Thursday, January 2, 2014
- International Tax Enforcement Cooperation, by Hugh Ault (Boston College) & Steve Johnson (Florida State)
- The IRS Scandal, by Andy Gewal (Iowa) & Richard Schmalbeck (Duke)
- Windsor and Rev. Rul. 2013-17: Marriage Equality and the Tax Law, by John Miller (Idaho)
- Tina Turner and the Renunciation of U.S. Citizenship, by Allison Christians (McGill)
- Loving: The Regulation of Tax Preparers, by Steve Johnson (Florida State)
- The IRS and the Affordable Care Act, by Jordan Barry (San Diego), Bryan Camp (Texas Tech) & Steve Johnson (Florida)
- Quality Stores: Severance Pay, Payroll Taxes, and the Intersection of Tax and Administrative Law, by Kristin Hickman (Minnesota)
- Internet Sales Taxes, by Adam Thimmesch (Nebraska)
- PPL: Foreign Tax Credits and International Tax Reform, by Reuven Avi-Yonah (Michigan) & Jordan Barry (San Diego)
- The Sunset of the Bush Tax Cuts, by David Elkins (Netanya)
1. International Tax Enforcement Cooperation
Hugh Ault (Boston College): The OECD’s (and subsequently G-20) Base Erosion and Profit Shifting (BEPS) initiative which may dramatically change some of the basic principles of international taxation and in any event has raised a number of important issues about the structure of international tax rules.
Steven Johnson (Florida State): The biggest story of the year, I think, is the growing momentum towards international tax enforcement cooperation. Its manifestations are manifold, including the OECD and G-20 BEPS initiative mentioned by Hugh Ault, the growing number of FATCA agreements, the U.S.-Swiss agreements, the start of multilateral tax audits, increased interest in improving competent authority procedures, and proposals for reforms of substantive tax rules to increase harmonization among national systems for taxing transactional transactions. Not long ago, the dominant sentiment internationally was “your collecting your taxes is your problem.” We’ve come a long way in only a few years.
2. The IRS Scandal
Andy Grewal (Iowa): Whether one believes it a case of a few errors being blown way out of proportion, or a case of a conspiracy from the White House on down, the Tea Party Scandal surely ranks as among the year's top tax stories. The events began strangely, with the disclosure of the IRS mistakes via a planted question at a practitioner conference, and the story continued to take on strange turns, with the pleading of the Fifth by a senior official probably being the high (or low) point. Although the IRS has released substantial information regarding its practices, its refusal to disclose certain documents to the highly respected Tax Analysts organization, and the related lawsuit, could put this story back in the headlines in 2014.
Richard Schmalbeck (Duke): The story was broken by the IRS itself, at a meeting of the ABA Tax Section in May. Lois Lerner, then the director of the Service’s Exempt Organization Division, apologized for subjecting applications for exempt status determinations from Tea Party organizations to special scrutiny. The regretful tone was no doubt intended to mollify critics who had brought this situation to the attention of Congress, and to upstage an inspector general’s report that was about to reveal the “targeting.” But the IRS statements—both from Lerner and from the agency press office—essentially admitted wrong-doing, and offered no reasonable explanation for the IRS actions. They did nothing to defuse the explosive quality of the IRS admissions.
In fact, however, there was a reasonable explanation, to a point. The applications that were singled out for special processing offered some reason to believe that the organizations in question—which were seeking recognition of exemption as “social welfare organizations” under section 501(c)(4)--were better described as “political organizations,” that might qualify for exemption under section 527 instead. After all, many of these organizations had the word “party” in their very name, and section 527(e)(1) defines “political organization” to include “a party . . . .”
The primary difference between the two categories—at least the one that appears to have had the most salience to the groups themselves—is not truly a matter of tax law. Rather, it is that federal election law requires political organizations to disclose the names of their donors, while no such requirement is imposed on social welfare organizations. Confidentiality of donor lists is really what the Tea Party applicants were fighting for.
Of course, an organization is entitled to seek any particular type of exempt status that it believes it qualifies for. And social welfare organizations—the ACLU and the NRA are nice polar examples illustrating the range of this category—are permitted to have and to express viewpoints on public policy issues. But the IRS has an obligation to patrol the borders of the several categories as well as it can; and closer scrutiny of applications that raise facially obvious questions about whether the applicant’s activities really fit within the category they seek to occupy is not merely legitimate; it is one of the duties of the IRS.
True, the IRS bungled this, primarily by choosing search strategies that were nearly certain to put more right-of-center organizations in the line of fire. One wonders how this crisis would have played out if it had simply occurred to the IRS to use the word “party” as a search term rather than “tea party.” The former would catch all the organizations that the latter would, and might snare at least a few organizations with names like “progressive party,” or even “socialist workers’ party” in the high-scrutiny net. Such a search would have been more neutral, and would have had a strong statutory basis founded on the definition of political organization as including “parties.”
“Tea party” was not the only search term, and (it came out much later) at least some of the terms used did identify primarily left-of-center groups for special scrutiny. But it is clear that a substantial majority—estimates run as high as 80%--of the organizations that received special scrutiny were conservative organizations. Needless to say, a wide range of right-of-center interests—in Congress, the media, and the nonprofit sector—were aggrieved, even outraged. And the outrage continues. The last day of the year will be the 236th day of the scandal, a count that will be duly noted in the Tax Prof blog, which will also cite the new set of protestations that occur on that day. (There will no doubt be several; there is something about auld lang syne that brings the grievances of the past year into renewed focus.)
This saga has several distressing aspects. At least a few senior IRS officials have lost their jobs, their reputations, and perhaps more. Opinion polls have reported that a narrow majority of the American public believe that the IRS broke the law in subjecting Tea Party applications to special scrutiny. And even the White House seems to have decided that jumping on the bandwagon of disparaging the IRS is a more prudent choice than defending any part of the IRS efforts to determine as accurately as possible the appropriate categories for exempt status for any particular applicant.
Sound government depends on confidence in the agency that collects the revenue to fund that government. That confidence took a severe blow in 2013. Let’s hope that 2014 is a better year.
3. Windsor and Rev. Rul. 2013-17: Marriage Equality and the Tax Law
John Miller (Idaho): The Supreme Court’s Decision in United States v. Windsor obviously has enormous tax and other implications for same sex married couples. The U.S. Supreme Court declared DOMA’s denial of the estate tax marital deduction to a same sex couple considered lawfully married under New York state law unconstitutional under the equal protection clause of the 14th Amendment as applied to the federal government under the 5th Amendment. United States v. Windsor, No. 12-307 (June 26, 2013), aff’g 699 F.3d 199 (2d Cir. 2012). In Rev. Rul. 2013-17, the Service ruled that Windsor applies to the income tax as well as to the transfer taxes. It adopted the state of celebration approach, that is, legally married same-sex couples may file jointly no matter where they reside. However, it ruled that Domestic Partners are not treated as married for federal tax purposes. The ruling was retroactive for the period within the statute of limitations.
4. Tina Turner and the Renunciation of U.S. Citizenship
Allison Christians (McGill): As we bid farewell to 2013, we also bid farewell to thousands of Americans overseas, who gave up U.S. citizenship at a historically unprecedented clip. Tina Turner became the icon of American renunciations when it was announced that she had relinquished her blue passport after acquiring citizenship in Switzerland, where she has lived for two decades. Whether Tina gave her citizenship up for love or money isn't known, of course. But Tina's relinquishment put a public face on a growing phenomenon. The U.S. is the only country in the world to exercise world-wide taxation on the basis of citizenship and green card status regardless of actual residence, and its recent decision to exercise this expansive jurisdiction through onerous third party investigation and reporting requirements has put tremendous pressure on an untenable situation. As the regime entrenches globally, the stream of renunciations seen in 2013 may yet be modest compared with what is to come.
5. Loving and the Regulation of Tax Preparers
On January 18, 2013, the federal district court for the District of Columbia invalidated, on Chevron Step 1 grounds, major portions a Treasury regulation increasing federal supervision of tax return preparers. Loving v. IRS, 917 F. Supp. 2d 67 (D.D.C. 2013), on appeal, No. 13-5061 (D.C. Cir.). A panel of the D.C. Circuit is expected soon to render its decision on appeal. The case presents in the tax context the long-playing question of whether governmental regulation advances the public interest or, via agency capture, the interest of a particular group or industry. The Government sees a lot of incompetence and dishonesty in the ranks of largely unregulated preparers. Opponents of the regulation doubt that the regulations would improve the situation much (because incompetence and dishonesty are far from unknown even among regulated preparers), and they suspect that the big tax return preparation firms support the regulation as a way of driving smaller competitors out of business. Doctrinally, the district court’s decision reflects exacting (nondeferential) Step 1 analysis, which has become the dominant mode in recent years. See Steve R. Johnson, Loving and Legitimacy: IRS Regulation of Tax Return Preparation, 60 Vill. L. Rev. __ (forthcoming 2014).
Loving also relates to the IRS's mission. In its analysis of whether an 1880s statute gives the Treasury authority to promulgate the regulations at issue, the district court’s opinion relied on a traditional conception of the IRS as a tax enforcement/collection agency, focusing on the steps of audit, assessment, and litigation. An important challenge to that approach was developed by National Taxpayer Advocate Nina Olson (in a Tax Notes article [More Than a 'Mere' Preparer: Loving and Return Preparation, 139 Tax Notes 767 (May 13, 2013)]), Professor Bryan Camp (in a Tax Notes article ['Loving' Return Preparer Regulation, 140 Tax Notes 457 (July 29, 2013)]), and five former IRS Commissioners (in an amici brief by the five and a Tax Notes article by one of the five, Commissioner Larry Gibbs [Loving v. IRS: Treasury's Authority to Regulate Tax Return Preparers, 141 Tax Notes 331 (Oct. 21, 2013)]). They noted that income tax returns have become a way of dispensing social welfare benefits (the EITC and others) unrelated to revenue raising. Whether this change in the role of the IRS affects the ultimately result in Loving we shall soon see.
6. The IRS and the Affordable Care Act
Jordan Barry (San Diego): Health insurance exchanges, supported by a mandate that almost all U.S. citizens have health insurance for themselves and their dependents, were a key piece of the Patient Protection and Affordable Care Act, also known as ObamaCare. The roll-out of these exchanges was a major sticking point in this year's Congressional debates surrounding appropriations, and resistance to the exchanges was a major cause of the year's government shutdown. Since the exchanges were unveiled, many of their websites have been plagued by technical problems. Meanwhile, the individual mandate that requires most Americans to acquire health insurance remains poorly understood.
Bryan Camp (Texas Tech): The ACA continues to supply tax stories this past year. The IRS shares responsibility for implementation of the Individual Mandate with the Department of Health and Human Services. HHS writes the regulations governing the Exchanges. Its regulation, published in July 2013, regulates the eligibility for and certain exemptions from the Individual Mandate, including provisions that set eligibility standards for the hardship exemption to be granted by the Exchanges. The IRS issued its proposed regulations in February, and received a substantial number of comments, from individuals and various advocacy groups. The IRS held hearings in May and issued final regulations at the end of August. This is very, very quick work for regulation-writing, which perhaps accounts for the two sets of corrective amendments to the regulations issued in late December.
There continues to be litigation concerning the legality of the Individual Mandate, although since the Supreme Court’s National Federation of Independent Businesses decision in 2012, the cases decided in 2013 basically uphold the penalty both for individuals, Sissel v. U.S. Dept. of Health and Human Services, --- F.Supp.2d ----, 112 A.F.T.R.2d 2013-5123, 2013-2 USTC P 50,411 (D.D.C. 2013), and employers, Liberty University v. Lew, 733 F.3d 72 (4th Cir, 2013). However, the ability of the IRS to provide, through regulation, that taxpayers may claim federal subsidies for health plans purchased through federally-created exchanges is still in litigation. See Oklahoma ex rel. Pruitt v. Sebelius, 2013 WL 4052610 (C.D. Okla. 2013).
Commentators continue to grapple with the issue of whether the IRS can even actually enforce the Individual Mandate. For articles on why the IRS will have a difficult time enforcing the Mandate, see Jordan M. Barry & Bryan T. Camp, Is the Individual Mandate Really Mandatory?, 132 Tax Notes 1633 (June 25, 2012). For an article taking the opposite view see Ajay Gupta, ACA Penalty: Toothless? Hardly! Corporate Raiders Fare Better, 141 Tax Notes 877 (Nov. 25, 2013).
One aspect of the collection controversy that did NOT make any news outlets and has NOT been discussed by commentators, but which may be central to the IRS’s ability to collect the Mandate by offset, is how will IRS perform the incredibly complex computer coding necessary to obey the Congressional command to refrain from filing Notices of Federal Tax Liens and making levies while still reflecting the Mandate as available for offset. The Automated Collection System (ACS) is not designed to discriminate between administrative collection methods for balances due. How and when the IRS will be able to alter coding to make such a discrimination is anyone’s guess.
Steve Johnson (Florida State): Another major trend again in evidence in 2013 is the transformation of the IRS from a tax collector to a hybrid tax collector and regulatory/social welfare agency in areas as diverse as poverty, medical care, energy, etc. Especially with implementation of ObamaCare, mission creep has become mission gallop for the IRS. This poses serious questions about institutional competence, and it exacerbates the budget squeeze described above.
7. Quality Stores: Severance Pay, Payroll Taxes, and the Intersection of Tax and Administrative Law
Kristin Hickman (Minnesota): Like many tax cases, United States v. Quality Stores, No. 12-1408, offers a tax story that spans multiple years. The Sixth Circuit reached its decision in the case in 2012, holding that certain severance payments are not subject to FICA taxes and setting up a split with the Federal Circuit. Once the Supreme Court gets done with it, the Quality Stores case may prove an even bigger story in 2014 than 2013. Regardless of how the case comes out, Quality Stores should be counted among the top tax stories of 2013 for providing the opportunity to call the Supreme Court’s attention to yet another unresolved issue at the intersection of tax and administrative law: whether revenue rulings are eligible for Chevron deference or only the lesser Skidmore review. Briefing on the issue has been lively, though the government seems to have saved its argument on this issue for its reply brief, due in early January.
8. Internet Sales Taxes
Adam Thimmesch (Nebraska): A significant tax story in 2013 (more for its lack of a story than any real development) was the federal government’s continued inaction regarding the scope of state power to require Internet merchants to collect state sales and use taxes. The scope of state power in that area has been the subject of increased debate in recent years, and both Congress and the Supreme Court considered intervening in 2013. Ultimately, however, neither body got involved. Although the Senate passed the Marketplace Fairness Act in early May, the bill sat idle in the House for the remainder of the year. Further, the Supreme Court considered petitions for certiorari in two cases attacking New York’s so-called "Amazon law," but declined to review the cases in early December. These failures to act have left the scope of state power unclear, but signal that states can continue to develop their own methods for approaching the Internet sales tax issue as we head into 2014.
9. PPL: Foreign Tax Credits and International Tax Reform
Reuven Avi-Yonah (Michigan): The Supreme Court rarely tackles tax cases and even more rarely international tax cases. PPL Corp. v. Commissioner, No. 12-43 (May 20, 2013), thus makes the list even though on the face of it the issue of whether the UK tax at issue is creditable is unlikely to recur. Nor is the substance over form rationale an easy one to apply to other cases. The best that can be said for this decision having an impact is that it broadens the scope of the credit and therefore makes an international tax reform that limits the credit more of a revenue raiser and hence more likely to be enacted in the current revenue estimate driven tax legislative climate.
Jordan Barry (San Diego): This summer, the Supreme Court decided PPL Corp. v. Commissioner, No. 12-43 (May 20, 2013), ruling that the United Kingdom's Windfall Tax qualified for a U.S. foreign income tax credit. Only a handful of U.S. taxpayers were subject to the Windfall Tax, but PPL was closely watched by tax practitioners and scholars alike. U.S. corporations and citizens claim over $100 billion in foreign income tax credits each year, and the Supreme Court rarely takes foreign tax credit cases. Thus, the Court's opinion will likely influence the scope of the foreign income tax credit--and taxpayers' pocketbooks--for many years to come.
10. The Sunset of the Bush Tax Cuts
David Elkins (Netanya): My vote for the tax story of the year is the final chapter of the sunset provisions of the Bush tax cuts. During the early years of the Bush Jr. administration, the top individual income tax rate was cut from 39.6% to 35%, the top tax rate on dividends was cut from 39.6% to 35%, and the top tax rate on long term capital gains was cut from 20% to 15%. However, according to the rules under which Congress operates, tax cuts need to be funded and in order to be permament they need to be funded for 10 years. At the time there were only enough funds available to enact the cuts until 2009. The cuts were later extended to 2010 and then to 2012. Consequently, for a decade or more, taxpayers and their advisors had to plan under conditions of uncertainly with supposedly temporay tax cuts that kept being extended. In the early hours of January 1, 2013 the President and the Republican leadership ended their high-stakes game of Chicken and reached an agreement. The Bush tax cuts were extended permanently for individuals with taxable income of under $450,000. For those with taxable income above that amount, rates reverted to their Clinton-era levels (with the exception of dividends, which are now subject to tax at the top rate of 20%). It was a compromise that nobody was really happy with, but at least it brought to an end the strange saga of the "temporary" tax cuts that refused to go quietly.