Thursday, September 24, 2009
The IRS sent a letter today to Senate Finance Committee Chairman Max Baucus announcing an extension of the suspension of collection enforcement efforts for some listed transactions through Dec. 31, 2009, as Congress works on legislation to even out penalties under § 6707A (enacted under the American Jobs Creation Act). The suspension of the penalties will aply where where the annual tax benefit is less than $100,000 for individuals and $200,000 for corporations. Commissioner Shulman on July 6, 2009, had sent a letter to top House and Senate tax writers announcing a suspension in collection efforts through September 30. See Wall Street Journal, IRS Extends Grace Period On Small Business Penalties.
[H]ow do America’s colleges stack up against each other, safety-wise? Specifically, which schools have the worst crime records? For that determination, The Daily Beast decided to look at the numbers. Specifically, for the past two decades, most colleges and universities nationwide have been required under the federal Clery Act—named for a Lehigh freshman raped and murdered in her dorm in 1986 before her parents discovered there’d been a slew of violent incidents at the university—to report annually to the U.S. Department of Education about crimes on and near campus, including murder, assault, sexual offenses and robberies.
The Daily Beast took the two most recent years of raw data from almost 9,000 schools and then further analyzed more than 4,000 (excluding two-year colleges, standalone graduate schools, etc.) over more than 50 different criteria, weighing different crimes against each other (murder carrying far more importance than, say, burglary), and factoring in incidents both on campus and nearby (since modern colleges, as everyone acknowledges, don’t stop strictly at the gates of the ivory towers). Local FBI data was also used to make the statistics as up-to-date as possible. (See full methodology below.) Schools were also judged on a students-per-capita basis so that large universities like Michigan State weren’t penalized when compared with small colleges like Amherst.
For a detailed description of the methodology, see here.
Here are the 25 most dangerous colleges in America:
- Emerson (Boston, MA)
- St. Xavier (Chicago, IL)
- Maryland-Baltimore (Baltimore, MD)
- Tufts (Medford, MA)
- MIT (Cambridge, MA)
- Maryland-Eastern Shore (Princess Anne, MD)
- Grambling State (Grambling, LA)
- South Carolina State (Orangeburg, SC)
- Bowie State (Bowie MD)
- North Carolina Central (Durham, NC)
- Fitchburg State (Fitchburg, MA)
- Illinois Institute of Technology (Chicago, IL)
- Hampton (Hampton, VA)
- Baltimore (Baltimore, MD)
- Norfolk State (Norfolk, VA)
- California State-Monterey Bay (Monterey Bay, CA)
- Springfield (Springfield, MA)
- Brown (Providence, RI)
- Buffalo State (Buffalo, NY)
- Harvard (Cambridge, MA)
- Alabama A&M (Huntsville, AL)
- New Jersey Institute of Technology (Newark, NJ)
- Yale (New Haven, CT)
- UC-Riverside (Riverside, CA)
- College of Saint Rose (Albany, NY)
For criticism of the methodology, see
(Hat Tip: Russ Fox.) Prior TaxProf Blog coverage:
- WaPo Calls on Rangel to Resign (9/3/09)
- The Clock Is Ticking on Tax Cheat Charlie Rangel (9/1/09)
- More Tax Problems for Rep. Rangel (8/29/09)
- Morality and Charlie Rangel’s Taxes: It’s Much Easier to Raise Taxes If You Don’t Pay Them (7/27/09)
- "Rangel Rule" Would Exempt All Taxpayers From IRS Penalties and Interest (1/29/09)
- Charles Rangel and the Harlem Tax Revolt of '09 (1/20/09)
- Rangel Sought $10 Million Contribution From AIG, Then Approved Subpart F Exception Benefiting AIG (1/3/09)
- Rangel Disputes NY Times' Charge That He Provided Retroactive Tax Break to Corporation Whose CEO Donated $1m to His Charity (12/4/08)
- Rangel Hires Accountant to Scrub Tax Returns (11/15/08)
- More Rangel Tax Troubles: Untaxed Free Parking (9/18/08)
- Rangel Refuses to Step Down as Ways & Means Committee Chair (9/16/08)
- NY Times: Rangel Should Resign as Ways & Means Chair (9/15/08)
- More on Rangel's Tax Troubles (9/12/08)
- Rangel Episode Shows Need to Audit Tax Returns of Ways & Means Committee (9/10/08)
- Rangel Failed to Report $75k Rental Income From Second Home (9/5/08)
As leaders of the world’s largest economies gather today in Pittsburgh for the Group of 20 meeting, people in the world’s poorest countries will likely look on with a mix of hope and trepidation, wondering whether their needs will figure in the deliberations at all. The G-20 nations could help both the poor and the global economy by fully financing lagging efforts to fight poverty and disease worldwide, and the best way to do this would be to impose a very small tax on the prosperous foreign exchange industry. ...
Donor countries, including the wealthiest of the G-20, are providing only 0.3 percent of their combined income in development aid. Although the donor countries have made commitments to provide more money, they are not giving it fast enough to tackle runaway health problems, including the emergence of drug-resistant pathogens that threaten people across the globe.
The one untapped source that could easily provide the amount of money needed is the foreign currency market, which handles almost $800 trillion in trades annually, all of which is untaxed. A tiny levy of 0.005 percent on transactions involving the world’s most traded currencies — the dollar, the euro, the pound and the yen — would raise more than $33 billion annually for development, while not hurting the market or affecting the average international traveler.
The tax could be collected automatically by the computer system that handles foreign exchange transactions — so it would be easy to put into place, and impossible to evade. And because not all currencies would be taxed, only the countries whose currencies would be affected would need to consent. France already supports the idea, and Chancellor Angela Merkel of Germany has signaled her willingness to consider it.
Lee Sheppard (Contributing Editor, Tax Analysts) speaks today at John Marshall's Center for Tax Law & Employee Benefits on Current Developments in Tax Law. Topics to be covered include work rpoduct production, the Arthur Young decision and the Textron decision.
In the October 2009 ABA Journal, 70 Sizzling Apps: Pump Up Your PC, PDA and smartphone With These Lawyer-Friendly Favorites, by G.M. Fillsko:
Apps: It’s a little word for those mini-programs that can pay off big in productivity, knowledge or just plain fun. And they come at all price points, from expensive-but-worth-it to absolutely free.
Whether you’re a born techie or a reluctant one, you, too, can harness the power of technology with these 70 apps lawyers are sure to love.
- Apps 1-5: Word Up
- Apps 6-30: Research and Reference
- Apps 31-38: Productivity
- Apps 39-45: Accessibility
- Apps 46-62: Task Management
- Apps 63-70: Maps, Fun, and Games
Richard L. Kaplan (Illinois) has posted To Roth or Not to Roth: Analyzing the Conversion Opportunity for 2010 and Beyond, BNA Daily Tax Report, Vol. 9, No. 181 (Sept. 22, 2009), on SSRN. Here is the abstract:
Beginning in 2010, all taxpayers will be able to convert their existing Individual Retirement Accounts (IRA) to Roth IRA's, without regard to their level of income or marital status. In effect, taxpayers will be able to lock in current income tax rates on account values that have been eroded by recent investment market declines. This article analyzes who should take advantage of this opportunity, using the barest minimum of arithmetic (and no calculus).
Girls Gone Wild founder Joe Francis plead guilty yesterday to two misdemeanor counts of filing false tax returns (and one count of bribing Nevada jail workers in exchange for food). The plea agreement calls for Francis to pay $250,000 in restitution and receive credit for jail time served. In the agreement, Francis acknowledged omitting over $500,000 in interest income on his 2003 tax return. Prosecutors had alleged that Francis took more than $20 million in fraudulent deductions in 2002 and 2003.
Prior TaxProf Blog coverage:
- Taxes Gone Wild: Joe Francis Indicted on Tax Charges (4/12/07)
- Founder of "Girls Gone Wild" Pleads Not Guilty to Tax Evasion Charges, Says "IRS Gone Wild" (7/23/08)
- "Girls Gone Wild" Founder Seeks New Counsel in Tax Evasion Case (1/28/09)
- Tax Lawyer Strikes Back at "Girls Gone Wild" Founder Joe Francis (1/30/09)
- Joe Francis to Use "Deductions Gone Wild" Defense in Tax Evasion Trial (8/27/09)
Wall Street Journal: Ex-KPMG Tax Partner Pleads Guilty In Tax-Shelter Case, by Chad Bray:
Former KPMG LLP tax partner Robert Pfaff pleaded guilty Wednesday to criminal charges in an alleged fraudulent tax-shelter scheme involving transactions in the U.S. and Saipan. ...
He faces up to 51 months to 60 months in prison under a stipulated sentencing guidelines range as part of a plea agreement. Sentencing is set for Nov. 16.
Pfaff is currently serving a 97-month prison sentence after he and two others were convicted on tax evasion charges last year in a case once billed as the largest tax-shelter fraud case in U.S. history.
The IRS has severed ties with ACORN, after several of its employees were caught on video giving advice to a couple posing as a prostitute and pimp. (ACORN in the the past has worked with various groups in providing tax assistance to the poor through the Volunteer Income Tax Assistance Program (VITA).) In addition, the IRS has filed over $2 million in tax liens against the organization.
Wednesday, September 23, 2009
- Low Income Taxpayer Representation Workshop -- Keith Blair (Baltimore), Keith Fogg (Villanova), Paul Kphlhoff (Valparaiso), Diana Leyden (UConn), Kathhryn Sedo (Minnesota), Carlton Smith (Cardozo)
- Tax Bridge to Practice -- Alice Abreu (Temple)
The Tax Foundation has published its 2010 State Business Tax Climate Index, which ranks the fifty states according to five indices: corporate tax, individual income tax, sales tax, unemployment insurance tax, and property tax. Here are the ten states with the best and worst business tax climates:
Interestingly, all ten of the states with the worst business tax climates voted for Barack Obama in the 2008 presidential election, and five of the ten states with the best business tax climates voted for John McCain (South Dakota #1, Wyoming (#2), Alaska (#3), Montana (#6), and Utah (#10)).
As recent events illustrate, state finances are pro-cyclical: during recessions, state revenues crash, worsening the effects of economic downturns. This problem is well-known, yet persistent. We argue here that, in light of predictable federalism and political economy dynamics, states will be unable to change this situation on their own. Additionally, we note that many possible federal remedies may result in worse problems, such as creating moral hazard that would induce states to take on excessively risky policy, both fiscal and otherwise. Thus, we argue that policy makers should consider so-called 'automatic' stabilizers, such as are found in the federal tax system.
We present an argument from micro-economic foundations suggesting that the federal AMT has potentially salutary -- and heretofore unrecognized -- effects that counteract pathologies of state budgets over the business cycle. Namely, as incomes grow and the AMT hits more state residents, state spending becomes more expensive in flush times as the federal tax subsidy for state and local taxes is reduced. Conversely, when state fiscal health deteriorates, the federal tax subsidy grows as fewer state residents fall under the AMT, boosting taxpayer support for state spending. This stabilizing mechanism has the potential to overcome problems state politicians face committing to saving during boom times and spending during bust times. We present empirical evidence suggesting that the AMT does indeed provide some degree of fiscal stabilization in accordance with micro-theory. We provide policy suggestions regarding how the AMT could be modified to leverage this stabilization effect.
Calls to "reform" the AMT pre-date the recent economic downturn. AMT reform has appeared in many congressional stimulus proposals, but significant cut-backs are unlikely as federal deficits are projected to grow for the foreseeable future. Our argument here implies that any AMT reform effort should consider whether the AMT’s stabilizer function could be replaced by any other viable mechanism.
Boxer Floyd Mayweather Jr. agreed to pay $5.6 million in back taxes before the IRS would be able to seize the money from his $10 million purse after his Saturday fight against Juan Manuel Marquez.
Following up on my prior post, Golfer Jim Thorpe Charged With Failing to Pay $1.6m Taxes: Mr. Thorpe pled guilty yesterday and faces a maximum of two years in prison and a $4.1 million fine when he is sentenced:
The Institute for Austrian and International Tax Law at the Vienna University of Economics and Business is looking to hire a Research Associate in the Special Research Program on International Tax Coordination:
The start of the job can be individually agreed between November 2009 and January 2010, and will last preferably for a period of 4 years (one year with the possibility to extend the position for another three years).
Applications should be sent to Maria Sitkovich by October 15.
Eric P. Bettinger (Stanford University, School of Education), Bridget Terry Long (Harvard Graduate School of Education), Philip Oreopoulos (University of Toronto, Department of Economics) & Lisa Sanbonmatsu (NBER) today released The Role of Simplification and Information in College Decisions: Results from the H&R Block FAFSA Experiment on NBER. Here is the abstract:
Growing concerns about low awareness and take-up rates for government support programs like financial aid for college have recently spurred calls to simplify the application process and enhance visibility. However, little research has been done to determine whether such reforms would truly improve college access and in what form “simplification” should take. This project examines the effects of two experimental treatments designed to test of the importance of simplifying the process of receiving financial aid and providing clear information about personal aid eligibility using a random assignment research design. H&R Block tax professionals helped low- to moderate-income families complete the FAFSA, the federal application for financial aid. Families were then immediately given an estimate of their eligibility for government aid as well as information about local postsecondary options. A second randomly-chosen group of individuals received only personalized aid eligibility information, which was calculated based on data from the tax form, but they did not receive help completing the FAFSA. Comparing the outcomes of participants in the treatment groups to a control group using multiple sources of administrative data, the analysis suggests that individuals who received assistance with the FAFSA and information about aid were substantially more likely to submit the aid application. High school seniors among this group were also much more likely to enroll in college and receive need-based financial aid the following fall. The program also increased college enrollment for independent adults with no prior college experience, and it increased aid receipt among independent adults who had previously attended college. These results suggest that simplifying the process and providing direct help with the application along with better information could be effective ways to improve college access. However, only providing aid eligibility information without also giving assistance with the form had no significant effect on FAFSA submission rates or college outcomes.
(Hat Tip: Jim Hart.)
Interestingly, the ten states with the highest median real estate taxes paid voted for Barack Obama in the 2008 presidential election, and nine of the ten states with the lowest median real estate taxes paid voted for John McCain (New Mexico voted for President Obama).
This article concerns the history of automation in U.S. tax administration and the challenges automation presents to administering the laws consistent with democratic values. The most under-theorized aspect of tax administration is the expansion of automation and its impact on the current tax system.
Historically, the U.S. system of taxation depended on the self-reporting of relevant financial information by taxpayers. The original design of tax administration was built around that premise and required significant human interaction between government employees and taxpayers.
The rise of what is called Automated Data Processing (ADP)-Particularly since WWII-has given the IRS wonderful efficiency in sorting through massive amounts of information. This has allowed it to rely less on the information provided by taxpayers and more on the information provided ABOUT taxpayers by various third parties. ADP has also allowed the IRS to become more efficient at identifying "non-responsive" taxpayers and taking action against them.
At the same time, ADP poses a constant threat to unbalance the Service, to degrade tax administration into an exercise in data manipulation and not an exercise in determining the correct taxes owed. It undermines the American way of taxation, where the IRS strives to administer the tax laws with a realization that the government's interests align with taxpayer interests and not simply with dollars to the fisc.
This article is one of a number of articles commenting on a reprint of Commissioner Mortimer Caplin’s thoughts about tax administration, orginially published in 1964. It is to be published in a forthcoming issue of the Virginia Tax Review.
TIGTA Re-releases Report Calling for IRS to Seek Mandatory e-Filing of Individual Tax Returns by Paid Preparers
Last week, I blogged the Treasury Inspector General for Tax Administration's release of New TIGTA Audit Encourages Mandatory e-Filing by Preparers (2009-40-130), which recommended that the IRS seek mandatory e-filing of individual tax returns prepared by paid preparers. One hour after its release, however, the report was pulled by TIGTA. Yesterday, TIGTA released a modified version of the report, Repeated Efforts to Modernize Paper Tax Return Processing Have Been Unsuccessful; However, Actions Can Be Taken to Increase Electronic Filing and Reduce Processing Costs (2009-40-130),
Tuesday, September 22, 2009
Wall Street Journal op-ed,Taxes, Depression, and Our Current Troubles: Tariffs, Rising State and Federal Taxes, and Currency Devaluation Ruined the 1930s, and They Could Do the Same Today, by Athur B. Laffer:
While Fed policy was undoubtedly important, it was not the primary cause of the Great Depression or the economy's relapse in 1937. The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products. Huge federal and state tax increases in 1932 followed the initial decline in the economy thus doubling down on the impact of Smoot-Hawley. There were additional large tax increases in 1936 and 1937 that were the proximate cause of the economy's relapse in 1937.
In 1930-31, during the Hoover administration and in the midst of an economic collapse, there was a very slight increase in tax rates on personal income at both the lowest and highest brackets. The corporate tax rate was also slightly increased to 12% from 11%. But beginning in 1932 the lowest personal income tax rate was raised to 4% from less than one-half of 1% while the highest rate was raised to 63% from 25%. (That's not a misprint!) The corporate rate was raised to 13.75% from 12%. All sorts of Federal excise taxes too numerous to list were raised as well. The highest inheritance tax rate was also raised in 1932 to 45% from 20% and the gift tax was reinstituted with the highest rate set at 33.5%.
But the tax hikes didn't stop there. In 1934, during the Roosevelt administration, the highest estate tax rate was raised to 60% from 45% and raised again to 70% in 1935. The highest gift tax rate was raised to 45% in 1934 from 33.5% in 1933 and raised again to 52.5% in 1935. The highest corporate tax rate was raised to 15% in 1936 with a surtax on undistributed profits up to 27%. In 1936 the highest personal income tax rate was raised yet again to 79% from 63%—a stifling 216% increase in four years. Finally, in 1937 a 1% employer and a 1% employee tax was placed on all wages up to $3,000.
Because of the number of states and their diversity I'm going to aggregate all state and local taxes and express them as a percentage of GDP. This measure of state tax policy truly understates the state and local tax contribution to the tragedy we call the Great Depression, but I'm sure the reader will get the picture. In 1929, state and local taxes were 7.2% of GDP and then rose to 8.5%, 9.7% and 12.3% for the years 1930, '31 and '32 respectively.
The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I'd give to all who will listen, it is that U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s. Net legislated state-tax increases as a percentage of previous year tax receipts are at 3.1%, their highest level since 1991; the Bush tax cuts are set to expire in 2011; and additional taxes to pay for health-care and the proposed cap-and-trade scheme are on the horizon.
- Tax Breaks Fuel Sale of Chicago Cubs for $845m (9/17/09)
- Lawsky: The Tax Savings Behind the Sale of the Chicago Cubs for $845m (9/18/09)
- Lawsky: More on The Tax Savings Behind the Chicago Cubs Sale (9/21/09)
Allan Sloan examines the tax implication of the Cubs sale (without mentioning this prior coverage) in today's Washington Post, Why We May Help Pay for Tribune to Unload the Cubs:
The Chicago Cubs aren't going to win anything this year despite having one of baseball's largest payrolls. But their bankrupt owner, Sam Zell's Tribune Co., may be about to hit a home run -- at your expense.
Zell, whose tax dodging is a frequent topic of mine, is trying to unload the team in a deal that would divert almost $300 million from taxpayers to the creditors of Tribune, the nation's second-biggest newspaper company.
The proposed Cubs deal, involving a "leveraged partnership" using lots of borrowed money, is so aggressive that a leading tax expert, Robert Willens expects the IRS to challenge it. "The IRS has expressed hostility to this sort of transaction," he said. ...
Zell is trying to get around the problem he created when he converted Tribune from a standard C corporation to an S corporation to avoid taxes. Firms making that switch owe corporate gains taxes if within 10 years of the change they sell assets, such as the Cubs, in which they had "built-in gains."
Hence Zell's nonsale sale of the Cubs, which would work like this. The Ricketts family, founders of Ameritrade (now TD Ameritrade), would put $150 million of cash into a partnership that would also borrow up to $698 million. Tribune would put the Cubs, Wrigley Field and related assets into the partnership.
Tribune would emerge with $740 million of cash and 5% of the partnership, while the Ricketts family would have 95% and operating control. Call me naive, but it sure seems to me that when you start with 100% and full control and end up with 5%, $740 million and no control, you've sold 95%.
Zell's tax folks, however, will argue that Tribune is getting nontaxable proceeds from a leveraged partnership. They'll also argue that Tribune's guarantee of some of the partnership's borrowings makes it a true partner of the Rickettses.
By my estimate, Tribune would have about a $720 million gain -- the $740 million, less 95% of the $21 million Tribune paid for the Cubs in 1981. At a 40% federal-state combined rate, the gain would generate about $290 million in taxes. Instead, that money would go to Tribune's creditors.
This is similar to the 2008 deal in which Zell unloaded 97.14% of the Long Island newspaper Newsday onto Cablevision Systems, walking off with $650 million in cash. "This is somewhat less egregious, but it's still egregious," said Willens, whose views are followed closely on Wall Street and in Washington.
Front page story in today's Wall Street Journal, To Outfox the Chicken Tax, Ford Strips Its Own Vans; Logic Takes a Back Seat -- and Windows, as Auto Maker Plays Tariff Games, by Matthew Dolan:
Several times a month, Transit Connect vans from a Ford Motor Co. factory in Turkey roll off a ship here shiny and new, rear side windows gleaming, back seats firmly bolted to the floor.
Their first stop in America is a low-slung, brick warehouse where those same windows, never squeegeed at a gas station, and seats, never touched by human backsides, are promptly ripped out.
The fabric is shredded, the steel parts are broken down, and everything is sent off along with the glass to be recycled.
Why all the fuss and feathers? Blame the "chicken tax."
The seats and windows are but dressing to help Ford navigate the wreckage of a 46-year-old trade spat. In the early 1960s, Europe put high tariffs on imported chicken, taking aim at rising U.S. sales to West Germany. President Johnson retaliated in 1963, in part by targeting German-made Volkswagens with a tax on imports of foreign-made trucks and commercial vans.
The 1960s went the way of love beads and sitar records, but the chicken tax never died. Europe still has a tariff on imports of U.S. chicken, and the U.S. still hits delivery vans imported from overseas with a 25% tariff. American companies have to pay, too, which puts Ford in the weird position of circumventing U.S. trade rules that for years have protected U.S. auto makers' market for trucks.
The company's wiggle room comes from the process of defining a delivery van. Customs officials check a bunch of features to determine whether a vehicle's primary purpose might be to move people instead. Since cargo doesn't need seats with seat belts or to look out the window, those items are on the list. So Ford ships all its Transit Connects with both, calls them "wagons" instead of "commercial vans." Installing and removing unneeded seats and windows costs the company hundreds of dollars per van, but the import tax falls dramatically, to 2.5 percent, saving thousands.
Wall Street Journal, New Light on the Plight of Winter Babies: Researchers Stumble Upon Alternative Explanation for the Lifelong Challenges Faced by Children Born in Colder Months, by Justin Lahart:
Children born in the winter months already have a few strikes against them. Study after study has shown that they test poorly, don't get as far in school, earn less, are less healthy, and don't live as long as children born at other times of year. Researchers have spent years documenting the effect and trying to understand it.
But economists Kasey Buckles and Daniel Hungerman at the University of Notre Dame may have uncovered an overlooked explanation for why season of birth matters. Their discovery challenges the validity of past research and highlights how seemingly safe assumptions economists make may overlook key causes of curious effects. ...
The two economists examined birth-certificate data from the Centers for Disease Control and Prevention for 52 million children born between 1989 and 2001, which represents virtually all of the births in the U.S. during those years. The same pattern kept turning up: The percentage of children born to unwed mothers, teenage mothers and mothers who hadn't completed high school kept peaking in January every year. Over the 13-year period, for example, 13.2% of January births were to teen mothers, compared with 12% in May -- a small but statistically significant difference, they say. ...
The question now is what drives women from different socioeconomic backgrounds to tend to have children at different times of the year. Ms. Buckles and Mr. Hungerman aren't entirely sure yet. Perhaps it has to do with fluctuations in employment; married women tend to conceive when unemployment is higher, research has shown. They also speculate it might be due to cooler temperatures in springtime, which don't adversely affect the fertility of poor parents, who may not have air conditioning, like hot temperatures do. Or they wonder if there might even be a "prom" effect at work. January is, after all, about nine months after many of those soirees.
The paper is Season of Birth and Later Outcomes: Old Questions, New Answers. Here is the abstract:
Research has found that season of birth is associated with later health and professional outcomes; what drives this association remains unclear. In this paper we consider a new explanation: that children born at different times in the year are conceived by women with different socioeconomic characteristics. We document large seasonal changes in the characteristics of women giving birth throughout the year in the United States. Children born in the winter are disproportionally born to women who are more likely to be teenagers and less likely to be married or have a high school degree. We show that controls for family background characteristics can explain up to half of the relationship between season of birth and adult outcomes. We then discuss the implications of this result for using season of birth as an instrumental variable; our findings suggest that, though popular, season-of-birth instruments may produce inconsistent estimates. Finally, we find that some of the seasonality in maternal characteristics is due to summer weather differentially affecting fertility patterns across socioeconomic groups.
The filmmakers have assembled a distinguished group of two dozen interviewees for the film, including Tax Profs Michael Graetz (Columbia) and Dan Shaviro (NYU).
Anita Bernstein (Brooklyn) has posted Pitfalls Ahead: A Manifesto for the Training of Lawyers on SSRN. Here is the abstract:
Entrants joining the legal profession are entitled to fair warning about what they are getting into. Accounts of lawyers' heroism, triumph, and reformist energy continue to inspire young people to pursue this profession, and they should. But before they represent a client, newcomers need to be informed about pitfalls, the complement to power: how lawyers lose their licenses, face liability for malpractice and breach of fiduciary duty, see their work performance deemed not competent or not "effective" under the Sixth Amendment, struggle against judges, become disqualified from representing particular clients, and forfeit some freedoms of speech and association. Learning about pitfalls enables lawyers not only to protect themselves should they encounter danger, but also to advance what is good for their clients and the public.
This Essay examines lawyers' pitfalls with an eye to their vocational and theoretical interest, gives examples of pitfalls-related teaching and learning strategies already present (but not always visible) in the American legal curriculum, and integrates this perspective with other approaches to lawyers' professional responsibility.
I have posted my Tax Stories chapter, The Story of Murphy: A New Front in the War on the Income Tax, on SSRN. Here is the abstract:
This chapter from the second edition of Tax Stories (Foundation Press) unpacks the D.C. Circuit’s stunning decision in Murphy v. United States, 460 F.3d 79 (D.C. Cir. 2006), which unsettled more than a half-century of tax jurisprudence in holding, based on an originalist view of the Sixteenth Amendment, that a personal injury award for emotional and reputational injuries could not be constitutionally treated as income. The chapter explores the background of the case, examines the parties’ conduct of the litigation, and critically analyzes the flaws and negative implications of the panel’s opinion. Although the D.C. Circuit panel ultimately granted rehearing and reversed its earlier decision in Murphy v. IRS, 493 F.3d 170 (D.C. Cir. 2007), the panel could not unring the bell and undo the lasting damage to the tax system caused by its original opinion.
In his chapter on The Story of INDOPCO, Joseph Bankman argues that the income tax often asks too much of judges (and taxpayers, tax accountants, tax lawyers, and the IRS), demanding Solomonic judgments that mere mortals are incapable of consistently getting right. As a result, what initially may appear as an isolated failure instead may be a systemic flaw in the income tax itself. In Murphy, however, the income tax asked very little of the D.C. Circuit: the case merely required understanding of the constitutional source of Congress’s taxing power; the relationship between constitutional and statutory definitions of income; the meaning of tax basis and the difference between financial capital and human capital; and the courts’ duty to the tax system. Instead, the D.C. Circuit turned what should have been a run of the mill tax dispute over the application of § 104(a)(2) into a threat to the very survival of the income tax. The D.C. Circuit, prodded by the tax blogosphere, ultimately backed away from the brink, but the panel’s willingness to arm the anti-tax brigades should give pause to those committed to defend the income tax. Although questions about the taxation of damage recoveries will not bring down the income tax, the willingness of so many to shake its foundations may ultimately prove its undoing.
The California Commission on the 21st Century Economy has delayed the release of its final report until later this week. The commission reportedly will call for a new 4% business net receipts tax in exchange for elimination of the corporate income tax, elimination of the state portion of the sales and use tax, and a reduction and flattening of the personal income tax to two brackets. The commsion also will recommend an enhanced "rainy day fund" and the creation of a new tax court.
Chief Judge John O. Colvin has announced several amendments to the Tax Court's rules:
Several of the amendments conform the Tax Court’s Rules more closely with selected procedures from the Federal Rules of Civil Procedure. In addition, the Court has amended Rule 202 (procedures applicable to disciplinary proceedings) and Rule 11 (payment of certain fees and charges by credit card). The Court has also adopted various conforming amendments to its Rules and forms. The appendix to this press release includes the amendments and an explanation of each amendment.
The Rules amendments generally are effective as of January 1, 2010, except that the amendment to Rule 11 regarding credit card payments is effective immediately. The amendments to Forms 5, 10, and 13 are effective immediately, and new Form 6 is effective January 1, 2010.
Twelve years ago, new regulations dramatically changed the manner in which the federal income tax system determines how business entities are taxed. The new explicitly elective “check-the-box” regulations for entity classification drew wide praise when they replaced the old multifactored corporate resemblance test. Now, with the benefit of hindsight and with previously unpublished data regarding entity classification elections made since 1997, this Article revisits the check-the-box regulations. As the first comprehensive study of these regulations in action, this Article critically examines the successes and failures of arguably the most significant change to the business tax system in the last twenty years. The Article argues that the experience with the check-the-box regulations suggests that they fall short of their promise even though they are an improvement over the prior entity classification rules. The Article also examines the scope of the check-the-box election itself and argues that the election lacks a coherent set of limitations, which undermines the goals behind the provision of the election. Ultimately, this Article concludes that the policy weaknesses revealed by an examination of the check-the-box regulations stem fundamentally from the existence of a multi-regime system for taxing businesses. Hence, the regulations expose a problem with the business tax regimes among which taxpayers can choose, thus adding an additional reason to reform the federal income tax treatment of businesses.
Andre L. Smith (Florida International) has published Do NFL Signing Bonuses Carry a Substantial Risk of Forfeiture within the Meaning of Section 83 of the Internal Revenue Code?, 19 Seton Hall J. Ent. & Sport L. 311 (2009). Here is the abstract:
Imagine a recently graduated collegiate football superstar who is drafted by and signs a lucrative contract with a National Football League team. The contract is for five years and includes a $10 million dollar signing bonus. During his rookie season, war breaks out, and the United States is involved. A patriot on the order of Pat Tillman, our star retires from football after only one season, joins the military and departs for the war theater. Unfortunately, he is injured during his tour of duty and is unable thereafter to return to professional football. Or, imagine that a current NFL player acts upon his preference to practice medicine or enter a religious order.
The collective bargaining agreement between the National Football Management Council and the National Football Players Association (the CBA) permits teams to recover the portion of the $10 million signing bonus that was not earned on the playing field, $8million dollars in this case. However, after paying let's say $3 million in federal income taxes on the receipt of $10 million, our football player turned patriot/doctor/priest does not have $8 million to return to his NFL team.
In addition, even if the athlete has other sources of funds and can in fact return the $8 million, he will have paid taxes on the receipt of funds he was ultimately not allowed to keep. Technically, he will be allowed a deduction for the $8 million he's lost, but as a practical matter a tax deduction has no benefit to a taxpayer who has not sufficient income to absorb the deduction. In the case of our war hero, it is unlikely that he will ever earn enough money during the rest of his life to take advantage of the loss deduction. Moreover, because of the time value of money, the future value of this loss deduction is obviously less than the present value of the taxes paid on that $8 million. Even worse, if the taxpayer's tax rate is lower in those later years, which is highly likely in the above scenario, the value of the deduction is even lesser.
This article demonstrates how the foregoing tax hardships can be ameliorated by paying NFL players their signing bonuses in the form of property such that they qualify for tax deferral pursuant to § 83 of the Internal Revenue Code. Section 83, originally designed to address the divestiture of employee stock options, permits deferral of the recognition of income until such time as it cannot be divested from the employee by reason of non-performance. Signing bonuses are earned by the mere signing of a contract and are, according to common law, not contingent upon actual performance on the playing field. However, the CBA permits their forfeiture, and thus places signing bonuses if paid in property within the purview of § 83.
Monday, September 21, 2009
James R. Hines, Jr. (Michigan) presents Reconsidering the Taxation of Foreign Income, 62 Tax L. Rev. 269 (2009), at Loyola-L.A. today as part of its Tax Policy Colloquium Series. Heather Field (UC-Hastings) is the commentator. Here is the abstract:
This paper evaluates the efficiency and distributional consequences of taxing foreign income, noting that home country taxation, as practiced by countries such as the United States, distorts the ownership of business assets, thereby reducing productivity and aggregate income, without advancing the distributional goals underlying most of the tax system. The alternative of exempting foreign income from domestic taxation would significantly influence patterns of capital ownership. In order to exempt foreign income from taxation in a way that does not distort capital ownership it is necessary to avoid making domestic expense deductions contingent on the allocation of investment and other income-producing activity between domestic and foreign locations. Thus it is not only the taxation of active foreign income, but also the expense
The efficiency and fairness arguments typically advanced to justify taxing foreign income also imply that countries should subject foreign sales to domestic sales taxation, foreign value added to domestic value added taxation, foreign property to domestic property taxation, and similarly subject any and all foreign activities to the corresponding domestic taxes. In practice, however, no country attempts to apply its sales, value added, property, and all other non-income taxes to the foreign activities of its resident companies, reflecting the obvious associated economic distortions and lack of any clear justification for such extraterritorial taxation. Since the efficiency and fairness considerations are the same whether taxes are imposed on income or they are imposed on sales or value added, it is difficult to understand the rationale for taxing foreign income but not taxing foreign sales or value added.
Wall Street Journal, Estate Tax Faces Its Own Life-and-Death Struggle, by Jonathan Weisman:
President Barack Obama and congressional Democrats are united behind an effort to block a scheduled year-end repeal of the estate tax. But prospects are blurred by divisions between the House and Senate over the contours of a restored tax, as well as Capitol Hill's focus on health care. ...
President George W. Bush's 10-year, $1.35 trillion across-the-board tax cut, passed in 2001, included a slow-but-steady reduction of the levy on heirs that critics branded "the death tax." Under the law, the value of an inheritance shielded from taxation increased from $1 million to $3.5 million in 2009. The tax rate on inheritances larger than that slowly decreased from 55% to 45%. Then, in 2010, the entire estate levy was to disappear.
But it is scheduled to come back in full, pre-Bush force in 2011 -- a 55% rate on the portion of estates over $1 million -- when the entire 2001 tax cut expires. ... Democrats say they do want to keep the Bush tax cuts in place for middle- and lower-income families. But they want to let the cuts expire for upper-income households and for large inheritances. Mr. Obama has proposed permanently locking in the estate tax at the current 45% rate with a $3.5 million exclusion. Politically, if Democrats can maintain the status quo rather than let the tax disappear next year, they can avoid being portrayed as raising taxes when the levy reverts to its pre-Bush level in 2011.
Officially, Republicans in Congress would like to see it disappear on schedule. ... But very few believe that is possible. Republican leaders worry that liberal Democrats would accept a one-year repeal, then block any action in 2010 to ensure the tax returns in 2011, at 55%. That has put Republicans in the mood to compromise as well. ...
Senate Finance Chairman Max Baucus (D, Mont.) and House Ways and Means Chairman Charles B. Rangel (D, N.Y.). Mr. Rangel agrees with the president that the 2009 estate tax -- a $3.5 million inheritance-tax exclusion and 45% rate -- should be locked in permanently. In March, Mr. Baucus proposed the same policy, though he added a provision indexing the exclusion to inflation. That plan is likely to pass the House handily.
But the Senate is more complicated. Senate Republican Whip Jon Kyl of Arizona has proposed a $5 million exemption, with a 35% tax rate, and he has teamed with moderate Democrat Blanche Lincoln of Arkansas, who is up for re-election in a state where opposition to the estate tax is solid.
Op-ed in today's Wall Street Journal, The Case for an Employer Tax Break: Temporary Tax Relief for Businesses Who Hire New Workers Can Energize the Economy, by Blair W. Effron (Centerview partners, New York):
Companies need more robust consumer spending to justify increased payrolls, but without increased payrolls, the consumer is less likely to spend. The way to break out is by enacting temporary tax credit for companies willing to reinvest in jobs.
To earn the credit, companies would have to demonstrate an increase in their U.S. employment levels (excluding the impact of acquisitions and divestitures) year-over-year. And to most effectively encourage businesses to hire new workers, the tax offset must come very close to equalling the additional payroll costs incurred, so the effect on company earnings is negligible. We remain in an environment where there is a reluctance to hire for long-term growth if it means short-term earnings dilution.
Ideally, this tax benefit would be available for the next two fiscal years. The consumer must be reactivated now, without further delay. With such a program, the accelerated benefit from creating more consumers should, over time, more than justify the incremental wage expense to companies after the tax offset is phased out
Second, the impact of a two-year program on the federal deficit would be relatively modest. Using a conservative set of assumptions, an $18 billion annual program, which represents 10% of estimated corporate tax receipts in the next fiscal year (excluding the $4 billion benefit of increased individual income taxes) could create nearly 600,000 good-paying jobs at the national median income. And this approach to job creation—which would impact government receipts less than 1%—would be much less costly than the more traditional solution of direct government spending.
Economies of scale exist if long-run average costs decline as output rises. All else being equal, the decline in average costs should lead to greater profitability, making economies of scale attractive to businesses. Nobel laureate George Stigler recognized that economies of scale should help determine the optimum size of a firm. To obtain economies of scale and optimum firm size, parties may integrate resources or grant access to resources without integrating. Such arrangements create shared economies of scale. Tax law must consider the effects of shared economies of scale and address them. In particular, the varying degrees of scale-sharing raise tax classification issues. Traditional classification analyses focus on the legal definition of tax partnership, which requires a joint-profit motive. The IRS and courts have concluded that sharing economies of scale satisfies the joint-profit-motive test and that arrangements with a joint-profit motive are tax partnerships. Relying on technical analysis and economic theory, this Article argues, however, that if parties integrate resources without integrating all relevant parts of the production process, they often should not come within the definition of tax partnership. By focusing upon shared economies of scale, the IRS and courts have created a slippery slope. Sharing economies of scale is common even in nonintegrated arrangements, which allow parties to benefit from each other’s specialized skills by granting access to resources. If tax law relies upon shared economies of scale to classify business arrangements, its classification system will include arrangements that are not suited for tax partnership classification.
Wall Street Journal editorial, Obama's Nontax Tax: On a Sunday Show, the President Offers a Revealing Definition:
President Obama didn't make much news on his round of five Sunday talk shows yesterday, with one notable exception. The President revealed a great deal about his philosophy of government and how he defines a tax increase. It turns out the President thinks a health-care tax is not a tax if he thinks the tax is for your own good.
The IRS today (IR-2009-84) extended its amnesty program (see FAQ here) for individuals who have evaded U.S. taxes through offshore accounts for an additional 22 days -- to October 15. So far, more than 3,000 taxpayers have come forward and agreed to pay back taxes, interest, and penalties. The IRS threatens to bring criminal charges against those who do not come forward by the October 15 deadline.
Sarah Lawsky (George Washington) expands on Friday's post, The Tax Savings Behind the Sale of the Chicago Cubs for $845m:
First, the deal may not be so bullet-proof. In a Chicago Tribune story published earlier this year (which unfortunately does not appear to be available on line for free), Robert Willens pointed out that the IRS might challenge this deal because it is not clear what it means for a company in bankruptcy (Tribune) to guarantee a debt. Michael Oneal, "Cubs Deal in 'Uncharted Territory,'" Chicago Tribune, Jan. 25, 2009.
Second, Tribune might be indifferent to the additional allocation required to provide Buyer with the full depreciation under the remedial method, but that indifference is probably not because of the interest allocation. Phillip Gall (Deloitte Tax LLP & NYU), who is a partnership tax master but does not have any particular knowledge of the Cubs deal, notes: "[T]he mere fact that Tribune is the guarantor does not lead to interest deductions being allocated to Tribune. You may be thinking that the debt becomes partner nonrecourse debt, which it probably does. However, interest expense on partner nonrecourse debt does not get allocated to the partner who bears the economic risk of loss for the debt until there are partner nonrecourse deductions associated with the interest expense . There probably would not be partner nonrecourse deductions for many years after the structure is put in place. Of course, the agreement could specially allocate the interest expense to Tribune, but this would be very unusual in a deal like this and would not have anything to do with the fact that the debt was guaranteed by Tribune." (This doesn't necessarily mean, though, that the deal's only benefit for Tribune stems from the time value of money. For example, Tribune might have enough losses to partially or entirely offset the ordinary income from the remedial allocation.)
George Ryan Huston & Thomas Joseph Smith (both of Florida State University, Department of Accounting) have posted Do Taxes Matter: Evidence of Individual and Corporate Tax Incentives on the Choice to Hold Shares Acquired from Exercise of Employee Stock Options on SSRN. Here is the abstract:
This paper extends prior stock option literature by examining whether individual and corporate tax incentives are associated with the decision to hold shares acquired through option exercises. Aboody, Hughes, Liu, and Su (2008) refute the previously-held assumption that individuals immediately sell shares acquired through option exercise. We extend their work by focusing on the trade-off between tax incentives and the costs of holding, including liquidity constraints, opportunity costs, and future share price decline. We find that insiders hold shares for at least a year in 18.26 percent of exercises. Additionally, insiders are more likely to hold shares obtained through exercise of ISOs (specifically ISOs that are deeper in the money) relative to NQSOs, as ISOs allow for the transfer of pre-exercise gains from ordinary income to capital gain treatment. Finally, we find corporate tax incentives associated with employee stock sales mitigate insiders’ likeliness to hold.
Sunday, September 20, 2009
- Police Seize Maradona's Earrings for Back Taxes
- SNL on Joe Wilson's Outburst
- Roberts: Mitigating the Distributional Impacts of Climate Change Policy
- An International Tax Guide for Professors Taking Non-U.S. Sabbaticals
- IRS to Audit 6,000 Companies
- Top 5 Tax Paper Downloads
- American Lawyer: Recruiting Season, 2009-10
- International Tax Law: U.S., Canada & Japan
Bloomberg, IRS to Audit 6,000 Companies to Test Employment Tax Compliance, by Ryan J. Donmoyer:
The IRS will audit 6,000 U.S. companies to determine whether they pay all their required employment taxes to fund Social Security and Medicare benefits. The IRS said the audits will provide data for its first statistical analysis since 1984 of how often companies misclassify workers to duck tax obligations, fail to pay taxes on fringe benefits such as personal use of company cars, and improperly pay taxes for company executives. The audits will begin in February, and the companies will be randomly chosen. ...
The Treasury Department in 2005 estimated, based on the 1984 IRS data, that companies underpay employer taxes by about $14 billion annually. In particular, federal agencies have raised concerns about whether employers are properly classifying workers as company employees or independent contractors.
This week's list of the Top 5 Recent Tax Paper Downloads is the same as last week's list
1. [357 Downloads] Ghosts of 1932: The Lost History of Estate and Gift Taxation, by Jeffrey A. Cooper (Quinnipiac)
2. [304 Downloads] A Tale of Two Codes: An Empirical Analysis of the Jurisprudence of the United States Tax Court (1990-2008), by Lilian V. Faulhaber (Harvard), Daniel Martin Katz (Michigan) & Michael James Bommarito (Michigan)
3. [284 Downloads] The Big, Bad FBAR: Reporting Foreign Bank Accounts to the U.S. IRS, by Lawrence Lokken (Florida)
4. [238 Downloads] Retirees at Risk: The Precarious Promise of Post-Employment Health Benefits, by Richard L. Kaplan (Illinois), Jordan Zucker (DLA Piper) & Nicholas J. Powers
The American Lawyer, Sullivan & Cromwell Drops Challenge to NALP Recruiting Rules After Threat of Harvard Ban, by Zach Lowe:
Everyone we talk to seems to agree that this is the craziest, most stressful recruiting season in recent memory. More top law schools have moved what used to be fall interview dates into late August. That in turn has led to some debate over whether the entire recruiting season should be pushed back into the middle of the academic year. Law firms, concerned about the economy, are trying everything to manage the size of their 2010 summer class, from making all their job offers on a single day (Skadden, Arps, Slate, Meagher & Flom) to extending the offers on the spot at call back interviews. ...
Perhaps nothing epitomizes the anxiety of this recruiting season better than Sullivan & Cromwell's abandoned attempt to bypass a standard, set by NALP, that firms leave offers to students open for up to 45 days. In late July, S&C called several of the nation's top law schools and informed career services personnel at those schools that the firm would not be following the 45-day guideline, according to six sources with direct knowledge of the situation. All six spoke only on the condition that they not be identified publicly.
Instead, S&C told the career services personnel, the firm would require prospects to respond yes or no in two weeks. Law school higher-ups had varying reactions to the move, but none reacted more strongly than Harvard, according to all six sources.
Harvard quickly told S&C that, if it stuck with its plan to leave offers open for just two weeks, the firm would not be invited to recruit on campus this year. ... S&C backed down quickly and promised to obey the 45-day standard. ... With offers and callbacks scarce, law schools aren't encouraging students to use their full 45 days anyway, according to several career services officials.
Sharon Stern Gerstman (Law Clerk, New York Supreme Court), Elinore Richardson (Borden Ladner Gervais, Toronto), Salvatore Mirandola (Borden Ladner Gervais, Toronto), Stephanie Wong (Borden Ladner Gervais, Toronto) & Pamela A. Fuller have published International Tax Law, 43 Int'l Law. 759 (2009). Here is the abstract:
This article reviews important international tax law developments during 2008 in the United States, Canada, and Japan.
Saturday, September 19, 2009
While former soccer star and current Argentina national team coach Diego Maradona was visiting a fat farm in Italy, local authorities seized his earrings to help pay off a $54 million tax liability from his playing days for the Napoli soccer team (1984-1991).
Tracey M. Roberts (Research Affiliate, Vanderbilt University, Climate Change Research Network) has posted Mitigating the Distributional Impacts of Climate Change Policy, 67 Wash. & Lee L. Rev. ___ (2010), on SSRN. Here is the abstract:
Under both a cap-and-trade system and a greenhouse gas tax the statutory incidence of the regulation will fall upon the energy suppliers and distributors, utility companies and large manufacturers. The economic incidence, however, will be borne primarily by consumers; these parties will bear the financial impacts of the regulation of greenhouse gas emissions in the form of increased costs of gasoline, electricity, and home heating fuels and in increased consumer prices for all goods manufactured or distributed using fossil fuels. The regulation will also generate significant revenue from this former consumer surplus. This paper addresses the question of what should be done with those revenues.
Economic models of the incidence of the two systems indicate that while high-income households will bear a larger portion of the distributional impacts because they consume more, low-income households will bear a disproportionate burden as a percentage of their household income. In view of the political challenges associated with redistribution, the practical challenges associated with calculating the net burdens of environmental regulation, and the central importance of protecting the least advantaged in society, this paper proposes that the optimal regulatory regime is one that neutralizes the distributional impacts. This may be achieved if the government captures revenues from a cap-and-trade system or a greenhouse gas tax and uses those revenues to issue a rebate that is proportional to household income and scaled according to household size. The paper also suggests that the most efficient method for delivering the rebate is to issue a refundable tax credit through t he income tax system, based on the institutional compatibility of that system with the regulatory and distributional goals of the policy
Michelle Dhanda (J.D. 2010, Suffolk) has published Note, International Taxation: A Guide for Academics Abroad, 32 Suffolk Transnat'l L. Rev. 701 (2009). Here is part of the Introduction:
Academics are one group who consistently travel to other nations, and their tax burden is relatively heavy. Once preparation for an academic career is complete, however, academics abroad can take advantage of one very important tax benefit: income exclusion for U.S. tax purposes. Further, academics are not required to pay foreign taxes while residing abroad under many bilateral tax treaties negotiated by the Department of Treasury. Thus, academics may receive one particular benefit that others, even business people, may not. The IRS has not welcomed the idea of academics working abroad, tax-free, because the purpose of this statutory exclusion in section 911 of the tax code was to assist American businesses competing abroad. Despite the resistance from the IRS, however, public policy and equity are good grounds for continued academic tax exclusion, and the Department of Treasury's tax treaties support exclusion.
This Note will explain some of the tax consequences of academic sabbaticals abroad. Specifically, Part II of this Note will provide a history of the applicable tax law, both congressional and administrative. Part III will consider various hypothetical academic situations, and Part IV will demonstrate how academics may benefit from tax laws. Finally, Part V will summarize the benefits and burdens of specific travel decisions.
Friday, September 18, 2009
Sarah Lawsky (George Washington) shares her thoughts on the tax savings driving the sale of the Chicago Cubs:
Yesterday, Paul linked to an article about the acquisition of the Chicago Cubs. The article said "tax breaks" would allow Tribune Company (the seller) and Tom Ricketts (the buyer) to "save hundreds of millions of dollars." It mentioned in particular that Tribune was smart to retain 5% of the team and take a lower purchase price, instead of taking more cash outright. As the article put it, this structure would give the company a "shrewd tax break," because "by accepting the lower purchase price in exchange for retaining a portion of team ownership, Tribune will save about $400 million in capital gains taxes." So what is this shrewd deal? Let's say that the higher offer was $1 billion (a number mentioned in the article). The blended federal and state corporate rate is about 40%. The claim appears to be that Tribune will pay no taxes at all (i.e., will save 40% of $1 billion, or $400 million) because of the current deal structure. What's going on?
I think, based on a quick perusal of the deal documents and some helpful guidance from the TaxProf mailing list, that the deal is structured as a "leveraged partnership." Tribune has used this structure before, when it sold Newsday. Here's how a leveraged partnership works (somewhat simplified): Tribune drops the Cubs business into a limited-liability company, or LLC, which taxed as a partnership, and Buyer drops in some cash. The LLC borrows a large amount of additional cash (essentially, the purchase price) and distributes that cash to Tribune. As a result, Buyer has a 95% interest in the LLC, and Tribune has a 5% interest and a lot of cash.
But wait, you may be saying. Yes, it's true that assets can be contributed tax-free to an LLC that's taxed as a partnership, and it's true that distributions from such an LLC are tax-free to the extent of basis. But surely the claim cannot be that Tribune did not sell the assets, but simply made a tax-free contribution to an LLC of assets worth $844 million and then received a tax-free distribution from the LLC of roughly that amount of cash. If it's that easy, every sale would be tax-free! Also, Tribune should have a basis in the LLC that's equal to its basis in the assets it dropped in. Surely the assets Tribune dropped into the LLC weren't even close to their fair market value, so even if we treat the transaction as a distribution from the LLC, wouldn't there be gain to the extent the distribution exceeds Tribune's basis in the LLC?
Well, there's a twist. Yes, there's a rule that says that you can't just drop assets into an LLC and get cash out and claim it's not a sale. But there is also an exception to that rule: under Treas. Reg. 1.707-5(b)(1), if the debt is allocable to Tribune (the member who got the cash), the transaction won't be considered a sale, because the cash distribution is traceable to the debt. The idea is that Tribune would have been allowed to borrow against the assets anyway, so we shouldn't prevent it from borrowing against the assets just because the assets are now in an LLC. So here's the clever move: Tribune guarantees the debt. Then all of the debt is allocable to Tribune, and the whole deal falls under this exception. And the guarantee means that Tribune's basis in the LLC is increased by the amount of the debt, which gives Tribune plenty of basis to receive the cash distribution tax-free. (Indeed, the Tax Matters Agreement states that Tribune's receipt of cash is meant to be a tax-free distribution, and in fact explicitly cites Treas. Reg. 1.707-5.)
Of course, even if this meets the letter of the law, it still looks like a sale, particularly since Tribune was looking to sell the Cubs and ended up doing this deal instead. Can the IRS do anything? Robert Willens, a master of deal tax analysis, didn't think so when he looked at the Newsday deal. He thought for that deal, at least (which was similar in many ways to this deal), the most the IRS could do would be to challenge it under the general partnership antiabuse provisions, but such a challenge would probably not succeed. (The IRS has also attacked a leveraged partnership structure by disregarding a guarantee, on the grounds that the guaranteeing party was so undercapitalized that it would not really have been able to pay off the loan, but Tribune probably holds enough assets to avoid this sort of attack.)
(A footnote on the basis question for partnership-tax types: the article also claimed the Cubs franchise could be depreciated over 15 years, which would fully offset the Cubs' earnings. If the deal is respected as structured, the assets will have a very low basis inside the LLC, precisely because this was a contribution and not a sale. However, the LLC Operating Agreement calls for the remedial method of allocation with respect to the Cubs assets. This gives Ricketts his full depreciation. Tribune has to be allocated extra income to offset Ricketts's deductions, but this extra income will probably be offset by the deductions for interest payments on the loan, which should be allocated to Tribune as the loan guarantor.)
You can read more about leveraged partnerships in, among other sources, Louis S. Freeman et al., The Partnership Union: Opportunities for Joint Ventures and Divestitures, 863 PLI/Tax 9 (2009). The Robert Willens article that suggests that the Newsday deal would probably be respected is Robert Willens, Newsday Postmortem, 120 Tax Notes 1211 (Sept. 22, 2008). The TaxProf mailing list, in particular Linda Galler, Ted Seto, and especially Adam Rosenzweig, helped me understand this transaction. You can look at the deal documents yourself: the LLC Formation Agreement, the Definitions Exhibit, the LLC Operating Agreement, the Tax Matters Agreement, and the debt guarantees. For a full set of deal documents (including the ones I've listed here), see Docket Number 2004 of Tribune Company's bankruptcy filing (click "Images").
Update: Sarah has more here.