TaxProf Blog

Kahn: Contribution of a Built-in Loss to a Partnership

Douglas A. Kahn (Michigan), Contribution of a Built-in Loss to a Partnership, 136 Tax Notes 571 (July 30, 2012):

In 2004 Congress amended the code to prevent the use of a partnership contribution as a means of transferring a deduction for a built-in loss from one person to another. That amendment has undermined the application of the remedial method (and the traditional method with curative allocations) that the regulations provide for the allocation of a contributed built-in gain or loss, Kahn argues. He also asserts that the 2004 amendment distorts income reporting.

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Tax Transparency in Kentucky

Jennifer Carr (Tax Analysts), Informal and Invisible Guidance in Kentucky Creates Transparency Issues, 65 State Tax Notes 303 (July 30, 2012):

The Kentucky Department of Revenue's refusal to release documents such as final rulings and other written guidance, combined with its informal approach to issuing written guidance, has created significant transparency problems within the state, practitioners say.

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Wells: Section 7874 Has Not Stopped Corporate Inversions

Bret Wells (Houston), Cant and the Inconvenient Truth About Corporate Inversions, 136 Tax Notes 429 (July 23, 2012):

Wells writes that inversion transactions and inversion benefits are still available and are being pursued even with the enactment of § 7874. That section obscures the fundamental design flaws of the tax system without solving the underlying defects. The inversion transactions that have occurred since the enactment of § 7874 prove that Congress should reform the U.S. international tax regime.

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How Hedge, Private Equity, and Venture Capital Funds Escape IRS Scrutiny

Amy S. Elliott (Tax Analysts), Audit Proof? How Hedge Funds, PE Funds, and PTPs Escape the IRS, 136 Tax Notes 351 (July 23, 2012):

True or false: The largest U.S. businesses are under continuous audit by the IRS.

False. Some are effectively immune from audit. Whether a business is audited every year depends in part on its form of organization.

While the tax planning strategies and low effective rates of household-name, publicly traded corporations have made newspaper headlines, those companies are regularly and thoroughly examined by the IRS.

But large, widely held partnerships, including publicly traded partnerships (PTPs) -- which generally have thousands of direct and indirect partners -- seem largely to escape the scrutiny that the Service gives to their C corporation counterparts.

PTPs (such as oil and gas and real estate funds and investment funds like the Blackstone Group LP, the Carlyle Group LP, and KKR & Co. LP) aren't the only lucky ones. While private hedge, private equity, and venture capital funds might not be widely held in terms of the number of direct partners, if one of their investors is a fund of funds, the number of indirect partners balloons.

Through an investigation based on interviews with dozens of practitioners who have direct knowledge of the IRS's large partnership audit practices, including many with government experience, Tax Analysts has learned that this growing class of business entities poses serious problems for tax examiners.

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Tax Transparency in North Carolina

Amy Hamilton (Tax Analysts), Transparency in North Carolina: Portrait of a State in Flux, 65 State Tax Notes 149 (July 16, 2012):

The issue of forced combination of separate entity returns began as a dispute between taxpayers and the North Carolina Department of Revenue, but has mushroomed into a public debate over how the DOR provides guidance to taxpayers -- or the lack thereof.

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The Role of Tax Havens in the Global Economy

Robert T. Kudrle (University of Minnesota, Hubert H. Humphrey School of Public Affairs), Whose ‘Treasure Islands’? The Role of Tax Havens in the Global Economy, 67 Tax Notes Int'l 69 (July 2, 2012):

Two recent works with the same title suggest radically different views of the role of tax havens in the global economy. In late 2010, James R. Hines Jr. [24 J. Econ. 103] (2010) made the case for a largely beneficial role. According to Hines, the tax havens improve markets: they facilitate direct investment by improving the attraction of high-corporate-tax states for real investment, and they may shore up rather than degrade corporate tax collections by high-corporate-income states such as the U.S. They also seem to improve the competitiveness of national financial institutions and hence facilitate portfolio capital provision in both rich and poor countries. A book by Nicholas Shaxson (2011), which appeared shortly after Hines's article, presents an utterly different assessment. In Shaxson's account, tax havens permit the superrich in high-income countries to evade their tax responsibilities, place a huge additional burden on rich-country taxpayers by allowing vast corporate profits to go untaxed, and facilitate the drain of capital from poor countries.

The works differ in four main areas:

• the jurisdictions considered
• the practices examined
• the evidence employed
• the implications for policy

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See also New York Times:  Tax Havens and Treasure Hunts, by Nancy Folbre (University of Massachusetts-Amherst).

Do State Corporate Tax Incentives Violate the Equal Protection Clause

Justin T. Golart (J.D. 2012, George Washington), Corporate Tax Incentives And the Equal Protection Clause, 65 State Tax Notes 33 (July 2, 2012):

The argument that targeted tax incentives are unconstitutional under the equal protection clause of the 14th Amendment is admittedly an aggressive one. Although it’s unlikely to succeed in the near future, strong arguments do exist that could form the basis for a challenge in the future. If the composition of the Supreme Court changes over time to a lineup that is more likely to extend the borders of suspect classifications, small business owners have a strong case that these discriminatory laws should be subject to heightened scrutiny.

In the short term, the more logical approach is to conduct studies and collect data demonstrating that there is no rational basis for states to offer tax breaks to select corporations. A skeptic would likely conclude that tax incentives are more related to continued financial support of elected leaders than they are to job growth and economic development. Although both arguments, in their current forms, are not slam-dunk cases, the Supreme Court’s decision in Citizens United is an excellent starting point for holding corporations to the same standard as natural persons and saying that corporations cannot pick and choose when they wish to be treated as natural persons. To ignore that argument is to accept the consequences of Citizens United that empower corporations without demanding the consequences that hold them accountable.

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Sullivan: The Economic Case for Unlocking Foreign Profits

Martin A. Sullivan (Tax Analysts), The Economic Case for Unlocking Foreign Profits, 136 Tax Notes 7 (July 2, 2012):

Martin A. Sullivan argues that the failure of Congress to pass a second repatriation holiday should not stop policymakers from considering ways to end the lockout effect on overseas profits.

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Jensen: Does the Taxing Clause Give Congress Unlimited Power?

Erik M. Jensen (Case Western), Does the Taxing Clause Give Congress Unlimited Power?, 135 Tax Notes 1515 (June 18, 2012):

The idea has gained currency that the Taxing Clause in the Constitution gives Congress the power to do anything, or almost anything, that would be funded by taxation. Most recently, that argument has been advanced in connection with the litigation about the individual mandate in the Obamacare legislation — by, among others, legal philosopher Ronald Dworkin. If the penalty for failure to acquire suitable insurance will be a tax, then, it is argued, the requirement to acquire insurance, the mandate, will itself be a valid exercise of the taxing power. If that’s right, it certainly isn’t obviously so. Since almost everything the national government does is funded through taxation, that understanding would lead to a conception of congressional power that is effectively unlimited, and the Taxing Clause would trump almost all other grants of congressional power in Article I, section 8.

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FATCA and the New International Tax Order

Jeff N. Mukadi (JP&MF Consulting, Peterborough, Ontario), FATCA and the Shaping of a New International Tax Order, 66 Tax Notes Int'l 1227 (June 25, 2012):

Jeff N. Mukadi gives his views on the future of FATCA enforcement around the globe, positing that there may come a time when nations work together so seamlessly that they will substantially constitute a virtual international tax coordination body.

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Johnson: The Clear Legislative Evidence Canon in Tax Cases

Steve R. Johnson (Florida State), Elephants, Mouse Holes, Non-Barking Dogs, and Statutory Interpretations, 64 State Tax Notes 911 (June 25, 2012):

This installment of Interpretation Matters examines a canon of statutory construction that has been applied in state and federal cases, both tax and nontax. Under the canon, a court will require clear legislative evidence before it holds that a statute was intended to effect a major substantive change. Inferences from wisps of textual or other evidence will not suffice. As the title of this installment suggests, and as will become clear below, the jurisprudence regarding this canon has been particularly rich in metaphors.

Part I below describes the U.S. Supreme Court cases that are the foundation of the canon, including a recent tax case. Part II surveys the canon's use in state and local cases, including tax cases. Part III analyzes the justification for the canon and its relations to other canons. Part IV sets out practical suggestions on how to use, and how to oppose the use of, the canon in actual cases.

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Barry & Camp: Is the Individual Mandate Really Mandatory?

Jordan M. Barry (San Diego) & Bryan T. Camp (Texas Tech), Is the Individual Mandate Really Mandatory?, 135 Tax Notes 1633 (June 25, 2012):

This article examines the tax collection process to see how the IRS might enforce the individual mandate under the healthcare reform law. It concludes that resistant taxpayers can generally be forced to pay the tax penalty only if they are entitled to receive refundable tax credits that exceed their net federal tax liability.

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Denning: Due Process and Personal Jurisdiction: Implications for State Taxes

Brannon P. Denning (Cumberland), Due Process and Personal Jurisdiction: Implications for State Taxes, 64 State Tax Notes 837 (June 18, 2012):

Brannon P. Denning ... examines the implications of a recent U.S. Supreme Court decision [J. McIntyre Machinery, Ltd. v. Nicastro, 131 S. Ct. 2780 (2011)] and asks whether restricting states' personal jurisdiction would affect their taxing jurisdiction.

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Tax Analysts Hosts Conference Today on Taxes and the Rich

Tax Analysts hosts a roundtable discussion today on Taxes and the Rich at the National Press Club in Washington, D.C. today at 9:00 - 11:00 a.m. EST (available live on C-SPAN2):

Please join us for a roundtable discussion on taxes and the rich when we will ask what the rich should pay, and why.

• Christopher E. Bergin (President and Publisher, Tax Analysts)
• Leonard E. Burman (Professor, Maxwell School of Syracuse University)
• Robert Carroll (Principal, National Tax Department, Ernst & Young) 
• Joseph Thorndike (Director of the Tax History Project and Contributing Editor, Tax Analysts)

Update:  CNN op-ed, Taxing the Rich: What's Fair?, by Joseph Thorndike (Director of the Tax History Project and Contributing Editor, Tax Analysts).

From the Tax Notes Vault: Mamas Don’t Let Your Babies Grow Up to Be Tax Lawyers

In celebration of the 40th anniversary of the publication of its inaugural issue, Tax Notes is re-publishing memorable articles from its archives. I am delighted that Tax Notes this week re-published one of my articles, Mamas Don’t Let Your Babies Grow Up to Be Tax Lawyers, 135 Tax Notes 1358 (June 11. 2012):

This article, originally published July 18, 1994, was excerpted from Caron’s article, Tax Myopia, or Mamas Don’t Let Your Babies Grow Up to Be Tax Lawyers, which was published in 13 Va. Tax Rev. 517 (1994).  The article discussed two related myths that have a strong currency among law students, lawyers, and the public.

The first myth is that tax lawyers are somehow different from other lawyers.  Part I of the article chronicled the disparagement of tax lawyers in a light-hearted fashion and set the stage for the discussion of the second myth that tax law is somehow different from other areas of the law.

As suggested by the abstract reference to ‘‘tax myopia’’ in the title, the article contended that tax law too often is mistakenly viewed as a self-contained body of law.  Part II explained how that misperception has impaired the development of tax law by shielding it from other areas of law that should inform the tax debate. It also explained how other areas of law have been impoverished by the failure to consider how tax law can enrich their development.  The article advocated a synergistic relationship between tax and nontax law through which each benefits from the insights of the other.

The full article is available here.

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Resolving Tax Disputes in Canada

Patrick Lindsay & Salvatore Mirandola (both of Borden Ladner Gervais, Calgary and Toronto), Resolving Tax Disputes in Canada, 66 Tax Notes Int'l 1043 (June 11, 2012):

Many tax authorities have become more organized, more aggressive, and more results-oriented. The Canada Revenue Agency is no exception. This article describes the process for tax dispute resolution in Canada, focusing on common procedural and substantive issues relevant to multinational enterprises. This article provides a basic understanding of the steps involved in resolving a typical tax dispute in Canada. A chart of the main steps involved in a tax dispute, and brief comments on each step, is also included.

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Johnson: ALJs in State & Local Tax Cases: To Whom Is Deference Due?

Steve R. Johnson (Florida State), ALJs in State-Local Tax Cases: To Whom Is Deference Due?, 64 State Tax Notes 785 (June 11, 2012):

Steve R. Johnson writes about a Nevada sales tax case in which the state supreme court had to determine whether the tax department gave deference to an administrative law judge's conclusions and whether equitable tolling applied to the refund claims.

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Auerbach: Reforming Capital Gains Taxation

Alan J. Auerbach (UC-Berkeley, Department of Economics), Reforming Capital Gains Taxation, 135 Tax Notes 1399 (June 11, 2012):

Auerbach argues that by shifting the capital gains tax from new investment to existing assets and by modifying the method of realization-based taxation, it’s possible to construct a progressive tax reform that reduces the lock-in effect, the limits on capital losses that discourage risk-taking, the incentives for recharacterizing other income as capital gains, and the incentives for corporate borrowing.

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The Home Mortgage Interest Deduction in the States

Donald Morris & Jing Wang (both of the University of Illinois-Springfield, Department of Accounting), How and Why States Use the Home Mortgage Interest Deduction, 64 State Tax Notes 697 (June 4, 2012):

[T]he home mortgage interest deduction primarily benefits upper-income taxpayers and ... the states should consider other ways of encouraging homeownership, if they do want to encourage it....

Of the 41 states that impose a tax on all forms of income, 31 (75%) permit income to be reduced (at least potentially) by a deduction for home mortgage interest. Of those 41 states, 28 (68%) use federal AGI as a starting point for developing their tax base. An additional six states (15%) use federal taxable income as the starting point in developing their tax base. For the remaining seven states, taxable income is computed independently of the federal formula. Also, two states (Tennessee and New Hampshire) tax only investment income and seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) impose no income tax. These results are summarized in Table 1, along with the number of each of those states that offers a deduction for home mortgage interest.

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Christians: Do We Need to Know More About Our Public Companies?

Allison Christians (McGill), Do We Need to Know More About Our Public Companies?, 66 Tax Notes Int'l 843 (May 28, 2012):

Allison Christians comments on whether the tax affairs of multinational corporations should be made more transparent and, if so, how that could be accomplished.

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Herzig: Exchange Funds

David J. Herzig (Valparaiso), Exchange Funds: A Proposal for Regulations, Finally, 135 Tax Notes 865 (May 14, 2012):

The economic downturn has created an investment market in which some tax-advantaged strategies have become favored. To avoid taxable diversification, taxpayers have turned to exchange funds. Through the rules in sections 351, 721, and 368, taxpayers can diversify a single stock position without recognition. Exchange funds have existed in one form or another since the 1930s. However, after 50 years of IRS acquiescence and minimal public discourse, the debate surrounding the technical rules has been renewed. This report discusses the basics of exchange funds and the regulation and legislative proposals the New York State Bar Association Tax Section submitted to Treasury. The author then explores those recommendations and makes a proposal of his own.

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Sullivan: Are You Ready for Taxmageddon ($5.8 Trillion in Tax Increases Over 10 Years, Starting Jan. 1, 2013)?

Martin A. Sullivan (Tax Analysts), Are You Ready for Taxmageddon?, 135 Tax Notes 931 (May 20, 2012):

A combination of spending cuts and tax increases could bring the economy to its knees at the end of 2012. By our count, the economy must deal with nine significant fiscal events that will be automatically triggered by current law if Congress and the president take no action. Together these events create a perfect storm of contractionary tax and spending policies that could push the already fragile American economy back into recession. Fed Chair Ben Bernanke dubbed it a "fiscal cliff." The media calls it Taxmageddon.  [Click on chart to enlarge.]

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Avi-Yonah: Camp, Obama, and Territoriality Reconsidered

Reuven Avi-Yonah (Michigan), Vive la Petite Difference: Camp, Obama, and Territoriality Reconsidered, 66 Tax Notes Int'l 617 (May 14, 2012):

The recent tax reform proposals by House Ways and Means Committee Chair David Camp, R-Mich., and by President Obama seem to offer starkly contrasting visions of how to reform the taxation of foreign-source income earned by U.S.-based multinational enterprises. Both acknowledge the problem, which is that U.S.-based MNEs currently have more than $1 trillion of "permanently reinvested" income offshore, which they cannot bring back to the U.S. without incurring a 35% tax penalty.

However, they seem to offer radically different solutions: Under the Camp proposal, a participation exemption will enable U.S.-based MNEs to bring back the income without paying significant tax. Under the Obama proposal, deferral will be abolished and U.S.-based MNEs will have to pay a minimum tax on foreign-source income earned by their controlled foreign corporations as it is earned. The result would be that the tax penalty on repatriating that income would be reduced because dividends would only be subject to tax at the difference between the statutory rate (reduced to 28% under the Obama proposal) and the minimum rate.

However, a closer look reveals that these proposals have more in common than meets the eye. Specifically, the Obama proposal's minimum tax on foreign-source income of CFCs is perfectly compatible with exempting that income from further tax when it is repatriated, as the Camp proposal envisages. Conversely, the provisions to prevent income shifting in the Camp proposal can in practice result in precisely the minimum tax on the foreign-source income of CFCs that is the centerpiece of the Obama proposal. This level of agreement suggests that a compromise embodying elements of both proposals should not be impossible to reach when tax legislation is enacted after the November election.

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Transparency in State Taxation, Part 2

Cara Griffith, Amy Hamilton & Jennifer Carr (all of Tax Analysts), Transparency in State Taxation, Part 2: Legislative Process and Letter Rulings, 64 State Tax Notes 331 (Apr. 30, 2012):

In part one of this series on transparency in state taxation, we looked at how states use discretionary authority and how, in circumstances in which they are able to use that authority, they provide guidance to taxpayers. We concluded that state revenue officials have been increasingly willing in the past few years to use their discretionary authority to adjust taxpayers’ incomes. Although that practice is potentially troublesome for taxpayers, when revenue officials provide adequate guidance on their use of that authority, taxpayers will be reassured because they can anticipate the consequences of a specific transaction or position.

In part two of this series, we begin by examining transparency in the state legislative process. Having an open forum for debate on tax legislation is vital to a transparent system. The trend in several states to push through legislation that was negotiated and debated by a select few state officials is troubling. We then turn to states’ use and publication of private letter rulings. Although many states attempt to both issue and publicly release letter rulings, some do not. Also, some states are unable to issue letter rulings in a timely fashion. Delay diminishes the usefulness of letter rulings.

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Bartlett: If Romney Wins, Will He Index Capital Gains by Presidential Fiat?

Bruce Bartlett, Indexing Capital Gains by Fiat, 135 Tax Notes 883 (May 14, 2012):

While Romney's views on this subject are as yet unknown, I expect that the same people who have been pushing capital gains indexing for decades will pressure him to support unilateral indexing -- and there's a very good chance he will go along. [Although the Department of Justice and the Treasury Department concluded in 1992 that that such authority did not exist, Romney] can cite for support a recently published article by Cooper and Colatriano in a respected academic journal arguing that not only was their earlier opinion correct, but that subsequent court cases have strengthened their argument [The Regulatory Authority of the Treasury Department to Index Capital Gains for Inflation: A Sequel, 35 Harv. J.L. & Pub. Pol'y 487 (2012)].

Not being a lawyer, I won't offer my own opinion on whether capital gains can be indexed to inflation by executive order. I do think it would be a bad idea politically. Regardless of which party controls Congress, it tends to jealously guard its prerogatives. I expect that even if Congress is under Republican control, the chairs of the Senate Finance and House Ways and Means committees would strongly recommend that indexing be done legislatively and not by presidential fiat.

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States Cut Taxes For First Time in Ten Years

Mandy Rafool & Todd Haggerty (National Conference of State Legislatures), State Tax Actions, 64 State Tax Notes 395 (May 7, 2012):

For the first time in 10 years, states cut taxes more than they increased them.

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Jackel: What Happens if the Supreme Court Throws Out Economic Substance Along With ObamaCare?

Monte A. Jackel (PricewaterhouseCoopers, Washington, D.C.), What's Next After Codification Fails?, 135 Tax Notes 783 (May 7, 2012):

In this article, Jackel raises the question whether Congress should reenact the economic substance doctrine statute if the Supreme Court declares it unconstitutional as part of the healthcare legislation. Assuming congressional reenactment, Jackel then discusses what a reenacted statute should contain to support sound tax policy, revenue considerations notwithstanding.

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ACA: Recommendations for U.S. International Tax Law Reform

Jackie Bugnion (American Citizens Abroad), Recommendation for U.S. International Tax Law Reform, 66 Tax Notes Int'l 459 (Apr. 30, 2012):

For reasons detailed below, ACA proposes two complementary changes to U.S. tax laws as they apply to American citizens and green card holders resident abroad:

1. Eliminate citizenship-based taxation.
2. Collect withholding taxes at source on all U.S. passive income (including dividends, interest, royalties, etc.) of overseas Americans on the same basis as the U.S. currently collects withholding taxes on the revenues generated by U.S. assets, such as shares and bonds, owned by non-resident foreigners.

The ACA proposal would make the United States more competitive in world markets, create jobs at home, simplify taxation for Americans living abroad, alleviate the burden on the IRS, and be revenue neutral (possibly even positive) for the United States.

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State Tax Treatment of LLCs and LLPs

Bruce P. Ely, Christopher R. Grissom & William T. Thistle (all of of Bradley Arant Boult Cummings, Birmingham, AL), State Tax Treatment of LLCs and LLPs -- 2012 Update, 64 State Tax Notes 245 (Apr. 30, 2012):

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Sullivan: If Romney Wins . . .

Martin A. Sullivan (Tax Analysts), If Romney Wins . . ., 135 Tax Notes 531 (Apr. 30, 2012):

Romney's tax agenda is ambitious. According to his campaign documents, he would extend the Bush tax cuts across the board (if they aren't already extended for him in the lame-duck session). Then he would add tax cuts that include a 20% cut in all individual income tax rates; elimination of all tax on interest, dividends, and capital gains for households with incomes below $200,000; elimination of the estate tax; repeal of the alternative minimum tax; and a reduction of the corporate rate to 25%. Because he would also repeal the Patient Protection and Affordable Care Act, Romney would eliminate that act's 3.8% tax on investment income of high-income individual taxpayers and the 0.9% tax on wages that is scheduled to take effect in 2013. The Romney campaign says eliminating tax benefits will offset the cost of these tax cuts, but it has not specified what tax benefits it intends to cut.

The price tag for the tax cuts is staggering. According to the Urban-Brookings Tax Policy Center, assuming the extension of the Bush tax cuts is already included in the baseline, the reduction in revenue would be $480 billion for 2015. That's about 3% of GDP.

There would have to be a lot of tax expenditure cuts to pay for that. The individual base broadening would have to be on a much grander scale than anything that was done under the Tax Reform Act of 1986. As noted, Romney needs $480 billion in 2015 alone. Table 1 shows revenue estimates for the largest tax expenditures Romney might conceivably consider (that is, excluding tax expenditures for investment income).

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Reaganomics: A Report Card

H. Nelson Yu (J.D. 2012, Oregon), Reaganomics: A Report Card, 134 Tax Notes 1649 (Mar. 26, 2012):

This report analyzes the economic effects of the significant changes in tax and regulatory policy that have occurred since the election of Ronald Reagan in 1980. Reagan's conservative policies, which have mostly been followed since, contrasted sharply with those that were in place for nearly five decades following the election of Franklin Roosevelt in 1932. The report looks at empirical results to see which party's political philosophy may be best for America. The economic results demonstrate that Reaganomics works poorly as an economic or regulatory philosophy if the country's goal is general and sustainable economic prosperity.

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Christians: The Arbitration Option in the New U.N. Model Tax Convention

Allison Christians (Wisconsin), Putting Arbitration on the MAP: Thoughts on the New U.N. Model Tax Convention, 66 Tax Notes Int'l 351 (Apr. 23, 2012):

The U.N.'s tax committee last month released its latest version of the U.N. model tax convention, designed for use between developed and developing countries. The big news in the 2011 update consists of the addition of "arbitration" as an option in the mutual agreement provision (MAP), the expansion of the information exchange provisions, and the addition of an assistance in collection provision. This column focuses on the first of those revisions.

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Gamage & Shanske: On Tax Increase Limitations

David Gamage (UC-Berkeley) & Darien Shanske (UC-Hastings), On Tax Increase Limitations: Part II — Evasion and Transcendence, 64 State Tax Notes 245 (Apr. 23, 2012):

In our previous column in this series we argued that tax increase limitations (TILs) are analytically incoherent. [On Tax Increase Limitations: Part I — A Costly Incoherence, 62 State Tax Notes 813 (Dec. 19, 2011).] We further suggested that this incoherence contributes to the observed ineffectiveness of TIL regimes. In this, our second column, we analyze the implications of the incoherent nature of TILs. In particular, we argue that because of their incoherent nature, TILs can be effectively evaded by a legislative majority wanting to do so.

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Sullivan: U.K. Road to Competitiveness Is Paved With Tax Increases

Martin A. Sullivan (Tax Analysts), U.K. Road to Competitiveness Is Paved With Tax Increases, 135 Tax Notes 390 (Apr. 23, 2012):

It has been the stated policy of the United Kingdom's Conservative-led coalition government "to create the most competitive corporate tax regime in the G20." Chancellor of the Exchequer George Osborne reiterated this policy -- expanded to include all noncorporate business -- in his 2012 budget speech delivered on March 21.

The flagship provisions of the policy are a large reduction in the corporate tax rate, exemption of most foreign profits from tax, and the introduction of a patent box. But these high-profile tax cuts have been accompanied by offsetting tax increases on business and -- by far the most significant tax change since the new government came to power -- an increase in the VAT rate. How the Conservatives have implemented tax reform has important lessons for U.S. policymakers who are considering the same path.

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Transparency in State Taxation

Cara Griffith, Amy Hamilton & Jennifer Carr (all of Tax Analysts), Transparency in State Taxation — Part I: Discretionary Authority, 64 State Tax Notes 189 (Apr. 16, 2012):

Founded by Tom Field, Tax Analysts was created to foster an open and informed debate about taxation. But Tax Analysts quickly realized that these activities required access to information — information that federal tax authorities did not want disclosed. Tax Analysts has fought to obtain access to key documents in tax policy and administration, including private letter rulings and technical advice memoranda. But the need for openness does not end with federal tax law. State taxing authorities should be held to the same standards. Transparency is vital to a dynamic debate on tax issues.

This article is the first in a series that will examine transparency at the state tax level, showing where states are doing things right and where there is room for improvement. This first installment focuses on how states use their discretionary authority and how states provide guidance to taxpayers in circumstances in which states can use that discretionary authority. Later articles will address transparency in the legislative process and how states issue and make available private letter rulings.

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Sullivan: Busting Myths About Rich People's Taxes

Martin A. Sullivan (Tax Analysts), Busting Myths About Rich People's Taxes, 135 Tax Notes 251 (Apr. 16, 2012):

Kevin Hassett of the American Enterprise Institute [calls] the Buffett rule "the stupid rule." "It's basically just a back-door way to hike taxes on capital," he told Bloomberg News (Richard Rubin, Top Earners Pay Higher Tax Rate Without Buffett Rule, Apr. 10, 2012). To maximize growth, economists would set the tax rate on capital gains, dividends, interest, and all business profits at zero. Yet for all the agreement about the optimality of minimizing taxes on capital, the magnitude of benefits from this policy is highly uncertain.

The economic growth arguments are powerful. But economics has its limitations. It can tell you how to expand the economy. But it cannot tell you how to distribute wealth. ... In the highly charged debate over the Buffett rule and extension of the Bush tax cuts for the top income brackets, many facts about income distribution and policies that would change it are getting distorted. The rest of this article tries to correct some of these distortions.

• Myth #1: The Buffett rule is largely a symbolic political ploy because it would raise only $5 billion a year. ...
• Myth #2: The United States cannot raise taxes on the wealthy because "there appear to be limits in the real world as to how much tax blood can be extracted from rich turnips" and "the U.S. has the world's most progressive tax burden." ...
• Myth #3:  The United States has a progressive income tax.

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Sullivan: Was the VAT a Money Machine for Europe?

Martin A. Sullivan (Tax Analysts), Was the VAT a Money Machine for Europe?, 135 Tax Notes 143 (Apr. 9, 2012):

In 1965 there was not a big difference between the level of taxes in the United States and in Western Europe. Then the Europeans put their VATs into high gear.

Virtually nonexistent in 1965, Western European VATs had an average rate of 11% by 1976 and 20% by 2007. As VATs became increasingly prominent, overall tax revenues in Europe grew in tandem. Between 1965 and 2007, average total tax as a percentage of GDP grew by a stunning 11.6 percentage points -- from 27.8% to 39.4% of GDP (Figure 1). Meanwhile, in the United States -- the only developed country to avoid adopting a VAT -- the overall level of tax grew by only 3.2 percentage points, from 24.7% to 27.9% of GDP.

Figure 1. Total Revenue as a Percentage of GDP, Western Europe and the United States, 1965-2007

The European experience is often used as an argument against considering a VAT in the United States. It would be a "fast track to a European welfare state," according to Daniel J. Mitchell of the Cato Institute (Will Republicans Hand the Left a VAT Victory?, The Wall Street Journal, Jan. 4, 2012). Even if that were true in Europe, why would it be true in the United States?

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CO2: Tax Now, Pay Later!

Étienne Billette de Villemeur (University of Lille, France) & Justin Leroux (Institute of Applied Economics, HEC Montréal), CO2: Tax Now, Pay Later!, 66 Tax Notes Int'l 49 (Apr. 2, 2012):

Regarding the climate change issue, a tax on greenhouse gas (GHG) emission flows (also dubbed the carbon tax) is arguably the most prominent instrument put forth to correct "the greatest market failure the world has seen" (Stern, 2008). According to the familiar Pigovian argument, the motivation behind carbon taxation is to make emitting GHGs expensive in order to induce a reduction in emissions.

We argue that the carbon tax as we know it suffers from fundamental shortcomings regarding its implementation, and we offer an alternative way to tax emissions that is free of these flaws. Our proposal relates to the timing of taxation: Instead of charging emitters today for the present value of the damage their emissions may cause, we should tax the emissions of countries over time -- albeit at a lower rate -- to reflect the environmental damage actually caused by their emissions. It turns out that this scheme, which we refer to as ex post taxation, is not only cheaper than the carbon tax but avoids the crucially problematic issues of predicting future climate damage and of having to settle the raging debate on how to account for the welfare of future generations. Moreover, it ensures that emitters are held accountable for the real damage incurred, rather than according to some indeterminate ideological stance on what may or may not happen.

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Demystifying Accountant-Client Privileges in State Tax Litigation

Pilar Mata & Melissa Smith (both of Sutherland, Washington, D.C.),  Demystifying Accountant-Client Privileges in State Tax Litigation, 64 State Tax Notes 41 (Apr. 2, 2012):

This [article] reviews states' adoption of accountant-client privileges and discusses other avenues of protection that may be available to taxpayers litigating in states that have not adopted an accountant-client privilege. Understanding states' various approaches to accountant-client privileges earlier rather than later can often make the difference in protecting communications between a client and an accountant from disclosure in litigation.

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Sullivan: If the ObamaCare Mandate Is Struck Down, Are Tax Incentives Next?

Martin A. Sullivan (Tax Analysts), If Mandate Is Struck Down, Are Tax Incentives Next?, 135 Tax Notes 14 (Apr. 2, 2012):

Martin A. Sullivan discusses how the individual mandate and penalty in the healthcare reform act functions similarly to tax incentives [click on chart to enlarge]:

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Update: New York Times, First the Mandate, Then All Tax Incentives.

Pike: U.S. Taxes Corporate Income at Comparatively Low Rate

Andrew Pike (American), U.S. Taxes Corporate Income at Comparatively Low Rate, 134 Tax Notes 1533 (Mar. 19, 2012):

This article asserts that the United States does not subject corporate profits to a relatively high nominal rate of taxation. In support of this assertion, the article analyzes the VAT, and concludes that the VAT incorporates a tax on corporate profits. The portion of the VAT that taxes corporate profit is comparable to, and at least as burdensome as, the current U.S. corporate income tax. The article concludes that the accepted wisdom that the United States imposes an exceptionally high nominal rate of tax (compared to the nominal rates of taxation imposed in other OECD countries) on corporate profits is wrong – at least with respect to a very broad range of domestic businesses. Consequently, the need to lower those tax rates is not justified – at least based on the need to meet the lower rates in other OECD countries.

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Cash D Reorgs and Basis

Lewis J. Greenwald & Christopher M. Flanagan (both of Sullivan & Worcester, Boston), New U.S. Regs Confirm That Basis Is Lost in Some Cash D Reorgs, 65 Tax Notes Int'l 1091 (Mar. 26, 2012):

On November 18, 2011, the IRS and Treasury released temporary and proposed regulations for determining the basis of stock or securities deemed to be received in certain D reorganizations. The 2011 regulations confirm what many taxpayers had feared — that some cash D reorganizations do indeed result in the loss of basis in the transferor corporation’s stock.

To best explain the full import of the 2011 regulations, this article first contains a discussion of D reorganizations generally. It then examines the regulations relating to D reorganizations issued by the IRS and Treasury on December 19, 2006 and those issued on December 18, 2009. Together, those regulations formed the basis for applying some of the technical requirements for D reorganizations to cash D reorganizations, and they serve as precursors to the 2011 regulations. Finally, this article reviews the 2011 regulations and the resulting potential for the loss of basis thereunder.

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Johnson: ObamaCare and the 'What Is a Tax?' Question

Steve Johnson (Florida State), Obamacare and the 'What Is a Tax?' Question -- Part II, 63 State Tax Notes 1037 (Mar. 26, 2012):

The current installment of our column details how the PPACA litigation sheds light on what constitutes a tax.

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Sullivan: Will Rate Changes Transform C Corps Into Tax Shelters?

Martin A. Sullivan (Tax Analysts),  Will Rate Changes Transform C Corps Into Tax Shelters?, 134 Tax Notes 1590 (Mar. 26, 2012):

[T]he potential for using C corporations as a tax shelter does not just depend on the values of the corporate and individual rates. The taxation of distributions from C corporations plays a critical role. More precisely, the choice between the passthrough and the corporate form depends on the relative value of the individual rate (on passthrough income) to the sum of the corporate rate plus the effective tax rate on distributions. Professor Daniel Halperin of Harvard Law School emphasized that in a 2010 article: "If the combined tax at the corporate level and on corporate distributions is sufficiently higher than the U.S. individual rate, closely held businesses might continue to prefer passthrough entities." [Mitigating the Potential Inequity of Reducing Corporate Rates.]

The effective tax rate on most dividends is 15%. The effective tax rate on profits realized through capital gains is less than the 15% statutory rate because many gains are deferred. And with the step-up in basis at death, capital gains can have an effective income tax rate of zero.

Table 2 compares passthrough rates with combined individual and corporate tax rates in OECD countries in 2011. Including both state and federal taxes, Table 2 shows that the combined individual and corporate tax rate on corporate income is 54.1% in the United States. That is more than 10 percentage points higher than the estimated corporate rate. The table suggests that if all corporate earnings are distributed as they are earned, the federal statutory rate could be reduced to 25%, and the rate differential that mattered would still tilt in favor of keeping income outside C corporations.  [Click on chart to enlarge.]

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The Effect of Bankruptcy on State Tax Enforcement and Proceedings

Andrew W. Swain (Indiana Office of the Attorney General), The Effect of Bankruptcy on State Tax Enforcement and Proceedings, 63 State Tax Notes 947 (Mar. 19, 2012):

Business owners allegedly evading sales taxes and stealing trust money will also argue that the automatic stay prevents taxing authorities from administratively revoking a sales tax license or prosecuting them for conducting business without a sales tax license. Conducting a retail business without a sales tax license is itself often a crime. Business owners will attempt to use the protections afforded to them through bankruptcy to continue unlicensed operations despite the state’s desire that the business close. This article discusses the use of the bankruptcy process to confound a state’s prosecution of tax crimes and avoid the state’s efforts to close a retail business accused of sales tax theft and evasion.

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When Immigration and Tax Converge

Linda Dodd-Major (Washington, D.C.) & Paula N. Singer (Vacovec, Mayotte & Singer, Newton, MA), When Immigration and Tax Converge, 65 Tax Notes Int'l 917 (Mar. 19, 2012):

Linda Dodd-Major and Paula N. Singer provide an extensive look at the confusion that exists between two important aspects of U.S. law -- tax and immigration.

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Sullivan: Tax Reform Goals Differ for Corporate Coalitions

Martin A. Sullivan (Tax Analysts), Tax Reform Goals Differ for Corporate Coalitions, 134 Tax Notes 1481 (Mar. 19, 2012):

Martin A. Sullivan discusses how the divided interests of corporate America could create a stumbling block to corporate tax reform.

When it comes to taxes, corporate America is divided into two parts. First, there are companies that pay full freight. Their effective tax rates are close to the statutory 35 percent rate. They tend to be low-tech and labor-intensive, and -- most of all -- they have most of their profits in the United States. Then there are those companies that collectively save tens of billions of dollars each year by taking advantage of loopholes in the transfer pricing and anti-deferral rules. Their effective tax rates are significantly less than 35 percent. They are technology-intensive and pack a lot of their profits in tax havens.

As the drumbeat for tax reform grows louder, the priority for members of the first group is easy to understand. Existing tax breaks don't do much for them, so a tax reform that cleaned up the code and lowered the rate could be a big plus. The membership of the RATE Coalition, a group dedicated to reducing the corporate tax rate, is made up mostly of this type of company. Its membership includes AT&T, Home Depot, Disney, and Macy's.

The tantamount concern of members of the second group is international taxation. That manifests itself in three general policy thrusts: (1) thwarting President Obama's perennial proposals to raise taxes on foreign profits; (2) securing a repeat of the 2004 tax holiday for repatriated foreign profits; and (3) moving the United States from a worldwide to a territorial system of international taxation. For territorial taxation, the proposal must be devoid of any significant expense allocation, thin capitalization, and anti-deferral rules to get the support of this group. (The revenue-neutral territorial proposal by House Ways and Means Committee Chair Dave Camp, R-Mich., does not make the grade.) Companies with this profile can be found among the members of the WIN America Campaign, a coalition dedicated to securing tax relief for repatriated foreign profits, and they include Apple, Microsoft, Pfizer, and Cisco Systems.

Figure 1 shows the share of foreign profits as a percentage of worldwide profits for the coalitions' members that are publicly traded corporations. These are three-year figures from each company's latest SEC Form 10-K. The difference between the two coalitions is striking. Of the 21 RATE members, only one, Nike, has more than half of its pretax profits outside the United States. Of the 19 WIN America members, 11 have more foreign than domestic profits. Four companies -- Brocade, Autodesk, Pfizer, and Broadcom -- reported losses in the United States even though they were profitable on a worldwide basis. [Click on chart to enlarge.]

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The New Politics of Tax Nominations

Jeremiah Coder (Contributing Editor, Tax Analysts), The New Politics of Tax Nominations, 134 Tax Notes 1207 (Mar. 5, 2012):

Jeremiah Coder reviews historical data on the confirmation process for nominees to government tax leadership positions and concludes that recent confirmation delays represent a significant shift away from treating those nominations as nonpolitical and requiring quick confirmation to further tax administration. [Click on chart to enlarge.]

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The Questionable Legality of New York City's Proposed UBT Audit Position

Cara Griffith (Tax Analysts), The Questionable Legality of New York City's Proposed UBT Audit Position, 63 State Tax Notes 713 (Feb. 27, 2012):

The New York City Department of Finance is facing a conundrum. It wants to subject carried interest to tax in one form or another. But doing so requires a legislative change, and making that sort of change has proven difficult (at the local, state, and federal levels). The proposed new UBT audit position may be the department’s solution to gleaning some additional revenue from private investment funds without needing a legislative change. Nonetheless, although the department can make changes to its audit positions without any public fanfare, taxpayers should closely examine what the department asserts as its legal basis for the change. Taxpayers should also challenge the department if it appears to have overstepped its bounds. Taxpayers can and should force the department to go through the appropriate legislative channels to make any significant changes to its enforcement of the city’s administrative tax code.

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Sullivan: A Grown-Up Conversation About Corporate Tax

Martin A. Sullivan (Tax Analysts), A Grown-Up Conversation About Corporate Tax, 134 Tax Notes 1051 (Feb. 27, 2012):

It's time for the United States to adopt a 21st-century tax system. More than anything else, that will mean minimizing the role of the corporate tax. It does not mean that liberals have to abandon their core objectives, just the traditional tactics for achieving them.

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