Friday, September 30, 2011
We affirm in all respects the district court’s judgment disposing of this petition for a readjustment of partnership tax items under § 6226. The plaintiff, Southgate Master Fund, L.L.C., was formed for the purpose of facilitating the acquisition of a portfolio of Chinese nonperforming loans (“NPLs”). A partnership for tax purposes, Southgate’s disposition of its portfolio of NPLs generated more than $1 billion in paper losses, about $200 million of which were claimed as a deduction by one of its partners in tax year 2002. The Internal Revenue Service determined that Southgate was a sham partnership that need not be respected for tax purposes and that Southgate’s allocation of the $200 million loss to the deducting partner should be disallowed. The district court upheld these determinations. After laying out the pertinent factual background in Part I, we explain in Part II why the district court was correct to do so. The Service further determined that the accuracy-related penalties in §§ 6662(b)(1)–(3) applied to the underpayments of tax resulting from Southgate’s treatment of its losses. On this point, the district court disagreed, disallowing the accuracy-related penalties on the ground that Southgate had reasonable cause for, and acted in good faith with respect to, the tax positions that resulted in the underpayments of tax. Although this issue is a close one, we affirm the district court’s decision to disallow the penalties.
(Hat Tip: Richard Jacobus.)
The issue of protecting tax accrual workpapers is not a recent debate, and the First Circuit’s opinion in Textron is just the latest installment in the series. The Textron majority dealt a significant blow to work product advocates by narrowly applying the “because of” test and concluding that the work-product doctrine does not prevent the IRS from accessing tax accrual work-paper documentation. In the short-term, the Textron opinion encouraged the IRS to promulgate Announcement 2010-75 and 2010-76, but in the long term, the decision raises some serious concerns as the SEC considers the transition to international accounting standards. In particular, if U.S. companies are required to move to an international probability-weighted standard for reporting uncertain tax positions, the Textron decision will lead to additional challenges for tax-reporting entities, not the least of which are the difficulty in accurately assessing estimates of success between 50.01% and 100% and the broad disclosure to the IRS of its uncertain tax positions. This potential framework could not only undermine the reliability of financial reporting, but also the value of the adversarial system. However, these concerns do not necessarily outweigh the societal gains achieved from the Textron decision. Broad disclosure of tax accrual workpapers may level the playing field between the IRS and corporate taxpayers, allowing for more complete, timely, and accurate tax assessments. Additionally, if all tax accrual information is disclosed, the efficiency of both IRS audits and any resulting litigation could be improved, reducing the societal cost of tax administration.As situations like that presented in Textron come to the forefront, we must ask ourselves: are we comfortable with the potential effects of the Textron standard in a world governed by international tax accounting standards? Additionally, who should resolve such questions— Congress, the courts, or administrative agencies like the IRS and SEC? The answers to these questions may provide the first clues as to how Textron will influence the corporate tax world—both now and in the years ahead.
Section II of this Comment looks at the language and legislative history of Ohio Revised Code sections 5721.30 to 5721.43 in an attempt to explain the purpose and the enforcement mechanisms of these tax certificate statutes. Section III of this Comment presents two issues. First, this section focuses on the ability of a county treasurer to negotiate a variety of terms including fees and a maximum interest rate of eighteen percent with private investors. Homeowners already struggling to pay off their property taxes are overwhelmed by these financial terms, especially the double-digit interest rates, and this frustrates any attempt to negotiate a reasonable redemption payment plan with the private investors. Second, this section focuses on the wider implications of these tax certificate statutes. ...
Finally, Section IV of this Comment suggests two alternative solutions to the problems described in Section III. First, counties should reevaluate the benefits of these tax certificate statutes, taking into account the wider implications, and reduce their reliance on these tax certificate statutes. Alternatively, the General Assembly should amend the statutes to include a series of limitations on the amount of tax certificates that can be sold in any year.
The taxation of Sovereign Wealth Funds in the United States is outmoded and is due for reconsideration. Offering a tax exemption to the billion dollar investment funds owned by foreign governments is both unfair and inefficient. Founded in the principles of sovereign immunity, the foreign sovereign tax exemption, found in § 892, fails to satisfy the Congressional goals that motivated its creation. This article explains the current taxation of foreign sovereigns and, by extension, Sovereign Wealth Funds. It then goes on to illustrate that the current exemption is both too broad, providing a tax exemption for activities that are clearly non-governmental activities, and therefore outside of the realm of sovereign immunity, and simultaneously too narrow, failing to provide a tax exemption for activities that clearly are governmental activities. Finally, the article explains that any exemption provided to foreign sovereigns should be offered only as a treaty matter, reserving the privilege as a negotiation tool, and thereby ensuring that the United States receives similar benefits in return.
News of additional errors in some LSAT and GPA data published in recent years by the University of Illinois isn't going to make any difference in U.S. News & World Report's annual law school rankings for those years.
For one thing, it appears that the erroneous information may have been statistically insignificant, as far as the rankings are concerned, Robert Morse, the magazine's director of data research, tells the ABA Journal. Plus, it's necessary to have finality at this point, he says. ...
At this point, Morse sees no need for U.S. News to change its procedures. But, he says, if any change is needed, the ABA is in the better position to audit, spot-check or otherwise review the accuracy of the information provided by the law schools it accredits. The question for the ABA, he suggests, is "Do they feel these [data reporting errors] are serious enough … that they need to take more steps than they’re taking now to ensure data integrity?”
- Faculty Lounge, More on Illinois Law Class Credentials
- Law Librarian Blog, Every Little Fraction of a Point Matters: A Brief (Don't Know If Complete) Chronology of the Univ. of Illinois College of Law Administration's Unethical Conduct
- Most Strongly Supported, University of Illinois Law School in Hot Water (Again)
I shouldn’t be paying a lower effective rate than a teacher, or a firefighter, or a construction worker. And they sure shouldn’t be paying a higher tax rate than somebody pulling in $50 million a year. It’s not fair, and it’s not right. And it’s got to change.
Somebody who’s making $50,000 a year as a teacher shouldn’t be paying a higher effective tax rate than somebody like myself or Jeff [Weiner, CEO of Linkdin], who’ve been incredibly blessed.
FactCheck.org, Obama’s Teacher Tax Whopper:
President Obama’s claim that he pays a lower tax rate than a teacher making $50,000 a year isn’t true. A single taxpayer with $50,000 of income would have paid 11.9% in federal income taxes for 2010, while the Obamas paid more than twice that rate — 25.3% (and higher rates than that in 2009 and 2008). And if the $50,000-a-year teacher were in Obama’s tax situation — supporting a spouse and two children — he or she would have paid no federal income taxes at all.
The outcome is the same whether we count payroll taxes or not, and even if we look at what the $50,000 earner will pay on 2011 income. Whatever the assumption, the rates Obama paid were higher — and usually much higher. ...
When we asked the White House about this, spokesman Matthew Vogel said: “The President was not offering a literal comparison of his personal tax rate. … He doesn’t say ‘I pay a lower tax rate than my secretary’ or anyone else.” We disagree. The president said: “Somebody who’s making $50,000 a year as a teacher shouldn’t be paying a higher effective tax rate than somebody like myself.” And in our judgment, that’s as “literal” as any comparison gets. Readers may interpret the president’s words as they please. The fact is, Obama pays higher rates than the $50,000-a-year teacher he mentioned.
Obama has released his returns for 2008, 2009 and 2010. What they show is that he made millions, mostly from the sale of two best-selling books, and he also paid millions in federal income taxes. His federal income tax rates for those years were 31.3 percent, 31.9 percent and 25.3 percent, respectively. And those are all higher than rates paid by anybody making $50,000 a year, whether they are a teacher or “a firefighter, or a construction worker.” ...
Any way we figure it, the $50,000-a-year teacher (or firefighter, or construction worker) paid a lower rate than Obama last year.
- Mary O'Keeffe (Union College), The Teacher or the Prez: Who Pays More in Taxes?
- Tax Lawyer's Blog, Obama Joins His Mascot, Warren Buffett, in Perpetuating Tax Lie
- Tax Policy Blog, Fact Checking the President's Tax Claims
- Tax Update Blog, Just Because You're President Doesn't Make You Warren Buffett
- Washington Times, Obama's Tall Tax Tales
'Suddenly, liberal Democrats are making the same argument about the tax code that I've been making for 20 years," laughs former Republican House Majority Leader Dick Armey. "Welcome to the party." Mr. Armey, who along with Steve Forbes has been the torch bearer for the flat tax since the early 1990s, believes that the latest applause line from President Obama that "billionaires should pay the same tax rate as janitors" may be the political gateway to sweeping tax reform.
Mr. Forbes sees an opening here too and says: "The flat tax is the perfect issue for these times. It fixes the economy and doesn't cost a dime." He's right. It's the teed-up GOP response to a jobless recovery and the near-universal sentiment among voters that the tax code is corrupt beyond repair. ...
Done correctly, the flat tax eliminates all double taxation of saving and investment. But if liberals won't accept a lower tax rate for capital gains and dividends, perhaps the grand deal in Washington could be to tax everything at 16% or 17%.
Democrats have come to a different conclusion: They want to get rid of the deductions and raise tax rates at the same time. When has that ever worked? The near 100-year history of the tax code teaches this inviolable law of politics: The higher the tax rate, the more tax carve-outs there will be for yacht owners. That is why the rich paid a smaller share of the income tax in the early 1960s when the top tax rate was 91%, and in the 1970s with a 70% rate, than they do today with a 35% rate. ...
Why aren't Republicans in Congress and in the presidential race making this case? Newt Gingrich and Jon Huntsman have tax rate reform proposals that move toward a flatter tax. But the candidate who comes closest to a true flat tax is Herman Cain. ... Mr. Cain has super-sized solutions to an economy with super-sized problems.
Organizations tax-exempt under section 501(c)(3) of the Internal Revenue Code, often referred to as charities, cannot, at risk of loss of exemption, “participate in, or intervene in (including the publishing or distributing of statements) any political campaign on behalf of (or in opposition to) any candidate for public office.” That is, they are subject to a campaign intervention prohibition. These organizations cannot endorse or oppose a candidate for public office or contribute to the candidate’s campaign. The IRS has long interpreted this campaign intervention prohibition broadly. An applicable regulation, for example, refers to violating the prohibition “directly or indirectly.” Revenue Ruling 2007-41, the most recent and comprehensive official IRS pronouncement on the subject, explains that “[w]hether an organization is participating or intervening, directly or indirectly, in any political campaign on behalf of or in opposition to any candidate for public office depends upon all of the facts and circumstances of each case.”
How the IRS interprets, communicates, and enforces the campaign intervention prohibition, particularly indirect intervention, has been – and continues to be – a matter of controversy. Representatives from the charitable community, both before and after the publication of Revenue Ruling 2007-41, have urged greater clarity regarding the criteria for campaign intervention. A number of commentators have suggested that current rules may be unconstitutionally vague and that, to avoid this problem, violation of the campaign intervention prohibition be limited to activities involving express advocacy.
This difference between the IRS and the charitable community rehearses the difference between rules and standards. As Louis Kaplow has explained in an influential article, Rules Versus Standards: An Economic Analysis, the choice between rules and standards involves “the extent to which a given aspect of a legal command should be resolved in advance or left to an enforcement authority to consider.” By asking the IRS for clarity and bright lines in defining the prohibition, the charitable community emphasizes a key ex ante consideration, the impact of guidance on appropriate charitable behavior. By offering a multifactor approach dependent on the particular situation, the IRS stresses an equally important ex post consideration, the impact of guidance on enforcement. Both set of considerations, of course, have a place in any calculus. Kaplow’s article, however, sets out a framework to help those that must give content to legal commands guidance on how to decide whether to frame such content as rules or standards. This article argues that, under Kaplow’s analysis, the IRS’s own concern for encouraging compliance by those subject to the law should lead it to develop more rules in this area. That is, this article emphasizes why the IRS itself should want to promulgate rules.
Part I sets forth Kaplow’s analytical framework, which demands consideration not only of levels of enforcement but also how the affected community will choose to learn about the legal command in any decision between embodying legal commands as rules or as standards. Part II describes the legal commands at issue. Part III considers aspects of Kaplow’s analysis related to enforcement. It examines the available sanctions, the numbers of parties subject to enforcement actions, and the kinds of sanctions in fact imposed. Part IV discusses the nature of the affected community and how members of the community will seek legal advice. Part V addresses a question Kaplow mentions frequently, but only in passing – the underlying norms a statutory command reflects. This part discusses both the legislative purpose in enacting the prohibition and attitudes toward its constitutionality. Part VI considers arguments against rules, both generally and as applied to tax law. Part VII applies the Kaplow analysis to all these considerations and concludes that the IRS should invest the time to develop a set of rules. Part VIII concludes.
This Article considers whether income tax exemption for charities is consistent with normal income tax. It finds that exemption for contributions is not special treatment and that exemption for income from sale of goods or performance of services related to the purpose of the charity is special treatment only if profits are used for expansion. It concludes that a subsidy for expansion can be justified. Most importantly the article finds that exemption for investment income is a subsidy. It concludes that exemption for such income depends on a value judgment as to whether public policy should favor less accumulation and more current spending by charities. It suggests that the exemption for investment income and the charitable deduction should be limited in certain circumstances.
[T]his article proposes a modified territorial system with two main prongs. First, Congress should exempt from U.S. taxes all corporate income (other than mobile income) earned in foreign countries with an effective corporate tax rate of 20% or higher. Such income could be repatriated at any time to the U.S., subject to payment of an administrative charge of 5% as is done in countries like France. This charge is a rough way to take into account some of the expense deductions previously taken by multinational corporations in their home countries in order to generate foreign-source income -- for example, a portion of the salaries of U.S. executives who helped start European operations.
Second, Congress should end the current deferral system for foreign-source income earned by U.S. corporations in countries with effective tax rates under 20%. That portion of foreign-source income would be taxed every year in the U.S. at a rate equal to the difference between 20% and the actual rate paid by the U.S. corporation in the tax haven. For example, if a U.S. corporation generated $100 million of income in Barbados, which collected $2 million in taxes on such income, it would pay $18 million in corporate taxes to the U.S. And if the company repatriated that income from Barbados to the U.S., it would pay the administrative charge of 5% or less.
This Article addresses the issue of tax preparer oversight. Currently, anyone may prepare a tax return for a fee. However, those preparers who are not lawyers, certified public accountants, or authorized to practice before the IRS are not required to meet a minimum standard of education, knowledge, training, or skill. After recent government studies revealed that these non-trained tax return preparers were making costly, egregious mistakes, the IRS proposed mandating oversight over any individual who prepares a tax return for compensation. This Article discusses, in depth, the Department of the Treasury’s proposed regulations to broaden the authorities of IRS Circular 230 and the Office of Professional Responsibility. Such proposals would adequately ensure the timeliness, accuracy, and completeness of tax returns.
The IRS today reminded estates of married individuals dying after 2010 that they must file an estate tax return to pass along their unused estate & gift tax exclusion amount to their surviving spouse.
Available for the first time this year, the new portability election allows estates of married taxpayers to pass along the unused part of their exclusion amount, normally $5 million in 2011, to their surviving spouse. Enacted last December, this provision eliminates the need for spouses to retitle property and create trusts solely to take full advantage of each spouse’s exclusion amount.
The IRS expects that most estates of people who are married will want to make the portability election, including people who are not required to file an estate tax return for some other reason. The only way to make the election is by properly and timely filing an estate tax return on Form 706. There are no special boxes to check or statements needed to make the election.
The first estate tax returns for estates eligible to make the portability election (because the date of death is after Dec. 31, 2010) are due as early as Monday, Oct. 3, 2011. This is because the estate tax return is due nine months after the date of death. Estates unable to meet this deadline can request an automatic six-month filing extension by filing Form 4768. The IRS emphasized that estates of those who died before 2011 are not eligible to make this election.
The IRS plans to issue regulations providing further guidance on this election and welcomes public comment on a number of issues.
Notice 2011-82, 2011-42 I.R.B. ___ (Oct. 17, 2011):
This notice alerts executors of the estates of decedents dying after December 31, 2010, of the need to file a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, within the time prescribed by law (including extensions) in order to elect to allow the decedent’s surviving spouse to take advantage of the deceased spouse’s unused exclusion amount. [§ 2010(c)(5)(A).] In particular, for the executor of the estate of a decedent to elect under § 2010(c)(5)(A) (a “portability election”) to allow the decedent’s surviving spouse to use the decedent’s unused exclusion amount, the executor is required to file a Form 706 for the decedent’s estate, even if the executor is not otherwise obligated to file a Form 706. This notice also alerts executors of the estates of decedents dying after December 31, 2010, that the estate of such a decedent will be considered to have made a portability election if a Form 706 is timely filed in accordance with the instructions for that form. For those estates filing a Form 706 that choose not to make a portability election, this notice addresses how to avoid making the election. This notice also reminds taxpayers that a portability election can be made only on a Form 706 timely filed by the estate of a decedent dying after December 31, 2010, and any attempt to make a portability election on a Form 706 filed for the estate of a decedent dying on or before December 31, 2010, will be ineffective. Finally, this notice alerts taxpayers that the Treasury Department and the IRS intend to issue regulations under § 2010(c) to address issues arising with respect to the portability election, and anticipate that those regulations will be consistent with the provisions of this notice.
A long standing feature of U.S. corporate taxation is a group of doctrinal devices serving to prevent taxpayer attempts to avoid double taxation of corporate earnings. These devices, referred to collectively as the constructive dividend doctrine (“CDD”) are predicated on a perspective under which corporate income is to be subject to double taxation. A contrasting perspective is one in which all income derived from a business enterprise would be taxed exactly once (the “Integrationist Norm”). Under such an idealized Integrationist Norm, all income would be imputed to individuals connected with the corporate enterprise - as shareholders or otherwise - as earned, and all income would be taxed at the individual rate schedules. This Article examines the CDD in light of the Integrationist Norm. Elsewhere, in an article entitled "Advancing to Corporate Tax Integration: A Laissez-Faire Approach," I advanced the proposition that although systematic corporate tax integration is unlikely to be enacted in the foreseeable future, integrationism should be regarded as normative. The Laissez-Faire Approach proposes that, to the extent that legal mechanisms serve to prevent self-help corporate tax integration, they are counterproductive, wasting valuable taxpayer, IRS, and judicial resources. This Article analyzes the CDD in light of the Laissez-Faire Approach in order to identify circumstances in which it is best to dispense with the CDD as a counter productive mechanism that wastes resources reinforcing the double tax anti-ideal.
Thursday, September 29, 2011
(Hat Tip: Walter Schwidetzky.)
American politicians love to rally around small businesses and grant them favorable treatment in the law. In the popular imagination, “small business” is synonymous with innovation, entrepreneurship and job creation. Yet just what is a small business, in the eyes of the law? Is a “small business” deemed small by its revenue, its number of employees, or other attributes? The fact is, there is no one standard definition. Current statues are inconsistent, and many definitions are remarkably broad. This has allowed even large and established firms that dominate their markets to take advantage of provisions intended to protect small businesses and improve their competitiveness.
This paper will examine the size standards found in government contracts law and the Internal Revenue Code, and will trace the development of these standards through their legislative history. The paper will conclude with a proposal for a unified progressive scale to replace current definitions of “small” business. This new model is based fundamentally on an entity’s prospective ability to compete.
For over 10 years, The Center for Measuring University Performance, now located at Arizona State University, has produced an annual report on "The Top American Research Universities" that uses objective data on nine measures to put universities into categories according to their performance. We measure research, of course, by the amount of research expenditures of each university in two categories: total research, which includes all sources, and federal research that includes the peer-reviewed research activities sponsored by the federal government. In addition we collect information on endowment, annual giving, National Academy membership, faculty awards, doctoral degrees awarded, postdoctoral fellowships supported, and average SAT scores of entering students. (For a full discussion of all these measures, see the most recent edition of "The Top American Research Universities" , available online.)
By combining these indexes of academic performance for the members of the conferences, we can produce a reliable indicator of the combined academic distinction of the institutions in each of the six BCS conferences.
- Big-10 (55)
- Pac-12 (48)
- ACC (28.5)
- SEC (14)
- Big-12 (12)
- Big East (8.5)
As a reference, we also constructed an index for the Ivy League, to put all this into perspective. This premier academic conference would fall into second place (51), after the Big-10 (55) and before the Pac-12 (48).
For the individual scores of the 74 BCS schools, as well as the 8 Ivy league schools, see here.
In July, 2011, the Budgetary Affairs Commission of the Standing Committee of China’s National People’s Congress convened an international symposium on reform of China’s Personal Income Tax (PIT) system. Currently about 30 years old, the Chinese PIT system very roughly resembles the U.S. PIT system at a similar age (prior to changes effected during World War II). This symposium paper describes general principles and specific practices to improve compliance and enforcement of the PIT, based on the U.S. experience with that tax. Support for the symposium was also provided by Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH (GIZ), an enterprise of the German government that supports international cooperation for sustainable development.
(Hat Tip: Kent Schenkel.)
We reported earlier in the year that the froth was gone from law schools, with applications for the fall 2011 class trending downward. In fact, the final application tally for the fall ’11 class reveals an almost 10% drop in the number of applicants, the steepest decline in at least 10 years. Here’s a summary of application data from the Law School Admission Council and here’s a report from the Minneapolis Star-Tribune. The article begins: “Law school is no longer a sure bet. Would-be students are noticing.”
Even more interesting, it appears law schools are not about to surge back to popularity soon. This summer, there was an 18.7% decline in LSAT test takers. That is the biggest decline in at least 24 years, according to this report from the Law School Admission Council.
In this article, we re-examine the existence and nature of the mismatch effect in law school, asking several key questions about this potential effect: its size and direction, its source, and its significance. We begin with a brief history of affirmative action and its legality, followed by a discussion of the efficiency and meritocracy arguments used by opponents of affirmative action. We then place the mismatch hypothesis within that context, considering how and whether it fits as part of those attacks. Next, we examine how race is, and is not, a reasonable part of the mismatch hypothesis discussion, and we describe how match effects can be modeled and analyzed. Before looking at research concerning those effects, however, we examine the causal assumptions among mismatch hypothesis supporters, and we present research about the effects of heterogeneous (diverse in terms of prior measured achievement) learning environments in related contexts. That is, the hypothesis also raises issues regarding postsecondary and post-baccalaureate/graduate school admissions, and those other levels of education help to contextualize the research in law school admissions. We conclude with some reflections on the policy and practice significance of any mismatch effects, again questioning the linking of these questions to affirmative action debates and suggesting instead that the major implications concern law school instruction and academic supports for entering students.
The recent ABA Section of Taxation debate on standards of advice and disclosure is not new among tax lawyers. The legal ethics literature reports tax lawyers discussing these issues in the 1950s and 1960s. Having neither the benefit of formal ethics opinions or committee work, for good or not, the debate was more open-ended, oriented more around the ethics of lawyering than the law of lawyering.
All Tax Analysts content is available through the LexisNexis® services.
Wednesday, September 28, 2011
Conservation easements raise a number of interesting legal issues, not the least of which is whether a conservation easement is automatically extinguished pursuant to the real property law doctrine of merger if its government or nonprofit holder acquires title to the encumbered land. This article explains that merger generally should not occur in such cases because the unity of ownership that is required for the doctrine to apply typically will not be present. This article also explains that extinguishing conservation easements that continue to provide significant benefits to the public through the doctrine of merger would be contrary to the conservation and historic preservation policies that underlie the state enabling statutes and the federal and state easement purchase and tax incentive programs.
In an investigation into the past 10 years of College of Law test scores and grade point averages (GPA), the ongoing University-initiated review has determined that inaccurate data were reported for four of those years. The findings indicate inaccurate data were entered that improved the Law School Admissions Test (LSAT) and GPA information describing the enrolled classes of 2011 through 2014.
Class of 2011
Class of 2012
Class of 2013
Class of 2014
- ABA Journal, U of Illinois Corrects LSAT and GPA Stats for Additional Law Classes
- Above the Law, Illinois Law Restates Its Numbers: The Deception is Deeper Than We Thought
- Associated Press, U. of Ill. Finds More Law School Data Problems
- Inside Higher Ed, U. of Illinois Admits to More Errors in Law School Data
- National Law Journal, Illinois Law Acknowledges Pattern of Reporting Inaccurate Data
Congress uses the income tax to regulate. Because states impose their own income taxes on the federally-defined income tax base, rather than on separately determined state tax bases, states automatically import federal policies into their own tax systems. But federal tax policies reflect national, not local, political choices. This Article calls attention to the practice of tax base conformity and to its advantages and drawbacks. Conformity conserves legislative, administrative, and judicial resources, and it reduces taxpayers’ compliance burdens. At the same time, however, conforming states cede tax autonomy to the federal government, thereby exposing themselves to revenue volatility stemming from the ever-changing federal tax law. Additionally, conformity jeopardizes the values served by federalism, including regulatory competition, diffusion of power, promotion of local values and policy preferences, and policy experimentation. Conformity also imports the defects of the federal tax base into state tax law. While the significant administrative and compliance advantages of federal-state tax base conformity suggest that it is here to stay, this Article makes recommendations for reducing its adverse impacts and for further study.
A simple rule meant to cut paperwork for U.S. companies has grown into one of the biggest multinational tax breaks around, costing the United States and other governments billions of dollars in lost taxes each year.
It thrives thanks to determined business support, including a campaign two years ago that forced the Obama administration to retreat from altering it and tax professionals worldwide who exploit its benefits.
The rule is dubbed “check-the-box.” It allows U.S. companies to strip profits from operations in high-tax countries simply by marking an IRS form that transforms subsidiaries into what the agency calls a “disregarded entity.” Others have labeled them “tax nothings.”
Check-the-box allows companies to avoid the normal 35% U.S. corporate tax on certain types of income. The Treasury Department estimates that annual revenue losses from check-the-box have hit almost $10 billion. Other countries are also said to lose billions as income is shifted to places with low or no taxes, although there is no official estimate.
The impact of check-the-box goes beyond the drain on government coffers. The rule, along with other tax provisions, has helped fuel explosive growth in foreign investment by American corporations. Since 2004, the earnings that U.S. companies keep overseas have doubled to about $1.8 trillion. ...
Check-the-box is but one of many forms of “tax arbitrage”—the art of exploiting differences in countries’ tax systems. It can reduce taxes all by itself or figure into more complex transactions. As the Financial Times and ProPublica reported Monday, the IRS in recent years has clamped down on what it views as abusive arbitrage deals involving foreign tax credits.
But check-the-box lives on. It is not among loopholes targeted by Obama’s new plan. Its untouchable status—the government has twice tried to kill it and balked—provides a case study in how a billion-dollar tax break was born by mistake, then protected by the power of
In the mid-1990s, U.S. companies were creating a growing number of domestic entities. The new rule said that, by simply checking a box on IRS Form 8832, businesses could declare them as corporations or partnerships.
But within days of its announcement in 1996, tax lawyers were on the phone saying the Treasury Department had overlooked the international ramifications. Inadvertently, the government had provided a way for companies to move profits from subsidiaries in high-tax countries like Germany to Luxembourg, the Caymans or other jurisdictions with lower or no taxes on certain kinds of income. Often, this is done by making royalty or interest payments between operations in different countries.
For decades, the IRS has had anti-abuse rules to make sure such payments could be subject to taxes. However, these rules generally don’t apply to payments made within a corporation. Check-the-box made it simple for a company to designate a subsidiary as a branch, with no U.S. tax consequences for the income unless it is repatriated. ...
By March 2000, Treasury reported the existence of nearly 8,000 “disregarded entities.” A paper by Heather M. Field, an associate professor at the University of California’s Hastings College of the Law in San Francisco, found that tens of thousands more were created between 2001 and 2006. ...Check-the-box continued unchallenged until 2009, when Obama took office. In his first budget proposal, the president made closing tax loopholes a top revenue-raising goal. And in the international area, check-the-box was his top target, the biggest revenue raiser in a list of 11 reforms.
Again, corporate opposition was swift. Philip D. Morrison, a tax lawyer at Deloitte Tax, wrote in a prominent tax journal that the Obama proposal on check-the-box was “ridiculous,” and he faulted the administration for overheated rhetoric and a “deep cynicism.” Morrison said the business community had already fought—and won—this battle in 1998. ... The Obama administration quickly retreated.
(Hat Tip: George Mundstock.)
In contrast to major league baseball, the National Basketball Association has a salary cap designed to provide every team an equal and fair chance of competing for the championship. The Miami Heat‘s recent incredible success in signing the game‘s three most hotly desired free agents, including mega-stars Lebron James and Dwyane Wade, therefore flies in the face of the NBA‘s attempted level playing field. How could one team so outmaneuver all the others in the sport which tried to eliminate such uncompetitive results via a salary cap?
As discussed in this Essay, the answer lies in the law of unintended consequences and perverse incentives. Some NBA teams are located in more attractive jurisdictions with nicer amenities or lower costs, such as taxes. In particular, Miami provides a highly-favorable climate both as to weather and taxes as Florida does not have a state income tax. In the absence of any salary cap limitations, teams in higher-tax jurisdictions could compete better with Miami for free agent players by offering higher salaries to offset the extra tax. But the NBA salary cap, by its very terms, blocks this usual free-market response.
Having flagged this perverse and unintended benefit to the no-tax clubs, this Essay then proposes an appropriate solution. Rather than scrapping the salary cap and restoring a competitive advantage to the wealthier clubs, a state tax adjustment to the cap amounts would remove the rich clubs‘ advantage without substituting an unintended benefit to the no-tax clubs. The salary cap amounts of no-tax teams simply should be reduced by a percentage equal to the highest state tax rate of any NBA team. After making this simple adjustment, this Essay then refutes more sophisticated arguments as to why the proposed adjustment might go too far. Among other points, this Essay highlights how Miami‘s tax advantage might extend beyond just Lebron‘s salary to include his extensive endorsement income as well. Expanding the analysis to such deeper level therefore highlights an even greater need for a state tax adjustment to the NBA salary cap.
Section 501(c)(4) organizations are required to primarily engage in the promotion of social welfare in order to obtain tax exempt status. Court decisions have established that in order to meet this requirement, § 501(c)(4) organizations cannot engage in more than an insubstantial amount of any non-social welfare activity, such as directly or indirectly participating or intervening in elections. Thus, the claim made by some political operatives and their lawyers that § 501(c)(4) organizations can spend up to 49% of their total expenditures on campaign activity and maintain their tax exempt status has no legal basis in the IRC and is contrary to court decisions regarding eligibility for tax-exempt status under § 501(c)(4). An expenditure of 49% of a group’s total spending on campaign activity is obviously far more than an insubstantial amount of non-social welfare activity.
- Associated Press, Watchdogs: End Campaign Groups' Tax-Exempt Status
- Bloomberg, Rove, Burton Political Groups Are Subject of New IRS Complaint
- The Hill, Watchdog Groups Take Aim at Crossroads GPS, Priorities USA
- Huffington Post, Political Groups Are Flouting IRS Rules To Keep Donors Secret, Reformers Say
- Politico, Watchdogs to IRS: Tamp down on Crossroads
- Talking Points Memo, Watchdogs Ask IRS To Probe Non-Profits Affiliated With Karl Rove and Obama Aides
Section 482 transfer pricing rules as applied to cross border transactions are the most important tax issue to multinational corporations. The reason surely lies in the potential found there for tax reduction (usually referred to as reducing the worldwide effective tax rate) by those corporations. Much of the heat and light surrounding transfer pricing for U.S. owners of foreign corporations could be eliminated by consolidating the foreign affiliates of domestic parents, whether or not Congress chose to tax currently (or ever) foreign source active business income earned in branches or in foreign corporations. At least the merits of this alternative should be considered by decision makers, rather than continuing with the current regime that just happened, is built on the skimpiest of formalities, and requires use of a second-best solution to transfer pricing abuses between affiliates.
Each year New York State lets real estate investors evade at least $200 million of taxes. In peak years the figure likely rises to $700 million, if known tax cheating in another state is any indication. Some of the investors who cheat New York State also cheat New York City out of at least $40 million annually.
Back in the 1990s Jerry Curnutt figured out how to finger such cheats when he was the top partnership specialist at the IRS. Curnutt’s computer sifted through tax returns until he learned how to separate thieves from honest taxpayers. The tax-evasion estimates of $200 million and $40 million are his. ...
Why has nothing been done for more than 11 years to make the cheats in New York pay what the law requires? ... Yet in letter after letter since 2001, New York state tax officials told Curnutt to go away, smugly insisting there were no untaxed millions. ...
And yet in Pennsylvania, Curnutt’s research “resulted in the taxation of over $700 million in unreported income,” the Pennsylvania Revenue Department wrote in a letter to tax administrators across the country in reference to a single instance.
So why are sightless sheriffs ignoring massive cheating by the most affluent among us? The likely reason became clear nearly a decade ago when one Kentucky tax official told Curnutt that the governor’s office did not want his services because it would uncover tax cheating by influential citizens, meaning campaign donors.
In [Boltar v. Commissioner, 136 T.C. No. 14 (2011)], a case in which the Tax Court addressed the valuation of a conservation easement, the court ruled on the admissibility of expert testimony.
All Tax Analysts content is available through the LexisNexis® services.
Tuesday, September 27, 2011
The new congressional committee on deficit reduction (the so-called "supercommittee") not only can consider revenue increases, but must consider them — as well as spending cuts — if it's going to produce a balanced plan. There are five main reasons why.
- Spending cuts alone can't do the job. The key fiscal policy goal is to reduce deficits sufficiently to stabilize the debt relative to the size of the economy. The only way to accomplish this without severe cuts that would hit low- and middle-income Americans hard — in areas ranging from Medicare, Medicaid, and possibly Social Security to basic assistance for the poor — and weaken core government functions like education, scientific research, and ensuring safe food and water, is through revenue increases.
- The 2001-2003 tax cuts are a significant contributor to projected deficits. Letting some or all of those tax cuts expire would make a significant contribution to reducing the deficit.
- Higher-income people can and should share in the sacrifices needed to reduce long-term deficits. Low- and moderate-income households shouldn't be forced to bear a disproportionate share of the burden through cuts in Medicare, Medicaid, Social Security, and programs targeted on people who are poor or near-poor.
- Taxes are low both in historical terms and in comparison with other countries. By either standard, the United States has significant room for increasing tax revenues.
- Higher taxes are not an inherent barrier to economic growth. In fact, the Congressional Budget Office (CBO) has said that tax increases used to reduce budget deficits can improve long-term economic growth and job creation. The experience of the 1990s shows that claims that reasonable revenue increases will sink the economy largely reflect politics and ideology, not solid analysis.
This report shows why the Buffett Rule is sorely needed:
- The federal tax system taxes income from work at a much higher rate than income from wealth.
- Buffett’s effective tax rate of 17.4% is typical of taxpayers with $10 million or more of investment income.
- Buffett’s claim that his secretary pays about 30% of her income in federal taxes is not only plausible, but very likely.
- News stories, reports, and blogs that focus only on the amount of federal income tax paid by highincome taxpayers are omitting the substantial amount of payroll taxes that workers pay.
- Critics of the Buffett Rule who cite data showing that the average effective tax rate for the wealthy is higher than the average effective rate for the middle class miss the point of the Buffett Rule.
This Article examines the adoption and diffusion of Tax Receivable Agreements (TRAs), an innovative contract used in connection with a basis step-up in some IPOs. We describe the development and adoption of TRAs, how the contracts have evolved over time, who uses them, and why. We also conduct a statistical analysis of 1300 IPOs from 2004 to 2011 to identify what factors are correlated with the use of TRAs.
Sarah Lawsky (UC-Irvine) was the commentator.
Warren Buffett has forcefully injected himself into the U.S. political debate, with President Obama using the billionaire's anecdote that he pays a lower tax rate than his secretary as a bludgeon in favor of raising taxes on millions of other Americans.
The Omaha stock-picker has every right to do so, and his foray may even do some good. His tax claim has already had the educational benefit of prompting the press to report that, as a general matter, the Buffett-Obama premise is false. CEOs don't typically pay lower rates than middle-class secretaries.
As data from the IRS make clear, the vast majority of those earning more than $1 million per year typically pay tax rates two to three times higher than people making less than $100,000. In 2008, the average tax rate for millionaires and above was 23.3% and for those earning between $30,000 and $50,000 it was 7.2%.
But the opportunity to educate the public would be even greater if Mr. Buffett would let everyone else in on his secrets of tax avoidance by releasing his tax returns. Going only by Mr. Buffett's unverified claims, his federal taxes in 2010 amounted to 17.4% of his taxable income, probably because much of his income was from capital gains and dividends. It's also likely that he took significant deductions for charitable donations. No doubt the millions of Americans who could end up paying more because of this claim would love to see the details. ...
If Mr. Buffett's anecdote is going to be the main political basis for rewriting the U.S. tax code, Americans have every right to know the basis for the anecdote. We called Berkshire Hathaway last week to see if Mr. Buffett would release his 2010 return, but we haven't heard back.
AIG, the bailed-out insurer, hired Clarissa Potter, former deputy chief counsel of the IRS, to help protect tax assets accumulated by the firm. Potter will be deputy tax director. ...Potter was previously an associate professor at Georgetown University Law Center and had worked at the Treasury, Congress’s Joint Committee on Taxation and Sullivan & Cromwell LLP. She holds a law degree from Yale University and a bachelor’s degree from Miami University of Ohio.
One original sin was the separation of the corporate and personal tax, giving lawyers, accountants and the wealthy a chance to game the system.[F]or the last 98 years we have had two completely separate and uncoordinated income taxes. It's a bit as if corporations were owned by Martians, otherwise untaxed, instead of by their very earthly—and taxed—stockholders.
This has had two deeply pernicious effects. One, it allowed the very rich to avoid taxes by playing the two systems against each other. When the top personal income tax rate soared to 75% in World War I, for instance, thousands of the rich simply incorporated their holdings in order to pay the much lower corporate tax rate.
There has since been a sort of evolutionary arms race, as tax lawyers and accountants came up with ever new ways to game the system, and Congress endlessly added to the tax code to forbid or regulate the new strategies. The income tax act of 1913 had been 14 pages long. The Revenue Act of 1942 was 208 pages long, 78% of them devoted to closing or defining loopholes. It has only gotten worse.
The other pernicious consequence of the separate corporate and personal income taxes has been a field day for demagogues and the misguided to claim that the rich are not paying their "fair share." Warren Buffett recently claimed that he had paid only $6.9 million in taxes last year. But Berkshire Hathaway, of which Mr. Buffett owns 30%, paid $5.6 billion in corporate income taxes. Were Berkshire Hathaway a Subchapter S corporation and exempt from corporate income taxes, Mr. Buffett's personal tax bill would have been 231 times higher, at $1.6 billion.
Just as in the late 19th century, the tax code is now hopelessly arbitrary and unfair. It requires a complete overhaul.
The Court this morning granted certiorari in the Home Concrete case from the Fourth Circuit [Home Concrete & Supply LLC v. United States, No. 09-2353 (4th Cir. Feb. 7, 2011)], thus paving the way for a definitive, nationwide resolution of the issues presented in the Intermountain cases. ... The government’s opening brief in Home Concrete is due November 14. The case will likely be argued in January, or possibly February, and the Court will issue its decision before the end of June 2012.
(Hat Tip: Kristin Hickman.)
Conventional wisdom suggests a tax LLM degree can open professional doors for an aspiring tax lawyer -- and that more are pursuing that degree in the sluggish economy -- but not all firms value the degree equally.
For our take, see:
All Tax Analysts content is available through the LexisNexis® services.
Oxytocin infusions might also increase citizens’ willingness to fund public goods through tax compliance, particularly if taxpayers perceived that their tax payments would benefit their in-groups. Of course, the government cannot distribute nasal inhalers along with Forms 1040. But it could try to increase taxpayer oxytocin levels nonpharmacologically, by presenting tax compliance as part of a trusting and reciprocal relationship. But what reciprocal relationship should the government try to trigger? There are at least three possibilities: (i) taxpayer-government reciprocity, (ii) taxpayer-taxpayer reciprocity framed by cooperative funding of public goods, and (iii) taxpayer-taxpayer reciprocity presented as a more intimate personal connection, for example with the help of an advertising narrative.
Law schools will not have to report to the American Bar Association the percentage of their 2010 graduates who landed jobs requiring bar passage or the percentage of graduates in part-time jobs.
Those queries will not appear on the questionnaire that law schools will be required to submit next month for the class of 2010. The ABA's questionnaire committee finalized that list of questions on Sept. 23, prompting criticism from some reformers that the ABA is protecting law schools from reporting what would surely be grim statistics.
"By all accounts, 2010 is the worst of a series of very bad years so far," said Brian Tamanaha, a professor at Washington University in St. Louis School of Law. "And now, owing to this decision, law schools do not have to say precisely how bad it was. NALP [the National Association for Law Placement] will still ask the question, but it publishes only aggregate data, not data on individual schools."
Tamanaha analyzed data compiled by the advocacy group Law School Transparency and concluded that for the class of 2009, 30 ABA-accredited law schools had 50% or fewer of their graduates in jobs that required a law degree after nine months.
Monday, September 26, 2011
There is growing interest in the issue of corporate tax reform as a way to boost economic growth and U.S. international competitiveness. While any comprehensive tax reform involves a multitude of issues, one important issue is the extent to which a reformed tax code should include, or even stress, specific incentives to shape corporate behavior.
- Robert D. Atkinson (President, Information Technology and Innovation Foundation)
- Ike Brannon (Director of Economic Policy, American Action Forum) (moderator)
- Michelle Hanlon (Chair, Department of Accounting, MIT Sloan School of Business)
- Donald Marron (Director, Tax Policy Center)
Income tax reform discussions too often are exercises in tax nostalgia. The Tax Reform Act of 1986 was revenue neutral because it could afford to be. (It also was preceded and followed by major tax increases.) The fact that we must raise revenues today means that a contemporary incremental income tax reform effort will look different, not that it is impossible.
Unlike in 1986, when the tax system overflowed with unintended tax shelters that could be cleaned up and traded off against lower rates, modern tax reform must tackle some of the deliberate Congressional subsidy programs baked into the tax code, which is to say, tax expenditures. Of these, the most important to address are the personal itemized deductions. They are extraordinarily costly -- about $250 billion/year in forgone tax revenues. And they are inefficient, poorly targeted and unfair.
The personal itemized deductions invariably are described as political “sacred cows.” But they are sacred cows that we can no longer afford to maintain. Either we eliminate these sacred cows, or we allow them to stampede over us.
Incremental income tax reform also must address the corporate income tax, but here there is no choice but a revenue-neutral approach, because the U.S. corporate rate is now a global outlier. A corporate tax reform package should be fashioned along the following lines: (1) Eliminate business tax expenditures; (2) Reduce the corporate tax rate to a rate in the range of 25-27 percent; (3) Tax multinationals on their worldwide income through worldwide tax consolidation. The resulting corporate tax system would represent a huge competitive boost for American domestic firms, would attract inward investment, and would provide a fair tax environment for U.S.-based multinationals.
- Accounting Today, Obama Signs Ban on Tax Strategy Patents
- Forbes (Deborah L. Jacobs), No More Patents For Cute Tax Tricks
- Journal of Accountancy, President Signs Patent Reform Bill Banning New Tax Strategy Patents
- Tax Policy Blog, The End of Tax Strategy Patents