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Friday, January 31, 2014

Morrow Presents Tax Valuation in Light of Uncertainty Today at Kentucky

MorrowRebecca Morrow (Wake Forest) presents Valuation in Light of Uncertainty at Kentucky today as part of its Faculty Brown Bag Workshop Series hosted by Jennifer Bird-Pollan:

Buyers and sellers of business interests, IRS officials, and courts have long faced a serious problem: they must frequently determine the present value of a future tax liability without knowing when that liability will be incurred. For example, when a corporation exists primarily to hold assets for the benefit of its owners, its value depends on the net value of the assets it holds. Such corporations are extremely common and often hold highly appreciated assets. The tax liability on the appreciation is not incurred upon the transfer of stock in the corporation; rather, it is incurred when the corporation sells its appreciated assets. Since the appreciation experienced prior to the stock transfer (referred to as “built-in gain”) will cause a future tax liability, it reduces the value of the company and therefore the value of the stock. Unfortunately, at the time when the stock is transferred, it is generally unknown when the appreciated assets will be sold. Thus, buyers and sellers attempting to arrive at appropriate stock prices and taxpayers, IRS officials, and courts attempting to calculate the estate or gift taxes due on gratuitous stock transfers must calculate the present values of future tax liabilities without knowing when those liabilities will be incurred. Courts and scholars have struggled with this problem, alternately assuming away uncertainty regarding timing or denying its importance. The result has been doctrinal inconsistency, taxpayer uncertainty, and opportunistic behavior.

This Article proposes a new valuation methodology to calculate the present value of a future tax liability when it is uncertain when that future tax liability will be incurred. Instead of ignoring uncertainties regarding timing, market participants, IRS officials, and courts can and should value future tax liabilities in a way that accounts for them by using weighted probabilities of multiple likely outcomes. This Article’s key insight is to adapt stock option valuation techniques, which account for similar uncertainties, to this problem. The resulting approach is both theoretically satisfying and eminently workable by parties, the IRS, and courts.

January 31, 2014 in Colloquia, Scholarship, Tax | Permalink | Comments (0)

Weekly Tax Roundup

January 31, 2014 in Tax, Weekly Tax Roundup | Permalink | Comments (0)

Weekly SSRN Tax Roundup

January 31, 2014 in Scholarship, Tax | Permalink | Comments (0)

Weekly Student Tax Note Roundup

January 31, 2014 in Scholarship, Tax, Weekly Student Tax Note Roundup | Permalink | Comments (0)

Journal of Taxation of Investments Publishes New Issue

Capture 2 The Journal of Taxation of Investments has published its Winter 2014 issue (Vol. 31, No. 2), with these articles:

January 31, 2014 in Scholarship, Tax | Permalink | Comments (0)

Call for Speakers: CALI Conference at Harvard Law School -- The Next Wave

CALI 2CALI has issued a call for speakers for law faculty, librarians, and IT staff (April 4 deadline) at its 24th Annual Conference for Law School Computing to be held Thursday, June 19 through Saturday June 21 at Harvard Law School. The theme of this year's conference is "The Next Wave":

CALI has been around for over 30 years. In that time, it has pioneered technology in legal education and in applications that improve access to justice and has worked with the innovators and early adopters in those fields. And now, excitingly, the next wave is here. Technology isn’t just something for hard core Teknoids. It’s become accessible and accepted in the law school and legal environments.

We know that you need to be looking out for the next wave. Much like waves constantly coming into shore, waves of change are constantly hitting legal education. How you approach them matters. To some people they may feel like tsunamis that are going to destroy everything and their inclination is to run and hide from them. Some people are going to hold fast and then be gradually eroded away and altered by the constant wave action. And some people are going to want to swim out to meet the waves and ride in on them on a surf board.

For 24 years, the CALI Conference has organized its schedule at nearly the last minute in order to bring the most relevant and up-to-date presentations to attendees. This year is no different and we are looking for law school faculty, librarians, and technologists with strong opinions, great ideas, interesting projects and useful advice. Come and share and be challenged. If you are willing and able to speak, your conference registration fee is just $95!

(Disclosure:  I am President of the CALI Board of Directors.)

January 31, 2014 in Conferences, Legal Education | Permalink | Comments (0)

The IRS Scandal, Day 267

IRS Logo 2Wall Street Journal op-ed:  Meanwhile, Back in America . . . The Growing Distance Between Washington and the Public It Dominates, by Peggy Noonan:

The State of the Union was a spectacle of delusion and self-congratulation in which a Congress nobody likes rose to cheer a president nobody really likes. It marked the continued degeneration of a great and useful tradition. Viewership was down, to the lowest level since 2000. ...

Meanwhile, back in America, conservatives targeted and harassed by the Internal Revenue Service still await answers on their years-long requests for tax exempt status. When news of the IRS targeting broke last spring, agency officials lied about it, and one took the Fifth. The president said he was outraged, had no idea, read about it in the papers, boy was he going to get to the bottom of it. An investigation was announced but somehow never quite materialized. Victims of the targeting waited to be contacted by the FBI to be asked about their experience. Now the Justice Department has made clear its investigation won't be spearheaded by the FBI but by a department lawyer who is a campaign contributor to the president and the Democratic Party. Sometimes you feel they are just laughing at you, and going too far.

In the past five years many Americans have come to understand that an agency that maintained a pretty impressive record for a very long time has been turned, at least in part, into a political operation. Now the IRS has proposed new and tougher rules for grassroots groups. Cleta Mitchell, longtime attorney for many who've been targeted, says the IRS is no longer used in line with its mission: "They're supposed to be collecting revenues, not snooping and trampling on the First Amendment rights of the citizens. We are not subjects of a king, we are permitted to engage in First Amendment activities without reporting those activities to the IRS."

All these things ... have the effect of breaking bonds of trust between government and the people. They make citizens see Washington as an alien and hostile power.

Continue reading

January 31, 2014 in IRS News, IRS Scandal, Tax | Permalink | Comments (2)

Zolt: Inequality in America: Challenges for Tax and Spending Policies

Eric M. Zolt (UCLA), Inequality in America: Challenges for Tax and Spending Policies, 66 Tax L. Rev. 1101 (2013):

The goal of this article is to provide a guide to addressing tax and spending policies in an era of increasing inequality of income and wealth. This is challenging because it requires a good understanding of inequality and economic mobility, the changing role of taxes and government social spending, the constraints on policy options, and the possible misconceptions that may influence tax and spending policies.

Inequality in the United States has increased dramatically over the last 30 years. Perhaps even more troubling than the rise in inequality may be the persistence of high levels of poverty and the decline in economic mobility. The same thirty-year period during which inequality has increased, poverty levels have not declined, and economic mobility has decreased has seen major changes in fiscal policy. Tax law changes have altered the relative tax rates, the relative revenue contributions from different tax instruments, and the tax burdens of different income groups. Government spending on social programs has increased substantially, but perhaps not in ways one might expect. The United States likely has a smaller percentage of government social spending going to the needy than other developed countries. In recent decades, an increasingly larger percentage of social spending has been directed to the elderly (without regard to need) and to the upper-half of the income distribution through tax subsidies for healthcare, education, housing, and retirement savings.

The essential first step in shaping fiscal policy is to identify clearly the relative priorities among reducing inequality, reducing poverty, and increasing economic mobility. Tax and spending policies will differ depending on the weight given each of these objectives, and especially in a world of relatively limited resources, the government needs to make difficult choices. Perhaps the most significant implication of this reality is that it may be time to stop thinking about increasing the income tax burden on the wealthy as the only, or perhaps even the primary, way to increase funding for social spending programs. The United States may need less progressive (or even regressive) taxes to fund more progressive spending programs.

January 31, 2014 in Scholarship, Tax | Permalink | Comments (0)

Exelron's $1 Billion § 1031 Case May Roil Like-Kind Exchange Industry

1031Reuters:  Exelon Quarrel With IRS Could Threaten Tax-Free Exchange Deals:

If Exelon loses its case against the IRS in U.S. Tax Court, tax-free property exchange deals, even smaller ones, could be at risk of more often being labeled "abusive tax shelters," by the agency, tax lawyers said this week. ... Exelon is defending two tax-free property exchanges worth more than $1 billion combined. They were carried out by one of its units in 1999, according to a Tax Court filing. ...

In the Exelon case, the IRS is arguing that the company "did not acquire and retain significant and genuine attributes of a traditional owner," to satisfy the like-kind exchange rules, according to court documents.

The case traces back to 1999 when an Exelon subsidiary sold some of its fossil fuel power plants to comply with new regulations. With the sale proceeds, the subsidiary acquired three power plants in Georgia and Texas in what the company said it structured as a tax-free exchange. The Exelon subsidiary then leased the Georgia and Texas properties back to the local governments that operated them. The governments paid advance rent to the Exelon unit totaling more than $1 billion, according to court filings.

The rent payments were part of a "sale in, lease out," or SILO, deal that was integral to the tax-free exchange.

The IRS contends that by leasing the properties, the Exelon unit did not take proper possession of the plants it got in the exchange. The IRS views some SILO deals as tax shelters and has won SILO disputes in court, including an unrelated one against Exelon last year in a federal appellate court.

"SILOs are old tax shelters and courts have ruled against them numerous times," said Bradley Borden, a Brooklyn Law School tax professor. He added that if the SILO portion of the power plants exchange does not hold up in court, Exelon could lose and its case could have "a chilling effect" on similar deals. "Exelon is going to have a hard time winning," Borden said.

However, in court fights over like-kind exchanges, "the IRS has a pretty bad track record," said David Shechtman, a lawyer with Drinker Biddle & Reath LLP who is not involved in the case.

Exelon's transaction was not a typical SILO and that might help the company prove it was playing by the rules, he said.

The case is Exelron Corp., as successor by merger to Unicom Corp and Subsidiaries v. Commissioner of Internal Revenue; Tax Court docket No. 29183-13.

January 31, 2014 in Tax | Permalink | Comments (1)

Muller: Which Law Schools Have the Highest Non-JD Enrollment?

Derek Muller (Pepperdine), Which Law Schools Have the Highest Non-JD Enrollment?:

I've discussed the trend of increased non-JD enrollment in law schools. Thanks to new ABA data, we now have the JD and non-JD enrollment data for each school in 2013. It turns out that the original figures I used were underinclusive in one respect: the ABA reports "non-JD enrollment" as the sum of post-JD enrollment and post-baccalaureate enrollment (including "non law," usually including "master level programs aimed at non-lawyer professionals"). But it excludes the 1677 "non-JD online" enrollment.

I sorted the schools by the total non-JD enrollment--including post-JD, post-baccalaureate, and non-JD online--as a percentage of total enrollment (the denominator being those categories, plus full-time and part-time JD enrollment). These schools had the highest percentage of non-JD enrollment.

  1. Vermont: 38.5%
  2. NYU: 33.3%
  3. Loyola Chicago: 32.2%
  4. Boston University: 30.7%
  5. Temple: 26.6%
  6. Georgetown: 25.4%
  7. Alabama: 24.5%
  8. Washington:  24.4%
  9. UC-Berkeley:  23.2%
  10. USC: 22.0%

January 31, 2014 in Law School Rankings, Legal Education | Permalink | Comments (4)

Thursday, January 30, 2014

Marian Presents Rethinking Tax Disclosure in Registered Offerings Today at Northwestern

MarianOmri Marian (Florida) presents Consult Your Own Tax Advisor: Rethinking Tax Disclosure in Registered Offerings at Northwestern today as part of its Tax Colloquium Series hosted by by Herbert Beller, Charlotte CraneDavid Cameron, Philip Postlewaite, Jeffrey Sheffield, and Robert Wootton:

Issuers in registered securities offerings are required to disclose, among other tax matters, the expected tax consequences to investors that result from investing in the offered securities (“nonfinancial tax disclosure”). I advance three arguments in this regard. First, current nonfinancial tax disclosure practice, as sanctioned by the SEC, performs little regulatory function. Nonfinancial tax disclosures provide irrelevant information, sometimes fail to provide material information, create unnecessary transactions costs, and divert valuable regulatory resources to the enforcement of largely-meaningless requirements. Second, I suggest the practical reason behind this regulatory failure is a failed attempt by tax practitioners and the SEC to address investors’ heterogeneous tax preferences. Nonfinancial tax disclosure practice assumes the existence of a “reasonable investor” that is also an “average taxpayer”, and tax disclosures are drafted for the benefit of such average taxpayer. I demonstrate, however, that the concept of the “average taxpayer” is not conceptually or empirically defensible. Third, the theoretical reason for the dysfunctionality of the regulatory regime is a misguided reliance on mandatory disclosure theory in the tax context. I argue that given the special nature of tax laws, mandatory disclosure theory—even if accepted at face value—does not support the current regulatory framework of nonfinancial tax disclosure. To remedy this failure, I describe the types of tax-related disclosures that would be supported by mandatory disclosure theory. Under my suggested regulatory reform, nonfinancial tax disclosure will only include issuer-level tax items, (namely, items at the company level not otherwise disclosed in the financial statements), that affect how “reasonable investors” calculate their own individual tax liabilities. Under such a regime, there is no need to rely on the “average taxpayer” construct.

January 30, 2014 in Colloquia, Scholarship, Tax | Permalink | Comments (0)

Osofsky Presents Beyond Worst-First Tax Enforcement Today at Indiana

Osofsky 3Leigh Osofsky (Miami) presents Beyond Worst-First Tax Enforcement at Indiana-Bloomington today as part of its Tax Policy Colloquium Series hosted by Leandra Lederman:

When enforcement resources are limited, how should the scarce enforcement resources be allocated to maximize compliance with the law? The answer to this question can determine to what extent the law on the books translates to the law in practice. A dominant school of thought in the tax literature suggests that they should be allocated based on a “worst-first” method, whereby the individuals likely to be most noncompliant are targeted. However, “worst-first” methods suffer some underappreciated weaknesses. While “worst-first” methods can encourage all individuals to increase compliance so as not to be deemed the “worst,” they can also provide cover to engage in noncompliance that is perceived moderate for the relevant population. This dynamic can become most problematic in highly noncompliant populations. In such populations, existing, high levels of noncompliance, and underlying, structural causes of the high noncompliance can serve as coordinating mechanisms, providing mutual assurance of low compliance. Moreover, “worst-first” theories do not provide a comprehensive explanation for the group and project-based enforcement practices that are found in a number of actual enforcement settings. In response to these deficits in existing theory, I draw on work from across different disciplines to develop a new layer of analysis regarding the allocation of scarce tax enforcement resources. I suggest that, under certain conditions, deterrence can be enhanced by allocating scarce enforcement resources among a low-compliance population of taxpayers through a process I call microdeterrence. After setting forth the theoretical case for microdeterrence, I examine how it might apply in the cash business tax sector, a setting that presents particular challenges for “worst-first” methods. I conclude that microdeterrence may increase compliance, meriting its application and empirical evaluation. More fundamentally, this Article underscores the importance of the allocation of scarce enforcement resources, some of the deficits in existing theory, and the potential benefits of integrating additional layers of analysis.

January 30, 2014 in Colloquia, Scholarship, Tax | Permalink | Comments (0)

Rosenthal Presents Local Public School Finance in a Time of Institutional Change Today at UCLA

RosentahlHoward Rosenthal (NYU, Department of Politics) presents The Twilight of the Setter? Local Public School Finance in a Time of Institutional Change (with Sean Corcoran (NYU, School of Culture, Education, and Human Development) & Thomas Romer (Princeton, Woodrow Wilson School of Public and International Affairs)) at UCLA today as part of its Tax Policy and Public Finance Colloquium hosted by Jason Oh, Kirk Stark, and Alexander Wu:

The operation and financing of primary and secondary public schools in the US is highly decentralized. Most of the budget of each of the 13,000+ school districts comes from a combination of local and state revenues. State constitutions and statutes determine the degree of local district autonomy and scope of taxing power.

As part of an ongoing project on the political economy of education finance, this paper reports on some developments in school spending in one state during a time when some of the state’s constitutional rules governing local school district taxing powers changed. In part, the paper provides a replication of tests of a model of bureaucratic agenda-setting in the financing of elementary and secondary public education.

Continue reading

January 30, 2014 in Colloquia, Scholarship, Tax | Permalink | Comments (0)

Lipton Presents Tribune, Canal Corp., and the New Proposed Partnership Tax Regs Today at Temple

LiptonRichard M. Lipton (Baker & McKenzie, Chicago) presents Leveraged Partnerships Under Fire? IRS Attacks Tribune's Transactions, 119 J. Tax'n 73 (Aug. 2013), and Tax Court Drains Canal Corporation's Leveraged Partnership Transaction, 113 J. Tax'n 340 (Dec. 2010), at Temple today as part of its Tax Policy & Administration Colloquium Series hosted by Alice Abreu & Andrea Monroe:

Tribune:

An internal IRS document indicates the manner in which the Service will argue against the results sought by a structured partnership transaction. Some of the Service's arguments, however, do not withstand scrutiny. It can be anticipated that this determination will not be accepted by the taxpayer involved. In CCA 201324013, the IRS set forth the reasons that it planned to attack a ‘leveraged partnership‘ transaction that was quickly identified as the Tribune Company's disposition of Newsday to Cablevision in 2010. The IRS based its attack on the reasoning in the Tax Court's decision in Canal Corporation, 135 TC 199 (2010), as well as the Service's view of the substance of the Tribune transaction.

The publication of the CCA immediately sparked a discussion in the popular press about how the Tribune could owe millions in tax, penalties, and interest as a result of this transaction and a related transaction involving the Chicago Cubs.  On a close review, however, it is far from clear that the Service's analysis in the CCA is the better view of the applicable law or the application of that law to the facts in the transaction. Indeed, the Service's contention that the transaction should be viewed as a disguised sale appears to be more wishful thinking than a sound consideration of what occurred. 

Canal Corp.:

The IRS has finally prevailed in its latest challenge to a leveraged partnership transaction, in Canal Corporation, 135 TC 199 (2010). The somewhat surprising (and arguably incorrect) holding in Canal was that the taxpayer's indemnification obligation of another partner's guarantee to the creditor of the partnership should be completely disregarded under the anti-abuse rule in Reg. 1.752-2(j) . Even more questionable was the Tax Court's decision to apply the accuracy-related penalty under Sections 6662(a) and (b)(2) for a substantial understatement of income tax. 

REG-119305-11, 79 Fed. Reg. 4826-4839 (Jan. 30, 2014):

This document contains proposed regulations under section 707 of the Internal Revenue Code (Code) relating to disguised sales of property to or by a partnership and under section 752 relating to the treatment of partnership liabilities. The proposed regulations address certain deficiencies and technical ambiguities in the section 707 regulations and certain issues in determining partners’ shares of liabilities under section 752. The proposed regulations affect partnerships and their partners.  

January 30, 2014 in Colloquia, Scholarship, Tax | Permalink | Comments (0)

Journal of Taxation of Investments Publishes New Issue

Capture 2 The Journal of Taxation of Investments has published its Fall 2013 issue (Vol. 31, No. 1), with these articles:

January 30, 2014 in Scholarship, Tax | Permalink | Comments (0)

Staudt Presents Guns and Taxes at Duke

StaudtNancy Staudt (USC) presented Guns and Taxes (with Thomas Griffith (USC)) at Duke as part of its Tax Policy Seminar hosted by Lawrence Zelenak:

The federal and state governments have long taxed commodities, such as alcohol, gas, cigarettes, guns and ammunition. Firearms, however, have recently taken on a unique status in the lexicon of taxable goods given the Supreme Court case, District of Columbia v. Heller, 554 U.S. 570 (2008), which held the 2nd Amendment protects an individual’s right to own a handgun in the home. For purposes of this paper, we assume that Heller does not create an outright bar to taxing weaponry, but does require clearly articulated economic and policy justifications to pass constitutional muster. Accordingly, we examine three possible rationales and uncover strong arguments both for and against taxation. Ultimately, we conclude that policymakers should operate much like insurers: they should subsidize the safe use of guns and tax high-risk users.

January 30, 2014 in Colloquia, Scholarship, Tax | Permalink | Comments (2)

Zelinsky: The First Amendment and the § 107 Parsonage Allowance

Tax Analysys Logo (2013)Edward A. Zelinsky (Cardozo),  The First Amendment and the Parsonage Allowance, 142 Tax Notes 413 (Jan. 27, 2014):

In this report, Zelinsky criticizes the recent district court decision in Freedom From Religion Foundation Inc. v. Lew, declaring section 107(2) unconstitutional on First Amendment grounds. The provision excludes from gross income cash housing allowances furnished to ministers. Zelinsky details three interrelated reasons why the district court’s opinion is unpersuasive.

Prior TaxProf Blog coverage:

January 30, 2014 in Scholarship, Tax, Tax Analysts | Permalink | Comments (0)

CRS: Overview of the Federal Tax System

CRS LogoCongressional Research Service, Overview of the Federal Tax System (RL32808) (Jan. 23, 2014):

The major sources of federal tax revenue are individual income taxes, Social Security and other payroll taxes, corporate income taxes, excise taxes, and estate and gift taxes. This report describes the federal tax structure, provides some statistics on the tax system as a whole, and presents analysis of selected tax concepts.

(Hat Tip: Bruce Bartlett.)

January 30, 2014 in Congressional News, Tax | Permalink | Comments (0)

5th Circuit Nixes Tax Shelter Used by 3 Attorneys to Keep More of $600M Legal Fee Award

ABA Journal, 5th Circuit Nixes Tax Shelter Used by 3 Attorneys to Keep More of $600M Legal Fee Award:

After winning a $600 million attorney fee award in 1998 for representing the state of Texas in litigation against big tobacco companies, three law firm partners sought to reduce the tax bite. But their efforts only made the situation worse: A federal appeals court last week ruled that the tax shelter deployed by the partners of Nix, Patterson & Roach was abusive, imposing a 40 percent gross valuation misstatement penalty as well as other penalties for underpaying income tax.  [NPR Investments LLC v. United States, No. 10-41219 (5th Cir. Jan. 23, 2014)]

January 30, 2014 in Tax | Permalink | Comments (0)

The IRS Scandal, Day 266

Wednesday, January 29, 2014

Doran Presents Tax Legislation in the Contemporary U.S. Congress Today at Duke

DoranMichael Doran (Georgetown; moving to Virginia) presents Tax Legislation in the Contemporary U.S. Congress, 67 Tax L. Rev. ___ (2013), at Duke today as part of its Tax Policy Seminar hosted by Lawrence Zelenak:

This paper identifies and analyzes a recent trend toward “clean” federal tax legislation. Existing explanations of the tax-legislative process account for the regular, highly particularistic tax legislation prevalent during the 1980s and the early 1990s using legislator-motivation and traditional policy models. But a new tax-legislative process, characterized by alternating periods of tax gridlock and strikingly non-particularistic tax legislation, emerged during the late 1990s. This paper argues that tax gridlock and non-particularistic tax legislation are best understood as companion phenomena, and it examines three general determinants of recent tax-legislative outcomes. First, exogenous events, particularly macro-economic and macro-political developments, typically provide the central policy objective for any item of major tax legislation. Second, the voting behavior of individual legislators on tax legislation corresponds closely to generally accepted understandings of legislator motivations. Third and most importantly, several legislative-organizational developments within Congress – specifically, the emergence of sharp coalitional polarization and strong coalitional cohesion, the re-establishment of centralized chamber management, and the relaxation of restrictions on the federal budget – combined to produce the new tax-legislative process during the late 1990s and the 2000s. This paper does not offer a positive theory of the tax-legislative process or make predictions about tax-legislative outcomes. Rather, it builds on existing accounts to provide an updated and more nuanced explanation of the tax-legislative process in the contemporary Congress.

January 29, 2014 in Colloquia, Scholarship, Tax | Permalink | Comments (0)

Wooley Presents The Taxation of Families in Canada Today at Toronto

WooleyFrances Woolley (Carleton University, Department of Economics) presents It's Just Not Fair! Canada's On-Going Debate Over the Taxation of Families at Toronto today as part of its James Hausman Tax Law and Policy Workshop Series:

The aim of this paper is to re-examine the Carter Commission’s stance on the taxation of married couples, and use it to illuminate current debates over the tax treatment of Canadian families. I argue that the Carter Commission’s fairness arguments for income splitting were neither well developed nor empirically grounded. I suggest there is an alternative, more pragmatic explanation of the Carter Commission’s advocacy of joint taxation: a desire to bring Canada’s tax treatment of families in line with the treatment south of the border. The issue was not so much the fairness of Canada’s tax treatment, but envy of American tax treatment. I then argue that a parallel dynamic of envy exists today. When the Carter Commission reported, a man’s standard of living was primarily determined by his own earnings. Two income professional couples were rare. Today, the two-income couple is the norm, and a professional man with a stay-at-home spouse can expect to enjoy a lower standard of living than his contemporaries in dual-career relationships. This, I argue, leads single-earner families to envy dual-earner ones’ greater affluence. While this envy is understandable, it is not the job of the income tax system to remedy it.

January 29, 2014 in Colloquia, Scholarship, Tax | Permalink | Comments (0)

Elkins Presents The Normative Underpinnings of Source-Country Taxation Today at Touro

Elkins (2014)David Elkins (Netanya College School of Law) presents The Normative Underpinnings of Source-Country Taxation at Touro today:

Taxpayers are subject to income tax imposed by the country to which they have a sufficient personal nexus (home-country taxation) and by the country from which they derive their income (source-country taxation). Home country taxation is ordinarily understood as an application of the principle of ability-to-pay. Source-country taxation is ordinarily understood as a function of benefit theory.

This paper challenges the conventional wisdom and argues that ability-to-pay offers a better normative justification for source-country taxation then does benefit theory. First, it shows that benefit theory cannot satisfactorily explain source-country taxation. Second, it examines current trends in social philosophy and demonstrates that source-country taxation flows from the same principles that support the imposition of income tax by the home country.

January 29, 2014 in Colloquia, Scholarship, Tax | Permalink | Comments (0)

Journal of Taxation of Investments Publishes New Issue

Capture 2 The Journal of Taxation of Investments has published its Summer 2013 issue (Vol. 30, No. 4), with these articles:

January 29, 2014 in Scholarship, Tax | Permalink | Comments (0)

Brunson: Mutual Funds, Fairness, and the Income Gap

Samuel D. Brunson (Loyola-Chicago), Mutual Funds, Fairness, and the Income Gap, 65 Ala. L. Rev. 139 (2013):

The rich, it turns out, are different from the rest of us. The wealthy, for example, can assemble a diversified portfolio of securities, or can invest through hedge and private equity funds. When the rest of us invest, we do so largely through mutual funds. Nearly half of American households own mutual funds, and mutual funds represented a significant portion of the financial assets held by U.S. households.

The tax rules governing mutual funds create an investment vehicle with significantly worse tax treatment than investments available to the wealthy. In particular, the tax rules governing mutual funds force shareholders to pay taxes on “forced realization income,” even though such income does not increase their wealth.

Because mutual fund investors must pay taxes on non-existent gains, while the wealthy can use alternative investment strategies to avoid such taxes, the taxation of mutual funds violates the tax policy objective of vertical equity. To correct the inequities faced by mutual fund investors, the tax law needs to permit low- and middle-income taxpayers to exclude from their income 10% of the capital gain dividends they receive each year.

January 29, 2014 in Scholarship, Tax | Permalink | Comments (0)

More on Overperforming and Underperforming California Law Schools

CA state bar logo PNGFollowing up on Saturday's post, July 2013 California Bar Exam Results: Donald J. Smythe (California Western), Ranking Law Schools Using Reported California Bar Exam Results: Some Observations and Conjectures:

Law school rankings are ubiquitous and inevitable. That should not be surprising, since they may help prospective law students decide where to study and prospective employers decide which law schools’ graduates to hire. Unfortunately, none of the existing law school rankings are substantially based on measures of student learning outcomes, and most are not helpful in evaluating the relative performance of non-elite law schools. This article attempts to fill the gap in the literature by ranking law schools using the California bar exam results reported by the State Bar of California for first-time takers over the period from 1997-2011 and especially 2007-2011. There are problems with this ranking too. The data are incomplete, the California bar exam has probably varied in difficulty over the period of the study, and bar exams probably do not adequately test law graduates’ preparation for the practice of law. Nonetheless, most law graduates need to pass a bar exam before they can obtain satisfying legal jobs. Moreover, bar exams arguably test law graduates on at least some of the knowledge and skills they will need to succeed in their legal careers. In these respects, at least, bar exam results provide a measure of student learning outcomes that should be important for most prospective law students. Some of the results of this study are interesting and surprising: Yale appears to outperform all other law schools, and Virginia and Emory appear to outperform their US News rankings. Harvard, Columbia, Chicago, Northwestern, and Cornell appear to underperform their US News rankings. There appears to be a surprisingly strong in-state advantage on the California bar exam, and Californian schools generally appear to outperform higher-ranked out-of-state schools, but some Californian schools appear to outperform others: USC, Pepperdine, Loyola, California Western, and Chapman all outperform Californian schools that the US News ranks higher; UC-Davis, UC-Hastings, and San Diego underperform Californian schools that the US News ranks lower. Some Californian schools had such low California bar passage rates over the period of this study that one can only wonder whether they might be at risk of accreditation problems, and some out-of-state schools had passage rates that were even lower and atrocious by any reasonable standards.

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(Hat Tip: Brian Leiter.)

January 29, 2014 in Law School Rankings, Legal Education | Permalink | Comments (1)

Schmalbeck Presents Big-Time College Sports and the Tax System at Duke

SchmalbeckRichard Schmalbeck (Duke) presented Two Strikes Against the Sweetheart Deal Between Big-Time College Sports and the Tax System at Duke as part of its Tax Policy Seminar hosted by Lawrence Zelenak:

The purpose of this essay is not to destroy big-time college sports. If that were the purpose, it would be completely pointless. Big-time sports are deeply and widely popular; they are not going away. But they are also unmistakably commercial, at least in some aspects. While the on-campus aspects of college sports may have some connections, however remote, with the educational purposes of the institution that sponsors them, the televised programming associated with college sports has no substantial connection to those purposes. When the broadcasting of college sports was largely local, and the revenue derived from it quite modest, it may have been appropriate to ignore the tangential connection to exempt purpose. But as the broadcasting of college sports has gone national, and begun to produce prodigious amounts of revenue, it no longer makes sense to ignore the fact that it is generating unrelated business income for the participating universities.

In 1980, the IRS made a mistake, even in light of the facts known at the time, in ruling that television revenue was related to exempt purpose. But as the revenue has grown a hundred fold in the years since, it has become clear that a reevaluation of this mistake is increasingly needed. The doctrine of disaggregating advertising revenue provides a plausible hook for the unrelated business income tax, but in fact any revenue from the sale of television rights has the same basic qualities: it furthers no educational purposes, and cannot be considered related to the university’s reason for exemption.

And when Congress added section 170(l) to the Code twenty-five years ago, it made a mistake. It too may have misjudged the significance of the deduction it was authorizing in declaring eighty percent of “contributions” made to purchase seat licenses was deductible, but that significance has become clearer as big-time sports have grown ever more big-time in the years since. There is now a substantial revenue loss associated with this provision, and the provision has no convincing rationale. Congress should review the rule, and close this loophole.

January 29, 2014 in Colloquia, Scholarship, Tax | Permalink | Comments (0)

Tax-Free Gifts Quadrupled After Increase of Exemption to $5 Million

Estate & Gift TaxBloomberg:  Tax-Free Gifts Quadrupled in U.S. After IRS Limit Lifted, by Richard Rubin & Margaret Collins:

Congress voted in December 2010 to let wealthy Americans make tax-free gifts of as much as $5 million -- and the money flowed.

U.S. taxpayers reported making $122 billion in nontaxable gifts on the returns they filed in 2012, more than four times the amount in each of the two previous years. The Internal Revenue Service released the data today.

Most of the money -- $84 billion -- came in the form of gifts exceeding $1 million, and those were made by fewer than 30,000 people, according to the IRS&.

January 29, 2014 in IRS News, Tax | Permalink | Comments (0)

Kahng: Path Dependence in Tax Subsidies for Home Sales

Lily Kahng (Seattle), Path Dependence in Tax Subsidies for Home Sales, 65 Ala. L. Rev. 187 (2013)

At a time of looming fiscal crisis and virtual unanimity that tax expenditures must be curtailed, tax subsidies for homeownership stand out as among the most costly and unfair of these expenditures. As a result of tax subsidies for homeownership, the government foregoes billions of dollars in revenue each year, most of which benefits wealthy taxpayers. Moreover, subsidies for homeownership encourage overinvestment in housing and underinvestment in other business sectors, which impedes economic productivity, jobs creation and the ability of U.S. businesses to compete in the global marketplace.

Scholars and commentators have analyzed extensively the tax subsidy for home mortgage indebtedness but have paid little attention to tax subsidies for home sales. This Article is the first to undertake a comprehensive examination of tax subsidies relating to home sales. The central thesis of this Article is that these subsidies rest upon questionable policy justifications, flawed logical reasoning, and poor design choices. To support this thesis, the Article traces the evolution of tax subsidies for home sales from their surprising origins in a World War I-era tax preference for requisitioned ships to their present incarnation as a practically unlimited tax exemption. This narrative account leads to several important findings. First, it shows how path dependence and bounded rationality have led lawmakers and policymakers to make questionable decisions and support problematic laws. Second, it demonstrates the power of the real estate lobby to shape the story — and the resultant legal rules ― from both tax and social policy perspectives. Finally, it illuminates the political and rhetorical forces that have shaped tax subsidies for home sales. The Article argues that only by understanding where we were before and how we got to where we are now, can we properly assess where we should go from here.

In assessing tax subsidies for home sales, the Article evaluates the subsidies by reference to the established tax policy criteria of efficiency and fairness while remaining cognizant of the broader context of the social and economic policies regarding homeownership. Although a comprehensive assessment of federal housing policies and the role of tax subsidies in structuring the domestic housing market lie beyond its scope, the Article offers important new insights that will contribute significantly to the ongoing policy dialog about homeownership in our society. In particular, it analyzes the economic impacts of tax subsidies for home sales, including whether and to what extent the subsidies contributed to the real estate bubble. Moreover, the Article highlights the important, but underappreciated, disparate race and gender impacts of homeownership as a wealth-building vehicle. Finally, the Article calls for the repeal of tax subsidies for home sales and argues that the “exogenous shock” of the global financial crisis presents a rare and fleeting opportunity to effect this reform.

January 29, 2014 in Scholarship, Tax | Permalink | Comments (1)

The IRS Scandal, Day 265

IRS Logo 2Wall Street Journal:  Enemies of Friends of Abe: How the IRS Chills Freedom of Association, by James Taranto:

These days "IRS Targets Conservative Group" is a dog-bites-man story. But this one was man-bites-dog by virtue of its placement: on the front page of the New York Times, a newspaper that is usually supportive of this administration's efforts to suppress domestic dissent. Put it down to a sudden outbreak of news judgment.

The news value to the Times may lie more in the nature of the organization than its trouble with the IRS. "In a famously left-leaning Hollywood, where Democratic fund-raisers fill the social calendar, Friends of Abe stands out as a conservative group that bucks the prevailing political winds," reads the lead paragraph.

But Friends of Abe--as in Lincoln--has sought nonprofit status under Section 501(c)(3) of the U.S. Tax Code, which would allow it to collect tax-deductible contributions. The IRS has been reviewing the application for some two years, seeking information about meetings where politicians spoke. A 501(c)(3) is prohibited from engaging in campaign activity, such as hosting a fundraiser, but as the Times notes, "tax-exempt groups are permitted to invite candidates to speak at events."

The most troubling revelation in the Times account is that at one point the IRS "included a demand--which was not met--for enhanced access to the group's security-protected website, which would have revealed member names." The Times points out that FOA "keeps a low profile and fiercely protects its membership list, to avoid what it presumes would result in a sort of 21st-century blacklist" and that "tax experts said that an organization's membership list is information that would not typically be required."

With the possible exception of academia, show business is about as totalitarian a subculture as you will find in America. Conservatives are a tiny minority, and they fear for their livelihoods if exposed. A few high-profile celebrities are exceptions--the Times mentions Gary Sinise, Jon Voight, Kelsey Grammer and Lionel Chetwynd--but for lesser-known actors and people who work in off-camera jobs, confidentiality is crucial. ...

The IRS's intrusive tactics thus have a chilling effect on people who wish to exercise their First Amendment right of free association without attracting public attention--or, more precisely, the attention of vicious ideological antagonists. Even calling attention to those tactics can compound the problem, as illustrated by FOA's need to reassure its members in the wake of the Times story. The gradual accretion of power by a vast administrative state, combined with an administration intolerant of dissent, has produced a clear and present danger to basic American freedoms.

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January 29, 2014 in IRS News, IRS Scandal, Tax | Permalink | Comments (0)

Tuesday, January 28, 2014

Shaheen Presents The GAAP Lock-Out Effect and the Investment Behavior of Multinational Firms Today at NYU

ShaheenFadi Shaheen (Rutgers-Newark) presents The GAAP Lock-Out Effect and the Investment Behavior of Multinational Firms, 68 Tax L. Rev. ___ (2014), at NYU today as part of its Tax Policy Colloquium hosted by Daniel Shaviro and Alan Auerbach:

This paper looks into the investment behavior of multinational firms with respect to earnings of their foreign subsidiaries that are locked-out abroad against the firms’ own real income (present value) interest in order to avoid the repatriation tax and the associated GAAP “penalty.” The paper extends the analysis of the existing theoretical models beyond the optimal repatriation-versus-retention point in order to explore what would be a second-best optimal investment strategy with respect to locked-out earnings. The paper shows that the choice of investment in this second-best optimal setting should differ from that in the first-best optimal setting. One example is that investing locked-out earnings in passive investments would generally generate higher present value than in active investments with higher rates of return. This in turn magnifies the conflict between real and book income considerations, leading firms to act again against their own real income interest when investing locked-out earnings abroad, and resulting in efficiency costs not yet identified, both at the firm level and to the economy in general.

January 28, 2014 in Colloquia, Scholarship, Tax | Permalink | Comments (0)

ABA Task Force on the Future of Legal Education Releases Final Report

ABA Logo 2The ABA Task Force on the Future of Legal Education has released its final 41-page report, "which calls on law schools, bar associations, regulators and others to redesign the financial model now prevalent in law schools, revise the system that accredits law schools to permit more experimentation and innovation, and expand opportunities for delivery of legal services."

National Law Journal:  Law Schools Task Force Changes Target for Reform Pitch:

The panel has shelved plans to submit resolutions to the ABA’s House of Delegates during its midyear meeting next month. Instead, chairman Randall Shepard, former chief justice of Indiana, will brief the delegates and task force members will pitch their recommendations to entities directly involved in legal education and bar admissions—law schools, state bar associations and state supreme courts.

“When you get right up to the moment of truth, the report wasn’t written in a format that the House of Delegates was accustomed to seeing,” Shepard said. “The Task Force decided that we could do more good engaging with the entities that have the power to carry out these recommendations.”

“For me, one of the most illuminating aspects of the task force experience has been to shed some light on pricing, scholarships and discounting,” Shepard said. “That’s changed a lot in the past 15 years, and most judges and practitioners don’t know that. Offering scholarships on merit rather than need has changed the face of law schools and affected who can go there.”

The matter was among the panel’s top priorities. In fact, ABA President James Silkenat told the ABA Journal that he plans to ask the Board of Governors to create another task force to examine it specifically.

Among the other key recommendations:

  • The ABA's accreditation standards create unnecessary homogeneity among schools and increase costs, and some standards should be repealed or "dramatically liberalized."
  • The ABA should make it easier and more transparent for schools to receive waivers from the accreditation standards to foster experimentation.
  • Schools should do more to provide students with the practical skills they will need as lawyers and continue the shift away from doctrinal instruction.
  • State supreme courts and bar associations should look for ways to license legal service providers who lack J.D.s but can handle some legal services, which would help address unmet legal needs.

January 28, 2014 in Legal Education | Permalink | Comments (0)

Official Statistics on Inequality, the Top 1%, and Redistribution

Tax Foundation logoTax Foundation, Official Statistics on Inequality, the Top 1%, and Redistribution:

President Obama will reportedly focus much of his State of the Union speech on addressing inequality and mobility in America. Undoubtedly, these issues will generate a considerable amount of rhetoric by pundits and politicians on both sides of the aisle in the days ahead. Much of this rhetoric will not be supported by data or facts.

In order to bolster this discussion with data, we’ve summarized some of the recent work done on inequality and mobility by the Congressional Budget Office and the IRS. Links are provided to the original source material.

Inequality: CBO data shows that inequality today is slightly higher than the average of the past thirty years, but less that it was during the last two years of the Clinton administration.

 

Progressivity:  According to the CBO’s progressivity index, the federal tax code is as progressive today as it has been at any time during the past thirty years.

 

The Top 1%:  The Top 1% continues to pay a larger share of the federal income tax burden than the bottom 90 percent combined.

 

Redistribution:  Using 2006 data, CBO found that tax and spending policies combined to redistribute $1.2 trillion in income from the top 40 percent of non-elderly households to the bottom 60 percent of non-elderly households.

 

Mobility:  IRS panel data that tracked the same group of taxpayers between 1999 and 2007 showed that Americans can move from one economic group to another fairly quickly.

More than 50% of Taxpayers Moved Out of the Bottom Quintile Between 1999 & 2007

1999 Income Quintile/Percentile

2007 Income Quintile/Percentile

Lowest

Second

Third

Fourth

Fifth

Total

Lowest

42.5%

25.1%

16.3%

10.4%

5.7%

100.0%

Second

32.2%

34.7%

17.3%

10.8%

5.0%

100.0%

Third

14.4%

26.0%

32.8%

17.8%

8.9%

100.0%

Fourth

7.7%

10.7%

25.7%

37.7%

18.3%

100.0%

Fifth

3.1%

3.8%

7.5%

23.3%

62.3%

100.0%

Tax Foundation calculations based on IRS data from the 1999-2007 SOI Individual Tax Panel.

January 28, 2014 in Tax, Think Tank Reports | Permalink | Comments (2)

Journal of Taxation of Investments Publishes New Issue

Capture 2The Journal of Taxation of Investments has published its Spring 2013 issue (Vol. 30, No. 3), with these articles:

January 28, 2014 in Scholarship, Tax | Permalink | Comments (0)

Sheffrin: Restitution for Ponzi Scheme Victims: The Symbiotic Relationship of Tax and Securities Laws

Steven M. Sheffrin (Tulane), Restitution for Ponzi Scheme Victims: The Symbiotic Relationship of Tax and Securities Laws, 10 Rutgers Bus. L.J. 21 (2013):

PonziThis paper contrasts the restitution processes used by the Securities Investment Protection Corporation ("SIPC") and the Internal Revenue Service ("IRS") to provide restitution to the victims of Ponzi schemes. With its roots in bankruptcy law, the goal of SIPC is to provide reimbursement to victims of Ponzi schemes in an equitable manner, while the IRS is principally concerned with the impact of Ponzi schemes for taxable income. On the surface, the methods used by SIPC and the IRS appears potentially contradictory. Despite these contradictions, these methods are broadly consistent with one another and have a collaborative relationship. Nonetheless, implementation of these policies has proven to bedifficult for both the SIPC and the IRS, which is highlight of this paper. It also provides a welfare framework for evaluating the consequences of alternative restitution strategies.

January 28, 2014 in Scholarship, Tax | Permalink | Comments (0)

2013 Law School Survey of Student Engagement

LSSSE CoverThe Law School Survey of Student Engagement (LSSSE) has released its 2013 Annual Survey Results:

Since 2007, the job market for new law school graduates has been in steady decline. According to the National Association of Law Placement, the overall employment rate was 92% in 2007. By 2012, however, that rate had declined to 85%. Moreover, median starting salaries as well as the proportion of new graduates working in jobs for which the law degree is required have experienced similar declines.

Given the angst engendered by these trends, conventional wisdom dictates that students are less satisfied with their law school experiences, especially the career counseling and job search help they receive. However, newly released data from the Law School Survey of Student Engagement (LSSSE) challenges this assumption. According to the survey, which garnered responses from more than 26,000 students at 86 U.S. law schools, student satisfaction rates have remained relatively stable since before the downturn.

In 2007, 45% of law students in their final year reported satisfaction with job search help provided by their law school. The 2013 satisfaction rate was 45%. When assessing their school’s overall career counseling services, 45% of law students in their final year were satisfied in 2007, compared to 49% in 2013.

These trends suggest that the challenging environment has not led to an increase in the proportion of law students who feel their school shoulders some blame for job search difficulty. The stability of these trends, in light of the overall market, is heartening, given much of the criticism directed at legal education. It is possible that law schools have been able to stem increased dissatisfaction by redoubling efforts to advise students on career-related matters.

But the trends have an unfavorable side. Large percentages of students remain unsatisfied with the career counseling and job search help they have received. In addition, satisfaction with all advising services—career, academic, personal, and financial aid—sharply declines as students progress through their program, with first year students being most satisfied and students in their final year being least satisfied.

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January 28, 2014 in Legal Education | Permalink | Comments (0)

California Bar Hosts 1st Annual Young Tax Lawyers Conference

California State BarThe State Bar of California hosts its First Annual Young Tax Lawyers Conference today:

Luncheon Address:  Karen L. Hawkins (Director of the IRS Office of Professional Responsibility)
Panels:
Practice Tips And War Stories From Tax Court
The Evolving Role of Young Lawyers in Modern Tax and Estate Planning
Ask the Director of the IRS Office of Professional Responsibility

(Hat Tip: Michael Wood.)

January 28, 2014 in Conferences, Tax | Permalink | Comments (0)

IRS Provides Simplified Extension to Make § 2010(c)(5)(A) Portability Election

IRS Logo 2The IRS yesterday released Rev. Proc. 2014-18:

This revenue procedure provides a simplified method for certain taxpayers to obtain an extension of time under § 301.9100-3 of the Procedure and Administration Regulations to make a “portability” election under § 2010(c)(5)(A) of the Internal Revenue Code (Code), by which a decedent’s unused exclusion amount (deceased spousal unused exclusion amount, or DSUE amount) becomes available to apply to the surviving spouse’s subsequent transfers during life or at death. No user fee is required for submissions filed under this revenue procedure.

January 28, 2014 in IRS News, Tax | Permalink | Comments (0)

Law’s Long Bitter Descent and its Tragic Human Toll

PhotoFollowing up on yesterday's post, NY Times:  A Lawyer and Partner, and Also Bankrupt: FrazerRice.com, The Death Of A Profession? Law’s Long Bitter Descent And Its Tragic Human Toll:

Whether on blogs, in books, in numerous movies and among friends, there have been no shortage of conversations about unhappy lawyers. This New York Times article by James B. Stewart, however, is in its own league. Stewart brutally details the multitude of horrible problems that have metastasized throughout the industry by telling the story of a lawyer tossed from the pinnacle of his profession into the dark abyss of personal bankruptcy. It is a cautionary tale well worth taking to heart.

After I finished reading the depressing (and frighteningly too common) saga depicted in the Times, I felt compelled to jot down my own thoughts on the modern legal profession -- drawn both from my experiences and those of my friends. ...

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January 28, 2014 | Permalink | Comments (8)

The IRS Scandal, Day 264

Monday, January 27, 2014

Barry & Taylor Present Corporate Inversions Today at San Diego

USDJordan Barry (San Diego) and Willard Taylor (Of Counsel, Sullivan & Cromwell; Visiting Professor, San Diego) present Corporate Inversions at San Diego today as part of its Tax Law Speaker Series:

An inversion, also known as an expatriation, is when a U.S. corporation alters its corporate structure so that it ceases to be a U.S. corporation, such as by re-incorporating (through a merger or otherwise) in another jurisdiction. We analyze current law regarding corporate inversions and the policy issues that inversions present. We provide a short history of inversions and the legislative and regulatory efforts enacted to restrain them. We then discuss which countries U.S. corporations currently expatriate to and why. We present some of the tax risks associated with corporate inversions and survey post-inversion tax planning. Finally, we discuss what policy measures Congress and the IRS might consider in response to the most recent wave of inversion transactions.

January 27, 2014 in Colloquia, Scholarship, Tax | Permalink | Comments (0)

Robinson Delivers Lecture on Skin in the Game: Invisible Taxpayers, Invisible Citizens? Today at Villanova

RobinsonMildred Robinson (Virginia) delivers the Martin Luther King, Jr. Memorial Lecture today at Villanova on Skin in the Game: Invisible Taxpayers, Invisible Citizens?, 59 Vill. L. Rev. ___ (2014):

“Skin in the game” -- some thing that the interested party has at risk -- has previously been the currency demanded of those seeking to influence an outcome in a variety of contexts including business, finance, betting, and war. ... In any case, the phrase with its unmistakable message has also become a part of everyday American political discourse. ... In short, it seems that “skin in the game” is becoming the price for participation in the political process. Personal financial risk – some personal stake -- is demanded of all “players.” The implications are clear: no skin, no play.

That these are very high stakes indeed should go without saying. Broad participation in political debate has long been the aspiration for American governance. Limiting political participation on the basis of economic participation would certainly undermine that goal and arguably compromises the concept of what it means to be a citizen. That the asserted lack of investment may be, at best, disingenuous is (or should be) a matter of concern.

The requirement for “skin in the game” in the context of the recent deficit debate along with the independently developing “concern” that almost fifty percent of Americans pay no federal income tax is but the latest version of the ongoing political “cut-taxes/reduce governmental size” wrangling. It is yet another play on the high political salience of the federal income tax as an institution. The debate, however, also chillingly illustrates how analytically compromised and therefore specious the standard can be.

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January 27, 2014 | Permalink | Comments (0)

Companies Fleeing Taxes Pay CEOs Extra as § 4985 Backfires

Corporate InversionsBloomberg, Companies Fleeing Taxes Pay CEOs Extra as Law Backfires, by Zachary R. Mider

Ten years ago, Congress passed a law intended to penalize chief executive officers whose companies shift their legal addresses to tax havens.

It hasn’t worked out as planned. Companies have found ways around the law that create new rewards for executives. When Actavis Inc. (ACT) changed its incorporation to Ireland in October, the New Jersey-based drugmaker helped CEO Paul Bisaro avoid the law’s bite by handing him more than $40 million of stock as much as three years ahead of its schedule, then promising him an additional $5 million to remain with the company.

The payouts to executives highlight the ineffectiveness of the 2004 law, which contained a series of provisions aimed at reducing the tax benefits of reincorporating overseas. In the past two years, a fresh wave of companies has fled the U.S. system to avoid hundreds of millions of dollars in taxes.

The 2004 law has “clearly been a failure” in halting the tax exodus, said Edward Kleinbard, a professor at University of Southern California’s Gould School of Law. “And it now has the perverse result of putting money into executives’ pockets sooner.”

The law [§ 4985] imposes a special tax of 15 percent on restricted stock and options held by the most senior executives when a company reincorporates outside the U.S. Since the measure took effect, at least seven large companies have disclosed in securities filings that they risked triggering the tax. All took steps to shield their executives from having to pay.

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January 27, 2014 in Tax | Permalink | Comments (0)

2014 USC Tax Institute

USC CoverThe three-day 2014 USC Gould School of Law Tax Institute kicks off today.  The keynote speakers are:

  • Monday:  Steven A. Bank (UCLA)
  • Tuesday:  Lawrence Gibbs (former IRS Commissioner; Miller & Chevalier, Washington, D.C.)
  • Wednesday:  Edward J. McCaffery (USC)

Other Tax Prof speakers include Richard Granat (Florida Coastal), Don Leatherman (Tennessee), Kevin Mohr (Western State), and Jeffrey Pennell (Emory)

January 27, 2014 in Conferences, Tax | Permalink | Comments (0)

Journal of Taxation of Investments Publishes New Issue

Capture 2 The Journal of Taxation of Investments has published its Winter 2013 issue (Vol. 30, No. 2), with these articles:

January 27, 2014 in Scholarship, Tax | Permalink | Comments (0)

NY Times: A Lawyer and Partner, and Also Bankrupt

Owens 3New York Times:  A Lawyer and Partner, and Also Bankrupt, by James B. Stewart:

Anyone who wonders why law school applications are plunging and there’s widespread malaise in many big law firms might consider the case of Gregory M. Owens.

The silver-haired, distinguished-looking Mr. Owens would seem the embodiment of a successful Wall Street lawyer. A graduate of Denison University and Vanderbilt Law School, Mr. Owens moved to New York City and was named a partner at the then old-line law firm of Dewey, Ballantine, Bushby, Palmer & Wood, and after a merger, at Dewey & LeBoeuf.

Today, Mr. Owens, 55, is a partner at an even more eminent global law firm, White & Case. A partnership there or any of the major firms collectively known as “Big Law” was long regarded as the brass ring of the profession, a virtual guarantee of lifelong prosperity and job security.

But on New Year’s Eve, Mr. Owens filed for personal bankruptcy. ...

Mr. Owens is an extreme but vivid illustration of the economic factors roiling the legal profession, although his straits are in some ways unique to his personal situation. ...

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January 27, 2014 in Legal Education | Permalink | Comments (4)

Johnston: Give to Charity, Turn a Profit

Tax Analysys Logo (2013)David Cay Johnston (Syracuse), Give to Charity, Turn a Profit, 71 State Tax Notes 225 (Jan. 27, 2014):

Arizona lawmakers let some donors make charitable gifts in a way that makes the donors richer, a trend sure to spread unless Congress stops it.

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

January 27, 2014 in Tax, Tax Analysts | Permalink | Comments (5)

NY Times: Some States Are Moving to Loosen Their Estate Taxes

New York Times:  Some States Are Moving to Loosen Their Estate Taxes, by Paul Sullivan:

For most of the United States, the estate tax is now something only the very wealthy have to plan for. The federal exemption for an individual this year is now $5.34 million, or $10.68 million for a married couple. And that amount is indexed to inflation, so it will continue to rise.

The exception is in the 16 states, mostly in the North, where state estate taxes remain and ensnare middle- and upper-middle-class residents — the very people the high federal exemption was supposed to protect.

The worst for taxpayers is New Jersey, with the lowest exemption in the country, $675,000 a person, and a rate that tops out at 16 percent. (Rhode Island is second.) New Jersey also has an inheritance tax — for bequests to, say, a niece or friend — which starts to be applied at $500. The rate is 15 percent until the amount reaches $700,000 and then it rises to 16 percent. (One concession: The estate pays the higher of the two taxes, not both.)

This week, New York’s governor, Andrew M. Cuomo, took a step toward bringing the state’s estate tax in line with the federal one. And he is not alone among governors of cold-weather states (along with the District of Columbia) that have realized affluent residents are moving to states without estate taxes (and in some cases, income taxes) and in doing so, depriving their old state of the other taxes they paid, like property, sales and income tax. ...

New York’s current exemption is $1 million a person with a top rate of 16 percent. Governor Cuomo proposed raising the exemption to $5.25 million by 2019, indexing that to inflation and lowering the top rate to 10 percent. (That tax is still in addition to the 40 percent federal estate tax rate.)

New York is not alone in re-evaluating this. Indiana repealed its inheritance tax, and Ohio ended its estate tax. Tennessee is in the process of phasing out its inheritance tax, and Maryland and the District of Columbia are reviewing their estate taxes.

Wall Street Journal Tax Report:  States You Shouldn't Be Caught Dead In: Investors Need to Contend With Growing State Estate and Inheritance Taxes, by Laura Saunders:

Nineteen states and the District of Columbia, home to just over one-third of the U.S. population, levy an estate tax on the assets of people who die or an inheritance tax on heirs receiving assets. Maryland and New Jersey have both, although each allows offsets to prevent double taxation. ...

WSJ

In January, Congress voted to keep Uncle Sam's inflation-adjusted estate exemption above $5 million per individual ($10 million per married couple). The change excluded almost all Americans from the federal levy, so state-level taxes loom larger by contrast. (This year, the federal exemption is $5.25 million.)

Many states also have far smaller exemptions than Uncle Sam's. The threshold is $1 million for estate taxes in Massachusetts, New York, Oregon and Minnesota, and just $675,000 in New Jersey. Pennsylvania's and Iowa's inheritance taxes have no exemption in some cases. However, all states allow surviving spouses to inherit tax-free from their partners. ... Only Delaware and Hawaii track the U.S.'s $5 million-plus exemption. ... Rates can be high as well. The top rate often is double digits, with Washington state's the highest: 20%. Most state exemptions aren't indexed for inflation, extending the tax's reach over time. ...

 WSJ2
Are these taxes effective—that is, do they raise more revenue than they lose when residents ... decide [to] go elsewhere? Economists are divided, and so are the states.

January 27, 2014 in Tax | Permalink | Comments (0)

The IRS Scandal, Day 263

TaxProf Blog Weekend Roundup