TaxProf Blog

Wednesday, May 12, 2004

Daniel Matthews (Thomas Cooley) has posted By George! Costanza Provides Additional Certainty to SCIN Transactions on SSRN. Here is part of the abstract:

Over two decades have passed since the Tax Court’s seminal decision in Estate of Moss v. Commissioner, which held that the value of a bona fide self cancelling installment note (SCIN) is not includible in the gross estate of its holder. Since that time, several commentators have attempted to provide guidance as to when a SCIN will be considered bona fide and will pass potential scrutiny from the Service. Fortunately for estate planners, the Sixth Circuit’s reversal of the Tax Court’s decision in Estate of Costanza v. Commissioner has provided additional guidance and certainty with respect to the use of the SCIN in estate planning. The Estate of Costanza decision is arguably the most important decision involving the estate and gift tax treatment of a SCIN since Estate of Moss….

This article discusses the impact of the Estate of Costanza decision, along with prior authorities, on the use of the SCIN for estate planning purposes. Specifically, the article provides guidelines for when a SCIN will survive scrutiny from the Service in light of the Estate of Costanza decision, especially with respect to an aggressive SCIN transaction involving a seller of advanced age….

Tuesday, May 11, 2004

Steven Bank (UCLA) has posted Tax, Corporate Governance, and Norms on SSRN. Here is the abstract:

This paper examines the use of federal tax provisions to effect changes in state law corporate governance. There is a growing academic controversy over these provisions, fueled in part by their popularity among legislators as a method of addressing the recent spate of corporate scandals. In order to better understand and distinguish between the possible uses of tax as a tool of corporate governance, this paper takes a historical approach by focusing on two measures enacted during the New Deal – the undistributed profits tax in 1936 and the overhaul of the tax-free reorganization provisions in 1934 – and considers why the former was so much more controversial and less sustainable than the latter. While some of the difference can be explained by the different political and economic circumstances surrounding each proposal, this paper argues that the divergence in the degree of opposition can be explained in part by an examination of the extent to which each provision threatened an underlying norm, or longstanding standard, of corporate behavior. The paper goes on to test this norms-based explanation against several recent attempts to enact corporate governance-oriented tax provisions and concludes that it has modern relevance. The implication is that while Congress may use the Tax Code to reinforce existing norms of corporate behavior, it is likely to be less successful when it tries to use the Code to change existing norms or introduce new ones.

Tuesday, May 11, 2004

David Case has published The Tax Court as a Conscientious Objector in Daubert’s War Against Bad Science. Here is part of the Conclusion:

Ten years after Daubert, the Tax Court has not explored the evidentiary and substantive effects of the Supreme Court’s direction that courts must inquire into the logic employed by proposed expert witnesses. Although this has the practical effect of keeping the Tax Court’s decisions relatively well-insulated from disturbance on appeal, it does little to develop any judicial scrutiny of scientific methodologies, and may actually allow relatively flawed methodologies to convince the Service of the veracity of its position or of a taxpayer’s position.

There may be reasons for shunning Daubert analysis and summary judgment at the Tax Court. However, each of these rationales seems to rely on purely ceremonial or symbolic grounds….[T]o spare both the Service and the taxpayer the indignity of a futile trial, and taxpayers as a whole the injustice of taxes calculated by bad science, the Tax Court should pre-screen scientific expert testimony and, if necessary, grant summary judgment if the testimony fails Daubert’s standards for admissibility.

Monday, May 10, 2004

Michelle Arnopol Cecil (Missouri-Columbia) has published Abandonments in Bankruptcy: Unifying Competing Tax and Bankruptcy Policies, 88 Minn. L. Rev. 723 (2004). Here is part of the Introduction:

…As the number of bankruptcy cases rises, the burden on the already overworked bankruptcy courts will continue to mount. In this situation it is imperative that the bankruptcy system operate effectively, which is impossible with so many bankruptcy issues left unanswered. This Article attempts to resolve one such issue: the tax consequences of property abandonments by the bankruptcy trustee.

….For example, if the debtor owns a factory with a fair market value of $450,000 that is encumbered by a nonrecourse mortgage of $500,000, the factory has no value to the debtor’s unsecured creditors; therefore, the trustee will abandon the factory either to the debtor or to the party holding the $500,000 mortgage on it (so long as the mortgage holder has a possessory interest in the factory at the time of the abandonment).

The issue that has perplexed the courts is whether the trustee’s abandonment of the factory should be a taxable event to the bankruptcy estate. For example, if the factory has a basis for tax purposes of $200,000, should the estate be liable for income taxes owed on the $300,000 gain triggered upon the factory’s abandonment, or should the abandonment instead be viewed as a nontaxable transfer, so that the debtor becomes liable for the income taxes due on the $300,000 gain when she later sells or disposes of the factory? This issue is governed by both the Bankruptcy Code and the Tax Code. Although each statute offers some guidance as to whether an abandonment is a taxable transfer, neither statute fully resolves this important issue. Courts have grappled with the issue with no greater success….

This Article not only resolves the issue of whether the trustee’s abandonment of property is a taxable transfer from a strict statutory construction standpoint, but it also attempts to provide a more comprehensive solution to the broader issue of who should bear the burden of the tax imposed on the gain inherent in an asset as of the commencement of a bankruptcy proceeding….