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Paul L. Caron
Dean
Pepperdine Caruso
School of Law

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  • Kirsch on Alternative Sanctions

    Friday, May 14, 2004

    Michael Kirsch (Notre Dame) has published Alternative Sanctions and the Federal Tax Law: Symbols, Shaming, and Social Norm Management as a Substitute for Effective Tax Policy, 89 Iowa L. Rev. 863 (2004). Here is the abstract:

    On several occasions in the past decade, when confronted with taxpayers taking advantage of the Internal Revenue Code in ways that Congress considered objectionable, Congress responded in an unusual way. Rather than merely modifying the Internal Revenue Code to alter the tax consequences of the taxpayer’s actions, or imposing traditional civil or criminal penalties on the taxpayer, Congress turned to alternative sanctions. For example, in response to United States citizens who renounce citizenship to avoid taxes, Congress enacted public shaming provisions that require publication of the individuals’ names in the Federal Register and modified the federal immigration laws to banish the former citizens from re-entering the United States. Similarly, in response to United States corporations that reincorporate abroad to reduce United States tax liability, Congress enacted legislation purporting to ban the corporation from entering into future government contracts. This Article, relying primarily on the public shaming and immigration-law banishment provisions applicable to individuals who renounce citizenship to avoid taxes, analyzes the alternative sanctions from three perspectives: their instrumental effects, their expressive function in altering social norms, and their role as symbolic legislation. This Article concludes that alternative sanctions, when used to deter or condemn behavior for which the tax code provides a tax benefit, produce significant instrumental, expressive, and symbolic problems. This Article suggests a narrower role for alternative sanctions, as a limited tool of tax enforcement, that might avoid these problems.

  • Yet More on Extreme Makeover = Extreme Taxes

    Friday, May 14, 2004

    Following up on this week’s TaxProf Blog posts (see here and here) on Newsweek’s discussion of the tax consequences of ABC’s plan to help the recipients of home makeovers avoid tax on the value of the improvements by characterizing the items as short term rental payments within the meaning of Code section 280A(g), two Tax Profs report that they use very similar fact patterns in their tax books:

    From Gail Levin Richmond (Nova), Federal Tax Research (Foundation Press, 6th ed. 2002):

    Your client was approached by a movie producer, who wants to film her home. He is interested only in the home’s façade; he will film interior shots at the production company’s studio. The producer offered your client rent for “camping out” on her lawn. Although he believes he will need only two days, he has offered $7,000 for ten days or $12,000 for twenty days. Find any tax provisions concerning the short-term rental of a home. Discuss how these apply to the time periods involved and to renting the façade only. What advice do you give your client?

    From Sam Donaldson (Washington), Federal Income Taxation of Individuals (West, forthcoming 2004):

    On the television show “Trading Spaces,” neighbors agree to switch homes for 48 hours and completely redecorate one room in the other’s house. They are assisted by a professional designer and a carpenter. The designer and the neighbors are limited to a budget of $1,000, furnished by the producers of the show.

    Suppose that Ricky and Lucy Ricardo, a married couple, agree to appear on the show with their neighbors, Fred and Ethel Mertz, also married. Ricky and Lucy remodeled the kitchen in the Mertz home with the assistance of designer Laurie Hickson-Smith. Meanwhile, Fred and Ethel remodeled the living room in the Ricardo home with the idle assistance of designer Doug Wilson. Amy Wynn Pastor served as the carpenter for both projects.

    Because of Laurie’s expert eye and good taste, and because of the Herculean efforts of Ricky and Lucy, the Mertz home increased in value by $5,000. On the other hand, Doug’s awkward sense of style and penchant for clashing colors caused the value of the Ricardo home to increase by only $1,000, the cost of the materials used to make the “improvements.” Without the skills of Amy Wynn, the Ricardo home might have even lost value!

    Assuming that Laurie and Doug both charge their normal customers $10,000 for two full days of advice and assistance, what are the federal income tax consequences to Ricky, Lucy, Fred, and Ethel?

  • Washington University Mini-Course on Conducting Empirical Legal Scholarship

    Thursday, May 13, 2004

    Nancy Staudt (Washington University) is one of the featured faculty at the Mini-Course on Conducting Empirical Legal Scholarship held May 11-13 at Washington University. Other (non-tax) faculty conducting the program are Lee Epstein, Pauline Kim, Andrew Martin, and Katherine Barnes.

  • Guest Blogger Don Leatherman Reports on Affiliated & Related Corporations at ABA Tax Section Meeting

    Thursday, May 13, 2004

    Guest Blogger Don Leatherman (Tennessee) shares his PowerPoint slides of the talk he gave at the Affiliated & Related Corporations panel at the ABA Tax Section May Meeting in Washington, D.C. Here is an overview of the presentation from the first slide:

    • Proposed Legislation

    • 2003-2004 Priority Guidance Plan

    • Section 1504 & Value Fluctuations

    • Final §1.1502-31, Stock Basis After a Group Structure Change

    • Consolidated worthless stock deduction rules

    • Administration of §1.337(d)-2T

    • Other Matters

    • Consolidated §108(b)

  • New Report Says Federal Policies Worsen State Fiscal Problems

    Thursday, May 13, 2004

    The Center on Budget and Policy Priorities has released a report, Passing Down the Deficit: Federal Policies Contribute to the Severity of the State Fiscal Crisis. As the accompanying press release explains:

    Federal policies that impose new costs on states and restrict state revenues have deepened the state fiscal crisis, a new report from the Center on Budget and Policy Priorities finds. The report is the first to provide state-by-state data on the budgetary damage these policies have caused. In all, added costs and lost revenue total $175 billion over fiscal years 2002-2005, or an average of 8.4 percent of total state general fund budgets.

    The report describes four types of federal policies that are harming states:

    Recent federal tax cuts. Some of the federal tax cuts enacted in 2001, 2002, and 2003 are reducing state revenues because of linkages between the federal and state tax codes.

    Federal restrictions on state sales taxing authority. Federal law bars states from taxing access fees for Internet service. Also, two Supreme Court decisions prevent states and localities from collecting sales taxes on most catalog and Internet purchases.

    Unfunded mandates. In areas such as the No Child Left Behind education law, the federal government has imposed new requirements on state and local governments without providing adequate funding.

    Shifting health care costs. In recent decades, some of the cost of caring for low-income elderly and disabled people has shifted from Medicare (which is fully federally funded) to Medicaid (where states pay nearly half of all costs) because Medicaid includes prescription drug coverage but Medicare does not. Under the recent Medicare bill, Medicare will begin providing drug coverage to these individuals in 2006, but states are required to return the bulk of their savings to the federal government.

    The combined cost of these policies — $175 billion over fiscal years 2002-2005 — dwarfs the $20 billion in federal fiscal relief that was enacted in 2003.

    For a 1-page fact sheet, see here. For the full 50-state breakdown, see here.

  • Differences Between House and Senate Tax Bills

    Thursday, May 13, 2004

    Donald Tobin (Ohio State) passed along a very helpful 6-page document given to the House Ways & Means Committee on the differences between the House and Senate versions of the Jumpstart Our Business Strength (JOBS) Act.

  • Guest Blogger Linda Beale Reports on National Taxpayer Advocate Nina Olson’s Speech at ABA Tax Section Meeting

    Thursday, May 13, 2004

    Guest Blogger Linda Beale (Illinois) reports on National Taxpayer Advocate Nina Olson’s speech at the Individual Taxation Committee’s session at the ABA Tax Section May Meeting in Washington, D.C.:

    While in the past the annual report has focused on a number of areas of concern, Olson made clear that her next report will target one single issue as the one most needful of legislative attention—simplification of the tax code. Whether she felt constrained by time limits or assumed that everyone at the session would agree wholeheartedly, she made little effort to draw the subtle distinctions necessary for a substantive discussion of simplification. She merely rode the current wave of ending complexity as we know it (a theme of many other sessions, including Dick Shaw’s annual report to the plenary session).

    In this blogger’s views, the National Taxpayer Advocate should be careful not to provide ammunition for those would argue for reducing taxes in the name of simplification. The problem with an overly simplistic view of the role of complexity in the tax system is that it turns a blind eye to the distinction that really matters—that between the ordinary and the sophisticated taxpayer. The millions of ordinary taxpayers who pay their tax through payroll withholding and take the standard deduction are the only ones worthy of protection from complexity. Much should be done to ensure that they can determine their tax liabilities themselves or find inexpensive help through tax return preparers or tax return software. And, yes, that means that tax items such as the earned income tax credit can and should be simplified and made more readily available to low-income wage earners—after all, that credit is intended to help struggling individuals or families doing their best to earn a living, and they should not have to pay tax return preparers or buy tax return software just to claim the credit.

    On the other hand, the high-income, high-wealth sophisticated taxpayer merits little sympathy. Many of the complications and uncertainties in the tax system belong there—from income phaseouts for tax preferences to various limitations and disallowances on interest deductions, from anti-abuse rules to the roundly criticized alternative minimum tax (assuming that it is amended to do what it was intended to do—target the rich and force them to share the costs of the many benefits they receive from government). Much of this complexity (and accompanying uncertainty) is necessary to prevent abuse of the tax system; in all likelihood, anti-abuse provisions will always be needed to target the schemes that highly paid accountants, lawyers and investment bankers can think up to get the rich out of paying their fair share of taxes. Much of the rest of the complexity is necessary to delineate incentive provisions built into the tax system. Once we accept the use of tax as a purported economic development tool, we have no business expecting simplicity, since each incentive requires definition and scope. Regrettably, even while larding the system with one subsidy after another, this administration (supported by an accommodating Congress) has still used complexity as a key word for its tax-cutting agenda—a stepwise movement towards a flatter rate, consumption tax system that lets investment capital off the hook. The tax bar’s general acquiescence in un-nuanced discussions of simplicity and certainty advances that agenda without the kind of in-depth analysis that is called for.

    Interestingly, a related point was Olson’s concern that the current visible enforcement efforts against a few unscrupulous taxpayers and promoters might discourage other taxpayers’ voluntary compliance. She urged increased emphasis on the work of the National Taxpayer Advocate and the availability of the office to assist taxpayers in working with the IRS. Her point here was not entirely clear—it appeared that she thought extra effort is needed to project the image of the IRS as a friendly taxpayer-helping institution, just to be sure that no one gets too discouraged by seeing the enforcement arm of the government going after KPMG and big tax avoiders, such as Henry Camferdam and others that used the FLIP/OPIS tax shelter schemes promoted to them. Mutterers in the back were heard to comment that the ordinary taxpayer has little opportunity not to comply, since federal income taxes are withheld from wage checks (along with the regressive payroll taxes for Medicare and Social Security). In fact, it could be argued that holding little regard for the voluntary compliance honor system is a problem primarily for wealthy taxpayers who set up offshore credit card schemes, offshore trusts and other gambits to avoid paying their fair share of federal taxes. A sounder premise might be that vigorous IRS enforcement of high-income tax cheaters who have made use of sophisticated and costly tax avoidance assistance will help to encourage greater compliance by all because such enforcement convinces us ordinary taxpayers that the big cheats are not getting away with it while we small fry are forced to pay through wage withholding.

    Finally, Olson focused on the Taxpayer Advocate Service’s advocacy portfolio. In particular, she noted a push to influence the offers-in-compromise process. Her goal is to help taxpayers (in a rough paraphrase) “feel good about being taxpayers in a system that recognizes the hazards caused by the slings and arrows of fate.” This means not treating offers in compromise as an “inventory management problem” but rather as a way to use discretion to alleviate burdens on worthy taxpayers. Olson claimed that the IRS is too mechanistic with offers in compromise, describing the process as use of a formula (the “full pay screen” that looks at whether taxpayers can pay within the “10 plus 5” years permitted by statute) to mechanically determine which taxpayers might be offered a compromise, followed by consideration of special circumstances and economic hardships to determine whether some dispensation should be allowed. Olson asserted that while the IRS has considerable discretion to reduce tax liabilities at this point, it systematically adheres too rigidly to guidelines and thus rejects taxpayer offers that it should accept. When one participant asked how it would be possible for her office (which sees only the worst cases) to determine that these are indeed systemic problems, Olson reiterated her view that the cases that come to her attention, coupled with the vivid complaints of tax practitioners, provide a reliable system perspective.

    By the way, Olson’s primary anecdotal example of a taxpayer whose offer to compromise a tax liability should be accepted was a 75-year old whose income and assets are sufficient to permit payment in full over 15 years but who might die before the full fifteen year payment period has passed. Again, mutterers in the back could be heard to ask why failure to compromise with the 75-year-old is a clear indication of unsympathetic IRS behavior. The 75-year-old may well suffer less if the same liability is extended over 15 years than if the full liability is collapsed into 4 years. There is likely less need to sell house and home, as he or she might have to if the liability were reduced but immediate payment required. Maybe a reverse mortgage can work here, so that current cash is available for living expenses and tax payments. If there is still a tax due at death, the estate should pay it, a method which is admirably unhurtful to the 75-year-old and in fact furthers our concept of fairness by not letting someone off the hook just to benefit their heirs. So what’s the problem?

  • Move Over Madonna: IRS Announces 6-City Summer Tax Forum Tour

    Thursday, May 13, 2004

    The IRS announced today that it will host a series of six Tax Forums this summer to help educate and serve the tax practitioner community. The dates and cities for each 3-day forum are:

    • July 6-8 in Atlantic City, New Jersey

    • July 20-22 in Orlando, Florida

    • August 3-5 in Minneapolis, Minnesota

    • August 17-19 in New Orleans, Louisiana

    • August 31-September 2 in San Antonio, Texas

    • September 14-16 in Las Vegas, Nevada

    The Tax Forums are in their 14th year and drew 17,000 tax professionals last summer. The announcement describes this summers forum’s as follows:

    The agenda for the 2004 Forums includes seminars on the new IRS e-Services program, retirement plans for small businesses, abusive tax avoidance transactions, the proposed revisions to IRS guidance on ethics and professional responsibility, privacy, faster account resolution, tax law changes and compliance initiatives, among others. The Forums will also continue the popular workshops “Applying for Tax-Exempt Status” and “How to Become an Enrolled Agent.” In addition, practitioners will have an opportunity at each Forum to bring their toughest unresolved case or question to IRS representatives for on-site resolution. IRS employees will also be on hand at each Forum to assist interested tax professionals in completing an application to participate in the IRS electronic return filing program.

    The Forums feature a variety of basic and advanced seminars designed to provide the tax professional community with the latest and most complete information on a variety of IRS programs, practices and policies. In addition to receiving updates directly from top IRS executives, the Forums provide practitioners with an opportunity to meet and exchange ideas with other practitioners and to view vendor exhibits to learn about the latest business technologies.

    The cost is $99 for the three-day forum (a fraction of the cost of attending one of Madonna’s 2-hour summer concerts!)

  • Guest Blogger Linda Beale Reports on Banking & Financial Institutions Panel at ABA Tax Section Meeting

    Thursday, May 13, 2004

    Guest Blogger Linda Beale (Illinois) reports on the Banking & Financial Institutions panel at the ABA Tax Section May Meeting in Washington, D.C.:

    The Banking and Financial Institutions panel at the ABA Tax Section meeting discussed the IRS perspective on new developments impacting financial institutions. Phillip Cook (Alston & Bird) moderated a panel of senior counsel members from the IRS Financial Services Industry Office in New York: Vince Guiliano, Ted Leighton, and John Sweeney. In a love-fest between the financial institution members of the tax bar and the IRS, IRS personnel highlighted three key developments in which the IRS has issued or is preparing to issue primarily taxpayer-friendly guidance advocated by financial institution lobbyists: (1) credit card fees, (2) accrual of interest on non-performing loans, and (3) the §475 conformity safe-harbor proposal.

    The guidance on credit card issues is in a new revenue ruling and two new revenue procedures. Revenue Ruling 2004-52 provides that annual credit card fees are not interest for federal tax purposes, on the basis that they do not merely compensate for use of money but relate to all benefits under the terms of the credit card agreement. Therefore, they are not treated as OID and are not subject to the special §1272(a)(6) rules for accounting for OID on debt subject to prepayments. The annual fee is includible under the all-events test, but Revenue Procedure 2004-32 permits ratable inclusion over the period covered by the fee, supporting the financial accounting conformity position advocated by credit card banks. Under Revenue Procedure 2004-33, late fees are interest and a taxpayer may elect to treat late fees as OID subject to the prepayment rules of §1272(a)(6). The revenue procedure provides audit protection in those cases in which a taxpayer adopted that method in self-help accounting for late fees prior to issuance of the revenue procedure. The proper mode of accounting for OID under §1272(a)(6) remains subject to ambiguities—issues include selection of a reasonable prepayment assumption, whether fees are aggregated or treated separately, and whether a billing with additional charges added to a carryover amount should be treated as a reissuance of old debt or whether instead the new charges constitute a new OID debt instrument. The IRS representatives strongly hinted that guidance on these and other issues under §1272(a)(6) may be included in the next business plan. (These issues are also significant for the REMIC industry, in which OID on REMIC regular interests, treated as debt for tax purposes, is subject to the prepayment adjustments required under the §1272(a)(6) formula.)

    The IRS is continuing to consider, at the request of the banking industry, book-tax conformity for non-performing loans. In particular, the goal is to make the rules more taxpayer-friendly for securitizations, where the loans are off-book for regulatory purposes.

    The IRS is also moving forward with its regulation project on mark-to-market valuation of derivatives, which began with the May 2003 release of an ANPRM (Ann. 2003-35) proposing a book-tax conformity safe harbor and has continued with an advance industry resolution (AIR) program on mark-to-market book-tax conformity, both heavily lobbied for by the Securities Industry Association. Ted Leighton praised the efforts and indicated IRS delight with the results of the AIR program to date. Both the IRS and industry representatives argue that the conformity proposal will simplify accounting issues, reduce administrative burdens, and eliminate controversies. (The blogger notes that most rules that yield to the taxpayer the hard work of determining how much taxable income a taxpayer has do eliminate controversies and relieve the IRS of administrative tasks; however, making life easier for taxpayers and the IRS is not necessarily the appropriate benchmark for evaluating new tax rules, especially in the arcane area of derivatives valuation.) There will likely be a Notice of Proposed Rulemaking by June 30. All indications from the meeting are that the Notice will give the industry exactly what it wants.

  • Reynolds on Local Government Revenue-Raising

    Wednesday, May 12, 2004

    Laurie Reynolds (Illinois) has published Taxes, Fees, Assessments, Dues, and the “Get What You Pay For” Model of Local Government, 56 Fla. L. Rev. 373 (2004). Here is part of the Introduction:

    This Article looks at the consumer view of local government from an intra- rather than inter-municipal vantage point. Focusing on revenue raising powers, this Article explores how the “dues mentality” pervades many aspects of local governments’ never-ending quest to raise more money. In particular, this Article evaluates how special assessments, fees, and the formation of business improvement districts have overtaken general taxation as the preeminent revenue raising device. As later Parts will show, the use of these techniques further exacerbates and cements the dues mentality in the minds of the citizenry, as taxpayers become accustomed to finely tuned tax-like charges that are levied in exchange for a growing number of government services. Though local government incentives to resort to these devices may have nothing to do with regionalism, the result is anti-regional nonetheless. Citizens who are repeatedly asked to pay a specific charge or assessment for a new government service are likely to develop the mindset that they are paying for what they get. In turn, this “get what you pay for” mentality may produce widespread opposition to the use of general tax dollars for redistributive purposes and, more fundamentally, taxation efforts in general.

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