TaxProf Blog

Thursday, May 6, 2004

Guidelines to Tax Practice Third, by the late Frederic G. Corneel of Sullivan & Worcester in Boston (where I got my start), has been posted on SSRN. Here is part of the abstract:

. . . . [T]his paper has two parts. The first part consists of a set of suggested general guidelines. The second part addresses specific problems arising in several areas of tax practice.

The guidelines for each firm will be helpful only if they reflect the particular practice of the firm. The first one, set out below, was drafted for my own firm, where most of the practice is in tax planning for business or personal transactions. However, at least to acknowledge other fields of practice, there follow considerations bearing on guidelines for tax lawyers engaged in criminal tax practice, tax lawyers who are working as corporation counsel and tax lawyers who have been unable to resist the lure (or perhaps lucre) of the Final Four and have become tax lawyers working in accounting firms.

Of course, the basic rules applicable to the conduct of a tax lawyer do not vary, regardless of the lawyer’s specialty or place of employment. But rules of conduct to be useful must reflect the context in which they are to be applied. Thus, both an SEC registration statement and a tax return require the lawyer preparing the document to be honest. But the degree of disclosure and the required certainty as to the correctness of what is stated may be different. Therefore, to be helpful, the guidelines of any firm should seek to address the specific aspects of its practice where problems are likely to arise.

The need for specificity in deciding upon the appropriate application of potentially conflicting rules requires caution in the use of these and any other guidelines. What they provide may be generally true, but in a particular situation quite a different course of conduct may be indicated. Nevertheless, the general guidelines supplemented by the second part of this paper hopefully will help the lawyer using them to have a basic understanding, which is fine as long as the lawyer is clear that in any particular case they do not tell the whole story.

Do notice that these guidelines focus on what should be done and not how far we may deviate from accepted standards without exposing ourselves to penalties, disbarment or malpractice liability. Of course, in practice we will from time to time feel forced to go to the limits of what is permissible. But our teaching should relate to the center of the highway. If what we teach is driving on the edge, the young lawyer will soon wind up in the ditch and perhaps we and our firm with him.

Thursday, May 6, 2004

Gregg Polsky (Minnesota) & Stephen Befort (Minnesota) have posted Employment Discrimination Remedies and Tax Gross Ups on SSRN. Here is part of the abstract:

This article considers whether a successful employment discrimination plaintiff may be entitled, under current law, to receive an augmented award (a gross up) to neutralize certain adverse federal income tax consequences. The question of whether such a gross up is allowed, the resolution of which can have drastic effects on litigants, has received almost no attention from practitioners, judges, and academics. Because of the potentially enormous impact of the alternative minimum tax (AMT) on discrimination lawsuit recoveries, however, the gross up issue is now beginning to appear in reported cases.

The three principal federal anti-discrimination statutes – Title VII, the Age Discrimination in Employment Act (ADEA), and the Americans with Disabilities Act (ADA) – generally confer broad equitable powers on the courts to devise remedies that will make the victims of discrimination whole in economic terms. The Internal Revenue Code (Code), however, sometimes operates to frustrate this make-whole objective by taxing a discrimination award more heavily than the components of the award would have been taxed had the components been earned in due course by the plaintiff. This excess taxation gives rise to what this article calls adverse tax consequences.

A discrimination plaintiff may suffer adverse tax consequences in two distinct ways. First, amounts recovered to compensate for back pay and front pay losses may be subjected to higher income tax rates than if such amounts had been earned as wages in due course. This increase in tax rates is typically due to the fact that the plaintiff’s recovery is in a lump sum; as a result, a portion of the recovery may be subject to marginal rates higher than the plaintiff’s typical marginal rate.

Second, an employment discrimination recovery could implicate the AMT. If so, the AMT may cause the recovery to be effectively taxed at rates significantly higher than the top marginal rate of 35 percent. In fact, in certain cases, the AMT may cause the tax on the recovery to exceed 100 percent – meaning that a victorious plaintiff would owe more in taxes than her recovery. This AMT trap is notoriously absurd as a matter of tax policy and undermines the national policy of encouraging the pursuit of meritorious civil rights claims. Yet, the trap persists, at least in most areas of the country.

The resolution of the gross up issue depends ultimately on whether the federal anti-discrimination remedial provisions permit judges to shift the liability for these adverse tax consequences from the plaintiff – on whom the Internal Revenue Code specifically imposes the liability – to the defendant – whose unlawful conduct necessitated the lawsuit that caused the adverse tax consequences. The potential vehicle for this shift is the broad equitable powers conferred upon courts to fashion relief in order to make victims of discrimination whole. . . .

Wednesday, May 5, 2004

Lillian Mills (University of Arizona – Keller College of Business & Public Admnistration) & Kaye Newberry (University of Arizona – Department of Accounting) have posted Do Foreign Multinationals’ Tax Incentives Influence Their U.S. Income Reporting and Debt Policy? on SSRN. Here is the abstract:

Using a matched sample of financial data on foreign multinationals and confidential income tax return data on U.S. foreign-controlled corporations (FCCs) during 1987-1996, we examine whether the tax incentives of foreign multinationals influence their U.S. tax reporting. We find that foreign multinationals with relatively low average foreign tax rates report less taxable income and use more debt in their FCCs than those with relatively high average foreign tax rates. Our findings provide insights regarding the complex reporting behavior of FCCs and have implications for U.S. tax policy.