By Sam Brunson
On Friday, the Western District of Wisconsin ruled (again) on the constitutionality of the section 107(2) rental allowance for “ministers of the gospel.”[fn1] The litigation between the Freedom From Religion Foundation and the IRS has been going on for a long time—I first blogged about it in 2013—so I’m not going to spend a lot of space here discussing the specifics of the case. If you want to look at what’s been going on, you can check out this post and the posts I’ve linked to in it.[fn2] Long story short, this is the second time the court has ruled the rental allowance is unconstitutional. The first time, the Seventh Circuit reversed on the grounds that the plaintiffs had never tried to claim a tax-free rental allowance, so they had no standing. This time, they did claim a refund, which the IRS refused, the court found standing, and, in a well-written and extremely persuasive opinion, it again found section 107(2) unconstitutional.
Although the court declared that section 107(2) violated the Establishment Clause, it didn’t order a remedy. The opinion explains that in the first round, all of the parties assumed that the only relief available was to declare the provision unconstitutional and enjoin its enforcement. This time, though, the Freedom From Religion Foundation suggests that there may be two other remedies available. The first is to refund a portion of plaintiffs’ taxes and order the IRS to “extend benefits under the statute to those excluded.” The second is to declare section 107(1) (that is, the in-kind provision of tax-free housing to “ministers of the gospel”) also unconstitutional. Continue reading “Remedies and the Parsonage Allowance”
By: Leandra Lederman
Susan Morse and Stephen Shay have blogged today on Procedurally Taxing about the Ninth’s Circuit oral argument tomorrow in Altera Corp. v. Commissioner, as has Dan Shaviro on his blog, Start Making Sense. Altera is the transfer pricing and administrative law case involving the Treasury’s cost-sharing agreement regulation. The Tax Court invalidated the regulation under the Administrative Procedure Act, as arbitrary and capricious. That is because the Tax Court accepted the taxpayer’s argument that it need not share stock-based compensation costs under a qualified cost-sharing agreement because arm’s length parties would not do so. The Tax Court found that Treasury had inadequately addressed evidence in the notice-and-comment process that parties not under common control did not share stock-based compensation costs, although Treasury explained in the Preamble to the regulation that cost-sharing agreements between uncontrolled parties are not sufficiently comparable to those in controlled-party transactions.
Altera raises an important administrative law question about what is required of Treasury for its regulations to be valid. Susie and Steve spearheaded an amicus brief in the Ninth Circuit in favor of the Commissioner, in which I joined, along with Dick Harvey, Ruth Mason, and Bret Wells. An amicus brief prepared by another group of professors also supports the Commissioner. There are also amicus briefs by business groups on the other side. See Susie and Steve’s blog post for more detail. And for prior coverage on the Surly Subgroup, see this post on our amicus brief, explaining why the Ninth Circuit should reverse the Tax Court’s decision invalidating the regulation.
By: Philip Hackney
The Treasury Inspector General for Tax Administration (TIGTA) just issued a new report four years and five months after rebuking the IRS for using “inappropriate” criteria to select applications for tax exempt status for scrutiny. In the first report, TIGTA rebuked the IRS for pulling the applications of conservative leaning organizations for greater scrutiny.
This time it considers the fact that the IRS over a period of 10 years used liberal leaning names such as ACORN, Emerge, and Progressive as criteria for pulling applications for greater scrutiny. This resulted in the IRS applying greater scrutiny to these organizations. Some might say the IRS targeted these organizations. Those organizations appear to have faced long wait times as well, and sometimes some questions of limited merit.
I write this piece to make two points: (1) had this information been in the initial report, I don’t think we would have had the “scandal” that shook the IRS and the political world of the time; and (2) the TIGTA report built its primary claim on a garbled faux legal postulate. The original report did terrible damage to the IRS and individuals by failing on both of these fronts. Continue reading “IRS ‘Targeted’ Liberal Organizations and After All These Years TIGTA is Still Wrong”
By: Leandra Lederman
It is well known that the IRS was accused in 2013 of targeting Tea Party and other conservative groups for delays in their 501(c)(4) applications for tax-exempt status. TIGTA’s May 2013 report (and Lois Lerner’s statements at an ABA Tax Section meeting a few days earlier) launched the controversy, which harmed the IRS and a number of its employees. (Cf. my earlier Surly post, “Don’t Impeach IRS Commissioner Koskinen.”)
In 2016, I published an article, “IRS Reform: Politics As Usual?,” analyzing the facts underlying these accusations and the law applicable to the IRS’s determination of tax-exempt status. I argued that the facts showed that the IRS was not motivated by partisan politics. Rather, what happened was that IRS employees included a keyword approach in its efforts to triage the large volume of applications for tax-exempt status it was receiving. Its “Be On the Lookout” (BOLO) list of words was designed to help it identify for further scrutiny those organizations that were engaged in more political activity than was permitted under section 501(c)(4), which, generally speaking gants exempt status to organizations “for the promotion of social welfare.” As I describe in that article, the IRS tried but failed to get ahead of a brewing political controversy on this. There was evidence even in the 2010 IRS PowerPoint highlighting types of groups applying for a determination of exempt status under 501(c)(4) that the IRS had both Tea Party and progressive political organizations on its radar. But the news was full of stories of the IRS supposedly targeting conservative tax-exempt organizations.
The Washington Post has reported in an article titled Liberal groups got IRS scrutiny, too, inspector general suggests, that TIGTA will be issuing a new report finding that the IRS also used keywords to try to identify progressive groups engaging in too much political activity to qualify for the tax exemption under 501(c)(4) they were applying Continue reading “The Real IRS Scandal”
By Sam Brunson
Last Friday the District Court for the Western District of Texas issued a decision in Chamber of Commerce v. IRS. In its decision, the court held that the IRS violated the Administrative Procedure Act in issuing Treas. Reg. § 1.7874-8T. The most interesting part of the case was that the Chamber got past the standing and Anti-Injunction Act hurdles; the substantive decision was that Congress didn’t eliminate the notice-and-comment requirement by expressly permitting time-limited temporary regulations. For a great substantive discussion of the case, take a look at Andy Grewal’s post on Notice & Comment.
The question on everybody’s mind now is, will the government appeal? On the one hand, as Andy explains, the court’s opinion is fairly summary; it may be right that the Anti-Injunction Act doesn’t bar the suit here, but it hasn’t done the work to make the holding bullet-proof.
On the other hand, the IRS takes a risk appealing to the Fifth Circuit. I’m not a close court-watcher, but I’ve heard talk that the Fifth Circuit is less than totally favorable to the IRS. Continue reading “Appealing Chamber of Commerce v. IRS?”
Shu Yi Oei
Boston College Law School’s Regulation and Markets workshop series continues today. Professor Rory Van Loo (BU Law) will present “Making Innovation More Competitive: The Case of FinTech.”
This Article examines recent financial technology (“fintech”) developments to diagnose the federal regulatory architecture surrounding innovation. Startups offer artificially intelligent financial assistants, touchless payments, and other potentially game-changing products for individuals. Yet unlike more lightly regulated industries such as retail goods, in consumer finance barriers to entry have insulated the largest businesses from competition. Regulatory insulation helps explain why too big to fail banks have become bigger, U.S. innovation has lagged that of foreign countries, and consumers pay higher prices.
Taking an institutional lens to this problem reveals an overlooked shortcoming in financial regulation: The organizational design of the administrative agencies responsible for enforcing competition. The current framework was built in the wake of financial instability and consumer protection crises, and its organizational design reflects those priorities. Competition enforcement for consumer finance is spread across five entities, including the Department of Justice and the Federal Reserve, each of which focuses on other industries or missions. In particular, agencies whose primary goal is to prevent banks from failing have insufficient incentive to ensure those same banks face competition. As a result, no regulator is optimally structured either to develop licenses suitable for startups or to address banks’ anticompetitive conduct.
The stakes of getting innovation competition right are increasing. Effective competition enforcement could enable new entrants to reduce the size of the largest banks—providing a partial market solution to taxpayer bailouts and to a major economic stability threat. It would also force U.S. banks to prepare for an increasingly borderless financial world in which virtual currencies bypass regulators. Inept competition enforcement could bring opposite results. As Google, Microsoft, and Facebook have shown, technology firms tend to capture higher market shares than those in other industries, often well over 60 percent. If a large bank were to attain similar shares, it could destabilize the financial system. Reallocating competition authority to a motivated financial agency would better position regulators to safeguard the future of finance.
If you’re an academic in the Boston area, please feel free to join us. You can send me email for more information.
By: Diane Ring
Today, the Guardian is reporting that big-four accounting firm Deloitte suffered a hack back in March, 2017. The underlying attack may have originated in the fall of 2016 and may have allowed access to Deloitte systems for several months.
Deloitte itself is not unfamiliar with cybersecurity. As stated on its website, among the services that Deloitte offers clients is Cyber Risk. However, being a victim of a hack provides a new perspective. At this point, details are scarce on exactly which clients have been affected and what specific information may have been accessed, but it has been reported that “confidential emails and plans of some of its blue-chip clients” may have been compromised. This doesn’t sound good. But it is also no surprise.
Leaks and hacks can target a wide variety of data including business plans, mergers and acquisitions, scientific developments, business forecasts, individual identities, and government records. In recent years, tax-related information has proven especially attractive to leakers and hackers. As my co-author, Shu-Yi Oei and I explored in our recent article, Leak-Drive Law studying tax leaks that have occurred over the past 10 years, tax information can be valuable and their release by leakers can have powerful impacts. Moreover, as the tax community has embraced increased reporting and transparency to the government, the number of caches of well-organized data held by corporations, tax advisers and governments increases. Such caches may be magnets for those seeking to hack into it or leak it.
As we continue to move forward in this new world, what do we know? Continue reading “Tax Leaks: The New Normal?”
By: Leandra Lederman
A hot topic among professors at the recent ABA Tax Section meeting in Austin was the reduction in travel support for academics scheduled to take effect with the upcoming meeting in San Diego. As Prof. Bryan Camp wrote on TaxProf blog, The background is that, for years, and through the most recent meeting, full-time professors who have a leadership role in the section (Chair or Vice-Chair of a committee, or higher positions) have received a travel subsidy. The subsidy consists of $100/night toward actual hotel expenses, reimbursement of coach airfare (up to a mileage-based cap*), and $10 towards local transportation. Full-time professors speaking on panels who are not in leadership have also long received a travel subsidy, which I believe is the same as for professors in leadership, except without the $100/night towards hotel room cost. The Tax Section recently decided to eliminate the subsidy for academics, except for those who meet the Section’s definition of “young lawyer,” which has been reported as under age 40 or less than 5 years in practice. (I’m not sure how the “less than 5 years in practice” works, but I imagine it refers to something like bar membership, so that someone like me, who practiced for less than 5 years before entering academia in 1994, would not qualify.)
What’s so sad about this decision is that Tax Section meeting attendance by academics is likely to drop off markedly, although academics add a lot to the Section, as discussed further below. The Teaching Taxation Committee will suffer significantly, and so will other committees with many professors in leadership. It will also be harder to get faculty to speak on panels. There are several factors that will drive this effect:
- Law school budgets, and notably travel budgets, have been cut significantly in the wake of student application declines nationally that began in about 2011. My school continues to be generous, but I have heard from so many professors I have lost count about reduced, often dramatically reduced, annual travel budgets for faculty–budgets that may not support more than one or two conferences a year, for example. Continue reading “Analysis of the ABA Tax Section’s Reduced Travel Support for Academics”
By: Diane Ring
Complaints regarding the international tax system’s ability to handle the digital economy (think Google, Amazon, and a myriad of online service providers) are now ubiquitous. The heart of the problem is two-fold: (1) technology allows these corporations to effectively conduct business in a country without a physical presence there, and (2) much of these businesses’ value derives from intangibles whose value can be difficult to document.
The first reality limits a host country’s ability, under current law, to assert jurisdiction to tax the businesses. The second means that for core transactions by these businesses, such as licensing intangibles to related parties, it can be very difficult for the tax authorities to guarantee that the transactions are at arm’s length prices (and not shifting profit into low tax jurisdictions). The topic is pervasive enough to have merited its own Action Item in the ongoing OECD BEPS Project (Base Erosion and Profit Shifting).
However, a real, coordinated global response has been much harder to secure. This week, the European Commission (EC) made its most recent foray into the debate with a Communication from the Commission to the European Parliament and the Council. But the EC was not just talking to European Union (EU) bodies; it was directly speaking to the OECD and EU member states. What exactly is the EC’s goal with this Communication?
Bottom line the EC seems to have several intersecting objectives: (1) clarify the problem, (2) identify and prod global actors, (3) delineate proper approaches, and (4) warn about the implications of nonaction. Continue reading “European Commission Prods OECD, EU, and Members States on Digital Taxation: An Analysis”
Last Thursday, the House passed an appropriations bill by a vote of 211 to 198. At this point, it’s anybody’s guess how much of the appropriations bill will survive the Senate, but, just in case, it’s worth taking a look at it. And, it turns out, the House really wants to use the appropriations bill to regulate the IRS. Some of the provisions strike me as warranted. Some innocuous. Some strike me as bizarre, payback, perhaps, for long-held grudges. And some strike me as downright insidious. In this post I’m going to focus on the last two categories because frankly, they’re more fun to write about.
The provisions that regulate IRS behavior can be found in sections 101-116 of the appropriations bill. And what provisions are bizarre payback or downright insidious? Continue reading “FY 2018 Appropriations Bill and the IRS”