TaxProf Blog

Dems, GOP Trade Barbs After CRS Pulls Report on Tax Rates and Economic Growth

New York Times:  Nonpartisan Tax Report Withdrawn After GOP Protest:

The Congressional Research Service has withdrawn an economic report [Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945 (R42729) (Sept. 14, 2012), by Thomas L. Hungerford] that found no correlation between top tax rates and economic growth, a central tenet of conservative economic theory, after Senate Republicans raised concerns about the paper’s findings and wording....

The decision, made in late September against the advice of the agency’s economic team leadership, drew almost no notice at the time. ... But it could actually draw new attention to the report, which questions the premise that lowering the top marginal tax rate stimulates economic growth and job creation. ...

Senate Republican aides said they had protested both the tone of the report and its findings. Aides to Mr. McConnell presented a bill of particulars to the research service that included objections to the use of the term "Bush tax cuts” and the report’s reference to “tax cuts for the rich,” which Republicans contended was politically freighted.

They also protested on economic grounds, saying that the author, Thomas L. Hungerford, was looking for a macroeconomic response to tax cuts within the first year of the policy change without sufficiently taking into account the time lag of economic policies. Further, they complained that his analysis had not taken into account other policies affecting growth, such as the Federal Reserve’s decisions on interest rates.

“There were a lot of problems with the report from a real, legitimate economic analysis perspective,” said Antonia Ferrier, a spokeswoman for the Senate Finance Committee’s Republicans. “We relayed them to C.R.S. It was a good discussion. We have a good, constructive relationship with them. Then it was pulled.”

The pressure applied to the research service comes amid a broader Republican effort to raise questions about research and statistics that were once trusted as nonpartisan and apolitical. ... “When their math doesn’t add up, Republicans claim that their vague version of economic growth will somehow magically make up the difference. And when that is refuted, they’re left with nothing more to lean on than charges of bias against nonpartisan experts,” said Representative Sander Levin of Michigan, ranking Democrat on the House Ways and Means Committee....

The report received wide notice from media outlets and liberal and conservative policy analysts when it was released on Sept. 14. It examined the historical fluctuations of the top income tax rates and the rates on capital gains since World War II, and concluded that those fluctuations did not appear to affect the nation’s economic growth. “The reduction in the top tax rates appears to be uncorrelated with saving, investment and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie,” the report said. “However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution.” ...

Mr. Hungerford, a specialist in public finance who earned his economics doctorate from the University of Michigan, has contributed at least $5,000 this election cycle to a combination of Mr. Obama’s campaign, the Democratic National Committee, the Democratic Senatorial Campaign Committee and the Democratic Congressional Campaign Committee.

Wall Street Journal editorial:  Congressional Research Hit Job: Democrats Politicize a Supposedly Nonpartisan Think Tank:

The Congressional Research Service is supposed to be a nonpartisan research tool for the House and Senate, but like so many institutions in Washington it is now being hijacked for partisan ends. The dispute concerns a highly politicized CRS tax study that Democrats have been trying to use as a cudgel against Mitt Romney.

The tax study just happened to appear on the CRS website in September in the heat of the Presidential tax debate. Author Thomas Hungerford purported to show that 65 years of changes in "top tax rates have had little association with saving, investment or productivity growth." The timing couldn't have been better for President Obama, and the usual liberal media suspects picked it up. So did New York Senator Chuck Schumer, who used it in a speech to attack tax reform.

Mr. Hungerford tells us the study wasn't requested by a Member of Congress, so perhaps it was his idea. You won't be surprised to learn that Mr. Hungerford has donated to the Obama campaign and Senate Democrats and worked as an economist at the White House budget office under Bill Clinton.

Republicans understandably objected to this partisan exercise, especially because the study has statistical design flaws and ignores multiple peer-reviewed studies that have found a significant relationship between cuts in tax rates and the pace of capital formation, investment and economic growth.

CRS officials then pulled the report from its website. In a Sept. 28 email to a Republican Senate staffer, CRS deputy director Colleen Shogan wrote that "I decided to remove the Hungerford report from the CRS website for now." She added that she had given Mr. Hungerford's manager, Don Marples, "a list of concerns I would want addressed in a future version" and that "in particular, I want a better, more robust defense of the methodology in the paper."

Now Senate Democrats are trying to portray Mr. Hungerford as a victim of censorship due to GOP pressure, and Thursday they got an impressionable Jimmy Olson at the New York Times to buy the spin. The reality is that sometime after we called Mr. Hungerford, he or someone else at CRS talked to Senate Democrats, who decided to give the study one more propaganda run before Election Day. ...

This episode is nonetheless a significant blot on the CRS reputation for unbiased research. We're not sure why Congress needs a research operation when it already has a budget office, a tax committee and thousands of staff, but it surely doesn't need one that acts like an arm of the Democratic Party.

(Hat Tip: Ann Murphy, Mike Talbert.)

Update:

• New York Times:  Gingrich and the Destruction of Congressional Expertise, by Bruce Bartlett
• New York Times:  More on Tax Rates and Growth, by Economix Editors
• New York Times:  Republicans Censor What They Can’t Refute, by Bruce Bartlett

Joint Tax Committee: Repealing Deductions Pays for 4% Tax Rate Cut (Not 20% Claimed by Romney)

The Joint Committee on Taxation yesterday released a report throwing water on the possibility of reducing tax rates by eliminating tax expenditures. The report assumes that Congress allows today's reduced rates to rise in January and concludes that the elimination of certain provisions (the AMT; limitations on itemized deductions and personal exemptions for certain taxpayers; itemized deductions; preferential rates for capital gains and dividends; interest exclusion on state and local bonds) would fund only a 4% decrease in all ordinary income tax rates (from 15% to 14.4%; 28% to 26.9%; 31% to 29.8%; 36% to 34.6%; and 39.6% to 38.0%). The report did not consider the exclusion for employer-provided health care; earned income tax credit; child tax credit; and retirement and pension provisions.

Alan Simpson, Erskine Bowles, Alice Rivlin and Pete Domenici released this statement in response:

A new study by the Joint Committee on Taxation (JCT) assumes a less drastic reduction in tax expenditures and a different baseline that allocates more savings to deficit reduction, and therefore is able to achieve much less rate reduction. The fact that rates cannot be lowered as much if large tax expenditures are left unaddressed and if most of the savings from those that are eliminated are put towards deficit reduction illustrates a tradeoff, but does not surprise anyone who has worked with tax estimation.

The JCT study looks at only a subset of the tax expenditures we reformed or eliminated, thereby leaving out a substantial amount of savings that were included in our proposals. Most notably, the JCT study does not address the employer health exclusion, the largest tax expenditure in the code, as our plans would. In addition, the JCT study assumes tax reform is revenue neutral relative to a "current law" baseline -- a baseline that includes the expiration of all parts of the 2001, 2003 and 2010 tax cuts, a position neither party is advocating. This assumption effectively required the JCT to find $4.5 trillion of deficit reduction through base broadening -- far more than is included in our plans or any other plan - and use only roughly $700 billion for rate reduction.

JCT looked at one possible model for tax reform -- although we do not disagree with their analysis, it does not reflect the model embodied by our plans. Nothing in the JCT analysis changes our belief that it is possible for tax reform to reduce rates and produce additional revenues if policymakers are willing to make the tough choices to eliminate or scale back tax expenditures. There is no question that reforming the tax code will require making hard and careful choices. Policymakers should work diligently on a bipartisan basis to identify the appropriate reforms to force our debt under control and get our economy growing.

• Bloomberg, One Criticism of Romney's Math That Doesn't Add Up
• Bloomberg, Repealing Deductions Pays for 4% Tax Cuts, Study Says
• The Hill, Tax Scorekeeper: Ending Deductions Pays for 4-Percent Rate Cut
• Politico, JCT Letter Draws New Attention to Romney Tax Plan
• Reuters, Ending Some Tax Breaks Would Allow 4-Percent Cut in Rates
• Wall Street Journal, Fresh Debate Over New Tax Study
• Washington Post, GOP Tax Plan Would Have Minimal Reduction on Federal Tax Rates, Analysis Says
• Washington Post, Joint Committee on Taxation: Base-Broadening Tax Reform Is Really Hard

For more, see:

• Heritage Foundation, Attacks on Tax Reform Miss the Mark
• Tax Policy Center, Can Romney Cut Taxes for the Rich Without Reducing Their Share of Taxes? Yes, but….
• Tax Policy Center, Five Things You Should Know About Mitt Romney’s “$5 Trillion Tax Cut”
• Tax Vox Blog, What the Joint Tax Committee Really Said About Tax Reform

Jost: ObamaCare Authorizes IRS Rule Expanding Premium Tax Credits

Timothy Stoltzfus Jost (Washington & Lee), The Internal Revenue Service’s Implementation and Administration of the Democrat’s Health Care Law:

In a widely publicized paper, Jonathan Adler and Michael Cannon claim that the Affordable Care Act does not authorize federal exchanges to offer premium tax credits and that an IRS rule allowing them to do so is illegal. It is clear that Congress in fact intended all exchanges, including federal exchanges, to issue premium tax credits. Moreover, the language Cannon and Adler point to in the ACA as supporting their position, when read in context, does not preclude federal exchange premium tax credits. Timothy Jost’s testimony submitted to the House Ways and Means Committee explains why the IRS position is correct.

CBO: The Taxation of Capital and Labor Through the Self-Employment Tax

The Congressional Budget Office yesterday released The Taxation of Capital and Labor Through the Self-Employment Tax:

The Self-Employment Contributions Act (SECA) tax is paid mainly by certain small business owners. That tax on sole proprietors and owners of partnerships is often characterized as one that parallels the Federal Insurance Contributions Act (FICA) tax that employers and employees pay to fund Social Security and Medicare. The two taxes, CBO concludes, are not really parallel in the way that they tax capital income and labor income. (For people who are not self-employed, interest, dividends, rents, and capital gains are capital income, and wages and benefits are labor income.) The differences in the treatment of capital and labor income may prompt people to make choices that they would not otherwise make about self-employment or the organizational form of a business, thereby reducing the efficient allocation of resources.

CBO finds that:

• Approximately 40 percent of the SECA tax base derives from capital income and 60 percent from labor income. The FICA tax base, in contrast, derives entirely from labor income.
• More than half of the labor income of self-employed people is not included in the SECA tax base. In contrast, virtually all of the labor income of employees is taxable under FICA.

NY Attorney General Refuses to Back Off Investigation of 501(c)(4) Groups

Following up on last week's post, Camp, Hatch Call on NY AG to Back Off Investigation Into 501(c)(4) Groups: New York Attorney General Eric Schneiderman sent this letter to the top Republicans on the House Ways & Means Committee and Senate Finance Committee informing him that he will not back down in his investigation of 501(c)(4) groups:

I am certain that as Chairman and Ranking Member of the congressional committees that oversee the IRS, you share my interest in ensuring compliance with our tax laws and promoting accountability. I therefore write to correct your apparent misimpressions concerning the right of state officials to obtain and utilize information that may appear on tax returns in carrying out our law enforcement functions.

Under our federalist system, each state has a fundamental interest in ensuring compliance with its tax laws and in regulating certain activities of nonprofits. ... While you correctly identify procedures for obtaining tax returns and tax return information from the IRS, those procedures do not prohibit state authorities from requesting such documents or information directly from taxpayers. ...

I hope you share my understanding of federalist principles, which contemplate a crucial role
for state law enforcement. The recent activities of some tax-exempt organizations and businesses have been matters of great concern to New Yorkers. While my office respects applicable federal requirements and restrictions, I will continue to perform my duties and enforce the laws of the State of New York.

• The Hill, New York AG Defends Efforts on Tax-Exempt Groups
• Huffington Post, Eric Schneiderman Defends Authority to Investigate Dark Money Groups, Private Equity Firms
• New York Times, New York Attorney General Rebuffs Congressional Republicans
• Politico, New York Attorney General Eric Schneiderman Defends Probe of Tax-Exempt Groups

House and Senate Hold Joint Hearing Today on Tax Reform and Capital Gains

The House Ways & Means Committee and Senate Finance Committee hold a rare Joint Hearing today on Tax Reform and the Tax Treatment of Capital Gains:

The hearing will focus on the taxation of capital gains in the context of comprehensive tax reform. It will explore several tax reform policy issues relating to the treatment of capital gains, including background on capital gains taxation and its history, the impact of the capital gains tax rate on investor behavior, the treatment of capital gains as compared to ordinary income, the revenue-maximizing rate on capital gains, the distribution of capital gains income across taxpayer income levels, and the types of assets eligible for capital gains treatment.

• David H. Brockway (Partner, Bingham McCutchen)
• Leonard E. Burman (Professor, Syracuse University)
• Lawrence B. Lindsey (President & CEO, The Lindsey Group)
• David L. Verrill (Founder and Managing Director, Hub Angels Investment Group)
• William D. Stanfill (Founding Partner, TrailHead Ventures)

In connection with the hearing:

• Joint Committee on Taxation, Present Law and Background Information Related to the Taxation of Capital Gains (JCX-72-12)
• Center on Budget and Policy Priorities, Raising Today’s Low Capital Gains Tax Rates Could Promote Economic Efficiency and Fairness, While Helping Reduce Deficits
• Citizens for Tax Justice, Ending the Capital Gains Tax Preference Would Improve Fairness, Raise Revenue and Simplify the Tax Code

Senate Holds Hearing Today on Offshore Profit Shifting and the U.S. Tax Code

The Permanent Subcommittee on Investigations of the Senate Committee on Homeland Security and Governmental Affairs holds a hearing today on Offshore Profit Shifting and the U.S. Tax Code:

The Subcommittee will examine the shifting of profits offshore by U.S. multinational corporations and how such activities are affected by the Internal Revenue Code and related regulations.

Panel #1:

• Reuven Avi-Yonah (University of Michigan School of Law)
• Jack T. Ciesielski (President, R.G. Associates)
• Stehen E. Shay (Harvard Law School)

Panel #2:

• Bill Sample (Corporate Vice President for Worldwide Tax, Microsoft)

Panel #3:

• Bett Carr (Partner, International Tax Services, Ernst & Young)
• Lester Ezrati (Senior Vice President and Tax Director. Hewlett-Packard)
• John N. Mullen (Senior Vice President and Treasurer, Hewlett-Packard)

Panel #4:

• Susan M. Cosper (Technical Director, Financial Accounting Standards Board)
• Michael Danilack (Deputy Commissioner (International), Large Business and International Division, IRS)
• William J. Wilkins (Chief Counsel, IRS)

• Bloomberg, Microsoft Avoided Billions in U.S. Tax, Senate Memo Says
• Politico, Carl Levin Targets Microsoft, HP Tax Strategies
• Reuters, Microsoft, HP Skirted Taxes Via Offshore Units: Senate Panel

Camp, Hatch Call on NY AG to Back Off Investigation Into 501(c)(4) Groups

• Press Release
• The Hill, Tax Writers Fire Off Warning to NY AG
• New York Times, Congressional Republicans Raise Questions About New York Investigations
• Politico, Dave Camp, Orrin Hatch Tell New York Attorney General Eric Schneiderman to Back Off 
• Wall Street Journal, GOP Lawmakers Push Back on Tax Probes

CRS: Corporate Tax Rate Could Drop to 29.4% in Revenue-Neutral Tax Reform

Congressional Research Service, The Corporate Income Tax System: Overview and Options for Reform (R42726) (Sept. 13, 2012):

Many economists and policymakers believe that the U.S. corporate tax system is in need of reform. There is, however, disagreement over why the corporate tax system needs to be reformed, and what specific policy measures should be included in a reform. To assist policymakers in designing and evaluating corporate tax proposals, this report (1) briefly reviews the current U.S. corporate tax system; (2) discusses economic factors that may be considered in the corporate tax reform debate; and (3) presents corporate tax reform policy options, including a brief discussion of current corporate tax reform proposals.

The current U.S. corporate income tax system generally taxes corporate income at a rate of 35%. This tax is applied to income earned domestically and abroad, although taxes on certain income earned abroad can be deferred indefinitely if that income remains overseas. The U.S. corporate tax system also contains a number of deductions, exemptions, deferrals, and tax credits, often referred to as “tax expenditures.” Collectively, these provisions reduce the effective tax rate paid by many U.S. corporations below the 35% statutory rate. In 2011, the sum of all corporate tax expenditures was $158.8 billion.

The significance of the corporate tax as a federal revenue source has declined over time. At its post-WWII peak in 1952, the corporate tax generated 32.1% of all federal tax revenue. In 2010, the corporate tax accounted for 8.9% of federal tax revenue. The decline in corporate revenues is a combination of decreasing effective tax rates, an increasing fraction of business activity that is being carried out by pass-through entities (particularly partnerships and S corporations, which are not subject to the corporate tax), and a decline in corporate sector profitability.

A particular aspect of the corporate tax system that receives substantial attention is the 35% statutory corporate tax rate. Although the U.S. has the world’s highest statutory corporate tax rate, the U.S. effective corporate tax rate is similar to the Organization for Economic Co-operation and Development (OECD) average. Further, the U.S. collects less in corporate tax revenue relative to Gross Domestic Production (GDP) (1.9% in 2009) than the average of other OECD countries (2.8% in 2009).

This report discusses a number of economic considerations that may be made while evaluating various corporate tax reform proposals. These might include analyses of the likely effect on households of certain reforms (also known as incidence analysis). Policymakers might also want to consider how certain corporate tax provisions contribute to the allocation of economic resources, choosing policies that promote an efficient use of resources. Other goals of corporate tax reform may include designing a system that is simple to comply with and administer, while also promoting competitiveness of U.S. corporations.

Commonly discussed corporate tax reforms include policies that would broaden the tax base (i.e., eliminate tax expenditures) to finance reduced corporate tax rates. Concerns that the U.S. corporate tax system inefficiently imposes a “double tax” on corporate income has led some to consider an integration of the corporate and individual tax systems. The treatment of pass-through income—business income not earned by C corporations—has also received considerable attention in tax reform debates. How the U.S. taxes income earned abroad, and the possibility of moving to a territorial tax system, have emerged as important issues. Both the Obama Administration and the House Committee on Ways and Means Chairman David Camp have released tax reform proposals that would change the current tax treatment of U.S. multinationals.

CRS: An Economic Analysis of the Top Tax Rates Since 1945

Congressional Research Service, Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945 (R42729) (Sept. 14, 2012):

Income tax rates have been at the center of recent policy debates over taxes. Some policymakers have argued that raising tax rates, especially on higher income taxpayers, to increase tax revenues is part of the solution for long-term debt reduction. For example, the Senate recently passed the Middle Class Tax Cut (S. 3412), which would allow the 2001 and 2003 Bush tax cuts to expire for taxpayers with income over $250,000 ($200,000 for single taxpayers). The Senate recently considered legislation, the Paying a Fair Share Act of 2012 (S. 2230), that would implement the “Buffett rule” by raising the tax rate on millionaires.

Other recent budget and deficit reduction proposals would reduce tax rates. The President’s 2010 Fiscal Commission recommended reducing the budget deficit and tax rates by broadening the tax base—the additional revenues from broadening the tax base would be used for deficit reduction and tax rate reductions. The plan advocated by House Budget Committee Chairman Paul Ryan that is embodied in the House Budget Resolution (H.Con.Res. 112), the Path to Prosperity, also proposes to reduce income tax rates by broadening the tax base. Both plans would broaden the tax base by reducing or eliminating tax expenditures.

Advocates of lower tax rates argue that reduced rates would increase economic growth, increase saving and investment, and boost productivity (increase the economic pie). Proponents of higher tax rates argue that higher tax revenues are necessary for debt reduction, that tax rates on the rich are too low (i.e., they violate the Buffett rule), and that higher tax rates on the rich would moderate increasing income inequality (change how the economic pie is distributed). This report attempts to clarify whether or not there is an association between the tax rates of the highest income taxpayers and economic growth. Data is analyzed to illustrate the association between the tax rates of the highest income taxpayers and measures of economic growth. For an overview of the broader issues of these relationships see CRS Report R42111, Tax Rates and Economic Growth, by Jane G. Gravelle and Donald J. Marples.

Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the 1970s; today it is 15%. The real GDP growth rate averaged 4.2% and real per capita GDP increased annually by 2.4% in the 1950s. In the 2000s, the average real GDP growth rate was 1.7% and real per capita GDP increased annually by less than 1%. There is not conclusive evidence, however, to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth. Analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. The share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie, but there may be a relationship to how the economic pie is sliced.

Update #1:

• Heritage Foundation, Congressional Research Service Wrongly Implies Lower Tax Rates Don’t Strengthen Economy
• Tax Foundation, CRS: Nothing Affects Economic Growth

Update #2:  Dems, GOP Trade Barbs After CRS Pulls Report on Tax Rates and Economic Growth (Nov. 2, 2012)

House Holds Hearing Today on Small Businesses’ Perspectives on the Tax Cliff

The Subcommittee on Economic Growth, Tax and Capital Access of the House Small Business Committee holds a hearing today on Adding to Uncertainty: Small Businesses’ Perspectives on the Tax Cliff:

As many small businesses are organized as “pass-through” entities, where business owners pay their taxes at individual rates, the hearing will examine how the potential expiration of the 2001 and 2003 tax relief is influencing small businesses’ decision making. The hearing will also examine small businesses’ perspectives on the Obama Administration’s tax proposal to allow the top two marginal tax rates to increase for taxpayers with income in excess of $200,000 a year ($250,000 if filing jointly).

• Theresa Kern (Steel Erectors, Inc., Palos Heights, IL)
• Doug Harmon (CEO, Twin City Die Castings Co., Minneapolis, MN)
• Scott Hodge (President, Tax Foundation, Washington, D.C.)
• Jeffrey A. Porter (Vice Chair, American Institute of Certified Public Accountants)

House Holds Hearing Today on The IRS's Implementation of ObamaCare

The House Ways & Means Committee held a hearing this morning on The IRS's Implementation and Administration of Democrats' Health Care Law:

[T]he Democrats’ health care law contains 47 tax or tax-related provisions, some of which are already in effect and others that will become effective over the next 18 months.  These provisions include, the individual mandate and employer mandate taxes, restrictions on the use of Flexible Spending Arrangements and Health Savings Accounts, a new 3.8% tax on investment income, newly-mandated information reporting on health insurance coverage, new taxes on medical devices, a new Medicare payroll tax, the health insurance premium subsidy, and new requirements for tax-exempt hospitals and group health insurance plans.

The IRS is charged with implementing and administering these new provisions on top of its existing duties under the Internal Revenue Code, which include collecting $2.4 trillion in taxes, processing 145 million individual tax returns, issuing $345 billion in tax refunds, and administering numerous non-revenue provisions such as the Earned Income Tax Credit and various green energy subsidies.

Along with its review of the IRS’s new duties, the Subcommittee will consider: (1) how the IRS’s new duties under the health care law will affect both taxpayers and the IRS’s core revenue-collection function; (2) the IRS’s progress in implementing various provisions of the health care law, both those that are already in effect and those that are not yet in place; and (3) how the agency will coordinate with other federal departments, state governments, and stakeholders to implement the new tax provisions.

Panel #1:  Steven T. Miller (Deputy Commissioner for Services and Enforcement, IRS)

Panel #2:

• Fred Goldberg, Jr. (Skadden)
• Scott A. Hodge (Tax Foundation)
• Seth T. Perreta (Crowell & Moring)
• Kathy Pickering (H&R Block)

Press and blogosphere coverage:

• Bloomberg, Health Law Means IRS Quagmire, Former Commissioner Says
• The Hill, GOP: 80 Million Hours Will be Lost to HealthCare Tax Filing Requirements
• Washington Times, IRS: We'll be Ready for Health Care Law

Froomkin: Will the IRS Revoke Tax-Exempt Status of Karl Rove's Crossroads GPS After the Election?

Following up on Friday's post, CRS: Political Ads and the Tax Code:  Huffington Post:  Karl Rove's Donor Plan Could Run Afoul of IRS, Congressional Report Suggests, by Dan Froomkin:

A new report from Congress' nonpartisan research arm suggests that the IRS won't have much patience with the argument from groups like Karl Rove's Crossroads GPS that the ads it buys shouldn't be counted as political campaign activity.

The claim that ads attacking candidates aren't political -- as long as they avoid words like "vote" or "elect" -- is key to the empire of shadowy non-disclosing political groups that Rove, the Koch Brothers and other major political players have created. By insisting that most of their budget goes toward "issue advocacy," rather than influencing elections, these groups exploit a loophole that allows certain non-political groups to keep their donors secret.

The Aug. 30 report from the Congressional Research Service ... reviews IRS rulings on what qualifies as issue advocacy, and strongly indicates that the Rove-style ads wouldn't be a tough call for the agency -- which could revoke an organization's tax-exempt status.

CRS: 501(c)(4)s and the Gift Tax

Congressional Research Service, 501(c)(4)s and the Gift Tax: Legal Analysis (R42655) (Aug. 10, 2012)

Recent media reports of donors contributing substantial amounts to tax-exempt 501(c)(4) organizations have led some to ask whether these donations are subject to the federal gift tax. The short answer is that the gift tax statutes do not contain an exemption for these donations, thus indicating they are subject to tax. While some have argued that Congress did not intend this result, there is arguably insufficient evidence of such intent. As such, it appears the stronger argument is that contributions to 501(c)(4) groups are statutorily subject to the gift tax.

However, this analysis is complicated by two issues. First, it appears the IRS, while finding that these contributions are subject to tax, has not been enforcing this position for many years. This seemed to change in 2011, when the agency confirmed it had sent letters to five 501(c)(4) donors informing them that their contributions may be subject to the gift tax. In light of the agency’s long silence on the issue, some asked whether the IRS inquiry was a politically motivated response to the growing involvement of 501(c)(4) organizations in campaign activities. The IRS denied having improper motivations, and the agency subsequently announced it was closing all examinations regarding the application of the gift tax and that any action would only be done prospectively. Thus, it appears that, for now at least, the gift tax will not be enforced on donations to 501(c)(4) groups.

Second, some have argued that while contributions to 501(c)(4) groups may be generally subject to the gift tax, those contributions made for advocacy-related purposes (e.g., issue advocacy, campaign activity, or lobbying) are exempt. Part of this argument is statutorily based, with the assertion that these types of donations may not be taxable gifts under at least three theories: (1) the donor may receive full and adequate consideration in the form of the organization’s advocacy on his or her behalf; (2) some are made within the ordinary course of business; and (3) advocacy related contributions were not the type of transfer that Congress intended the gift tax to cover. There is case law, albeit minimal, to support some of these conclusions; however, the holdings in these cases are not without controversy, and it is not clear the extent to which other courts would agree with their analysis.

Additionally, some have asserted that imposing the gift tax on advocacy-related donations would violate the donor’s First Amendment rights to freedom of speech and association. The theory is that these types of contributions are a form of speech and since an individual could not be taxed for speaking directly on an issue or candidate, that person cannot be taxed for donating to an organization that will combine contributions from like-minded people to conduct such advocacy. On the other hand, it is not clear that a court would adopt this argument since the gift tax is a generally applicable, content neutral tax and therefore arguably does not impermissibly interfere with the donor’s First Amendment rights.

(Hat Tip: Rick Hasen.)

CBO: Trends in The Distribution of Household Income, 1979–2009

The Congressional Budget Office today released Trends in The Distribution of Household Income, 1979–2009:

Households in the top 1% experienced very rapid growth in after-tax income over the 1979–2009 period

• Peak to peak (1979-2007), their after-tax income grew by over 300%
• Recent recession disproportionately affected highest income households in 2008 and 2009, causing their income to fall by over one-third

Rest of the top quintile has also fared better than the lower four quintiles

After-tax income for the middle three quintiles grew by almost 40% over the 31 years, a little over 1% per year

Lowest income quintile tracked the middle three

Republican Senators Urge IRS to Resist Political Pressure From Democrats on 501(c)(4) Groups

Press Release:

After the IRS signaled its intent to consider proposed changes to the tax treatment of non-profit 501(c)(4) organizations, 10 Senators today asked IRS Commissioner Shulman to clarify the agency’s intentions for the 52-year-old regulation.  In a letter led by U.S. Senator Orrin Hatch (R-Utah), Ranking Member of the Senate Finance Committee, the lawmakers questioned the IRS’s response to a public rulemaking petition from outside groups pressuring the agency to take action on 501(c)(4)s and said it was essential that politics not play any role in its decision-making process.

“We believe these petitions have less to do with concerns about the sanctity of the tax code and more about setting the tone for the upcoming presidential election, and we urge you to resist allowing the IRS rulemaking process to be subverted to achieve partisan political gains,” wrote the Senators.

On July 17th in a letter to petitioners, the IRS said it “was aware of the public interest” in 501(c)(4)s and that it “will consider proposed changes,” raising questions on whether the agency has already started a an internal process to amend its regulations.

The Senators continued, “Your acknowledgement of the political character of the public interest in 501(c)(4) organizations would caution against sudden changes to well-established law.  Yet, your letter seems to suggest that outside political pressure is actually what is triggering your agency’s considering of changes to the law.”

Joining Hatch on the letter are Senators Chuck Grassley (R-Iowa), Jon Kyl (R-Ariz.), Pat Roberts (R-Kan.), Mike Enzi (R-Wyo.), John Cornyn (Texas), John Thune (R-S.D.), Mitch McConnell (R-Ky.), Lamar Alexander (R-Tenn.), and Kay Bailey Hutchison (R-Texas).

• Chicago Tribune, IRS in Political Crossfire Over Tax-Exempt Pressure Groups
• The Hill, Senators Warn IRS to Ignore Political Pressure to Rewrite Super-PAC Rules

Senate Holds Hearing Today on Online State Sales Taxes

The Senate Committee on Commerce, Science & Transportation holds a hearing this afternoon on Marketplace Fairness: Leveling the Playing Field for Small Business:

The U.S. Senate Committee on Commerce, Science, and Transportation will hold a hearing to examine the rule that allows many online retailers to be exempt from state sales tax laws.  Based on the Supreme Court’s decision in Quill Corp. v. North Dakota, states are prohibited from collecting sales taxes from online retailers who do not have a physical presence in their state.  As a consequence, local retailers who compete with online companies are at the mercy of a 6-10% price disadvantage, and state and local governments are deprived of billions of dollars in revenue.  Bipartisan legislation co-sponsored by Chairman John D. (Jay) Rockefeller is pending in the Senate that would eliminate this price disadvantage on local retailers and would provide states with the ability to enforce their existing state and local sales and use tax laws in a manner that does not unduly burden e-commerce.

• Steven Bercu (CEO and Co-owner, BookPeople, Austin, TX)
• Steve DelBianco (Executive Director, NetChoice Coalition)
• Paul Misener (Vice President for Global Public Policy, Amazon.com)
• Scott Peterson (Executive Director, Streamlined Sales Tax Governing Board)

Press and blogosphere coverage:

• Bloomberg, Amazon Splits With Peers in Pushing Online Sales Taxes
• L.A. Times, Online Sales Taxes: Not Taxation Without Representation
• Retail Industry Leaders Association, Fact Check: Retailers Debunk DeMint WSJ Op Ed
• USA Today, Senate Looks at State Sales Taxes for Online Purchases
• Wall Street Journal op-ed:  No Internet Taxation Without Representation, by Jim DeMint (R-SC)

Senate Holds Hearing Today on Tax Reform -- Taxation of Business Entities

The Senate Finance Committee holds a hearing today on Tax Reform: Examining the Taxation of Business Entities:

• Fred C. De Hosson (Partner, Baker & McKenzie, Amsterdam, The Netherlands)
• Harrison T. LeFrak (Vice Chairman, The LeFrak Organization, New York)
• Dana L. Trier (Adjunct Professor, University of Miami School of Law and Columbia Law School)
• Alvin C. Warren (Ropes & Gray Professor of Law, Harvard Law School)

In connection with the hearing, the Joint Committee on Taxation has released Selected Issues Relating to Choice of Business Entity (JCX-66-12):

This document ... sets forth data, present Federal tax law, and history, and provides analysis of selected issues relating to taxpayers’ choices of business entities. The first part of this document provides data on passthrough entities and C corporations. The second describes present law relating to C corporations, passthrough entities, and certain other entities, as well as the current rate structure for individuals and C corporations and the rules relating to social insurance taxes. The second part also provides a chart comparing the features of S corporations and partnerships. The third part of this document provides historical background with respect to business entity classification issues generally, and with respect to certain legislative changes to the taxation of different entities since 1986. The fourth part of this document analyzes selected issues relating to choice of business entity.

Sen. Grassley Releases Hold on Treasury Nominees After Receiving Agency Responses on Whistleblower Office

Following up on my previous posts (links below):  Senate Finance Committee Ranking Member Chuck Grassley press release:

Sen. Chuck Grassley of Iowa has released his objection to proceeding to the nominations of two Treasury nominees after receiving responses to his inquiries urging action to correct slow progress on whistleblower claim processing and the issuance of awards at the IRS whistleblower office.

• Sen. Grassley Floor Statement (July 30, 2012)
• Treasury Department Letter to Sen. Grassley (July 25, 2012)
• IRS Letter to Sen. Grassley (July 25, 2012)
• Sen. Grassley Letter to IRS and Treasury Department (July 20, 2012)

Prior TaxProf Blog posts:

• Sen. Grassley Demands Accounting From IRS Whistleblower Office (May 3, 2012)
• Sen. Grassley Wrongly Targets IRS Whistleblower Office (May 8, 2012)
• The IRS Whistleblower Office: Where Allegations of Tax Cheating Go to Die (June 19, 2012)
• Sen. Grassley Places Hold on Treasury Nominations Pending Response on IRS Whistleblower Office (July 12, 2012)

Joint Economic Committee: Cost and Consequences of the Federal Estate Tax

Joint Economic Committee Republican Staff Study, Cost and Consequences of the Federal Estate Tax: An Update (July 25, 2012):

This study confirms that the cost of the estate tax far exceeds any benefits it produces. This study updates and extends two previous Joint Economic Committee studies on the estate tax, building on these previous studies to reflect updated data and legislation.

 

Senate Holds Hearing Today on Education Tax Incentives and Tax Reform

The Senate Finance Committee holds a hearing today on Education Tax Incentives and Tax Reform:

• Waded Cruzado (President, Montana State University)
• Susan Dynarski (Associate Professor, University of Michigan)
• Scott Hodge (President, Tax Foundation)
• Lynne Munson (President, Common Core)
• James White (Director, Tax Issues, U.S. Government Accountability Office)

In connection with the hearing, the Joint Committee on Taxation has released Background and Present Law Relating to Tax Benefits for Education (JCX-62-12).

House Holds Hearing Today on Public Charity Tax Issues

The Subcommittee on Oversight of the House Ways & Means Committee holds a hearing today on Public Charity Organizational Issues, Unrelated Business Income Tax, and the Revised Form 990:

The hearing will focus on organizational and compliance issues related to public charities, including the increased complexity of public charity organizational structures, the rules governing profit-generating activities giving rise to unrelated business income tax, and whether the newly redesigned Form 990 is promoting increased compliance and transparency.

• Eve Borenstein (Borenstein and McVeigh Law Office)
• John Colombo (University of Illinois College of Law)
• Thomas K. Hyatt (SNR Denton)
• Steven T. Miller (Deputy Commissioner for Services and Enforcement, IRS)
• Donald Tobin (Ohio State University College of Law)

House Holds Hearing Today on Internet Sales Tax Collection Legislation

The House Judiciary Committee holds a hearing today on H.R. 3179, the Marketplace Equity Act of 2011:

The bill would authorize states to "require all sellers making remote sales to collect and remit sales and use taxes with respect to such sales into the state, without regard to the location of the seller, if such states implement a simplified system for administration of sales and use tax collection for remote sellers," according a to a summary by the Library of Congress.  The collection system would be required to include: "(1) an exception for remote sellers with gross annual receipts in the preceding calendar year from remote sales not exceeding $1 million in the United States or not exceeding $100,000 in the state, (2) a single sales and use tax return for use by remote sellers and a single revenue authority within the state with which remote sellers are required to file a tax return, and (3) a uniform tax base throughout the state."

The bill would define "remote sale" as a sale of goods or services attributed to a state with respect to which a seller does not have adequate physical presence to establish a nexus so as to allow such state to require such seller to collect and remit taxes.

• Steve DelBianco (NetChoice)
• Wayne Harper (Utah House Member, on behalf of Streamlined Sales Tax Governing Board)
• Bill Haslam (Tennessee Governor, on behalf of National Governors Association)
• Joseph Henchman (Tax Foundation)
• Hanns Kuttner (Hudson Institute)

Press and blogosphere coverage:

• Bloomberg:  Wal-Mart Pushes Web Sales Tax as Washington Clout Grows
• The Hill:  Coalition Looks to Battle Online Sales Tax
• Wall Street Journal:  Online Sales Tax is Coming!
• Wall Sstreet Journal:  Tax Break Nears End For Online Shoppers; Republican Governors, in Need of Revenue, Drop Opposition

House Holds Hearing Today on Tax Reform and the Manufacturing Sector

The House Ways & Means Committee holds a hearing today on Tax Reform and the U.S. Manufacturing Sector:

This hearing will examine how the current tax system affects U.S. manufacturers, including U.S.-based public and closely held companies as well as foreign-owned U.S. manufacturers, and how comprehensive tax reform might affect their ability to expand and create jobs.

• Kim Beck (Association for Manufacturing Technology)
• Heather Boushey (Senior Economist, Center for American Progress)
• Diane Dossin (Chief Tax Officer, Ford Motor Company)
• Susan L. Ford (Vice President of Tax, Corning Inc.)
• Henry W. Gjersdal, Jr. (Vice President of Tax and Real Estate, 3M)
• Ralph E. Hardt (President, Jagemann Stamping Company)
• Hugh Spinks (Vice President of Tax, Air Liquide USA Inc.)

In connection with the hearing, the Joint Committee on Taxation has released Background and Present Law Relating to Manufacturing Activities Within the United States (JCX-61-12):

This document ... describes and analyzes present Federal income tax rules applicable to businesses with respect to capital cost recovery, expensing provisions, tax credits related to capital investment, the treatment of research and development costs (including the research tax credit), and the treatment of income from domestic qualified production activities. Data from 2009 show that the manufacturing sector accounts for the largest share of depreciation deductions at $195.7 billion (27.5% of all such claims in 2009). Included in the $195.7 billion amount is $3.6 billion in section 179 deductions (7.0% of all such claims) and $40.7 billion in bonus depreciation deductions (20.0% of all such claims). Taxpayers claimed $14.2 billion of deductions for domestic production activities in 2009, almost two-thirds of which ($8.9 billion) was claimed by taxpayers in the manufacturing sector. Taxpayers in the manufacturing sector also claimed $5.6 billion in research credits (68.6% of all such claims in 2009).

Senate Holds Hearing on Tax Reform and the American Dream

The Senate Finance Committee held a hearing yesterday on Boosting Opportunities and Growth Through Tax Reform: Helping More Young People Achieve The American Dream:

• Miles Corak (University of Ottawa, Graduate School of Public and International Affairs)
• Erin Currier (Pew Charitable Trusts)
• Lars J. Lefgren (Brigham Young University, Department of Economics)
• Katherine S. Newman (Johns Hopkins University)
• Eugene Steuerle (The Urban Institute)

CBO: The Distribution of Household Income and Federal Taxes, 2008 and 2009

The Congressional Budget Office today released The Distribution of Household Income and Federal Taxes, 2008 and 2009 (July 2012):

For most income groups, the 2009 average federal tax rate was the lowest observed in the 1979–2009 period. ... For the lowest income group, the average rate fell from 7.5% in 1979 to 1.0% in 2009. ... Households in the middle three income quintiles saw their average tax rate fall by 7.1 percentage points over 30 years, from 19.1% in 1979 to 12.0% in 2009. ... The average tax rate for households in the 81st to 99th percentiles of the income distribution also reached a low point in 2009, about 4 percentage points below its 1979 level. ... In contrast, in 2009 the average tax rate for households in the top 1% of the before-tax income distribution was above its low point, reached in the early 1980s. ... The tax rate ... rose somewhat from 2007 to 2009, as sharp declines in capital gains income caused a larger portion of the income of that group to be subject to the ordinary income tax rates. The decline in after-tax income between 2007 and 2009 was much larger at the top of the income distribution than further down the distribution.

Washington Times, CBO: The Rich Pay an Outsized Share of Taxes:

Wealthy Americans earn about 50% of all income but pay nearly 70% of the federal tax burden, according to the latest analysis Tuesday by the Congressional Budget Office — though the agency said the very richest have seen their share of taxes fall the past few years.

CBO looked at 2007 through 2009 — the latest years data are available, but enough to include the early effects of the last recession — and found the bottom 20% of American earners paid just three-tenths of a percent of the total federal tax burden, while the richest 20% paid 67.9% of taxes.

The top 1%, whom President Obama has made a target during the presidential campaign, earned 13.4% of all pre-tax income but paid 22.3% of taxes in 2009, CBO said. When tax burden is figured in, the top 1% took in only 11.5% of income.

But the richest 1% share of the total tax burden did drop 4.4 percentage points from 2007 to 2009 — a figure likely to bolster Mr. Obama’s calls for them to pay more by letting the Bush-era tax cuts expire.

The big losers over the past few years were the rest of the well-off — those in the 60th percent to 99th percent of earnings — who saw their tax burdens go up.

“Specifically, between 2007 and 2009, the share of taxes paid fell for the bottom three income quintiles, was close to flat for the fourth quintile, but rose for the highest quintile,” CBO said. “Within the top quintile, however, the shift was uneven; the share paid by the top percentile fell, and the share paid by the rest of the top quintile rose.”

In terms of actual earnings, the top 1% suffered the most in the recession, with their average earnings dropping from $1.9 million to $1.2 million. The lowest 20% saw their incomes drop from $23,900 to $23,500 during that time.

Bloomberg, Recession Reduced Top 1% Income While Raising Tax Rate

House Holds Hearing Today on The Tax Ramifications of the Supreme Court’s Ruling on the Affordable Care Act

The House Ways & Means Committee holds a hearing today on The Tax Ramifications of the Supreme Court’s Ruling on the Affordable Care Act:

The hearing will focus on the implications of the Supreme Court’s ruling that the individual mandate is constitutional on the grounds that it is a tax and that Congress has the broad power to levy taxes far beyond the historic scope of raising revenue.

• Steven G. Bradbury (Partner, Dechert, Washington, D.C.)
• Lee A. Casey (Partner, Baker Hostetler, Washington, D.C.)
• Walter Dellinger (Partner, O’Melveny & Myers, Washington, D.C.)
• Carrie Severino (Chief Counsel, Judicial Crisis Network, Washington, D.C.)

Press and blogosphere coverage:

• Bloomberg, Camp Says Health-Care Ruling Opens New World for Taxes
• CBS News, The Tax Man Cometh to Police You on Health Care
• CNN, Maine Governor Calls IRS the New Gestapo
• U.S. News & World Report:  Can IRS Police Both Taxes and Health Care Law?
• Washington Post, Your Family, Your Doctor and the IRS

ETAAC Releases 2012 Annual Report to Congress

The Electronic Tax Administration Advisory Committee (ETAAC) has released its 2012 Annual Report to Congress:

Highlights of the report include recommendations on the following key outcomes:

• Reinforcing standards for security, privacy, and fraud prevention
• Moving forward on e-file of employment tax and information tax returns,
• Creating Internet tools for taxpayers and tax professionals,
• Leveraging tax delivery service channels and
• Funding Modernized e-File and Customer Account Data Engine to completion

House and Senate Hold Joint Hearing on Tax Reform and Capital Gains

The House Ways & Means Committee and Senate Finance Committee hold a Joint Hearing today on Tax Reform and the Tax Treatment of Capital Gains:

The hearing will focus on the taxation of capital gains in the context of comprehensive tax reform.  It will explore several tax reform policy issues relating to the treatment of capital gains, including background on capital gains taxation and its history, the impact of the capital gains tax rate on investor behavior, the treatment of capital gains as compared to ordinary income, the revenue-maximizing rate on capital gains, the distribution of capital gains income across taxpayer income levels, and the types of assets eligible for capital gains treatment.

• David H. Brockway (Partner, Bingham McCutchen)
• Leonard E. Burman (Professor, Syracuse University)
• Lawrence B. Lindsey (President & CEO, The Lindsey Group)
• David L. Verrill (Founder and Managing Director, Hub Angels Investment Group)
• William D. Stanfill (Founding Partner, TrailHead Ventures)

Update: The hearing has been postponed.

National Taxpayer Advocate Releases Report to Congress

National Taxpayer Advocate Nina Olson today released (IR-2012-66) her semi-annual report to Congress, Fiscal Year 2013 Objectives:

The report expresses particular concern about the taxpayer impact of expired and expiring tax provisions, the rise in tax fraud and tax-related identity theft, and attempts to limit the National Taxpayer Advocate’s formal input on issues that affect taxpayer rights and taxpayer burden via “Taxpayer Assistance Orders” and “Taxpayer Advocate Directives.”

Impact of Changes in Tax Law on Taxpayers and the IRS.  “The continual enactment of significant tax law and extender provisions late in the year has led to IRS delays in handling millions of taxpayers’ returns and caused many taxpayers to underclaim benefits because they did not know what the law was,” Olson wrote. “Because of the magnitude of these challenges and the uncertainty about such a large number of important provisions, the 2013 filing season is already at risk. The 2013 filing season is likely to pose problems for many (if not most) taxpayers and the IRS if Congress does not address the many provisions that have already expired or soon will.”

• Accounting Today, National Taxpayer Advocate Sees 2013 Filing Season ‘At Risk’
• Bloomberg, Fiscal Cliff Puts 2013 Tax Filing At Risk, Advocate Says
• The Hill, IRS Watchdog: ‘Fiscal Cliff’ Imperils 2013 Filing Season
• Reuters, A Mid-Year Look at the Coming Tax Mess

Joint Tax Committee: Description of Tax Portions of President Obama's 2013 Budget

The Joint Committee on Taxation yesterday released Description of Revenue Provisions Contained in the President’s Fiscal Year 2013 Budget Proposal (JCS-2-12) (824 pages):

This document ... provides a description and analysis of the revenue provisions modifying the Internal Revenue Code of 1986 that are included in the President’s fiscal year 2013 budget proposal, as submitted to the Congress on February 13, 2012.  The document generally follows the order of the proposals as included in the Department of the Treasury’s explanation of the President’s budget proposals.  For each provision, there is a description of present law and the proposal (including effective date), an analysis of policy issues related to the proposal, and a reference to relevant prior budget proposals or recent legislative action.

CBO & JCT: New Evidence on the Tax Elasticity of Capital Gains

The Congressional Budget Office and the Joint Committee on Taxation yesterday released New Evidence on the Tax Elasticity of Capital Gains:

This study uses a large panel of tax returns from 1999 to 2008 to investigate how taxes affect the decision to realize gains. The study distinguishes the persistent effect of tax changes from the transitory effect. Similar to earlier studies in the literature, we use the generalized Tobit model to address the sample selection problem and the endogeneity problem in the tax variables, but we improve the identification of the tax elasticity by using the presence of carryover loss as an exclusion restriction. We also control for the financial sophistication of taxpayers because that could be an important source of omitted variable bias. The preferred persistent elasticity estimate is -0.79, and the transitory estimate is -1.2. Those estimates are statistically significant and are robust to a number of sensitivity tests. Although we focus our examination on personal capital gains, we also compare the results of our model to results from the original model applied to contemporary data, estimate our model on subperiods, and estimate our model on other types of capital gains. We find that passthrough capital gains are highly sensitive to persistent tax changes, but gains from mutual fund distributions are extremely insensitive.

House Holds Hearing Today on Framework for Evaluating Expiring Tax Provisions

The Subcommittee on Select Revenue Measures of the House Ways & Means Committee holds a hearing today on Framework for Evaluating Certain Expiring Tax Provisions:

The hearing will explore ideas on the framework that Congress should use to evaluate tax extenders, the principles of good tax policy that Congress should apply during this evaluation, and the specific metrics against which Congress should test the merits of particular provisions. While the hearing is not intended to focus on specific tax extenders, individual provisions may be discussed for the purpose of illustrating how to use such principles and metrics.

• Joint Committee on Taxation, List Of Expiring Federal Tax Provisions 2011-2022 (JCX-1-12)
• Alex Brill (Research Fellow, American Enterprise Institute)
• Aaron Gornstein (Undersecretary for Housing & Community Development, Massachusetts Department of Housing and Community Development)
• Donald B. Marron (Director, Tax Policy Center, The Urban Institute)

House Holds Hearing on Small Business and the Estate Tax

The Subcommittee on Economic Growth, Tax and Capital Access of the House Committee on Small Business held a hearing yesterday on Planning for the Death Tax: Can Small Businesses Survive?:

The recession has been hard on small businesses, and many family-owned small firms may face yet another hurdle: business succession and the impact of the death tax, also known as the estate tax. If Congress fails to act, the current federal estate tax law will expire on December 31, 2012, and revert to the pre-2001 levels. At this hearing, Members will hear testimony on the impact of the estate tax on small businesses and the economy.

Neil D. Katz (Managing Partner, Katz, Bernstein & Katz, Syosset, NY)

• Testimony 
• Witness Disclosure

Karen Madonia (Chief Financial Officer, Illco, Inc., Aurora, IL) (testifying on behalf of the Heating, Air-Conditioning Refrigeration Distributors International)

• Testimony
• Witness Disclosure

Michael G. Flesher (Owner, Taylor Rental Center, Vestal, NY) (testifying on behalf of the American Rental Association)

• Testimony
• Witness Disclosure

Thala Taperman Rolnick (Owner, Thala T. Rolnick, CPA, Phoenix, AZ)

• Testimony 
• Witness Disclosure

House Holds Hearing Today on Tax Exempt Organizations

The Subcommittee on Oversight of the House Ways & Means Committee holds a hearing today on Tax Exempt Organizations:

The hearing will focus on certain current issues related to tax-exempt organizations, including the current IRS compliance initiative related to Universities, recently enacted reporting requirements for tax-exempt hospitals, recent efforts by tax-exempt organizations to design and implement good governance standards, and taxpayer involvement in redesigning the Form 990. In addition, the hearing will discuss the history of recent legislative changes to the tax code dealing with tax-exempt organizations and what prompted those changes.

• Diana Aviv (President & CEO, Independent Sector)
• Roger Colinvaux (Professor, Columbus School of Law, Catholic University)
• Joanne M. DeStefano (Vice President & CFO Cornell University, testifying on behalf of the National Association of College and University Business Officers)
• Bruce R. Hopkins (Senior Partner, Polsinelli Shughart)
• Michael Regier (Senior Vice President of Legal and Corporate Affairs, VHA Inc.)

Senate Holds Hearing Today on What Tax Reform Means for Tribes and Territories

The Senate Finane Committee holds a hearing today on Tax Reform: What It Could Mean for Tribes and Territories:

• Sarah Hall Ingram (Commissioner, Tax Exempt and Govenment Entities, IRS)
• Robert Odawi Porter (President, Seneca Nation of Indians, Salamanca, NY)
• Lindsay G. Robertson (Professor, University of Oklahoma College of Law)
• Steven Maguire (Specialist in Public Finance, Congressional Research Service)

In connetion with the hearing, the Joint Committee on Taxation has released two reports:

• Overview of Federal Tax Provisions and Analysis of Selected Issues Relating to Native American Tribes and Their Members (JCX-40-12)
• Federal Tax Law and Issues Related to the United States Territories (JCX-41-12)

Sen. Hatch Demands Investigation of IRS's Leak of Mitt Romney's Contribution to Pro-Marriage Group

Following up on my prior post, Senator Orrin Hatch (R-UT), Ranking Member of the Senate Finance Committee, has sent this letter to the IRS, demanding an investigation into whether the IRS leaked an official tax form listing a $10,000 contribution by Mitt Romney's PAC to the National Organization for Marriage during NOM's campaign to repeal California's gay marriage law. From Sen. Hatch's press release:

While federal law prohibits the unauthorized release of certain tax return information, unredacted privileged donor information from the non-profit NOM, filed with the IRS, was published earlier this year by the Human Rights Campaign and the Huffington Post. Recent evidence raises serious questions about the source of the improperly disclosed information. In the letter to Shulman, Hatch demanded a comprehensive IRS review of this matter, and referred it to the Attorney General for review as well.

• Fox News, Hatch Calls on IRS to Probe Whether Staffer Leaked Anti-Gay Marriage Group's Files

House Holds Hearing Today on Identity Theft and Tax Fraud

The Subcommittee on Oversight of the House Ways & Means Committee holds a hearing today on Identity Theft and Tax Fraud:

Improper payments of tax refunds have cost taxpayers over $100 billion in recent years. This hearing will explore a major source of the problem – identity thieves who steal Social Security numbers to engage in tax fraud. We need to make sure that we have a complete accounting of the size of the problem, understand why it is getting worse, and explore what can be done to combat tax fraud so we can catch and put more identity thieves in jail.

• J. Russell George (Treasury Inspector General for Tax Administration)
• Patrick P. O’Carroll, Jr. (Inspector General, Social Security Administration)
• Steven T. Miller (Deputy Commissioner for Services and Enforcement, IRS)
• Nina E. Olson (National Taxpayer Advocate, IRS)
• David F. Black (General Counsel, Social Security Administration)

CRS: Is § 162(e) Unconstitutional After Citizens United?

Congressional Research Service, Deductibility of Corporate Campaign Expenditures (R42381), by Erika K. Lunder:

As the 2012 election cycle heats up, one question often asked is whether businesses may deduct amounts spent on political activities. A related question is whether they may deduct dues paid to a § 501(c)(6) trade association that then engages in such activities. These questions have greater significance in light of the Supreme Court’s 2010 decision in Citizens United v. FEC, which struck down long-standing prohibitions in federal campaign finance law on corporations making certain types of campaign-related expenditures.

Section 162(e) generally prohibits corporations from deducting the types of expenditures that they can now make post Citizens United. The statute, which long predates the 2010 decision, prohibits taxpayers from deducting campaign-related and lobbying expenditures as a trade or business expense. With respect to dues, the IRC generally permits a § 501(c)(6) trade association to decide whether to notify its members of the portion of dues that are allocated to political activities and, therefore, not deductible. If the group provides the notification, then its members may not deduct that portion of the dues. If the group chooses not to provide the notification, or otherwise fails to do so, then it must generally pay a tax (known as a “proxy tax”) on that amount. The notification and proxy tax requirements do not apply to any amount on which the § 501(c)(6) organization is taxed under § 527(f). That section imposes a tax on § 501(c) organizations that make an expenditure for influencing elections, among other activities.

Some have suggested that Citizens United calls into question the constitutionality of § 162(e). The arguments appear to be that the tax code cannot disallow a deduction for activities that the Supreme Court has held are protected speech or provide beneficial tax treatment to only some types of speech (e.g., non-political business speech, the expenditures for which may be deductible). It is not clear this is true. Prior to Citizens United, the Supreme Court ruled that a regulatory provision similar to § 162(e) was constitutional, explaining there is no requirement that the government subsidize a taxpayer’s First Amendment rights by permitting a deduction for political expenditures. It is not at all clear that Citizens United changes this analysis. Therefore, until a court speaks to the issue, it seems premature to conclude that § 162(e) is unconstitutional based on Citizens United.

GSA Demanded 19% Kickbacks on Energy Efficiency Tax Deductions Claimed by Government Contractors

Charles Boustany, Jr. (R-LA), Chair of the Subcommittee on Oversight of the House Ways & Means Committee, sent a letter to 17 federal departments and agencies demanding information about possible kickbacks on any claimed § 179D Energy Efficient Commercial Buildings Deductions:

Documentation recently obtained by the Ways and Means Committee suggests that the General Services Administration (GSA) may be using the deduction to secure kickbacks from contractors by requiring the contractor to write checks payable to GSA for 19% of the value of the deduction.

Discussing the letter, Boustany commented, “The action by the GSA raises a number of serious questions about whether this particular tax deduction is being abused.  Requiring a cash payment in exchange for a tax deduction is a kickback, pure and simple.  We must ensure that this tax deduction is being used for its intended purpose and not being sold to line some government slush fund.  Given the wide range of abuse of taxpayer dollars being used for everything from fortune tellers to clowns to spaying pets, it is clear that strong and vigorous oversight is necessary to ensure that taxpayer dollars are being protected.”

• Associated Press, GSA Offered Contractors Tax Breaks -- At a Price
• Wall Street Journal, GSA: Tax Troubles, Too?

Sen. Grassley Demands Accounting From IRS Whistleblower Office

Senate Finance Committee Ranking Member Charles Grassley issued this press release today:

Sen. Chuck Grassley of Iowa has asked the IRS and the Treasury Department to answer a detailed series of questions aimed at understanding why the IRS whistleblower office has been so slow in processing cases and making rewards.  Grassley expressed his “extreme disappointment in the management of the program” in a letter to the agency.

“The IRS does not have a problem attracting whistleblowers,” Grassley said.  “The IRS has a problem processing whistleblower information and compensating whistleblowers in a timely manner.  I’m hearing frustration from whistleblowers, and my worst fears are coming true.  The lack of progress is demoralizing whistleblowers, and they might stop coming forward.  That would be a bad outcome for the taxpayers.”

Grassley’s latest inquiry was prompted in part by revelations that the director of the IRS whistleblower program was a panelist at the Offshore Alert Conference at the Ritz-Carlton in Miami Beach.  “It seems the whistleblower office director’s time might be better spent reviewing hundreds of existing cases instead of attending a conference that isn’t directed at potential whistleblowers,” Grassley said.

Grassley wrote to IRS Commissioner Douglas Shulman and Treasury Secretary Timothy Geithner to seek a status update on several benchmarks that would indicate progress in the whistleblower program. The letter is the latest step in Grassley’s oversight of the whistleblower office.

• Sen. Grassley Letter to IRS Commissioner Shulman, Treasury Secretary Geithner (Apr. 30, 2012)
• IRS Commissioner Shulman Letter to Sen. Grassley (Nov. 22, 2011)
• Sen. Grassley Letter to IRS Commissioner Shulman (Sept. 13, 2011)
• Sen. Grassley Letter to treasury Secretary Geithner (June 21, 2010)

CNBC, IRS Presence at OffshoreAlert Conference Criticized:

We're standing by the pool at the Ritz Carlton in Florida's South Beach, attendees at a financial conference here mingle by the bar and wander through meeting rooms upstairs.

This isn’t just any industry conference — it’s the tenth annual OffshoreAlert gathering, bringing together financial advisors, Cayman Islands and other offshore bankers, and government officials.

“This is the 'Star Wars' bar of off-shore finance,” says one attendee by the pool bar, quoting a description of the event that’s appeared in the press. “Everybody’s here.”

But it was the presence of 19 IRS officials at the conference earlier this week that attracted the attention — and criticism — of Republican Sen. Chuck Grassley of Iowa, ranking member of the Senate Judiciary Committee and a former chairman of the Finance Committee.

While the IRS said the officials were learning the ins and outs of the latest offshore tax avoidance strategies and delivering a message of compliance with U.S. laws, Grassley thought that far too many U.S. government officials to be hanging around this particular Cantina. “There is certainly no reason for 19 IRS employees to attend the conference,” Grassley wrote in a letter to IRS Commissioner Douglas Shulman and Treasury Secretary Tim Geithner Monday. “In a challenging fiscal time, this is not the best use of IRS resources.” ...

The IRS said it did try to minimize costs, saying seven of those attending were based locally and none of the other 12 IRS stayed at the Ritz Carlton — one even bunked with his parents. The others roomed at a nearby Courtyard Marriott.The conference itself was free for speakers — there were five IRS officials scheduled to address the group — but the tax agency says it paid more than $1,300 each in attendance fees for 13 officials, incurring expenses of under $18,000, according to the IRS.

Update: Forbes, Sen. Grassley to IRS: Whistleblower Office Is a Disgrace

House Holds Hearing Today on Expiring Tax Provisions

The Subcommittee on Select Revenue Measures of the House Ways & Means Committee holds a hearing today on Expiring Tax Provisions:

The hearing provides Members of Congress the opportunity to speak on behalf of specific tax proposals they have introduced or cosponsored in the 112th Congress related to the extension, modification, or termination of one or more tax extenders. The hearing will evaluate how these proposals would measure against key metrics such as cost, effectiveness, and job creation.

In connection with the hearing:

• The Congressional Research Service has released An Overview of Tax Provisions Expiring in 2012.
• The Joint Committee on Taxation has released  Legislative Background of Selected Federal Tax Provisions Scheduled to Expire in 2011 or 2012 (JCX-39-12)

Senate Holds Hearing Today on Improving the Tax Filing Experience

The Senate Finance Committee holds a hearing today on Tax Filing Season: Improving the Taxpayer Experience:

• James White (Government Accountability Office)
• Troy Lewis (Lewis & Associates, CPAs, Draper, UT)
• Beth Tucker (Deputy Commissioner, IRS)
• Teresa Thompson (Taxpayer Advocate for Montana)

Senate Holds Hearing Today on What Tax Reform Means for State and Local Tax and Fiscal Policy

The Senate Finance Committee holds a hearing today on Tax Reform: What It Means for State and Local Tax and Fiscal Policy:

• Walter Hellerstein (University of Georgia School of Law)
• Joseph Henchman (Tax Foundation)
• Kim Rueben (Urban-Brookings Tax Policy Center)
• Frank Sammartino (Congressional Budget Office)
• Sanford Zinman (Zinman Accounting, White Plains, NY)

In connection with the hearing, the Joint Committee on Taxation has released Present Law and Background Information Related to State and Local Government Finance (JCX-36-12):

This document ... summarizes tax-exempt and tax-credit bond provisions, the provisions allowing a deduction for certain State and local taxes, and provides select background data relating to State and local bonds and revenues.

Joint Tax Committee Releases IRS Disclosures of Tax Return Information, 2011

The Joint Committee on Taxation has released Disclosure Report for Public Inspection Pursuant to Internal Revenue Code Section 6103(p)(3)(C) for Calendar Year 2011 (JCX-38-12):

Section 6103(p)(3)(C) provides that the Secretary of the Treasury shall, within 90 days after the close of each calendar year, furnish to the Joint Committee on Taxation for disclosure to the public a report which provides, with respect to each Federal agency and certain other entities, the number of: (1) requests for disclosure of returns and return information (as such terms are defined in § 6103(b)); (2) instances in which returns and return information were disclosed pursuant to such requests or otherwise; and (3) taxpayers whose returns, or return information with respect to whom, were disclosed pursuant to such requests. In addition, the report must describe the general purposes for which such requests were made.

Pursuant to § 6103(p)(3)(C), the IRS prepared a disclosure report for public inspection covering calendar year 2011. This document sets forth the report of the IRS.

The report reveals that the IRS made 9 billion (up from 7.1 billion in 2010) disclosures of tax return information to federal and state agencies. Here are the Top 5 recipients of taxpayer information:

1. States: 6.9 billion disclosures (up from 4.2 billion in 2010)
2. Bureau of Census: 1.3 billion disclosures
3. Congressional Committees: 700 million disclosures
4. Medicare Premium Subsidy Adjustment: 41.0 million disclosures
5. Child Support Enforcement Agencies: 11.3 million disclosures

House Holds Hearing Today on Problems at the IRS: Closing the Tax Gap and Preventing Identity Theft

The House Committee on Oversight and Government Reform held a hearing this morning on Problems at the Internal Revenue Service: Closing the Tax Gap and Preventing Identity Theft:

• J. Russell George (Treasury Inspector General for Tax Administration)
• Steven Miller (Deputy Commissioner of Service and Enforcement, IRS)
• Nina Olson (National Taxpayer Advocate, IRS)
• James White (Director, Strategic Issues, U.S. Government Accountability Office)

House Holds Hearing Today on Tax Reform and Tax-Favored Retirement Accounts

The House Ways & Means Committee hold a hearing today on Tax Reform and Tax-Favored Retirement Accounts:

The hearing will consider the current menu of options for retirement savings – both with respect to employer-based defined contribution plans and with respect to IRAs. The hearing will explore whether, as part of comprehensive tax reform, various reform options could achieve the three goals of simplification, efficiency, and increasing retirement and financial security for American families.

• David John (Heritage Foundation)
• Randy H. Hardock (Davis & Harman, on behalf of the American Benefits Council)
• Judy A. Miller (American Society of Pension Professionals and Actuaries)
• William Sweetnam (Groom Law Group)
• Jack VanDerhei (Employee Benefit Research Institute)

On connection with the hearing, the Joint Committee on Taxation has released Present Law and Background Relating to the Tax Treatment of Retirement Savings (JCX-32-12) (84 pages):

This document ... provides a summary of the present law tax rules applicable to retirement savings arrangements, discussions of selected proposals and economic issues relating to retirement savings, and data on qualified retirement plans and IRAs.

Senate Confirms Kathryn Keneally as Assistant Attorney General, Tax Division

The Senate yesterday confirmed Kathryn Keneally (Fulbright & Jaworski, New York) as Assistant Attorney General for the Tax Division (Senate Judiciary Committee file here):

Kathryn Keneally is a partner of the law firm Fulbright & Jaworski LLP in New York.  For over twenty-five years, Ms. Keneally has represented clients in tax controversies and defended against allegations of tax fraud and other financial crimes.  She is currently the Vice Chair for Committee Operations for the ABA Section of Taxation, a Co-Chair of the ABA National Institutes on Criminal Tax Fraud and Tax Controversy, and a fellow of the American College of Tax Counsel.  Ms. Keneally previously served as Chair of the Tax Section's Standards of Tax Practice Committee and as Chair of the Civil and Criminal Tax Penalties Committee.  Ms. Keneally co-authors a column on IRS Practice in the Journal of Tax Practice and Procedure.  She has also served on the Practitioners’ Advisory Group to the U.S. Sentencing Commission.  Ms. Keneally began her legal career in 1982 as the law clerk for the Honorable Edward R. Neaher, U.S. District Judge for the Eastern District of New York.  She received a B.S. in 1979 from Cornell University, a J.D., magna cum laude, in 1982 from Fordham Law School and an LL.M in Taxation in 1993 from New York University School of Law.

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House Holds Hearing Today on IRS Operations and the 2012 Tax Return Filing Season

The Subcommittee on Oversight of the House Ways & Means Committee holds a hearing today on Internal Revenue Service Operations and the 2012 Tax Return Filing Season:

In fiscal year 2011, the IRS collected $2.4 trillion in taxes, processed 144.7 million individual tax returns, and issued $345 billion in refunds.  With the 2012 tax return filing season underway, the Subcommittee will review IRS performance with a focus on taxpayer service, taxpayer rights, and refund administration. 

In conjunction with the review of the current tax return filing season, the Subcommittee will review IRS operations in general.  Specifically, the Subcommittee will consider: (1) the recently reported delays in tax refunds; (2) fairness in examinations and tax administration; and (3) efforts to prevent fraud, waste, and abuse.  As part of its consideration of IRS operations, the Subcommittee will also review the Administration’s fiscal year 2013 budget proposal for the IRS of $16.1 billion, an increase of $1.3 billion over the fiscal year 2012 enacted level.

Witness:  IRS Commissioner Douglas Shulman

House Holds Hearing Today on Tax Reform and Closely-Held Businesses

The House Ways & Means Committee holds a hearing today on The Treatment of Closely-Held Businesses in the Context of Tax Reform:

The hearing will examine how the tax code affects closely-held businesses in particular, and how tax reform might improve their ability to grow and create jobs. To this end, the hearing will consider how and under which sets of rules closely-held entities should be taxed, as well as general burdens imposed on closely-held businesses such as high compliance costs and tax rates.

• Jeffrey L. Kwall (Professor, Loyola University School of Law)
• Dewey W. Martin (CPA)
• Tom Nichols (Meissner Tierney Fisher & Nichols)
• Mark Smetana (Chief Financial Officer, Eby-Brown Company)
• Martin A. Sullivan (Contributing Editor, Tax Analysts)
• Stefan F. Tucker (Partner, Venable)

In connection with the hearing, the Joint Committee on Taxation has released Selected Issues Relating to Choice of Business Entity (JCX-20-12):

This document ... sets forth data, present Federal tax law, and history, and provides analysis of selected issues relating to taxpayers’ choices of business entities. The first part of this document provides data on passthrough entities and C corporations. The second part of the this document describes present law relating to C corporations along with the types of passthrough entities provided for tax purposes, as well as the current rate structure for individuals and C corporations and the rules relating to social insurance taxes. The second part also provides a chart comparing the features of S corporations3 and partnerships. The third part of this document provides historical background with respect to business entity classification issues. The fourth part of this document analyzes selected issues relating to choice of business entity.