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TaxProf Blog

Paul L. Caron
Dean
Pepperdine Caruso
School of Law

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  • Paul Caron

    Schwidetzky: Integrating Subchapters K and S

    Tax Lawyer LogoWalter D. Schwidetzky (Baltimore) has published Integrating Subchapters K and S—Just Do It, 62 Tax Law. 749 (2009). Here is part of the Introduction:

    The Code contains two “pass-through” tax regimes for business entities. One is contained in Subchapter K, which applies to partnerships, the other in Subchapter S, which, unsurprisingly, applies to S corporations. In the main, both Subchapters tax the owners of the entities rather than the entities themselves. Having two pass-through tax regimes creates obvious administrative and other inefficiencies. There was a time when S corporations served a valuable purpose, particularly when taxpayers needed a fairly simple and foolproof pass-through entity that provided a liability shield. But limited liability companies (LLCs), which are usually taxed as partnerships, in most contexts make S corporations obsolete. LLCs too can be fairly simple and foolproof, while providing the superior tax benefits of the partnership provisions of Subchapter K. The advent and popularity of LLCs means that the inefficiency created by two separate pass-through tax regimes can no longer be justified. I propose that a new pass-through regime be created that retains Subchapter K and incorporates the best parts of Subchapter S, with the balance of Subchapter S repealed. Integrating these two pass-through regimes requires that some changes be made to the C corporation provisions of Subchapter C as well. I also make Subchapter K available to most nonpublic C corporations, putting most closely held businesses on a level playing field.

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  • Paul Caron

    Taxes and Health Care Reform

    FactCheck.org, RNC Tax Attack Goes Too Far:

    The Republican National Committee claims in a new Web ad that Democratic health care plans propose taxes on "charities and small businesses. A doctor’s tax. Taxes on your health insurance. Even a tax on medical supplies."

    It’s perfectly true, as the ad says, that "hundreds of billions" in taxes are being proposed – spread over 10 years. But the ad exaggerates and misleads in a number of ways:

    • It makes a downright false claim that ordinary wheelchairs would be among "medical supplies" subject to a proposed tax on manufacturers and importers. That’s not true: Wheelchairs and roughly half of all other medical devices would be exempt. (When we pointed this out, an RNC official said the ad would be modified, however.)
    • It features a proposed tax on medical laboratory services that has already been dropped.
    • The alleged tax on "charities" is actually a proposed limit on federal income tax deductions for charitable gifts by individual taxpayers in the highest brackets, not a tax levied directly on the charities themselves.
    • Similarly, the "small business" tax also refers to a proposed tax increase on individuals making more than $280,000 a year ($350,000 for families), only some of whom own small businesses. The vast majority of small-business owners don’t bring in enough to be affected.
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  • Paul Caron

    Live Webcast of Today’s Volcker Tax Reform Panel Meeting

    A live webcast is available here of today's first meeting of the President's Tax Reform Panel (President's Economic Recovery Advisory Board (PERAB)) at 12:30 p.m. EST.  From Austin Goolsbee:

    The Administration wanted a report on options for tax reform from an outside group so they asked the PERAB to take on the role. The PERAB is comprised of industry and labor representatives, and academic experts and is chaired by Paul Volcker. It is made up of voices from outside the government. The tax subgroup's focus is on gathering as many ideas and options as possible and identifying the pros and cons of each option in three specific areas:

    • Tax code simplification
    • Enforcement
    • Corporate tax reform

    The materials gathered and compiled by the tax group will be presented to the full PERAB board and discussed at a future PERAB meeting. The final report that the board puts forward in December will not be a recommendation of a specific direction in tax policy. It will present a view of the pros and cons of different options. It will be an important step in the process of studying the many ways we can reform and improve our tax code.

    It will not represent the view of the administration. The PERAB is an advisory group representing a wide range of viewpoints from outside the administration and we expect the options it presents to represent a range of views and opinions on tax reform.

    Everyone knows that tax reform is a complicated undertaking. In preparation for this series of public meetings, the members of the tax subgroup have spent the last several months familiarizing themselves with the options already out there, through individual conversations with experts from academia and the tax field, members of Congress and members of the Administration.

    The PERAB and the administration both want the public to provide their insight, ideas and comments to help educate the group and they invite anyone to visit the webpage and submit their own ideas or comment on other proposals. We will also post the tax presentations made by the attendees following the meeting.

    I look forward to providing updates on future meetings and seeing the work on various tax reform options that comes out of the PERAB in December.

  • Paul Caron

    Does IRS Enforcement Make Health Care Mandate a ‘Tax’?

    Following up on my prior posts (Tax Penalties and the Health-Care Bill; Obama's Nontax Tax):

    Wall Street Journal editorial, Rhetorical Tax Evasion:

    The IRS says it will fine or jail you for not paying Obama's mandate levy.

    President Obama's effort to deny that his mandate to buy insurance is a tax has taken another thumping, this time from fellow Democrats in the Senate Finance Committee.

    Chairman Max Baucus's bill includes the so-called individual mandate, along with what he calls a $1,900 "excise tax" if you don't buy health insurance. (It had been as much as $3,800 but Democrats reduced the amount last week to minimize the political sticker shock.) And, lo, it turns out that if you don't pay that tax, the IRS could punish you with a $25,000 fine or up to a year in jail, or both.

    Under questioning last week, Tom Barthold, the chief of staff of the Joint Committee on Taxation, admitted that the individual mandate would become a part of the Internal Revenue Code and that failing to comply "could be criminal, yes, if it were considered an attempt to defraud." Mr. Barthold noted in a follow-up letter that the willful failure to file would be a simple misdemeanor, punishable by the $25,000 fine or jail time under Section 7203.

    So failure to pay the mandate would be enforced like tax evasion, but Mr. Obama still claims it isn't a tax. … Too bad Mr. Obama's rhetorical tax evasion can't be punished by the IRS.

    PolitiFact.com, Conservative Group Says You'll be Imprisoned for Not Having Health Insurance:

    As the Senate Finance Committee took up its version of health care legislation, conservatives ramped up their opposition to a variety of provisions in the bill. One of them touches two hot buttons for conservatives: taxes and the long arm of the federal government.

    On Sept. 29, 2009, a subsidiary of the conservative group Americans for Prosperity sent out an e-mail headlined, "Health Care Mandate Will Require Imprisonment and Fines for Americans Who Can’t Afford to Purchase Insurance or Pay Hefty Government Penalties."

    The group was referring to an exchange in the Senate Finance Committee between Sen. John Ensign, R-Nev., and Joint Committee on Taxation chief of staff Thomas Barthold on Sept. 24, 2009. …

    It is a significant exaggeration to say that the Baucus bill's "health care mandate will require imprisonment and fines for Americans who can’t afford to purchase insurance or pay hefty government penalties." It won't "require imprisonment and fines" — those are simply two of the options for enforcement, and experts say that neither a prison term nor a fine anywhere near that high is likely to be used.

    The official responsible for the Patients First release acknowledges that his headline overstated what the Joint Committee on Taxation chief of staff said, but the release does accurately report the penalties in the body of the text. The notion that one could go to prison for not buying insurance is certainly attention-grabbing, but based on past patterns of prosecution, the likelihood of it happening is extremely small. So while the fear seems to us to be overheated, the possibility exists, so we rate the statement Barely True.

    As I noted earlier, William A. Jacobson (Cornell) was the first on this story:

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  • Paul Caron

    Business Groups Seek Estate Tax Compromise

    Following up on last week's post, The Estate Tax Legislative Battle:  forty-six business associations joined in a letter to Congress yesterday, abandoning their goal of repealing the estate and instead offering their support for Senator Kyl's proposal for a $5 million exemption ($10 million for married couples) and a  35% rate.  President Obama has proposed making this year's law permanent — a $3.5 million exemption ($7 million for married couples) and a 45% rate.

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  • Paul Caron

    Waller: Dynamic Taxation, Private Information and Money

    Christopher J. Waller (University of Notre Dame, Department of Economics) has posted Dynamic Taxation, Private Information and Money on SSRN.  Here is the abstract:

    The objective of this paper is to study optimal fiscal and monetary policy in a dynamic Mirrlees model where the frictions giving rise to money as a medium of exchange are explicitly modeled. The framework is a three period OLG model where agents are born every other period. The young and old trade in perfectly competitive centralized markets. In middle age, agents receive preference shocks and trade amongst them- selves in an anonymous manner. Since preference shocks are private information, in a record-keeping economy, the planner’s constrained allocation trades off efficient risk sharing against production efficiency in the search market. In the absence of record-keeping, the government uses flat money as a substitute for dynamic contracts to induce truthful revelation of preferences. Inflation affects agents’ incentive constraints and so distortionary taxation of money may be needed as part of the optimal policy even if lump-sum taxes are available.

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  • Paul Caron

    ABA Tax Section Webcast Today on Tax-Exempt Bonds & Green Energy

    ABA Tax The ABA Tax Section offers a teleconference and webcast today on Public and Private Municipal Financing of Renewable Energy Projects and Green Expenditures from 1:00 – 2:30 p.m. EST:

    This teleconference will explore the various ways municipal bonds can be utilized in connection with the public and private development of new energy technologies and renewable energy projects. Our panel will identify and discuss the panoply of municipal bonds available to finance the different types of energy facilities including Qualified Energy Conservation Bonds, Qualified School Construction Bonds, Solid Waste Exempt Facility Bonds, Build America Bonds, Recovery Zone Facility Bonds, Cogeneration Exempt Facility Bonds and Recovery Zone Economic Development Bonds etc.

    To be complete, the panel will highlight the other tax incentives which may be considered in combination with municipal financing including the production tax credit, investment tax credit, depreciation and expense deductions, as well as guarantee and grant programs.

    Our panel will then examine and critically discuss the general tax policy themes behind taxable Build America and Recovery Zone Economic Development Bonds and the various types of tax-credit bonds. Hear our panel further address what municipal finance may likely look like in the future. Will Internal Revenue Code Section 103 be gradually replaced by Code Sections 54 and 54AA?

    Speakers:

    • Jeremy A. Spector (Partner, Mintz Levin, New York) (moderator)
    • Gary W. Bornholdt (Counsel, Nixon Peabody, Washington, D.C.)
    • John Buckley (Chief Democratic Tax Counsel, House Ways & Means Committee)
    • John J. Cross, III (Associate Tax Legislative Counsel, Office of Tax Policy, U.S. Department of the Treasury)
    • Laura Ellen Jones (Partner, Hunton & Williams, Richmond)
    • Stanley Langbein (Professor, University of Miami School of Law)
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  • Paul Caron

    Stanford Law Grad-Call Girl Sentenced to Home Confinement Following Guilty Plea in Tax Evasion Case

    I previously blogged (here, here, and here) the case of 2001 Stanford Law Grad Cristina Warthen, who pled guilty in January 2009 in California federal district court to failing to pay taxes on $133,717 she earned as a prostitute in 2003 (United States v. Warthen, No. CR-08-682).  From today's New York Daily News, Law School Grad Turned Call Girl Cristina Warthen Under House Arrest After Cheating the Government:

    Stanford Law School grad turned escort Cristina Warthen, previously Christina Shultz, continues to strut her stuff on the web, despite house arrest after cheating on her taxes. …

    In a plea deal with the government, Warthen has been fitted with an electronic monitoring device while sentenced to one year of home detention, as well as three years' probation. … In a San Jose, Calif., federal court, U.S. District Judge James Ware forced restrictions on Warthen’s escort advertisements while on probation. According to Mercury News, the restriction on advertisements occurred once Assistant U.S. Attorney David Callaway told Ware that the former escort had posted Internet ads claiming "companionship" for $2,000 a night.

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  • Paul Caron

    Chorvat Presents The Effect of the Taxation of Risky Income on Investment Behavior Today at Toronto

    Terrence Chorvat (George Mason) presents The Effect of the Taxation of Risky Income on Investment Behavior at the University of Toronto today as part of the James Hausman Tax Law and Policy Workshop Series.  Here is the abstract:

    Domar and Musgrave’s article concerning the effects of a full-loss-offset income tax has been a staple of the public finance literature since 1944. Their model of investor behavior with a full-loss-offset income tax predicts that if a variety of conditions are met, investors should shift their portfolios to higher-risk assets since the government is sharing the risk. Their model assumes that taxpayers are capable of calculating their risk preference under a risk-altering tax structure. Despite the model’s prominent role in the literature, the extent to which its predictions match actual economic behavior has yet to be directly empirically examined. In this paper, we use a laboratory experiment to test the hypothesis that individuals are willing to accept more risk when faced with a full-lossoffset income tax. Preliminary data in this experiment indicate that a symmetrical income tax has either no affect on portfolio allocation or might reduce an investor’s willingness to take on risk. These results imply that the model’s predictions may be reliant on unreasonable assumptions of human behavior.

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  • Paul Caron

    Tax Court: CPA’s Google Search Does Not Constitute Reasonable Cause to Avoid Penalty

    The Tax Court yesterday held that a Google search did not constitute reasonable cause to excuse a Harvard MBA/ CPA's failure to properly rollover a $150,000 IRA distribution.  Woodard v. Commissioner, T.C. Summ. Op. 2009-150 (Sept. 28, 2009):

    Mr. Woodard asks the Court to accept that his research on the Internet using the Google search engine provided him with reasonable cause for the position he took when filing his 2004 Federal income tax return; to wit, not reporting IRA distributions he commingled with other funds by depositing the distributions into his checking account because he later invested those funds in private mortgages. Mr. Woodard has not provided the Court with any information about the sources of the information he found on the Internet.

    Good-faith reliance on advice from an independent, competent professional as to the tax treatment of an item may meet the reasonable cause requirement. …  Mr. Woodard claims that he relied on information found on unspecified Web sites written by unidentified individuals or organizations. From the record, it is not clear that he questioned the provenance or accuracy of the information he found through the Google search engine.FN.

    FN: We recognize that petitioner had not worked as an accountant for years before filing the 2004 return, but his accounting degree, M.B.A., and C.P.A. training, no matter how stale, undoubtedly taught him what sources could be relied upon as definitive; such as, for example, the Internal Revenue Code and the income tax regulations, both of which are readily available on the Internet.

    Without knowing the sources of the information, it is impossible for the Court to determine that those sources were competent to provide tax advice. Accordingly, we cannot conclude that Mr. Woodard exercised ordinary business care and prudence in selecting and relying upon the information he found on line. As a result, we find that he has not shown reasonable cause for failing to report the distributions from his IRA on the 2004 Federal income tax return.

    For more, see Joe Kristan.

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