TaxProf Blog

The UBS Case and Health Care Reform

Reuters:  Obama’s Self-Defeating War on the Wealthy, by James Pethokoukis:

The push by the Justice Department, along with the IRS, to compel UBS to fork over the names of some 52,000 American taxpayers with banking accounts in Switzerland may produce an important benefit for the Obama administration — or so it might think. How so? Those presumably wealthy 52,000 taxpayers, along with some two million other upper-income Americans, can be drafted to help pay for U.S. healthcare reform.

Under the $1.2 trillion plan passed by the Democratic-controlled House of Representatives, the wealthiest 1.2% of U.S. households would have to pay an additional $540 billion in taxes over the next 10 years via an income surtax of between 1 and 5.4%. For the super-elite, those in the top 10th of 1% (and presumably the type of taxpayers who have Swiss bank accounts), that works out to an additional $280,000 a year in taxes on an average annual income of $2.3 million a year, according to the Tax Policy Center. ...

The wealthy have the means to manipulate tax laws to their advantage through various — sometimes outlandish — tax sheltering strategies. As Howard Gleckman of the Tax Policy Center puts it, "The bad old days of bull semen partnerships may not return, but I suspect the financial Merlins are already cooking up new shelters for what promises to be a booming new market."

More on the House's Proposed Surtax on the "Wealthy"

• Citizens for Tax Justice, State-by-State Figures on Proposals to Pay for Health Care Reform
• Citizens for Tax Justice, Ways & Means Committee Proposal to Apply a Graduated Surcharge to Incomes Over $350,000
• Don't Mess With Taxes, State + Federal Health Tax = 50%-Plus Rate
• Greg Mankiw's Blog, Top Tax Rate May Soon Exceed 50 Percent
• Heritage Foundation, Income Tax Surtax Should Not Fund Government Health Care Expansion
• Tax Foundation, House's Health Care Plan Pushes Top Tax Rates Over 50% in 39 States
• Tax Vox, Paying for Health Reform By Taxing the Rich—An Update
• Tax.com, To Fund Healthcare "Other" Proposals are More Likely Than Rate Hikes

House Democrats Propose 5.4% Income Tax Surtax on Millionaires to Fund Health Care Reform

House Democrats today unveiled their 1018-page health care reform bill, (H.R. 3200) which increases their previously announced income surtax to (page 197 of the bill):

• 1.0% on married couples earning $350,000 - $5,000
• 1.5% on married couples earning $500,000 - $1,000,000
• 5.4% on married couples earnings > $1,000,000

The 1.0% and 1.5% surtaxes would increase to 2.0% and 3.0% in 2013, unless the OMB certifies $150 billion in health care savings. Other revenue raisers are:

• Tax on individuals without acceptable health care coverage
• Delay in application of worldwide allocation of interest
• Limitation on treaty benefits for certain deductible payments
• Codification of economic substance doctrine
• Penalties for underpayments

Press coverage:

• Associated Press
• Bloomberg
• Wall Street Journal

The Joint Committee on Taxation has released its Description (JCX-30-09) and Estimated Revenue Effects (JCX-31-09) of the House Bill.

For a state-by-state breakdown of the impact of the surcharge, see Citizens for Tax Justice.

Why Not a 0% Tax Rate for the Bottom 60%?

Op-ed in today's Wall Street Journal:  The 0% Tax Rate Solution:  It's Better Policy, and Politics, Than the Proliferation of Tax Credits, by Peter Ferrara (Institute for Policy Innovation):

The federal income tax code is now so mangled that we can probably increase federal revenues with a 0% income tax rate for a majority of Americans. Long before President Barack Obama took office, the bottom 40% of income earners paid no federal income taxes.

Because of refundable income tax credits like the Earned Income Tax Credit (EITC), in 2006 these bottom 40% as a group actually received net payments equal to 3.6% of total income tax revenues, according to the latest Congressional Budget Office data. The actual middle class, the middle 20% of income earners, pay only 4.4% of total federal income tax revenues. That means the bottom 60% together pay less than 1% of income tax revenues. ...

But what if Republicans proposed a federal tax reform with a 0% income tax rate for the bottom 60% of income earners? With that explicit 0% tax rate framing the issue, abolishing the refundable tax credits that actually ship money to lower income earners through the tax code would become politically viable. Trading an explicit 0% tax rate for the bottom 60% in return for eliminating the refundable tax credits would likely be at least revenue neutral, and probably result in a net increase in revenue.

WSJ: Obama Should Rethink UBS Tax Shelter Case

Editorial in today's Wall Street Journal:  Picking on the Swiss: The Obama Administration Blows Up a Tax Treaty:

President Obama has been traveling the world to "reset" diplomatic relations with the likes of Russia and Iran. But his Administration continues to do what it can to blow up America's long and amicable relationship with Switzerland.

In a federal court in Florida, the IRS and Justice Department are seeking to compel the Swiss bank UBS to hand over the names of 52,000 U.S. taxpayers with private-banking accounts in Switzerland. ...  This sort of fishing expedition expressly violates the U.S.-Swiss treaty on sharing tax information. ... [W]hat the IRS is attempting here is a mass search of U.S. taxpayers merely for banking in Switzerland.

This is not to say that everyone caught up in the IRS's dragnet is pure. But the American system of justice contains probable cause and reasonable search requirements precisely to prevent law enforcement from rounding up everyone who might conceivably be guilty of some crime. ...  [T]he government's request for so broad a swath of information could well run afoul of the Fourth Amendment's protections against unreasonable search. The Obama Administration should use the court reprieve to rethink the whole case.

Also in today's Wall Street Journal:

• Behind UBS Case, a Dogged IRS
• UBS Tax Case Unsettles Account Holders

WSJ: Democrats Choose Income Redistribution Over Economic Growth

Editorial in today's Wall Street Journal: The Small Business Surtax:  The Obama Democrats Pick Income Redistribution Over Job Creation and Economic Growth:

Jason Furman owes an apology to Michael Boskin, the Stanford economist who wrote a year ago on these pages that Barack Obama would raise American income tax rates nearly to 60%. Mr. Furman, then in the Obama campaign and now at the White House, claimed this was wrong and that Democrats would merely raise taxes back to their Clinton-era level.

House Democrats are now proving that Mr. Boskin had it right, and before it's over even he may have underestimated how high taxes will go. In the middle of a recession and with rising unemployment, Democrats have been letting it leak that they want to raise U.S. tax rates higher than they've been in nearly 30 years in order to finance government health care.

LAWSUIT! Wins Game of the Year Award

For the third year in a row, LAWSUIT!™ has won the Game of the Year award in family education from Creative Child magazine. From the press release:

It puts a fun spin on the law while teaching players legal jargon, tactics, and what it takes to run a practice. The board game is both fun and educational. It can accommodate between 2 to 6 players at a time, and is suitable for ages 8 and up.

Strategic decisions involved in playing the game include whether to settle, litigate, or appeal a court’s verdict; whether to remain in sole practice or “buy into” a law partnership; and when to end the game by reaching the final square, where “Attorney of the Year” is determined.

Settlement Near in US - UBS Tax Shelter Case?

• ABC News
• Bloomberg
• Financial Times
• New York Times
• Wall Street Journal

Update:  U.S. District Judge Alan S. Gold this morning granted the parties' joint motion to stay the trial pending settlement negotiations and rescheduled the trial for August 3 (with a telephone conference on July 29).

• Order
• Joint Motion for Stay

NY: Widow Cannot Sue Husband's Attorney for Estate Planning Malpractice

New York Law Journal:  Widow Lacks Standing to Sue Husband's Lawyers Over Mishandled Will, Judge Finds, by Mark Fass:

A widow who claims that the mishandling of her husband's will by his attorneys will cost her $9 million may not pursue a malpractice claim against them, a Manhattan judge has ruled. Supreme Court Justice Marilyn Shafer ruled that there was neither privity nor even "near privity" between the widow, Jeanne Sorenson Leff, and the attorneys, William Bush and Richard J. Cunningham of Fulbright & Jaworski.

Shafer discounted Leff's argument that her occasional interactions with the attorneys, including their preparation of her own will, created an attorney-client relationship regarding her husband's estate planning. "[T]he mere fact that plaintiff might have had a 'subjective belief as to the existence of an attorney-client relationship' is not enough to create [one]," Shafer wrote in Leff v. Fulbright, 117424/06.

The decision raises the question of who, if anyone, may sue in New York for malpractice when attorneys make mistakes in planning estates.

"That's a very good question," said Sanford J. Schlesinger, the chair of the wills and estates department at Schlesinger Gannon & Lazetera. "In New York, we're one of the few states left with the privity doctrine. When the decedent died, he was the only one who had privity and he was the only one who could sue." Not even the administrator or executor of a decedent's estate may stand in his stead for a malpractice action, according to Schlesinger, whose firm is not involved in the Leff case. Nationally, the law is evolving away from that position, he added, as states move to abandon the doctrine.

Democrats for a Flat Tax?

Op-ed in the Weekend Wall Street Journal: Democrats For a Flat Tax?, by Joe Mathews:

Karen Bass is an unlikely tax cutter. She's the Democratic speaker of the California State Assembly, a fierce defender of the labor movement, and an advocate for repealing a constitutional provision that requires that tax increases pass the state legislature with a two-thirds majority.

But as California faces a budget crisis that defies efforts to resolve it, there is a woman-bites-dog story developing with Ms. Bass at its center. By the end of the month, a commission she pushed to create is expected to recommend that the state adopt a flat (or at least flatter) personal income tax and cut or repeal corporate and sales taxes.

Normally, such proposals would be dead on arrival in Sacramento. But now many Democrats, including the speaker, are realizing that what they need is a tax base that will provide steady funding for their programs. In other words, they need a tax base that doesn't count on a large slice of revenue from taxes on a relatively small number of wealthy residents who can flee the state or who are themselves vulnerable to losing a substantial portion of income in a recession. ... [S]he [is] worried about the state's heavy reliance on about 144,000 wealthy people to pay half of all income taxes for a state with a population of 38 million.

IRS Not Pursuing 18% of Taxpayers Who Owe >$1m in Taxes

The Treasury Inspector General for Tax Administration has released a report, Collection Actions Could Be Accelerated on Some Large Dollar Balance Due Accounts (2009-30-090):

On December 22, 2007, there were 2,454 individual taxpayers in the IRS’ potentially collectible inventory who each owed more than $1 million in taxes, penalties, and interest. While the vast majority of these individuals (2,006 of 2,454) were being actively pursued for collection, we identified 448 accounts totaling approximately $1.2 billion that were in the Queue1 (357 accounts) or that had been shelved (91 accounts).

• Web CPA:  IRS Overlooks Hundreds of Big Overdue Accounts

Adultery and Tax Planning

As Kay Bell points out, there is a tax angle to the sordid tale of Sen. John Ensign (R-Nev.), who had an extra marital affair for eight months with Cynthia Hampton, a campaign staffer who is married to Douglas Hampton, Sen. Ensign's chief of staff.  Sen. Ensign's parents made $96,000 in gifts (hush money) to the Hamptons in the form of eight checks of $12,000 each -- four checks each from Sen. Ensign's father and mother to Cynthia Hampton, her husband, and their two children.   The eight checks thus took full advantage of the $12,000 gift tax annual exclusion available in 2008 (it is $13,000 this year).  Nice.

• The Hill
• New York Times
• Talking Points Memo
• Wall Street Journal
• Washington Post
• Wonkette

Former BDO Seidman Partner Pleads Guilty in Criminal Tax Shelter Case

Robert Greisman, a CPA and tax lawyer, former partner in BDO Seidman's Chicago office, pleaded guilty yesterday to three counts of conspiracy to defraud the United States in connection with tax shelter transactions marketd by his firm and the Jenkens & Gilchrist law firm.   United States v. Daugerdas,  No. S109CR581 (S.D.N.Y. July 9, 2009).

• U.S. Attorney's Press Release
• Indictment
• Plea Agreement
• ataxingmatter
• Chicago Tribune
• New York Times
• Wall Street Journal

Tax Protesters Ed and Elaine Brown Are Convicted on All Counts

I previously blogged (here, here, here, here, and here) the case of tax protesters Ed and Elaine Brown who, after being convicted of evading $1.9 million in taxes on her dental practice, holed up in their New Hampshire mountaintop home for months, vowing to die fighting rather than surrender.  The Associated Press reports that they were convicted yesterday on weapons charges and of plotting to kill federal agents.  They face a minimum sentence of thirty years in prison.

Wells Fargo Redux: Sen. Grassley Accuses IRS of Overstepping its Authority in IR-2009-44

Dow Jones:  Sen Grassley Says IRS Defied Congress on Tax Credit, by Martin Vaughan:

A senior Republican senator is questioning whether the IRS overstepped its authority in implementing a tax credit in economic stimulus legislation for home energy efficiency upgrades. The provision allowed homeowners to claim a tax credit of up to $1,500 for replacing property including windows, doors, skylights and insulation. It replaced a tax credit that was worth up to $500 for such upgrades. But the stimulus provision also included tougher energy efficiency requirements for windows, doors and skylights to qualify for the new credit.

Sen. Charles Grassley, R-Iowa, charges that the IRS contradicted Congress by allowing the tax credit to apply to property that met the older, less stringent standard, if purchased before June 1. "The question apparently becomes ... can the IRS essentially change the words of the statute to reach a result that the IRS deems more appropriate than the one clearly intended by Congress," Grassley wrote in questions to an Obama administration nominee this month.

The IRS says it did not go outside its legal authority. "Under Code section 7805(a) and (b) the secretary of the Treasury has broad authority to provide rules to interpret and administer the tax law, and that is what IRS did in this specific situation," said IRS spokeswoman Michelle Eldridge. ...

It is not the first time in recent months Treasury has faced criticism for allegedly encroaching on Congress' legislative powers. The Bush administration's Treasury Department came under fire from lawmakers for a decision that allowed banks to use tax losses racked up by failing banks they acquired -- a move that was seen as intended to ease the acquisition of Wachovia Corp. (WB) by Wells Fargo & Co. (WFC). Congress reversed that Treasury policy as part of the stimulus bill, although it did not take away any benefits from Wells Fargo.

On April 22, IRS announced [in IR-2009-44] that property qualifying for the older standard -- that is, property that earned an "Energy Star" label -- purchased between Feb. 17 and June 1, would qualify for the new, expanded tax credit. ... 

Michael Desmond, a former Treasury official who leads the tax practice at law firm McKee Nelson, said it is not uncommon for Treasury to improvise a transition period when faced with new tax provisions that involve technical standards. "The IRS is acting very pragmatically here. They're allowing people to utilize the credit in the interim until the experts can catch up with the standard," he said.

Swiss to Block Release of UBS Client Data to U.S. in Tax Shelter Crackdown

• Associated Press
• ataxingmatter
• Bloomberg
• Financial Times
• New York Times
• Wall Street Journal
• Web CPA

Does Judge Sotomayor Have a Tax Problem?

Following up on this morning's post, Judge Sotomayor's Law Practice: A Tax Dodge?:  the issue was first flagged by Glenn Reynolds (Tennessee), and he notes that he "was just following Ralph Winter’s advice from my Business Associations class in law school:  When you see a business arrangement that doesn’t seem to make any sense, just say 'it’s probably for tax reasons,' and you’ll be right nine times out of ten."  At my invitation, Linda Galler (Hofstra) expands on the potential tax issues surrounding Judge Sotomayor's sideline legal practice:

While I am supportive of Judge Sotomayor's nomination to the Court, and do not think that the facts in the New York Times article suggest that there is a problem large enough to preclude confirmation, I do think there is an interesting tax issue. There is also an interesting non-tax issue, which I will address first.

Most law firms have strict policies prohibiting partners and associates from engaging in legal work “on their own.” This is because conflicts of interest problems can be created. For example, the New York Times article indicates that Judge (then attorney) Sotomayor reviewed contracts for an insurance salesman. What kind of contracts were they, and who was the other party? If the other contracting party was an insurance company that was represented by the judge’s law firm, or later sought representation, the firm could have found itself in an awkward position. This suggests three possible alternatives: (1) the firm had a policy and Judge Sotomayor violated it, (2) the firm had no policy, or (3) Judge Sotomayor wasn’t really practicing law out of her home so getting the firm’s permission was never an issue for her.

Which brings us to the tax issue. The judge presumably did not bring her clients into the firm because she could not justify charging them the fees generally charged to other clients. Otherwise, she (like most lawyers) would have represented the client through the firm. If that is the case, then she was either doing the side legal work for free or for almost-free. Does the amount of work that she did and the income that she brought amount to a trade or business, justifying Schedule C (above the line) deductions? If she had represented the clients through the firm, then expenses either would have been the firm’s expenses (perhaps deductible by the firm but not by Judge Sotomayor) or, if she paid them herself, they would have been deductible below the line since she was an employee.

Her position as to this issue is slightly stronger with respect to the side work that she did when she was employed by the district attorney’s office because she could not have gotten permission to represent the clients “at work.” The question remains, however, whether her side activities amounted to a trade or business.

Moreover, what were the expenses? If they were minimal, who really cares. But suppose she was taking home office deductions. If my earlier presumption is correct, then the receipts from her side practice were likely to have been trivial or insignificant at best. Maybe she claimed to run a law practice out of her home so that she could take home office deductions when she was really (just) an employee whose employer provided her with an office, and the home office deductions would then have been improper. (Employees generally are not permitted to deduct the costs associated with home offices, no matter how much work they actually perform at home. But people who run businesses out of their homes often can.)

Judge Sotomayor's Law Practice: A Tax Dodge?

New York Times:  Little Information Given About Solo Law Practice Run by Sotomayor in ’80s, by Serge F. Kovaleski:

Judge Sotomayor has explained very little about one facet of her legal life: Sotomayor & Associates, the solo law practice she ran out of her Brooklyn apartment for several years in the 1980s.

In her questionnaire, Judge Sotomayor says she was the “owner” of Sotomayor & Associates, which she described as a consulting business she operated on the side from 1983 to 1986. During this period, she also worked, first for the Manhattan district attorney’s office and then as a member of Pavia & Harcourt, a large firm in Manhattan. ...

White House communications officials said the judge no longer had copies of the tax returns that listed the income, and any deductions, that she attributed to her outside work.  ...

White House spokesman Ben LaBolt ... said that Ms. Sotomayor came up with the name when she was filling out her tax returns. “It was necessary to list a name for the practice on her tax returns,” he said.

Tax experts say there was nothing in the law that requires a lawyer, or any other self-employed person, to create a corporate name to report income, or deductions, on the standard form, known as a Schedule C. Just one’s own name will do. But Mr. LaBolt pointed out that the 1983 copy of the form asked the filer to list his or her “business name.” “Significant time was not spent in choosing a name,” he said.

(Hat Tip:  InstaPundit:  "So maybe that on-the-side private law practice was just some sort of a tax dodge. That would make it okay, right?")

Lawyer Charged With Forging Brother's Will Pleads Guilty to Tax Charges

The Legal Intelligencer: Lawyer Charged With Forging Brother's Will Pleads Guilty to Tax Charges, by Shannon P. Duffy:

Allentown, Pa., attorney John P. Karoly Jr. pleaded guilty Monday to charges of dodging $1.9 million in federal taxes by hiding more than $5 million in income. In return, prosecutors agreed to drop all charges relating to an alleged fraud scheme in which Karoly, 59, was accused of fabricating wills after his brother and sister-in-law died in a plane crash.

But under the terms of the guilty plea, Karoly also promised that he would drop his claims in the state court battle over the couple's estates and renounce any share in those estates.

Assistant U.S. Attorney Seth Weber said Karoly has also agreed to a non-jury trial to resolve a third category of charges in which Karoly is accused of scheming to get a $500,000 tax deduction for charity by laundering money through a church.

See also Philadelphia Inquirer,

DOJ Fights 'Last Minute' Discovery Request From UBS in Tax Case

Blog of The Legal Times, DOJ Fights 'Last Minute' Discovery Motion From UBS in Tax Case, by Mike Scarcella:

Swiss bank UBS AG wants the federal government to give up information it has on U.S. taxpayers who have failed to disclose and pay taxes on foreign accounts in a motion the Justice Department this week called a "last-minute" attempt at discovery before a hearing next week in the high-profile dispute.

The IRS is seeking enforcement of a summons that compels UBS to provide the names of 52,000 accounts of U.S. clients who purportedly evaded taxes on the foreign accounts. A hearing is scheduled for July 13 in U.S. District Court for the Southern District of Florida.

House Democrats to Push for Surtax on Those Earning > $250k

Bloomberg:  U.S. House May Include Surtax on Wealthy in Health-Care Package, by Ryan J. Donmoyer:

House Ways and Means Committee members are likely to propose a surtax on high-income Americans to help pay for an overhaul of the health-care system, according to people familiar with the plan.

The tax would be similar to, yet much smaller than, a surtax proposed in 2007 by Ways and Means Committee Chairman Charles Rangel, a person familiar with the committee’s talks said. That plan would have added at least a 4% levy on incomes exceeding $200,000, and was projected to reap as much as $832 billion over 10 years.

Two people familiar with closed-door talks by committee Democrats said a House bill probably will include a surtax on incomes exceeding $250,000, as Congress seeks ways to pay for changes to a health-care system that accounts for almost 18% of the U.S. economy. By targeting wealthier Americans, a surtax may hold more appeal for House Democrats than a Senate proposal to tax some employer-provided health benefits. ...

Rangel’s 2007 plan would have added a 4% tax on incomes exceeding $200,000 and an extra 0.6% levy on those making more than $500,000. A House plan this year may include lower rates and higher income thresholds, a person familiar with the plan said.

A surtax proposal would force President Barack Obama to decide whether he is willing to add the levy on top of higher income-tax rates for top earners that he wants to take effect in 2011. Obama has promised that he won’t increase taxes on Americans earning less than $250,000 and said he will delay increases for high-income earners until 2011. Obama hasn’t commented on the possibility of a surtax, and the White House had no comment on specific proposals. The president has proposed limiting itemized deductions for high- income taxpayers.

McKee Nelson to be Acquired by Bingham McCutchen

The elite specialty law firm of McKee Nelson has agreed to be acquired by Bingham McCutchen:

McKee Nelson, which is known as one of the pre-eminent firms for tax planning and tax litigation, was viewed by Bingham as an attractive addition. "It's really rare to find a firm that is this size that has three market-leading practices," says Bingham chairman Jay Zimmerman, referring to McKee's expertise in tax, financial institution litigation, and capital markets-structured finance. Structured finance might be moribund now, but Zimmerman sees it as an area worth investing in. "It will be part of our longterm strategy for serving the financial institution industry." ...

McKee Nelson co-founders William McKee and William Nelson will co-head the tax group at Bingham McCutchen .

• Press Release
• ABA Journal
• Above the Law
• American Lawyer
• Wall Street Journal's Law Blog

Do State Tax Breaks Actually Boost Jobs?

Business Week: Will Tax Breaks Boost Jobs?, by Jessica Silver-Greenberg:

With the economy slumping and unemployment approaching 10%, states are kicking corporate tax incentives into overdrive. In the past year they've doled out a record $50 billion to spur job growth. Cash-strapped locales are depending indirectly on federal aid to fund the tax-break bonanza.

But economists are beginning to wonder whether such initiatives create or save jobs at all. Companies taking advantage of lucrative tax incentives are jumping from state to state—and bringing their jobs with them. Sure, some states will see job gains, but they may be only temporary. As a result, the states' efforts likely won't improve the national jobs picture. The tax-break boom "undermines the economic union, and it misallocates resources," says Arthur J. Rolnick, senior vice-president and research director for the Federal Reserve Bank of Minneapolis. "It amounts to economic warfare among states." ...

[S]tates often use tax breaks to poach jobs from each other. In March, Pepsi Bottling Group (PBG) began threatening to move its headquarters from Somers, N.Y., if local lawmakers didn't pass favorable tax and other policies. Now both New Jersey and Connecticut are using a slew of tax incentives to lure Pepsi Bottling to their states.

Such warring is creating a conundrum for the Obama Administration. The states are an integral part of the U.S. recovery and job-creation plan. Some economists say the only remedy is a congressionally mandated cease-fire; they're suggesting the U.S. withhold federal funds unless the states stop using tax incentives to grab jobs from other states. Says Rolnick of the Minneapolis Fed: "It's time for Congress to act."

DOJ Asks Court to Order UBS to Release Names of 52,000 U.S. Offshore Account Holders in Tax Evasion Case

• DOJ Memo
• Associated Press
• Bloomberg
• Reuters
• Wall Street Journal

Altman: We Need to Raise Taxes, Soon

Op-ed in today's Wall Street Journal:  We'll Need to Raise Taxes Soon; Expect Congress to Seriously Consider a Value-Added Tax, by Roger Altman:

Today, the U.S. ranks next to last among the 28 OECD nations in total federal revenue as a share of GDP. Our federal revenues represent 18% of national output, down from 20% just 10 years ago. That makes the mismatch between our spending and our revenue very large, producing the huge deficits we face.

We all know the recent and bitter history of tax struggles in Washington, let alone Mr. Obama's pledge to exempt those earning less than $250,000 from higher income taxes. This suggests that, possibly next year, Congress will seriously consider a value-added tax (VAT). A bipartisan deficit reduction commission, structured like the one on Social Security headed by Alan Greenspan in 1982, may be necessary to create sufficient support for a VAT or other new taxes.

This challenge may be the toughest one Mr. Obama faces in his first term. Fortunately, the new president is enormously gifted. That's important, because it is no longer a matter of whether tax revenues must increase, but how.

The Washington Metro Subway Crash: "Tax Law Should Raise Revenue, Not Kill People"

Tuesday's post on Sarah Lawsky's observations on How Tax Law Caused the Washington Metro Train Wreck has attracted a lot of attention.  Senate Finance Committee Ranking Member Charles Grassley today issued this press release:

Senator Chuck Grassley is urging House Majority Leader Steny Hoyer to include language in any proposal to give the Washington Metropolitan Area Transit Authority necessary additional funds for maintenance and upgrade of subway equipment to make sure the money would be used for safety improvements and not to pay off transit agencies’ obligations to corporations, including foreign corporations, who use the agreements as tax shelters.

Grassley also has written to the American Public Transportation Association to ask how many other public transit systems may be constrained from making equipment upgrades by tax-advantaged leases. ...

In 2006, the Washington Metropolitan Transit Authority rejected recommendations made by the National Transportation Safety Board to retire or do a heavy overhaul on the 1000 Series, Rohr railcars because “WMATA is constrained by tax advantage leases, which require that WMATA keep the 1000 Series cars in service at least until the end of 2014.”

Sarah has more:

• The Metro Crash and Tax:  A WMATA Leaseback Agreement
• The Metro Crash and Tax:  Known Unknowns
• The Metro Crash and Tax:  Leaseback Infrequently Asked Questions

See also:

• Bloomberg:  Metro to Use Funds for Upgrades, Not Bank Lease Deals
• Dow Jones: DC Metro Delayed Upgrades Due To Tax Shelter Deal
• New York Times:  Crash Puts Focus on Aging Rail Fleets
• New York Times:  A Tax Shelter and the D.C. Train Crash
• Wall Street Journal:  Metro Crash Blamed on Tax-Shelter Deal
• WSJ Law Blog:  Did Tax Law Cause the D.C. Train Wreck?

Chris Bergin, President and Publisher of Tax Analysts, yesterday posted A Train Wreck of a Tax Code:

By now, just about everybody knows of the horrible and deadly crash of two subway trains in Washington, D.C., on what is known as the Metro system. Prof. Paul Caron, on his TaxProf Blog, noted that Sarah Lawsky, has written about The Washington Metro Crash and Tax, speculating that sale-leaseback arrangements may have locked the Washington Metropolitan Transit Authority “into using outdated and unsafe equipment and thus made this crash even more deadly than it might otherwise have been.”

I live in the Washington metro area. I travel on the transit system regularly; my family travels on the Metro. I work for Tax Analysts, which sponsors this site; we lost a family member in this accident.

Tax pinheads –- and you can call me one if you like –- like to sit around and talk about what is the stupidest tax law we have. Now maybe we should start talking about which one is the deadliest.

A tax system is supposed to collect revenue. That’s it. No social engineering or favoring one group over another. But if it starts to contribute to killing people, I think we can all agree that it is time to change our tax system.

First UBS Client Pleads Guilty to Offshore Tax Evasion

The Department of Justice and IRS announced that the first UBS client pleaded guilty today to tax evasion.  Steven Michael Rubinstein, a Boca Raton accountant, pleaded guilty to filing a false 2004 tax return by failing to disclose the existence of a Swiss bank account maintained by UBS of which he was the beneficial owner and failed to report any income earned on that account.  United States v. Rubinstein, S.D. Fla., No. 09-6116).

• DOJ Press Release
• Indictment
• UBS Deferred Prosecution Agreement
• Bloomberg
• New York Times

Obama Proposes Using IRS Data to Simplify Process for Applying for College Financial Aid

The Obama Adminsistration yesterday proposed simplification of the Free Application for Federal Student Aid (FAFSA) form, including allowing student applicants and their parents to directly retrieve relevant tax information from the IRS to help them complete the online FAFSA. "When you're online filling out the FAFSA, there'll be a button that says, 'Want to go get your IRS data?'" said IRS Commissioner Doug Shulman.

• Associated Press
• Bloomberg
• Chronicle of Higher Education
• Inside Higher Ed
• New York Times
• Wall Street Journal
• Washington Post

How Tax Law Caused the Washington Metro Train Wreck

  Sarah Lawsky (George Washington), The Washington Metro Crash and Tax:

[T]he National Transportation Safety Board repeatedly recommended that Metro (more formally known as the Washington Metropolitan Area Transit Authority, or WMATA) retrofit or replace these older cars, but Metro refused. Why? Because “WMATA is constrained by tax advantage leases, which require that WMATA keep the 1000 Series cars in service at least until the end of 2014.”

What are these “tax advantage leases”? They appear to be standard sale-leaseback transactions, in which WMATA sold equipment, including train cars, to another party and now leases it back. The other party gets various tax advantages (depreciation, credits, and so forth) associated with owning the equipment, and WMATA, which as a tax-exempt organization cannot use these advantages, gets cash. But apparently the leases did not include language that permits WMATA to break the leases if newer, safer equipment comes along.

Thus sale-leasebacks, which are purely tax-motivated transactions, may have locked Metro into using outdated and unsafe equipment and thus made this crash even more deadly than it might otherwise have been.

Deducting the Cost of a Kindle

Legal Blog Watch:  Five Uses for a Kindle in a Law Practice:

OK, so I realize that most of you are probably coveting a Kindle, Amazon.com's digital book device. But you haven't yet figured out how to justify its cost as a business expense when you're planning on using it to read novels on the beach, right?

Thankfully, Justin Rebello of the Wisconsin Law Journal gives you five ways that you can use the Kindle for your law office.

Wisconsin Law Journal:  Five Ways Lawyers Can Utilize the Kindle:

1. Read depositions
2. Take private records home with you
3. Find new ways to release your own book
4. Keep up on blogs
5. Save on printing costs

New Details Emerge of Scientology-IRS Settlement

One of the enduring tax mysteries is the 26-year battle between the Church of Scientology and the IRS (documented here), culminating in a 1993 settlement (during Fred Goldberg's stint as Commissioner) in which the IRS agreed to grant tax exempt status to the church (Rev. Rul. 93-73, 1993-2 C.B. 75) , which in turn agreed to drop its multi-front litigation "war" against the IRS.  Yesterday's St. Petersburg Times began a three-part special report on the church, with Part 1 including details of the Scientology-IRS settlement (today's Part 2 is here):

Scientology vs. the IRS

By the late 1980s, the battle with the IRS had quieted from the wild days of break-ins and indictments. But Miscavige was no less intent on getting back the church's tax exemption, which he thought would legitimize Scientology.

The new strategy, according to Rathbun: Overwhelm the IRS. Force mistakes.

The church filed about 200 lawsuits against the IRS, seeking documents to prove IRS harassment and challenging the agency's refusal to grant tax exemptions to church entities.

Some 2,300 individual Scientologists also sued the agency, demanding tax deductions for their contributions.

"Before you knew it, these simple little cookie-cutter suits … became full-blown legal cases," Rathbun said.

Washington-based attorney William C. Walsh, who is now helping the church rebut the defectors claims, shepherded many of those cases. "We wanted to get to the bottom of what we felt was discrimination,'' he said. "And we got a lot of documents, evidence that proved it.''

"It's fair to say that when we started, there was a lot of distrust on both sides and suspicion,'' Walsh said. "We had to dispel that and prove who we were and what kind of people we were.''

Yingling teamed with Walsh, Miscavige and Rathbun on the case. She said the IRS investigation of Miscavige resulted in a file thicker than the FBI's file on Dr. Martin Luther King. "I mean it was insane,'' she said.

The church ratcheted up the pressure with a relentless campaign against the IRS.

Armed with IRS records obtained under the Freedom of Information Act, Scientology's magazine, Freedom, featured stories on alleged IRS abuses: lavish retreats on the taxpayers' dime; setting quotas on audits of individual Scientologists; targeting small businesses for audits while politically connected corporations were overlooked.

Scientologists distributed the magazine on the front steps of the IRS building in Washington.

A group called the National Coalition of IRS Whistleblowers waged its own campaign. Unbeknownst to many, it was quietly created and financed by Scientology.

It was a grinding war, with Scientology willing to spend whatever it took to best the federal agency. "I didn't even think about money,'' Rathbun said. "We did whatever we needed to do.''

They also knew the other side was hurting. A memo obtained by the church said the Scientology lawsuits had tapped the IRS's litigation budget before the year was up.

The church used other documents it got from the IRS against the agency.

In one, the Department of Justice scolded the IRS for taking indefensible positions in court cases against Scientology. The department said it feared being "sucked down" with the IRS and tarnished.

Another memo documented a conference of 20 IRS officials in the 1970s. They were trying to figure out how to respond to a judge's ruling that Scientology met the agency's definition of a religion. The IRS' solution? They talked about changing the definition.

Rathbun calls it the "Final Solution" conference, a meeting that demonstrated the IRS bias against Scientology. "We used that (memo) I don't know how many times on them," he said.

By 1991, Miscavige had grown impatient with the legal tussle. He was confident he could personally persuade the IRS to bend. That October, he and Rathbun walked into IRS headquarters in Washington and asked to meet with IRS Commissioner Fred Goldberg. They had no appointment.

Goldberg, who did not respond to interview requests for this story, did not see them that day, but he met with them a week later.

Rathbun says that contrary to rumor, no bribes were paid, no extortion used. It was round-the-clock preparation and persistence — plus thousands of lawsuits, hard-hitting magazine articles and full-page ads in USA Today criticizing the IRS.

"That was enough," Rathbun said. "You didn't need blackmail."

He and Miscavige prepped incessantly for their meeting. "I'm sitting there with three banker's boxes of documents. He (Miscavige) has this 20-page speech to deliver to these guys. And for every sentence, I've got two folders'' of backup.

Miscavige presented the argument that Scientology is a bona fide religion — then offered an olive branch.

Rathbun recalls the gist of the leader's words to the IRS:

Look, we can just turn this off. This isn't the purpose of the church. We're just trying to defend ourselves. And this is the way we defend. We aggressively defend. If we can sit down and actually deal with the merits, get to what we feel we are actually entitled to, this all could be gone.

The two sides took a break.

Rathbun remembered: "Out in the hallway, Goldberg comes up to me because he sees I'm the right-hand guy. He goes: 'Does he mean it? We can really turn it off?' ''

"And I said,'' turning his hand for effect, " 'Like a faucet.' ''

The two sides started talks. Yingling said she warned church leaders to steel themselves, counseling that they answer every question, no matter how offensive.

Agents asked some doozies: about LSD initiation rituals, whether members were shot when they got out of line and about training terrorists in Mexico. "We answered everything,'' Yingling said, crediting Miscavige for insisting the church be open, honest and cooperative.

The back and forth lasted two years and resulted in this agreement: The church paid $12.5 million. The IRS dropped its criminal investigations. All pending cases were dropped.

On Oct. 8, 1993, some 10,000 church members gathered in the Los Angeles Sports Arena to celebrate the leader's announcement: The IRS had restored the church's tax exemption, legitimizing Scientology as a church, not a for-profit operation.

"The war is over," Miscavige told the crowd. "This means everything.''

For a recent example of the continuing impact of the Scientology settlement on the administration of the tax law, see 9th Circuit: Parents Cannot Deduct Payments to Their Children's Religious Schools (12/13/08).  For additional commentary on the IRS and Scientology, see:

• Gregg Polsky, Can Treasury Overrule the Supreme Court?, 84 B.U. L. Rev. 185 (2004).
• Alison H. Eaton, Comment, Can the IRS Overrule the Supreme Court, 45 Emory L.J. 987 (1996).

Can States Force Out of State Border Businesses to Collect Sales Tax?

City Journal:  Interstate Confiscation Clause: Massachusetts Wants Even More Tax Revenue—From New Hampshire:

Should New Hampshire businesses have to collect Massachusetts sales taxes from border-crossing shoppers? That’s the issue in Town Fair Tire v. Massachusetts, a case before the Bay State’s Supreme Judicial Court with ramifications for commerce and constitutional law well beyond New England.

See also Overlawyered: Massachusetts’s Long Tax Arm, by Walter Olson.  Prior TaxProf Blog posts:

• Mass SJC Requests Amicus Briefs in Town Fair Tire Case (2/6/09)
• Swain & Hellerstein: The Silliness of the Physical Presence Rule for Use Tax Collection Nexus (11/19/08)

U.S., Switzerland Agree to Information Exchange to Combat Tax Evasion

From Treasury Department Press Release TG-177:

As part of the Obama Administration's aggressive efforts to enforce U.S. tax laws and reduce offshore tax evasion, the U.S. Department of the Treasury today announced the conclusion of negotiations with Switzerland to amend the U.S.-Switzerland income tax treaty to provide for increased tax information exchange. Official signing of the protocol is expected in the next few months. ...  The protocol would revise the existing U.S.-Switzerland income tax treaty to allow for the exchange of information for income tax purposes to the full extent permitted by Article 26 of the OECD Model Income Tax Convention. 

• Associated Press
• BBC
• Bloomberg
• New York Times DealBook
• Reuters

Obama Digs in on Smith Nomination to Head DOJ Tax Division

Following up on Sunday's post, Senate Judiciary Committee Approves Mary Smith to Head DOJ Tax Division Over Fierce Republican Opposition:  the Blog of Legal Times reports that Justice Department Says Tax Nominee is Qualified:

The Department of Justice is defending President Barack Obama's contentious nominee to head its Tax Division, arguing that her litigation experience outweighs her lack of specialization in tax law.

In a statement to The National Law Journal, the department downplayed the objections of Republican senators who have said that Mary Smith is unqualified to lead the division. Sen. Tom Coburn (R-Okla.) last week called Smith the worst appointment Obama has made during his presidency.

"It is true that she is not a traditional tax lawyer or a tax specialist," the department's statement reads in part. "However, Smith has extensive experience in financial litigation, both for and against the government."

The statement continues: "The Tax Division is not a policymaking entity — it enforces the federal tax laws and defends the United States when it is sued by taxpayers seeking refunds for taxes that have been paid. For this reason, the Assistant Attorney General for the Tax Division needs first and foremost to be a person with significant litigation experience, preferably experience in tax, corporate or financial litigation."  ...

In response to questions from GOP senators, Smith acknowledged that she never focused on tax law in private practice, written any law review articles on the subject, or taken any continuing legal education classes on tax law.
 

Silencing the Inner Voice That Says You're a Fraud

Interesting article in the Wall Street Journal: Silencing the Voice That Says You're a Fraud:

A physician starts playing a harsh mental tape in her head every time a new patient calls: What if I make the wrong diagnosis? I'm a terrible doctor. How did I get into medical school?

An executive loses his job and despite 25 productive years, he tells himself: I'm a loser. I can't provide for my family, and I'll never be able to again.

An eminent scholar is offered a top post in the Obama administration and his first reaction is: They must have made a mistake.

If these real-life examples sound familiar, you may have a caustic commentary running in your head, too. Psychologists say many of their patients are plagued by a harsh Inner Critic -- including some extremely successful people who think it's the secret to their success.

An Inner Critic can indeed roust you out of bed in the morning, get you on the treadmill (literally and figuratively) and spur you to finish that book or symphony or invention.

But the desire to achieve can get hijacked by harsh judgment and unrelenting fear. "There's a healthy version and an unhealthy version," says Daniel F. Seidman, a clinical psychologist at Columbia University Medical Center in New York. In some cases, he says, "people may achieve a lot, but they are totally miserable about it."

Why Are Tax Forms Blue?

From Web CPA:

Changes should be made in the layout and typeface of 1040 individual tax forms, including more use of boldface, colors and explanations, to help reduce taxpayer errors, recommends a new government report. The Treasury Department’s Inspector General for Tax Administration noted in the report that each year, the IRS sends out more than 7 million math error notices informing taxpayers of mistakes in their tax returns. More than 2.3 million of those errors could have resulted from unclear or inadequate forms, TIGTA noted. An analysis of taxpayer errors on 2005 tax returns identified three areas where modifying the 1040 and its instructions could reduce errors. These included errors made computing the deduction for personal tax exemptions; the omission of dependent Social Security numbers or Individual Taxpayer Identification Numbers; and children claimed for the Child Tax Credit who exceeded the age limit. ...

TIGTA also recommended that the IRS seek congressional approval to use additional colors on tax returns and instructions to highlight important warnings and information. Congressional approval would be needed because the IRS used multiple colors on the cover of of its 1995 tax packet and received some negative publicity. After that happened, Congress mandated in the Treasury Department Appropriations Act of 1997 that the IRS could use only two ink colors on tax packages. ...

The IRS did not comment on the color recommendation, but noted that matters of tax policy are within the jurisdiction of the Treasury Department's Office of Tax Policy, and a copy of the report will be forwarded to that office. However, IRS management agreed to conduct a review of where it could more effectively use shading, bolding, and other changes such as font sizes on the 1040 to highlight the most important areas.

Use of 529 Plan Assets for Technology

The American Recovery and Reinvestment Act of 2009 amended § 529(e)(3)(A) to add new clause (iii):

(iii) expenses paid or incurred in 2009 or 2010 for the purchase of any computer technology or equipment (as defined in section 170(e)(6)(F)(i)) or Internet access and related services, if such technology, equipment, or services are to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution.

This language is quite broad, covering the "beneficiary and the beneficiary's family."  As a result, it appears to cover not only a college student's laptop but also the family's home computer and related equipment, software, and Internet access.  The language also is broad enough to cover Apple's iPhone, Sprint's Pre, Blackberry's Storm, and other smart phones.  For further discussion, see:

• Kiplinger:  Strategies for Your 529 When Tuition Is Due
• Morningstar:  College Expenses and the Stimulus Package

Congress Asks IRS to Suspend Tax Shelter Penalties on Small Businesses

The House Ways & Means Committee and Senate Finance Committee yesterday issued this press release:

Bipartisan lawmakers from the Senate Finance Committee and House Committee on Ways and Means sent a letter Friday to IRS Commissioner Douglas H. Shulman, requesting assistance while Congress works to address certain penalties assessed on small businesses. The lawmakers are seeking to help small businesses that invested in listed tax shelter transactions that generated modest tax benefits, but resulted in tax penalties significantly larger than the tax benefits received.

[The letter points] out that such disproportionate consequences were unexpected at the time the penalty was enacted, and they expect to introduce legislation that would result in penalty amounts in better proportion to the tax benefits. While the penalty has helped IRS end many abusive deals, many of the shelters being examined by the IRS involve significantly smaller dollar amounts, and current penalty levels may be excessive in some circumstances. ...

The lawmakers indicated that, while they are committed to creating bipartisan, bicameral legislation to modify the law and make the penalties more proportional to the tax savings, Commissioner Shulman should, “use the discretion provided to the IRS with its effective tax administration authority to suspend efforts to collect IRC [Internal Revenue Code] section 6707A liabilities … while Congress acts to remedy this situation.”

• Associated Press
• Dow Jones

Is 8th Circuit 'Widely Seen as the Most Favorable Circuit for Taxpayers'?

Following up on Friday's post, 8th Cir.: Medical Residents Are Subject to FICA: today's Inside High Ed has a detailed report on the case, Setback for Academic Medical Centers, which includes this comment:

[W]ith scores of medical schools and teaching hospitals in similar disputes with the IRS over the taxability of residents' payments, the Eighth Circuit's decision will resonate far beyond the Twin Cities.

"If every time the IRS lost cases in court, it could simply amend its regulations setting out its new positions," isn't that unfair? wondered Bertrand M. Harding, a tax lawyer who works with colleges on FICA issues. But the Eighth Circuit seemed to anticipate that complaint in its ruling in the Minnesota case, noting that "[t]he Supreme Court has repeatedly held that agencies may validly amend regulations to respond to adverse judicial decisions, or for other reasons, so long as the amended regulation is a permissible interpretation of the statute.

And Friday's ruling may bode particularly badly for teaching hospitals because, as Harding notes, the Eighth Circuit is widely seen as the "most favorable circuit for taxpayers."

IRS Not Backing Down From Push to Tax Employee Cell Phone Use

Following up on my prior posts (here and here):  today's Wall Street Journal editorializes against the IRS's recent notice on taxing employee cell phone usage: The IRS Phones Home:  What's Next, a Tax on Each Sip of Office Coffee?:

The IRS believes that some percentage of the costs incurred by employees using company-provided wireless devices should count as a "fringe benefit" and thus be subject to taxation. Since workers inevitably end up taking personal calls or emails, the thinking goes, it's only fair that they pay for the privilege. What's next? Maybe a per-cup tax on office coffee, or targeting furtive visits to ESPN or Hulu on the office PC? As one wag put it on the Journal's Web site, "It's like charging for the use of the company washroom." ...

The political class may come to regret stepping into this minefield, however, and not only because this is precisely the sort of common non-sense that incites tax revolts. It's one thing if the next Tom Daschle forgets to pay taxes on his company chauffeur. But it'll be quite another if the next nominee goes down for taking too many personal calls without giving the government its due.

But the Wall Street Journal also reports that IRS Defends Tax Proposal for Employer-Issued Mobile Phones, by Martin Vaughan:

The IRS defended its proposals to enforce a law that taxes personal use of employer-provided cellphones, saying the changes are aimed at helping businesses comply, not taxing individuals. ...

A senior IRS official Friday said the agency is more concerned about making sure employers deduct the correct amounts for cellphone equipment and services provided to employees, than it is about taxing those employees on benefits. ... Marianna Dyson, a lawyer at Miller and Chevalier who specializes in the taxation of employee benefits, said that as a practical matter, the IRS proposals would affect both the business and the employee.

For instance, if IRS implemented its proposal to limit business deductions to 75% of the value of the employer-provided cellphones, and deem the rest personal use, the remaining 25% would have to be counted in an employee's gross income. That would trigger both income tax and payroll tax withholding requirements on the employee's wages. "If they decide 25% is personal use, guess what? It is a wage, and you have to withhold on it," Ms. Dyson said. "For IRS to suggest this would have no impact on employees, is a little disingenuous."

See also:

• CNN
• The Heritage Foundation
• Web CPA.

Senate Judiciary Committee Approves Mary Smith to Head DOJ Tax Division Over Fierce Republican Opposition

From The Blog of the Legal Times: Embattled Tax Nominee Advances on Party-Line Vote:

Democrats on the Senate Judiciary Committee voted today to move ahead with the nomination of Mary Smith to head the Justice Department’s Tax Division, over Republican objections that Smith lacks significant relevant experience.

At a committee meeting, three Republican senators spoke against Smith, noting that she has never held a job specializing in tax law. She has never written or spoken on tax issues, does not have a specialized degree, and has never taken a continuing legal education course in tax law, said the committee Ranking Member Jeff Sessions (R-Ala.).

“Tax law is very specialized and it’s certainly not an area where you learn on the job,” Sessions said. He argued that Smith could be an embarrassment to the administration, saying, “You should not put people in a job they’re not prepared to handle.”

Sen. Tom Coburn (R-Okla.) called Smith the “worst choice” that President Barack Obama has made in all of his appointments. Sen. Jon Kyl (R-Ariz.), the Republican whip, said there must be “thousands of highly experienced tax lawyers who would love to have a job like this.”

No Democrats spoke in defense of Smith before voting for her, though Chairman Patrick Leahy (D-Vt.) noted that the committee has received letters supporting her nomination ....

Smith is a partner at Schoeman Updike Kaufman & Scharf in Chicago. ...  The committee voted 12-7 along party lines to send Smith’s nomination to the full Senate.

Prior TaxProf Blog coverage:  Obama Nominates Mary L. Smith to Head DOJ Tax Division.

Tax Prof's Carbon Footprint

According to the Tax Foundation's calculator, my family's annual tax burden under the proposed cap and trade legislation would be $1,656 per year. See Who Pays for Climate Policy? New Estimates of the Household Burden and Economic Impact of a U.S. Cap-and-Trade System.

WSJ: CEOs Defend Foreign Tax Breaks

In today's Wall Street Journal: CEOs Defend Foreign Tax Breaks As Health-Care Bill Looms, by Martin Vaughan:

CEOs of multinational companies pressed House lawmakers this week not to raise taxes on their firms' foreign profits in order to fund a $1.2 trillion overhaul of the health system. CEOs that are members of the Business Roundtable, a trade group of Fortune 500 companies, held meetings with individual House Ways and Means Committee members to press their case on the international tax issues.

According to those present, CEOs that participated included John T. Chambers of Cisco Systems Inc. (CSCO), David M. Cote of Honeywell International Inc. (HON), Kenneth I. Chenault of American Express Co. (AXP) and Joseph M. Tucci of EMC Corp. (EMC).

They are fighting proposals by President Obama to curb a tax break known as deferral, which allows firms to postpone taxes on their foreign income as long as they do not repatriate it to the United States. And they are finding some allies among House Democrats.

WSJ: IRS Targets Employer-Provided Cell Phones

Following up on Tuesday's post, today's Wall Street Journal has a front-page story, Tax Man's Target: The Mobile Phone:

The use of company-issued mobile phones could trigger new federal income taxes on millions of Americans as a "fringe benefit."

The IRS proposed employers assign 25% of an employee's annual phone expenses as a taxable benefit. Under that scenario, a worker in the 28% tax bracket, whose wireless device costs the company $1,500 a year, could see $105 in additional federal income tax.

The IRS, in a notice issued this week, said employees could avoid tax liability if they showed proof they used personal cellphones for nonbusiness calls during work hours. The agency also could decide on a set number of phone minutes as "minimal personal use" that would be untaxed. ...

The IRS move, which is spurring efforts by the wireless industry and others to kill the idea, would mark a stricter enforcement of an existing rule that classifies employer-provided cellphones as a taxable benefit, rather than a 24-hour-a-day work tool. ...

Wireless companies also argue the IRS rule is outdated. Rates have declined so dramatically in the past decade -- with night and weekend calls free under many plans -- that it makes little sense for the IRS to assess employee benefits by nickels and dimes. "This is a regulation from a bygone time, dating back to the infancy of the cellphone business, and it is in desperate need of updating," said Howard Woolley, a senior vice president with Verizon Wireless. ...

Such companies as Verizon and Sprint Nextel Corp. are backing congressional proposals to repeal the tax. They are supported by local government, education and farm groups. ...

The 1989 law requires that company-provided wireless services be included in a worker's gross income -- unless the employee keeps detailed records showing the device was used only for work. Following one IRS audit, the University of California system owed additional payroll taxes because it couldn't substantiate that employees' cellphone use was solely work-related.

   

• National Review:  IRS Weighs Rules for Taxing Private Use of Work Cellphones
• Washington Post:  IRS Seeks to Simplify Workers' Cellphone Tax Law

Of course, computers are also listed property under § 280F, so one wonders whether the IRS next will target employees' personal use of computers provided by their employers.

WSJ: Democrats and the Health Tax Taboo

Op-ed in today's Wall Street Journal:  Democrats and the Health Tax Taboo: The President Attacked McCain for Proposing a Benefits Tax, by Kimberly A. Strassel:

Mr. Baucus, the Finance Committee chairman who is helping lead the Obama health effort, is still deciding what to include in the bill. But his far bigger headache remains how to pay for this blowout. He and other Democrats have been inching toward the taboo benefits-tax, putting them on a collision course with liberal special interests like unions. Mr. Baucus's newest solution? A union payoff.

The cost estimates for the Democrats' health-care reform have by now hit $1.5 trillion over a decade. Goodness knows the architects of this beast -- which they hope will include a new "public option" health entitlement -- have been creative in dreaming up ways to pay for it. In recent months, the administration and Congress have floated ideas to limit tax deductions, penalize soda-pop drinking, tax alcohol, tax salty foods, further raise the price of cigarettes, tax specific companies, charge for carbon, cut Medicare payments, or even implement a national sales tax.

In each case, Democrats have confronted the bitter reality that the proposed tax is too puny (Dr. Pepper tariffs), too doomed (cap-and-trade revenue), or too politically ugly (a sales tax). Contrast this with the tantalizing reality that requiring Americans to pay taxes on some part of the company health-care benefits they now receive for free could easily raise a half-trillion dollars over a decade.

In a choice between a dozen niggling tax fights that could yield uncertain revenue, or a bigger fight over benefits taxes that could yield oodles, Mr. Baucus will take the oodles. But for two small problems.

The first is that about 99% of the Democratic Party is on record trashing the idea of taxing health benefits. Trasher-in-chief is none other than President Barack Obama, who mercilessly berated Sen. John McCain for proposing such a change during the 2008 campaign. ...

The Democrats' other problem is that the usual populist line won't fly. The party would like to be able to protect itself by saying that only those who now receive the most generous benefits will face taxes. Then again, the Americans who now have the Cadillacs ... of health-care coverage are union workers. Union workers "would be stuck footing more of the bill than others" ...

Mr. Baucus officially floated his plans for a tax this week, only with a surprising twist: His levy will not apply to union plans, at least for the duration of existing contracts. In other words, Mr. Baucus intends to tax the health-care benefits only of those who didn't spend a fortune electing Democrats to office.

Forbes: The 10 Highest State Income Tax Rates (In Pictures)

Forbes:  In Pictures: The 10 Highest State Income Tax Rates:

Facing budget shortfalls, revenue-hungry states are raising personal income tax rates. As they do, some are targeting the better-off. In May, Hawaii displaced California as the state with the highest rate when it imposed a new top rate of 11% on income above $400,000 for a married couple. In April, New York raised its top rate by 31%--to 8.97% from 6.85%--but only on incomes over $500,000. Add in the local tax and Big Apple residents pay a 12.62% combined rate, the highest in the nation. The average rate, in the 43 states that levy income taxes: 6.5%.

More on the J&G/BDO Tax Shelter Indictments

Following up on my post on yesterday's Jenkens & Gilchrist/BDO Seidman tax shelter indictments:

• American Lawyer:  Ex-Jenkens Lawyer Paul Daugerdas Indicted for Tax Fraud
• ataxingmatter:  More on the Jenkins & Gilchrist/BDO Seidman Tax Shelters
• Roth & Co.:  Is Backdating the Fatal Flaw for Daugerdas?
• Tax Girl: Former Jenkens & Gilchrist Tax Attorneys Indicted
• Texas Lawyer:  Three Former Jenkens & Gilchrist Tax Lawyers Indicted

Tax Shelter Indictments

Three lawyers, two accountants, and two bankers were charged today with tax fraud related to tax shelters promoted by the Jenkens & Gilchrist law firm, BDO Seidman accounting firm, and a foreign bank with headquarters in New York. 

• Press Release
• Indictment
• Bloomberg
• New York Times
• Wall Street Journal

Speedway Takes Checkered Flag in Tax Dispute With IRS

International Speedway Corp.("ISC"), which owns and operates 13 of the nation's major motorsports tracks (including Daytona and Talladega) today announced a settlement with the IRS in connection with depreciation deductions claimed on its 1999-2005 tax returns.  ISC deposited $118 million with the IRS to avoid accruing additional interest, and the IRS has returned $97 million to ISC.

• ISC Press Release
• Daytona Beach News-Journal
• Orlando Sentinel

USC Caught Gaming U.S. News Rankings

Following up on last week's post, Clemson Official Admits to Manipulating its U.S. News Ranking, today's Inside Higher Ed reports on More Rankings Rigging at USC:

How many members of the National Academy of Engineering are on the faculty at the University of Southern California?

This might seem like a straightforward question, but it's anything but when you add in the politics of rankings. USC's Viterbi School of Engineering maintains a list of 34 faculty members it says are in the academy. And when reporting to U.S. News & World Report, which uses NAE members on the faculty as one criterion in its rankings of top engineering graduate schools (where USC landed at No. 7), Southern California claimed 30 members.

But according to the National Academy of Engineering, USC has only 22 members on its faculty.

USC provided three different explanations to Inside Higher Ed when asked why it was claiming more faculty members as NAE members than it appears to have. ...

Robert Morse, who directs the rankings for U.S. News, said that if USC indeed has significantly fewer faculty members in the academy than the university claimed, that could well lower the engineering college's ranking. But Morse said he couldn't tell how much without knowing the actual numbers. Morse said that U.S. News defines the way it counts faculty members (as full time, tenure track), but doesn't seek to verify the numbers submitted by universities.