TaxProf Blog

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.

Gabilondo Named One of 50 Most Influential Minority Law Professors

José Gabilondo (Florida International) is the only Tax Prof named to Lawyers of Color's 2013 50 Under 50 List ("The Most Influential Minority Law Professors 50 Years of Age or Younger") in its Law School Diversity Issue:

José Gabilondo joined the College of Law after working in financial market regulation at the U.S. Department of the Treasury, the U.S. Securities and Exchange Commission, the Office of the Comptroller of the Currency, and the World Bank. He served as Associate Dean for Academic Affairs from 2009-2011. Professor Gabilondo teaches tax and corporate finance. He is co-author of Corporate Finance Debt, Equity, and Derivatives Markets and their Intermediaries in the American Casebook Series. He is a nationally recognized commentator in the Spanish-language media on financial and economic matters.

For the complete list of the 50 Under 50, see here.

The IRS Scandal, Day 7

• The Atlantic:  'Angry' Obama: IRS Chief Is Out, and New Safeguards Are Coming
• Bloomberg:  Congress Focuses on IRS Delay in Disclosing Tea Party Scrutiny
• Bloomberg:  IRS Says Concerns About Some Tea Party Groups Prompted Label
• Boston Globe editorial:  In Targeting Conservative Groups, IRS Violated Core Principles
• Cato Institute:  The IRS Scandal: Hiding In Plain Sight, by Walter Olson
• Columbia Journalism Review:  The Other IRS Scandal: Required Context for a Controversy, by David Cay Johnston
• CNN:  Source: Two 'Rogue' Workers Principally Behind IRS Targeting of Conservatives
• Daily Caller:  Scandal-Plagued IRS Official Will Give Speech, Receive Award at College Commencement
• Forbes:  Suit Alleges IRS Improperly Seized 60 Million Personal Medical Records
• Human Events:  Left-Wing Groups Sailed Past the Politicized IRS
• L.A. Times:  The Real Scandal: IRS Gives Tax Exemptions to Political Partisans
• Legal Ethics Forum:  IRS Scandal: Why Reveal at the ABA Conference? (The Answer Isn't Flattering to the IRS), by John Steele
• National Law Journal:  Scandal Could Change How IRS Regulates Political Groups
• National Review:  Defending the Taxman: Debunking the IRS Excuses and Evasions
• National Review:  Director of IRS Tax-Exempt Determinations Office is Obama Donor
• National Review:  IRS Employees Disproportionately Donate to Obama: Statistics Reveal an Imbalance in a Nominally Nonpartisan Agency 
• National Review:  IRS Source: Cincinnati Told to Lock Down Data
• New York Times:  Acting Chief of IRS Forced Out Over Tea Party Targeting
• New York Times editorial:  Take Politics Away From the IRS
• New York Times op-ed:  The Real IRS Scandal
• New York Times Opinionator:  The Taxman Cometh, by David Brooks & Gail Collins
• Reuters:  US Senator Probing Why IRS Revealed Mistakes at Lawyer Meeting
• The Right Sphere:  Speaking of Shady 501(c)(4) Non-Profits…
• Slate:  It’s About Disclosure, Stupid: The Larger Failing Behind the Terrible IRS Treatment of Tea Party Groups, by Richard L. Hasen (UC-Irvine)
• Wall Street Journal editorial:  Your Next IRS Political Audit:  The Tax Agency Is Getting Vast New Power in Health Care
• Wall Street Journal editorial:  Democrats and the IRS: Chuck Schumer Wanted the Agency to Probe Tax-Exempt Political Groups
• Wall Street Journal op-ed:  The Senate Roots of the IRS Scandal: High-ranking Democrats in 2010 Began Egging the Agency to Investigate Conservative Nonprofits
• Wall Street Journal:  A Brief History of IRS Political Targeting: One Survey Found That 75% of IRS Respondents Felt Entitled to Deceive or Lie to Congress
• Wall Street Journal:  The 'Independent' Revenue Service: President Obama Has a Strange View of IRS Political Accountability
• Wall Street Journal:  Tax Scandal Fells IRS Chief 
• Washington Post:  Acting Director of IRS Resigns Amid Furor Over Targeting of Conservative Groups
• Washington Examiner:  IRS Exec Got $42K in Bonuses in Three Years

IRS, Exempt Organization Field Examination Flowchart:

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.

Senate Releases Tax Reform Option Paper on Economic and Community Development

The Senate Finance Committee yesterday released its Sixth Tax Reform Option Paper on Economic and Community Development:

This document is the sixth in a series of papers compiling tax reform options that Finance Committee members may wish to consider as they work towards reforming our nation’s tax system. This compilation is a joint product of the majority and minority staffs of the Finance Committee with input from Committee members’ staffs.

The paper lists the following broad goals in this policy area:

• Simplify the law in order to reduce the cost to businesses and individuals of complying with the tax code;
• Carefully consider whether and how to address any positive or negative externalities;
• If policy makers choose to include incentives in a reformed tax code, make such tax expenditures more equitable and efficient; and
• Carefully consider how to treat different parts of the country and industries equitably.

On housing, the paper includes the following options:

• Gradually repeal the mortgage interest deduction;
• Limit the mortgage interest deduction;
• Convert the mortgage interest deduction to an above-the-line deduction;
• Convert the mortgage interest deduction to a credit;
• Phase out exclusion for capital gains on sale of principal residence;
• Make permanent the deduction for mortgage insurance premium payments;
• Extend exclusion from income for cancellation of certain home mortgage debt;
• Repeal the Low-Income Housing Tax Credit (LIHTC);
• Replace the LIHTC with an equivalent reduction in tax on rental income;
• Reform or expand the LIHTC; and
• Create a non-refundable tax credit for low-income renters.

The paper lists other policy options for state and local financing, tribal financing, community development, and state and local tax uniformity.  

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."

Top Tax Court Judge to be Suspended 9 Months Without Pay for Submitting Late Opinions

Following up on my previous post, Minnesota Tax Court Chief Judge Accused of Missing Deadlines, Evading Work:  ABA Journal, Top Tax Court Judge Should be Suspended 9 Months Without Pay, Review Panel Says:

A review panel has recommended that the chief judge of the Minnesota Tax Court be censured and suspended without pay for nine months, because he routinely exceeded the three-month deadline for submitting his opinions and falsified dates to try to obscure his noncompliance.

Nonetheless, Judge George Perez was known for not filing timely tax opinions, suggesting "a lack of oversight, both organizationally and technologically.” the Board on Judicial Standards wrote. Its recommendation, which includes monthly reports by Perez on the status of his cases and a requirement that he seek permission for extensions from the new chief judge, once he is back on the bench, now goes to the state supreme court for a final decision, the Star Tribune reports.

AEI: Tax Policy and the Nobel Prize

American Enterprise Institute Podcast:   Tax Policy and the Nobel Prize:

What will you do with your Nobel Prize Money? On the latest episode of Banter, AEI economist Aparna Mathur discusses the tax policy surrounding academic, scientific, and philanthropic prize winnings. America is the only country that taxes these earnings and as a result, many give their winnings to charity. Should these winners, who’ve contributed so much to society already, be allowed to keep the fruits of their labor or should they be encouraged to contribute to further social good? Plus, Stu and Andrew play a round of “guess the feminist critique.”

Aprill: The TIGTA Report on the IRS Scandal: Questions About the IRS and About the Report

Ellen Aprill (Loyola-L.A.), The TIGTA Report on the IRS Scandal: Questions about the IRS and About the Report:

We now have the report from the Treasury Inspector General for Tax Administration, Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review (the Report). The Report details certain problems that have already been made public, such as the Exempt Organization’s Determination Unit relying on names such as “Tea Party” or “Patriot” to identify potential cases of excessive campaign intervention or asking inappropriate questions of applicants, such as names of donors and the intention of officers, directors, etc. to run for political office. There is also new and disquieting information. We discover, for example, that it took the Director, Rulings and Agreements, three months to learn that the reviewers of these applications had in January 2010 changed the criteria being applied. Moreover, processing of cases stopped in October 2010, but the Determination Unit Program thought the cases were still being processed, and draft written guidance was not received from the Technical Unit until November 2011, 13 months after the Determinations Unit stopped processing cases. At the same time, the Report documents that the Director, Exempt Organizations acted promptly when, however belatedly, problems did come to her attention.

Nonetheless, the quality of some aspects of the Report troubles me. Figure l on page 2 of the Report purports to display “Characteristics of Certain Common Types of Tax-Exempt Organizations.” According to the Figure, section 501(c)(3) organization do not have to publicly disclose the identity of their donors. That is simply wrong.

One important category of section 501(c)(3) organization, private foundations -- which are generally grant-making organizations supported by an individual, couple, family or corporation (think Ford Foundation or Gates Foundation) -- are required to disclose publicly the identity of their donors. The Report several times faults the IRS for not properly applying the applicable laws and Treasury Regulations. According to page 14 of the Report, “Treasury Regulations state that I.R.C. § 501(c)(4) organization should have social welfare as their ‘primary activity.’” The Treasury Regulations, however, do not use this phrase. They provide, “An organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. An organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements.” While exempt organization specialists often use the phrase “primary activity” as a shorthand for the regulatory requirements, nowhere do these regulations speak of “primary activity.” That is, the Report, which faults the IRS for its understanding of the applicable rules, fails to quote the key Treasury Regulations accurately.

At other points, the Report seems to me to forget that it focuses on only one particular aspect of the IRS Exempt Organizations Division. For example, the Report recommends that the IRS develop guidance for specialists on how to process requests for recognition of exempt status involving potentially significant political campaign intervention and post this guidance on the Internet. The IRS disagreed with this recommendation. The Report insists that posting such guidance on the Internet could “address a concern raised in the IRS’s response that many applications appear to contain incomplete and inconsistent information.” The IRS, however, must process applications for all categories of tax-exempt organizations. It is not just those applications with potentially significant campaign intervention that often contain incomplete and inconsistent information. According to the Exempt Organizations FY 2012 Annual Report and FY 2013 Work Plan, its Determinations Unit receives approximately 60,000 new applications for exemption annually. If the IRS is to post guidance on the Internet regarding processing of requests for recognition of exemption, it needs to do so more broadly than just for section 501(c)(4) organizations with political campaign involvement. The Report fails to take account of such considerations in rejecting the IRS response.

The Report has exposed a number of needed procedural and substantive changes in connection with applications for section 501(c)(4) status. I heartily endorse all the recommendations on which TIGTA and the IRS agree. We should, however, consider the need for procedural reform and greater substantive guidance for exempt organizations generally, and not just exempt under section 501(c)(4) organizations.

Hackney: The TIGTA Report on the IRS Scandal: Be on the Lookout for False Partisan Witchunts

Phillip Hackney (LSU), The TIGTA Report on the IRS Scandal: Be on the Lookout for False Partisan Witchunts:

The TIGTA report on the IRS Teaparty scandal pretty much confirmed my expectations which is that the claim that the IRS "targeted" conservative groups to the exclusion of others is false.  This is the most explosive charge that everyone had been expecting.  Additionally, the IRS did not single out conservative groups alone to send ridiculously long and inappropriate questions -- it did it to everyone caught in the net of political advocacy. Interestingly, the report identifies that 96 of 298 cases were related to conservative tea party, patriot or 9/12 groups.  I don't know what that leaves for the allegiances of the other 68%, but it would have been nice to know. If the other greater than 2/3s amount had liberal or democratic allegiances, we have a much different scandal on our hands -- Obama is targeting liberals, why? -- but TIGTA does not provide this information.

The report is well-written and gives some good recommendations, but it acts like a knee surgeon examining an elderly sick patient.  The doctor tells her that her problem is a bad knee and if he gives her a new knee, she will be like new again.   It's all good and well to tell the IRS to beef up its work on political advocacy, but that ignores the real problem, which is that it gets in over 60,000 paper applications a year that it somehow has to both quickly and with accuracy review with too small of a staff. 

The types of applications the IRS faces are changing continuously leaving little ability for the high level standard setting TIGTA calls for. As soon as it develops one set of standards developed organically from watching the applications coming into the office, a new type of organization arises. Meanwhile the IRS EO office is trying to meet the twin aims to be fast and accurate.  They are impossibilities. To be fast, you must eliminate much in the way of higher level review. To be accurate you must involve higher level review. To do higher level review you need more seasoned knowledgeable attorneys that can make these calls. Such money will not be allocated to this office ever. Better recommendations might be to force the application process to become electronic and to use some social science methods to determine applications that are most likely in need of a review, but the office would need a lot more money for that. 

At the end of the day -- yes to inept management, but that does not acknowledge the ridiculous challenge that office faces -- but, No to Intentional partisan conservative hunting on the part of the IRS.  What happened here is simply endemic of this office.Any organization that applies for exemption presenting a type of organization that the office has the time and inclination to try to focus on at the moment will face similar challenges in timing and ridiculously broad inquiries. This is the agents, who are not lawyers but good people trying to do their job, muddling through the best they can getting slow frustrating legal advice from the folks above them like me when I was there. The report notes that the average time for other types of organizations flagged for review was much less than faced by the political advocacy cases -- very simple explanation -- this is an average and probably a lot of the other types of organizations had methods developed for handling such matters -- the IRS was faced with a wave of social welfare organization applications engaged in political advocacy in a way that the office had not really faced or thought through before (social welfare organizations had even recently been referred to as the trash bin of exempt organizations by the IRS). Any time the IRS faces a new issue, it is very slow and very deliberate in the way it works to handle such applications and they tend to be handled from bottom up rather than top down as we witnessed in this case.  This means they will probably get some calls wrong during the early stage of the development of a wave of new organizations, but quickly like bees in a beehive they will make corrections to more properly handle the situation.

Critically, note that all the worst IRS inquiries to the political advocacy organizations that the public has been most concerned about were ultimately overruled when subjected to actual review at a higher level. The TIGTA report for instance demonstrates that the IRS found that the request for lists of donors was an inappropriate request and they devised a way to ensure that these donor lists were not disclosed and in fact destroyed. This is slower than we might have liked, but it is very common for this office because of the challenges it faces in handling its workload. It often works from bottom to top rather than the other way around because of necessity. 

The biggest problem is the IRS's inept handling of the politics of the whole affair, and its bizarre means of communicating its failures in this instance. This led to the IRS losing control of the message, even to Jon Stewart and The Daily Show, with the public thinking the worst of the IRS. I remain concerned regarding the apparently deficient disclosure to Congress when high level officials were asked apparently direct questions that I would have thought would have led to disclosure of the review of the Tea Party organizations. There may be a good explanation for those failures and hopefully we will hear those when Steve Miller testifies soon.

Nevertheless, other than the disclosure problems, this TIGTA review gives an accurate picture of an organization that I came to know and love when I worked there.  Good people trying to do good work, but set for failure because provided poor clay in the Internal Revenue Code provisions on exempt organizations and too little staff and money to carry out the twin aims of accuracy and speed in molding that poor clay into a consistent good product.

The IRS Scandal, Day 6

• The Atlantic, The IRS' Role in Campaign Finance Is an Awkward, Unhappy Accident
• Bloomberg, Carney Says White House Not Involved in IRS Targeting Groups
• Bloomberg, IRS Focus on Tea Parties Stirs Dissent on Health Care Law
• Bloomberg, IRS Sent Same Letter to Democrats That Fed Tea Party Row
• Breitbart:  Progressive Group: IRS Gave Us Conservative Groups' Confidential Docs
• CNN, The Real Risk of the IRS Scandal
• Daily Caller:  IRS Official Lerner Speedily Approved Exemption for Obama Brother’s ‘Charity’
• The Guardian, The IRS Should Do More, Not Less, Scrutinizing of Political Groups
• Human Events, More IRS Abuses of Power Against Conservative Groups
• National Law Journal, Scandal Could Leave IRS 'Gun Shy' With Political Groups
• New York Times editorial, The IRS Audits Are Condemned 
• New York Times, Uneven IRS Scrutiny Seen in Political Spending by Big Tax-Exempt Groups
• Politico:  Franklin Graham: IRS Targeted Us, Too
• Time, New IRS Scandal Echoes a Long History of Political Harassment
• Townhall, Partisan Obama Culture Spawned a More Abusive IRS
• USA Today:  IRS Approved Liberal Groups While Tea Party in Limbo
• Wall Street Journal editorial, The IRS Wants You: The Scandal Over Politicized Tax Enforcement Is Growing
• Wall Street Journal, How Obama Learned to Love the IRS
• Wall Street Journal, The IRS's Nonprofit Helper: A Tax-Exempt Charity Disseminated Confidential Tax Information 
• Washington Examiner:  IRS Scandal Raises Fears About Enforcing Obamacare
• Washington Examiner:  Jay Carney Walks Back Denial of White House Involvement in IRS Scandal
• Washington Post:  IRS Has Been Too Lax on Tax-Exempt Status
• Weekly Standard:  McConnell: 'We’ve Only Started to Scratch the Surface of This Scandal'

Prior TaxProf Blog coverage:

• IRS Admits to Targeting Conservative Groups in 2012 Election (May 10, 2013)
• WaPo and WSJ Agree: IRS Targeting of Conservatives Is Appalling (May 11, 2013)
• Schmalbeck on the IRS 'Targeting' of Conservative Groups (May 12, 2013)
• The Deepening IRS Scandal (May 13, 2013)
• The IRS Scandal, Day 5 (May 14, 2013)
• Jon Stewart and Vic Fleischer on the IRS Scandal (May 14, 2013)
• Inspector General: Ineffective IRS Management Allowed Agents to Target Conservative Groups (May 14, 2013)

House Holds Hearing Today on Small Business and Pass-Through Entity Tax Reform

The Subcommittee on Select Revenue Measures of the House Ways & Means Committee holds a hearing today on Ways and Means Small Business and Pass-Through Entity Tax Reform Discussion Draft:

The hearing will focus on the Ways and Means small business discussion draft released on March 12, 2013. For purposes of this hearing, the Subcommittee is interested in comments and analysis relating to the basic architecture of the draft proposals including, in particular, the implications of the changes to the cash accounting rules, the questions that must be answered in designing a workable unified pass-through regime, and the real-world ramifications of the incremental proposals to modify the rules governing S corporations and partnerships.

• Roger Harris (President, Padgett Business Services, Athens, GA)
• Willard Taylor (Former Partner, Sullivan & Cromwell, New York)
• Blake Rubin (Partner, McDermott Will & Emery, Washington, D.C.)
• Thomas Nichols (Partner, Meissner Tierney Fisher & Nichols, Milwaukee)

Inspector General: Ineffective IRS Management Allowed Agents to Target Conservative Groups

The Treasury Inspector General for Tax Administration today released Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review (2013-10-053):

Early in Calendar Year 2010, the IRS began using inappropriate criteria to identify organizations applying for tax-exempt status to review for indications of significant political campaign intervention. Although the IRS has taken some action, it will need to do more so that the public has reasonable assurance that applications are processed without unreasonable delay in a fair and impartial manner in the future.

• Bloomberg:  Ineffective IRS Management Led to Targeting, Report Says
• Bloomberg:  Obama Calls IRS Actions Outlined in Internal Report Intolerable
• Fox News:  Watchdog Report Describes Massive Delays as IRS Slow-Walked Tea Party Groups
• Huffington Post:  Inspector General: IRS' Ineffective Management Allowed Tea Party Targeting
• New York Times:  Management Flaws at IRS Cited in Tea Party Scrutiny
• Politico:  5 Takeaways From IRS Report
• Wall Street Journal:  Inspector General’s IRS Report
• Washington Post:  Inspector General Says Ineffective Management at IRS Allowed Agents to Target Tea Party Groups
• Washington Times:  IRS Audit Found Political Bias Against Conservatives; Groups Gave Up After Application Delay

(Hat Tip: Ellen Aprill.)

Jon Stewart and Vic Fleischer on the IRS Scandal

The Daily Show with Jon Stewart
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New York Times DealBook:  Congress’s Role in the IRS Focus on Conservative Groups, by Victor Fleischer (Colorado; moving to San Diego):

Outrage continues to escalate over the revelation that IRS employees focused on conservative groups applying for tax-exempt status. The indignation is understandable: political targeting is an abuse of power, and the idea of using the IRS to go after one’s enemies is a classic dirty trick. Unfortunately, the incident provides a new fuel source for the paranoid style in American politics.

The reality is that this is a story of institutional incompetence. And Congress should share the blame.

The root of the problem is poor institutional design, not a political conspiracy. Current law forces the IRS to enforce a vague set of campaign finance laws that have next to nothing to do with raising revenue. The conservative groups at issue were applying for tax-exempt status as “social welfare” organizations rather than Section 527 tax-exempt political organizations. The chief benefit of becoming a social welfare organization is the ability to keep the names of one’s donors private. These social welfare organizations may engage in issue advocacy, and may do some lobbying, but are not supposed to engage in political campaigning. How much political activity is too much? No one really knows.

The IRS is supposed to enforce the tax code, not administer a byzantine campaign finance system. It is good at gathering and processing enormous amounts of data that help the nation raise revenue. Under current law, however, it has little choice but to exercise discretion in the constitutionally dangerous waters of campaign finance.

As Lloyd Mayer, a law professor at the University of Notre Dame, explained, “because Congress and the Treasury have left both the definition of political activity and, for [social welfare organizations], the amount of permitted political activity uncertain, the I.R.S. is required to make broad inquiries and to use politically sensitive criteria to decide if a given organization qualifies for tax-exempt status.” ...

For further reading, see

• Donald B. Tobin [Ohio State], Campaign Disclosure and Tax-Exempt Entities: A Quick Repair to the Regulatory Plumbing, 10 Election L.J. 427 (2011)
• Ellen P. Aprill [Loyola-L.A.], Why the I.R.S. Should Want to Develop Rules Regarding Charities and Politics, 62 Case Western Res. L. Rev. 643 (2011)
• Brian D. Galle [Boston College], Charities in Politics: A Reappraisal [, 54 Wm. & Mary L. Rev. ___ (2012). 

Attorney General Orders Criminal Investigation of IRS Targeting of Conservative Groups

• ABA Journal
• Bloomberg
• Fox News
• MSNBC
• New York Times
• Wall Street Journal
• Washington Post

(Hat Tip: Ellen Aprill, Mike Talbert.)

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.

The IRS Scandal, Day 5

• Treasury Inspector General for Tax Administration, Report on IRS Targeting of Conservative Groups, Appendix VI and Appendix VII
• Senate Finance Committee, Baucus Comments on Accusations that IRS Targeted Political Groups for Greater Oversight
• Senate Finance Committee, Hatch Calls for Finance Committee Hearing, Investigation into IRS Targeting Conservative Groups
• Senate Finance Committee, Timeline of Key Events Surrounding IRS Targeting of Conservative Groups
• Bloomberg, How IRS Stumbled Into Scandal by Probing Its Nonprofits
• Bloomberg, Obama Says IRS Targeting of Tea Party Groups ‘Outrageous’
• Human Events, IRS Scandal Grows Deeper
• New York Times, Obama Scoffs at Libya Outcry but Vows to Act on IRS Audits
• Politico, President Obama: ‘No Patience’ for ‘Outrageous’ IRS Mess
• Pro Publica, IRS Office That Targeted Tea Party Also Disclosed Confidential Docs From Conservative Groups
• Wall Street Journal,  Nobody's Laughing Now: How Pervasive Is the Obama IRS Scandal?
• Wall Street Journal, Obama to Hold IRS Staff ‘Fully Accountable’
• WSJ Law Blog, How the IRS is Supposed to Vet Social Welfare Groups
• Washington Post, IRS Official Lois Lerner Becomes Face of Scandal Over Targeting of Conservative Groups
• Washington Post, Obama Denounces Reported IRS Targeting of Conservative Groups

Prior TaxProf Blog coverage:

• IRS Admits to Targeting Conservative Groups in 2012 Election (May 10, 2013)
• WaPo and WSJ Agree: IRS Targeting of Conservatives Is Appalling (May 11, 2013)
• Schmalbeck on the IRS 'Targeting' of Conservative Groups (May 12, 2013)
• The Deepening IRS Scandal (May 13, 2013)

Tax Partner Tony Nitti Reflects on His Brain Aneurysm

Inspiring story from tax partner (and blogger) Anthony J. Nitti (WithumSmith & Brown, Aspen, CO), Five Years After a Brain Aneurysm, Fear of Dying Can't Make Me Quit Living:

As I sat down to write today, it dawned on me that this might come off as a touch self-indulgent. But then I realized that a blog, by definition, is inherently self-indulgent, is it not? So here goes…

Five years ago today was the single worst day of my life. Two weeks earlier, a three-month battle with debilitating migraines ended in a terrifying diagnosis: a brain aneurysm. And on the morning of May 9^th, 2008, I kissed my wife goodbye before being wheeled into an operating room, where Dr. Robert Rosenwasser of Thomas Jefferson Hospital proceeded to cut through my skull, recess my brain, and clip off the offending artery. ...

My surgery went fantastically well, and a quick series of self-tests performed while still in my hospital bed confirmed my belief that cognitively, I was completely intact. The physical and emotional recovery, however, was another matter altogether. If there’s one thing I’ve learned throughout this process, it’s that when recovering from a life-threatening ailment, the real challenge often doesn’t begin until the healing is complete. ...

I’ve seen first-hand what fear can do to a man. How visions of a foreshortened future can elevate one’s instinct for self-preservation above all others, driving a person once brimming with life to spend their remaining days in a self-imposed protective bubble. To die without dying. I was desperate to not allow that to happen to me, but I was terrified of the alternative. ...

I realized I’d enjoyed a blessed existence for 33 years prior to my diagnosis, a life devoid of tragedy or adversity. I had supportive parents and a loving wife who would encourage me in my return, despite what was likely their natural instinct to beg me to live out my days from the safety of the couch. In fact, it was my mother who challenged me not to allow one bad experience to become my defining moment. It was she who would remind me, in a way that only an Eastern European mother could pull off, that she would “kick my butt” if I didn’t get back to living my life to the fullest. And I love her for that more than she can ever imagine.

If that weren’t enough motivation, a few months after surgery, my wife and I found out we would be welcoming a son into the world. Faced with that prospect, I knew I couldn’t spend the rest of my days explaining to my boy that Daddy had to quit living out of fear of dying. ...

Five years later, I can proudly say that I have taken my life back, and I hope beyond hope that my story is able to provide inspiration. And to top it all off, just as my father promised, life is better than I ever could have imagined. ...

In addition to our son Ryan, our daughter Emily was born one year ago next week. Anytime I find myself thinking existentially, questioning why I survived when so many don’t, all I need to do is look at my son and daughter, and it all makes sense. I was meant to watch them grow up. ...

But if you take nothing else away from my story from the past year, take away the understanding that happy endings do indeed exist. Sure, life can seem cruel and unjust at times, but every once in a while, it can go the other way too. Life can be beautiful. Life can be just. Life can smile upon you, handing you miracles you never thought possible.

For the past several yars, I have ended my one-week Introduction to Law course for incoming 1Ls with this chorus from One Life to Love by 33 Miles:

You only get just one time around,
You only get one shot at this,
One chance,
To find out,
The one thing that you don't wanna miss,
One day when its all said and done
I hope you see that it was enough,
This one ride,
One try,
One life,
To love.

GAO Finds 60 Deficiencies in IRS's Internal Controls

The Government Accountability Office today released Improvements Are Needed to Enhance the Internal Revenue Service's Internal Controls (GAO-13-420R):

During its audit of the IRS fiscal year 2012 financial statements, GAO identified one new internal control deficiency that contributed to IRS's continuing material weakness in internal control over unpaid tax assessments as of September 30, 2012. Specifically, IRS's controls over its process for estimating the balances of federal taxes receivable and other unpaid tax assessments were not effectively implemented to ensure the proper accounting classification and dollar amounts. In addition, GAO identified the following six less significant, new internal control deficiencies as of September 30, 2012. ...

Further, GAO's work showed that as of September 30, 2012, IRS had completed corrective action on 23 of the 69 recommendations from GAO's prior financial audits and other financial management-related work that remained open at the beginning of the fiscal year 2012 financial audit. As a result, IRS currently has 60 recommendations that need to be addressed, which consist of the previous 46 open recommendations as well as 14 new recommendations GAO is making in this report.

European Leaders Talk Tough on Tax Avoidance While Passing Laws That Encourage It

Bloomberg:  Europe Eases Corporate Tax Dodge as Worker Burdens Rise, by Jesse Drucker:

In early November, members of the U.K. Parliament assailed executives from Google, Starbucks and Amazon for moving billions of dollars in profits into tax havens.  

Less than a month later, Chancellor of the Exchequer George Osborne said he would lower the U.K.’s corporate tax rate to 21%, below Germany and France, from 28% in 2010. A month after that, the U.K. cut the rate further, to less than 6%, on profit attributed to offshore arms that make loans to other units. These subsidiaries can help U.K.-based multinationals shift income to mailboxes in tax havens.

“Here is a blatant incentive inside the U.K. tax system to move profits previously in London into a tax haven,” said Richard Murphy, director of Tax Research LLP in Norfolk, England. “It is just absurd. At the same time, we have people like Osborne saying ’I’m going to crack down on tax avoidance.”’

As politicians in Europe and the U.S. talk tough on corporate tax dodging, several of their governments are helping multinationals lower tax bills. They have been cutting corporate rates, introducing laws that encourage tax avoidance, and rejecting proposals to close loopholes. Even amid growing public outrage in Europe against austerity policies, the gulf between rhetoric and reality on taxation means individuals rather than businesses are often bearing the brunt of higher taxes.

WSJ: IRS Reviews Private Equity Management Fee Waivers

Wall Street Journal:  IRS Eyes a Private-Equity Tax Move, by Mark Maremont:

The IRS is examining the propriety of a tax practice used in some parts of the private-equity industry, in which firms convert management fees into investments that receive more favorable tax treatment, a senior IRS official said at a recent legal conference.

The practice, often called a management-fee waiver or fee-waiver conversion, has been used for years by partners at some of the nation's largest private-equity firms to reduce their taxes, and can involve significant sums. ...

In the main strategy in question, private-equity firms or firm partners voluntarily waive annual or quarterly management fees due to them from investors. Instead, the firms often redirect that fee money to satisfy their own obligations to invest in the funds they manage. That change can turn management fees, currently taxed as ordinary income at federal rates of up to 39.6%, into investments that enjoy capital-gains treatment at lower rates, now starting at 20% for upper-income federal taxpayers....

Proponents have said the strategy is legal, that executives take on risk by redirecting the money into investments and thus should be taxed at lower rates. Some academics have called it aggressive and potentially subject to IRS challenge.

Partly at issue is whether the strategy fits within a 1993 IRS ruling [Rev. Proc. 93-27, 1993-2 CB 343], and whether it potentially triggers a separate law about partnership transactions that would require the income to be taxed at ordinary rates.

Some lawyers say private-equity firms have employed different versions of the tax strategy, along a spectrum ranging from conservative to more aggressive from a tax standpoint.

NY Times: Greek Crackdown on Tax Evasion Yields Little Revenue

New York Times:  Greek Crackdown on Tax Evasion Yields Little Revenue:

If ignominy were tax revenue, Greece might be a big step closer to ending its budget problems. Politicians, business executives and bankers are being raked through the headlines or incarcerated in a white-collar crackdown as the Greek government goes after people suspected of tax dodging. Those under questioning include the former finance minister George Papaconstantinou, in a highly charged parliamentary investigation into his handling of a list of Greeks with foreign bank accounts. ...

Tax evasion lies at the heart of the Greek financial collapse, which has resulted in international bailout loans exceeding 205 billion euros, or $266 billion, the size of Greece’s depressed economy. In fact, Greece’s international creditors have made revamping its notoriously lax tax system a primary condition for any additional bailout financing.

But even after an overhaul of Greece’s tax collection apparatus — and a politically charged campaign to pursue delinquents — government officials have collected only a tiny fraction of what is owed and potentially collectible.

Rather than capture a lot of extra money, the crusade seems mainly to have captured prominent quarry. The net cast by newly empowered prosecutors has snared the former mayor of Salonika, the leader of the Greek national statistical agency and several former cabinet members.

Lawyers and tax officials estimate that hundreds of people have been locked up in the last year, suspected of tax evasion. Under the new laws, someone who owes the government more than 10,000 euros in taxes can be arrested on the spot and given the choice between paying up or being put behind bars. While held, the suspect can wait as long as 18 months before the prosecutor decides on a formal charge.

Despite those efforts, of the estimated 13 billion euros that government officials say is owed by Greece’s 1,500 biggest tax debtors, only about 19 million euros has been collected in the last two and a half years. ...

If Greece’s 1,500 biggest tax debtors paid, the government would easily wipe out its budget deficit for 2013. Analysts estimate that the taxes avoided by Greeks of all income levels total 55 billion euros, which would help Greece return to firmer financial footing.

(Hat Tip: Mike Talbert.)

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. 

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

The Deepening IRS Scandal

• American Thinker:  IRS Scandal Deepens: High Officials Knew of Tea Party Targeting in 2011
• CNN:  IRS Abuses Power in Targeting Tea Party
• Fox News:  Republicans Slam IRS Targeting of Tea Party as 'Chilling,' a Form of Intimidation
• The Hill:  Rep. Issa: IRS apology to Tea Party Groups ‘Not an Honest One’
• Legal Insurrection:  IRS Reaped Hatred of Tea Party Sown by Democrats and the Media, by William Jacobson (Cornell)
• Legal Insurrection:  The Washington Post leads on the #IRScandal ... Who Will Follow?
• Mother Jones:  The IRS Shoots Itself in the Foot, Then Reloads
• New York Post:  The Nixon Wing at the IRS
• New York Times:  IRS Focus on Conservatives Gives G.O.P. an Issue to Seize On
• Politico:  5 Questions on the IRS Debacle
• Reuters:  IRS Kept Shifting Targets in Tax-Exempt Groups Scrutiny: Report
• The Volokh Conspiracy:  IRS Scrutinized Teaching the Constitution, by Jonathan Adler (Case Western)
• Wall Street Journal:  Wider Problems Found at IRS: Probe Says Tax Agency Used Sweeping Criteria to Scrutinize Conservative Groups
• Washington Examiner:  Conservatives Want Congress to Audit IRS for Targeting Tea Party
• Washington Post:  IRS Targeted Groups That Criticized the Government, IG Report Says 
• Washington Tims:  IRS Scandal Grows to Include Debt Critics

Prior TaxProf Blog coverage:

• IRS Admits to Targeting Conservative Groups in 2012 Election (May 10, 2013)
• WaPo and WSJ Agree: IRS Targeting of Conservatives Is Appalling (May 11, 2013)
• Schmalbeck on the IRS 'Targeting' of Conservative Groups (May 12, 2013)

TaxProf Blog Weekend Roundup

Saturday:

• WaPo and WSJ Agree: IRS Targeting of Conservatives Is Appalling
• ABA Tax Section May Meeting
• College Advice From The Daily Show
• State Beer Taxes

Sunday:

• Happy Mother's Day:  Tax Attorney Son Tries to Deduct $1.2 Million for Caring for Infirm Mother
• Schmalbeck on the IRS 'Targeting' of Conservative Groups
• A Cincinnati Lawyer's Rise, Fall, and Redemption ... in Hawaii (Thanks to a Tax Prof)
• Top 5 Tax Paper Downloads

Happy Mother's Day: Tax Attorney Son Tries to Deduct $1.2 Million for Caring for Infirm Mother

Robert Wood reminds us on Mother's Day about the 2011 Tax Court decision in Estate of Olivo v. Commissioner, T.C. Memo. 2011-163 (July 11, 2011):

[T]he issues we must decide are: (1) Whether the estate is entitled to deduct [$1,240,000] as an expense the claim on the estate tax return for services rendered by Anthony M. Olivo (Mr. Olivo), the son of Emilia W. Olivo (decedent) to decedent before her death; (2) whether the estate is entitled to deduct the [$44,200] administrator’s commission paid to Mr. Olivo; and (3) whether the estate is entitled to deduct the [$55,000] accountant’s and attorney’s fees claimed by Mr. Olivo.

Mr. Olivo, the administrator of the estate, resided with decedent at the time of her death and had provided care for her for many years before her death. Mr. Olivo began providing nearly full-time care for decedent and her late husband, Matthew W. Olivo, his parents (we sometimes refer to Matthew W. Olivo as his father), around September 18, 1994. ...

[D]uring September 1994, Mr. Olivo began to find it increasingly difficult to maintain his practice as an attorney. He had received his J.D. from Rutgers University School of Law (Camden) in 1976 and his LL.M. in taxation from New York University School of Law in 1979. Mr. Olivo practiced law at private firms in Cherry Hill, New Jersey, from 1976 until 1988, when he began his own practice. However, his solo practice began to disintegrate during the mid-1990s, in part because of the amount of time he devoted to his parents’ health problems. He earned no significant income from his law practice during the period when he was caring for his parents, from 1994 through 2003....

Mr. Olivo’s care for decedent during the last years of her life was extraordinary, and the efforts he expended on her behalf are commendable. However, we conclude that the estate has not established that Mr. Olivo is entitled to recover for that care....

Applying the statutory formula to the estate value of $1,711,163.81 reported on the return yields an administrator’s commission of $52,223.28. ...

The record shows that Mr. Olivo did perform some legal services for the estate, in addition to his services as administrator. For instance, he filed the estate’s tax return,handled the IRS examination on behalf of the estate, and filedthe estate’s original petition with this Court. However, the record does not establish the value of his legal services. Mr. Olivo kept no records of the time he spent performing legal services for the estate. Instead, he merely estimated the numberof hours and used a billing rate of $150 per hour. On account of the lack of corroborating evidence in the record concerning theattorney’s fees issue, we decline to accept Mr. Olivo’s estimates of the amount of time he spent performing legal services for the estate.

Schmalbeck on the IRS 'Targeting' of Conservative Groups

Following up on my prior posts:

• IRS Admits to Targeting Conservative Groups in 2012 Election (May 10, 2013)
• WaPo and WSJ Agree: IRS Targeting of Conservatives Is Appalling (May 11, 2013)

Richard Schmalbeck (Duke) agreed to allow me to share his perspective posted on the TaxProf Email Discussion Group:

I was at the Exempt Organizations Committee meeting of the ABA Tax Section meeting when Lois Lerner, the director of the division that handles exempt organizations matters, dropped the bombshell that is in the papers today, and generating a lot of media outrage, especially but not exclusively on Fox News. I think her explanation in person was probably better than the statement that the IRS released, at least in terms of explaining why some exemption applications actually require more scrutiny than others.

The IRS position on 501(c)(4) organizations ("social welfare organizations")is that, while they can engage in campaign activities, they cannot do so as their primary activity—which they understand as more than 50% of the organization's activities. Many organizations that seek this status probably should be section 527 political organizations rather than social welfare organizations. So when the service center in Cincinnati, which handles exemption applications, was inundated with unusually large numbers of (c)(4) applications, they tried to find ways to triage them, so that the traditional social welfare organizations would not have their processing held up, but organizations that might be close to the 50% campaign activity zone would get the appropriate level of scrutiny. In developing ways to identify the applications requiring attention, one of the tests that somebody decided would work is whether the organization had "tea party" or "patriot" in its name. The IRS did also look at other organizations with potential for abuse of the social welfare organization status, but apparently did not come up with any shorthand ways of identifying any such organizations that did not have "tea party" or "patriot" in their names.

This was obviously a bad idea for a number of reasons, including its political asymmetry. But a) it didn't come from the top—Lois is herself a career employee, and it was a decision made somewhere below her level; and b) it did not involve scrutiny that was inappropriate under the circumstances. The content of some of the scrutiny may have been inappropriate, however, in seeking names of donors, which is not ordinarily done. (Even here, I can imagine some basis for thinking this was relevant to the inquiry: if all an organization's funds were coming from a party, or other 527 organizations, it would be a matter of some concern, and raise a somewhat higher suspicion that the organization was being used to finance campaign activities primarily. And while public disclosure of donors is not required, there is no absolute bar on the IRS seeking information about donors. They do it routinely in their efforts to determine private foundation status and compliance, since major donors are disqualified persons for purposes of the private foundation excise taxes. I should emphasize that Lois did not offer this explanation however—it is just my speculation on why IRS staff might have asked that question.)

I think the problem is that if you hear that tea party organizations were "targeted" for special scrutiny, it is hard to imagine an explanation that doesn't depend on partisan bias. But there is such an explanation: the need to draw the line between (c)(4) and 527 organizations. I'm not saying that this was the right way to go about this, and neither is Lois or anyone else in the IRS. But at the same time, it isn't the smoking gun that some in the media seem to think it is. It is nothing like Richard Nixon asking the IRS to audit his political enemies, though it is being compared to that.

• Legal Ethics Forum, Legal Ethics Angle in That IRS Auditing Scandal?, by John Steele
• New York Times op-ed, The Taxman vs. the Tea Party, by Ross Douthat
• San Diego Union-Tribune editorial, A Shameful Abuse of Power by the IRS

A Cincinnati Lawyer's Rise, Fall, and Redemption ... in Hawaii (Thanks to a Tax Prof)

In the small world department:  my Pepperdine colleague Shelley Saxer is completing a visit at Hawaii and dropped me a note about her colleague next door, Ken Lawson, whose faculty bio only begins to capture his extraordinary journey:

Ken Lawson is the associate director of the Hawaii Innocence Project and an associate faculty specialist at the William S. Richardson School of Law. He had a successful law practice in Cincinnati, Ohio, until his license to practice law was revoked because of misconduct while addicted to prescription painkillers. He pled guilty to the felony of obtaining controlled substances by fraudulent means and served 10 months in federal penitentiary. Mr. Lawson is now active in the Hawaii Lawyers and Judges Assistance Program.

Ken started his legal career as an associate in one of Ohio’s oldest and largest law firms. He eventually started his own firm, which grew to 12 lawyers. Over that 18 year period, he was lead counsel in more than a hundred criminal trials, including many murder and capital cases. He also litigated numerous civil rights and police misconduct cases in both federal and state courts and had an active appellate practice. Ken won numerous cases that were considered by many to be “unwinnable”. These and many of Ken’s other cases were followed closely by the media, and he made numerous appearances on CBS, ABC, CNN, CNBC, MSNBC, Court TV, and numerous radio shows. Some of the appearances related to his cases but he also was frequently asked by reporters to comment on and explain to lay audiences the legal issues in other newsworthy cases.

Ken’s high-profile clientele included NFL star Elbert “Ickey” Woods, NFL star and professional baseball player Deion Sanders, and entertainer Peter Frampton. More important to Ken, he represented many “everyday” people, including a single mother whose 16 year old juvenile son, incarcerated in an Ohio prison for adults, had died after being stabbed 16 times by the leader of a racist hate group, the Aryan Nation.

From a recent article in Cincinnati Magazine, Soul Survivor: From His Fiery Fame as "The Pit Bull Lawyer" to Finding His Family, the Unlikely Redemption of Ken Lawson:

At the top of his game, Ken Lawson was the Ray Lewis of the Hamilton County Courthouse — the linebacker lawyer nobody wanted to run into.

He was “Law Dog,” bigger than life on a colorful two-story mural in the West End. On posters he was a warlord, seated on a skull-topped throne, the decapitated head of a white man rolling at his feet. On the streets he was the answer to the Cops theme song: “What ya gonna do when they come for you, bad boys, bad boys?”

In the eye of the hurricanes that swirled around race — riots, lawsuits, stormy city council meetings, press conferences, headline-grabbing accusations — there was Lawson, an adopted kid who traced his biological father to Cincinnati heavyweight boxing champ Ezzard Charles. ...

His drug habit — prescription opiates (Oxycontin, Percocet), weed and cocaine — reached $1,000 a day. He stole from his clients, failed to show up in court, was “sick” for weeks at a time. A judge finally asked for an investigation. He was convicted of organizing a drug ring with a local doctor and sentenced to two years in prison.

But that’s not the end of his story. It was just the beginning. ...

“It was a nightmare,” he says from his new home in Hawaii. “If I had a way of dying, I would have done it.” During detox, “for 45 days, the only way I could stop shaking was to take three or four hot showers a day. I would put a chair in there and just sit until the hot water ran out. I was hopeless. Hopeless.”

“My first day sober in years was Feb. 1, 2007.  My drug habit was so expensive that I had depleted all of our money and was stealing from the client trust account to support my addiction to painkillers.  When I got out of detox, our house was in foreclosure, my law license was about to be suspended, I was being investigated by the DEA, the kids’ tuition had not been paid, all of the rotten stuff I did and the rotten person I had become was all over the news for months, and I was looking at going to prison.

“My sponsor kept telling me that God had me right where I was supposed to be. The kids and I were living in my mother’s house in my old bedroom. Boy, was I being humbled; and, looking back, I needed to learn some humility.”

His wife, Marva, stuck by him through it all. “I love him unconditionally,” she explains. “I knew him as ‘Kenny,’ that boy in high school who was relentless even then. ... Marva, whose parents didn’t finish eighth grade, went to college, then medical school, became a psychiatrist, found a job in Hawaii and moved there “on a wing and a prayer, trusting God.” To raise money to join her, Ken mowed lawns and did odd jobs. “My sponsor took up a collection, and we had enough funds for plane tickets. ...

The dark hours emphasized the light around the corner. “If I had not gone to prison, I would not be the person I am today.” ...

Randall Roth, the University of Hawaii [tax] law professor who took a chance to help Lawson get hired as office manager for the Hawaii Innocence Project, says, “Anyone who doesn’t believe in second chances, or the concept of redemption, hasn’t met Ken. His failures are well documented, but I’m convinced that he can and will do more good for people during the rest of his life than anyone else I know could do in 10 lifetimes. I value his friendship greatly and I trust him completely.” ...

“The easy answer to what happened is alcohol and drugs,” Lawson says. “But the honest answer is that I was off track way before I took my first drink or drugs. My thinking about what life was about was way off track. I thought it was money, things, power, prestige. I kept chasing that stuff and none of it could fill that hole in my soul.”

“The irony is that all of the people that God put in my life to help me have been white. I found it ironic that very few blacks showed up in court to support to me. I’m not angry or even bitter about this as I’ve come to learn to accept people for who they are, wherever they are in life. 

“However, over the last few years I have come to see how racism was such a distraction from the truth. The truth is, I ended up hitting bottom as a direct result of choices I made. I had to learn that blaming others for my problems keeps me from seeing the truth about myself. By refusing to accept responsibility for our own conduct, by refusing to forgive others for their wrongs, the community stays resentful.

“I was wrong for the positions I took with the police and race in Cincinnati, but it’s not until I was able to do a complete and honest self-inventory that I was able to see the truth about my actions. So I have learned that my resentments and anger hurt me more than the person I’m resentful at.

“Life and where it takes us is so amazing. When I can stay in the moment and think of others more than myself, is when I truly realize what a gift life really is! Sometimes I look back on that part of my life when I chased money, power and success thinking it is what life is about and I often just wonder, ‘Where have I been all this time to miss so much of what really matters?’ “Well, I’m present now.”

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)

WaPo and WSJ Agree: IRS Targeting of Conservatives Is Appalling

Following up on yesterday's post, IRS Admits to Targeting Conservative Groups in 2012 Election:

Washington Post editorial, Playing Politics With Tax Records:

A bedrock principle of U.S. democracy is that the coercive powers of government are never used for partisan purpose. The law is blind to political viewpoint, and so are its enforcers, most especially the FBI and the IRS. Any violation of this principle threatens the trust and the voluntary cooperation of citizens upon which this democracy depends.

So it was appalling to learn Friday that the IRS had improperly targeted conservative groups for scrutiny. It was almost as disturbing that President Obama and Treasury Secretary Jack Lew have not personally apologized to the American people and promised a full investigation. 

“Mistakes were made,” the agency said in a statement. IRS official Lois Lerner explained that staffers used a “shortcut” to sort through a large number of applications from groups seeking tax-exempt status, highlighting organizations with “tea party” or “patriot” in their names. The IRS insisted emphatically that partisanship had nothing to do with it. However, it seems that groups with “progressive” in their titles did not receive the same scrutiny.If it was not partisanship, was it incompetence? Stupidity, on a breathtaking scale? At this point, the IRS has lost any standing to determine and report on what exactly happened. Certainly Congress will investigate, as House Majority Leader Eric Cantor (R-Va.) promised. Mr. Obama also should guarantee an unimpeachably independent inquiry. 

Wall Street Journal editorial, The IRS Targets Conservatives:

Just because you're paranoid doesn't mean the IRS isn't out to get you. We only wish that were a joke. On Friday, an IRS official disclosed for the first time, and by way of apologizing, that the agency that wields the taxing power of the federal government had targeted conservative groups for special scrutiny during the 2012 election season. Apology or not, that can't be the end of the matter.

The stunning admission didn't emerge in an official statement by a senior official at the Treasury Department, which supervises the IRS. Instead, IRS Director of Exempt Organizations Lois Lerner disclosed it on Friday in response to a question from the audience at a meeting of American Bar Association tax lawyers in Washington, D.C.

Ms. Lerner acknowledged that the agency had flagged groups with the words "tea party" or "patriot" to have their tax returns inspected, presumably with an eye on the legality of their tax exemption. Ms. Lerner called this "inappropriate," which it certainly was, and she said it wasn't done "out of any political bias," which is hard to believe. If there was no political bias, why were only conservative groups targeted? White House spokesman Jay Carney also called the IRS actions "inappropriate" on Friday, which makes that the word of the day.

Ms. Lerner added the tax inspections were carried out entirely by low-level workers in Cincinnati without any direction from Washington. Forgive us if we also don't take that claim as gospel.

Even if the idea did arise as some kind of spontaneous Cincinnati political combustion, where could they possibly have come up with the idea that targeting the tea party might be a good career move? That certainly was the uber political message coming out of the White House, even if it wasn't a directive from the top of the IRS. Another question is who stopped the "inappropriate" requests once they were discovered. Was anyone punished? And how far up the chain of command did knowledge go? ...

Republicans were up in arms Friday about the IRS disclosure, and rightly so. We assume they will use their oversight power in the House to find out what happened, and whether these Cincinnati kids were really operating on their own.

Other than the power to prosecute, the taxing authority is the most awesome power the government has. It can ruin people and companies. When wielded for political purposes, it is a violation of the basic contract the American people have with their government. The abuse admitted by Ms. Lerner can't be dismissed in a casual apology on a casual Friday as no big deal. It's a very big and bad deal.

• Christian Science Monitor, IRS Apologizes for Singling Out Conservative Groups: How Did It Happen?
• The Daily Beast, IRS Singled Out Conservative Groups for Extra Scrutiny, by Megan McArdle
• The Hill, Camp Vows Hearing on IRS Treatment of Tea Party Groups
• Hot Air, 10 Crazy Things the IRS Asked Tea Party Groups
• Politico, IRS Under Siege With No Friends
• Power Line, Obama’s Abuse of the IRS–This Isn’t the First Time
• Wall Street Journal Law Blog, Reaction to the IRS Apology 
• Washington Examiner, IRS Won't Say Whether it Will Discipline Employees Over Targeting of Tea Party Groups

Update:   From the Associated Press:

Senior Internal Revenue Service officials knew agents were targeting tea party groups as early as 2011, according to a draft of an inspector general's report obtained by The Associated Press that seemingly contradicts public statements by the IRS commissioner. ...

Among the other revelations, on Aug. 4, 2011, staffers in the IRS’ Rulings and Agreements office “held a meeting with chief counsel so that everyone would have the latest information on the issue.” 

• The Hill, Report: Top IRS Officials Knew of Tea Party Targeting Two Years Ago
• L.A. Times, IRS Official Knew in 2011 That Tea Party Was Targeted
• Politico, IRS Officials Knew of Tea Party Targeting
• Volokh Conspiracy, IRS Officials Knew of Targeting in 2011
• Washington Post, Report: Top IRS Officials Knew in 2011 That Conservative Groups Were Targeted

ABA Tax Section May Meeting

The ABA Tax Section May meeting concludes today in Washington, D.C. The full program is here. Tax Profs with speaking roles include:

• Affiliated & Related Corporations:  Michelle Kwon (Tennessee), Don Leatherman (Tennessee)
• Diversity:  Patricia A. Cain (Santa Clara)
• Employee Benefits Distributions Update:  Kathryn J. Kennedy (John Marshall)
• Exempt Organizations:  Jill S. Manny (NYU)
• Individual & Family Taxation:  David L. Rice (California Polytechnic)
• Pro Bono & Tax Clinics:  Michael Campbell (Villanova), Keith Fogg (Villanova)
• Publications:  Alice Abreu (Temple)
• S Corporations:  Robert K. Morrow (Chapman)
• Sales, Exchanges & Basis:  Bradley T. Borden (Brooklyn), Erik Jensen (Case Western)
• Tax Policy & Simplification:  Itai Grinberg (Georgetown), Roberta F. Mann (Oregon), Erik Jensen (Case Western), Tracy Kaye (Seton Hall)
• Tax Practice Management:  Michael B. Lang (Chapman)
• Teaching Taxation:  Joshua Blank (NYU), Adam S. Chodorow (Arizona State), Deborah A. Geier (Cleveland State), Omri Marian (Florida), Adam Rosenzweig (Washington U.)

Tax Prof Dinner:

State Beer Taxes

IRS Admits to Targeting Conservative Groups in 2012 Election

After months of denying that the IRS has been targeting tea party groups for special scrutiny, Lois Lerner, Director of the IRS's Exempt Organizations Division, admitted that the IRS had been giving additional scrutiny to applications for tax-exempt status from goups with the "Tea Party" or "patriot" in their title. She denied there was any political motivation and blamed the practice on a low-level employee in Cincinnati.

Update:  The IRS has released this statement.

• ABC News, Tea Party Rejects IRS Apology
• Daily Beast:  The IRS Takes Aim at the Tea Party
• Election Law Blog, “IRS Apologizes For Targeting Conservative Groups In 2012 Election”
• Forbes, IRS to Tea Party: Sorry We Targeted You and Your Tax Status 
• National Review, 'Mistakes Were Made'
• New York Times, IRS Apologizes to Conservative Groups Over Application Audits
• Tax Update Blog, Look at a Celebrity Return? You’re Fired! Harass a Tea Party Outfit? Carry On.
• Volokh Conspiracy, IRS Admits Targeting “Tea Party” Groups
• Wall Street Journal, IRS Apologizes for Scrutiny of Conservative Groups 
• Wall Street Journal, The New Nixon:  This Time, the Press Cheered as the IRS Investigated the President's Opponents.
• Washington Post, IRS Admits Targeting Conservatives for Tax Scrutiny in 2012 Election
• Washington Times, Congress Vows to Investigate IRS Over Conservative Audits

Prior TaxProf Blog coverage:

• Is President Obama Ineligible to Work for the IRS?
• Barack Milhous Obama: Presidents Should Not Joke About Using the IRS as Political Enforcer

Joint Tax Committee Scores President's Budget as $890 Billion Tax Increase

The Joint Committee on Taxation today released Estimated Budget Effects of the Revenue Provisions Contained in the President’s Fiscal Year Budget Proposal (JCX-11-13).  The Joint Tax Committee estimates that the President's budget would raise taxes by $890 billion over ten years.

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.

IRS Releases FY2012 Criminal Investigation Report

IR-2013-50, IRS Criminal Investigation Issues Fiscal 2012 Report:

IRS Criminal Investigation (CI) today released its Annual Report for fiscal 2012, highlighting strong gains in enforcement actions and penalties imposed on convicted tax criminals.

The 28-page report summarizes a wide variety of IRS CI activity on a range of tax related issues during the year ending Sept. 30, 2012. CI investigates potential criminal violations of the Internal Revenue Code and related financial crimes in a manner to foster confidence in the tax system and compliance with the law.

"The key to our successes is perseverance and dedication to working complex financial investigations aimed at stopping tax fraud, identity theft, offshore tax evasion, public corruption, money laundering and other financial crimes," said Richard Weber, Chief of Criminal Investigation. ...

Investigations initiated and prosecution recommendations were both up nearly 9 percent in fiscal 2012 compared to the prior year. Filings of indictments and other charging documents rose 13 percent. Meanwhile, convictions and those sentenced both gained roughly 12 percent from the prior year.

Criminal investigation initiations totaled 5,125 cases in fiscal 2012 while investigations completed were 4,937 – up 5 percent from fiscal 2011. Convictions totaled 2,634 in fiscal 2012 while the conviction rate edged up slightly to 93 percent.

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.

Senate Releases Tax Reform Option Paper on International Competitiveness

The Senate Finance Committee yesterday released its Fifth Tax Reform Option Paper on International Competitiveness:

This document is the fifth in a series of papers compiling tax reform options that Finance Committee members may wish to consider as they work towards reforming our nation’s tax system.  This compilation is a joint product of the majority and minority staffs of the Finance Committee with input from Committee members’ staffs.  The options described below represent a non-exhaustive list of prominent tax reform options suggested by witnesses at the Committee’s 30 hearings on tax reform to date, bipartisan commissions, tax policy experts, and members of Congress.  For the sake of brevity, the list does not include options that retain current law. The options listed are not necessarily endorsed by either the Chairman or Ranking Member.  ...

The paper outlines the following broad goals for reform in this area:

• Increasing U.S. competitiveness and job creation by reducing barriers to U.S. and foreign multinationals investing in the U.S.;
• Reducing tax incentives for multinationals to be foreign-based;
• Reducing tax incentives for U.S. multinationals to keep foreign earnings abroad;
• Preventing base erosion and profit shifting to low-taxed foreign entities lacking relevant business substance; and
• Reducing complexity, uncertainty, and compliance burdens.

Some of the reform options discussed in the paper in greater detail include:

• Tightening anti-base erosion rules and reforming the treatment of non-subpart F earnings;
• Strengthening the subpart F rules via several specific changes;
• Repealing deferral for controlled foreign corporations;
• Strengthening thin-capitalization rules to limit base erosion through excessive debt financing;
• Strengthening rules against U.S. base erosion by foreign companies;
• Limiting cross-crediting of foreign tax credits;
• Improving the sourcing of income rules;
• Repealing Domestic International Sales Corporation (DISC) provisions;
• Reforming passive foreign investment company (PFIC) rules;
• Reforming effectively connected income rules;
• Providing an election to long-term nonresident citizens to be taxed as nonresident aliens if they meet certain conditions; and
• Repealing the foreign-earned income exclusion.

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. 

Max & Dave's Excellent Tax Reform Adventure

Bloomberg:  ‘Max and Dave’ Start Public Campaign for Simpler Tax Code:

Calling themselves “Max and Dave,” the top two tax writers in Congress are starting a public-relations campaign for a simpler U.S. tax code.

Max Baucus, chairman of the Senate Finance Committee, and Dave Camp, his counterpart on the House Ways and Means Committee, set up a website -- taxreform.gov -- and a handle on Twitter -- @simplertaxes -- to gather public support and input as they try to revise the U.S. tax system.  

Baucus and Camp are designing their public pitch as a 21st-century update of the “Write Rosty” campaign of Dan Rostenkowski, the Ways and Means panel chairman at the time of the last major tax-code rewrite in 1986. “We want to know what people think the nation’s tax system should look like and how we can make families’ lives easier,” Baucus said in a statement.

• The Hill:  Camp, Baucus Launch New Tax Reform Website
• NPR:  Lawmakers Use Web To Request Help Simplifying Tax Code
• Politico:  Dave Camp, Max Baucus Dream of a New Tax Code
• USA Today:  Lawmakers Seek Public Support for Tax Overhaul
• Wall Street Journal:  Camp, Baucus Launch Tax-Reform Campaign Online

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)

IRS, Australia & UK Join Forces to Combat Offshore Tax Evasion

IR-2013-48 (May 9, 2013):  IRS, Australia and United Kingdom Engaged in Cooperative Effort to Combat Offshore Tax Evasion:

The tax administrations from the United States, Australia and the United Kingdom announced today a plan to share tax information involving a multitude of trusts and companies holding assets on behalf of residents in jurisdictions throughout the world.

The three nations have each acquired a substantial amount of data revealing extensive use of such entities organized in a number of jurisdictions including Singapore, the British Virgin Islands, Cayman Islands and the Cook Islands. The data contains both the identities of the individual owners of these entities, as well as the advisors who assisted in establishing the entity structure.

The IRS, Australian Tax Office and HM Revenue & Customs have been working together to analyze this data and have uncovered information that may be relevant to tax administrations of other jurisdictions. Thus, they have developed a plan for sharing the data, as well as their preliminary analysis, if requested by those other tax administrations.

• Bloomberg, IRS Opens Tax Cases Based on Trove of Offshore Data

President Obama Nominates Two Tax Court Judges

President Obama yesterday nominated Joseph W. Nega and Michael B. Thornton to the United States Tax Court:

Joseph W. Nega, Nominee for Judge, United States Tax Court
Joseph W. Nega is a Senior Legislation Counsel to the Joint Committee on Taxation of the United States Congress, a position he has held since 2008.  His primary areas of responsibility are the individual income tax, tax exemption requirements for state and local bonds, tax credit bonds, and employment taxes.  Mr. Nega has served on the Joint Committee staff since 1985.  Prior to his current position, Mr. Nega served as a Legislation Counsel from 1989 to 2008, and as a Legislation Attorney from 1985 to 1989.  Mr. Nega received a B.S.C. in Accounting from DePaul University, a J.D. from DePaul University School of Law, and an M.L.T. (Taxation) from Georgetown University School of Law.

Judge Michael B. Thornton, Nominee for Judge, United States Tax Court
Judge Michael B. Thornton currently serves as a Judge of the United States Tax Court, a position held since March 1998.  From June 2012 to March 2013 he served as Chief Judge of the Tax Court.  Previously, Judge Thornton served in the U.S. Department of the Treasury as Deputy Tax Legislative Counsel in the Office of Tax Policy from 1995 to 1998, first joining the Department  as an Attorney-Adviser in February 1995.  He served with the U.S. House Committee on Ways and Means as Chief Minority Tax Counsel in 1995, and as Tax Counsel from 1988 to 1994.  Judge Thornton was an Associate Attorney with Miller and Chevalier from 1985 to 1988 and Sutherland, Asbill, and Brennan from 1982 to 1983.  He was a Law Clerk to the Honorable Charles Clark, Chief Judge, U.S. Court of Appeals for the Fifth Circuit from 1983 to 1984.  Judge Thornton received a B.S. and M.S. from University of Southern Mississippi, an M.A. from University of Tennessee, and J.D. from Duke University School of Law.

(Hat Tip: John Barrick.)

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.