
- Fog, Fairness, and the Federal Fisc: Tenancy-by-the-Entireties Interests and the Federal Tax Lien, 60 Mo. L. Rev. 839 (1995)
- Targets Missed and Targets Hit: Critical Tax Studies and Effective Tax Reform, 76 N.C. L. Rev. 1771 (1998)
- The Phoenix and the Perils of the Second Best: Why Heightened Appellate Deference to Tax Court Decisions Is Undesirable, 77 Or. L. Rev. 235 (1998)
- After Drye: The Likely Attachment of the Federal Tax Lien to Tenancy-by-the-Entireties Interests, 75 Ind. L.J. 1163 (2000)
- Unfinished Business on the Taxpayer Rights Agenda: Achieving Fairness in Transferee Liability Cases, 19 Va. Tax Rev. 403 (2000)
- Why Craft Isn’t Scary, 37 Real Prop., Prob. & Tr. J. 439 (2002)
- The 1998 Act and the Resources Link Between Tax Simplification and Tax Compliance, 51 U. Kan. L. Rev. 1013 (2003)
- The Canon that Tax Penalties Should Be Strictly Construed, 3 Nev. L.J. 495 (2003)
- Supermajority Provisions, Guinn v. Legislature, and a Flawed Constitutional Structure, 4 Nev. L.J. 491 (2004)
- The E.L. Wiegand Inaugural Lecture: Administrability-Based Tax Simplification, 4 Nev. L.J. 573 (2004)
TaxProf Blog Weekend RoundupSaturday:
- Texas Supreme Court Upholds Constitutionality of $5 'Pole Tax'
- IRS Releases Summer 2011 SOI Bulletin
- The FATCA Provisions of the HIRE Act
- State Taxation of Indian Reservation Cigarette Sales to Non-Indians
- Steve Jobs' Advice on Life and Death
- Top 5 Tax Paper Downloads
- The IRS's UBS Settlement
- The Effect of the IRS's UBS Settlement on the Swiss Banking Industry
August 28, 2011
Steve Jobs' Advice on Work, Life, and DeathThe Wall Street Journal has a great editorial on the impact of Steve Jobs, who resigned Wednesday as Apple CEO because of pancreatic cancer. Francine Lipman passed along this wonderful 2005 commencement address that Mr. Jobs gave at Stanford:
[8:11] Sometimes life hits you in the head with a brick. Don't lose faith. I'm convinced that the only thing that kept me going was that I loved what I did. You've got to find what you love. And that is as true for your work as it is for your lovers. Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven't found it yet, keep looking. Don't settle. As with all matters of the heart, you'll know when you find it. And, like any great relationship, it just gets better and better as the years roll on. So keep looking until you find it. Don't settle.
When I was 17, I read a quote that went something like: "If you live each day as if it was your last, someday you'll most certainly be right." It made an impression on me, and since then, for the past 33 years, I have looked in the mirror every morning and asked myself: "If today were the last day of my life, would I want to do what I am about to do today?" And whenever the answer has been "No" for too many days in a row, I know I need to change something.
Remembering that I'll be dead soon is the most important tool I've ever encountered to help me make the big choices in life. Because almost everything — all external expectations, all pride, all fear of embarrassment or failure — these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart. ...
[11:55]: No one wants to die. Even people who want to go to heaven don't want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.
Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma — which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.
Top 5 Tax Paper DownloadsThere is a bit of movement in this week's list of the Top 5 Recent Tax Paper Downloads, with a new paper debuting on the list at #5:
1. [275 Downloads] 2010 Developments in Connecticut Estate and Probate Law, by Jeffrey A. Cooper (Quinnipiac) & John R. Ivimey (Reid and Riege, Hartford)
4. [127 Downloads] Is Knowledge of the Tax Law Socially Desirable?, by David A. Weisbach (Chicago)
5. [119 Downloads] PIIGS ‘R’ Us? The Coming U.S. Debt Crisis and What Can Be Done About It, by Stephen R. Richardson (University of Calgary; former Associate Deputy Minister of Finance, Government of Canada)
The IRS's UBS SettlementJared Seff (Tabas, Freedman, Soloff, Miller & Brown, Miami) has published Cracking Down on Tax Evaders--Swiss Banking: Secrets, Lies, and Deception, 38 S.U. L. Rev. 159 (2010). Here is the Introduction:
My goal for this article was to research the UBS and Swiss Federation's dispute with the IRS and United States Justice Department over secret bank accounts. I will first address the lengths that Swiss bankers undertook to attract high net worth US taxpayers and the methods they used to avoid reporting requirements established under US laws. I further address the whistleblower and the lawsuit that arose as a result. I describe in detail the terms of the settlement between UBS, the Swiss Government, and the United States. I also explore the history and differences between Swiss banking laws and US banking laws. This will lead into a discussion of how this settlement agreement may be a turning point for Swiss banking and other tax haven countries throughout the world. This is an evolving issue as new developments are currently arising daily since UBS has until fall 2010 to comply with the settlement agreement.
The Effect of the IRS's UBS Settlement on the Swiss Banking IndustrySpencer Daly (J.D. 2011, Hofstra) has published Note, Secrecy in Limbo: What the Most Recent Settlement With the IRS Means for UBS and the Rest of the Swiss Banking Industry, 10 J. Int'l Bus. & L. 133 (2011). Here is part of the Introduction:
Part I of my paper will introduce the origins and backgrounds of Swiss Bank Secrecy laws and provide some context for the discussion that follows. Part II examines the history of banking secrecy in Switzerland and how it has helped to shape the various treaties that help to enforce the secrecy as well as facilitate information sharing amongst various nations. Further, the evolution of these treaties today have impacted the current events surrounding these laws and have laid the groundwork for the new settlements reached today. Part III of my paper examines the current legal battle between UBS and the IRS and United States Department of Justice over the turnover of client data pursuant to a deferred prosecution agreement. A brief background on the various cases against UBS bankers that led to the eventual lawsuit against UBS, helps set the stage for an analysis of the agreement. Part IV discusses what the ruling by the Swiss Court in Bern and Swiss Parliaments recent acceptance means for the status of the agreement and what may happen to UBS in the United States and abroad. Finally, Part V summarizes the concepts discussed and proposes the next step in gaining greater transparency while still allowing Switzerland to maintain its historical identity of strong banking secrecy and reliability.
August 27, 2011
Texas Supreme Court Upholds Constitutionality of $5 'Pole Tax'The Texas Supreme Court on Friday overruled the Texas trial and appellate courts and unanimously upheld the constitutionality of a $5 "pole tax' on strip club patrons. Combs v. Texas Entertainment Ass'n, No. 09-0481 (Tex. Aug. 26, 2011):
A Texas statute requires a business that offers live nude entertainment and allows the consumption of alcohol on its premises to remit to the Comptroller a $5 fee for each customer admitted. We are asked to decide whether the statute violates the right to freedom of speech guaranteed by the First Amendment to the United States Constitution. We hold it does not.
Prior TaxProf Blog coverage:
- Texas Imposes "Pole Tax" on Strip Club Patrons (Dec. 22, 2007)
- Texas "Pole Tax" on Strip Club Patrons Ruled Unconstitutional (Apr. 1, 2008)
- Texas Legislator Files Amicus Brief in Support of 'Pole Tax' (Dec. 11, 2009)
- Texas Supreme Court to Decide Constitutionality of 'Pole Tax' (Feb. 15, 2010)
IRS Releases Summer 2011 SOI BulletinThe IRS's Statistics of Income Division yesterday released (IR-2011-86) the Summer 2011 SOI Bulletin (Vol. 31, No. 1), with these articles:
- Sole Proprietorship Returns, 2009 (p.5), by Jason Paninos & Scott Hollenbeck
- Foreign-Controlled Domestic Corporations, 2008 (p.71), by James R. Hobbs
- Interest-Charge Domestic International Sales Corporations, Tax Year 2008 (p.116), by Daniel S. Holik
- Corporate Foreign Tax Credit, 2007 (p.138), by Scott Luttrell
- Federal Estate Tax Returns Filed For 2007 Decedents (p.182), by Brian Raub & Joseph Newcomb
The FATCA Provisions of the HIRE ActMelissa A. Dizdarevic (J.D. 2012, Fordham) has published Comment, The FATCA Provisions of the HIRE Act: Boldly Going Where No Withholding Has Gone Before, 79 Fordham L. Rev. 2967 (2011). Here is the abstract:
In an effort to crack down on offshore tax evasion, the United States is implementing a new set of information reporting and withholding requirements on foreign banks and other foreign entities. These provisions, known as the Foreign Account Tax Compliance Act (FATCA) provisions of the Hiring Incentives to Restore Employment (HIRE) Act, require thirty percent withholding of the entity’s U.S.-source income, unless they disclose specific information regarding their customers’ identities and account balances. While this may be an effective way to force foreign institutions into compliance, it also raises questions about how it will function within existing tax reporting systems, where the function of withholding serves a materially different purpose.
The FATCA reporting and withholding provisions depart from the norm of using withholding as a tax enforcement mechanism, and instead use it as a coercive compliance measure. This Comment looks to current domestic and international withholding systems as a point of comparison for this new regime. By examining the objectives and operation of these existing systems as compared to those of FATCA, it becomes clear that withholding income serves a drastically different purpose. Existing systems utilize withholding as a means of ensuring that taxes will be paid, while FATCA implements it as a way to force foreign banks to comply with a set of reporting requirements. Considering this is the first time withholding appears to be used in this way, it is prudent to ask whether this is a desirable use of withholding in our current international taxation system. This Comment posits that, without significant revision to account for conflicts arising with pre-existing obligations, converting the accepted concept of withholding into a drastically different punitive measure is both undesirable and unacceptable.
State Taxation of Indian Reservation Cigarette Sales to Non-IndiansAmanda M. Murphy (J.D. 2012, Fordham) has published A Tale of Three Sovereigns: The Nebulous Boundaries of the Federal Government, New York State, and the Seneca Nation of Indians Concerning State Taxation of Indian Reservation Cigarette Sales to Non-Indians, 79 Fordham L. Rev. 2301 (2011). Here is the abstract:
This Note examines the conflict between New York State and the Seneca Nation of Indians regarding the taxation of cigarette sales to non-Indians on Indian reservations. In 1994, the United States Supreme Court found New York’s taxation scheme facially permissible without providing boundaries or guidance for the state’s subsequent enforcement. Seventeen years after the Court’s decision, no taxes have been collected on these sales.
The issue involves conflicting spheres of federal, state, and tribal control. From 1965 to 1994, the Supreme Court balanced these competing interests, creating precedent that has failed to provide a definitive solution to this crisis. The Note examines the background of these decisions, the history of the treaties between the Seneca tribe and the United States, and the shift in federal Indian policy towards promoting a government-to-government relationship between the United States government and Indian tribes.
Lastly, this Note proposes a solution modeled on the example of Washington State. Facing a crisis analogous to that of New York, Washington created a lasting solution to its taxation crisis by forging a relationship of trust between the state, its agencies, and the Indian tribes. This Note advocates that New York follow the same path and create cigarette tax compacts between New York and the Indian tribes.
August 26, 2011
CTJ: Progressive Think Tank Ignored Data in Backing Repatriation Tax HolidayFollowing up on yesterday's post, Progressive Think Tank Backs Repatriation Tax Holiday: Citizens for Tax Justice, Data on Top 20 Corporations Using Repatriation Amnesty Calls into Question Claims of New Democrat Network:
The twenty companies that repatriated the most offshore profits under the temporary repatriation amnesty enacted by Congress in 2004 now have almost triple the amount of profits “permanently reinvested” (i.e., parked) overseas as they did at the end of 2005.
The figures call into question a recent report from the New Democrat Network (NDN), which assumes away the likelihood that a tax amnesty for repatriated offshore profits ultimately encourages corporations to shift more of their profits and operations to other countries.
The corporations, which include well-known companies like Pfizer, Merck, Hewlett-Packard, Coca-Cola, Citigroup, McDonald’s and many others, collectively had $269.6 billion in “permanently reinvested earnings” parked offshore (largely in tax havens) at the end of 2004.
This offshore hoard shrank as expected in 2005, to $152 billion, after these companies repatriated most of it in response to the tax amnesty. But their offshore hoard immediately climbed to new highs in the years afterwards, reaching $426.5 billion in 2010.
The recent study from the New Democrat Network (NDN) claims that a second repatriation amnesty would actually raise revenue rather than increase the budget deficit. The NDN study has several fatal flaws.
Do As Warren Buffett Says, Not As He DoesFollowing up on this morning's post, Warren Buffett's Tax Hypocrisy: Ted Hart (CPA), Do As Warren Buffett Says, Not As He Does:
Geez this is fun. There is really a whole new thread that could be opened up from the simple question posted in the comment, "What's the effective tax rate for Berkshire Hathaway?" There are a few different ways to calculate it and I've produced a little illumination in the attached spreadsheet. All the basic numbers used in the calculations in the spreadsheet are derived from Berkshire Hathaway's 2010 Annual Report.
A very straightforward approach is "income tax expense over earnings before taxes." This produces an intermediate term or multi-year expense rate of 29.1% or roughly 6 percentage points below the statutory rate of 35%.
A more nuanced but also probably more accurate "cash on cash" approach produces an effective rate of either 23.8% or 23.9% or a little more than 11 percentage points below the federal statutory rate.
We can get into a long, drawn-out discussion full of nuanced technicalities as to why the "cash on cash" approach is not appropriate, ignoring deferrals and all of that nonsense, or we can go to the relatively simple fact that this is what the financial statements actually disclose as the cash paid on income earned in the respective years on which the financial statements purport to report. I would say Berkshire's multi-year effective tax rate is 23.9%.
What is represented by the 6% or 11% statutory rate v. "paid" differential? "Loopholes", aka the normal operation of the tax code. The taxes are not legally payable yet as a function of the tax code and may never be actually paid if the changes in asset values are not "recognized" for tax purposes. However it's important to note that the 11% or 6% differences are not exactly chump change either. 5.9% of the pre-tax earnings total of $38.2 billion reported over those three years represents $2.2 billion in arguably "underpaid" tax and the 11.1% differential would represent $4.25 billion "underpaid" tax. If Berkshire were an "evil" oil company these figures would likely be spun this way.
- Tax Lawyer's Blog, Buffett’s Berkshire Hathaway Disputes IRS Tax Assessment
IZA: Tax Policy and Income Inequality in the U.S., 1978-2009Institute for the Study of Labor (Bonn, Germany), Tax Policy and Income Inequality in the U.S., 1978-2009: A Decomposition Approach:
We assess the effects of U.S. tax policy reforms on inequality by applying a new decomposition method that allows us to disentangle mechanical effects due to changes in pre-tax incomes from direct effects of policy reforms. While tax reforms implemented under Democrat administrations, in particular the EITC reforms in the 1990s and the ARRA in 2009, had an equalizing effect at the lower half of the distribution, the disequalizing effects of Republican reforms are due to tax cuts for high-income families. As a consequence of partisan politics, overall policy effects almost cancel out over the whole time period.
State-by-State Growth of High-Income ($200k/Year) TaxpayersTax Foundation, Growth of High-Income Taxpayers:
These data show percentage growth of taxpayers earning over $200,000, minus the percentage growth of all taxpayers, over the decade-long period from 1999 to 2009. The $200,000 threshold is in nominal dollars, so all states will have had considerable growth, but the differences between the states demonstrate that certain states have had much stronger increases in wealthy taxpayers than others.
The Rich Already Pay More Than Their Fair Share of TaxesTax Policy Blog, Maybe the Rich Can Afford to Pay More Tax, But Should They?:
As the following graph shows, in 2007 those households in the highest income quintile (the top 20%) had an effective tax rate of a little less than 15%. This has changed very little since 1986 or anytime in the 1980s.
Contrast that with the lower income quintiles, which all pay dramatically less tax now than they did in the 1980s. The trend is most pronounced among those in lowest income quintile, which had an effective rate of about zero up until that magical year 1986, and thereafter a more and more negative rate. In 2007, those in the lowest income quintile not only paid no tax, they got paid at the rate of 6.8% of their income! Starting in 2002, the effective rate for the second lowest income quintile goes negative as well. This means that the bottom 40% of households are now getting paid through the income tax code.
This is why the OECD finds that the U.S. has the most progressive income tax system in the industrialized world. That means the rich in the U.S. pay a greater share of income taxes than in any other OECD country. The top 10% pay about 70% of income taxes. Mr. Bartlett's argument that the rich should pay even more doesn't hold water.
New Nashville Law School Opens With 30% More Students Than ExpectedNational Law Journal, New Law School Opens on Schedule in Nashville, by Karen Sloan:
The nation's newest law school opened its doors on Aug. 25 to welcome its first class.
The Belmont University College of Law in Nashville has an incoming class of 130 students — 30 more than a feasibility study predicted, said Dean Jeff Kinsler. "We had a much higher yield on our offers than we thought we would," he said.
That same feasibility study predicted that the class' median score on the LSAT would be 152, but it ended up at 154.
That Belmont opened at all is remarkable, considering that two other new law schools that were scheduled to open this year — Concordia University Law School in Boise, Idaho, and the University of North Texas at Dallas College of Law — have delayed their plans.
Belmont's law school is slated to have about 325 students once it is fully ramped up, Kinsler said. It has nine faculty members.
Luke & Abramovsky: A Tax System Approach to Flood InsuranceCharlene Davis Luke (Florida) & Aviva Abramovsky (Syracuse), Managing the Next Deluge: A Tax System Approach to Flood Insurance, 18 Conn. Ins. L.J. ___ (2011):
This Article critiques the National Flood Insurance Program and proposes an alternative insurance plan that would use the strengths of the federal tax system to address the complexities of flood loss and provide basic coverage for all individuals. The Article also discusses the current tax rules applicable to flood loss and proposes methods for harmonizing such rules with the proposed program.
Warren Buffett’s Tax HypocrisyNetright Daily, Warren Buffett’s Taxing Hypocrisy:
[Warren Buffett] wrote of the so-called “super-rich,” which he apparently defines as households earning $1 million or more a year: “Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.” Isn’t that nice of Mr. Buffett?
But if he were truly sincere, perhaps he might simply try paying the taxes the IRS says his company owes? According to Berkshire Hathaway’s own annual report — see Note 15 on pp. 54-56 — the company has been in a years-long dispute over its federal tax bills.
According to the report, “We anticipate that we will resolve all adjustments proposed by the IRS for the 2002 through 2004 tax years at the IRS Appeals Division within the next 12 months. The IRS has completed its examination of our consolidated U.S. federal income tax returns for the 2005 and 2006 tax years and the proposed adjustments are currently being reviewed by the IRS Appeals Division process. The IRS is currently auditing our consolidated U.S. federal income tax returns for the 2007 through 2009 tax years.”
Americans for Limited Government researcher Richard McCarty, who was alerted to the controversy by a federal government lawyer, said, “The company has been short-changing the tax collection agency for much of the past decade. Mr. Buffett’s company has not fully settled its tax bills from 2002-2009. Yet he says he’d happily pay more. Except the IRS has apparently been asking him to pay more going on nine years.”
Fourteen Tips to Improve Law School CasebooksMichael Hunter Schwartz (Washburn), Improving Legal Education by Improving Casebooks: Fourteen Things Casebooks Can Do to Produce Better and More Learning, 3 Elon L. Rev. 27 (2011):
Legal education has enough scholar-driven casebooks. What legal education needs right now are learning-centered casebooks written by experts in law teaching. We need casebooks that engage students in all three Carnegie apprenticeships, casebooks that make it easy for law professors to adopt best practices, casebooks that offer law teachers a different model. We need casebooks that translate well-documented principles of instructional design to the creation of law school casebooks. This article uses the core, guiding principles of the Context and Practice Casebook Series as a mechanism for arguing for a new model of law school casebook design. It identifies fourteen features of casebooks in the Context and Practice Series that distinguish the books from some, most, and, in some instances, all other casebooks currently available in the legal education marketplace. The distinctive features fall into five categories. Firstly, describes innovations aimed at increasing the likelihood that we produce practice-ready lawyers. Secondly, articulates what casebooks can take from the field of instructional design. Thirdly, addresses what was, perhaps, the most challenging aspect of the design, creating learning experiences that assist students in synthesizing their existing value systems with the value systems implicitly and explicitly taught in law school. Fourthly, describes the ways in which series books assist law teachers in being more effective as day-to-day classroom teachers, and finally explains what the books in the series do to assist law professors in providing students meaningful opportunities for practice and feedback and to make it easier for law teachers to conduct multiple and varied summative assessments.
Tax Accrual Workpapers Are Protected by the Work Product DoctrineMark Aquilio (Saint John's), The Split Widens as the D.C. Court of Appeals Rules that Tax Accrual Workpapers Are Protected by the Work Product Doctrine:
In U.S. v. Deloitte LLP, the D.C. Circuit, applying the “because of” test, ruled that the IRS may not be entitled to a memorandum prepared by Deloitte LLP recording the thoughts provided orally of a client’s attorneys regarding contingent tax liabilities for financial reporting purposes, as the work product doctrine applies to documents “prepared in anticipation of litigation” with a dual non-litigation purpose. It also held that disclosure to Deloitte LLP of other documents did not waive work product protection. Conversely, the Fifth Circuit in U.S. v. El Paso Co. used the “primary purpose” test and denied work product protection to tax accrual workpapers. The First Circuit in U.S. v. Textron, Inc., using the “because of” test, denied work product protection to tax accrual workpapers, opining that they were not “prepared for use in litigation.” Proposed regulations require certain corporations to file a Schedule UTP, Uncertain Tax Position Statement.
August 25, 2011
Progressive Think Tank Backs Repatriation Tax HolidayThe think tank NDN today released The Revenue Implications of Temporary Tax Relief for Repatriated Foreign Earnings: An Analysis of the Joint Tax Committee’s Revenue Estimates, which estimates that a repatriation tax holiday would raise $8.7 billion of revenues over ten years, compared to the Joint Committee on Taxation's recent estimate of a $78.7 billion ten-year revenue cost.
- Press Release, New NDN Study Shows "Repatriation" Brings Tax Revenue Gains, Not Losses
- Bloomberg, Repatriation Tax Break Study Challenges Official Estimates
- The Daily Caller, Progressive Group Backs Tax Holiday for Multinationals
- The Hill, Texas Democrat Fires Back at Repatriation Study
- Wall Street Journal, Study Finds Benefits in Temporary Tax Break for Multinationals
The 2004 Repatriation Tax Holiday Did Not Create U.S. JobsM. Mendel Pinson (MBA 2011, Columbia) & Melanie Shanley (MBA 2011, Columbia), Effects of 2004 International Tax Holiday, Recommendations Going Forward, 132 Tax Notes 845 (Aug. 22, 2011):
The authors argue that the American Jobs Creation Act of 2004 failed to create jobs in the United States. However, in this critical economic period, taking a longer term perspective on the treatment of foreign earnings could have a lasting effect and meet the goals of the Jobs Act.
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