TaxProf Blog

A Proposal for Handling Digital Assets After Death

Chelsea Ray (J.D. 2013, Oregon), Til Death Do Us Part: A Proposal for Handling Digital Assets After Death, 47 Real Prop. Tr. & Est. L.J. 583 (2013) (First Place, 2012 Real Property, Trust and Estate Law Section Student Writing Competition):

As electronic communication continues to pervade the daily lives of modern individuals and allow us to instantaneously develop and document intellectual property, this Article questions whether states are prepared to protect these digital assets after owners' deaths. Specifically, it discusses whether state legislatures should follow Idaho, Rhode Island, Indiana, Connecticut, and Oklahoma in enacting legislation that protects decedents from identity theft and provides personal representatives with the ability to access decedent online accounts, such as Facebook, Twitter, e-mail, and blogs to identify and dispose of valuable digital property. After analyzing the key problems faced by personal representatives, this Article concludes that legislatures should address issues in this field as soon as practicable and provides a draft uniform act to help direct lawmakers in addressing the complications associated with identifying and disposing of digital assets. Further, until legislatures enact solutions, the author urges that individuals leave specific instructions for the disposal of their digital assets.

Elkins: Taxation of Barter Transactions

David Elkins (Netanaya College School of Law, Israel), Taxation of Barter Transactions: Theory, Combination Transactions, and Interest-Free Loans:

This is the English abstract of a book recently published by the author in Hebrew entitled Taxation of Barter Transaction: Theory, Combination Transactions, and Interest-Free Loans (Tel-Aviv 2012).

The book (and the attached abstract) first discusses the taxation of barter transactions from a theoretical perspective: the relationship between the taxation of barter transactions and the realization principle; and the identification, classification, and quantification of both income and expenses in barter transaction. The author presents a model to analyze the tax consequences of barter transaction, and he compares and contrasts his model to those in common usage, the 'notional income and expense model” and the 'avoided expenses' model.'

Subsequent parts discuss two specific types of barter transactions. The first is known is Israel as 'combination transactions,' in which a developer constructs a building on property owned by someone else, with the developer and the landowner eventually dividing between them either the apartment units or the proceeds from their sale. The second is interest-free loans. Here the book goes a bit beyond barter transactions. While interest-free loans to service providers are barter transactions (services in exchange for use of money), gift loans and interest-free loans from corporations their shareholders or from shareholders to the corporation are not. Nevertheless, a great deal can be learned by considering the similarities and, more importantly, the differences between these various loans.

Knoll & Mason: A Brief Sur-Reply to Graetz & Warren

Michael S. Knoll (Pennsylvania) & Ruth Mason (Connecticut; moving to Virginia), A Brief Sur-Reply to Professors Graetz and Warren, 123 Yale L.J. Online 1 (2013):

We are grateful for the deep engagement by Michael Graetz and Alvin Warren with our article, What Is Tax Discrimination?, which appeared in the print edition of the Yale Law Journal, and for this opportunity to respond to their comments. The Court of Justice of the European Union (ECJ) is charged with deciding whether the laws of European Union (EU) member states violate the fundamental freedoms guaranteed by the Treaty on the Functioning of the European Union (TFEU): the free movement of goods, capital, workers, and services, and the right to establish business across borders. The ECJ frequently has held that tax discrimination violates these fundamental freedoms. Although the ECJ has been aggressive in finding that long-standing member-state tax practices violate the EU prohibition on tax discrimination, its failure to clearly articulate a guiding principle in tax cases has attracted extensive critical commentary. Accordingly, our goals in What Is Tax Discrimination? were to identify the principle behind the ECJ’s interpretation of tax discrimination, to explain that principle in economic terms, and to describe how to apply that principle.

In that article, we argued that the guiding principle behind the prohibition of tax discrimination is the prevention of protectionism (expressed negatively) or the promotion of competition (expressed affirmatively). In other words, the tax-nondiscrimination principle promotes a level playing field between similarly situated economic actors from different member states. We argued that in the direct tax context, the ECJ interprets the fundamental freedoms to require member states to refrain from using taxes to make it more difficult for cross-border actors than for domestic actors to compete for jobs or investments. Thus, we concluded that the ECJ’s interpretation of the fundamental freedoms amounts to requiring what public finance economists call “capital ownership neutrality” (CON). CON is the notion that tax policies should not distort the ownership of assets. (The labor analog of CON is the notion that tax policies should not provide workers from one state with a tax-induced advantage over workers from other member states in securing a job.)

In their fifty-page response to our article, Graetz and Warren raise numerous objections. While we cannot answer all of their objections in these few pages, we will respond briefly to their most serious criticisms. Those criticisms can be divided into two broad categories: criticisms of our interpretation of tax nondiscrimination and criticisms of our proposed application of this interpretation. ...

Our project, then, stands in contrast with that of Graetz and Warren. In their 2006 article, Graetz and Warren examined the substantive outcomes in tax-discrimination cases and criticized the ECJ’s resolution of those cases for infringing EU member states’ tax sovereignty. They stressed that tax policy ought to be made by the member states, not the ECJ.

Our task was different. We started from the widely accepted premise that the TFEU prohibits states from exercising their tax sovereignty in a manner that discriminates against nonresidents or intra-EU commerce. Thus, we did not reexamine the questions of whether the TFEU ought to constrain member states’ tax sovereignty or whether the ECJ is the right institution to arbitrate disputes about whether particular tax laws violate the nondiscrimination principle. Rather, our goal was to identify the guiding economic principles the ECJ uses in resolving tax-discrimination cases. We argued that competitive neutrality is a better fit for the doctrine and for the language of the TFEU than are competing tax-neutrality norms. Although they say they disagree with that interpretation, Graetz and Warren do not seriously challenge that position; indeed, in earlier writing, they have expressed views consistent with our own interpretation. Graetz and Warren also argue that we have not sufficiently demonstrated that a competitive-neutrality interpretation of tax discrimination would maximize EU welfare. That is true, but normative claims of that kind fall outside the scope of our project.

Having identified competition as the primary efficiency value promoted by the tax-nondiscrimination principle, we then turned to the question of how courts can apply that interpretation in a consistent way. We showed that competitive neutrality requires uniform taxation as well as universal adoption of either worldwide taxation with an unlimited foreign tax credit or ideal deduction. Graetz and Warren do not seriously challenge that conclusion either. Finally, we argued that in light of the ECJ’s inability to require member states to adopt an unlimited foreign tax credit or an ideal deduction system, the ECJ should interpret the principle of tax nondiscrimination to preclude states from enacting and enforcing non-uniform taxes.

Graetz and Warren strongly disagree with our recommendation, but in their response they offer no alternative. Given Graetz and Warren’s sharp criticism of the ECJ’s tax-discrimination jurisprudence in their 2006 article, it is unlikely that they favor sticking with the status quo, in which the ECJ rules without expressly stating its decision-making criteria, at times in the face of fierce external criticism. Nor is it obvious that Graetz and Warren would favor significant limitations on the ECJ’s jurisdiction to decide tax-discrimination cases, given their stated concern that failure to restrict tax discrimination would leave member states largely free to use tax policies to protect domestic interests, thereby “undermining the internal market” and “severely restricting the four freedoms.” Although our aim in our original article was not to argue that the ECJ has struck the proper balance between economic integration and member states’ tax sovereignty, we believe that our interpretive recommendation represents an appropriate compromise between the two.

Blattmachr, Kamin & Bergman: Powers of Appointment: Estate Planning's Most Powerful Tool

Jonathan G. Blattmachr (Eagle River Advisors, New York), Kim Kamin (Schiff Hardin, Chicago) & Jeffrey M. Bergman (Schiff Hardin, Chicago), Estate Planning's Most Powerful Tool: Powers of Appointment Refreshed, Redefined, and Reexamined, 47 Real Prop. Tr.& Est. L.J. 529 (2013):

One of the most versatile tools estate planners have at their disposal is the power of appointment. Despite its wide use, the benefits and limitations of the power of appointment are not widely understood. This Article discusses those benefits and limitations, and instructs how to use the power of appointment to achieve the intended disposition of the donor or testator, including drafting techniques for both general and special powers of appointment either exercisable presently or in the future. Finally, this Article discusses how to use powers of appointment to “decant” trust assets from one trust to another, reducing the tax consequences of trust dispositions.

Tax Enforcement in Virtual Worlds

William E. Arnold, IV (J.D. 2013, Syracuse), Note, Tax Enforcement in Virtual Worlds--Virtually Impossible?, 40 Syracuse J. Int'l L. & Com. 187 (2012):

This Note will consider financial and social impacts that virtual worlds have had on various countries, specifically the United States and China. It will then discuss efforts that China, and to some extent, the U.S., have made to impose tax liability on virtual world sales. This Note then briefly discusses property interests tied to virtual items found in these worlds. Finally, an analysis of a sales-and-use tax and capital gains tax is employed to determine the feasibility of their application to a virtual world under U.S. tax law.

Ultimately, this Note demonstrates that, while it is conceivable to apply a sales-and-use tax, it is not feasible due to administrative considerations. Without a feasible tax scheme in virtual worlds, enforcement of regulations is unlikely. Thus, this Note argues that an effective tax regulation cannot be enforced on transactions stemming from scripted world games such as World of Warcraft. Since the ability to effectively administrate regulations is central to all tax systems, this Note concludes by demonstrating that other countries will also be unable to enforce a virtual tax regulation for similar reasons. For purposes of this Note, it is assumed that income generated from virtual worlds is taxable. 

Corporate Governance, Incentives, and Tax Avoidance

Chris Armstrong (University of Pennsylvania, Wharton School), Jennifer L. Blouin (University of Pennsylvania, Wharton School), Alan D. Jagolinzer (University of Colorado, Leeds School of Business) &  David F. Larcker (Stanford University, Graduate School of Business), Corporate Governance, Incentives, and Tax Avoidance:

This paper examines the link between corporate governance, managerial incentives, and tax avoidance. Similar to other investment opportunities, unresolved agency problems may cause managers to over- or under-invest in tax avoidance relative to the preferences of shareholders. Using quantile regression, we find that the impact of corporate governance on tax avoidance is most pronounced in the upper and lower tails of the tax avoidance distribution, but not at the mean or median of this distribution.

Specifically, we find a positive relation between the financial sophistication and independence of boards and tax avoidance in the upper tail of the tax avoidance distribution, but a negative relation in the lower tail of the tax avoidance distribution. However, we find no relation between corporate governance and tax avoidance and either the conditional mean or median of the tax avoidance distribution. These results suggest that corporate governance tends to decrease extremely high levels of tax avoidance and increase extremely low levels of tax avoidance, which may be symptomatic of over- and under-investment, respectively, by managers. Our results also suggest that inferences about these relations that are drawn from the conditional mean and median and unlikely to be representative across the entire tax avoidance distribution.

Hickman: Don’t Overlook City of Arlington, Texas v. FCC

Kristin Hickman (Minnesota), Don’t Overlook City of Arlington, Texas v. FCC:

While many tax practitioners are understandably focused right now on the outcome of PPL Corp. v. Commissioner, in the wake of Mayo and Home Concrete, the tax community would be remiss if it did not also register the Supreme Court’s decision Monday in City of Arlington, Texas v. FCC, No. 11-1545. City of Arlington was not a tax case, but the decision represents a significant statement regarding the scope of Chevron deference with potential implications for future tax litigation. Plenty of administrative law scholars are and will be commenting on the case, but the opinions are nuanced, and careful consideration of the decision is worthwhile.

The question before the Court was whether a court should apply Chevron to review an agency’s determination of its own jurisdiction—an issue that had divided the circuits for some time. In an opinion written by Justice Scalia, a majority of five Justices answered this question in the affirmative. Justice Breyer wrote an opinion concurring in part and concurring in the judgment. Chief Justice Roberts wrote a dissenting opinion in which he was joined by Justices Kennedy and Alito.

The principal explanation for the Court’s decision in favor of Chevron review was the difficulty of delineating which questions of statutory interpretation are jurisdictional and which are not. “[T]he distinction between ‘jurisdictional’ and ‘nonjurisdictional’ interpretations is a mirage,” according to Justice Scalia. That said, Justice Scalia’s opinion is arguably internally inconsistent on this point, as he then proceeded to support his position by listing from among the Court’s extensive Chevron jurisprudence several cases in which he said the Court had afforded Chevron deference for jurisdictional interpretations. The dissenters, by contrast, focused particularly on the “vast power” that agencies wield, the role of the judiciary as an important check on agency exercises of that power, and the potential for courts to apply the Chevron standard so as to abdicate that responsibility. Interestingly, Chief Justice Roberts arguably seems in this opinion as though he would like to resurrect the old general versus specific authority distinction that he rejected so explicitly in Mayo as a basis for denying or extending Chevron deference.

Also significantly, the Court described elaborated the standard articulated in United States v. Mead Corp. for determining whether Chevron applies in the first instance. Recall that Mead calls upon a reviewing court to ascertain whether Congress delegated to an interpreting agency the power to act with the force of law. The dissenters argued that a reviewing court should evaluate each question of statutory interpretation independently under this step of Mead to determine whether Congress would have wanted the agency rather than the courts to resolve any ambiguity in the relevant statutory provision. The majority, however, said that a general grant of authority to adopt regulations effectuating a statute was sufficient to require Chevron review for all of an agency’s regulations that interpret that statute. In short, according to a majority of the Court, Mead’s first step calls for a statute-by-statute assessment of congressional delegation, not a provision-by-provision one.

One final, if somewhat less obvious, aspect of these opinions, however, is their relatively consistent embrace—whether under the guise of Mead or Chevron step one—of a robust, almost de novo-level of judicial review in ascertaining whether Congress would have wanted the courts to defer to an agency’s interpretation of a statute it administers. Justice Scalia has always been a staunch proponent of an involved approach to Chevron step one, for example stating in a 1989 Duke Law Journal article that he finds Chevron-triggering ambiguity in relatively few cases. In dismissing the dissenters’ concerns about the judiciary abdicating its oversight role, Justice Scalia again suggested “taking seriously, and applying rigorously, in all cases, statutory limits on agencies’ authority.” Justice Breyer’s concurrence reflected a somewhat different conception of Chevron generally but also advocated a sweeping approach to Chevron step one that takes into account not only “traditional tools of statutory construction” like the statute’s test, context, and structure but also the complexity of the subject matter, the relationship between the question at issue and the agency’s core expertise, and the longevity of the agency’s interpretation. The dissenters’ concerns about limitations on agency power potentially foreshadow an inclination to beef up their inquiry at Chevron step one as well. If reviewing courts take this aspect of the City of Arlington opinions to heart, then notwithstanding that the Court’s majority opted for a broader scope of applicability for Chevron, agencies may not win that many more cases than they would if the dissenters had prevailed.

Houston Business & Tax Journal Publishes New Issue

The Houston Business & Tax Law Journal has published Vol. 12, Part 2 (2012):

• Beckett G. Cantley (Thomas Jefferson), Steering into the Storm: Amplification of Captive Insurance Company Compliance Issues in the Offshore Tax Crackdown, 12 Hous. Bus. & Tax L. J. 224 (2012)
• Frank H. Pedersen (NYU), Advancing the Study of Tax Complexity with the usability Model, 12 Hous. Bus. & Tax L. J. 282 (2012)
• Kristian Sullivan, Student Article, A Work in Progress: The Ever [or Never] Changing Role of the Machine-or-Transformation Test in Determinations of Patentable Subject Matter Under 35 U.S.C. § 101, 12 Hous. Bus. & Tax L. J. 362 (2012)
• David Wechsler, Student Article, The Indispensable Advisor: Why Communications with Certain Non-Parties Should Fall Within the Attorney-Client Privilege, 12 Hous. Bus. & Tax L. J. 388 (2012)

Taylor: Suppose FIRPTA Was Repealed?

Willard Taylor (Sullivan & Cromwell, New York), Suppose FIRPTA Was Repealed?, 14 Fla. Tax Rev. 1 (2013):

This article argues, as others have before, that the Foreign Investment in Real Property Tax Act of 1980 (or “FIRPTA”), or at least the provisions of FIRPTA relating to “United States real property holding corporations,” should be repealed. Their enactment in 1980 was misguided and in any event changes in the Internal Revenue Code since then have made the provisions obsolete. But if FIRPTA is repealed, in whole or in part, the article argues that the lack of parity between foreign investment in real property that is made directly or through a partnership, on the one hand, and foreign investment in a real estate investment trust (or a regulated investment company that invests in shares of real estate investment trusts) should be dealt with. Otherwise, repeal will exacerbate existing distortions (which were already pushed further by FIRPTA) resulting from the choice of the entity used to make an investment in US real property. The article also suggests that repeal of FIRPTA would provide an opportunity to look at the taxation of foreign investment in the United States more broadly and in particular the rules that tax income from U.S. real property. The tax treatment of inward investment is a generally neglected subject.

The article concludes by arguing against legislation that would keep the FIRPTA rules and simply expand provisions of present law that favor foreign investment through real estate investment trusts, such as the Real Estate Jobs and Investment Act of 2011.

Boudreaux: The Impact Xat: A New Approach to Charging for Growth

Paul Boudreaux (Stetson), The Impact Xat: A New Approach to Charging for Growth, 43 U. Mem. L. Rev. 35 (2012):

At a time when the economy and the housing market rise and fall together, the phenomenon of impact fees complicates the construction of new housing across the nation. Although justified as a means of forcing new development to “pay its way” for the costs of government infrastructure necessitated by the new housing, impact fees typically are imposed in a way that makes them, in effect, a dubious population tax. Indeed, the typical fee does little to discourage costly suburban sprawl. This Article--using economic lessons from policies that discourage usage of scarce resources with light bulbs, bathrooms, and buildings--suggests a new policy course. The Article proposes an “impact xat” (a hybrid of a tax and fee) based on a combination of location and size of the housing, along with a conservation baseline to encourage close-in, affordable housing. If it were to replace the current system of property taxes, the impact xat could offer a simpler, fairer, and wiser path for the regulation of housing development in the twenty-first century.

Foreign Tax Credits and the P&G Decision

John P. Dombrowski (J.D. 2013, Toledo), Note, Foreign Tax Credits: The Recent Decision in Proctor & Gamble v. United States Allows Procedure to Override the Statutory Intent, 43 U. Tol. L. Rev. 405 (2013):

The crux of this article stems from a recent case, Proctor & Gamble (P&G) v. United States, in which a U.S. District Court denied the taxpayer’s otherwise meritorious claim for a foreign tax credit due to the court’s misinterpretations of the regulation’s requirements and potential avenues of relief available under tax treaties. Between the presentation of this case and its analysis, this article will give a general overview of the foreign tax credit system. This discussion will lead to the factors or merits used to determine whether a tax is compulsory and thus allowable as a foreign tax credit. The procedural requirements, which involve the invocation of a competent authority, and the two distinct definitions of competent authority, that exist in treaties and regulations will then be discussed. Lastly, the article analyzes the P&G case, a case in which a company’s alleged failure to exhaust competent-authority procedures barred it from receiving a foreign tax credit on an otherwise meritorious claim.

Formula Clauses After Wandry

Patrick J. Duffey (The Duffey Law Firm, Boca Raton, FL), Brian K. Duffey (The Duffey Law Firm, Boca Raton, FL) & Lee-ford Tritt (Florida), A Question of Value: The Evolution of Formula Clauses Through The Decades, 47 Real Prop. Tr.& Est. 467 L.J. (2013):

Wealthy families often use closely-held businesses to manage, preserve, and transfer wealth. These entities are difficult to value and, therefore, present estate planning and transfer challenges when owners attempt to give or sell portions of the business. Attorneys often use formula clauses to ensure predictability in the parties' expected tax liability. Recently, the Tax Court decided Wandry v. Commissioner [T.C. Memo. 2012-88 (Mar. 26, 2012)] in favor of the taxpayer, where the taxable transfer employed a defined value clause with a non-charitable valve. Until this decision, courts have endorsed only the use of charitable valves in conjunction with defined value clauses. This Article analyzes the Tax Court's decision in Wandry and attempts to fit it within well-established case law decided in the last century. Although Wandry was decided in favor of the taxpayer, this Article suggests that attorneys who step outside the boundaries of court-blessed formula clauses do so at their own risk.

Prior TaxProf Blog coverage:

• Wendy C. Gerzog (Baltimore), Wandering Far Afield With Defined Value Clauses, 135 Tax Notes 1171 (May 28, 2012)
• WSJ: Tax Court Blesses Tax-Free Technique for Parents to Transfer Family Business, Wealth to Their Children (Apr. 29, 2012)

Avant-Garde Art and the VAT

Rachel J. Tischler (J.D. 2013, Brooklyn), Note, "The Power to Tax Involves the Power to Destroy": How Avant-Garde Art Outstrips the Imagination of Regulators, and Why a Judicial Rubric Can Save It, 77 Brook. L. Rev. 1665 (2012):

This note will begin in Part I with brief overviews of Minimalist Art and Conceptual Art, paying particular attention to the public reception of⎯and reactions to⎯shifting trends in artworks over time and geography. Part II will give a brief explanation of the legislative systems at work in the European Community, as well as an introduction to the European value-added tax system. Part III of this note will discuss various instances of courts, both in the United States and abroad, attempting to navigate the intersection of artwork and customs duties and taxation. Part IV will explore various approaches to protection for conceptual and visual artworks, giving special attention to problems encountered by the more difficult cases. That part will conclude with a suggested method for evaluation and classification of artworks that can be applied by courts and legislators, domestically and abroad, that leaves intact both the artists’ intentions and their artworks’ integrity. This note will conclude with a brief discussion of how similar VAT or flat-tax systems implemented in the United States could lead to comparable difficulties in U.S. courts and legislatures.

When a Wife Earns More Than Her Husband

Marianne Bertrand (University of Chicago, Booth School of Business), Jessica Pan (National University of Singapore, Department of Economics) & Emir Kamenica (University of Chicago, Booth School of Business), Gender Identity and Relative Income Within Households:

We examine causes and consequences of relative income within households. We establish that gender identity { in particular, an aversion to the wife earning more than the husband - impacts marriage formation, the wife's labor force participation, the wife's income conditional on working, marriage satisfaction, likelihood of divorce, and the division of home production. The distribution of the share of household income earned by the wife exhibits a sharp cli at 0.5, which suggests that a couple is less willing to match if her income exceeds his. Within marriage markets, when a randomly chosen woman becomes more likely to earn more than a randomly chosen man, marriage rates decline. Within couples, if the wife's potential income (based on her demographics) is likely to exceed the husband's, the wife is less likely to be in the labor force and earns less than her potential if she does work. Couples where the wife earns more than the husband are less satised with their marriage and are more likely to divorce. Finally, based on time use surveys, the gender gap in non-market work is larger if the wife earns more than the husband.

Hymel: Environmental Tax Policy in the U.S.

Mona L. Hymel (Arizona), Environmental Tax Policy in the United States: A 'Bit' of History, 3 Ariz. J. Envtl. L. & Pol'y 157 (2013):

This Article discusses the history of U.S. environmental tax policy. Well, not really “environmental tax policy,” because only a few decades of “environmental tax policy” history exist. If environmental tax policy addresses the development of new energy sources — “environmentally friendly” energy — this Article analyzes the “non-environmental” tax history of our old energy sources, primarily oil and gas (not “environmentally friendly”). Through a historical analysis of federal tax incentives and subsidies used to build the existing energy industry, the Article demonstrates that the United States must provide significant investment incentives in renewable and alternative energy technology if we hope to achieve a sustainable society. This historical analysis chronicles not only the development of tax laws, but also corresponding changes in American lifestyles. Americans’ appetite for technology and mobility (highly dependent upon fuel energy) began long before the implementation of the federal tax laws. Yet substantial government support provided to the burgeoning fossil fuel industry complemented the dramatic changes in the American way of life.

American consumption shows no signs of slowing down — yet. But without a dramatic shift away from fossil fuels, the entire world may come to an abrupt halt. Just as the government invested in oil and gas, it must now invest in new energy sources. In a sense, Americans need history to repeat itself.

Marineau: International Corporate Tax Reform

Paul K. Marineau (Thomas Cooley), International Corporate Tax Reform: It's Time to "Walk-the-Talk" (No More Platypuses, Please), 40 Syracuse J. Int'l L. & Com. 29 (2012):

it is the position of this article that a well-designed and comprehensive full-inclusion tax system for taxing a U.S. corporation's foreign-source income is the most efficient and effective tax system for accomplishing the many stated objectives outlined by Congress and recited above. Prior to delving into the full-inclusion tax system, this article will provide an overview of the current worldwide deferral tax system for taxing corporate foreign-source income and evaluate the proposed territorial tax system contained in the discussion draft of the Tax Reform Act of 2011.

Top 5 Tax Paper Downloads

This week's list of the Top 5 Recent Tax Paper Downloads is the same as last week's list:

1.  [333 Downloads]  Using a Sledgehammer to Crack a Nut: Why FATCA Will Not Stand, by Frederic Alain Behrens (J.D. 2013, Wisconsin)

2.  [306 Downloads]  The Supercharged IPO, by Victor Fleischer (Colorado; moving to San Diego) & Nancy Staudt (USC)

3.  [233 Downloads]  Was Blackstone's Initial Public Offering Too Good to Be True?: A Case Study in Closing Loopholes in the Partnership Tax Allocation Rules, by Emily Cauble (DePaul)

4.  [193 Downloads]  Recent Developments in Federal Income Taxation: The Year 2012, by Martin J. McMahon, Jr. (Florida), Ira B. Shepard (Houston) & Daniel L. Simmons (UC-Davis)

5.  [173 Downloads]  Reforming the Taxation of Retirement Income, by Richard L. Kaplan (Illinois)

Benefit Corporations and the Business Expense Deduction

Emily Cohen (J.D. 2013, William & Mary), Note, Benefit Expenses: How the Benefit Corporation's Social Purpose Changes the Ordinary and Necessary, 4 Wm. & Mary Bus. L. Rev. 269 (2013):

The recent spread of Benefit Corporations formally challenges the assumption that for-profit companies are strictly profit maximizing entities. Businesses can now incorporate under charitable business purposes that were once restricted to 501(c)(3) non-profit organizations. While incorporating under a charitable purpose is no longer restricted to only non-profit entities, Benefit Corporations are not able to receive the same income tax exemption under the Internal Revenue Code. While for-profit entities do receive some tax benefits for their charitable behavior, such as the charitable donation deduction, the current tax structure does not provide an equal amount of tax benefits for charitable behavior when performed by a Benefit Corporation as it does for a 501(c)(3). This Note argues that the Internal Revenue Code’s entity classification for non-profits and forprofits does not accommodate the mixed-purpose structure of the Benefit Corporation. This Note will explore the Internal Revenue Code’s treatment of non-profit 501(c)(3)s and charitable behavior by for-profit entities and posits that the Internal Revenue Code attempts to treat the charitable behavior of an entity favorably more than it attempts to treat an entity as a whole favorably. Because charitable behavior is not considered a trade or business under the Internal Revenue Code, Benefit Corporations will now be regularly engaging in charitable behavior, the expense of which will not be categorized as either a charitable deduction or as ordinary and necessary business expenses. This Note suggests that a possible way to give Benefit Corporations the same tax treatment for its charitable behavior as non-profits engaging in the same behavior is to create a “Benefit Expense” deduction akin to the ordinary and necessary business expense deduction currently available to for-profit entities.

Sense and Sensibility: Estate Planning Lessons From Jane Austen

Michael D. Whitty (Vedder Price, Chicago), The Jane Austen Plan Club: Lessons For Estate Planners and Their Clients From The Life and Novels of Jane Austen, 47 Real Prop. Tr.& Est. 501 L.J. (Winter 2013):

As we commemorate the 200th anniversaries of the publication of Jane Austen's novels, estate planners and their clients can learn many valuable lessons from Austen's life and novels. The themes of family, property, wealth, and society that connect Austen's life and stories still resonate today.

[T]his Article will focus primarily on her six completed novels: four published during her life -- Sense and Sensibility, Pride and Prejudice, Mansfield Park, and Emma -- and two published shortly after her death in 1817 -- Northanger Abbey and Persuasion. This Article also will illustrate some of the lessons it describes with experiences and examples from Jane Austen's own life. The author has selected nineteen relevant lessons for estate planners and their clients that can be illustrated by examples from Austen's life and novels. These nineteen lessons are by no means an exhaustive list, but the author hopes these will be a good start. The first lesson will be the lengthiest, as it provides some context for the subsequent lessons, while the next most lengthy lesson is saved for last as it involves the most quantitative analysis.

1. Wealth Is More Than Financial Capital
2. The Fundamentals of a Will Remain the Same
3. Will It, Don't Wish It
4. Name a Faithful Fiduciary
5. Draft Wills and Trusts Using Flexible Provisions
6. Consider All Consequences
7. Cash Flow Reality Will Trump Estate Plan Wishes
8. Diversification
9. Encourage Thrift, Discourage Waste and Extravagance
10. Teach A Man to Fish: Beneficiary Education and Career Training
11. Separating Suitors from Seducers, Gracious Ladies from Gold Diggers
12. Using Prenuptial Agreements and Settling Trusts to Protect Wealth
13. Providing Care for Elders and the Incapacitated
14. Annuities
15. The Simple Pleasures of Country Life
16. Philanthropy Adds Purpose
17. Be Proactive, Not Passive
18. Successful Succession Planning Requires Long-Term Effort
19. The Hard Facts of Demographics 

FATCA: Toward a Multilateral Automatic Information Reporting Regime

Joanna Heiberg (J.D. 2013, Washington & Lee), Note, FATCA: Toward a Multilateral Automatic Information Reporting Regime, 69 Wash. & Lee L. Rev. 1685 (2012):

This Note will argue that international cooperation is essential for successful FATCA implementation. Part II will provide background information on offshore tax evasion and existing U.S. mechanisms for international tax enforcement. Part III will explain key FATCA provisions, and Part IV will discuss concerns regarding FATCA as originally enacted. Finally, Part V will introduce the proposed intergovernmental approach to FATCA and argue that international cooperation and development of standardized requirements will mitigate FATCA concerns and facilitate its implementation. Part V also argues that abandonment of the U.S. policy of citizenship-based taxation is necessary to achieve an efficient multilateral FATCA regime.

UC-Hastings Hosts Northern California Tax Roundtable Today

UC-Hastings hosts the Spring 2013 Northern California Tax Roundtable today with these papers:

Heather Field (UC-Hastings), Tax Planning and the Ethical Tax Lawyer
Commentator:  Caroline Chen (Santa Clara)

David Gamage (UC-Berkeley), On Double-Distortion Arguments, Distribution Policy, and the Optimal Tax Mix
Commentator: Susie Morse (UC-Hastings)

Stu Karlinsky (Pacific Rim Tax Institute), Back to the Future
Commentator: Mark Gergen (UC-Berkeley)

Rasmusen: The Meaning of 'Value' for Estate & Gift Tax Purposes

Eric B. Rasmusen (Indiana University, Kelley School of Business), The Meaning of 'Value' for Gift and Estate Tax Donee Limitations in § 6324(B): An Amicus Brief for Marshall v. Commissioner:

In 1995, J. Howard Marshall II made a gift to Elaine Marshall worth some $43 million at the time of transfer. The IRS assessed gift tax against his estate, which failed to pay. In 2008 the IRS assessed gift tax of $74 million against donee Elaine Marshall, which exceeds $43 million because of the interest accumulated since 1995 but is less than the $81 million the gift would compound to at 5% per year. Does the limitation on donee liability to “the value” of the gift imposed by § 6324(b) mean to “the original amount of the gift” or to “the value of the gift at the time of eventual tax payment”? In effect, that is the issue in Marshall v. Commissioner, which is now before the 5th Circuit. The SD Texas and the 11th Circuit went one way; the 3rd and 8th Circuits went the other way on the issue. This paper is an amicus brief for that case and, I hope, a good example of how economics can inform and simplify law.

Lang: Tax Malpractice -- Issues and Avoidance

Michael B. Lang (Chapman), Tax Malpractice: Issues and Avoidance, 54 Bloomberg BNA Tax Mgmt. Mem. ___ (2013):

Despite considerable regulation of tax practitioners by both statutory rules and professional ethical standards, when a tax advisor mishandles a client’s tax work, whether because of incompetence, a conflict of interest or for some other reason, the client seeking redress must generally resort to malpractice or related actions against the errant tax advisor. Such actions draw upon a peculiar mixture of tax law, professional ethical standards promulgated by state bars and the IRS Office of Professional Responsibility and torts law, three areas of law usually frequented by different groups of experts. This article attempts to further understanding of this peculiar mixture by addressing core issues of malpractice and related causes of action in a tax practice context, covering issues such as the duties to the client, possible causes of action, damages, privity, statutes of limitations and repose, and the relevance of ethical rules. In addition, it discusses key procedures that tax practitioners can use to reduce their malpractice risk and explores some classic tax practice situations fraught with malpractice potential. While the discussion is largely based upon the standards applicable to lawyers, much of it applies equally to other tax practitioners, particularly CPAs. However, unlike other tax practitioners, lawyers generally cannot limit their malpractice liability prospectively or, if they can, can only do so with some difficulty. In addition, in some contexts lawyers may be subject to special rules, such as with regard to the applicable statutes of limitations. The article represents one view of important legal issues and concerns that tax professionals should bear in mind, along with other factors, in trying to prevent, avoid or mitigate the risk presented by malpractice-type litigation.  

Yin: The Role of Nonpartisan Staff in the Legislative Process

George K. Yin (Virginia), The Role of Nonpartisan Staff in the Legislative Process:

This short paper explains why the value of nonpartisan staff in the legislative process may stem primarily from the staff’s responsibilities to serve a broad group of legislators with heterogeneous interests, rather than on the “nonpartisan” nature of the staff. An earlier version of this paper was the keynote address to the participants of an April, 2013 Tax Symposium sponsored by the Northwestern University Law School in celebration of the centennial of the modern income tax.

Virginia Tax Review Publishes New Issue

The Virginia Tax Review has published Vol. 32, No. 3 (Winter 2013):

• Heather M. Field (UC-Hastings), Binding Choices: Tax Elections & Federal/ State Conformity, 32 Va. Tax Rev. 269 (2012)
• George Mundstock (Miami), The Tax Import of the FASB/IASB Proposal on Lease Accounting, 32 Va. Tax Rev. 327 (2012)
• Eric Chason (William & Mary), Extending the Taxation-of-Risk Model to Timing Options and Marked-to-Market Taxes, 32 Va. Tax Rev. 367 (2012)
• Ilan Benshalom (Hebrew University, Faculty of Law), Rethinking the Source of the Arm’s Length Transfer Pricing Problem, 32 Va. Tax Rev. 387 (2012)

Avi-Yonah: Virtual PE: International Taxation and the Fairness Act

Reuven S. Avi-Yonah (Michigan), Virtual PE: International Taxation and the Fairness Act:

Congress may be about to enact the Marketplace Fairness Act of 2013, which overrules the Supreme Court's 1992 decision in Quill that banned states from requiring remote vendors to collect use tax on their behalf unless the vendor had a physical presence in the state. This paper explores the international tax implications of such a move given that the Permanent Establishment threshold is similar to the physical presence requirement that the Fairness Act seeks to abolish. It argues that the small business exception in the Fairness Act is a good model for international tax to follow in re-evaluating the PE threshold.

Lucas: The Paternalistic Use of Cigarette Taxes

Gary Lucas, Jr. (Texas-Wesleyan), Saving Smokers from Themselves: The Paternalistic Use of Cigarette Taxes, 80 U. Cin. L. Rev. 693 (2012):

Governments at all levels have significantly increased cigarette taxes in recent years. Under the framework traditionally used by tax policy analysts, these tax increases are justified (1) if they are necessary to force smokers to internalize the harm that smoking causes others or (2) if they are a fair and efficient way to fund the government. But economists have generally concluded that on net, smokers do not impose large costs on third parties. In addition, heavily taxing cigarettes places a significant financial burden on low-income smokers and their families, which raises fairness concerns. As a result, scholars who support cigarette tax increases have begun to rely less on conventional tax policy arguments and to instead invoke novel arguments based on paternalism.

Paternalists argue that people smoke because they are incapacitated by addiction or because they suffer from failures of rationality. Smoking is a mistake, so the government should intervene to save smokers from themselves. And because cigarette taxes reduce smoking, the government should use them as its primary tool in this effort. Moreover, contrary to conventional wisdom, cigarette taxes may actually benefit the poor by encouraging them to give up a habit that reduces their welfare.

This Article challenges the claim that the government should use cigarette taxes for paternalistic purposes. The evidence suggests that most smokers are not incapacitated by addiction. But to the extent that they are, cigarette taxes effectively penalize them for using a product that they find difficult to quit. Additionally, smokers appear to be heterogeneous with respect to rationality. Some people may smoke due to failures of rationality, but for others, smoking appears to be a rational choice. This is problematic because cigarette taxes are a one-size-fits-all solution, and they harm rational smokers. Moreover, many smokers respond to cigarette taxes in dangerous ways. For example, some smokers switch to cigarettes that are higher in tar and nicotine. This allows them to get more tar and nicotine per cigarette smoked. But because high-tar cigarettes pose a greater risk, this response undermines the goal of improving public health. Finally, despite large cigarette tax increases in recent years, the smoking rate among the poor remains high, which suggests that regressivity is still a serious drawback.

Given the many problems with cigarette taxes, the Article recommends that policy makers focus instead on alternatives that can help smokers but that are more suitable for a heterogeneous population and that do not unfairly burden low-income families. The Article examines several proposals that satisfy these criteria, including the commitment contract for smoking cessation and the smoking license.

Lederman & Sichelman: Enforcement as Substance in Tax Compliance

Leandra Lederman (Indiana-Bloomington) & Ted Sichelman (San Diego), Enforcement as Substance in Tax Compliance, 71 Wash. & Lee L. Rev. ___ (2013):

It is well known that the government’s complete failure to enforce a law can nullify that law. But what are the effects of partial enforcement? This Article shows that imperfect enforcement can alter the de facto content of the written law in predictable and beneficial ways. Specifically, in the tax compliance context, even if perfect enforcement were costless, it would not always be socially optimal. When improving the substantive law is infeasible, the enforcement agency can effect beneficial changes in the law by adopting a probabilistic enforcement scheme that varies according to the category of taxpayer and type of transaction. Our model shows that properly “measuring” enforcement in this manner can increase overall social welfare without reducing tax revenues. Unlike case-by-case discretionary enforcement, which often results in costly uncertainty, measured enforcement operates via systemic, published policies that legal actors can respond to predictably. Accordingly, measured enforcement can offer substantial benefits not readily obtained through traditional lawmaking or enforcement schemes.

The Ohio Legacy Trust Act

Kevin R McKinnis (J.D. 2014, Cleveland State), Note, The Ohio Legacy Trust Act: The Good, the Bad and the Poor Man’s Prenuptial: An Analysis of What Asset Protection Trusts Will Mean for Ohio, 60 Cleve. St. L. Rve. ___ (2013):

This law review note, forthcoming in The Cleveland State Law Review, provides an in-depth analysis of the Ohio Legacy Trust Act and explores the potential effects the Act will have on Ohio. This note also explores the requirements to establish a Legacy Trust and the potential federal income and estate tax consequences. In the latter portion of the note, the possible ethical implications for Ohio attorneys is examined, as well as the arguments creditors will make when attempting to void a disposition to a Legacy Trust.

Kleinbard: Starbucks and Stateless Income Tax Planning

Edward D. Kleinbard (USC), Through a Latte, Darkly: Starbucks' Window into Stateless Income Tax Planning:

This paper uses Starbucks Corporation, the premier roaster, marketer and retailer of specialty coffee in the world, as an example of stateless income tax planning in action. “Stateless income” comprises income derived for tax purposes by a multinational group from business activities in a country other than the domicile of the group’s ultimate parent company, but which is subject to tax only in a jurisdiction that is neither the source of the factors of production through which the income was derived, nor the domicile of the group’s parent company.

The paper reviews both Starbucks’ recent U.K. tax controversy (including a parliamentary inquiry), which revolved around the intersection of its consistent unprofitability in the United Kingdom with large deductible intragroup payments to Dutch, Swiss and U.S. affiliates, and its more recent submission to the U.S. House Ways and Means Committee. The paper draws from this review two lessons.

First, if Starbucks can organize itself as a successful stateless income generator, any multinational firm can. Starbucks follows a classic bricks and mortar retail business model, with direct customer interactions in thousands of “high street” locations in high-tax countries around the world. Moreover, Starbucks is not a firm driven by hugely valuable identifiable intangibles that are separate from its business model, which it employs whenever it deals with those retail customers. Nonetheless, it appears that Starbucks enjoys a much lower effective tax rate on its non-U.S. income than would be predicted by looking at a weighted average of the tax rates in the countries in which it does business.

Second, The Starbucks story – in particular, its U.K. experience – demonstrates the fundamental opacity of international tax planning, in which neither investors in a public firm nor the tax authorities in any particular jurisdiction have a clear picture of what the firm is up to. It is not appropriate to expect source country tax authorities to engage in elaborate games of Twenty Tax Questions, in turn requiring detailed knowledge of the tax laws and financial accounting rules of many other jurisdictions, in order simply to evaluate the probative value of a taxpayer’s claim that its intragroup dealings necessarily are at arm’s-length by virtue of alleged symmetries in tax treatment for expense and income across the group’s affiliates. U.S.-based multinational firms owe a similar duty of candor and transparency when dealing with the Congress of the United States.

The remedy begins with transparency towards tax authorities and policymakers, through which those institutions have a clear and complete picture of the global tax planning structures of multinational firms, and the implications of those structures for generating stateless income. National governments should recognize their common interest in this regard and promptly require their tax and securities agencies to promulgate rules providing a uniform world-wide disclosure matrix for actual tax burdens by jurisdiction. As a first step the United States should enforce the current rule requiring U.S. firms to quantify the U.S. tax cost of repatriating their offshore “permanently reinvested earnings."

Raskolnikov: Accepting the Limits of Tax Law and Economics

Alex Raskolnikov (Columbia), Accepting the Limits of Tax Law and Economics, 98 Cornell L. Rev. 523 (2013):

This Article explores the limits of tax law and economics, attributing them to the unique complexity of the tax optimization problem. Designers of the optimal tax system must account for the impossibility of deterring socially undesirable behavior, provide for redistribution, and minimize social costs on the basis of assumptions that are laden with deeply contested value judgments, pervasive empirical uncertainty, or both. Given these challenges, it is hardly surprising that economic theory has a much weaker connection to the content of our tax laws and their enforcement than it does to the content and enforcement of many other legal regimes. This weakness has a profound effect on the debates about the fundamental features of our tax system. It shapes the meaning of the foundational tax concepts. It affects many familiar arguments about anti-avoidance rules and sanctions. And it extends to evaluating outright tax evasion. In sum, the limits of tax law and economics shape every aspect of tax law and tax administration. At the same time, accepting these limits shifts focus to several research agendas where tax law and economics will continue to make valuable contributions to the project of improving our tax system.

Johnson & Joulfaian: A Dynamic Analysis of Estate Tax Repeal

Craig E. Johnson & David Joulfaian (both of the U.S. Treasury Department, Office of Tax Analysis), A Dynamic Analysis of Estate Tax Repeal:

This paper examines the effects of permanently repealing the estate tax on capital accumulation and output using two different approaches to modeling the economic distortions resulting from the estate tax. In the first approach, the estate tax acts as an additional tax on capital income. The estate tax rate can be converted into an annual accrual tax rate on capital income that leaves a household with the equivalent amount of after-tax bequest. Assuming the economy-wide marginal accrual estate tax rate equals 1.7 percent, repeal of the estate tax leads to a long-run increase in the capital stock of 1.8 percent when repeal is combined with contemporaneous reductions in lump-sum transfer payments. The capital stock increases by 0.9 percent if repeal is financed by increasing income tax rates in every year. The long-run increase in the capital stock would rise to 3.3 percent if the marginal accrual rate equaled 2.6 percent and lump-sum transfer payments declined annually with repeal of the estate tax.

In the second approach, bequests are taxed directly and the after-tax bequest is included in the household’s utility function in a manner consistent with what is known as the “joy of giving” bequest motive. Under this approach, the long-run capital stock declines when the estate tax is repealed, even when financed by contemporaneous reductions in lump-sum transfer payments. This decline is 0.7 percent when the initial marginal bequest tax rate equals the average rate of 20 percent, and the decline is 0.4 percent when the initial marginal bequest tax rate equals 41 percent.

Olson: Loving and Tax Return Preparation

Nina E. Olson (National Taxpayer Advocate), More Than a 'Mere' Preparer: Loving and Return Preparation, 139 Tax Notes 767 (May 13, 2013):

Each year, tens of millions of taxpayers hire paid practitioners to prepare their Form 1040-series returns because of the overwhelming complexity of the tax code and the amount of money at stake. That has led to significant concerns about incompetent and unscrupulous preparers and their negative impact on taxpayers and compliance. The IRS and Treasury had developed and substantially implemented standards governing preparers when, in Loving v. IRS, a U.S. district court found that Treasury lacked the authority to issue the regulations. The government has appealed the case to the D.C. Circuit. The NTA believes that the district court’s decision in Loving is based in part on an outdated understanding of return preparation and filing. This report makes the case for preparer regulation generally, explains where the district court erred, and illustrates how problems in today’s tax system are directly analogous to the problem Congress sought to address in its original grant of regulatory authority to Treasury. 

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Top 5 Tax Paper Downloads

This week's list of the Top 5 Recent Tax Paper Downloads is the same as last week's list:

1.  [306 Downloads]  Using a Sledgehammer to Crack a Nut: Why FATCA Will Not Stand, by Frederic Alain Behrens (J.D. 2013, Wisconsin)

2.  [277 Downloads]  The Supercharged IPO, by Victor Fleischer (Colorado; moving to San Diego) & Nancy Staudt (USC)

3.  [216 Downloads]  Was Blackstone's Initial Public Offering Too Good to Be True?: A Case Study in Closing Loopholes in the Partnership Tax Allocation Rules, by Emily Cauble (DePaul)

4.  [173 Downloads]  Recent Developments in Federal Income Taxation: The Year 2012, by Martin J. McMahon, Jr. (Florida), Ira B. Shepard (Houston) & Daniel L. Simmons (UC-Davis)

5.  [157 Downloads]  Reforming the Taxation of Retirement Income, by Richard L. Kaplan (Illinois)

Johnson: Reforming Federal Tax Litigation: An Agenda

Steve R. Johnson (Florida State), Reforming Federal Tax Litigation: An Agenda, 41 Fla. St. L. Rev. ___ (2013):

King Vertigorn, it is said, wished to build a castle to defend Britain against invaders. Each day, his mason raised and set the stones. Each night, however, the earth would rumble, bringing the work crashing to the ground. Vexed, Vertigorn asked Merlin for an explanation. Merlin’s mystical divination revealed that, in a cavern far below the surface, there resided two foes, a red dragon and a white dragon. In their perpetual struggle for dominance, first one dragon then the other would gain temporary ascendancy. Their jostling unsettled the ground, rendering all construction temporary.

In federal tax procedure, the red dragon and the white dragon are facilitation of revenue collection and fairness to taxpayers.

Numerous times during the first century of the modern federal income tax, the courts have noted the centrality of the first value: “taxes are the life-blood of government, and their prompt and certain availability an imperious need.” But, were that the only value, we could return to brutal efficiency of the proscription system. We have refrained from doing so because our limited government traditions demand that citizens’ claims to due process under the law be taken seriously.

Thus, tax administration in the United States – before, during, and (no doubt) after the income tax’s first one hundred years – has involved and will involve the balancing of the revenue facilitation and fairness protection imperatives. Just as the power balance between the red and white dragons fluctuated, so have the relative weights accorded the two tax imperatives. During times of international or domestic crisis, we have looked to Government to save us from threats. This demands opening wider the spigot of fiscal flows, so the first tax value receives greater weight. During more placid times, menace recedes, causing the virtues of the second value to appear more attractive.

In short, the pendulum swings between emphasis on revenue maximization and taxpayer protection. This affects legislative, regulatory, and judicial actions, and it implicates not just substantive rules of tax liability and tax rates but also styles of statutory interpretation and the rules and devices of tax procedure.

This article is about the procedural rules. Specifically, it considers the mechanisms by which disputes as to federal tax liabilities are resolved. The article identifies an agenda for reforming federal tax litigation. Fully developing the justifications for and the particulars of the proposed changes necessarily is the work of more than one article. Thus, this article sets the agenda, describing the core elements of the changes (and, in some cases, the reaffirmations) I propose. Subsequent articles will develop specific proposals in greater detail.

Virginia Tax Review Publishes New Issue

The Virginia Tax Review has published Vol. 32, No. 2 (Summer 2012):

• Steve R. Johnson (Florida State), Preserving Fairness in Tax Administration in the Mayo Era, 32 Va. Tax Rev. 269 (2012)
• Richard Kaplan (Illinois), Reforming the Taxation of Retirement Income, 32 Va. Tax Rev. 327 (2012)
• Deborah L. Paul (Wachtell, Lipton, Rosen & Katz, New York), Another Look Through the Worthless Stock Deduction: Section 165(g)(3) as Applied to Foreign Subsidiaries, 32 Va. Tax Rev. 367 (2012)
• Peter V. Nelson (Pillsbury, Washington, D.C.), Conflicts of Interest: Resolving Legal Barriers to the Implementation of the Foreign Account Tax Compliance Act, 32 Va. Tax Rev. 387 (2012)

Klass: The Future of Tax Benefits for Renewable Energy

Alexandra B. Klass (Minnesota), Tax Benefits, Property Rights, and Mandates: Considering the Future of Government Support for Renewable Energy:

This essay explores the history of tax benefits, property rights benefits, and mandates for energy development for the purpose of gaining insights on how such incentives can best be used to encourage the development of renewable energy. Part I describes some of the tax preferences and other financial incentives the U.S. government has historically provided to the energy sector, including to fossil fuel development, renewable fuels (particularly ethanol), and renewable electricity sources. It compares and contrasts the varying types and levels of support for these energy sectors, and concludes that the tax preferences and other financial support provided to date to renewable electricity do not provide the same level of continuity for investment purposes and long-term growth as the support provided to the fossil fuel and biofuels industries. Part II turns to property rights incentives, and discusses the long-time property rights benefits states have conveyed to oil, gas, and other natural resource developers as well as to electric utilities to encourage the development and use of energy resources. This Part suggests that policymakers should use caution in conveying new property rights incentives to renewable energy developers to avoid upsetting existing certainty in property law and also to avoid a situation where the burdens of such changes fall too heavily on a small and discrete number of landowners. Part III considers mandates in the energy industry. These include: (1) state renewable portfolio standards (RPS) for renewable electricity; (2) the federal Renewable Fuel Standard (RFS) that benefits the biofuels industry; and (3) California’s Low Carbon Fuel Standard regulations that mandate use of an increasing amount of fuels with lowered GHG emissions each year in the state. It compares the federal RFS for biofuels with the lack of a similar mandate at the federal level for renewable electricity, and discusses the potential benefits associated with a federal RPS for electricity. Finally, Part IV considers the important role certainty and continuity play in efforts to support renewable energy development. Ultimately, this essay concludes that the continuity and relative certainty associated with certain types of tax benefits and mandates may be the best means of providing long-term support to renewable energy markets. Property rights incentives, on the other hand, should be used more sparingly to provide benefits to particular energy sectors or markets, but may be best used to create the nationwide, physical networks such as electric transmission grid expansions necessary for those markets to exist.

Patent Box Litigation in Europe: A Model for the U.S.?

Jason M. Brown (J.D. 2013, SMU), Student Article, Patent Box Taxation: A Comparison of Four Recent European Patent Box Tax Regimes and an Analytical Consideration of if and how the United States Should Implement its Own Patent Box, 46 Int'l Law. 913 (2012):

As the global economy is increasingly driven by the commercialization of highly mobile assets, several European governments have sought to encourage investment in and retention of such assets within their domestic borders by offering heavily incentivized tax rates on profits derived from patents and other highly mobile assets. Notable among the European and Asian countries to enact such patent-income tax incentives--colloquially known as patent box tax regimes--are Belgium, Luxembourg, the Netherlands, and the United Kingdom. This paper addresses the primary distinguishing features of these four regimes, including their effective tax rates, their scope, and their general qualification requirements and further addresses the preliminary economic results of the enactment of these regimes. Finally, this paper considers the shortcomings in the four regimes and discusses how the United States can capitalize on such shortcomings to enact a more effective patent box tax regime. 

NYU Tax Law Review Publishes New Issue

The Tax Law Review has published a new issue (Vol. 66, No. 1 (Fall 2012)):

• Chris William Sanchirico (Pennsylvania), Optimal Tax Policy and the Symmetries of Ignorance, 66 Tax L. Rev. 1 (2012)
• Jason S. Oh (UCLA), The Social Cost of Tax Expenditure Reform, 66 Tax L. Rev. 63 (2012)
• Leigh Osofsky (Miami), Some Realism About Responsive Tax Administration, 66 Tax L. Rev. 121 (2012)

Graetz & Doud: Technological Innovation, International Competition, and International Taxation

Michael J. Graetz (Columbia) & Rachael Doud (J.D. 2012, Yale), Technological Innovation, International Competition, and the Challenges of International Income Taxation, 113 Colum. L. Rev. 347 (2013):

Because of the importance of technological innovation to economic growth, nations strive to stimulate and attract the research and development (“R&D”) that leads to that innovation and to make themselves hospitable environments for the holding of intellectual property (“IP”). Tax policies have taken center stage in their efforts to accomplish these goals and to capture a share of the income from technological innovations.

Designing cost-effective methods of supporting technological innovations has, however, become substantially more difficult as the world economy has become more interconnected. Where R&D is performed and where income is earned change in response to the nature and level of government support. The capacity of multinational enterprises (“MNEs”) to shift their IP production, IP ownership, and IP income across national borders, along with their ability to establish new corporations in tax-favorable jurisdictions, makes designing cost-effective incentives exceptionally difficult. Devising appropriate tax rules for developing IP and for taxing IP income has become the central challenge for international income taxation.

This Article examines the three primary tax policies supporting innovation: (1) incentives for R&D, (2) “patent boxes,” and (3) tax benefits for “advanced manufacturing.” It then briefly describes common techniques MNEs use to lower their taxes on IP income. The Article then assesses the various incentives and offers recommendations about how the United States might respond to challenges it now faces in promoting technological innovation. Based on extensive examination of the economic evidence, the Article concludes that, at most, only R&D incentives are justified.

This Article also summarizes the current proposals for limiting opportunities for U.S. MNEs to shift IP income to low- or zero-tax jurisdictions. In that connection, it offers proposals for change that would more closely align U.S. taxes with U.S. sales.

Wright: Financial Alchemy and Tax Shelter Promoters

Del Wright Jr. (Valparaiso), Financial Alchemy: How Tax Shelter Promoters Use Financial Products to Bedevil the IRS (And How the IRS Helps Them):

People often question why tax shelters proliferate and why it is so difficult for the government to stop them. This Article explains, through examples, how tax shelters are structured to be a no-lose proposition for wealthy taxpayers. In a manner accessible to non-finance people, the Article sets forth the legal and financial tools underlying modern tax shelters and sheds light on how those tools are used to create technical tax shelters; i.e., tax shelters that work from an often hyper-technical tax perspective but are contrary to any reasonable legislative purpose. The Article then goes on to detail some of the most costly tax shelters in history, including Son of Boss, which the government estimates has cost taxpayers over $6 billion since the mid-1990s. The Article further explains how many shelters, including Son of Boss, evolved from a ninety-year-old tax avoidance technique called short-against-the-box. The Article concludes with a prescription, informed by ten years' experience in the tax shelter industry, for combating tax shelters.

Ryznar: Incentivizing Parental Support for College Tuition through the Tax Code

Margaret Ryznar (Indiana-Indianapolis), Incentivizing Parental Support for College Tuition through the Tax Code, 2013 Mich. St. L. Rev. ___:

University tuition costs continue to increase, while education continues to be important. Efforts to alleviate this problem must be undertaken carefully as to not simply aggravate the problem. To this end, this Article proposes that parental contribution towards university tuition be treated more favorably by the tax code, and in particular, be treated as tax deductible. Universities already expect parental contributions as part of a child’s financial aid package, and this proposed tax deduction may help fulfill that expectation. Furthermore, this proposed deduction would spare students some reliance on the loan system, including the risk of default. This proposed deduction, finally, may be structured in a cost-neutral way. Specifically, the funds used for this deduction would be the taxpayer funds saved from the decrease in loan defaults and loan interest subsidies, which currently cost tens of billions of tax dollars.

Tax and the Catastrophe Insurance Industry

Thomas Berghman (J.D. 2012, Illinois), A Market Under(writing) the Weather: A Recommendation to Increase Insurer Capacity, 2013 U. Ill. L. Rev. 221:

The Note begins by providing a background of (1) the state of the catastrophe insurance industry and its inadequate capitalization, (2) insurer incentives, basic insurance principles, and tax treatment, (3) basic principles and tax treatment of the reinsurance industry, and (4) current proposals to increase capacity in the catastrophe insurance industry. The Note then analyzes (1) the capacity shortage problem, comparing the costs and benefits of reinsurance and alternative risk transfer, (2) the various federal policies purporting to address the increasing price of homeowner insurance premiums, and (3) several alternative risk transfer devices. The Note then discusses the advantages of the cat bond, such as the adaptability of bonds to numerous circumstances. Furthermore, the Note discusses the ability of cat bonds to supplement traditional reinsurance methods of increasing capacity. Lastly, the Note analyzes the benefits of treating cat bonds as tax-free. 

Brooks Presents The Standard Deduction, Progressivity and Simplification Today at the Treasury Department

John R. Brooks II (Georgetown) presents Doing Too Much: The Standard Deduction and the Conflict Between Progressivity and Simplification, 2 Colum. J. Tax. L. 203 (2011), at the Treasury Department's Office of Tax Analysis today:

In U.S. federal income tax, the standard deduction, along with the personal exemptions, provides taxpayers with a minimum amount of untaxed income, effectively creating a “zero bracket amount.” For historical and political reasons, however, the standard deduction also operates as a simplified substitute for the itemized deductions, such as the deductions for extraordinary medical expenses, charitable contributions, and home mortgage interest. This seemingly reasonable compromise in fact leads to substantial, and surprising, conceptual complexity. In particular, close analysis of each of the two roles shows that their effects, and related criticisms, are often contradictory, which in turn makes it difficult to have coherent debates regarding the proper roles of the standard deduction and the personal deductions.

This article argues that, while the standard deduction is worse than we think it is, it is also easier to fix than we think it is. We can replace the standard deduction with a true, independent zero bracket amount and a floor under the itemized deductions while staying revenue-and distribution-neutral. This would effectively divorce the two roles of the standard deduction – zero bracket amount and simplification of the itemized deductions – leading to more coherence in individual income taxation and giving more flexibility to policymakers. This article proposes further to disaggregate the single floor under the itemized deductions into multiple, independent floors under each itemized deduction. This also would lead to greater coherence and flexibility in tax system design. While creating multiple floors would marginally increase complexity for some taxpayers, the costs of such complexity are overstated relative to the benefits of more accuracy and coherence.

Houston Business & Tax Journal Publishes New Issue

The Houston Business & Tax Law Journal has published Vol. 12, Part 1 (2012):

• Bret Wells (Houston), "Territorial" Tax Reform: Homeless Income Is the Achilles Heel, 12 Hous. Bus. & Tax L.J. 1 (2012)
• Genevieve Loutinsky (Judge Advocate General Corp), Gladwellian Taxation: Deterring Tax Abuse Through General Anti-avoidance Rules, 12 Hous. Bus. & Tax L.J. 82 (2012)
• Blake W. Gipson, Student Article, The Disappearing Discount: Applying the Minority and Marketability Discounts to the Cost of Capital in Shareholder Appraisals, 12 Hous. Bus. & Tax L.J. 129 (2012)
• Rachel Goodson, Student Article, The Adequacy of Whistleblower Protection: Is the Cost to the Individual Whistleblower Too High?, 12 Hous. Bus. & Tax L.J. 161 (2012)
• Nicole Washington, Student Article, Transparency v. Intelligence: Corporate Information Privacy Rights under the Freedom of Information Act and Whether Inquiring Minds Still Have a Right to Know, 12 Hous. Bus. & Tax L.J. 194 (2012)

Urquhart: Why Is Taxpayer Standing Permissive in State Courts and Restrictive in Federal Courts?

Joshua G. Urquhart (Law Clerk, Chief Judge Philip P. Simon, U.S. District Court for the Northern District of Indiana), Disfavored Constitution, Passive Virtues? Linking State Constitutional Fiscal Limitations and Permissive Taxpayer Standing Doctrines, 81 Fordham L. Rev. 1263 (2012):

This Article contrasts the permissive state taxpayer standing doctrines in place in most states with the restrictive federal and state taxpayer standing rules applied in federal court. It proposes a new theory to explain this disparity, arguing that ubiquitous state constitutional fiscal restrictions, which specifically limit a state government’s ability to tax, spend, and borrow, are a primary impetus in the creation and development of liberal state taxpayer standing doctrines. The Article evaluates this novel hypothesis through an empirical-historical survey of the early state taxpayer standing decisions in every permissive jurisdiction and finds that these provisions are indeed involved in most cases and in most states. It concludes by discussing the implications of these results.

Tobin Reviews Hickman's Unpacking the Force of Law

Donald Tobin (Ohio State), Temporary Treasury Regulations and IRB Guidance in a Post-Mead and Mayo World (Jotwell) (reviewing Kristin Hickman (Minnesota), Unpacking the Force of Law, 66 Vand. L. Rev. 465 (2013)):

With the Supreme Court’s recent decision in Mayo Foundation for Education and Research v. United States, there is a huge void of scholarship regarding how administrative law principles apply in the tax context.  Kristin Hickman helps fill that void by continuing her work at the intersection of administrative law and tax procedure in her recent Vanderbilt Law Review article “Unpacking the Force of Law,” which deals with the treatment of temporary treasury regulations and IRB guidance after the Supreme Court’s decisions in Mayo and United States v. Mead Corp. ...

Hickman’s work here is insightful, and she clearly and painstakingly explains the application of administrative law principles in the tax context.  Her conclusions naturally come from her argument that temporary Treasury regulations and IRB guidance have the “force of law,” and her work here is incredibly important.  The Treasury has routinely argued that the APA does not apply in the tax context.  Hickman’s work convincingly argues that it does and also sets out the significant mess that will be caused if Treasury does not ensure that its regulatory practices comply with the APA.  Hickman’s work reminds us all, and most importantly the Treasury, that tax exceptionalism does not apply in the administrative law context and that the Treasury should take action to ensure that its promulgation of temporary Treasury regulations (and maybe IRB guidance) comply with the APA.

Georgetown Symposium on The Intersection of Tax Law, Gender and Sexuality

Symposium, Confronting the Intersection of Tax Law, Gender and Sexuality, 13 Geo. J. Gender & L. 1- 105 (2012):

• Anthony C. Infanti (Pittsburgh), LGBT Taxpayers: A Collision of "Others", 13 Geo. J. Gender & L. 1 (2012)
• Deborah H. Schenk (NYU), Reflections on Women in Tax Law Academia, 13 Geo. J. Gender & L. 47 (2012)
• Nancy Staudt (USC), April Yanyuan Wu (Boston College) & Chao Wang (Fried, Frank, New York), Is Gender-Based Policymaking Relevant in the 21st Century?, 13 Geo. J. Gender & L. 59 (2012)

Unequal Burdens in EITC Compliance

Karie Davis-Nozemack (Georgia Institute of Technology, Scheller College of Business), Unequal Burdens in EITC Compliance, 31 Law & Ineq. 37 (2012):

Lower income means harsher treatment from the government for taxpayers who claim the Earned Income Tax Credit (EITC). EITC claimants are audited more often than any taxpayers other than the very wealthy. More concerning, however, is that the IRS audits EITC claimants by correspondence examination in a manner that unduly burdens access to this refundable tax credit, a credit that often keeps lower income workers out of poverty.

Improper payment law brings increased scrutiny to federal programs that issue erroneous payments. Because the EITC is alleged to have substantial improper payments, it is subject to federal improper payment law, which adds administrative process and burdens in hopes of diminishing erroneous payments. While other scholars have noted the relationship between improper payment law and the EITC, this article takes the unique view that improper payment law, instead of burdening EITC administration, could provide relief to the Service’s onerous EITC compliance methods.

Chetty Presents Active vs. Passive Decisions and Retirement Savings Today at NYU

Raj Chetty (Harvard University, Department of Economics) presents Active vs. Passive Decisions and Crowd-Out in Retirement Savings Accounts: Evidence from Denmark at NYU today as part of its Colloquium Series on Tax Policy and Public Finance convened by Daniel Shaviro (NYU) and William Gale (Tax Policy Center; visiting at NYU):

Do retirement savings policies -- such as tax subsidies or employer-provided pension plans -- increase total saving for retirement or simply induce shifting across accounts? We revisit this classic question using 45 million observations on savings for the population of Denmark. We find that a policy's impact on total savings depends critically on whether it changes savings rates by active or passive choice. Tax subsidies, which rely upon individuals to take an action to raise savings, have small impacts on total wealth. We estimate that each $1 of tax expenditure on subsidies increases total saving by 1 cent. In contrast, policies that raise savings automatically even if individuals take no action -- such as employer-provided pensions or automatic contributions to retirement accounts -- increase wealth accumulation substantially. Price subsidies only affect the behavior of active savers who respond to incentives, whereas automatic contributions increase savings of passive individuals who do not reoptimize. We estimate that 85% of individuals are passive savers. The 15% of active savers who respond to price subsidies do so primarily by shifting assets across accounts rather than reducing consumption. These individuals also offset changes in automatic contributions and have higher wealth-income ratios. We conclude that automatic contributions are more eective at increasing total retirement savings than price subsidies for three reasons: (1) subsidies induce relatively few individuals to respond, (2) they generate substantial crowdout conditional on response, and (3) they do not influence the savings behavior of passive individuals, who are least prepared for retirement.