Weekly SSRN Tax Article Review And Roundup: Layser Reviews The (Uncertain) Future Of Corporate Tax Shelters By Blank & Glogower

This week, Michelle Layser (San Diego) reviews Joshua D. Blank (UC Irvine) & Ari Glogower (Northwestern), The (Uncertain) Future of Corporate Tax Shelters, in Corporate Tax Research Handbook (Reuven Avi-Yonah, ed., Edward Elgar Publishing, forthcoming, 2023).

Last August, Congress approved a plan to provide the IRS with $80 billion in funding over the next 10 years. Though the details about how the IRS will use the funding are still unfolding, many of us hope the IRS will use the extra money to clamp down on abusive tax planning activities by high-income and corporate taxpayers. In recent years, lack of resources has hindered the agency’s capacity to police taxpayer abuses, and increased funding was desperately needed. But money alone may not be enough for the IRS to effectively fight taxpayer abuses. In a new book chapter focused on corporate tax shelters, Professors Joshua Blank and Ari Glogower argue that the IRS will also need new tools to identify abusive activities.

Blank and Glogower begin by describing the current approach used by the IRS to combat abusive corporate tax shelters. Namely, the IRS relies on a “reportable transaction regime” that requires taxpayers to disclose certain activities the agency has identified as potentially abusive. Broadly speaking, reportable transactions include known structures with features associated with tax shelters. Tax law prohibits tax shelters, but the rules are sometimes vague, leaving room for taxpayer manipulation and creating enforcement challenges. The IRS’s current reportable transaction regime, which the authors describe as an “activity-based approach,” helps clarify the tax rules. By specifically describing the mechanical details of transactions that may be abusive, the rules clearly communicate to taxpayers when disclosure is necessary. In fact, many taxpayers choose to avoid transactions that would require disclosure, and the deterrent effect of the regime has been notably successful at “chilling the market for corporate tax shelters.”

Still, the reportable transaction regime could be better. Blank and Glogower offer three major critiques of the approach before offering some proposed fixes. First, the reportable transaction regime is “reactive, not preemptive.” In other words, by the time a transaction is listed, it’s already too late. Taxpayers “have already pursued the abusive tax activity,” and the rules do little to “preempt their initial spread nor to deter the pursuit of new tax avoidance strategies.” Worse, some taxpayers react to new listings by switching to other tax avoidance tactics, leading to “a game of corporate tax shelter ‘Whac-A-Mole.’”

Second, the disclosures themselves are manipulatable by taxpayers, who can choose how much information to disclose to the IRS. In some cases, taxpayers probably under-disclose, omitting important information. In other cases, taxpayers over-disclose, submitting unnecessary disclosures. While over-disclosure may not seem like such a bad thing, it adds noise and further burdens the already-overburdened IRS. As Blank and Glogower explain, it is “unclear whether the IRS has the resources necessary to review these disclosures and pursue audits.” It is clear, however, that the IRS has moved very slowly with respect to listing new transactions, as only two of the currently listed transactions were added after 2010. As Blank and Glogower note, the current list essentially describes “tax strategies that were popular during the corporate tax shelter boom of the early 2000s.”

Third, the reportable transactions regime may ultimately be hindered by a recent judicial decision in CIC Services vs. IRS. That case allowed taxpayers to move forward with an objection that the IRS failed to comply with notice-and-comment procedures when it issued notice of a new reportable transaction. The court held that the taxpayer was not required to “’follow the Anti-Injunction Act’s pay first/sue later procedure.’” In doing so, it opened the door to legal challenges from corporations and other taxpayers who want to challenge the validity of notices of reportable transactions.

The upshot: the reportable transaction regime is good, but it’s not great. Blank and Glogower have some ideas about how to make it better. They propose three major changes to the reportable transaction regime: “an affirmative taxpayer duty to disclose tax positions which conflict with regulations; disclosure of tax advice as a condition to penalty defenses; and disclosure of non-tax documentation regarding reportable transactions.” As detailed in the chapter, these changes would broaden the scope of the disclosure regime, enabling the IRS to spot abusive transactions they don’t already know about, and they would help the IRS understand the nontax reasons (if any) why taxpayers might employ these transactions.

For example, by requiring taxpayers to disclose positions that conflict with regulations, the IRS can gain early insights to taxpayers’ next moves, giving the service a fighting chance at winning that game of Wac-A-Mole. Requiring taxpayers to disclose tax opinions they receive from their tax advisors would help “move beyond the activity-based focus of current law” to provide “greater insight into the motivation, structure, and tax treatment” of the transactions. And requiring taxpayers to disclose nontax information, such as presentations given to boards of directors or shareholders, would shed further light on taxpayers’ motivations. Moreover, nontax disclosures could even help the IRS identify other parties involved in tax shelter transactions, such as tax shelter promoters, or to identify “emerging tax avoidance trends among large corporations.”

The authors’ proposed changes would surely go a long way to strengthen the reportable transaction regime. Where the current regime is reactive, narrow, and limited in the information it conveys, a reformed regime might be preemptive, broader, and more illuminating. Or it might just result in a landslide of disclosures that further expand the backlog of unprocessed filings. The authors acknowledge that their proposals might not help much if the IRS lacks the resources to analyze the new information, especially if the reformed regime increases processing time. But, if there was ever a time to propose a major expansion of IRS tax shelter enforcement efforts, it’s now. With $46 billion of the new IRS funding earmarked for enforcement, let’s hope that some of that money makes its way to the Office of Tax Shelter Analysis.

This book chapter provides an accessible critique of the current reportable transaction regime and thoughtful suggestions for how to improve it. I recommend this book chapter to anyone interested in tax enforcement, including tax shelters and evasion.

Here’s the rest of this week’s roundup:

• Allison Christians (McGill) & Tarcísio Diniz Magalhães (University of Antwerp), Undertaxed Profits and the Use-It-or-Lose-It Principle, 108 Tax Notes International (2022).
• Fotios Hakas (University of Patras), Eleftherios Aggelopoulos (University of Patras) & Antonios Georgopoulos (University of Patras), Effects of Profit Shifting and BEPS Regulations on Real Investments and Tax Competition Among European MNEs (November 15, 2022).
• Diane Kemker (Southern University Law Center), 'Cracking Open' the Tax Casebook: Genre, Ideological Closure, and the Earned Income Tax Credit, (November 10, 2022).
• Narcis Eduard Mitu (University of Craiova) & George Teodor Mitu (University of Craiova, Faculty of Economics and Business Administration), Reforming the Property Tax System in Romania: A Necessity, 73 Revue des Sciences Politiques 99 (2022).
• Leopoldo Parada (Leeds), Global Minimum Taxation: A Strategic Approach for Developing Countries (November 18, 2022).
• Amanda Parsons (University of Colorado Law School), May I Pay More? Lessons From Jarrett for Blockchain Tax Policy, 176 Tax Notes Federal (2022).
• Sagnik Sarkar (Tamil Nadu National Law University), The Conundrum of Lifting the Corporate Veil of One-Person Companies for Tax Evasion, NLIU Journal of Business Laws, Vol. 3 (2022).
• Brooke Shroyer (unaffiliated), The Misnomer of Section 501(c)(3): The Exclusivity Requirement (May 12, 2022).
• Christian Traxler (Hertie School) & Libor Dusek (Charles University), Fines, Non-Payment, and Revenues: Evidence from Speeding Tickets (November 19, 2022).