Paul L. Caron
Dean
Pepperdine Caruso
School of Law
Tuesday, June 1, 2004
TaxProf Blog posts over the long holiday weekend:
Saturday
• Tax Prof Spotlight: Darryll Jones
• FBI Enlists IRS in War v. Terrorism
• Germany To End Tax-Free Treatment of Life Insurance
Sunday
• Top 5 Tax Paper Downloads
• Gershon on Teaching Tax Using Socioeconomics
• “The Day After Tomorrow” Takes a Shot at Tax Profs
Monday
• Tax Problems of U.S. Soldiers in Iraq
• Bank Leads Two Tax Colloquia at Tel Aviv University
• Do State Tax Incentives Work?
Tuesday, June 1, 2004
William Bratton (Georgetown) has posted The New Dividend Puzzle on SSRN. Here is part of the abstract:
The dividend puzzle of economic theory asks why firms pay substantial dividends, given the classical tax rate preference for capital gains and deferral of capital gains taxation until realization. A new dividend puzzle arises at the level of practice in the wake of The Jobs and Growth Tax Relief Reconciliation Act of 2003 (the JGTRRA), which aligns tax rates on shareholder capital gains and dividend income at a maximum 15 percent even as it leaves in place the capital gains deferral. The new tax regime puts a difficult question to corporate boards: Whether, assuming payout, dividends hold out relative advantages over stock repurchases as the mode of payment….
The Article concludes that the shift to repurchases should not be read as a governance success story. Since repurchases held out tax benefits for most shareholders prior to the JGTRRA, there was no reason for outside monitors to ask hard questions about flexibility and adverse selection or to inquire further about the motivational effects of stock option valuation. With rate parity, the governance system needs to start the questioning process. The bargain repurchase possibility must be weighed against the adverse selection possibility, with the balance depending on the state of the market. Taxation remains a consideration: Repurchases and capital gains still hold out deferral value for long term, taxpaying shareholders. Finally, special dividends hold out advantages of transparency with the possible spillover of improved executive compensation policy. More generally, the JGTRRA poses a cost-benefit puzzle to be solved firm-by-firm, case-by-case. Unfortunately, the corporate governance system still rubber stamps management payout decisions, and so probably will fail to confront the questions. Governance reform is needed to assure that the payout decision is uncoupled from perverse incentives stemming from stock option compensation and reformulated in light of rate parity. It follows that payout should join management compensation in the emerging regime of governance by independent director committee.
Monday, May 31, 2004
Memorial Day reprise (from TaxProf Blog 5/24/04):
Congress has enacted various tax breaks for members of the U.S. Armed Forces, including section 112 which excludes from income military pay for soldiers serving in combat zones like Iraq. The IRS has a very helpful web site and publication (Publication 3: Armed Forces’ Tax Guide) explaining these tax benefits. Yet a recent GAO Report, Active Duty Military Compensation and Its Tax Treatment (GAO-04-721R), reports that the section 112 income exclusion has adverse tax consequences because of its interaction with other tax benefits, and that the adverse consequences get worse the longer a solder is stationed in a combat zone:
The complex interactions between the combat zone exclusion and certain tax credits (principally the Earned Income Tax Credit and the Additional Child Tax Credit) appear to be creating unintended consequences. Specifically, some low-income-earning service members who serve in a combat zone are worse off for tax purposes, while some higher-income-earning members are better off because they become eligible for a tax credit that is normally targeted to low-income workers.
Our analysis suggests that some of the roughly 430,000 members serving in a combat zone in 2003—between 5,000 and 10,000 members in one-earner households—suffered a net loss of tax benefits…. [T]he number of members losing tax benefits could be larger in 2004 depending on the how many service members are in a combat zone and how long they are there.
Monday, May 31, 2004
Steven Bank (UCLA) will have a busy Memorial Day, as he is leading two tax colloquia at Tel Aviv University:
• The Divident Divide in Anglo-American Corporate Taxation, at the Tax Policy Workshop (organized by Assaf Likhovski & Yoram Margalioth)
• Tax, Corporate Governance, and Norms, at the Legal History Workshop (organized by Assaf Likhovski & Ron Harris)
Monday, May 31, 2004
There is a lot of tax scholarship questioning the long-term effectiveness of state and local tax incentives to attract and keep business. (For some notable examples, see here, here, and here). Recent news reports out of Denver also question the practice. (Thanks to reader Ben Cunningham for the tip.)
Sunday, May 30, 2004
SSRN has resolved its technical problems, and there are three new entries in our weekly list of Top 5 Tax Paper Downloads:
1. Corporate Tax Avoidance and High Powered Incentives by Dhammika Dharmapala (Connecticut – Economics Department) & Mihir Desai (Harvard Business School)
2. The New Dividend Puzzle by William Bratton (Georgetown)
3. Masking Redistribution (or its Absence) by Jonathan Baron (Penn – Wharton) & Edward McCaffery (USC)
4. Evidence of Differing Market Responses to Meeting or Beating Targets Through Tax Expense Management by Cristi Gleason (Iowa – Dep’t of Accounting) & Lillian Mills (Arizona – College of Business & Public Administration)
5. Keeping Two Sets of Books: The Relationship Between Tax & Incentive Transfer Prices by Charles Hyde (Unviersity of Melbourne) & Chongwoo Choe (Australian Graduate School of Management)
Sunday, May 30, 2004
Richard Gershon (Dean, Charleston) has published Teaching Federal Income Taxation Using Socioeconomics, 41 San Diego L. Rev. 401 (2004). Here is the Introduction:
I have very fond memories of sitting around the dining room table at my mother’s house in Atlanta, Georgia, and enjoying Shabbat dinner. My older brother had recently become a physician, much to the delight of my father, who was also a doctor. The two of them would eagerly discuss everything from the development of new medical techniques to the business of their profession. It was in these discussions that I had my first introduction to the applications of socioeconomic theory to tax law. I remember my brother saying that he was going to spend money on something he did not need so that he could take a deduction. Economically, he would have been better off keeping his money and paying his taxes, but his reason for making his decision was that he “did not want the government to have the money.”
Clearly, my brother’s behavior could not have been predicted merely by assessing what was in his best economic interest. Instead, his actions reflected his own beliefs and expectations regarding the nature of the federal tax system. This, in many respects, is a classic example of why it is important to incorporate socioeconomics into the teaching of federal income taxation. Students need to understand that the study of tax is not a study of pure economics, but instead involves many factors. Understanding those factors can better help them to read and apply the Internal Revenue Code (Code) and the Treasury regulations interpreting it. Accordingly, this Article gives examples for using socioeconomic theory to teach taxation.
Sunday, May 30, 2004
I saw The Day After Tomorrow with my 13-year old son. It is one of those movies that is so cheesy that, if you are in the right mood, can be a lot of fun. My favorite line was when Dennis Quaid’s son and others are trying to survive the coming ice age in the New York City Public Library. They need to burn books in the fireplace to generate heat and start quarreling over which books to torch. One character wants to preserve Nietzsche. Another wants to preserve the Gutenberg Bible. But all agree that the tax law books are a good beginning for the bonfire!
Saturday, May 29, 2004
Darryll Jones, Associate Dean and Associate Professor of Law at Pittsburgh, begins his web page with the following quote:
Neophytes, to whatever field of endeavor, invariably seek or receive advice from those who have come before. As a new attorney in the Army–an environment of waning machismo, fortunately–I was the surprised and fortunate recipient of this advice: ‘To be a good attorney, one must become a Renaissance man.’ It struck me years later what the advisor meant. One must stimulate and nurture a broad range of intellectual understanding; law and life are so much more than the application of rule to fact. The law is poetry and science, intuition and objectivity, and only men and women of the Renaissance mind can appreciate, practice and profess its artistic and scientific nuances. Indeed, legal education is the ultimate arts and science curriculum. I might add, in closing, that the study of taxation is the ultimate liberal arts and science course in that most exciting of arts and sciences curricula.
Professor Jones has proven himself to be a true tax Renaissance man in the past year, as he has pioneered two important projects that will have profound effects on the tax community for years to come.
With his colleagues Anthony Infanti and James Flannery, he started the Pittsburgh Tax Review, which recently published its inaugural issue. Tax Profs who have long bemoaned the dearth of specialized tax law reviews should embrace this new outlet for our work. The first issue is quite strong, with these major pieces:
• Richard Kovach,A Seldom Considered Aspect of Tax Fairness and Simplification: The Need for a Coherent Policy Perspective on the Many and Varied Dollar Limitations Contained in the Internal Revenue Code
• Ann Murphy, Campaign Signs and the Collection Plate–Never the Twain Shall Meet?
• Eric Lustig, Who We Are: An Empirical Study of the Tax Professoriate
If first issue is any indication, the Pittsburgh Tax Review is well on its way to accomplishing its mission:
The Mission of the Pittsburgh Tax Review is to provide a forum for the discussion and debate of current issues in the field of tax law. The Tax Review seeks top-rate scholarship from professors, practitioners, judges and other interested persons whose work contributes to the development, understanding and critical analysis of tax law. The Tax Review publishes notes, comments, reviews, essays, and articles concerned with Federal Income Tax, Federal Estate and Gift Tax, Corporate and Partnership Tax, International Tax, and related areas. By providing a forum in which these issues are presented, the Tax Review seeks to develop a greater understanding and appreciation of tax law.
The Pittsburgh Tax Review thus joins the Tax Law Review, Florida Tax Review, Virginia Tax Review, Tax Lawyer, and Houston Business & Tax Review as law review outlets for Tax Prof scholarship. (Editor’s shameless plug: we are delighted that the Pittsburgh Tax Review has agreed to join these other tax law reviews in providing abstracts of forthcoming articles to be published in the Social Science Research Network’s Tax Law & Policy e-journal.)
Professor Jones also published an important new casebook, The Tax Law of Charities and Other Exempt Organizations (West, 2003), with Steven Willis (Florida), David Brennen (Mercer) & Beverly Moran (Vanderbilt). The book is one of only three in this very important and growing area, and their novel multi-media approach is sure to attract professors and students. Here is a description of the book:
This law school text on charities and other exempt organizations uses a modular approach that allows instructors to tailor the presentation to their own style. Each chapter incorporates concise summaries of relevant law, cases, legislative materials, administrative rulings, questions, and planning activities. Part I explores the exempt purpose requirement, the exclusivity and commerciality doctrines and the procedural/organizational requirements for charities. Subjects include restrictions on charitable organizations, private foundations, non-charitable organizations, unrelated business income, modifications to
UBTI, controlled subsidiaries, unrelated debt financed income, and the taxation of member dues. It also reviews the charitable contribution deduction, foreign charities, and cross-border giving.
Each Saturday, TaxProf Blog shines the spotlight on one of the 700+ tax professors in America’s law schools. We hope to help bring the many individual stories of scholarly achievements, teaching innovations, public service, and career moves within the tax professorate to the attention of the broader tax community. Please email me suggestions for future Tax Prof Profiles. For prior Tax Prof Profiles, see here.
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