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A New Paradigm for IRS Guidance: Ensuring Input and Enhancing Participation
Get PDFCathy is a financially unsophisticated homemaker whose husband engaged in Medicare fraud in 1999, for which he was imprisoned the following year. Cathy had no involvement in the family's financial dealings, legal or otherwise, and was completely unaware of her husband's fraud. As aresult of the Medicare fraud, the couple owed an additional $900,000 in income taxes for the 1999 taxable year, which the IRS attempted to collect from Cathy and her husband in 2003. In the collections packet issued to Cathy, the IRS informed her of the availability of "innocent spouse" relief, whereby a spouse may be relieved from joint and several liability when thespouse meets certain requirements. Cathy, however, declined to elect innocent spouse relief because her incarcerated husband assured her that he would handle the matter. Cathy's husband died without having completed the necessary paperwork, and in 2006 the IRS resumed collection activities against Cathy. Cathy then claimed innocent spouse protection, but a Treasury regulation imposed a two-year deadline on such claims, and the IRS denied her relief.
The New OECD Approach on Profit Allocation: A Step Forward Towards Neutral Treatment of Permanent Establishments and Subsidiaries
Get PDFOne of the vexing questions in tax law is whether or not the legal form should make a difference in taxing companies. This question arises amongst others when companies do business outside their country of residence.Companies may set up a subsidiary. The subsidiary, being a separate legal person, will in most countries be taxed as a resident company in the state of incorporation and/or in the state in which it has its effective management. It will be taxed as if it acts on an arm's length basis with the parent company and other associated companies. In case the taxpayer performs its foreign activities without setting up a subsidiary the income derived from these foreign activities may also be taxed in the country where the activity is performed. Most countries tax non-residents on income derived from sources in their country including income derived from permanent establishments situated in that country. These countries generally use the concept of permanent establishment both in their domestic law and in tax treaties. A permanent establishment generally is defined as a fixed place of business through which the business of an enterprise is wholly or partly carried on. PE-profits are determined on the basis of the separate enterprise theory for allocating profits to permanent establishments: the PE-state taxes the profits which the permanent establishment might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. Important exception is the United States. In its tax treaties the United States uses the PE-concept. However, in its domestic law the United States uses the fixed place of business concept in combination with the "income effectively connected with a trade of business" rule
The Myth of Realization: Mark-to-Market Taxation of Publicly-Traded Securities
Get PDFIn the Greco-Roman world, touching right hands as a greeting demonstrated that one was weaponless and contributed to a more convivial atmosphere. In Medieval Europe, warriors grasped the right hand of their adversaries during a truce as a precaution against treachery. Similarly, when greeting a friend, a knight would extend an ungloved right hand as a token of confidence in the peaceful intentions of his comrade. A handshake is still the traditional form of greeting. It continues to denote friendship, or at the least a lack of hostile intent, even though the circumstances in which it arose may no longer be relevant.Like the handshake, legal rules and concepts ofttimes survive the situations that fostered their adoption. Originally developed as means to contend with certain conditions, they can acquire a life of their own and be applied, out of habit or inertia, even where there is no justification for their existence. However, unlike the innocuous handshake, blindly applying rules and concepts in situations other than those with which they were developed to contend can be counterproductive
Recent Developments in Federal Income Taxation: The Year 2010
Get PDFThis recent developments outline discusses, and provides context to understand the significance of, the most important judicial decisions and administrative rulings and regulations promulgated by the Internal Revenue Service and Treasury Department during the year 2010 — and sometimes a little farther back in time if we find the item particularly humorous or outrageous. Most Treasury Regulations, however, are so complex that they cannot be discussed in detail and, anyway, only a devout masochist would read them all the way through; just the basic topic and fundamental principles are highlighted – unless one of us decides to go nuts and spend several pages writing it up. This is the reason that the outline is getting to be as long as it is. Amendments to the Internal Revenue Code generally are not discussed except to the extent that (1) they are of major significance, (2) they have led to administrative rulings and regulations, (3) they have affected previously issued rulings and regulations otherwise covered by the outline, or (4) they provide Dan and Marty the opportunity to mock our elected representatives; again, sometimes at least one of us goes nuts and writes up the most trivial of legislative changes. The outline focuses primarily on topics of broad general interest (to the three of us, at least) – income tax accounting rules, determination of gross income, allowable deductions, treatment of capital gains and losses, corporate and partnership taxation, exempt organizations, and procedure and penalties. It deals summarily with qualified pension and profit sharing plans, and generally does not deal with international taxation or specialized industries, such as banking, insurance, and financial services. Please read this outline at your own risk; we take no responsibility for any misinformation in it, whether occasioned by our advancing ages or our increasing indifference as to whether we get any particular item right. Any mistakes in this outline are Marty’s responsibility; any political bias or offensive language is Ira’s; and any useful information is Dan’s
Practical Aspects of Implementing Formulary Apportionment in the European Union
Get PDFThe author presented this paper at the 2007 International Tax Symposium held at theUniversity of Florida Levin College of Law Graduate Tax Program.The European Commission is fast approaching its self-imposed deadline to present a legislative measure introducing a consolidated common corporate tax base and formulary apportionment within the European Union in 2008. This deadline represents the culmination of work that began when the Commission released a study in 2001 advocating that the European Union adopt a new method of taxing EU multinational companies that would eliminate the tax obstacles to cross-border investment that undermine the internationalcompetitiveness of EU multinationals.The Commission has concluded that the European Union would not be able to function as a true internal market as long as its multinational enterprises had to contend with up to 27 different sets of company tax rules - one set of rules for each of the 27 Member States. EU business groups generally support the Commission's efforts, noting that a common EU level company tax system would reduce the complexity and uncertainty surrounding corporate taxation in the EU. For example, the trade group Business Europe (formerly UNICE) has indicated that a common consolidated EU corporate tax base is the only way to eliminate the tax obstacles to cross-border business integration in the European Union. EU multinationals could become more competitive and expend fewer resources in complying with Member States tax rules if they could use one set of tax rules to calculate their EU-wide profits
Recent Developments in Federal Income Taxation: The Year 2006
Get PDFThis recent developments outline discusses, and provides context to understand the significance of, the most important judicial decisions and administrative rulings and regulations promulgated by the Internal Revenue Service and Treasury Department during the most recent twelve months — and sometimes a little farther back in time if we find the item particularly humorous or outrageous. Most Treasury Regulations, however, are so complex that they cannot be discussed in detail and, anyway, only a devout masochist would read them all the way through; just the basic topic and fundamental principles are highlighted. Amendments to the Internal Revenue Code generally are not discussed except to the extent that (1) they are of major significance, (2) they have led to administrative rulings and regulations, (3) they have affected previously issued rulings and regulations otherwise covered by the outline, or (4) they provide Marty the opportunity to mock our elected representatives. The outline focuses primarily on topics of broad general interest (to the two of us, at least) – income tax accounting rules, determination of gross income, allowable deductions, treatment of capital gains and losses, corporate and partnership taxation, exempt organizations, and procedure and penalties. It deals summarily with qualified pension and profit sharing plans, and generally does not deal with international taxation or specialized industries, such as banking, insurance, and financial services. Please read this outline at your own risk; we take no responsibility for any misinformation in it, whether occasioned by our advancing ages or our increasing indifference as to whether we get any particular item right. Any mistakes in this outline are Marty’s responsibility; any political bias or offensive language is Ira’s
International Comity and the Foreign Tax Credit: Crediting Nonconforming Taxes
Get PDFThe combination of expanding international trade and climbing corporate income tax rates in the early part of this century required nations to evolve methods for reducing the level of international double taxation. While most countries came to rely upon a variety of techniques, two general approaches emerged to the taxation of the income of residents derived from foreign economic activity. Some countries adopted a territorial based system in which foreign source income is normally exempted from domestic tax. That system generally leaves the taxation of foreign income to the government within whose territory the activity occurs and thus avoids double taxation entirely. Other countries, including the United States, chose to impose their tax on the world-wide income of their individual citizens and residents and domestic corporations. That approach necessitated the development of specific mechanisms to reduce double taxation when the country within whose borders the income had been derived also imposed a tax on that income.The prevailing solution to this source of double taxation is for the residence country to allow its taxpayers to credit taxes paid to foreign jurisdictions against their domestic income tax liability. The extent to which such a foreign tax credit effectively relieves double taxation, however, depends in part upon the adequacy of the description of the foreign taxes that may be credited against the domestic tax liability. If the description is overinclusive, allowing too broad a range of foreign taxes to be credited, the foreign income will be taxed too lightly. Conversely, if the description is under-inclusive, double taxation will not be fully relieved and the foreign source income will be taxed more heavily than domestic income
Another Uneasy Compromise: The Treatment of Hedging in a Realization Income Tax
No full textTax law distinguishes between holding an asset and disposing of it. Dispositions are "realization" events, occasions for taxing accrued appreciation, while holding is not. An owner of an asset who would like to dispose of it may instead hold the asset and hedge. Hedging, like disposing, changes a taxpayer's exposure to risk, but is, in many cases, not a realization event. A taxpayer may hedge an asset by obtaining a derivative financial instrument whose value varies inversely with the value of the asset. Derivative financial instruments thus enable taxpayers to simulate a disposition without current tax. Because hedging is often a close economic substitute for disposing, hedging should arguably be taxed like a disposition. If taxpayers are indifferent between two methods of accomplishing the same result, tax law can create social costs by taxing the two methods differently. Indeed, on January 12, 1996, the Treasury released a proposal that would treat an owner of an appreciated asset as having sold the asset if the person enters into a transaction that offsets exposure to risk in the appreciated asset. Several authors also favor treating hedging as a realization event, while others believe that this would not be a helpful reform.This article explores the conceptual and practical foundations and limits of the economic substitute argument for taxing hedging like a disposition. Within the context of an income tax, reformations of the realization requirement to apply to hedges might well accomplish little improvement in the efficiency and equity of the tax system because the realization requirement itself is a departure from an ideal income tax. Although treating hedging as a realization event might reduce transaction costs associated with hedges, it would encourage taxpayers to engage in more complicated and expensive transactions to avoid the new realization rule and would increase the extent to which taxpayers are locked into investments that they would prefer to sell. As to equity, the current ability to hedge without tax undermines the tax on capital. But, so too does the ability to hold without tax, and this undermines the equity argument for taxing hedging. By exposing the inevitable formality of the realization requirement, this article supports examination of a broader reform that would apply accrual taxation to marketable securities
Rethinking Section 2702
No full textIn 1990, Congress added chapter 14 to the Code to address several gift and estate tax avoidance techniques that flourished under prior law. In general, those avoidance techniques involved fragmenting beneficial ownership into separate interests to facilitate transferring the underlying property in several stages. A donor utilizing one of these techniques initially transferred one interest while retaining another interest in the same property. Eventually, the interest retained in the initial transfer lapsed or was disposed of in a subsequent transfer. Especially where the underlying property was held in a closely-held business entity or family trust, the respective interests could be tailored to shift value from donor to donee in ways that proved extremely difficult to detect or measure. Chapter 14 responds by adopting special valuation rules for certain types of transactions to ensure that such value shifts are included in the transfer tax base.Section 2702 of the Code applies to split-interest arrangements involving successive beneficial interests representing present and future rights to possess or enjoy the underlying property. When a donor transfers one interest to a family member while retaining another interest, the special valuation rules of section 2702 assign a value of zero to the retained interest unless it meets various statutory requirements. Since the value of the transferred interest is determined by subtracting the value of the retained interest from the value of the underlying property, section 2702 produces a correspondingly high value for the transferred interest, which is reflected in the donor's gift tax base.For example, a parent who gratuitously transfers a remainder to a child while retaining an income interest for a limited term makes a completed gift of only the remainder. If the special valuation rules assign a zero value to the income interest, the donor makes a taxable gift of the full value of the underlying property. If the parent subsequently disposes of the retained interest in a transfer that attracts a gift or estate tax, a problem of double taxation may arise. The section 2702 regulations address this problem by providing a corrective adjustment at the time of the subsequent transfer
Interpreting Tax Legislation: The Role of Purpose
No full textThis paper was delivered in abbreviated form at the January 1995 meeting of the American Association of Law Schools, Tax Section.Copyright © 1995 by Deborah A. Geier"Sex Illegal in Missouri? Perhaps." (I knew that would get your attention.) That was the headline of an article in the Cleveland Plain Dealer in November 1994. The article described a Missouri statute enacted the preceding August that, if read literally, outlaws all sex in Missouri. One of the legislators is quoted in the article as saying that "[n]o one is going to be prosecuted for having normal sex," a statement I don't dare touch.The connection that this newspaper article has with the topic I discuss here is that tax law has a rich history of nonliteral interpretation in order to avoid results that one person or another has considered to be inconsistent with the purpose of the statute as a whole. This tradition is illustrated by the common law doctrines variously named substance over form, sham transaction, step transaction, business purpose, and assignment of income. In other instances, however, we have an extremely form-conscious approach, such as the approach to bootstrap acquisitions in the Zenz v. Quinlivan context. How do we make sense of it all?Interest in statutory interpretation has been renewed over the last decade, probably prompted-at least in part-by the confluence of two events that have nothing to do with tax law: the elevation to the Supreme Court of Antonin Scalia (whose literal textualist approach to statutory language is now embedded in the Court's opinions) and the attention paid to literature theorists, the so-called deconstructionists, who seized upon the notion that language is indeterminate. All of a sudden language and its interpretation were once again center stage after a long hiatus during which the theory behind the language dominated academic discourse