Past Moratoria on Tax Guidance and Regulations(?)

By: Sam Brunson

cch_standard_federal_tax_printOn my previous post talking about the the IRS’s announcement that it was putting a moratorium on issuing new regulations and formal guidance, a commenter asked if it was such an odd thing for a new Administration to temporarily pause guidance. After all, who wants to issue guidance before the new Administration’s people are in place and agenda is set, lest the new Administration change its priorities and positions in the coming months?

I didn’t remember any such (formal, at least) pause in 2009, but, when I got home, I decided to look back a few years. I looked at new regulations and revenue rulings in the first month of the Obama, George W. Bush, Clinton, and Reagan presidencies (I didn’t bother with George H.W. Bush, because that was a Republican to Republican switch). Also, because we don’t know how long the current limitations on regulations and other guidance will last, I also expanded my search of revenue rulings for the first three months of the new administrations.[fn1] Continue reading “Past Moratoria on Tax Guidance and Regulations(?)”

The Status of Judicial Anti-Abuse Doctrines if Code Section 7701(o) Were Repealed

As Daniel Hemel points out in a cross-linked post on Whatever Source Derived, if Congress repeals the Affordable Care Act (ACA), it is possible that Code section 7701(o) will go with it. (Section 7701(o) and its accompanying penalty were included in the ACA as a revenue raiser.) This raises the question of what repeal would mean for the economic substance doctrine specifically and for judicial anti-abuse rules more generally. This post makes three main points:

  1. Repeal of Code section 7701(o) is not a good idea. At a minimum, its potential repeal should be considered separately from the ACA, as it has no substantive link to the ACA.
  1. Repeal of the codified economic substance doctrine should not affect other judicial doctrines.
  1. Repeal of Code section 7701(o) would not eliminate the judicially developed economic substance doctrine. Daniel has provided a couple of arguments in support of that view, drawing on statutory-interpretation principles, and I add an argument based on the language of section 7701(o) itself.

First, anti-abuse rules are valuable. They help prevent taxpayers from engaging in artificial transactions designed to produce artificial tax benefits, such as non-economic losses used to offset unrelated income. Some of these transactions may not actually “work” under the technical provisions of the Code, Treasury regulations, or IRS guidance. However, abusive tax shelters typically are structured to take advantage of the literal language of the tax laws. If (and, ideally, only if) technical challenges fail, anti-abuse doctrines help prevent misuse of the tax laws. Continue reading “The Status of Judicial Anti-Abuse Doctrines if Code Section 7701(o) Were Repealed”

When Leaks Drive Tax Law (a.k.a. our new paper!)

Shu-Yi Oei

Diane Ring and I just posted our new article, Leak-Driven Law, on SSRN. I had previously blogged about this paper as part of Leandra Lederman’s 2017 Mini-Symposium on Tax Enforcement and Administration, The abstract is here:

Over the past decade, a number of well-publicized data leaks have revealed the secret offshore holdings of high-net-worth individuals and multinational taxpayers, leading to a sea change in cross-border tax enforcement. Spurred by leaked data, tax authorities have prosecuted offshore tax cheats, attempted to recoup lost revenues, enacted new laws, and signed international agreements that promote “sunshine” and exchange of financial information between countries.

The conventional wisdom is that data leaks enable tax authorities to detect and punish offshore tax evasion more effectively, and that leaks are therefore socially beneficial from an economic welfare perspective. This Article argues, however, that the conventional wisdom is too simplistic. In certain circumstances, leak-driven lawmaking may in fact produce negative social welfare outcomes. Agenda-setting behaviors of leakers and media organizations, inefficiencies in data transmission, suboptimally designed legislation, and unanticipated behavioral responses by enforcement-elastic taxpayers are all factors that may reduce social welfare in the aftermath of a tax leak.

This Article examines the potential welfare outcomes of leak-driven lawmaking and identifies predictable drivers that may affect those outcomes. It provides suggestions and cautions for making tax law, after a leak, in order to best tap into the benefits of leaks while managing their pitfalls.

In this paper, we wanted to explore how leaks of taxpayer data in the offshore context have shaped international tax law and policy, both in the US and other countries. We especially were interested in the possibility that—while leaks might appear useful on the surface from a tax enforcement and informational standpoint—there are unexplored pitfalls and downsides to relying on leaks to direct lawmaking and policy priorities.

In the non-tax world, of course, leaks have suddenly become very salient, in terms of both their usefulness and their dangers. But (non-tax lurkers take note!) tax law has been dealing with leaks of taxpayer information and what they mean for tax enforcement for at least the past ten years. Of course, tax leaks have some distinctive characteristics that make them different from other types of leaks. For example, the tax leaks that are the subject of this paper are usually (though not invariably) leaks of private taxpayer data, rather than leaks about governments from government sources.

We do think that the framework we introduce in our paper for analyzing the upsides and downsides of leak-driven lawmaking can be applied to explore how non-tax leaks and reactions to them may be socially beneficial but could also lead to less than ideal results. In both tax and in other fields, the meta-issue is not just how governments and private actors can use leaked information to sanction bad behaviors, make decisions, or design laws. Rather, the issue is how the actions and responses of leakers, governments, journalists, international organizations and the public work together to create and promote certain outcomes. Once we understand the underlying dynamics, then we can consider how the outcomes they create should be evaluated, supported, or resisted.

If you’re working on leak-related scholarship in either tax or other fields, we’d love to chat.

The (Near) Future of Treasury Regulations

cfrToday’s Tax Notes reports[fn1] that the IRS has announced that it will not release pretty much any new formal guidance (including revenue rulings and revenue procedures) for the foreseeable future.[fn2]

Why not? A confluence of an Executive Order and a January 20 memorandum. The EO, “Reducing Regulation and Controlling Regulatory Cost,” requires that, for every new regulation issued, two existing regulations be eliminated.

The January 20 memorandum further prohibits agencies from sending regulations to the Federal Register until they’ve been reviewed by an agency or department head appointed by Trump. Continue reading “The (Near) Future of Treasury Regulations”

Concluding Thoughts on the 2017 Mini-Symposium on “The Future of Tax Administration and Enforcement”

By: Leandra Lederman

Since January 18, 2017, the Surly Subgroup has hosted a mini-symposium featuring posts by members of the Discussion Group I organized for the Association of American Law Schools (AALS) annual meeting on the topic of The Future of Tax Administration and Enforcement.” Over the course of the mini-symposium, we have seen a wide range of posts, all of which are listed at the end of this post, following my take on the topic.

Specifically, Sam Brunson argued that, in light of the large tax gap and low IRS audit rate, it’s time for tax returns to be public (with information such as Social Security numbers redacted). Roberta Mann also blogged on possible solutions to the tax gap. In part, she points to improving the process for IRS guidance.

Chris Walker also focused on IRS guidance, blogging on “administrative law exceptionalism,” particularly in the context of the application of APA rules to Treasury rulemaking in Altera, a case in which he served as counsel of record for the U.S. Chamber of Commerce as amicus curiae in support of Petitioner-Appellee Altera in the 9th Circuit, and in which I participated in an amicus brief in support of the Commissioner.

Part of what has caused problems for the IRS has been the outrage in 2013 over its treatment of organizations applying for exemption as social welfare organizations under Code section 501(c)(4) despite names suggesting a focus on political activity. Lloyd Mayer’s post focused on the exempt organizations context, pointing to three issues impeding IRS enforcement: (1) unchecked growth in the use of tax-exempt entities; (2) vague facts-and-circumstances tests for qualifying for tax exemption; and (3) shrinking IRS resources, particularly in the exempt organizations area. He also proposed substantive law changes and a more robust enforcement vehicle. Continue reading “Concluding Thoughts on the 2017 Mini-Symposium on “The Future of Tax Administration and Enforcement””

As If It Were A “Tax”

Bobby L. Dexter
Professor, Chapman University, Dale E. Fowler School of Law

A complete and comprehensive discussion of the future of tax administration and enforcement requires, as an initial matter, some level of consensus with respect to the meaning of “tax.” For the most part, commentators referring to the word “tax” are comfortably on the same page, but as NFIB v. Sebelius, 132 S. Ct. 2566 (2012), recently taught us, the question of what does or does not constitute a tax can be contentious enough to make it to the nation’s highest court.  In Sebelius, the U.S. Supreme Court ruled that the penalty imposed on those failing to comply with the individual health care mandate of the Patient Protection and Affordable Care Act (“ObamaCare”) constituted a “tax” within the meaning of Article I, § 8 of the Constitution.  The Court thus confirmed that the notion of a “tax” is far more chameleon than one might think at first glance.  Then again, even if the Court had held otherwise, taxpayers might still have found themselves vulnerable.

Several years ago, section 6305 of the Internal Revenue Code of 1986 (as amended) (hereinafter, the “Code”) was used to allow aggressive pursuit of specific past due child support obligations.  Legislative fiat did the trick. Under that provision, the IRS could collect amounts certified by the Secretary of Health and Human Services “in the same manner, with the same powers, and . . . subject to the same limitations as if such amount were a tax . . . the collection of which would be jeopardized by delay . . .” (emphasis added). Thus, § 6305 not only morphed what many would consider non-tax items into tax status but also allowed the IRS to apply jeopardy assessment and collection measures.  Because pursuit of the revenue using § 6305 was deemed cumbersome even with enhanced collection powers, the new weapon of choice became § 6402.  That provision authorizes the seizure of federal income tax refunds with respect to a host of items including (1) past-due child support obligations; (2) past-due, legally enforceable debt owed to a federal agency (e.g., federally-guaranteed student loans); and (3) past-due, legally-enforceable state income tax obligations.  These provisions ultimately have the potential to substantially complicate “plain vanilla” tax administration and enforcement given that the federal government can serve, in essence, as debt collector for a host of obligations. Even if past due state income tax obligations and past-due child support obligations remain static, one cannot ignore the specter of ever-burgeoning, past-due, federally-guaranteed student debt owed to a federal agency (i.e., the Department of Education). A substantial portion of student debt now rests in the hands of the federal government, the cost of college-level and graduate education is skyrocketing, and student grant funding is under attack.

Some might argue that refund seizure is an extraordinarily efficient collection method given that it is largely electronic and therefore unlikely to result in enhanced administrative burden.  After all, unlike most unsecured creditors, the IRS sitting on a taxpayer refund need not seek out and secure a judgment, petition for a writ of execution, and attempt levy on widely-scattered, fortuitously unencumbered, and rapidly-evaporating assets. But at the end of the day, the measure may backfire. Badly. Although certain innocent spouses impacted by refund seizure under a joint return may enhance administrative burdens by pursuing partial refunds, the more ominous concern regarding administration and enforcement relates to what taxpayers may do in response to an initial seizure. The IRS’s creative display of power is just the first step in a sequential game.  Given their inevitable turn, taxpayers may alter withholdings to ensure that they do not end up in a refund posture or (assuming an initial seizure eliminated the obligation) embrace cheating as a way of “getting back” what was seized previously. Thus, the IRS’s willingness to seize a refund under one set of circumstances may ultimately introduce compliance and enforcement hurdles that were not initially present and may persist for years in the future. The refund intercept program also has potential privacy violation ramifications. A given taxpayer may suffer, for example, the revelation not only that they have a child outside their existing relationship but that they have failed to support the child.  Further, equity concerns present because a refund intercept program may affect only those subject to withholding while sparing those who submit quarterly estimated tax payments, notwithstanding the fact that both taxpayer classes are similarly-situated from an obligation default perspective.

Perhaps tax administrators should stay their hand and let those seeking payment from those with “non-tax” delinquencies pursue other channels. After all, the government may have the power to serve as debt collector, but it need not intervene in every instance, especially when administration and enforcement revenues have long been scarce. Indeed, intervention at the behest of a federal agency (or one of the several states) may ultimately make it more difficult for the IRS to accomplish its central and core mission of collecting revenue due the United States under its tax laws.

For further analysis of these issues, including those rooted in constitutional law, see Bobby L. Dexter, Transfiguration of the Deadbeat Dad and the Greedy Octogenarian:  An Intratextualist Critique of Tax Refund Seizures, 54 U. Kan. L. Rev. 643 (2006).

Is the Emperor Naked? Non-Enforcement of Tax-Exempt Organization Laws

Lloyd Hitoshi Mayer
Professor of Law, Notre Dame Law School

The Donald J. Trump Foundation admits to illegal self-dealing (The Washington Post). The Bill, Hillary & Chelsea Clinton Foundation files amended annual returns to correct numerous reporting errors (Amended Returns Fact Sheet). A white nationalist group avoids filing annual returns for several years, apparently in reliance on a bureaucratic misclassification (The Washington Post). On “Pulpit Freedom Sunday,” thousands of churches violate the prohibition on IRC section 501(c)(3) organizations supporting or opposing candidates (CNN). These and numerous other recent examples of behavior by tax-exempt organizations that clearly violates the applicable tax laws lead to one obvious question: where was the IRS? The growing perception – and sometimes although not always the reality – is that when it comes to the administration and enforcement of those laws there is no one home.

This trend should be of concern not only for tax scholars and policy makers but also for tax-exempt organizations themselves, if for no other reason than increasing instances of individuals and organizations taking advantage of this perceived lack of oversight almost certainly will lead to questions about the wisdom of providing tax and other benefits to such organizations in the first place. While charitable organizations are the most vulnerable in this respect because they enjoy the greatest such benefits and so face the highest public expectations regarding their behavior, commentators have begun to question even the more modest benefits enjoyed by other types of tax-exempt organizations (see, e.g., Philip T. Hackney, What We Talk About When We Talk About Tax Exemption, 33 Virginia Tax Review 115 (2013); David S. Miller, Reforming the Taxation of Exempt Organizations and Their Patrons, 67 The Tax Lawyer 451 (2014)). To understand this trend and therefore how to address it requires understanding the confluence of factors that have lend to its emergence. Continue reading “Is the Emperor Naked? Non-Enforcement of Tax-Exempt Organization Laws”

What Would Happen if the Johnson Amendment Were Repealed?

By Benjamin Leff

Donald Trump recently repeated his campaign promise to “totally destroy” the Johnson Amendment. The Johnson Amendment is that portion of Section 501(c)(3) of the Internal Revenue Code that forbids tax-exempt charities (including most churches) from “interven[ing] in … any political campaign on behalf of (or in opposition to) any candidate for public office.” Only Congress can change the Tax Code, and, as Daniel Hemel recently pointed out, congressional Republicans just re-introduced the Free Speech Fairness Act, a bill to permit some limited campaign-related speech by the leaders of 501(c)(3) organizations, including churches. I’ve written previously in support of this legislation as an “adequate solution” to provide a little extra wiggle room to protect the speech rights of charities without making significant changes to the way campaigns are currently financed. Hemel points out that the Free Speech Fairness Act doesn’t come close to totally destroying the Johnson Amendment, but is more like a “de minimis carveout.”

But, rather than talk about the relatively sensible Free Speech Fairness Act, I want to predict what would happen if Donald Trump actually succeeds in “totally destroying” the Johnson Amendment. In other words, what would happen if Congress simply repealed the portion of section 501(c)(3) quoted above?

Because a charity must be organized and operated primarily for charitable purposes (although the word used in the statute is “exclusively”[1]), and intervening in campaigns is not a charitable purpose, new charities could not be created for the purpose of engaging in campaign speech or making political contributions. But existing charities could divert a significant quantity of their funds to political campaigns if they so chose. The question of how much is hard to answer without new guidance, but it would be plausibly reasonable (though aggressive[2]) for a charity to make 49% of its expenditures in any year as campaign contributions, since that leaves 51% of its activities to satisfy the requirement that it is engaged “primarily” in activities that accomplish its exempt purposes.

How would that change the way campaigns are financed in the US? Well, if people could find charities willing to accept their contributions and then spend them on political contributions, taxpayers could transform political campaign contributions from nondeductible expenditures to tax-deductible charitable contributions. This would work for corporations as well as individuals. The charities would then have to limit their political spending to 49% of their overall spending. The charities best suited for this type of intermediation of campaign spending are large existing public charities.[3] For example, a university, like the one I work for, could choose to make political contributions on behalf of its donors, if it wanted.

If I were involved in fundraising at my university, I would immediately suggest that it create a fund called the Alumni for Kamala Harris for President Fund and the Alumni for Paul Ryan for President Fund (just a guess for 2020). For every tax-deductible contribution of $100 to the fund, $60 would go to the candidate or to an independent PAC that supports the candidate, and $40 would go towards scholarships at the University. There are some legal issues that the University would have to maneuver to make this program work, and there might be some blowback from stakeholders who were upset about the University getting involved in politics, but the program would not be illegal or impossible.   As discussed below, for donors in the 39.6% tax bracket, a tax-deductible contribution of $100 costs about the same to them as a non-tax-deductible contribution of $60, so why not send $40 to scholarships at your alma mater, if it’s free (or, technically, paid for by the government)?

In the 2016 presidential election, total spending by Hilary Clinton, Donald Trump, the Democratic and Republican parties, and all Super PACS was just over $2 billion. There are almost certainly enough public charities in this country that would be tempted to raise funds in the manner described above that all $2 billion could be funneled through them, making all campaign spending tax-deductible for the donor.

So, would that be good or bad? Obviously, it has very little to do with whether churches or their leaders can or cannot endorse candidates from the pulpit. The question is whether it would be good or bad policy to permit all campaign contributions — whether to candidates directly or to independent PACs or political parties — to be made on a tax-deductible basis. Generally, a tax deduction functions like a government subsidy. On the one hand, subsidizing all campaign spending doesn’t seem so bad. Campaigns are important for democracy; why shouldn’t the government subsidize them? Under current law, the playing field is made level by denying tax deduction to everyone who makes a political contribution or spends money to elect a candidate. At first glance, it seems like the playing field would be equally level if everyone gets a tax deduction for similar spending. As long as everyone is treated the same, it seems like a fair system.

But everyone is not treated the same when political campaign contributions and campaign spending is tax deductible. First of all, most political campaign contributions are made by very wealthy taxpayers, and so subsidizing political spending is a subsidy for the wealthiest taxpayers. For example, the conservative Koch brothers were reported to have planned to spend almost 900 million dollars in the 2016 presidential election. The liberal donor Thomas Steyer reportedly spent over 86 million dollars. Even if the government subsidized such spending in an equal way, say 10 cents for every dollar spent, this subsidy would be unfair. The government would magnify the Koch brothers’ voice by 90 million dollars, Steyer’s voice by 8.6 million dollars and most Americans voice by nothing or almost nothing, simply because they make small contributions. Most people would think that even a subsidy that was delivered proportional to spending would probably be bad policy.

But a tax deduction is not proportional to money spent, because our Tax Code is not proportional. Tax deductions (including the deduction for charitable contributions) treat wealthier donors better than less wealthy donors. First, deductions for charitable contributions are only available to taxpayers who “itemize” their deductions. Under the current income tax system, 70 percent of taxpayers do not itemize; instead they take the standard deduction or do not owe any tax. If you take the standard deduction, your taxes remain exactly the same whether you make charitable contributions or not. If campaign contributions could be deducted like charitable contributions, then non-itemizers would not have any tax benefit from making campaign contributions, while itemizers would. Itemizers are disproportionately found among the highest-income taxpayers.

Second, the amount of benefit one receives from a deduction is equal to one’s marginal tax rate. Since tax rates are progressive, that means that higher-income taxpayers get more benefit from deductions than lower-income taxpayers. For example, single taxpayers who have taxable income over $415,050 pay tax at a 39.06% rate on their income that exceeds that threshold. That means that the ability to deduct a political contribution is worth 39.06 cents for every dollar contributed. It is like a federal subsidy of almost 40 percent to wealthy political donors. For single taxpayers (who itemize) with taxable income under $9,275, the comparable subsidy is only 10 cents for every dollar contributed. That’s what tax scholars generally call an “upside down” subsidy.

So, not only is deductibility a government subsidy for political spending that would go disproportionately to wealthy taxpayers, it would go to them in disproportionate amounts, providing a greater subsidy per dollar contributed to wealthier taxpayers than to less wealthy ones. It’s hard to imagine that there are many people who would interpret that dramatic tilt of the playing field in favor of wealthy donors a good thing. Not even Trump could sell a policy like that with a straight face.

[1] See Treas. Reg. 1.501(c)(3)-1(c)(1)(“An organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3).” emphasis added.)

[2] It’s an aggressive position at least in part because the second sentence of Treas. Reg. 1.501(c)(3)-1(c)(a) states, “An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.” A lot of negatives in that sentence, but it appears to interpret the opposite of “primarily” as “an insubstantial amount.” The idea that 49% of an organization’s activities is “an insubstantial part” is an aggressive position, to say the least.

[3] This post has been modified from its original form. It was originally published proposing that donor-advised funds would be the simplest vehicle for making tax-deductible campaign contributions. But, thanks to post-publication feedback about the likelihood that such use of donor-advised funds would still be improper even after a full repeal of the Johnson Amendment, I have changed the proposed vehicle for tax-deductible campaign contributions to existing public charities that are not donor-advised fund hosts.

Newspapers and the Total Destruction of the Johnson Amendment

By Sam Brunson

Yesterday at the National Prayer Breakfast, Donald Trump promised to “get rid of and totally destroy the Johnson Amendment.”

In case you’re unfamiliar with the name “Johnson Amendment” (and I kind of hope you are—it’s a stupid name), that refers to the phrase in section 501(c)(3) that prohibits tax-exempt organizations from endorsing or opposing candidates for office. It was proposed by Senator Lyndon Johnson in 1954, and inserted into the tax code with little fanfare and no legislative history.

There’s a lot that can (and, in fact, has) been said about Trump’s proposal, which follows up on a campaign promise he made, apparently repeatedly. I wouldn’t doubt if we return to it a few times here at Surly. But I just wanted to point out one potential consequence: Continue reading “Newspapers and the Total Destruction of the Johnson Amendment”

Rules and Standards in International Tax Enforcement

Steven Dean
Professor of Law, Brooklyn Law School

The international tax regime has struggled to make the leap to the era of big data.  The internet and other potent digital tools make it easy to accumulate and trade vast hoards of information.  Learning how to harness that data to improve fairness and efficiency by making it just as hard to evade taxes abroad as it is at home has proven more difficult.  Simply put, despite years of sustained effort, the algorithm that can do for international tax enforcement what Über has done for finding a ride remains out of reach.

In pursuit of that algorithm, the international tax regime has abandoned flexible standards in favor of precise rules.  Unfortunately, a rule capable of effortlessly bringing tax cheats to justice has so far proven elusive.  In Neither Rules Nor Standards, 87 Notre Dame L. Rev. 537 (2013), I described the appeal and the limits of the the hunt for algorithms (rules) to replace the standards that have long formed the core of the international tax regime.

Which is better for the international tax regime?  Rules seem to be the obvious answer.  And indeed, since the global financial crisis, nations have embraced rules calling for the supply of information according to precise specifications.  The U.S. FATCA regime calls for foreign banks to supply information about U.S. taxpayers to the I.R.S.  while the OECD’s Common Reporting Standard imposes comprehensive income reporting obligations on a broad network of states.  Each promises to provide tax authorities with extraterritorial tax information they need to crack down on tax cheats. Continue reading “Rules and Standards in International Tax Enforcement”