Is Bitcoin Prudent? Is Art Diversified? Offering Alternative Investments To 401(k) Participants

Edward Zelinsky (Cardozo), Is Bitcoin Prudent? Is Art Diversified? Offering Alternative Investments to 401(k) Participants, 54 Conn. L. Rev. 509 (2022):

Whether 401(k) plans’ investment menus should feature “alternative” investments is a fact-driven inquiry applying ERISA’s fiduciary standards of prudence, loyalty, and diversification. Central to this fact-driven inquiry is whether the alternative investment class in question is broadly accepted by investors in general and by professional defined benefit trustees in particular. A similarly salient concern when making this inquiry is the financial unsophistication of many, perhaps most, 401(k) participants. Accounting for these considerations, this Article concludes that REITs, private equity funds, and hedge funds can, with limits, today be offered as investment choices to 401(k) participants, but that cryptocurrencies (including Bitcoin), art, and environmental-social-governance (ESG) funds cannot. These latter investment categories have yet to achieve acceptance among professional defined benefit trustees and thus are not yet prudent to offer to 401(k) participants—if they ever will be. 

This Article explores each of these five categories as a class. Even if 401(k) participants should be offered choices within any (or all) of these classes of alternative investments, particular investments within each class must still be scrutinized individually for their compliance with ERISA’s fiduciary standards. The threshold, fact-intensive question that this Article addresses is whether, before considering specific investments, any generic category of alternative investments ought to be considered for the menu of choices offered to 401(k) participants. 

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Lesson From The Tax Court: Counting The Days

Most people know that the IRS generally has three years to audit a return. Calculating the proper three-year period, however, requires close attention to both the start date and the end date.  You need to count those days properly.  I tried to drill into my students the practice of always consulting a calendar when attempting to calculate the proper dates.  Christian Renee Evert v. Commissioner, T.C. Memo. 2022-48 (May 9, 2022) (Judge Marshall), reinforces that teaching: to calculate the period in which the IRS can assess a tax, you need to properly count the days in the three year period.

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The Top Five New Tax Papers

There is a bit of movement in this week's list of the Top 5 Recent Tax Paper Downloads, with a new paper debuting on the list at #5:

1. [521 Downloads]  How Treasury and the IRS Have Allowed High-Net-Worth Taxpayers to Exploit Stepped-Up Basis on Intergenerational Wealth Transfers, and How They Can Stop It: Answers to Question for the Record, by Daniel Hemel (Chicago; moving to NYU; Google Scholar)
2. [397 Downloads]  Taxing Robots, by Rita de la Feria (Leeds; Google Scholar) & Maria Amparo Grau Ruiz (Universidad Complutense de Madrid; Google Scholar)
3. [370 Downloads]  A Matter of High Interest: How a Quiet Change to an Actuarial Assumption Turbocharges the Life Insurance Tax Shelter, by Andrew Granato (J.D.|Ph.D., Yale; Google Scholar)
4. [358 Downloads]  Permanent Establishment and Fixed Establishment in the Context of the Subsidiary and the Digital Economy, by Stoycho Dulevski (University of National and World Economy; Google Scholar)
5. [320 Downloads]  Where Nonprofits Incorporate and Why It Matters, by Peter Molk (Florida; Google Scholar)

Weekly SSRN Tax Article Review And Roundup: Eyal-Cohen Reviews AI, Taxation, And Valuation By Soled And Thomas

This week, Mirit Eyal-Cohen (Alabama; Google Scholar) reviews Jay Soled (Rutgers; Google Scholar) & Kathleen DeLaney Thomas (North Carolina; Google Scholar), AI, Taxation, and Valuation, 108 Iowa L. Rev. __ (2023).

Artificial intelligence (AI) is improving our lives by utilizing technology and machine learning to accomplish tasks that require considerable human labor. It can deliver similar and often better outcomes in a cost-effective manner. I have written here that calculative actions do not require much creativity thus are the most obvious fields in which machines are superior to humans. It is very fitting to ask, then, how can AI improve tax enforcement and compliance? Valuation is one of the most calculative and arduous areas in tax administration that automation can greatly improve. 

Valuation often requires many efforts determining fair market value (FMV) when there is no willing buyer and seller that negotiate the asset’s purchase price. Because of the essential role that asset valuations play in determining tax liabilities, there is a high sensitivity by the IRS and taxpayers to their accuracy. Transactions between related parties or not at arm’s length such as transfer of bequests, nonfungible real estate, or closely held business interests present complex valuation issues as there is no clear FMV. Congress uses a traditional carrot-and-stick approach to valuation by encouraging taxpayers to comply through clarifying and simplifying reporting obligations, along with imposing penalties for misstating the value of assets.

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Tax Now Or Tax Never: Political Optionality And The Case For Current-Assessment Tax Reform

David Gamage (Indiana-Maurer; Google Scholar) & John R. Brooks (Georgetown; moving to Fordham; Google Scholar), Tax Now or Tax Never: Political Optionality and the Case for Current-Assessment Tax Reform, 100 N.C. L. Rev. 487 (2022):

The U.S. income tax system is broken. Due to the realization doctrine and taxpayers’ consequent ability to defer taxation of gains, taxpayers can easily minimize or avoid the taxation of investment income, a failure that is magnified many times over when considering the ultra-wealthy. As a result, this small group of taxpayers commands an enormous share of national wealth yet pays paltry taxes relative to the economic income their wealth produces—a predicament that this Article condemns as being economically, politically, and socially harmful. 

The conventional view among tax law experts has assumed that the problems created by the realization doctrine can be fixed on the back end by adjusting the rules that govern taxation at the time of realization. Specifically, most tax scholars have favored reform proposals that would retain the realization doctrine while aiming to impose taxes in a way that would erase or reduce the financial benefits of deferral. Examples include retrospective capital gains tax reforms, progressive consumption tax reforms, and more incremental reforms such as ending stepped-up basis. 

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Raskolnikov Presents Should Only The Richest Pay More? Today At The OMG Transatlantic Tax Talks

Alex Raskolnikov (Columbia) presents Should Only the Richest Pay More? today as part of the OMG Transatlantic Tax Talks Series (OMG = Oxford-Michigan-MIT-Munich-Georgetown):

This paper challenges the leading academic, political, and cultural narrative supporting greater redistribution. This narrative holds that redistribution should come at the expense of the very restricted group of the highest earners: the one percent, the super-rich, the billionaire class. I argue that the very reasons offered in support of this view call for redistribution from a much broader group that includes the affluent—those with incomes in the ninetieth to ninety ninth percentiles of the distribution. Whether one looks at the recent trends in income concentration, wealth concentration, economic mobility, government capture, political polarization, or the rise of populism, the affluent are as great or greater contributors to these problems as those in the top one percent. Remarkably, the contemporary U.S. legal and economic scholarship has ignored the affluent almost completely, greatly limiting the magnitude of possible economic transfers as well the form that these transfers may take.

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Texas Tax Faculty Workshop

Tax faculty from all Texas Law Schools were invited to gather yesterday for an informal workshop at Texas A&M. As is our tradition, lunch doubled as a half-baked idea brainstorming session for all participants to share ideas and seek input on projects in very early stages. Below the fold is the list of who presented works in progress and who were the official commentators.

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Who Gives A Trump? Evidence Of Framing Effects In Tax Policy

Mark McKnight (Southern Indiana; Google Scholar), Curtis Price (Southern Indiana; Google Scholar), Andrew Dill (Southern Indiana), Timothy Bryan (Marshall; Google Scholar) & Brett Bueltel (Southern Indiana; Google Scholar), Who Gives a Trump? Evidence of Framing Effects in Tax Policy, 23 J. Acct., Ethics & Pub. Pol'y 149 (2022):

We use a framed survey to measure how associating the name “Trump” with the Tax Cuts and Jobs Act (TCJA) affects people’s satisfaction of said Act. Our research included 72 participant clients from a Volunteer Income Tax Assistants (VITA) program, who were asked to provide baseline data regarding political affiliation and attitudes prior to having tax returns completed. We find that using the name “Trump” with people who self-identify as Republican results in more satisfaction with the Act, whereas, for people with who do not self-identify as Republican, association with the name “Trump” does not precipitate stronger or weaker satisfaction with the Act.

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Innovations In IPO Deal Structure: Do Up-C IPOs Harm Public Shareholders?

Mary Brooke Billings (NYU), Kevin Hsueh (NYU), Melissa F. Lewis-Western (BYU; Google Scholar) & Gladriel Shobe (BYU; Google Scholar), Innovations in IPO Deal Structure: Do Up-C IPOs Harm Public Shareholders? (additional write-up here):

This paper examines an innovation in capital formation that has spurred contentious debate: the Umbrella Partnership Corporation (“Up-C”) IPO. Advisors and underwriters argue that the Up-C deal structure is a driver of post-IPO value and, thus, is a value-enhancing means of raising capital that may be one solution to concerns regarding the drop in the number of publicly traded companies. Consistent with these claims, recent research suggests that organizing soon-to-be public businesses as pass-through entities (as is the case for UpCs) leads to superior future performance. Yet, broadening the analysis to consider abnormal stock performance and post-IPO litigation of a larger and more recent sample of exclusively Up-C IPOs, we conclude just the opposite. While the Up-C deal structure increases IPO valuations and predicts positive post-IPO operating performance, the return performance of Up-C IPOs indicates that Up-C deals harm public shareholders.

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Soled & Morris: The Strange And Curious Tax Treatment Of Investment Expenses

Jay A. Soled (Rutgers; Google Scholar) & Mallory A. Morris (Dechert), The Strange And Curious Tax Treatment Of Investment Expenses, 67 Vill. L. Rev. 101 (2022):

To secure income, taxpayers often incur a wide range of expenses. At least theoretically, one might think that the Internal Revenue Code (“Code”) would accord all such expenses similar tax treatment, but (i) trade or business expenses and (ii) investment expenses endure the exact opposite tax treatment: the former are generally allowed, whereas the latter are commonly disallowed. The obvious question is why there is a difference in treatment between the two.

This Article explores possible answers to that important question. It first traces the evolution of the Code’s dichotomous tax treatment of trade or business versus investment expenses. It then investigates possible justifications and their associated merits for the different handling of these two expense categories. 

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Using The Internal Revenue Code To Limit Coaching Salaries: A Proposal To Bring Amateurism Back Into College Football

Blaire Mikesell (J.D. 2022, Indiana-Maurer), Note, Using the Internal Revenue Code to Limit Coaching Salaries: A Proposal to Bring Amateurism Back into College Football, 97 Ind. L.J. 393 (2022):

Since formal collegiate athletic competitions began in 1852, they have gained popularity and become a mainstay in American culture. This rise in popularity coupled with increased media coverage allowed college athletics, and particularly college football, to grow into a successful business that generates billions of dollars in revenue each year. Colleges and institutions earn this athletic revenue as tax-free income due to their tax-exempt status under the Internal Revenue Code § 501(c)(3) tax-exemption statute. The basic policy underlying this statute is as follows: colleges and universities provide an important benefit to the public by providing education, and in exchange for that provided benefit, the IRS does not tax educationally related income. Currently, income generated by college athletics is educationally related and thus is earned under the tax-exempt status of the university.

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A Half-Century With The Internal Revenue Code: The Memoirs Of Stanley Surrey

A Half-Century with the Internal Revenue Code: The Memoirs of Stanley S. Surrey (Lawrence Zelenak (Duke) & Ajay Mehrotra (Northwestern; Google Scholar) eds. Carolina Academic Press 2022):

Stanley S. Surrey was the most prominent mid-twentieth-century American tax law academic, and the federal government official with the greatest influence on tax policy over that same period (aside from politicians). His professional life with the federal tax system spanned half a century, ending only with his death at the age of 73 in 1984. As Surrey writes in his memoirs, he had good reason to "doubt that any person alive today has had as close and as varied a relationship with the Internal Revenue Code as I have had."

He divided the five decades of his professional life between academia (three early years at the University of California, Berkeley, followed by many years at Harvard Law School), and two lengthy tours of duty in the service of the U.S. Treasury Department. In his second Treasury stint he served as the Assistant Secretary of the Treasury for Tax Policy, the highest executive branch position exclusively focused on taxation. Surrey's influence on the federal tax system was deep and pervasive and continues to this day; perhaps his most enduring accomplishment has been his development of tax expenditure analysis, which since the 1970s has played a central role in a wide range of tax policy discussions.

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Socialism, Progressive Taxation, And The Fiscal State

Sol Picciotto (ICTD, Lancaster, London; Google Scholar), Socialism, Progressive Taxation, and the Fiscal State:

This paper traces the philosophical, political, sociological and economic underpinning for the advocacy by socialists of progressive taxation, from the Communist Manifesto to recent supporters of tax justice campaigns. Socialists’ attitudes to taxation have been tied to their primary aim of socialisation of the ownership of the means of production, reflecting the view that inequality and exploitation are inherent in capitalism, which rests on private property enforced by state power. Communism, as developed particularly by Marx and Engels, aimed to transcend capitalism and end the separation of the state from civil society, by the socialisation of property, including through progressive taxation. Marx’s view in Capital volume 3 that the emergence of large scale enterprises already entailed the ‘abolition of capital as private property within the framework of capitalist production itself’, when it was published in 1894 became central to the debates among German socialists (Liebknecht, Kautsky, Bernstein and Luxemburg), and the Austro-Marxists (Renner, Hilferding), but socialists split when graduated direct taxes were introduced to help fund the welfare-warfare state. Goldscheid’s outline for a social science of the state centred on fiscality underpinned his radical and influential wartime proposals to finance the socialisation of large corporations through taxes on capital.

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Colella: Crispino Upholds IRS Mailbox Rule Reg

Frank G. Colella (Pace), ‘But I Mailed It’ — Crispino Upholds IRS Mailbox Rule Regulation, 173 Tax Notes Fed. 1479 (Dec. 13, 2021):

In Crispino, the U.S. District Court for the District of New Jersey held that taxpayers cannot introduce extrinsic evidence under the common law mailbox rule to establish timely filing of their claim for refund and, accordingly, dismissed the refund action for lack of jurisdiction. Crispino, a decision appealable to the Third Circuit, upheld the IRS’s position that the only means to satisfy section 7502, the statutory “mailbox rule,” is by proper compliance with reg. section 301.7502- 1(e)(2), which requires proof of certified or registered mailing when the IRS alleges that it has not received a document.

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Lipman: How To Design An Antiracist State And Local Tax System

Francine Lipman (UNLV; Google Scholar), How to Design An Antiracist State and Local Tax System, 53 Seton Hall L. Rev. ___ (2022):

Since the first ship of enslaved African people landed in Virginia in 1619, racist policies in institutions, systems, structures, practices, and laws have ensured inequity for people of color. These racist policies include every imaginable variant of injustice from slavery to lynching, to segregation, and to economic injustices, including those delivered through tax systems today. Although facially color-blind, tax systems have long empowered the explosion of white wealth and undermined wealth accumulation for Black families and communities of color. State and local tax systems, especially in the South, have deeply-rooted racist fiscal policies, including Jim Crow laws that continue to sustain and bolster racial inequality today. These injustices have become even more obvious during the global pandemic.

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Lesson From The Tax Court: Only One Exclusion For Military Retiree Disability Payments

My dad served as a doctor in the military for 30 years, 23 days. Starting this week, he will have been retired for longer than he served. When he first retired, he received a monthly pension check from the Defense Finance and Accounting Service (DFAS) and that was all.  A few years later he learned that his hearing loss, likely from his time in Vietnam, qualified him for disability payments from the Department of Veterans Affairs (VA).  He applied for, and received, a 30% disability rating.  He then started receiving two checks each month, one from DFAS and one from the VA.

My dad’s DFAS check is included in gross income but his VA check is not, thanks to §104(a)(4).  If he had never applied for the disability rating, however, §104 would still permit him to exclude part of his DFAS check to the extent he would have be entitled to a disability check from the VA.  Confused?  Today’s lesson will help! 

In Tracy Renee Valentine v. Commissioner, T.C. Memo. 2022-42 (Apr. 28, 2022) (Judge Gustafson), the taxpayer was a veteran and received two checks per month, one from DFAS and one from VA for disability compensation.  She wanted to exclude not only the VA disability check, but she also wanted to exclude part of her DFAS check.  But she mis-read §104(a)(4)’s interplay with §104(b).  Judge Gustafson teaches us the proper way to read the rules.  Basically, veterans get only one exclusion for their disability payments.  Details below the fold.

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The Top Five New Tax Papers

There is a bit of movement in this week's list of the Top 5 Recent Tax Paper Downloads, with a new paper debuting on the list at #4:

1. [940 Downloads]  Amazon and the State Aid Tax Saga, by Leopoldo Parada (Leeds; Google Scholar)
2. [521 Downloads]  How Treasury and the IRS Have Allowed High-Net-Worth Taxpayers to Exploit Stepped-Up Basis on Intergenerational Wealth Transfers, and How They Can Stop It: Answers to Question for the Record, by Daniel Hemel (Chicago; moving to NYU; Google Scholar)
3. [385 Downloads]  Taxing Robots, by Rita de la Feria (Leeds; Google Scholar) & Maria Amparo Grau Ruiz (Universidad Complutense de Madrid; Google Scholar)
4. [350 Downloads]  A Matter of High Interest: How a Quiet Change to an Actuarial Assumption Turbocharges the Life Insurance Tax Shelter, by Andrew Granato (J.D.|Ph.D., Yale; Google Scholar)
5. [346 Downloads]  Permanent Establishment and Fixed Establishment in the Context of the Subsidiary and the Digital Economy, by Stoycho Dulevski (University of National and World Economy; Google Scholar)

Azam: Online Taxation Post Wayfair

Rifat Azam (Radzyner School of Law, Israel; Google Scholar), Online Taxation Post Wayfair, 51 N.M. L. Rev. 116 (2021):

The United States Supreme Court saved the states’ sales tax base in the landmark case of South Dakota v. Wayfair in 2018. This revolutionary decision ended the long ban on states imposing sales tax collection duties on out-of-state retailers without a physical presence in the state, as established in Bellas Hess v. Department of Revenue of Illinois in 1967 and Quill Corp. v. North Dakota in 1992. Wayfair now allows states to impose sales taxation on out-of-state retailers in the era of digitalization. In this article, I provide valuable guidelines and suggestions to aid states on this critical journey toward taxing remote online transactions fairly and efficiently.

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Next Week’s Tax Workshop

Thursday, May 19: Alex Raskolnikov (Columbia) will present Should Only the Richest Pay More? as part of the OMG Transatlantic Tax Talks Series. This event does not require registration. 

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Brookings: Rethinking The Corporate Income Tax — The Role Of Rent Sharing

William G. Gale (Brookings Institution; Google Scholar) & Samuel I. Thorpe (Brookings Institution), Rethinking the Incidence of the Corporate Income Tax:

Debates about corporate income tax cuts follow a familiar script. Republicans claim that rank-and-file workers benefit. Democrats argue that affluent shareholders reap the gains.

In a new project [Rethinking the Corporate Income Tax: The Role of Rent Sharing], we find that, workers do benefit, but it is the most affluent employees — managers and executives — who receive the lion’s share of benefits, not rank-and-file staff.

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The Tax Lawyer Publishes New Issue

The Tax Lawyer has published Vol. 75, No. 3 (Spring 2022):

• Linda Galler (Hofstra), Tax Opinion Policies and Procesures,  75 Tax Law. 443 (2022)
• Steven Z. Hodaszy (Robert Morris), Exchange-Traded Funds Use Section 852(b)(6) for Tax Avoidance, Not Just Tax Deferral: So Why Is This Loophole Still Open?, 75 Tax Law. 489 (2022)

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Parsons: Cryptocurrency, Legibility, And Taxation

Amanda Parsons (Academic Fellow, Columbia; moving to Colorado), Cryptocurrency, Legibility, and Taxation:

In Jarrett v. United States, a taxpayer in Tennessee is arguing that staking cryptocurrency did not result in him earning “income” under federal income tax law. This case illustrates the fundamental challenge that cryptocurrency and blockchain technology present for tax law. Wealth creation in the crypto space is not readily legible to the state. This absence of legibility threatens tax law’s reliance on placing economic activities into categories to determine how they should be taxed. Furthermore, this case highlights the harms Congress and Treasury are risking by not taking action on cryptocurrency taxation. The uncertainty and lack of guidance on the appropriate taxation of cryptocurrency is opening the door for a critical juncture in tax law to be decided via strategic litigation. This threatens a jurisprudential evasion of the democratic and administrative process in a high-stakes moment for tax law.

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Brooks: The International Tax System Is There To Achieve Justice

Kim Brooks (Dalhousie University, Schulich School of Law; Google Scholar), The International Tax System Is There to Achieve Justice (JOTWELL) (reviewing Allison Christians (McGill; Google Scholar) & Laurens van Apeldoorn (Open University, the Netherlands), Tax Cooperation in an Unjust World (2021)):

I love everything about this book book, Tax Cooperation in an Unjust World, by Allison Christians and Laurens van Apeldoorn. It’s short, it’s readable, there’s no mystery about the point (and the authors don’t belabour it), and it’s important.

The main claim: our international tax system has justice at its heart. And when we fail to attend to its justice consequences, we enable states with great wealth to “facilitate[] and feed[] off continued human suffering.” (P. 1.)

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Wiedenbeck & Stein: The Executive Compensation Threat To Retirement

Peter J. Wiedenbeck (Washington University; Google Scholar) & Norman P. Stein (Drexel), The Executive Compensation Threat to Retirement:

In recent years a new phenomenon has appeared on the retirement savings landscape: the expansion into middle management ranks of a traditional tool of executive compensation, the so-called “top hat” pension plan. Top hat plans are unfunded deferred compensation programs for a “select group of management or highly compensated employees.” Properly structured, top hat plans amass retirement resources that are taxed to employee-participants only when distributed. From the participant’s viewpoint, that delayed inclusion appears comparable to the tax deferral accorded qualified retirement plan savings, yet top hat plans are exempt from all of the Code’s qualification conditions. They are likewise excused from virtually all of ERISA’s pension plan participant protections, including vesting, funding, and fiduciary responsibilities.

This regulatory immunity licenses three interconnected pathologies that undermine core retirement policy objectives. The inapplicability of ERISA’s worker protections, combined with preemption of state law, relegates top hat plan participants to a uniquely precarious position: their retirement savings are more exposed to depredation and vulnerable to loss than if ERISA had never been enacted. The inapplicability of the Code’s qualified plan nondiscrimination requirements allows employers to offer additional retirement savings to highly-paid managerial, technical, and professional employees without having to pay comparable benefits to rank-and-file workers. And the dramatic disparity, post-2017, between income tax rates applicable to corporations and high-income individuals incentivizes that favoritism with a substantial tax subsidy that’s unmeasured and generally overlooked.

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Hasen: Interest Deductibility

David Hasen (Florida; Google Scholar), Interest Deductibility:

The proper tax treatment of interest expense has been a subject of disagreement since the inception of the modern income tax in the early twentieth century. On one view, the purpose of the financing transaction dictates the tax treatment of interest so that interest paid on borrowing used to finance consumption should be nondeductible, whereas business interest should be deductible. On another view, interest paid does not finance a consumption item but rather a mere shift in resources and therefore should be deductible at all events, assuming the recipient includes the interest received in income.

Both of these views lead to conundrums that cannot be resolved without considering the broader question of why some expenses are deductible at all. Focusing on that question, it turns out that business interest, like any other business expense, should generally be deductible as a timing or an accounting principle under an income tax. That principle does not apply to personal interest expense. Nevertheless, there may be an independent basis to permit a deduction for personal interest expense that is grounded in considerations of vertical equity.

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Tax Law Review Publishes New Issue

The Tax Law Review has published a new issue (Vol. 74, No. 2 (Spring 2021)):

• Jason S. Oh (UCLA) & Eric M. Zolt (UCLA; Google Scholar), Wealth Tax Design: Lessons from Estate Tax Avoidance, 74 Tax L. Rev. 175 (2021)
• Ilan Benshalom (Hebrew Univ.), Recalibrating Moral Feasibility Boundaries of Taxation, 74 Tax L. Rev. 211 (2020)

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Hasen: Legal Standards And Incomplete Monitoring

David Hasen (Florida; Google Scholar), Legal Standards and Incomplete Monitoring, 30 Res. in L. & Econ. 109 (2022):

Regulators can adjust penalties to compensate for incomplete monitoring of regulated parties that are subject to legal rules, but compensating penalty adjustments often are unavailable when regulated parties are subject to legal standards. Incomplete monitoring consequently invites greater noncompliance under standards than under rules. This chapter develops a model that quantifies some of the specific tradeoffs that regulators face in designing standards regimes under incomplete monitoring. 

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A Critical Review Of Tax The Rich! And The Patriotic Millionaires

Michael Conklin (Angelo State; Google Scholar), We Must Raise Taxes on the Rich: A Critical Review of Tax the Rich! and the Patriotic Millionaires:

At the 2021 Met Gala, Alexandria Ocasio-Cortez sparked controversy by wearing a “Tax the Rich” dress. Afterward, AOC championed the race of the dress designer and accused her critics of being sexist, while her critics pointed to the irony of such a message at a $30,000-a-ticket event designed to support the interests of the ultra-rich. But these points are largely irrelevant when considering if taxes on the rich should be increased. This is unfortunately also the level of discourse present in the book Tax the Rich! How Lies, Loopholes, and Lobbyists Make the Rich Even Richer. Anyone reading this book in an effort to better understand the arguments for and against raising taxes on the rich will be disappointed, as it largely provides neither. This review critiques the book for selectively omitted information, ignoring incentivization effects, and the appeal to emotion by villainizing the rich. These critiques provide a better understanding of the legitimate arguments for and against raising taxes on the rich and point to potential hypocrisy in groups such as the Patriotic Millionaires.

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Pennell & Weisbord: Trust Alteration And The Dead Hand Paradox

Jeffrey Pennell (Emory) & Reid K. Weisbord (Rutgers), Trust Alteration and the Dead Hand Paradox, 48 ACTEC L.J. __ (2023):

Trusts are popular instruments for wealth transmission because they can be crafted to suit almost any imaginable estate planning goal that is not contrary to public policy. With the abrogation of the Rule Against Perpetuities in most states, settlors may impose trust terms that will be legally enforceable for scores of future generations, if not in perpetuity. Long-term and perpetual trusts, however, present a paradox of dead hand control, because the specificity and the durability of settlor-imposed restrictions tend to be inversely related. As donative preferences become increasingly specific and restrictive, trusts become less durable with the passage of time, as changing circumstances imperil the settlor’s original intent or render the trust unadministrable.

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Jones & Maynard: Unfulfilled Promises Of The FinTech Revolution

Lindsay Sain Jones (Georgia-Terry Business School; Google Scholar) & Goldburn Maynard Jr. (Indiana-Kelley Business School; Google Scholar), Unfulfilled Promises of the FinTech Revolution, 111 Cal. L. Rev. ___ (2023):

Racial wealth inequality is complex. While not entirely to blame, lack of access to credit and financial services, lower rates of return, and discrimination have contributed to this persistent gap. Some are hopeful that financial technology (fintech) can address these underlying issues by broadening access to capital and providing fairer lending standards, better investment advice, and more secure transactions. Indeed, key players in the industry promote fintech as a primary means to advance financial inclusion for minorities. Despite promises of financial inclusion from the fintech industry, however, underserved populations continue to experience unequal access to financial services and wealth. This Paper evaluates claims relating to key components of the so-called “fintech revolution” to determine whether they can address underlying causes of wealth inequality.

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Lesson From The Tax Court: Avoiding The 2-Year Lookback Period In Bankruptcy

Today’s lesson is about how to maximize the discharge of tax liabilities through bankruptcy.  It's a lesson on timing.  Last year I blogged two cases showing how a bankruptcy tolls both the collection and assessment limitation periods in the Tax Code.  See Lesson From The Tax Court: For Whom The Bankruptcy Tolls, TaxProf Blog (July 19, 2021).  Today’s lesson is the flip side: we learn how taxpayers who want to discharge old tax liabilities through bankruptcy need to be careful about how the two-year lookback exception to discharge may be tolled by provisions in the Tax Code.

I offer today’s lesson in honor of Bob Pope, who died on April 29th.  Bob was one of those remarkable attorneys who could navigate the complex interplay of bankruptcy and tax law.  He was one of the founders of the Tax Collections, Bankruptcy and Workouts Committee in the ABA Section of Taxation, along with Paul Asofsky, Fran Sheehy, Ken Weil, and Mark Wallace.  He will be missed.

Bob would appreciate today’s lesson.  In Robert J. Norberg and Debra L. Norberg v. Commissioner, T. C. Memo 2022-30 (Apr. 5, 2022) (Judge Lauber), the taxpayers filed their 2016 return in February 2019 without paying the tax they reported due.  When the IRS started collection, the Norbergs asked for a CDP hearing.  When they got to Tax Court in September 2020 they filed a bankruptcy petition, hoping to wipe out the liability.  They failed because they mis-timed their bankruptcy petition.  An irony is that these taxpayers could have likely gotten their desired discharge if they had ignored the siren song of CDP.  Bob could have taught them that.  And, if you click below the fold, you too can learn this lesson on how to maximize the discharge of tax liabilities in bankruptcy.

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The Top Five New Tax Papers

This week's list of the Top 5 Recent Tax Paper Downloads is the same as last week's list. The #1 paper is #131 among 16,795 tax papers in all-time downloads:

1. [2,112 Downloads]  Pillar 2: Rule Order, Incentives, and Tax Competition, by Michael Devereux (Oxford; Google Scholar), John Vella (Oxford) & Heydon Wardell-Burrus (Oxford)
2. [896 Downloads]  Amazon and the State Aid Tax Saga, by Leopoldo Parada (Leeds; Google Scholar)
3. [504 Downloads]  How Treasury and the IRS Have Allowed High-Net-Worth Taxpayers to Exploit Stepped-Up Basis on Intergenerational Wealth Transfers, and How They Can Stop It: Answers to Question for the Record, by Daniel Hemel (Chicago; moving to NYU; Google Scholar)
4. [335 Downloads]  Taxing Robots, by Rita de la Feria (Leeds; Google Scholar) & Maria Amparo Grau Ruiz (Universidad Complutense de Madrid; Google Scholar)
5. [331 Downloads]  Permanent Establishment and Fixed Establishment in the Context of the Subsidiary and the Digital Economy, by Stoycho Dulevski (University of National and World Economy; Google Scholar)

Louis Brandeis, Antitrust, And A Functioning Tax System

Jasper L. Cummings, Jr. (Alston & Bird, Raleigh, NC), Louis Brandeis, Antitrust, and a Functioning Tax System, 175 Tax Notes Fed. 241 (Apr. 11, 2022):

In this article, Cummings wonders what happened to Justice Louis Brandeis’s approach to deciding federal tax cases and whether it has anything to do with antitrust policy. ...

Justice Louis D. Brandeis was one of that small group of justices who wore the “tax wreath” during his tenure on the Supreme Court from 1916 to 1939. The chief justices assigned him the routine opinions in tax cases, which usually involved complex business arrangements or difficult but small-bore interpretational issues, or both. His fellow justices honored him by almost never dissenting or even concurring, and the few times they did, never writing a rebuttal to his reasoning.

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Weekly SSRN Tax Article Review And Roundup: Elkins Reviews International Response To The U.S. Tax Haven By Noked & Marcone

This week, David Elkins (Netanya, visiting NYU 2021-2023; Google Scholar) reviews Noam Noked (Chinese University of Hong Kong (CUHK); Google Scholar) & Zachary Marcone (CUHK), International Response to the U.S. Tax Haven, 48 Yale J. Int’l L. ___ (2022):

The term “tax haven” tends to evoke images of sparsely populated Caribbean islands with pristine beaches and whose most important industry is the registration of corporations. Alternatively, it may bring to mind countries such as Switzerland or Luxembourg, whose banking laws have traditionally provided for strict secrecy, enabling wealthy individuals to shield their capital and income from the prying eyes of their home countries’ tax authorities.

Wherever they may be and whatever function they serve, tax havens have been the subject of intense scrutiny and criticism in recent years. The United States has been particularly active in this regard. One of the primary tools in its arsenal is the Foreign Account Tax Compliance Act (FATCA) that prohibits foreign financial institutions from aiding and abetting tax evasion by U.S. persons. Foreign financial institutions that run afoul of these regulations are subject to stiff penalties (even, it may be noted, when abiding by the regulations would constitute a violation of local law).

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Bearer-Friend Presents Colorblind Tax Enforcement Today At Leeds

Jeremy Bearer-Friend (George Washington; Google Scholar) presents Colorblind Tax Enforcement, 97 N.Y.U. L. Rev. ___ (2022), at Leeds today, co-hosted by the Centre for Business Law and Practice and the Centre for Criminal Justice Studies (register here).

The United States Internal Revenue Service (“IRS”) has repeatedly taken the position that, because the IRS does not ask taxpayers to identify their race or ethnicity on submitted tax returns, IRS enforcement actions are not affected by taxpayers' race or ethnicity. This claim, which I call “colorblind tax enforcement,” has been made by multiple IRS Commissioners serving in multiple Administrations (both Democratic and Republican). This claim has been made to members of Congress and to members of the press.

In this article, I refute the IRS position that racial bias cannot occur under current IRS practices. I do so by identifying the conditions under which race and ethnicity could determine tax enforcement outcomes under three separate models of racial bias: racial animus, implicit bias, and transmitted bias. I then demonstrate how such conditions can be present across seven distinct tax enforcement settings regardless of whether IRS asks about race or ethnicity. The IRS enforcement settings analyzed include summonses, civil penalty assessments, collection due process hearings, innocent spouse relief, and DOJ referrals.

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Sanchirico: Should A Global Minimum Tax Be Country-By-Country?

Chris William Sanchirico (Penn; Google Scholar), Should a Global Minimum Tax Be Country-by-Country?, 175 Tax Notes Fed. 549 (Apr. 25, 2022):

In this report, Sanchirico questions the consensus view that a country-by-country approach to global minimum tax design is superior to one based on across-country averaging.

Conclusion
This report shows in the context of a simple game theoretic model that a global minimum tax regime that operates on a country-by-country basis is not necessarily superior to one that is based on global averaging — at least not from the perspective of the high-tax jurisdictions spearheading reform.

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Tax Law Review Publishes New Issue

The Tax Law Review has published a new issue (Vol. 74, No. 1 (Fall 2020)):

• Michelle Layser (Illinois; moving to San Diego; Google Scholar), How Place-Based Tax Incentives Can Reduce Geographic Inequality, 74 Tax L. Rev. 1 (2020)
• Ethan Yale (Virginia; Google Scholar) & Gregg Polsky (North Carolina; Google Scholar), Taxing Residential Solar, 74 Tax L. Rev. 69 (2020)

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The Constitutionality And Application Of New York’s Proposed Mark-to-Market Tax

Beckett Cantley (Northeastern) & Geoffrey Dietrich (Cantley Dietrich), The Constitutionality and Application of New York’s Proposed Mark-to-Market Tax, 16 Ohio St. Bus. L.J. __ (2022): 

The state of New York has proposed legislation that would implement a mark-to-market taxation system for its’ billionaire taxpayers. The proposal would tax billionaires on the increase in value that their assets have experienced over the past calendar year, whether or not these assets are sold. The tax would raise significant revenue for the state by eliminating the ability of taxpayers to hold assets until death to receive a “stepped-up” basis. Other policy reasons espoused in support of the tax are that it increases fairness and better reflects actual income. However, there are skeptics of the feasibility and constitutionality of the proposed tax. First, it will be extremely difficult to determine a market value for each asset for purposes of determining the taxpayer’s unrealized appreciation on each asset. Because of this, there will undoubtedly be numerous challenges by billionaire taxpayers to government valuations of the market value of their assets.

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Kim: Taxing Teleworkers

Young Ran (Christine) Kim (Utah; moving to Cardozo; Google Scholar), Taxing Teleworkers, 55 U.C. Davis L. Rev. 1149 (2021):

Since COVID-19 has forced many governments to restrict travel and impose quarantine requirements, telework has become a way of life. The shift towards teleworking is raising tax concerns for workers who work for employers located in another state than where they live. Most source states where these employers are located could not have taxed income of out-of-state teleworkers under the pre-pandemic tax rules. However, several source states have unilaterally extended their sourcing rule on these teleworkers, resulting in unwarranted risk of double taxation — once by the residence state and again by the source state. At this time, there is no uniform guideline by state or federal governments.

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Blue J Predicts With 86% Confidence Debt-Equity Decision In Tribune Media

Benjamin Alarie (Osler Chair in Business Law, University of Toronto; CEO, Blue J Legal) & Kathrin Gardhouse (Senior Legal Research Associate, Blue J Legal), The Debt-Equity Distinction and Tribune Media, 175 Tax Notes Fed. 593 (Apr. 25, 2022):

In this article, Alarie and Gardhouse use the Blue J debt-equity predictor to analyze part of the Tax Court’s recent decision in Tribune Media [v. Commissioner, T.C. Memo. 2021-122 (Oct. 26, 2021)]. ...

Common law debt-equity characterization depends on the synthesis of more than a dozen factual and circumstantial elements. In real-world situations, with so many considerations in play, ambiguity is endemic. The threshold challenge for taxpayers, the IRS, and, ultimately, the courts is to determine the most appropriate characterization for a given financing, all things considered.

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Blank & Glogower: The Tax Information Gap At The Top

Joshua D. Blank (UC-Irvine; Google Scholar) & Ari D. Glogower (Ohio State; Google Scholar), The Tax Information Gap at the Top, 108 Iowa L. Rev. __ (2023):

Tax information reporting is an essential element of tax administration and compliance the United States. When individuals earn wages, accrue interest, or receive Social Security benefits, the Internal Revenue Service almost always knows. In these situations, a third party, such as an employer or a bank, files an information return with both the individual taxpayer and the IRS. Not surprisingly, when income is subject to tax information reporting, tax compliance is extremely high. Despite the power of tax information reporting to maximize the IRS’s ability to collect taxes owed, these rules also contain significant gaps where limited or no information reporting is required. Often the beneficiaries are high-income and wealthy taxpayers (high-end taxpayers) who earn their income in situations where no third party files information reports with the IRS. Meanwhile, most wage earners are subject to tax information reporting by their employers.

This Article offers a new theory for why the U.S. tax information reporting regime treats high-end taxpayers differently from other taxpayers and offers recommendations for closing gaps in the current rules.

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Soled & Thomas: AI, Taxation, And Valuation

Jay A. Soled (Rutgers; Google Scholar) & Kathleen DeLaney Thomas (North Carolina; Google Scholar), AI, Taxation, and Valuation, 108 Iowa L. Rev. __ (2023):

Virtually every tax system relies upon accurate asset valuations. In some cases, this is an easy identification exercise, and the exact fair market value of an asset is readily ascertainable. Often, however, the reverse is true, and ascertaining an asset’s fair market value yields, at best, a numerical range of possible outcomes. Taxpayers commonly capitalize upon this uncertainty in their reporting practices, such that tax compliance lags and the IRS has a difficult time fulfilling its oversight responsibilities. As a by-product of this dynamic, the Treasury suffers.

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Lesson From The Tax Court: Distinguishing Employees From Independent Contractors

Pro Publica has proudly proclaimed that “If You’re Getting a W-2, You’re a Sucker.”  I know lots of workers who would strongly disagree.  For them, being a W-2 worker (a/k/a “employee”) is far more beneficial than their realistic alternative, which is being a 1099 worker (a/k/a “independent contractor”).  The Pro-Publica story was channeling this Brookings Institution study which noted how business owners can often hide their income but workers cannot because their employers rat them out with W-2s.

But most workers have no realistic choice.  Just ask your next Uber or Lyft driver.  For them, as for many others in various industries—from child-care to health-care to landscaping and construction—the choice is not whether or not to hide income.  Their choice is only whether their income gets reported to the IRS on a Form W-2 or a Form 1099.  The upside of being an employee is lower employment taxes and eligibility for unemployment benefits.  The potential downside is no §199A and no ability to deduct unreimbursed job expenses, given the current nastiness codified in §67(g).

And the choice of status is often on the employer.  Employers must decide whether and when to treat their workers as employees or as independent contractors.  Today’s lesson shows how they might be on the hook if they make the wrong classification.  Pediatric Impressions Home Health, Inc. v. Commissioner, T.C. Memo. 2022-35 (Apr. 12, 2022) (Judge Greaves), teaches us how Tax Court distinguishes employees from independent contracts.  It also shows us a potential safe harbor that employers can use to escape the unpaid obligations if it turns out they erroneously classified employees as independent contractors.  Details below the fold.

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The Top Five New Tax Papers

This week's list of the Top 5 Recent Tax Paper Downloads is the same as last week's list, with some reshuffling of the order within the Top 5. The #1 paper is #137 among 16,786 tax papers in all-time downloads:

1. [2,077 Downloads]  Pillar 2: Rule Order, Incentives, and Tax Competition, by Michael Devereux (Oxford; Google Scholar), John Vella (Oxford) & Heydon Wardell-Burrus (Oxford)
2. [866 Downloads]  Amazon and the State Aid Tax Saga, by Leopoldo Parada (Leeds; Google Scholar)
3. [484 Downloads]  How Treasury and the IRS Have Allowed High-Net-Worth Taxpayers to Exploit Stepped-Up Basis on Intergenerational Wealth Transfers, and How They Can Stop It: Answers to Question for the Record, by Daniel Hemel (Chicago; Google Scholar)
4. [317 Downloads]  Taxing Robots, by Rita de la Feria (Leeds; Google Scholar) & Maria Amparo Grau Ruiz (Universidad Complutense de Madrid; Google Scholar)
5. [297 Downloads]  Permanent Establishment and Fixed Establishment in the Context of the Subsidiary and the Digital Economy, by Stoycho Dulevski (University of National and World Economy; Google Scholar)

Weekly SSRN Tax Article Review And Roundup: Speck Reviews Blue J's Use Of Machine Learning To Predict Tax Litigation Results

This week, Sloan Speck (Colorado; Google Scholar) reviews new works by: 

• Benjamin Alarie (Toronto; Google Scholar) & Stefanie Di Giandomenico (Blue J Legal), Timing Is Everything: The Step Transaction Doctrine in GSS Holdings, 174 Tax Notes Fed. 1849 (Mar. 28, 2022)
• Benjamin Alarie (Toronto; Google Scholar) & Christopher Yan (Blue J Legal), Using Machine Learning to Evaluate the Existence of a Trade or Business: Olsen, 174 Tax Notes Fed. 1231 (Feb. 28, 2022)
• Benjamin Alarie (Toronto; Google Scholar) & Bettina Xue Griffin (Blue J Legal), Using Machine Learning to Crack the Tax Code, 174 Tax Notes Fed. 661 (Jan. 31, 2022)

Since 2014, Ben Alarie and his team at Blue J Legal have worked to apply machine learning (ML) principles to the process of tax advising (among other areas of law). Through a series of articles in Tax Notes Federal, Alarie and his coauthors provide a window into their artificial intelligence prediction engine. Their commentary is crucial: big data has arrived in legal and accounting practice, and some degree of transparency may improve tax equity and administration. In addition, these articles yield important and interesting insights about various doctrines in tax law.

In winter 2022, Alarie and his coauthors gave us three short articles: a general review of ML’s potential in tax practice and two applications of Alarie’s ML model to existing controversies.

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Next Week’s Tax Workshop

Friday, May 6: Jeremy Bearer-Friend (George Washington; Google Scholar) presents Colorblind Tax Enforcement, 97 N.Y.U. L. Rev. ___ (2022), at Leeds today, co-hosted with the Centre for Business Law and Practice and the Centre for Criminal Justice Studies. If you would like to attend, please register here. 

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Tax-Loss Harvesting With Cryptocurrencies

Lin William Cong (Cornell; Google Scholar), Wayne R. Landsman (North Carolina; Google Scholar), Edward L. Maydew (North Carolina; Google Scholar) & Daniel Rabetti (Tel Aviv; Google Scholar), Tax-Loss Harvesting with Cryptocurrencies:

We study investors' responses to increasing tax reporting awareness and scrutiny in the crypto markets. Using novel data on retail investors' trading, we document significant taxation effects on investors' behavior and preferences for crypto exchanges. Investors engage in tax-loss harvesting through wash trading and trading new products such as non-fungible tokens, consistent with the motive to minimize taxable events, improve tax reporting quality, and balance portfolio losses. U.S.-based traders engage in more tax-loss harvesting at the end of the year than their international peers. 

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Layser: Overcoming Constitutional (And Political) Barriers To State Place-Based Tax Incentive Reform

Michelle Layser (Illinois; moving to San Diego; Google Scholar), Overcoming Constitutional (And Political) Barriers to State Place-Based Tax Incentive Reform, 170 U. Pa. L. Rev. ___ (2022):

Place-based tax incentives, which are used to promote investment in distressed geographies, have the potential to become an effective tool to fight poverty at the state and local level. However, the incentives that are currently used by state and local governments to advance their community economic development strategies often fail to benefit residents of low-income communities. Ideally, these tax incentives would be reformed by restricting their availability to activities that directly benefit low-income residents of distressed regions within the state, such as by requiring business taxpayers to hire or serve residents of the targeted areas. However, for reasons to be explained in this Article, under current constitutional law frameworks, these proposed reforms would constitute unconstitutional discrimination under the Dormant Commerce Clause—a consequence of decades of Court doctrine that has developed to constrain state tax competition. Successful state place-based tax incentive reform will require Congress to modify the existing constitutional framework to enable these types of reforms. Without such changes, there is a real and imminent risk that constitutional frameworks will continue to evolve in ways that further restrict the use of place-based tax incentives, depriving state and local governments of an important anti-poverty tool.

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Brunson: Constitutional Flat Taxes, Demogrants, And Progressive Income Taxation

Samuel D. Brunson (Loyola-Chicago; Google Scholar), Bargain Basement Progressivity? Constitutional Flat Taxes, Demogrants, and Progressive Income Taxation, 53 Loy. U. Chi. L.J. __ (2022):

State and local governments raise revenue in three primary ways: property, sales, and income taxes. Property and sales taxes tend to impose a higher burden on low-income households. To ensure the fairness and progressivity of their overall revenue system, states need their income tax to be sufficiently progressive.

Four states face an apparently insurmountable barrier to progressive income taxation: their state constitutions mandate that any income tax must have a flat rate, applicable to all taxpayers. Without a constitutional amendment, a difficult process, they cannot adopt marginal rates that increase as income increases.

While the impediment appears insurmountable, however, it can in fact be overcome. Moreover, it may lead these states to adopt a more-progressive income tax. Through the use of a flat-rate income tax with a refundable tax credit—called a “demogrant”—states can enact a flat-rate income tax that is simultaneously remarkably progressive and is more economically efficient than an income tax with progressive marginal rates.

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Saito: Agency Coordination And Opportunity Zones

Blaine G. Saito (Northeastern; Google Scholar), Agency Coordination and Opportunity Zones, 48 Fordham Urb. L.J. 1203 (2021):

The Opportunity Zone (OZ) program, which is designed to provide place-based equity investments into certain low-income communities, has potential upsides and pitfalls. The program is complicated, and it implicates numerous spheres of policy expertise. But currently, it is mostly administered by the Internal Revenue Service (IRS) as a tax program.

This Essay seeks to find a technical-managerial solution to some of the problems of the OZ program, and that is agency coordination. It would have the IRS and the Office of Tax Policy (OTP) work with other agencies with expertise in place-based investment programs to administer the OZ program. It outlines the benefits and potential problems of coordination and discusses what tools could help improve this endeavor. It also proposes that the coordinated effort attempt to engage communities that live in OZs further in guiding the program.

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