Friday, April 25, 2008
The three-day Fifth Annual Institute on Tax Aspects of Mergers and Acquisitions, sponsored by the New York City Bar and Penn State's Center for the Study of Mergers and Acquisitions, concludes today. The co-chairs are Michael L. Schler (Cravath) & Samuel C. Thompson Jr. (Penn State). See the program here.
Andrew Leigh (Australian National University, Economics Program, Research School of Social Sciences) has published Do Redistributive State Taxes Reduce Inequality?, 61 Nat'l Tax J. 81 (2008). Here is the abstract:
Do income taxes levied at a state or regional level affect the after–tax distribution of income? Or do workers merely move between regions, causing pre–tax wages to adjust? Using the full income tax parameters for all U.S. states from 1977–2002, I create a "simulated tax redistribution index" that captures the mechanical impact of changes in tax policy on the Gini coefficient, but is exogenous to any behavioral response. Analyzing the effect of this redistribution index on inequality, I find that gross wages do not adjust so as to undo the effect of changes in state income taxes. On aggregate, more redistributive state taxes do not substantially affect interstate migration, nor do they reduce per–capita state personal income.
Thursday, April 24, 2008
- Protective Refund Claims, by Robert J. Stuart (Fredrikson & Byron, Minneapolis)
- The Gradual Relaxation of the Statutory and Non-Statutory Requirements for a Reorganization Under Section 368, by Thomas May (Baker & McKenzie, Washington, D.C)
- The Hubert Case: Does a DRO Increase a Partner's Amount at Risk?, by Jeffrey Erickson & Michele Hyndman (Ernst & Young, Washington D.C.)
Actor Wesley Snipes was sentenced shortly before 6 p.m. Thursday to the maximum term of three years in federal prison on three misdemeanor convictions of failure to file his income taxes. Snipes was also sentenced to one year of supervised release. He was not taken into custody immediately. Instead, the Bureau of Prisons or the U.S. Marshal's Service when notify him when and where to report. His lawyer requested a facility not too far from his family's home in New Jersey, and the judge said he would recommend that.
After a day-long hearing, U.S. District Judge William Terrell Hodges talked of the importance of deterrence in tax cases and noted that, despite Snipes' apology in court, he had a years-long record of defying the tax laws. No fine was imposed. The judge left that to the civil process. ...
Early in the afternoon, lead Snipes attorney Daniel Meachum deposited three envelopes containing $5 million in checks with the judge. It apparently was meant to show that Snipes accepted responsibility and was ready to pay his taxes. Problem: The judge didn't know what to do with it, and the prosecutors weren't ready to accept that whopping sum of money. Hodges said he had "no authority on the part of the court to accept funds on behalf of the United States Treasury." Assistant U.S. Attorney Scot Morris conferred with other at the prosecution table. "You honor," he said, "I'm not authorized at this time to accept that money." "I'll take the checks back," said Meachum.
During a break, an IRS agent accepted the payment. "Your honor, that was a grandstanding move," Morris said late in the day. "It's essentially a down payment on his taxes. It is in no way a settlement of his taxes. It will be a fraction of what he owes."
- ABC News
- Associated Press
- E! Online
- Orlando Sentinel
- People Magazine
- WSJ Law Blog
Jason Furman (Director, The Hamilton Project) presents Reforming the Tax Treatment of Health Care: Right Ways and Wrong Ways at NYU today as part of its Colloquium Series on Tax Policy and Public Finance. The co-convenors are Daniel Shaviro (NYU) & Mihir Desai (Harvard Business School). Here is part of the Conclusion:
Proposals that would add new tax breaks risk keeping this entire structure intact. At best, they will help ameliorate some of the problems but at a potentially large budgetary cost that would have to be paid for in other manners. At worst, the extra spending could even risk being counterproductive and worsen the very indicators it is trying to improve, like coverage and health spending. Often, the level of uncertainty is such that it is not clear which of these cases prevails. Instead, a better approach is the replace the existing income tax exclusion.
By itself such a policy risks disrupting employer-sponsored insurance, making some people worse off, and not achieving significant gains. But structured in the right way, including progressive tax credits, a mandate or other institutional mechanisms, new pooling systems, and other techniques to reduce adverse selection, it could be a relatively low-risk and no cost way to reduce health spending and expand coverage – potentially to all Americans.
Fleming Presents Some Perspectives from America on the Worldwide Taxation vs. Territorial Taxation Debate Today in Budapest
J. Clifton Fleming, Jr. (BYU) presents Some Perspectives from America on the Worldwide Taxation vs. Territorial Taxation Debate (with Robert J. Peroni (Texas) & Stephen E. Shay (Ropes & Gray, Boston)) today at Central European University, Budapest, Hungary. Here is the abstract:
This debate is usually framed as a contest between the highly flawed U.S. system of taxing the worldwide incomes of U.S. residents vs. a well-designed system under which foreign active business income of U.S. multinational corporations would be exempt from U.S. tax. This is a highly prejudicial approach that virtually assures a victory for the exemption alternative. A properly framed debate would match a well-designed worldwide system against a well-designed exemption system. When this is done, we conclude that efficiency considerations and ability-to-pay fairness considerations indicate that worldwide taxation with a foreign tax credit is the better approach. We also conclude that the new ownership neutrality defense of exemption systems is unsuccessful.
Editorial in today's New York Times: Empty Talk on Taxes:
One of the toughest questions that will face the next president is what to do about taxes. There can be no real progress on health care, rebuilding the military or any other major issue without dealing with rising budget deficits and mounting debt from nearly eight years of profligate spending and tax breaks for the wealthy.
And that is why it has been so distressing to see all three of the presidential hopefuls pretend they can make good on their promises without broadly raising taxes.
Marjorie E. Kornhauser (Arizona State) has published A Tax Morale Approach to Compliance: Recommendations for the IRS, 8 Fla. Tax Rev. 599 (2007). Here is the Summary:
Why do people follow the law? The answer, under the traditional theory of compliance, is fear of detection and punishment. This deterrence theory, however, accounts for only a minor portion of actual compliance levels. It has such poor explanatory power because it assumes that the decision to comply is based solely on a cost-benefit analysis in which people rationally weigh the benefits of non-compliance against the costs of detection and penalties. Recent literature reveals, however, that the decision to comply is not purely rational. Rather, personal values, social norms, and non-rational cognitive processes also strongly affect the decision.
Our Tax Policy Workshop is loosely modeled on NYU's, except that the authors get to present their own papers. It is attended by students and faculty from law, economics and business. The speaker presents for about half an hour and then we have an open discussion. Two recent innovations have been to enforce a rule that students get to speak first (otherwise faculty tend to dominate the discussion), and to have a preparatory session with students the week before the speaker presentation (so that we only have six or seven presenters each year other than thirteen). Over the years since 2002, we have been able to hear many of the top names in the field, including both lawyers and economists. We try not to have too many repeat players, so as to open the opportunity to as wide a field as possible. I think we all feel the series has been a successful contribution to the intellectual life of the law school and to our students, including both the JDs and the tax LLM students (for whom it is a required course).
Denzel & Woody Urge Probation for Wesley Snipes; Government's Battle Against Tax Protesters at Risk in Today's Sentencing
I previously blogged the Government's sentencing memo in the Wesley Snipes case, in which prosecutors urged the federal district court in Florida to sentence the actor to the maximum three years in prison and $5 million fine for his conviction on three misdemeanor tax charges (he was acquitted of the more serious felony tax fraud charges). In advance of today's sentencing, Snipes' defense counsel have filed a sentencing memo requesting probation:
At age 45, after a life-time of hard work and dedication to his family, to his craft and to the struggle to better himself, Wesley Trent Snipes stands before the Court to be sentenced on three misdemeanor charges that he willfully failed to file income tax returns for the years 1999, 2000, and 2001 in violation of 18 U.S.C. § 7203. He is contrite, promises that he will never again break the law, and respectfully asks the Court to consider not just the jury verdict but also all the good that he has done in his life. He asks this Honorable Court to impose a sentence that does not include imprisonment.
The memo attaches over three dozen letters attesting to Snipes' good character, including letters from Denzel Washington (calling Snipes "a mighty oak") and Woody Harrelson (noting that Snipes "strives for rightness in all his relations"):
Forbes describes what is at stake in today's sentencing:
When Wesley Trent Snipes is sentenced Thursday in an Ocala, Fla., courtroom for willfully failing to file federal income tax returns, more than the 45-year-old star's freedom will be on the line. Also at risk will be the government's efforts to staunch the spread of what it recently re-branded "tax defiers."
Tax defiers--or "tax protesters" as they've traditionally been known--glom onto one kooky, discredited theory or another as to why the income tax is illegal or doesn't apply to them personally or doesn't cover their normal sources of income. ...
Beyond Web sites and online groups, defiers are now using MySpace and YouTube to promote their ideas, reports Maryland insurance analyst JJ MacNab, who has testified before Congress and maintains Web sites tracking the tax protester movement. With these newer methods, the demographics of the tax defiers are shifting too, she says.
"I've watched it go from middle-aged white guys meeting in hotels and Denny's to all races, both sexes and younger, and they're meeting online," MacNab said. That new demographic makes it an even bigger problem for the government, if Snipes, the star of action flicks and the vampire-hunting Blade movies, walks free.
(Hat Tip: Ben Cunningham.) Other press and blogosphere coverage:
The Government on Tuesday lost an important Son-of-BOSS tax shelter case in the U.S. District Court in Colorado. Sala v. United States, No. 05-cv-00636 (D. CO 4/22/08):
Although Sala had income in 2000 of more than $60 million, he claimed a tax loss that essentially nullified his tax burden. Sala achieved the alleged loss through his involvement in a foreign currency options investment transaction known as Deerhurst. Sala filed an amended return on November 18, 2003, eliminating the loss claimed on his original 2000 return and paying over $26 million in taxes, plus penalties and interest. Sala later filed another amended return reclaiming the tax loss and seeking a refund of the taxes, interest, and penalties. The Government contends Sala is not entitled to claim the tax loss because Deerhurst was an improper tax shelter. Sala disagrees, and brought suit against the Government to obtain a refund of the taxes, interest, and penalties he paid to the Government.
An eight day trial to the Court in this matter was held commencing March 10, 2008, and concluding March 19, 2008. The two claims at issue were Sala’s entitlement to a refund of the taxes, penalties, and interest he paid on his 2000 income and—to the extent any refund was due Sala on putatively “excess” interest—the Government’s entitlement to an accuracy-related penalty owed, but not assessed. After a review of all the evidence presented both at trial and by deposition, I find in favor of Carlos Sala and Tina Zanolini-Sala and against the Government on all claims and counterclaims. ...
- Peter R. Orszag (Director, Congressional Budget Office)
- Robert Greenstein (Executive Director, Center on Budget and Policy Priorities)
- Henry Derwent CB (President and CEO, International Emissions Trading Association)
The hearing takes place at 10:00 a.m. in 215 Dirksen Senate Office Building.
W. Robert Reed (University of Canterbury, Department of Economics) has published The Robust Relationship between Taxes and U.S. State Income Growth, 61 Nat'l Tax J. 57 (2008). Here is the abstract:
I estimate the relationship between taxes and income growth using data from 1970–1999 and the forty–eight continental U.S. states. I find that taxes used to fund general expenditures are associated with significant, negative effects on income growth. This finding is generally robust across alternative variable specifications, alternative estimation procedures, alternative ways of dividing the data into "five–year" periods, and across different time periods and Bureau of Economic Analysis (BEA) regions, though state–specific estimates vary widely. I also provide an explanation for why previous research has had difficulty identifying this "robust" relationship.
Wednesday, April 23, 2008
Leandra Lederman (Indiana) kicks off what I hope will be an extended discussion about how to best structure a tax policy workshop series:
Paul asked me to kick off a discussion about tax workshop series in which students participate; Indiana-Bloomington recently considered and adopted a proposal for a Tax Policy Colloquium, which we will launch next spring. Like colloquia at other schools, it will be structured as a class for students in which faculty will also participate. I proposed the colloquium partly because Indiana-Bloomington recently adopted a strategic plan that highlights the importance of scholarship and has among its goals (1) the inclusion of students in our intellectual community by bringing faculty scholarship into the classroom, and (2) the development of forums for intensive intellectual exchange within the faculty. My colleague Ajay Mehrotra plans to run the colloquium in alternate years. It will be open to our full faculty, and we will also invite our adjunct tax faculty, tax faculty from the Kelley School of Business, and faculty in other schools on campus who are interested in tax policy issues.
Indiana does not have a tax LL.M. program, so the colloquium will be structured with that in mind. Students will be required to write a short reaction paper in response to each paper that is presented in the colloquium, and, as is customary, those reaction papers will be shared with the presenters. Income Tax will be a prerequisite, and we are planning to experiment with an invitation/permission-of-the-instructor format, in order to recruit students with the interest and commitment necessary to make the colloquium a success. We also concluded that it would be best to have speakers only in alternate weeks so that we can first discuss the speaker’s paper as a class, to help prepare the students for the discussion with the speaker.
Perhaps the trickiest issue about a course like this is to balance pedagogical needs with the needs of presenters. With respect to the pedagogical component, I plan to encourage students to ask their questions first and faculty to hold their questions until students have had a chance to participate. In addition, I intend to try, as much as possible, to select papers that will be accessible to the students. For example, many individual federal income tax topics would be a natural fit, particularly for early in the semester. Ajay and I have also discussed assigning background reading to familiarize the students with the relevant literature. With respect to the presenters, for their experience to be a really good one, I think faculty participation is essential. Before proposing the colloquium, I ascertained that Ajay; Bill Popkin; and our Assistant Dean for Research, Archana Sridhar, who is a tax specialist, would all be interested in participating on a regular basis, and at least a few other faculty would be interested in attending periodically. To involve as many interested faculty as possible, we will try to select some papers that fit within their areas of interest, such as business tax papers that will interest Kelley School faculty, so long as the topics will be reasonably accessible to the students.
I have no doubt that this will be a learning process, but it is one that my colleagues and the students I have talked to are excited about. I look forward to hearing from others and learning from their experiences.
Given the weight of the Japanese economy in a global market, it is increasingly important to have an understanding of Japanese tax rules. And one can fully appreciate the present system only when one knows its historical background. The purpose of this article is to provide a historical overview of the Japanese corporate tax rules on inbound and outbound transactions. The particular Japanese experience may be of more general interest because it shows a pattern of legal evolution similar to many other jurisdictions. The current Japanese tax rules face the challenge of globalization, accelerated by the advent of information technology. The evolution of international tax rules in Japan demonstrates a pattern of how tax law changes as a traditional rural economy adapts itself to a modern global environment. This article proceeds in a chronological order. It focuses on major legislative changes in the following stages: the early years (1899-1940); the war period (1940-1945); postwar reforms and opening of the economy (1945-1962); establishment of the core system (1962-1973); and additions of countermeasures (1973-present).
Today's Wall Street Journal Tax Report, by Martin A. Vaughan:
Law students, be civic minded ... but also be tax wise.
Yale Law School last week announced it is expanding its student-loan-forgiveness program to include students in public-service jobs making up to $60,000. Yale is one of more than 100 law schools nationwide that offers to forgive student debt, as an incentive for graduates to work for the government or a nonprofit when they graduate. But law students should be aware of possible tax consequences of such a gift, says Heather Jarvis of Equal Justice Works, an organization to promote public-interest law. "It's an unsettled area of tax law," Ms. Jarvis says.
Most schools have structured their programs so that the loan amounts forgiven wouldn't be treated as income, she said. But a 2006 court decision threw some doubt on whether law-school programs qualify for a tax exclusion. Other schools structure their loan-forgiveness programs as a grant. In those cases, lawyers in the programs will owe some tax on the grant amounts.
In the meantime, school administrators including Associate Dean Ellen Aprill of Loyola Law School -- who blogged about the issue on the TaxProfBlog Web site -- and University of Virginia Law School Dean John Jeffries -- have asked the IRS to clarify its guidance.
Whether the U.S. government should be allowed to claim credit for the private philanthropy of its citizens is a hot topic in today's foreign aid debate. Overlooked in this debate, however, is a form of aid that straddles the traditional public/private divide: charitable tax expenditures. Through the many tax privileges that the United States grants to its nonprofit organizations, the government implicitly foots some portion of the bill anytime these organizations send money into foreign countries for development purposes. Other tax privileges subsidize the income-earning activities of American individuals and corporations living or operating abroad. Unlike official development assistance (ODA), these tax expenditure funds are privately organized and distributed, yet unlike voluntary transfers they are paid for by the public fisc. This is not private aid; it is privatized aid. At the same time that explicit expenditures on aid were falling in recent decades, these "hidden" tax expenditures were rising.
The basic goal of this Article is descriptive: to show how domestic tax policies have covertly shaped the content of American aid. The broader goal is to connect this insight with the literatures on tax expenditures and international development. If one accepts the Article's theoretical premise, then U.S. government spending on aid is somewhat larger, and substantially different in character, than most commentators have assumed. Although tax expenditures on foreign aid raise a number of concerns, they also, I contend, possess unique virtues that make them a valuable complement to ODA.
The Rochester school would be affiliated with St. John Fisher College, a private school in suburban Pittsford, while the SUNY system's Binghamton and Stony Brook universities would get their own law schools. ...
"There's no question that we simply have a glut of law schools," said Makau Mutua, interim dean of the University at Buffalo Law School. "There's no shortage of access to legal education for New Yorkers who want to go to law school." ...
Mutua said the state hasn't done enough to support UB's law school and doesn't need to spend taxpayer dollars studying whether to establish more state-run law schools, let alone one that would be affiliated with a private college.
"It's mind-boggling for the state to contemplate giving money to start up a private law school," said Mutua, a UB law faculty member for nearly a dozen years before being named interim dean in December. The state would be better off investing in UB to hire more faculty and recruit students for its law school, where about 800 students must share a 35-year-old building with undergraduates, Mutua said. "We need a completely new building," he said. "We're squeezed for space."
Today is the Tax Foundation's Tax Freedom Day® -- the date on which Americans will have worked long enough to have earned enough money to pay this year's tax obligations at the federal, state and local levels. April 23 is the national average -- the Tax Freedom Day® in individual states range from the state with the highest tax burden -- Connecticut (May 8) -- to the state with the lowest tax burden -- Alaska (March 29).
Here are the ten states with the heaviest tax burdens and the latest Tax Freedom Days®:
- Connecticut (May 8)
- New Jersey (May 7)
- New York (May 5)
- California (April 30)
- Washington (April 29)
- Massachusetts (April 28)
- Maryland (April 28)
- Minnesota (April 27)
- Florida (April 26)
- Hawaii (April 26)
Here are the ten states with the lowest tax burdens and the earliest Tax Freedom Days®:
- Alaska (March 29)
- Mississippi (April 7)
- Montana (April 8)
- West Virginia (April 8)
- Alabama (April 9)
- Kentucky (April 10)
- Tennessee (April 11)
- Oklahoma (April 11)
- New Mexico (April 12)
- South Dakota (April 12)
Check out the Tax Freedom Day® song:
For a chart showing the Tax Freedom Day® through the years, see below the fold:
The IRS yesterday withdrew proposed regulations that treated mortgage loans as capital assets and thereby restricted the deductibility of losses caused by mortgage defaults:
On August 7, 2006, the Treasury Department and the IRS published ... proposed regulations § 1.1221-1(e) under § 1221(a)(4). These regulations sought to clarify the circumstances in which accounts or notes receivable are “acquired … for services rendered” within the meaning of § 1221(a)(4). ... Most of the comments focused on the decisions in Burbank Liquidating Corp. v. Commissioner, 39 T.C. 999 (1963), ... aff’d in part & rev’d in part on other grounds, 335 F.2d 125 (9th Cir. 1964), and Federal National Mortgage Ass'n v. Commissioner, 100 T.C. 541 (1993). The Treasury Department and the IRS considered the comments and have decided to withdraw the proposed regulations. The IRS will not challenge return reporting positions of taxpayers under § 1221(a)(4) that apply existing law ... The IRS and the Treasury Department will continue to study this area and may issue guidance in the future.
As a result, lenders will be able to deduct losses on defaulted loans against ordinary income for four years under the new NOL rules. Bloomberg reports that although Fannie Maw and Freddie Mac are the biggest beneficiaries of this change, 70 of the world's biggest banks, securities firms, and mortgage companies have taken $290 billion in asset writedowns and credit losses since the beginning of 2007. Fannie, Freddie Losses May Be Mitigated as IRS Cancels Rules, by Ryan J. Donmoyer & Dawn Kopecki.
The movie Smart People has a tax angle: the daughter (Ellen Page) of the main character (Dennis Quaid) wants to donate the clothes of her deceased mother to charity for the tax deduction. She ultimately brings the clothes to Goodwill and asks for a tax receipt; her father then buys the clothes back but later donates them himself and also asks for a tax receipt. (Good exam question: can the father claim two charitable deductions for the double donation? Answer: yes, because the father's purchase of the clothes gives him basis in the clothes which he can then deduct.)
Bonus factoid: Quaid plays Victorian literature professor at Carnegie-Mellon who moves his clock forward so he can tell a waiting student that office hours are over.
(Hat Tip: Leandra Lederman.)
Cheung: Proposition 13 and the Effect of Property Tax Limitations on Residential Private Governments
Ron Cheung (Florida State University, Department of Economics) has published The Effect of Property Tax Limitations on Residential Private Governments: The Case of Proposition 13, 61 Nat'l Tax J. 35 (2008). Here is the abstract:
The proliferation of residential private governments, in the form of homeowners' associations, to deliver public services coincided with a period in which cities faced significant property tax limitations. Using panel data from California in the era of Proposition 13, I test whether cities that were more tax constrained experienced higher rates of private government formation. The degree of constraint is measured by using the limitation's revenue sharing formula and by using crime to proxy for local service demand. I find the more a city is constrained, the higher is the membership in and the rate of growth of, private governments.
Tuesday, April 22, 2008
The Treasury Department and IRS yesterday issued an updated 2007-08 Guidance Priority Plan with a joint statement by Eric Solomon (Assistant Secretary (Tax Policy), U.S. Department of the Treasury), Douglas H. Shulman (Commissioner, Internal Revenue Service), and Donald L. Korb (Chief Counsel, Internal Revenue Service).
We welcome your submission on any subject related to tax collection and compliance, including but not limited to tax evasion, obstruction, audits, and innovative policy proposals or implementations.
Our goal is to have a well-rounded symposium that addresses these issues from all perspectives. Selected articles will be published in May 2009. Authors will be invited to present their articles at a conference on "Closing the Tax Gap" at Stanford University.
We will be accepting submissions for next year's volume through June 15, 2008. Articles should be between ten and forty double-spaced pages, not including notes and citations. Articles should be submitted via e-mail.
Following up on yesterday's post by Christopher Hoyt (Missouri-Kansas City) on new IRS rulings approving single-member LLCs as eligible shareholders of a Subchapter S corporation: Alice Abreu (Temple), Brant Hellwig (South Carolina), and several other commentators share their thoughts here.
The Ninth Circuit yesterday upheld the Tax Court's holding that innocent spouse relief under § 6105 only is available if a taxpayer has filed a joint return for the year in question. Christensen v. Commissioner, No. 06-71881 (9th Cir. 4/21/08), aff'g T.C. Memo. 2005-299:
Christensen argues that § 6015(f) is available to spouses who face joint liability under community property laws but do not file a joint return. We disagree. In light of the plain language of § 6015 and the context of the statute, we conclude that § 6015(f) is available only to spouses who file a joint return.
Nancy C. Staudt (Northwestern), Lee Epstein (Northwestern) & Peter J. Wiedenbeck (Washington University) have published The Ideological Component of Judging in the Taxation Context, 84 Wash. U. L. Rev. 1797 (2006). Here is the abstract:
One of the most enduring divides that scholars have uncovered between decision making in different areas of the law is the role of politics, whether in the form of partisanship or ideology. Study after study confirms a strong correlation between judges' political preferences and their behavior in civil rights/liberties-type cases, but researchers have only rarely identified an association between politics and decisions in economics cases. Some argue that the apolitical nature of decision making in the business and finance contexts is due to the fact that judges simply do not have political preferences in these areas, or if they do, other factors work to neutralize them
In our view, the existing literature highlights a curious puzzle: Why do judges appear to stand above politics in the areas of the law that are rife with conflict and controversy in the other two branches of government? Lawmaking in the context of taxation, bankruptcy, securities, antitrust, corporate law, to name just a few examples, is highly political in both the legislative and executive branches, as many empirical scholars have documented. For this reason, we seriously question the claim that judges are unique in that they have no political or ideological preferences when it comes to business and finance. Our conjecture is that the null findings in the literature are due to the technical difficulties associated with uncovering politics in large-N studies addressing economics decision-making rather than to a lack of judicial interest in these issues. But this is precisely the question we investigate here.
The Department of Justice announced yesterday that it has won a major LILO tax shelter case involving Fifth Third Bancorp in Cincinnati (Fifth Third Bancorp v. United States, No. 1:05CV350 (S.D. OH 4/18/08)):
A jury in Cincinnati ruled on Friday that Fifth Third Bancorp is not entitled to a $5.6 million tax refund for its 1997 tax year, the Justice Department and the IRS announced today. Fifth Third was seeking to take tax deductions that related to complex leasing transactions involving passenger rail cars.
The bank’s subsidiary leased passenger rail cars from transit authorities in Massachusetts, France and Germany, and then leased them back to the transit authorities on the same day. In each case, the transit authorities continued to use the rail cars without interruption. The bank claimed that it was entitled to tax deductions for rent payments and for interest on financing loans.
The jury found that these paper transactions lacked economic substance, because there was no realistic chance for the bank to earn an economic profit apart from the tax benefits. As a result of the jury’s finding, Fifth Third is not entitled to claim any deductions based on this scheme.
This type of leasing arrangement is commonly known as a Lease-In, Lease-Out or a LILO transaction. The government has prevailed in both of the LILO tax shelter cases that have been decided in court. A federal district court in North Carolina ruled in favor of the United States in January, 2007, in a LILO case brought by BB&T Corporation. Fifth Third was the first large, complex corporate tax shelter case tried by a jury.
Hundreds of LILO transactions were entered into by taxpayers in the late 1990s, and the Government calculates that billions of dollars are at stake nationwide in disputes over these transactions. In filings with the SEC, Fifth Third has disclosed that it is disputing with the IRS $900 million in tax deductions arising out of Fifth Third’s participation in LILO or similar transactions.
For a copy of the jury's verdict, see here.
A late addition to my list of 2008-09 Tax Prof Moves: Mark P. Gergen, The Fondren Foundation Centennial Chair for Faculty Excellence at Texas, has accepted a senior offer at UC-Berkeley. As many readers of this blog know, Mark is one of the most frequently cited professors who write in the tax field. He is the author of Chapter 7 in the Business Tax Stories book, The Story of Subchapter K: Mark H. Johnson's Quest. Brian Leiter notes:
What a great hire for Berkeley! If I were not, myself, moving, I should be even more depressed about reporting this. Berkeley has hired a distinguished scholar, dedicated teacher, and outstanding institutional citizen.
As long time readers of this blog know, I have an interest (obssession?) in the application of objective metrics, à la Michael Lewis's wonderful Moneyball book, in measuring law school and law professor performance. (See links below the fold.). But Dan Drezner suggests that the Moneyball phenomenon may be a victim of its own success -- Winning Strategy Loses Its Edge (Marketplace):
Some baseball traditionalists are delighted by the A's woes. To them, this represents a clear rebuke to Michael Lewis' 2003 book, "Moneyball." That book chronicled how Billy Beane allegedly out-drafted, out-traded, and out-thought other baseball GMs by relying on sophisticated baseball statistics known as sabermetrics.
This innovative strategy helped the A's outperform their payroll, because Beane signed and drafted players that performed better than baseball scouts expected. He applied a simple economic principle to the practice of building a baseball team: When a business sector is run by an insular old-boy network, an outsider can exploit market inefficiencies and reap significant arbitrage opportunities. For some of those traditionalists, the apparent decline and fall of the A's symbolizes the failures of the "Moneyball" philosophy.
But as sabermetric methods have become more accepted in the boardrooms of baseball, Beane and other innovators have fewer inefficiencies to exploit. Since the publication of “Moneyball,” almost every team in the major leagues has incorporated sabremetric thinking into their organization.
The Boston Red Sox won two World Series in the past four years while employing Bill James, the godfather of the sabermetrics community. Other franchises around the league have also hired young sabermetrics devotees to run their front offices. The result: The popularization of sabermetrics has left Beane with less of an advantage — it’s harder to find diamonds in the rough when everyone else is mining the same territory. The A’s are not struggling because of “Moneyball”’s failure — they are struggling because of its success.
Hat Tip: Is "Moneyball" Out of Gas? (Voir Dire).
Victor Fleischer (Illinois) has published Two and Twenty: Taxing Partnership Profits in Private Equity Funds, 83 N.Y.U. L. Rev. 1 (2008). Here is the abstract:
Private equity fund managers take a share of the profits of the partnership as the equity portion of their compensation. The tax rules for compensating service partners create a planning opportunity for managers who receive the industry-standard “two and twenty” (a two percent management fee and twenty percent profits interest). By taking a portion of their pay in the form of partnership profits, fund managers defer income derived from their labor efforts and convert it from ordinary income into long-term capital gain. This quirk in the tax law allows some of the richest workers in the country to pay tax on their labor income at a low rate. Changes in the investment world – the growth of private equity funds, the adoption of portable alpha strategies by institutional investors, and aggressive tax planning – suggest that reconsideration of the partnership profits puzzle is overdue. In this Article, I offer a menu of reform alternatives, including a novel cost-of-capital approach that would strike an appropriate balance between treating returns on human capital as ordinary income and rewarding entrepreneurial activity with a tax subsidy.
While there is ample room for disagreement about the scope and mechanics of the reform alternatives, this Article establishes that the status quo is an untenable position as a matter of tax policy. Among the various alternatives, perhaps the best starting point is a baseline rule that would treat carried interest distributions as ordinary income. Alternatively, Congress could adopt a more complex "cost of capital" approach that would convert a portion of carried interest into ordinary income on an annual basis, or it could allow fund managers to elect into either the ordinary income or "cost of capital" approach. Any of these alternatives to the status quo would tax carried interest distributions to fund managers in a manner that more closely matches how our tax system treats other forms of compensation, thereby improving economic efficiency and discouraging wasteful regulatory gamesmanship. These changes would also reconcile private equity compensation with our progressive tax rate system and widely-held principles of distributive justice.
Michael F. Lovenheim (Stanford Institute for Economic Policy Research) has published How Far to the Border?: The Extent and Impact of Cross-Border Casual Cigarette Smuggling, 61 Nat'l Tax J. 7 (20080. Here is the abstract:
This paper uses data on cigarette consumption in the Current Population Survey Tobacco Supplements to estimate cigarette demand models that incorporate the decision of whether to smuggle cigarettes across a lower–price border. I find demand elasticities with respect to the home state price are indistinguishable from zero on average and vary significantly with the distance individuals live to a lower–price border. However, when smuggling incentives are eradicated, the price elasticity is negative but still inelastic. I also estimate between 13 and 25% of consumers purchase cigarettes in border localities. The central implication of this study is cross–border smuggling confounds many of the potential health and revenue gains from cigarette taxation.
Monday, April 21, 2008
As expected (see here), the Supreme Court today denied certiorari in Murphy v. IRS, 493 F.3d 170 (D.C. Cir. 7/3/07). Ms. Murphy's counsel issued this press release, claiming that the D.C. Circuit panel agreed to rehear its initial decision because it was "under pressure from the Bush Administration," and lambasting the denial of certiorari:
The DC Circuit's decision was contradictory and wrong. It will have a tragic impact on thousands of whistleblowers and victims of discrimination. We are not surprised though, that the Supreme Court declined to hear the case, as there was not a traditional "split in the circuits," as the DC Circuit was the first court to take this issue on. Given the DC Circuit's difficulty in dealing with this issue, I expect that it will be taken up in other courts across the country.
It is unfair and unconstitutional to tax victims of discrimination and retaliation when the awards were simply compensation to make them whole again. The money is to restore a loss for personal injury; it is not income.
Unfortunately, as a result of the Court's decision not to hear the Murphy case, whistleblowers and other civil rights victims whose make whole compensatory damages awards are taxed will have to continue to fight the IRS through the courts. The only alternative to continued litigation is for Congress to change the tax code.
Zolt Presents Inequality, Collective Action, and Taxing and Spending Patterns of State & Local Governments Today at Harvard
Scholars have examined how inequality influences the development of different types of institutions. This article takes a historical perspective to examine how economic inequality and challenges to collective action may have contributed to different taxing and spending patterns of state and local governments in the United States. Particularly before the Great Depression, clear differences existed among state and local governments in different regions of the United States. Differences existed in the absolute and relative size of state and local governments, the use of different tax instruments to fund government operations, and the size and nature of spending programs. The evidence suggests that those areas with greater economic equality chose to acquire common goods and services collectively and to impose taxes to fund those expenditures at a greater relative level than areas with greater inequality. These patterns continued through World War II, and, to a much lesser extent, to the present day. This article also examines the dramatic changes in the relative roles of local, state, and federal governments in assessing taxes and providing common goods and services. Over the last 100 years, the relative reduction in the size of local government (and the corresponding increase in state and federal governments) may have weakened the relationship among inequality, collective action, and the taxing and spending patterns of local governments.
Christopher R. Hoyt (Missouri-Kansas City) shared with the TaxProf E-Mail Discussion Group his analysis of three private letter ruliongs released by the IRS on Friday (April 14, 2008): PLR 200816002, 200816003, and 200816004 (Jan. 14, 2008). He has agreed to let me share his thoughts on the rulings with the broader tax community on TaxProf Blog:
PLR 200816002 - 200816004 informs us that there is a new type of eligible shareholder of a Subchapter S corporation: a single-member LLC that is completely owned by an eligible S corporation shareholder (e.g., an individual).
The statutes provide that only an individual, an estate (including a bankruptcy estate), a charity, a qualified retirement plan, and certain specific types of trusts (grantor trust, QSST and ESBT) are eligible to be shareholders of an S corporation. §§ 1361(b)(1)(B), 1361(c)(2), 1361(c)(6) and 1361(d). One other eligible shareholder is another S corporation, but only when that S corporation is a 100% shareholder (making the controlled S corporation a 100% subsidiary). § 1361(b)(3). A partnership cannot own stock of an S corporation. On the day that an S corporation has an ineligible shareholder it loses its S corporation tax statutes and is instead treated as a C corporation. § 1362(d)(2).
In the PLR, the Service permitted a single-member LLC to be an S corporation shareholder. The logic is that the single-member LLC is disregarded for federal tax purposes. Reg. § 301.7701-2(a). The tax information of the LLC is reported on the sole owner's personal income tax return, just as was the case when the individual personally owned the stock. In the ruling, an individual transferred his S corporation stock as well as other property to a single-member LLC, where the shareholder was the sole owner of the LLC.
- Seems to me that if another person ever became a member of the LLC, the corporation would lose its S corporation tax status because the LLC would be deemed to be a partnership for tax purposes. By having an LLC as an owner of an S corporation, there may be a greater risk of an inadvertent termination?
- Basic question: when would someone recommend putting S corporation stock into a single-member LLC? What are the advantages? Some sort of administrative convenience? Greater estate tax discounts if the other property contributed is marketable securities? Perhaps it is helpful when the LLC will engage in a business related to the S corporation and the financial activities will be consolidated?
Comments and suggestions are welcome.
- Alice Abreu (Temple):
This is very interesting, and it is consistent with prior IRS positions. For example, PLR 20000815 and 20010712 describe situations where each of two shareholders of an S corporation formed two entities. One entity was an LLC and the other was a state law limited partnership in which the partners were the LLC and the shareholder. The S shareholder then transferred part of the S stock to each of the two entities. The Service concluded that both the LLC and the partnership were disregarded entities and therefore for tax purposes, the shareholder was still the owner of the S corporation stock and the S election remained valid. To reach that conclusion the Service reasoned, correctly in my view, that the LLC was a disregarded entity because it had only the shareholder as its owner, and that the partnership was also a disregarded entity because it had only one owner - the shareholder. Ownership of a partnership interest by the LLC was disregarded because the LLC was disregarded, which left the partnership with only the shareholder as owner.
I've wondered why someone would do the transactions described in the ruling and I'm told that the reason is likely that more owners make the corporation a better vehicle for asset protection under state law.
- Brant Hellwig (South Carolina):
Like Alice, I have heard that the reason for holding S Corp shares through a single-member LLC is to gain the advantage of charging-order protection in the LLC context. Under most states' LLC statutes, a creditor of an LLC member is entitled only to a charging order on the LLC member's distributional interest, meaning that the creditor is entitled to whatever distributions are made to the debtor-member. Similar to a wage garnishment arrangement. Importantly, the creditor does not acquire the debtor-member's managerial rights. So, in theory, the debtor LLC member could simply refuse to make any distributions from the entity, leaving the creditor with a charging order on a non-existent payment stream.
If all of this sounds too good to be true in the context of a single-member LLC, it probably is. Recent bankruptcy cases concerning single-member LLCs have blown through the charging order protection. See In re Modanlo, 2007 WL 2609470 (Bankr. D. Md. 2006); In re Albright, 291 B.R. 538 (Bankr. D. Colo. 2003). While these decisions rely on bankruptcy law to conclude that the bankruptcy trustee possessed the managerial rights of the debtor-member, each case characterizes the state-law charging order protection as essentially meaningless in the single-member context. [The Albright court in a footnote goes so far as to note the creation of "peppercorn" interests in other LLC members could be disregarded under fraudulent conveyance theory. Whether this "peppercorn" analysis would extend to the creation of a partnership between an individual and that individual's single-member LLC is another question.]
So the purported asset-protection advantages of holding S corporation stock through a single-member LLC that is disregarded for tax purposes may not amount to much. On the other hand, having a multiple-shareholder S corporation that is organized under state law as an LLC that checks the box should provide the owners with the benefits of charging-order protection.
Tax Prof Kevin Yamamoto (South Texas) has posted Banning Laptops in the Classroom: Is it Worth the Hassles?, 57 J. Leg. Educ. ___ (2007), on SSRN. Here is the abstract:
Over the last several years law school classrooms have seen an explosion of student laptop use. Law professors have allowed this by default, generally under the pretense that laptops make note-taking easier. However, many professors complain that students use their laptops to play games, watch movies, or if they have an Internet connection, to do web surfing and e-mailing during class. This paper presents my experience in banning laptops from my classroom in the Fall of 2006, the first time it was done at my institution. The article covers the reasons for and against allowing laptops in the classroom, my reasoning and procedure for banning them, perceived differences in the classroom experience and relevant student comments from my course evaluations, which were overwhelmingly positive to the laptop ban. Also covered are the cognitive psychological reasons in support of banning laptops. Studies show that lower grades were correlated with increased student web browsing during class (Grace-Martin & Gay, 2001; Hembrooke & Gay, 2003), and the amount of time which students used their laptops for tasks other than taking lecture notes (Fried, 2007). MRI studies of the brain indicate that the brain stores information differently when distracted, which occurs when students attempt to multi-task in class (Foerde, Knowlton, & Poldrack, 2006). The science of note-taking is also covered, which indicates verbatim typing may interfere with learning (e.g., Kiewra, 1991). The paper concludes by urging law school professors to review why laptops are allowed in their classrooms and, unless they feel that laptops increase student learning, to ban or heavily restrict their classroom use.
The New York State Department of Taxation and Finance, Office of Tax Policy Analysis, Taxpayer Guidance Division, has issued Advisory Opinion TSB-A-08(17)S (3/19/08):
Petitioner's newly constructed laundromat facility is also equipped with a coin-operated dog washing machine. Customers use the dog washing machine to wash and dry their dogs without the assistance of any of Petitioner's employees. Pursuant to section 526.8(a)(4) of the Regulations, dogs are considered to be tangible personal property for purposes of the sales tax. Washing a dog using a coin-operated machine qualifies as maintaining tangible personal property under section 1105(c)(3) of the Tax Law and section 527.5(a) of the Regulations as such action helps keep the dog in a condition of fitness. Therefore, the receipts from Petitioner's coin-operated dog washing machine are subject to sales tax under section 1105(c)(3).
Aprill: Yale's New Public Interest Loan Forgiveness Program Highlights Need for IRS Guidance on Tax Consequences to Students
On Friday, I blogged Yale's announcement that it would forgive student loans of its graduates earning $60,000 or less per year. Tax Prof and Associate Dean Ellen P. Aprill (Loyola-L.A.) explains the tax issues arising from Yale's and other law school loan forgiveness programs:
A large number of law schools forgive debt of their former students who, up to an income ceiling that varies from school to school, work for a § 501(c)(3) organization or, at many but not all schools, a governmental agency. Under current law, it is not clear whether such debt forgiveness may be excluded from income under the special rule of § 108(f) as "pursuant to a program . . . which is designed to encourage students to serve in occupations with unmet needs or in areas with unmet needs." I and others have written to Treasury and the IRS explaining the reasons we think that § 108(f) should apply to these programs [see links below], and the issue has been placed on the Treasury and IRS's 2007-08 Priority Guidance Plan.
Nowhere, however, does § 108(f) set or discuss an income ceiling. The income level for loan forgiveness is a requirement that has been introduced by the law school themselves. (In 2006, Financing the Future: Responses to the Rising Debt of Law Students reported that 40 of 53 schools set the ceiling for loan forgiveness eligibility at $50,000 or under.) Yale has not changed any of its other requirements for loan forgiveness other than to raise the income ceiling. This change in itself should have no tax consequences. Yale's announcement, however, underscores the need for guidance as to the applicability of § 108(f) to law school programs in general.
Prior TaxProf Blog coverage:
Growing up in Boston, my goal was to play first base for the Red Sox. After a mediocre high school and college career, I hung up the spikes for good. It turns out the my failing owed more to my July 27 birthday than to my inability to hit a curveball: The Boys of Late Summer: Why Do So Many Pro Baseball Players have August birthdays? (Slate), by Greg Spira:
Since 1950, a baby born in the United States in August has had a 50% to 60% better chance of making the big leagues than a baby born in July. The lesson: If you want your child to be a professional baseball player, you should start planning early. Very early. As in before conception.
The table below lays out the full month-to-month data. ...
The pattern is unmistakable. From August through the following July, there is a steady decline in the likelihood that a child born in the United States will become a major leaguer. Meanwhile, among players born outside the 50 states, there are some hints of a pattern but nothing significant enough to reach any conclusions. ...
The magical date of Aug. 1 gives a strong hint as to the explanation for this phenomenon. For more than 55 years, July 31 has been the age-cutoff date used by virtually all nonschool-affiliated baseball leagues in the United States. ... (There is no such commonly used cutoff date in Latin America.) The result: In almost every American youth league, the oldest players are the ones born in August, and the youngest are those with July birthdays.
The authors of Freakanomics chronicled a similar birthday effect with January-March birthdays in European soccer. Unfortunately, I did not learn of this birthday effect in time to help my kids, who have both managed to become quite good high school athletes despite having non-advantageous May and June birthdays.
I would advise virtually every law student to concurrently earn an MBA. In this column, I'll set forth five key reasons why I think this is the right course. ...
- A Partner in a Law Firm Must Co-Run a Small Business
- A Lawyer's Clients are Likely to Include Businesspeople
- The Law Is All About Risk, Return, and Strategy
- Business School Teaches Creative Thinking and a Global Perspective; Law School Typically Does Not
- Business School Can Establish the Credentials to Lead, Not Simply Counsel Leaders
Sunday, April 20, 2008
- 30-Year IRS Agent Sentenced to One Year in Prison in Tax Fraud Case
- Capital Gains on the Presidential Campaign Trail
- Industry Group Blasts I-File
- Tax Lawyers Are More "Productive" Than Tax Profs
- Angry Bear: Eliminate the Charitable Deduction
- Top 5 Tax Paper Downloads
- IRS Launches Political Activity Compliance Initiative for 2008 Election
- Academic Journals to Use Anti-Plagiarism Software on Submitted Articles
- Gerzog: Disclaimers and Defined Value Clauses: Christiansen
- Law School Softball Rankings
There is a bit of movement on this week's list of the Top 5 Recent Tax Paper Downloads, with new papers debuting on the list at #4 and #5. The #1 paper has climbed to #139 on the all-time tax paper downloads list (out of 5,052 tax papers):
2. [327 Downloads] Deduction Ad Absurdum: CEOs Donating Their Own Stock to Their Own Family Foundations, by David Yermack (NYU, Stern School of Business) [blogged here]
3. [254 Downloads] Back to School: The New Parameters of Funding a Grandchild's College Education, by Richard L Kaplan (Illinois) [blogged here]
5. [144 Downloads] Empty Promises: Settlors' Intent, the Uniform Trust Code, and the Future of Trust Investment Law, by Jeffrey A. Cooper (Quinnipiac) [blogged here]
The IRS has announced (IR-2008-61) that its Political Activities Compliance Initiative (PACI) once again will be in effect for the 2008 election season. The PACI program seeks to educate § 501(c)(3) organizations such as charities and churches about the federal law concerning political campaign activity and to enforce the law in this area.
By law, organizations exempt from tax under § 501(c)(3) may not “participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.” “We take very seriously our obligation to ensure that tax-exempt organizations have the information they need to make the right decisions about political campaign activities,” said Steven T. Miller, Commissioner of IRS’ Tax Exempt and Government Entities Division. ...
The IRS also has posted on its Web site a program letter to its Exempt Organizations employees. The letter explains the PACI objectives for 2008 and emphasizes the IRS’ priority both to educate the public and tax-exempt community about the law pertaining to political campaign intervention and to maintain a meaningful enforcement presence in this area. ...
In June 2007, the IRS released a Report on the Political Activity Compliance Initiative for the 2006 election cycle.
The Congressional Research Service has issued a report to Congress, Churches and Campaign Activity: Analysis Under Tax and Campaign Finance Laws (RL 34447):
This report examines the restrictions imposed on campaign activity by churches under tax and campaign finance laws, discusses recent IRS inquiries into such activity, and analyzes H.R. 2275 [, which repeal the political campaign prohibition in the tax code. If this bill were enacted into law, churches could engage in campaign activities without jeopardizing their tax-exempt status, but they would still be subject to applicable campaign finance laws.]
The makers of Turnitin, the anti-plagiarism software used to screen student papers (and now college application essays), has announced a new service to help scholarly journals detect plagiarism in submitted articles:
CrossRef is partnering with iParadigms, LLC to offer its members — leading scholarly and professional publishers — the opportunity to verify the originality of works submitted for publication using the iThenticate service to check against a vast database of proprietary as well as open web content. Until now, there was no automated way to check submissions against previous publications because the published literature had not been indexed and “text fingerprinted” for this purpose. The CrossCheck database will include the full-text journals of leading academic publishers, and is expected to grow very rapidly over the coming months as CrossRef member publishers sign up for the service.
(Hat Tip: Inside Higher Ed.)
Wendy C. Gerzog (Baltimore) has posted Disclaimers and Defined Value Clauses: Christiansen, 119 Tax Notes 91 (4/7/08), on SSRN. Here is the abstract:
A South Dakotan attorney who had become a full-time farmer, left her entire estate to her daughter, but she anticipated that her daughter would disclaim some of that property. The article discusses the Christiansen case [130 T.C. No. 1 (1/24/08)] that examined the validity of that disclaimer as well as of a defined value clause.
Saturday, April 19, 2008
The Best Law School ... Softball Team (Legal Blog Watch), by Robert J. Ambrogi:
Forget the U.S. News and World Report law school rankings. Here is an honor that reveals the true grit of a law school -- the best student softball team. Over the weekend of April 4 to 6, more than 100 law school softball teams faced off in Charlottesville, Va., at the University of Virginia School of Law's 25th annual spring invitational tournament. Forty-eight regular-division and 64 co-recreational teams participated, with top honors going to UVA in the regular division and to Florida Coastal School of Law in the co-rec division.
Check out the cool spreadhseet with the results.
- Angry Bear: Charlie Gibson and the Capital Gains Tax
- Center on Budget & Policy Priorities: Experts Agree that Capital Gains Tax Cuts Lose Revenue
- Citizens for Tax Justice: Charlie Gibson Repeats Misinformation at Democratic Presidential Debate
- Fairmark: Capital Gain: What Obama Should Have Said; Misleading Question, Weak Answer
- Heritage Foundation: Economic Effects of Increasing the Tax Rates on Capital Gains and Dividends
- Tax Foundation: Obama and Gibson Capital Gains Tax Exchange
- Wall Street Journal: Obama's Tax Evasion (editorial)