TaxProf Blog

Wednesday, April 28, 2004

Alvin Lurie has posted That Newtime Religion: Breaking Another False Idol – The COSS on SSRN. Here is the abstract:

And there is nothing new under the sun. Is there a thing whereof it is said: “See, this is new? – it hath been already, In the ages which were before us.”
– Ecclesiastes 1:9-10

So it says in the Bible, but it ain’t necessarily so. It is doubtful that the abusive tax shelters designed in recent years “hath been already,” and no doubt never before have so many been gobbled up by so many taxpayers to avoid so many billions of tax dollars. For a time the Internal Revenue Service seemed overwhelmed by a steady stream of abusive shelters like nothing it had ever seen before, and it was slow to react. But all of a sudden the mills of the gods are not grinding so slowly, and with no sacrifice in the exceeding small grist of their grinders.

Take the case of Ernst & Young. That icon of the business world has been forced to pay the Service $15 million (nondeductible) for alleged violations of the shelter registration and list maintenance requirements, according to a Service press release last July 2nd. One has to believe that the much-publicized compensatory option sale shelter (“COSS” to the initiate) devised by Ernst & Young for the two top executives of Sprint, for estimated tax savings exceeding $100 million, played a big part in this outcome.

It was early last year that the story broke of the startling boardroom doings at Sprint that led to the sudden resignation of its then two top guns, Esrey and LeMay, for having taken advantage of a tax shelter designed by Sprint’s outside auditors, the very same Ernst & Young, presumably with full knowledge and encouragement of the Sprint directors. So one might be forgiven for head-scratching at this sudden outbreak of morality in high places. It sort of reminds one of the retort of Claude Raines, “I’m shocked, shocked,” on being told, as the police inspector in “Casablanca” (the movie), of corruption in his very domain.

One could hardly blame the company executives for yielding to the temptation placed before them by their own company’s accountants to avoid – or at least long defer – the enormous, mega-million dollar tax bill that would otherwise come with the even more enormous paper profits they had potentially enjoyed on the run-up in value of their stock options. While they could not be completely unaware of the potential exposure associated with any tax shelter that promises such wondrous results, presumably they were assured there was nothing illegal about the attempt to reduce tax liability by lawful means (and possibly even reassured by recital of Learned Hand’s famous line, “Any one may so arrange his affairs that his taxes shall be as low as possible”). This option sale device, after all, had been constructed by their own company accountants, one of the nation’s most respected tax powerhouses, and copper-riveted by the tax opinion of an equally prestigious, Dallas-based law firm.

Wednesday, April 28, 2004

Michael Baillif (Ernst & Young) has posted Sales Price Adjustments: The Continuing Conundrum on SSRN. Here is the abstract:

The identification and treatment of sales price adjustments are among the most wide-ranging, and under-analyzed subjects in the tax law. The consequences of such classification can be substantial and far-reaching. Generally speaking, the question of whether sales allowances, rebates, refunds, trade or other discounts, or other inducements to buy (referred to collectively as “sales price adjustments”) are being provided by the seller, will govern the timing, character and treatment by the seller with respect to such adjustments. They also may determine the ability of the seller to recover over time the amount of the transfer through depreciation or amortization deductions. From the perspective of the purchaser, if a sales price adjustment is received, the purchaser would not recognize this amount in current income, but instead would reduce the basis in its newly acquired property or the cost of its assets held in inventory.

The proper parameters of the nature and scope of sales price adjustments have long been a matter of contention between taxpayers and the Service, and have represented a source of substantial confusion. This area is sufficiently broad that a single article cannot do it justice. As a result, this article is devoted to an examination of the sales price adjustment inquiry from the perspective of the seller. This article also considers two other intriguing issues involving incentives from nonsellers: inducements furnished by third parties with a business interest in the transaction, and inducements taking the form of nonshareholder contributions to capital under section 118.