Paul L. Caron

Friday, April 30, 2004

Sales & Use Tax Simplification

Saturday, May 1, 2004

Gary Cornia (BYU), David Sjoquist (Georgia State) & Lawrence Walters (George Mason) have posted Sales and Use Tax Simplification and Voluntary Compliance on SSRN. Here is the abstract:

Because of difficulties collecting sales taxes on Internet sales, several states have engaged in an effort (the Streamlined Sales Tax Project, SSTP) to simplify their sales tax systems. One hope among SSTP proponents is that a simplified system will result in Internet vendors voluntarily collecting the sales tax.
We address two issues:
- Will states adopt the extensive reforms proposed by the SSTP?
- Will vendors voluntarily collect the sales tax?
We argue that states are unlikely to adopt extensive reforms, but if they did, many vendors would voluntarily collect sales taxes.

April 30, 2004 in Scholarship | Permalink | Comments (0) | TrackBack (0)

Shay on Alternatives to Subpart F

Saturday, May 1, 2004

Stephen Shay (Ropes & Gray) has posted Exploring Alternatives to Subpart F on SSRN. Here is the abstract:

This paper considers possible changes to the subpart F rules that would be intended to achieve a balance between deferral for a controlled foreign corporation's active business operations and current taxation in circumstances where a controlled foreign corporation earns passive income or uses tax havens or base company techniques to erode the tax base of countries where economic activity actually occurs. While the discussion is in terms of the U.S. rules, the basic principles could be applied by the increasing number of countries that have adopted foreign controlled company rules that trigger current taxation of the company's income in the hands of a resident.
The paper begins with a description of the existing U.S. rules for taxation of foreign income relevant to the following discussion, with particular reference to the subpart F anti-deferral rules. In order to highlight the current subpart F rules' technical deficiencies, the paper then reviews some of the "plain-vanilla" planning techniques used to avoid subpart F. Without endorsing any proposal, the paper next considers alternatives that would in differing respects address these deficiencies. While the author would prefer to see a more systemic approach that would broadly eliminate the deferral privilege, the conclusion of the paper is that there are potential reform proposals that likely would be an improvement over current law. These proposals at least should be considered as part of the ongoing debate over the future of subpart F.

April 30, 2004 in Scholarship | Permalink | Comments (0) | TrackBack (0)

Update on NY Times Article on New Technology in Tax Teaching

Friday, April 30, 2004

A follow-up on yesterday's post about the New York Times article on the new "clicker" technology that I use in my tax classes: Jim Maule (Villanova) has posted on his blog a thoughtful explanation of why he supports the technology. Here's the opening paragraph:

It hasn't yet been 72 hours since the NY Times article about Prof. Paul Caron's use of clickers in his courses at the University of Cincinnati Law School and already the reactions are beginning to reverberate throughout the law academy.

Jim addresses the concern expressed by Ann Althouse (Wisconsin) that the clickers interfere with student classroom autonomy. The former law student who runs the popular JD2B site notes that the technology "engages students during lectures and cuts down on solitaire and IM'ing (yikes!)." Exactly!

Update, Part II: More Althouse (anti-clicker by a self-described "cranky old retro lawprof"); more Maule (pro-clicker).

April 30, 2004 in Teaching | Permalink | Comments (0) | TrackBack (0)

Thursday, April 29, 2004

Google Pays 59% Tax Rate

Friday, April 30, 2004

Although the top U.S. corporate tax rate is 35%, Google reported an effective tax rate of 59% in the third quarter (down from 70% in the second quarter) because of its treatment of employee stock options. Google takes a conservative approach and deducts costs associated with the options, thus lowering its pretax income (the denominator in the ETR calculation). As Gordon Smith points out on his Venturpreneuer Blog, Google's 59% ETR greatly exceeds the ETRs for the S&P 500 (28%) as a whole as well as the high-tech companies in the index (32%), as calculated by George Yin in his recent article, How Much Tax Do Large Public Corporations Pay? Estimating the Effective Tax Rates of the S&P 500, 89 Va. L. Rev. 1793 (2003), blogged here last week.

April 29, 2004 in News | Permalink | Comments (1) | TrackBack (1)

Houck on Restrictions on Political Activities of Public Charities

Friday, April 30, 2004

Oliver Houck (Tulane) has posted On the Limits of Charity: Lobbying, Litigation, and Electoral Politics by Charitable Organizations under the Internal Revenue Code and Related Laws on SSRN. Here is the abstract:

This is a history and an examination of the policies underlying the three major restrictions on political activity by public charities: lobbying, litigation and electoral politics. These restraints have been in evolution, and dispute, for nearly a century. They represent no grand plan, but, rather, a design arrived at in pieces by impulses of the moment and supported by rationales that seem increasingly thin. As the dust has settled, we have something of a hierarchy of ineffectiveness in political life, with educational activity unrestricted, litigation lightly restricted, lobbying limited in amount and manner, and campaign work permitted only, and within limits, to companion social welfare organizations. This hierarchy does not jibe easily with the high premium placed on political speech, nor the unique perspectives that chariticable organizations can bring to the marketplace. The article suggests a re-examination of the reasons for the restrictions and their redesign based on the issues, and fears, that seem to be in play.

April 29, 2004 in Scholarship | Permalink | Comments (0) | TrackBack (0)

More on Kerry's 2003 Tax Return

Friday, April 30, 2004

Even Sen. Kerry's hometown newspaper is questioning his 175k capital gain from the sale of his 1/4 interest in a famous Dutch masterpiece, Adam Willaerts's "The Arrival of Frederick and Elizabeth, Prince and Princess of the Palatinate, at Flushing, 29th April 1613." The Boston Globe asks, "Is selling 17th-century artwork for profit perhaps too . . . aristocratic for the friend-of-the-people image our junior senator would like to project?" For an in-depth analysis of the tax issues raised by the Boston Globe story, see here. For prior TaxProf Blog coverage of Sen. Kerry's tax return, see here, here, here, here. here, here, and here.

April 29, 2004 in News | Permalink | Comments (3) | TrackBack (0)

Why No Increase In Standard Mileage Rate?

Friday, April 30, 2004

The Tax Guru asks why the IRS has not increased the 37.5 cent standard mileage rate for business in light of the increase in fuel costs since the rate was set in October. For example, the average price of a gallon of regular gasoline in New York is $1.88 now, compared to $1.75 in October.

April 29, 2004 in News | Permalink | Comments (0) | TrackBack (0)

NY Times Article on New Technology in Tax Teaching

Thursday, April 29, 2004

Forgive the shameless plug, but today's New York Times has a story (In Class, the Audience Weighs In; Instant Feedback with Wireless Keypads Keep Lectures Lively, at G1) about a new technology that I use in my tax classes. You can access the article on-line here (requires free registration). The New York Times reporter apparently came across an article that my colleage Rafael Gely and I wrote on the subject that is forthcoming in the Journal of Legal Education, Taking Back the Law School Classroom: Using Technology To Foster Active Student Learning. Here is the abstract:

Law schools (and indeed all of higher education) have witnessed an explosive growth in the use of technology in the classroom. Many law professors now deploy a wide array of technological bells and whistles, including PowerPoint slides, web-based course platforms, in-class Internet access, and the like. Students, in turn, increasingly come to class armed with laptop computers to harvest the fruits of the classroom experience. Yet in recent years there has been somewhat of a backlash, with various law professors arguing that this technology is interfering with, rather than improving, pedagogy in the classroom. According to the critics, this technology increases student passivity and thus interferes with the active learning that should be the hallmark of a law school classroom. In addition, the critics complain that laptops provide too much competition for the students' attention, enticing them to play computer games or DVDs and, with in-class Internet access, to read and send email (or instant messages), shop on-line, or check out the latest political, financial, or sports news. This Article opens a new chapter in this debate, explaining how law professors can use both old and new technologies to increase student engagement in the classroom.
We first lay out the pedagogical case for creating an active learning environment in the law school classroom and then examine the critics' charge that technology impedes these goals. The Article offers a competing vision of how technology can be harnessed to increase active student learning and, in the process, empower students to resist their laptop's siren song. In particular, we describe how in our tax and labor law courses we combine both old (substituting word processing text for PowerPoint slides) and new (using handheld wireless transmitters) technologies to inject more active learning into the classroom.

Unfortunately, the Journal of Legal Education does not allow authors to post articles on SSRN. If you would like a copy, please email me.

For some reactions in the blogosphere, see Larry Solum's Legal Theory Blog and Ann Althouse's Blog.

April 29, 2004 in Teaching | Permalink | Comments (1) | TrackBack (0)

Wednesday, April 28, 2004

50th Anniversary of Journal of Taxation

Thursday, April 29, 2004

To mark its 50-year anniversary, the Journal of Taxation is publishing a series of special articles:

Philip Jones, Tax Court Discovery and the Stipulation Process: Branerton 30 Years Later (Jan. 2004)
Richard Lipton & Steven Dixon, When Is a Partner Not a Partner? When Does a Partnership Exist? (Feb. 2004)
David Forst, Often Overlooked and Mostly Unresolved Issues in International Partnerships (March 2004)
John Huffaker & Edward Kessel, How the Disconnect Between the Income and Estate Tax Rules Created Planning for Grantor Trusts (April 2004)
Alvin Lurie, How Tax Shelters Evolved: The Road From Crane Has Been Paved With Bad Contentions (May 2004)
Steven Frost & Sheldon Banoff, Square Peg, Meet Black Hole: Uncertain Tax Consequences of Third Generation Limited Liability Entities (June 2004)

April 28, 2004 in Scholarship | Permalink | Comments (0) | TrackBack (0)

Samansky on Charitable Contributions to Churches

Thursday, April 29, 2004

Allan Samansky (Ohio State) has posted Deductibility of Contributions to Religious Institutions on SSRN. Here is the abstract:

In Hernandez v. Commissioner, 490 U.S. 680 (1989), the Supreme Court held that payments by Scientologists to their local churches for auditing and training, which are required religious practices, were not deductible as charitable contributions because they were made in exchange for specific services. Four years later the Internal Revenue Service "walked away" from its victory. Since 1993 the IRS has allowed a deduction for payments that are identical to those the Supreme Court held to be nondeductible in Hernandez, but has never explained its rationale. As Sklar v. Commissioner, 282 F.3d 610 (9th Cir. 2002), has shown, adherents of mainstream religions are now claiming that they are being treated unfairly compared to the Scientologists.
The law concerning deductibility of charitable contributions to religious institutions is unclear. This article explores the issues raised by Hernandez and provides a framework for determining deductibility of "quid pro quo contributions." It recommends that payments for auditing should be deductible, but payments for training should not be. The failure by all those involved in the Hernandez litigation to distinguish between auditing and training may be one of the reasons that the Supreme Court decision has been so unsatisfactory.

April 28, 2004 in Scholarship | Permalink | Comments (0) | TrackBack (0)

Tax Foundation Releases Data on Marriage Penalty

Wednesday, April 28, 2004

With proposed legislation pending on Capitol Hill to make permanent the 2001 Tax Act's marriage penalty relief provisions, the Tax Foundation has released a timely study profiling the couples who would benefit from that relief. They conclude that the failure to enact the pending legislation would have the biggest impact on lower-income couples. For example:

Income Range..............% Increase in Tax Burden If No Marriage Penalty Relief


April 28, 2004 in Think Tank Reports | Permalink | Comments (0) | TrackBack (2)

Woman Leaves 70% of Estate to Government

Wednesday, April 28, 2004

Having just spent a semester teaching students how to advise clients to pay as little estate tax as possible, I was struck by the news reports about Maria Woods, a German immigrant who died at age 80 and left 70% of her $98,000 estate to the U.S. Government. Her attorney noted: "My job is to help my clients avoid giving anything to the government," he said. "She told me this country has given her everything she has and she wanted to give some back."

For a few of the many news reports, see here, here, here, here, and here.

April 28, 2004 in News | Permalink | Comments (0) | TrackBack (0)

Lurie on Compensatory Option Sale Tax Shelter

Wednesday, April 28, 2004

Alvin Lurie has posted That Newtime Religion: Breaking Another False Idol - The COSS on SSRN. Here is the abstract:

And there is nothing new under the sun. Is there a thing whereof it is said: "See, this is new? - it hath been already, In the ages which were before us." - Ecclesiastes 1:9-10
So it says in the Bible, but it ain't necessarily so. It is doubtful that the abusive tax shelters designed in recent years "hath been already," and no doubt never before have so many been gobbled up by so many taxpayers to avoid so many billions of tax dollars. For a time the Internal Revenue Service seemed overwhelmed by a steady stream of abusive shelters like nothing it had ever seen before, and it was slow to react. But all of a sudden the mills of the gods are not grinding so slowly, and with no sacrifice in the exceeding small grist of their grinders.
Take the case of Ernst & Young. That icon of the business world has been forced to pay the Service $15 million (nondeductible) for alleged violations of the shelter registration and list maintenance requirements, according to a Service press release last July 2nd. One has to believe that the much-publicized compensatory option sale shelter ("COSS" to the initiate) devised by Ernst & Young for the two top executives of Sprint, for estimated tax savings exceeding $100 million, played a big part in this outcome.
It was early last year that the story broke of the startling boardroom doings at Sprint that led to the sudden resignation of its then two top guns, Esrey and LeMay, for having taken advantage of a tax shelter designed by Sprint's outside auditors, the very same Ernst & Young, presumably with full knowledge and encouragement of the Sprint directors. So one might be forgiven for head-scratching at this sudden outbreak of morality in high places. It sort of reminds one of the retort of Claude Raines, "I'm shocked, shocked," on being told, as the police inspector in "Casablanca" (the movie), of corruption in his very domain.
One could hardly blame the company executives for yielding to the temptation placed before them by their own company's accountants to avoid - or at least long defer - the enormous, mega-million dollar tax bill that would otherwise come with the even more enormous paper profits they had potentially enjoyed on the run-up in value of their stock options. While they could not be completely unaware of the potential exposure associated with any tax shelter that promises such wondrous results, presumably they were assured there was nothing illegal about the attempt to reduce tax liability by lawful means (and possibly even reassured by recital of Learned Hand's famous line, "Any one may so arrange his affairs that his taxes shall be as low as possible"). This option sale device, after all, had been constructed by their own company accountants, one of the nation's most respected tax powerhouses, and copper-riveted by the tax opinion of an equally prestigious, Dallas-based law firm.

April 28, 2004 in Scholarship | Permalink | Comments (0) | TrackBack (0)

Cafeteria Worker Grabs $2m Tax Refund from IRS by Claiming to be an Hawaiian Princess

Wednesday, April 28, 2004

A cafeteria worker in Pennsylvania with less than $5,000 of annual income managed to get a $2.1 million tax refund check from the IRS. She used the social security number of a real Hawaiian princess (Abigail Kawananakoa) to get a refund check from money the princess deposited to cover her own estimated taxes. An IRS spokesperson said "an erroneous tax refund of this magnitude is very rare." Her attorneys claimed she was suffering from an "irrational insistence upon an identity that is not her own."

For press reports, see here, here, here, here, here, here, and here. Kudos to Jack Bogdnaski for flagging this great story.

April 28, 2004 in Celebrity Tax Lore | Permalink | Comments (0) | TrackBack (2)

Tuesday, April 27, 2004

Baillif on Sales Price Adjustments

Wednesday, April 28, 2004

Michael Baillif (Ernst & Young) has posted Sales Price Adjustments: The Continuing Conundrum on SSRN. Here is the abstract:

The identification and treatment of sales price adjustments are among the most wide-ranging, and under-analyzed subjects in the tax law. The consequences of such classification can be substantial and far-reaching. Generally speaking, the question of whether sales allowances, rebates, refunds, trade or other discounts, or other inducements to buy (referred to collectively as "sales price adjustments") are being provided by the seller, will govern the timing, character and treatment by the seller with respect to such adjustments. They also may determine the ability of the seller to recover over time the amount of the transfer through depreciation or amortization deductions. From the perspective of the purchaser, if a sales price adjustment is received, the purchaser would not recognize this amount in current income, but instead would reduce the basis in its newly acquired property or the cost of its assets held in inventory.
The proper parameters of the nature and scope of sales price adjustments have long been a matter of contention between taxpayers and the Service, and have represented a source of substantial confusion. This area is sufficiently broad that a single article cannot do it justice. As a result, this article is devoted to an examination of the sales price adjustment inquiry from the perspective of the seller. This article also considers two other intriguing issues involving incentives from nonsellers: inducements furnished by third parties with a business interest in the transaction, and inducements taking the form of nonshareholder contributions to capital under section 118.

April 27, 2004 in Scholarship | Permalink | Comments (0) | TrackBack (0)

SOI Releases 2000 Foreign Sales Corporation Data

Wednesday, April 28, 2004

The just-released Statistics of Income Bulletin (Winter 2003-04) includes Foreign Sales Corporations, 2000. Here is the abstract:

Foreign Sales Corporations (FSC’s) filed 4,200 income tax returns for Tax Year 2000. FSC’s are foreign corporations, created by “parent” shareholders (mostly corporations). Generally, the FSC mechanism exempts a portion of income derived from the export of U.S. manufactured merchandise and certain services from U.S. income taxation.
Overall measures of FSC economic activity and earnings can be highlighted using Tax Year 2000 statistics. For 2000, the gross receipts of FSC’s and related suppliers, a broad measure of economic activity, was $349.0 billion, up from $285.9 billion for 1996, the last year for which comparable statistics were compiled. After subtracting costs of goods sold, and allocations of receipts using pricing rules to FSC’s and their related suppliers, FSC’s generated $43.9 billion of “total income.” Of this amount, $16.0 billion were subject to U.S. tax as nonexempt income, while $27.9 billion were exempt from regular U.S. income taxation. Following other adjustments, income subject to U.S. tax, the tax base, was $6.7 billion, which generated a total U.S. income tax of $2.3 billion. In 2000, FSC’s distributed $14.7 billion to their parent shareholders, mostly U.S. corporations. These distributions reflected current and accumulated (i.e., prior-year) earnings and profits.

For three related Excel tables of data, see here. For more statistics on FSC's, see here.

Over the coming week, TaxProf Blog will summarize the remaining Featured Articles and Data Releases in the latest SOI and provide links to the full reports and accompanying tables and statistics.

April 27, 2004 in Gov't Reports | Permalink | Comments (0) | TrackBack (0)

IRS Disclosure of Individual Tax Return Information

Tuesday, April 27, 2004

The IRS recently published its annual report on the number of times it discloses individual income tax return information. For 2003, the IRS disclosed this information 3.7 billion times. Since only 125 million tax returns are filed each year, that works out to 30 disclosures per return. (The 2003 figures represent a reduction from the 4.1 billion disclosures of individual tax return information in 2002.) Jim Maule (Villanova) has a nice discussion on his blog of the issues raised by these disclosures.

April 27, 2004 in Gov't Reports | Permalink | Comments (0) | TrackBack (0)

Brennen on Examining Race and Tax Exempt Law in Teaching and Scholarship

Tuesday, April 27, 2004

David Brennen (Mercer), the co-author of a new casebook on The Tax Law of Charities and Other Exempt Organizations, has posted Race and Equality Across the Law School Curriculum: Tax Exempt Law on SSRN. Here is the abstract:

Race and Equality Across the Law School Curriculum: Tax Exempt Law chronicles the possibilities for racial examinations of tax exempt law in the law school environment, either through teaching or scholarship. The Article, prepared in conjunction with Association of American law School's Summer 2004 "Racial Justice" professional development conference, relates the racial study of tax exempt law to the broader critical race theory movement in law generally. Thus, the Article highlights critical race theory's initial focus on constitutional law issues and traces its development to a focus on more neutral-looking areas of law such as tax law. The Article then outlines the basic scholarship concerning tax law generally as it relates to race, demonstrating how this general tax and race scholarship has effectively exposed racial bias in the federal tax imposed on wages and income of individuals. Finally, the Article outlines a laundry list of race issues in tax exempt law that might also contribute to improved notions of justice and fairness in the law. For example, the Article discusses the public policy limitation imposed on tax exempt charities, the role that racial diversity might play on tax exempt organization boards of directors and the current statutory prohibition on racial discrimination by tax exempt social clubs.

April 27, 2004 in Teaching | Permalink | Comments (0) | TrackBack (0)

SOI 1997 Gift Data

Tuesday, April 27, 2004

In the just-released Statistics of Income Bulletin (Winter 2003-04), Martha Britton Eller reports on Inter Vivos Wealth Transfers, 1997 Gifts. Here is the abstract:

Federal gift tax data provide a glimpse into the economic behavior of predominantly wealthy Americans. Such behavior includes donors’ transfer of money and other assets to gift recipients and the creation and continued funding of trusts, both of which are reported on gift tax returns. The population of donors who gave gifts in 1997 and reported those gifts to IRS in 1998 included 218,008 individuals, and those individuals transferred more than $31.1 billion in total gifts. The reported gift tax liability totaled $3.2 billion. Female donors outnumbered male donors, with 53.3 percent of the donor population comprised of females and 46.7 percent of the population comprised of males.
Donors gave a wide variety of gifts. The largest category of gifts was cash and cash management accounts, which made up more than a third of all gifts. The second and third largest categories of gifts were stock and real estate, respectively. While only a small percentage of donors, 10.1 percent, utilized discounts in the valuation of gifts, the size of total vaulation discounts, $3.4 billion, was rather significant and represented 33.0 percent of the full value of discounted assets.

For a previous study by Ms. Eller, Analysis of the 1998 Gift Tax Penal Study, presented at the 2002 Joint Statistical Meetings of the American Statistical Association, see here.

Over the coming week, TaxProf Blog will summarize the remaining Featured Articles and Data Releases in the latest SOI and provide links to the full reports and accompanying tables and statistics.

April 27, 2004 in Gov't Reports | Permalink | Comments (0) | TrackBack (0)

Monday, April 26, 2004

Where Tax Court Judges Went To Law School

Tuesday, April 27, 2004

Inspired by Brian Leiter's post about where federal district court and court of appeals judges went to law school, TaxProf Blog checked out the educational background of the 17 Tax Court Judges from the Tax Court web site.

Interestingly, the 17 judges earned their JD degrees from 17 different law schools:
* UC-Berkeley
* Chicago
* Colorado
* DePaul
* Duke
* Emory
* George Washington
* Georgetown
* Houston
* Illinois
* Kentucky
* Maryland
* Montana
* Pennsylvania
* South Dakota
* Virginia

9 of the 17 judges earned tax LL.M. degrees:
* NYU (6)
* Georgetown (2)
* Boston University (1)

11 of the judges were appointed by Republican Presidents, 6 by Democratic Presidents.

April 26, 2004 in News | Permalink | Comments (0) | TrackBack (0)

US Joins with 3 Allies To Fight Tax Avoidance

Tuesday, April 27, 2004

According to an article in the New Zealand Herald, "the United States, Britain, Canada and Australia are setting up a new international taskforce to fight tax avoidance, which may be up and running by the summer. A United Kingdom source said senior tax officials from the four countries had been meeting in Williamsburg, Virginia, before the spring meetings of the International Monetary Fund and World Bank in Washington."

April 26, 2004 in News | Permalink | Comments (0) | TrackBack (0)

SOI Releases Data on 2002 Individual Tax Returns

Tuesday, April 27, 2004

The just-released Statistics of Income Bulletin (Winter 2003-04) includes Individual Income Tax Returns, Preliminary Data, 2002. Here is the abstract:

Taxpayers filed 130.2 million U.S. individual income tax returns for Tax Year 2002, a decrease of 0.2 percent from the 130.5 million returns filed in 2001. Adjusted gross income less deficit decreased 2.3 percent to $6.0 trillion for 2002. Taxable income declined 4.3 percent to $4.1 trillion. Total income tax fell 10.6 percent to $797.8 billion, and the total tax liability also decreased 10.1 percent to $834.3 billion. At the same time, statutory adjustments to total income increased 28.4 percent, from $58.6 billion to $75.3 billion; total deductions increased 1.9 percent to $1,373.6 billion; and total tax credits used to offset income tax liabilities decreased 13.8 percent to $39.0 billion. The total earned income credit for all income size classes increased 14.4 percent to $38.7 billion for Tax Year 2002.

For a related Excel table of data, see here. For more statistics on individual income tax returns, see here.

Over the coming week, TaxProf Blog will summarize the remaining Featured Articles and Data Releases in the latest SOI and provide links to the full reports and accompanying tables and statistics.

April 26, 2004 in Gov't Reports | Permalink | Comments (0) | TrackBack (0)

Larson on Evidence Rules in the Tax Court

Tuesday, April 27, 2004

Joni Larson (Thomas Cooley) has posted Tax Evidence II: A Primer on the Federal Rules of Evidence as Applied by the Tax Court on SSRN. Here is the abstract:

The United States Tax Court applies the Federal Rules of Evidence (the "Rules") during its proceedings. These rules establish the guidelines the judge will use to determine what testimony and documents will be admissible in evidence.
We follow the Federal Rules of Evidence in our proceedings. This provides all parties with ground rules for presenting their cases. To depart from these rules not only would contradict our mandated authority but also would prejudice the parties by removing the certainty of what the Court may consider in finding facts. A party could not adequately prepare or defend a case if it were uncertain what standards would be applied to judge the admissibility of evidence. While it is generally accepted that a relaxed application of the rules of evidence during a bench trial results in less prejudice to the fact finder because of a judge's legal training and experience, the uncertainty of what will be used to find facts is highly prejudicial to a party whether the fact finder is a judge or a jury. Incompetent evidence should not be admitted to proof. We, therefore, believe that adhering to the Federal Rules of Evidence is a sound way to protect the integrity of our proceedings.
In order to present the best case possible, it is imperative for a party litigating in the Tax Court to understand the Rules and how they have been interpreted and applied by the Tax Court.
This Article surveys the Tax Court's interpretation and application of the Rules. It updates and expands an earlier version of this Article. The Article does not discuss the application of the Rules by federal district courts, the Court of Federal Claims, or the federal circuit courts of appeal, except to the extent there is a split of authority in the circuit courts. Appendix A identifies those Rules that have not been addressed or interpreted by the Tax Court in its opinions. Appendix B provides a tabular summary of the Rules most commonly used in the Tax Court and their various foundational requirements.

April 26, 2004 in Scholarship | Permalink | Comments (0) | TrackBack (0)

U.S. Supreme Court Grants Cert. on Access to Special Trial Judge Reports

Monday, April 26, 2004

Leandra Lederman (George Mason) reports that the US Supreme Court granted certiorari today in two cases involving Tax Court Rule 183 (the procedure relating to Special Trial Judge reports in cases involving over $50,000):

The cases are Ballard v. Commissioner and Estate of Kanter v. Commissioner. Both of these cases are appeals from Investment Research Associates v. Commissioner, in which the Tax Court issued an order refusing to release to the parties the report of the Special Trial Judge who heard the case and refusing to include the report in the record on appeal. The refusal is consistent with the Tax Court's practice since 1984, when amendments to Rule 183 took effect.
Investment Research Associates was appealed to three circuits. None of them found in favor of the taxpayer on the issue of the Special Trial Judge report (which was argued primarily as a due process issue) but Judge Cudahy filed a long and powerful dissent in Kanter. There are a number of interesting aspects to these cases, including the fact that an attorney for the taxpayers filed an affidavit stating that two Tax Court judges told him that the Tax Court opinion, which found against the taxpayers on multi-million dollar fraud issues, did not reflect the findings of the Special Trial Judge who heard the case. Also, Kanter involves the estate of Burton Kanter, who was a well-known tax attorney and an adjunct professor at Chicago Law School for about 10 years.
The Courts of Appeals' decisions in Ballard and Kanter arguably are in conflict with a 1989 decision of the DC Circuit, Stone v. Commissioner. That case involved the prior version of Rule 183 (then Rule 182), but the language it interpreted was not changed when the rule was amended. The government opposed certiorari in Ballard and Kanter. It will be very interesting to see what the Court does.

For Professor Lederman's March 22 article on this topic in Tax Notes, see here. For a front-page National Law Journal story on the topic, see here.

April 26, 2004 in News | Permalink | Comments (1) | TrackBack (0)

SOI on Split-Interest Trusts

Monday, April 26, 2004

In the just-released Statistics of Income Bulletin (Winter 2003-04), Melissa Belvedere reports on Split-Interest Trusts, 2001. Here is the abstract:

Split-interest trusts remained an increasingly popular option for planned giving in 2001. Overall, the number of split-interest trusts increased by 6.0 percent. Charitable remainder unitrusts remained especially popular (75.0 percent of all split-interest trusts). Yet the greatest numerical increase was for charitable lead trusts (15.8 percent). The vast majority of both charitable remainder annuity trusts and pooled income funds were small trusts with under $500,000 in book value of total assets (82.1 percent and 79.3 percent, respectively). Charitable remainder unitrusts were also skewed in favor of the small trusts, but not as strongly (68.7 percent). In contrast, the majority of charitable lead trusts were midsized trusts with between $500,000 and $3.0 million in book value of total assets (46.8 percent).
Of the total net income reported by charitable remainder annuity and unitrusts, net long-term capital gains was the largest component (83.4 percent and 84.1 percent, respectively). More interesting to note are the large changes in the amount of net short-term capital losses reported. Charitable remainder annuity trusts reported approximately $135.8 million in short-term capital losses for 2001, compared with only $15.1 million in losses for 2000. For charitable remainder unitrusts, the losses were even more pronounced—overall, unitrusts reported $389.6 million in short-term capital losses in 2001, compared with net long-term capital gains for $78.5 million in 2000.

For nine related Excel tables of data, see here. For more statistics on split-interest trusts, see here.

Over the coming week, TaxProf Blog will summarize the remaining Featured Articles and Data Releases in the latest SOI and provide links to the full reports and accompanying tables and statistics.

April 26, 2004 in Gov't Reports | Permalink | Comments (0) | TrackBack (0)

Kalinka on St. David's Case

Monday, April 26, 2004

Susan Kalinka (LSU) has posted Individuals and Passthrough Entities - Fifth Circuit's Opinion in St. David's Raises More Questions than it Answers on SSRN. Here is the abstract:

On November 7, 2003, the United States Court of Appeals for the Fifth Circuit published its opinion in St. David's Health Care System, Inc., reversing a grant of summary judgment in favor of the plaintiff, a nonprofit hospital, by the District Court for the Western District of Texas. The issue in St. David's concerned whether the IRS had abused its discretion in revoking the tax-exempt status of the nonprofit hospital when it entered into a limited partnership with a for-profit hospital. This article discusses the opinions of both the district court and the Fifth Circuit in St. David's and the standards that the Fifth Circuit set forth for purposes of determining whether forming a partnership or other entity classified as a partnership with a for-profit organization will cause a nonprofit organization to lose its tax-exempt status.

April 26, 2004 in Scholarship | Permalink | Comments (0) | TrackBack (0)

Sunday, April 25, 2004

Bankman to Deliver Woodworth Lecture

Monday, April 26, 2004

Joe Bankman (Stanford) will deliver the prestigious Laurence Neal Woodworth Lecture on Federal Tax Law and Policy, sponsored by Ohio Northern, on Thursday, May 6 in connection with the ABA Tax Section Meeting in Washington, D.C. The lecture will take place at 5:00 pm in the Grand Hyatt Hotel. The title of the lecture is Norms and Enforcement Strategy: Tax Shelters and the Cash Economy. Here is the abstract:

A lack of effective enforcement policy made tax shelters seem an economically attractive investment in the 1990's. Changing norms also helped fuel tax shelter boom. Corporate tax departments became profit centers; the literal interpretivism that supports tax shelters gained respectability. The interaction of economic self-interest and these prescriptive norms created new behavioral norms: taxpayers, financial intermediaries and lawyers became more aggressive. Tax shelters became (more) mainstream.

A lack of effective enforcement has also made underreporting in cash business an economically attractive strategy. The result is a long-standing behavioral norm characterized by low reporting rates. Underreporting by small business, which is favored, does not carry with it the disapprobation of underreporting by public corporations, which are viewed with distrust. However, the revenue cost to the fisc (and net social cost to society) almost certainly exceeds the loss from tax shelters.

The role of tax administration is to use the lever of enforcement and penalties to change the cost benefit-calculus and behavioral norms that support underreporting in both sectors. Obviously, any successful policy initiative must take account of the political constraints that limit enforcement options. I will consider the range of administratively feasible policy options, and the political constraints on their adoption.

For a list of prior Laurence Neal Woodworth Lectures, see here.

April 25, 2004 in ABA Tax Section, Tax Conferences | Permalink | Comments (1) | TrackBack (0)

Abrams on Section 734(b) Basis Adjustment

Monday, April 26, 2004

Howard Abrams (Emory) has posted The Section 734(b) Basis Adjustment Needs Repair on SSRN. Here is the abstract:

The partnership tax provisions - Subchapter K of the Internal Revenue Code - work pretty well. Those provisions have a difficult job of providing a reasonable mechanism for taxing arrangements between parties that can be far from off-the-rack. It should not be difficult to figure out how to tax two individuals who contribute equal amounts of cash to start a joint business in which each will own a one-half interest. It quickly becomes problematic, however, when one of the two partners wants a greater share of early receipts in exchange for a lower share of back-end gains. If the amounts the partners contribute are unequal, they will have some arrangement to account for that difference which the taxing structure must digest. A partnership is the most flexible form of business organization, and the rules of Subchapter K capture that flexibility surprisingly well.
The basic paradigm upon which Subchapter K is best described is tax transparency; that is, that a partnership should be all but invisible to the taxing system. In particular, transactions between a partner and the partnership should be tax-free as much as possible, with the taxable events being dealings between the partnership (or the partners) and third parties. Thus, most contributions and distributions are tax-free, but transfers of partnership assets or interests to non-partners generally are taxable.
A corollary of tax transparency is the general equality of aggregate inside and outside bases. "Inside basis" is the partnership's adjusted basis in its assets, while outside basis is a partner's adjusted basis in his partnership interest. Because aggregate inside basis and aggregate outside basis each represent the after-tax (and debt-financed) investment in partnership assets, they should equal each other. They start equal by reason of the basis rules applicable to contributions of property (including the debt allocation rules of section 752), and will in general remain equal throughout the life of the partnership. The examples presented in this Article do not consider the case of partnership indebtedness, although adding debt to the transaction should not create any change to the analysis.
When inside and outside basis are not equal, astute taxpayers can exploit the difference. Suppose, for example, that aggregate outside basis is higher than aggregate inside basis. A sale of all the partnership interests would transfer the partnership's assets just as would a direct asset sale, but by selling the higher-basis interests, aggregate gain is reduced. Conversely, if inside basis were higher, the assets rather than the interests would be sold.
Nonetheless, there are transactions that can break the equality of aggregate inside and aggregate outside basis. An election is provided by section 754 which ensures, by adjusting inside basis, that this equality is in fact always maintained so long as the election is made early enough. Indeed, the basis adjustments provided by the section 754 election are so well designed - and the equality between aggregate inside and aggregate outside basis so important - that commentators have called for making these basis adjustments mandatory rather than optional.
When an election under section 754 is made, the electing partnership becomes subject to two basis adjustment provisions: (1) section 734(b), providing for certain inside basis adjustments upon the occurrence of specified triggering distributions of cash or property from the partnership; and (2) section 743(b), providing for certain inside basis adjustments upon the sale or exchange of a partnership interest. The regulations specifying the manner of making these adjustments have recently undergone major revisions, with the greatest attention focused on the section 743(b) adjustments. Now, despite the lack of any real statutory support, an incoming partner will in effect take a share of inside basis in each of the partnership's assets equal to that partner's share of each asset's fair market value, an outcome so reasonable that one could only have wished Congress rather than the Treasury had seen fit to specify it.
Unfortunately, the regulations applicable to section 734(b) adjustments were not much changed, and that is indeed unfortunate. While the amount of the section 734(b) adjustment is computed properly, the allocation of that adjustment is not right. Absent a correction, the statute as written offers significant tax reduction strategies.

April 25, 2004 in Scholarship | Permalink | Comments (0) | TrackBack (0)

Saturday, April 24, 2004

Top 5 Tax Paper Downloads

Sunday, April 25, 2004

This week's list of the Top 5 Tax Paper Downloads at SSRN is basically unchanged from last week, with #4 and #5 switching positions:

1. Corporations, Society and the State: A Defense of the Corporate Tax, by Reuven Avi-Yonah (Michigan)

2. The Dividend Divide in Anglo-American Corporate Taxation, by Steven Bank (UCLA)

3. Balance in the Taxation of Derivative Securities: An Agenda for Reform, by David Schizer (Columbia)

4. The Progressive Consumption Tax Revisited, by Steven Bank (UCLA)

5. The Tax Efficiency of Stock-Based Compensation, by Michael Knoll (Pennsylvania)

For the complete Top 10 Tax Paper Downloads over the past two months, see here

April 24, 2004 in Top 5 Downloads | Permalink | Comments (0) | TrackBack (0)

Friday, April 23, 2004

New Statistics of Income Bulletin Released

Saturday, April 24, 2004

The Winter 2003-04 Statistics of Income Bulletin has been released with a wealth of interesting tax data. (The SOI is one of the
permanent links maintained on TaxProf Blog.) From my corner of the tax world, the estate tax data (Table 17) is particularly interesting. In 1999, the last year for which statistics are available, the largest perentage of people dying were subject to the estate tax than in any year since 1976, and paid more estate tax than in any year in history:

% of Adults Dying Whose
Estate Filed Tax Returns..................Estate Tax
2.3%.....................................................$24.8 billion

But these statistics will change dramatically because of the estate tax relief enacted in 2001 (raising the amount exempt from estate tax in stages, as well as a phased reduction in the maximum tax rate) for 2003-2009, followed by the repeal of the estate tax in 2010 and its resurrection in 2011. An article in the same issue of the SOI projects that the number of estate tax returns will fall 13.2% in 2004 compared to 2003, and 18.2% annually during 2004-2010.

In the coming days, TaxProf Blog will summarize the Data Releases and Featured Articles in the latest SOI and provide links to the full reports.

April 23, 2004 in Gov't Reports | Permalink | Comments (0) | TrackBack (0)

House & Shapiro on Phased-In Tax Cuts

Saturday, April 24, 2004

Christopher House (Michigan) & Matthew Shapiro (Michigan) have posted Phased-In Tax Cuts and Economic Activity on SSRN. Here is the abstract:

Phased-in tax reductions are a common feature of tax legislation. This paper uses a dynamic general equilibrium model to quantify the effects of delaying tax cuts. According to the analysis of the model, the phased-in tax cuts of the 2001 tax law substantially reduced employment, output, and investment during the phase-in period. In contrast, the immediate tax cuts of the 2003 tax law provided significant incentives for immediate production and investment. The paper argues that the rules and accounting procedures used by Congress for formulating tax policy have a significant impact in shaping the details of tax policy and led to the phase-ins, sunsets, and temporary tax changes in both the 2001 and 2003 tax laws.

April 23, 2004 in Scholarship | Permalink | Comments (0) | TrackBack (0)

NewTithing Group Criticizes Charitable Giving of Wealthy

Saturday, April 24, 2004

The NewTithing Group has issued a research report, The Generosity of Rich and Poor: How The Newly Discovered “Middle Rich” Stack Up, that makes three major points:

1. Average “upper middle class” (200k - 1m AGI) and “middle rich” (1m - 20m AGI) filers donated a lower percentage of their investment asset wealth to charity than did average filers in any other tax filer category.

2. If average filers in the “upper middle class” and the “middle rich” had donated as high a percentage of their investment wealth in 2001 as did average filers in the lower wealth groups, total individual contributions to charity in 2001 would have been an estimated $41.6 billion higher, an increase of 23%.

3. By selling appreciated assets for taxable gains while donating cash to charity, the “middle rich” and “super-rich” paid over half a billion dollars in avoidable capital gains taxes. Through more tax advantageous giving strategies, they could have kept or donated to charity an additional $659 million.

April 23, 2004 in Think Tank Reports | Permalink | Comments (0) | TrackBack (0)

Ass't AG O'Connor Speaks at Harvard

Friday, April 23, 2004

Eileen O'Connor, Assistant Attorney General for the Tax Division of the U.S. Department of Justice, spoke at Harvard Law School yesterday (April 22). O'Connor discussed the DOJ's role in tax shelter cases, efforts to lower the wall between civil and criminal tax enforcement, and the use of "John Doe" summonses. For a full report of the speech, see the Per Curiam Blog.

April 23, 2004 in News | Permalink | Comments (0) | TrackBack (0)

Mayo on Restricted Stock Notes

Friday, April 23, 2004

David Mayo (Gibson, Dunn & Crutcher) has posted Restricted Stock Notes on SSRN. Here is the abstract:

The 1990s saw an increasing use of equity-based compensation, most notably among dot com and other technology companies where stock options were seen as the path to quick riches at no cash cost to the issuer. Along with the increased use of equity-based compensation came increased efforts to avoid the principal downside of stock options, the realization of ordinary income on exercise, through the use of restricted stock. Restricted stock, however, requires the outlay of cash, either to the issuing corporation as a payment for the stock or to the government in payment of the taxes due on its vesting (or issuance, if a section 83(b) election, discussed below, is made). Sufficient cash for either purpose often would not be available to an employee who is to receive equity-based compensation, and in the start-up context the employer often would be unable to lend the employee cash to pay the taxes.

A transaction using a restricted stock note, which provides for the payment for restricted stock with a note issued by the employee, if properly structured, was thought to solve all of these problems. The restricted stock note provided payment for the restricted stock without the immediate outlay of cash by the employee to the employer, and because full fair market value would be paid for the restricted stock, no taxes would be due if the recipient were to make a section 83(b) election. As a result of the section 83(b) election the ordinary income that would arise on the exercise of a stock option would be avoided.

The problems that were not foreseen, however, were those caused by a falling stock market or, more specifically, a drop in the price of the stock of the employer. Most significant to the employee are the problems of repayment and of default on the restricted stock note if the market value of the restricted stock were to fall below the amount of the note. Inability to repay leads to issues regarding the characterization of full or partial forgiveness of the notes for both the employee and the employer.

Part I of this article discusses the structure and treatment of the issuance of restricted stock for restricted stock notes. Part II considers the potential consequences to employees of restructuring a restricted stock note, including partial and complete forgiveness and conversion of recourse notes to nonrecourse notes. Part III deals with the consequences to an employer of the restructuring of a restricted stock note.

April 23, 2004 in Scholarship | Permalink | Comments (0) | TrackBack (0)

Thursday, April 22, 2004

Bush-Kerry Tax Policy Debate

Friday, April 23, 2004

Representatives of the Bush and Kerry campaigns square off today in Washington, D.C. at a conference sponsored by Tax Analysts, Bush, Kerry, and Tax Policy: Where Do We Go From Here?

In one corner, representing the Bush campaign, is Pamela Olson, former Assistant Secretary of the Treasury for Tax Policy.

In the other corner, representing the Kerry campaign, is Gene Sperling, former National Economic Advisor to President Clinton.

Refereeing (er, moderating) is Christopher Bergin, Executive Director of Tax Analysts.

The conference begins at 10 a.m. at the National Press Club, 529 14th Street, N.W. Tax Profs in the D.C. area who attend the conference are encouraged to share their impressions on TaxProf Blog.

April 22, 2004 in Tax Conferences | Permalink | Comments (0) | TrackBack (0)

Desai & Dharmapala on Corporate Tax Avoidance and Incentives

Friday, April 23, 2004

Mihir Desai (Harvard) & Dhammika Dharmapala (Connecticut) have posted Corporate Tax Avoidance and High Powered Incentives on SSRN. Here is the abstract:

This paper analyzes the links between corporate tax avoidance, the growth of high-powered incentives for managers, and the structure of corporate governance. We develop and test a simple model that highlights the role of complementarities between tax sheltering and managerial diversion in determining how high-powered incentives influence tax sheltering decisions. The model generates the testable hypothesis that firm governance characteristics determine how incentive compensation changes sheltering decisions. In order to test the model, we construct an empirical measure of corporate tax avoidance - the component of the book-tax gap not attributable to accounting accruals - and investigate the link between this measure of tax avoidance and incentive compensation. We find that, for the full sample of firms, increases in incentive compensation tend to reduce the level of tax sheltering, suggesting a complementary relationship between diversion and sheltering. As predicted by the model, the relationship between incentive compensation and tax sheltering is a function of a firm's corporate governance. Our results may help explain the growing cross-sectional variation among firms in their levels of tax avoidance, the "undersheltering puzzle," and why large book-tax gaps are associated with subsequent negative abnormal returns.

April 22, 2004 in Scholarship | Permalink | Comments (0) | TrackBack (0)

Schlunk to Visit at NYU

Thursday, April 22, 2004

Herwig Schlunk (Vanderbilt) will be visiting at NYU in the Spring 2005 semester. For a complete list of 2004-05 Tax Prof moves, see here.

April 22, 2004 in Tax Prof Moves | Permalink | Comments (0) | TrackBack (0)

Weisbach & Nussim on Integration of Tax & Spending Programs

Thursday, April 22, 2004

David Weisbach (Chicago) & Jacob Nussim (Chicago) have published The Integration of Tax And Spending Programs, 113 Yale L.J. 955 (2004). They posted an earlier draft of the paper on SSRN. Here is the abstract:

This paper provides a theory for deciding when a spending program should be implemented through the tax system. The decision is traditionally thought to be based on considerations of tax policy. The most common theories are the comprehensive tax base theory and the tax expenditures theory, both of which rely on tax policy to make the determination. We argue instead that the decision should be based solely on consideration of organizational design. Activities should be grouped together in a way that achieves the best performance, much like a corporation decides how to divide its business into divisions. Tax policy is entirely irrelevant to the decision. This paper begins the process of applying organizational design theory to the tax and spending problem, considering theories of hierarchies based on the needs for specialization in and coordination of activities. The paper then analyzes whether food stamps and the earned income credit should be implemented in through the tax system based on this analysis.

April 22, 2004 in Scholarship | Permalink | Comments (0) | TrackBack (0)

Brown on FIRPTA

Thursday, April 22, 2004

Fred Brown (Baltimore) has posted Whither FIPTA? on SSRN. Here is the abstract:

It is commonly understood that the tax law is composed of a complicated and interrelated set of statutory provisions. This raises the possibility that changes to one area of the law may necessitate revisions to other areas. While statutory change sometimes means that other provisions need to be added or amended, there is also the possibility that the enactment of a new provision allows for the repeal of another rule because it is either deadwood or simply no longer sensible in light of the rule's intended purpose as well as fundamental tax policies.

A simplification study released by the Joint Committee on Taxation in 2001 indicates the prevalence of this deadwood (and the like) phenomenon. This study recommends the repeal of 105 provisions identified as pure deadwood. The study also proposes the elimination of other provisions that no longer serve sound policy objectives as a result of tax law changes since their enactment. Given the tax law's interrelated statutory scheme and frequent changes, the extent of the deadwood phenomenon should come as no surprise.

An area that is ripe for such a deadwood analysis is the Foreign Investment in Real Property Tax Act ("FIRPTA"), and in particular section 897. Indeed, FIRPTA has been ripe for such an analysis since the changes effected by the Tax Reform Act of 1986. This Article suggests that the repeal of portions of FIRPTA may be in order and sets forth an analysis of the various considerations in arriving at this conclusion.

April 22, 2004 in Scholarship | Permalink | Comments (1) | TrackBack (0)

1-Week Anniversary of TaxProf Blog

Thursday, April 22, 2004

Today marks the one-week anniversary of TaxProf Blog. It looks like we are here to stay, as we have been blown away by the number of hits (5,500) in our first week. Thanks for the many words of encouragement and support, as well as the helpful suggestions on how to improve the site.

We are grateful for the many kind comments in the blogosphere, including Iowa Professor Tung Yin's prediction that TaxProf Blog "will become the tax equivalent of Larry Solum's Legal Theory Blog." That raises the bar quite a bit, and I hope over the coming weeks and months that we can approach that lofty standard.

We also are gratified by the many new friends we have made in high places in the academy, bar, and government, including a new fan in Washington, D.C.:

Bush Cartoon

April 22, 2004 in About This Blog | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 21, 2004

Yin on Effective Tax Rates of Fortune 500

Wednesday, April 21, 2004

Non-TaxProfer Gordon Smith (Wisconsin) blogs How Much Tax Do Large Corporations Pay? Estimating the Effective Tax Rates of the Fortune 500, 89 Va. L. Rev. 1793 (2003), by George Yin (on leave at Virginia while serving as Chief of Staff, U.S. Joint Committee on Taxation). Here is the abstract:

Three recent phenomena - the corporate governance scandals, continuing concern about corporate tax shelters, and the Bush Administration's proposal to exempt dividends from income - have generated renewed interest in the amount of taxes paid by public corporations on the profits they report to their investors. This paper estimates the effective tax rates (ETRs) from 1995 to 2000 of the corporations included in the S&P 500 based on a comparison of their worldwide current income tax expense to their worldwide pre-tax book income. It finds that after controlling for the disparate tax and accounting treatment of stock options, the ETR of the sampled corporations declined slightly, from 30.11% in 1995 to 27.98% in 2000. Potentially more revealing is the fact that there is an important reduction in the 1999 ETR relative to the 1995-98 period (during which the ETR was virtually unchanged), and the 2000 ETR remains below the 1995-98 average. The paper is unable to relate these remaining changes in ETR to trends in foreign investment of the companies involved.

The paper also estimates that the six-year ETRs (after stock option conformity) of ten industry groups varied from a low for the energy sector (25.72%) and industrials (25.84%) to a high for the information technology sector (32.48%) and utilities (32.43%). Both the level of taxation (compared to the statutory tax rate of 35 percent) and relative uniformity of tax treatment of the industries is to be contrasted with the much greater variations experienced by industries during the early 1980's.

April 21, 2004 in Scholarship | Permalink | Comments (1) | TrackBack (0)

Vote For Your Favorite Tax Prof

Wednesday, April 21, 2004

LawTV is running a poll to find "America's 100 most influential law professors." According to the site: "'Influential' is a measure of how large an impact a particular professor has on society. This influence can be, for instance, through academic writings, popular writings, litigation, media appearances, business activities, teaching, lecturing, charitable work, or scholarly impact."

Such popularity polls tend to be dominated by the Con Law types. Let's unleash the power of the TaxProf Blogosphere to stuff the ballot box for your favorite tax professors (you can vote for up to 10). The top 250 vote-getters will face off for the "Top 100" title. The site does not mention how the winners will be selected --perhaps all 250 law professors will be dumped on an island Survivor-like. Or have to face a Simon-like American Idol judge. Anything but a swimsuit competition!

April 21, 2004 in Tax Profs | Permalink | Comments (0) | TrackBack (0)

Kerry's Pre-Campaign Charitable Giving

Wednesday, April 21, 2004

In my prior post comparing Pres. Bush and Sen. Kerry's respective charitable giving as reported on their recent tax returns, I noted that "charitable giving knowing that one's tax returns are to be released to the public is not the best measure of a person's heart for charity." An alert reader points to a Florida Times-Union story reporting that Kerry was much more parsimonious in his giving before he considered running for the Presidency:

Pre-Campaign Mode:
1991: $0
1992: $820
1993: $175
1994: $2039
1995: $0

Campaign Mode:
1999: $21,995
2000: $19,221
2001: $22,370
2002: $18,600
2003: $43,735

April 21, 2004 in News | Permalink | Comments (3) | TrackBack (0)

Asofsky on Business Bankruptcy Filings

Wednesday, April 21, 2004

Paul Asofsky (Weil Gotshal & Manges) has posted A Guide to Common Tax Issues Incident to Filing Business Bankruptcy on SSRN. Here is the abstract:

Any company considering bankruptcy should be aware of certain routine tax procedural items, and this article addresses a number of those issues. The bankruptcy claims resolution process and the requirements of return filing are discussed. Additionally, the effects of bankruptcy on tax audits are touched on.

There is a distinction between liabilities that arise prior to the filing of the bankruptcy petition and those that come forward after the filing of the petition. This distinction of whether a tax liability is pre-petition or post-petition as well as the payment and refund consequences of each is discussed in length.

The most controversial issue within this area deals with the status of tax liabilities for the taxable year in which the bankruptcy petition is filed. Tax authorities adhere to the position that such a liability is a post-petition liability because the tax must not be paid until the last day of the taxable year which is a date following the filing of the bankruptcy petition. However, debtors take the opposing position that the liability should be considered pre-petition, and three Courts of Appeals have adopted their argument and instituted a bifurcation rule in their jurisdictions. The effects of these decisions as well as the determination and payment of pre-petition liabilities are addressed, and a discussion of post-petition interest on tax claims concludes the article.

April 21, 2004 in Scholarship | Permalink | Comments (0) | TrackBack (1)

Tuesday, April 20, 2004

Bush v. Kerry: Charitable Deductions

Wednesday, April 21, 2004

One element of the dueling analyzes of the Bush-Kerry tax returns that has been under-blogged is the relative amounts of the charitable deductions reported by each man. Here are the charitable deductions as a percentage of AGI

........ Bush ..Kerry
2003 8.3% 11.1%
2002 8.2% 12.9%
2001 10.2% 16.3%
2000... n/a 14.0%
Ave. .. 8.9% 13.6%

So much for compassionate conservatism.

Of course, Sen. Kerry's tax situation is muddled because he files separately from his wife and has not released her tax returns. And in any event charitable giving knowing that one's tax returns are to be released to the public is not the best measure of a person's heart for charity.

April 20, 2004 in News | Permalink | Comments (4) | TrackBack (1)

What Tax Profs Are Reading . . . Newman on Perfectly Legal

Tuesday, April 20, 2004

Joel Newman (Wake Forest) kicks off a new feature of TaxProf Blog: What Tax Profs Are Reading. The goal is to share with the broader tax community reviews of both tax-related and nontax-related books recently read by tax professors. We invite tax professors to submit reviews of books they are reading.

Here is Prof. Newman's take on Perfectly Legal by New York Times tax reporter David Cay Johnston:

Book Cover Life isn’t fair. We don’t all have an equal chance to win a footrace; people who can run the fastest tend to win. We all know that, and most of us accept it, provided that the process is fair. For example, it helps if all the racers are required to begin at the same starting line.

In his new book, Perfectly Legal, David Cay Johnston says that the game is rigged, and that our tax laws are at least partly to blame. The rich are getting richer and the poor are getting poorer. Recent tax changes lighten the load on the richest Americans, and pay for the shortfall by increasing the social security tax, which largely falls upon the middle class.

IRS enforcement trends don’t help. It has always been easier for the IRS to track wages—the income of the lower and middle classes, than to track the non-wage income earned by the richest Americans. Congress only made things worse by handcuffing the IRS, and cutting its budget to boot. Ironically, the only people who are experiencing increased IRS audit rates are the low-income taxpayers who try to navigate the complex and badly drafted Earned Income Tax Credit. Surely, even the IRS knows that that’s not where the money is.

Who is to blame? Much of the problem is structural. Law reflects its environment. One would surely expect US tax law, which reflects one of the largest, sophisticated, and complex economies the world has ever known, to be complex.

Further, our democratic process is unwieldy at best. Members of Congress do what they need to do to get reelected. It is rarely worth their time to get heavily involved in understanding, no less reforming, the tax laws, when the most likely result of their efforts would be to make them far more enemies than friends.

What’s more, the richest among us get to hire the best tax advisors. Moreover, only the rich are flexible enough to take their advice. Poor people have no choice about how to spend their money—they have barely enough as it is. Only the rich can shift their money around from one investment to another, to maximize tax savings. Of course our tax laws are most easily manipulated by the rich. Why should they be any different from our other laws?

To his credit, Johnston blames both Democrats and Republicans. Both share in the lack of understanding and guts which makes all of this possible. However, the Republicans, who have been in power most recently, are clearly responsible for the most recent debacles. It is they who rail against the federal estate taxes (which they call the “death tax” after consultation with their ad men and focus groups), after making claims against it which, as Johnston shows, absolutely cannot stand up.

Remember, a race can’t be fair unless everyone starts at the same place. Even with the estate tax in place, rich parents can give their children an enormous leg up on the competition in the next generation. Do we really want to eliminate the estate tax and make that potential competitive advantage even bigger?

David Cay Johnston is the best newspaper reporter on the tax beat. His book is entertaining and instructive. He does a marvelous job of simplifying complex things, including reincorporation in Bermuda, the out-of-control alternative minimum tax, and the excesses of corporate jets. On that last issue, if both the liberal Howard Metzenbaum and the conservative Jesse Helms agree that we have a problem, then we definitely have a problem. Also, he humanizes the story by focusing on the real people involved, from the IRS Commissioner to some of our best tax lawyers, to some of our most interesting taxpayers.

Johnston says that our tax code needs more than mere tinkering; it needs major overhaul. But which overhaul, and how? Perhaps we should shift the emphasis from taxing income to taxing consumption. Surely, we should reconsider how we tax international transactions. There is no doubt that we need to strengthen, and fund, the IRS, so that it can do its job fairly.

Whatever changes we make, however, we must make them openly. Our tax laws are hugely important. The people of the United States need to understand them well enough to participate in a national conversation about what they do, and how they might be changed. Perfectly Legal is a wonderful first step toward that understanding.

April 20, 2004 in Book Club | Permalink | Comments (2) | TrackBack (0)

Burke on Exculpatory Liabilities and Partnership Allocations

Tuesday, April 20, 2004

Karen Burke (San Diego) has posted Exculpatory Liabilities and Nonrecourse Partnership Allocations on SSRN. Here is the abstract:

The rise of limited liability companies (LLCs) classified as partnerships for federal income tax purposes challenges traditional assumptions concerning the treatment of recourse and nonrecourse liabilities under Subchapter K. The complex rules of sections 704(b) and 752 give little attention to liabilities that are recourse to the entity under section 1001 but for which no member bears the economic risk of loss under section 752. In comparison to traditional general or limited partnerships, however, LLCs are much more likely to incur such "exculpatory" liabilities because of the limited liability shield under state law. Under the existing regulations for section 704(b) and 752 (the "section 704(b)/752 regulations"), the classification of liabilities as either recourse or nonrecourse is essential for purposes of allocating basis and deductions attributable to such liabilities. Although exculpatory liabilities are functionally quite similar to traditional nonrecourse liabilities secured by all of an LLC's assets, literal application of the section 704(b)/752 regulations with respect to such liabilities is fraught with difficulties.

Under these regulations, the allocation of tax items attributable to nonrecourse liabilities is extraordinarily permissive: since no partner bears the economic risk of loss attributable to such liabilities, the corresponding deductions may be allocated in virtually any manner the parties desire. Upon disposition of the underlying property, however, the partners who received such deductions must be allocated offsetting gain and income to restore any capital account deficits, thereby vindicating the earlier loss allocations. The underlying premise of the nonrecourse allocation rules is that it is possible to identify the partnership's nonrecourse liabilities and track the deductions generated by such liabilities for purposes of allocating the corresponding basis and losses. Because of their hybrid nature as recourse liabilities for purposes of section 1001 and nonrecourse liabilities for purposes of section 752, exculpatory liabilities challenge the basic premises of this somewhat oversimplified description of the nonrecourse allocation rules. Indeed, as two recent articles demonstrate, the uncertainty and lack of consensus concerning the treatment of exculpatory liabilities within the framework of the section 704(b)/752 regulations is quite remarkable.

This article seeks to disentangle the treatment of exculpatory liabilities under the nonrecourse allocation rules and suggests several needed reforms. Part II concludes that an exculpatory liability should be treated similarly to a traditional nonrecourse liability for purposes of determining economic risk of loss upon a constructive liquidation. Part III argues that the mechanical provisions of the nonrecourse allocation rules can be properly applied to exculpatory liabilities once it is clearly understood that the nonrecourse standard of sections 704(b) and 752 diverges fundamentally from the nonrecourse standard of section 1001. Part IV discusses related problems that arise because exculpatory liabilities are secured not by particular assets but rather by all of an LLC's assets. Finally, Part V suggests that the section 704(b) regulations should be amended to harmonize the treatment of guaranteed recourse liabilities of an LLC (or recourse loans from an LLC member) and functionally similar guaranteed nonrecourse liabilities of an LLC (or nonrecourse loans from an LLC member).

While clarifying these issues is necessary to provide certainty in the tax treatment of exculpatory liabilities, this article also suggests the need to rethink the nonrecourse definition under sections 704(b), 752, and 1001. Upon a disposition of property encumbered by liabilities in excess of fair market value, the section 1001 regulations draw a distinction between recourse and nonrecourse liabilities; the latter generate section 1001 gain through relief from the underlying liability, while the former generate a combination of section 1001 gain (or loss) and ordinary income from discharge of indebtedness.10 Although the conceptual model underlying the section 704(b)/752 regulations is derived from section 1001 and Tufts v. Commissioner, the drafters failed to clearly articulate and rationalize the manner in which the nonrecourse allocation rules deviate from the section 1001 standard. Consequently, uncertainty persists concerning the precise boundaries between the nonrecourse definitions of sections 704(b), 752, and 1001. Ultimately, such uncertainty can be dispelled only if the section 704(b)/752 regulations construct a theory of nonrecourse allocations that is explicitly independent of the section 1001 standard.

April 20, 2004 in Scholarship | Permalink | Comments (0) | TrackBack (0)

Rasmussen Enters Kerry Tax Return Fray

Tuesday, April 20, 2004

Eric Rasmussen (Indiana-Bloomington) questions Sen. Kerry's treatment of the 175k capital gain on the sale of a painting and the 89k of book royalties on his 2003 tax return.

April 20, 2004 in News | Permalink | Comments (0) | TrackBack (0)

Monday, April 19, 2004

More on Bush-Cheney-Kerry Tax Returns

Monday, April 19, 2004

Jim Maule (Villanova) has an interesting take on the recently released Bush-Cheney-Kerry tax returns (recently blogged on TaxProf Blog here, here, here. here, and here). Maule compares their relative tax burdens as a percentage of AGI with some prior Presidents and finds no discernible pattern:

Bush II (2002): 31.4%
Cheney (2002): 29.2%
Bush II (2003): 27.7%
Carter (1977): 25.5%
FDR (1935): 25.1%
Clinton (1995): 23.9%
Kerry (2003): 22.9%
Cheney(2003): 20.0%
Bush I (1991): 15.5%

For the record, TaxProf Blog's was 15.1% Not bad, huh? (Who said those that can, do; those who can't, teach?)

April 19, 2004 in News | Permalink | Comments (1) | TrackBack (0)

Estate Planning for Pets

Monday, April 19, 2004

Interesting story via TaxGuru about a Charlton, NY widow who left $500,000 at her death to care for her pets: a horse, a dog, and 2 cats. Now, 8 years later, only 1 cat ("Teddy Bear") is alive and lives in the family home along with a caretaker (cattaker?) hired by a local trust company. Interestingly, no one has ever seen the cat, but a neighbor claims "the cat has a special tattoo to prevent anyone from replacing him with a look-alike when he dies." (Oh, oh: cat tattoos: can PETA be far behind?) Enterprising reporters have not been able to see the cat either. According to the will, when the cat dies the property is to be rented out on a year-by-year basis with the proceeds going to a local animal welfare organization. Check out the article.

April 19, 2004 in News | Permalink | Comments (1) | TrackBack (0)