Updates on the Williams/ETE Merger

By: David J. Herzig

On Saturday, I posted about a merger gone bad that I thought only a couple partnership tax people would find interesting.

Essentially, a $38 Billion merger was torpedoed because neither, Latham, Morgan Lewis nor Gibson Dunn could conclude that the merger qualified as tax-free under 721.[1] The fight between the the tax attorneys was whether the transaction was truly a partnership formation eligible under 721 with a 731 distribution or if the transaction was a disguised sale under the anti-Otey regulations (Treas. Reg. § 1.707-3).[2] Chancery Court Vice Chancellor Sam Glasscock [http://courts.delaware.gov/opinions/list.aspx?ag=court%20of%20chancery%5] ruled, since there was enough uncertainty that the proposed transaction could not be eligible for 721 treatment under a should opinion standard, Energy Transfer Equity (ETE) could back out of the deal. Williams stated that they will appeal.

I honestly thought no one would care about the post. But, it looks like people care, so I will try to keep up with the case and post updates here. I actually have some other thoughts on the transaction that I will post as they become more developed.

To some of the updates, here is a link to a letter to the shareholders of the Williams Continue reading “Updates on the Williams/ETE Merger” →

The EU, Robots, and Star Trek

By Diane Ring

Even in the midst of great turmoil surrounding the Brexit vote, I was intrigued by recent reports that the EU is contemplating taxing robots on their “labor.” My initial reaction was that this focus on “sophisticated autonomous” robotic forms was Star Trek meets employment taxes, reminiscent of an episode in which the ship’s android officer, Data, asserts and argues for status as a sentient being rather than a piece of shipboard machinery to be disposed of at will. See generally Episode 9, Season 2 (“The Measure of a Man”) of Star Trek: The Next Generation.

While my sci-fi vision of EU legislation was enticing, it turns out that the motivations for this proposal were grounded in much more immediate concerns . . . Continue reading “The EU, Robots, and Star Trek” →

State Tax Reform Amidst Cajun Sausage Making

Steven Sheffrin
Professor of Economics & Director of the Murphy Institute, Tulane University

It was not quite Cajun boudin being prepared in Baton Rouge this winter and spring, but the sausage being concocted in the Louisiana Legislature was equally spicy. With low oil prices and years of “creative” budgets under Governor Bobby Jindal, the new Governor, John Bel Edwards, and the Legislature faced an initial budget shortfall of roughly 16 percent of the state general fund for the next fiscal year. Three separate legislative sessions later, they did reach a balanced budget, although with less revenue than the Governor had wanted. The revenue raisers included a dizzying array of sales tax changes that only temporarily limited exemptions, temporary limits on the refundability of business credits, and various other “haircuts” for business. Not exactly the purest of tax reforms.

But buried in this avalanche of legislation were some serious reforms of the Louisiana corporate tax along the lines that my colleagues and I had recommended to the Legislature last year.

Continue reading “State Tax Reform Amidst Cajun Sausage Making” →

Tax Lawyers Kill $38 Billion Merger

By: David J. Herzig

I remember one of my first days at GT we were advising on a corporate merger. At the end of the process (of course), the M&A group asked tax to sign off on the deal. Everything was done and this was supposed to be a rubber stamp. Well, as you can guess by now, the tax consequences of the deal as structure were disastrous and the whole deal had to be restructured. I remember vividly the corporate lawyers saying as they walked out the door, this is why we never ask tax anything!

Today, a judge killed the proposed $38 billion merger between Energy Transfer Equity (“ETE”) and the Williams Companies. Chancery Court Vice Chancellor Sam Glasscock ruled that ETE could back out of the deal because of taxes. [UPDATE: The link is not consistently working so here is the web link to the court: http://courts.delaware.gov/opinions/list.aspx?ag=court%20of%20chancery%5D Latham & Watkins, actually, tax lawyers at three top firms (L&W, Gibson Dunn and Morgan Lewis and one law professor) could not opine that the deal was tax neutral under 721 despite one law professor and Cravath saying the deal worked. This opinion is a rather big deal for M&A lawyers. Usually, conditions precedent like this won’t allow one side to back out of a transaction.

This is a tax blog not a M&A blog, so, I thought I could show how a $38 billion deal was structured and some lessons that could be learned by examining the deal post-mortem. The post is rather long but I hope super interesting to partnership tax people.

As a total aside, the tax side sounds to me like cover. The $6B payout to Williams shareholders as part of the deal was bridge financing. This bridge financing dried up when the value of the assets dropped to about half after the agreement because of a drop in energy prices. From the opinion, “In light of its obligation to deliver $6.05 billion in cash, the Partnership and its Chairman Kelcy Warren have become increasingly troubled with its potential overall debt levels.” But failure to conduct a proper thought experiment regarding the guaranteed payment by the tax lawyers created the controversy.

According to the ruling, “The Proposed Transaction is an unusual structure, accommodating Williams’ desire for its stockholders to continue to be holders of publicly traded common stock (as opposed to partnership units) and to receive a substantial cash payment, in return for Williams’ assets being acquired by the Partnership.”

L&W was asked by ETE to issue a should opinion that “ETC and the Partnership “should” be treated by the tax authorities as a tax-free exchange under Section 721(a) of the Internal Revenue Code (the “721 Opinion”).” L&W could not issue the opinion and the Chancellor allowed, quite unusually, ETE to pull out of the deal.

Now, it was not like Williams was without adequate counsel. Cravath, Swaine & Moore LLP was deal and tax counsel to them and Gibson, Dunn & Crutcher LLP was additional deal counsel. For that matter, Morgan, Lewis & Bockius LLP (tax counsel) and Wachtell, Lipton, Rosen & Katz (deal counsel) also served as counsel to to ETE.

According to the opinion here was the proposed deal:

Continue reading “Tax Lawyers Kill $38 Billion Merger” →

Tax Times @ ABA Section of Taxation

By Francine J. Lipman

Supervising Editor Professor of Law Linda Beale and her team of outstanding ABA – Tax Section editors, Anne Dunn and Isel Pizarro, and staff have put together an exceptional June 2016 issue of the digital Tax Times. Features include . . . Continue reading “Tax Times @ ABA Section of Taxation” →

Law School Loans, REPAYE, and Taxes [Updated]

By: Sam Brunson

Friday, the New York Times‘s DealBook section had an article about law school debt. (H/t Paul Caron.) It focused on John Acosta, a recent Valparaiso graduate who is starting a defense and family law practice.

Although he’s done well for himself so far—top third of his class, passed the Bar Exam on his first attempt, and successfully convinced a former prosecutor to join him—he has a significant problem: debt. From the article:

Yet in financial terms, there is almost no way for Mr. Acosta to climb out of the crater he dug for himself in law school, when he borrowed over $200,000. The government will eventually forgive the loan — in 25 years — if he’s unable to repay it, as is likely on his small-town lawyer’s salary. But the Internal Revenue Service will treat the forgiven amount as income, leaving him what could easily be a $70,000 tax bill on the eve of retirement, and possibly much higher. [Emphasis added]

Up to $70,000 in taxes, or maybe more? Could that be right? And, if so, what’s up with that? Continue reading “Law School Loans, REPAYE, and Taxes [Updated]” →

IRS Scrutinized Mostly Conservative Nonprofits: Evidence of Targeting?

By: Philip Hackney

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Documents recently released in a court case demonstrate that 282 of 426 organizations caught in the IRS political advocacy, “Tea Party,” nonprofit organization net that caused such a hullabaloo three years ago, were in fact conservative. This comes three years after Lois Lerner apologized to Tea Party groups on behalf of the the IRS because, she said, it “inappropriate(ly)” selected these conservative groups’ applications for tax exemption for scrutiny based on name alone rather than legal cause.

An NPR report by Peter Overby concludes about the new information: “Whatever the IRS meant to do, this hodgepodge of a list illustrates how the agency bollixed the nonprofit application process.” In this post, I examine this seemingly “common-sense” claim and find it wanting. Additionally, because I have written publicly about this matter both at the time and more recently. I re-examine my conclusions in those writings in light of this new information.

Early on, I assumed that only about 1/3rd of the organizations caught in the IRS net were conservative. I made this assumption based on the TIGTA report because it noted that 96 of 298 applications, or 1/3rd of the organizations, were Tea Party, Patriot or 9/11 groups. I left wiggle room in my writing, but in the back of my mind, this was my assumption. I assumed TIGTA would have reported every conservative group that was in the lot. But, it turns out that about 2/3rds of the organizations were conservative. Thus, my assumption was wrong. The vast majority of the organizations caught in the net were conservative. Nevertheless, I don’t think this new information demonstrates some additional level of bungling by the IRS that was hitherto unknown. And, frankly, a list like this with little context does nothing to tell us about whether the IRS was fair or not.¹ Continue reading “IRS Scrutinized Mostly Conservative Nonprofits: Evidence of Targeting?” →

Consumer Financial Regulation Meets Income Share Agreements

By: Shu-Yi Oei

On Wednesday, I spoke at the National Association of Consumer Credit Administrators (NACCA) 81^st Annual Meeting and Regulators’ Training Symposium in Minneapolis. The panel was “Trends in Lending: Emerging Loan Products,” and the topic I was asked to discuss was income share agreements (ISAs).

The Powerpoint slides from the talk are here. The last slide contains a partial source list for those who’d like to read more about income share agreements.

I have some thoughts, following the presentation, and after sitting in a couple of (non-tax) panels on lending and regulation:

(1) Legal Scholarship and Restlessness

The NACCA invitation supports my longstanding theory about restlessness and legal scholarship. The theory is that two (or three, or four) years after you did the project (and are likely bored with it) is when anyone else notices that you’ve even done it at all. Therefore, to me, a big part of the scholarly endeavor is really the ongoing fight against your own internal boredom-clock (which, if you’re like me, is likely a tad…accelerated).[fn1]

In this case, Diane Ring and I wrote about ISA transactions back in 2014. See Human Equity? Regulating the New Income Share Agreements, 68 Vand. L. Rev. 681 (2015). And then we became convinced that the industry had sputtered and tanked and so our attention transitioned to other projects.[fn2] But folks I spoke to at the NACCA conference—as well as others I’ve have talked to—assure me that this is not so! Fast-forward to 2016 and new offerings by Cumulus Funding and Purdue University suggest that perhaps the ISA market is not entirely dead after all. Also, those ISAs entered into between 2012-14 (offered by companies like Pave and Upstart) have been percolating in the ether, and the full array of their tax and other regulatory consequences are presumably becoming clearer as time goes on. State regulators are now starting to pay attention and think about how to weigh in. So the time seems right to refocus the attention on an old scholarly project.

Continue reading “Consumer Financial Regulation Meets Income Share Agreements” →

Snowden and Taxes

By: David J. Herzig

Over the weekend, I came across a tweet from Edward Snowden that caught my eye. He mentioned the Scottish governments use of the UK meta data. What was surprising to me is that the data was shared not only with the policing authorities, but also, with the tax authorities.

In this article, there is a claim that “[t]he confirmation that UK state spy agency GCHQ ran a specific programmed, called “MILKWHITE”, to share data with devolved policing and tax authorities is the first Snowden leak to directly implicate Scottish authorities in the controversial policy of ‘bulk data’ collection.”

The entire article is devoted to the problematic practices of meta data collection and sharing. Further, it only mentions the tax authorities once. But what is especially intriguing to me is that the taxing authorities are part of data analysis.

I would have suspected that the taxing authorities would want to use data to verify taxpayer movement. For example, if you are avoiding US taxes because you claim a non resident status (I know it is a rolling calculation), wouldn’t it be nice for US to use your cell phone records to catch you spending 220 days a year in the US.

But I never thought they the IRS, let alone other countries, had either the desire or funds to do data harvesting. The idea that the Scottish taxing authorities are part of the data distribution protocol now gives me pause. I wonder if taxpayers now need to be worried about taxing authorities starting to use meta data?

Universal Basic Income and Marginal Rates

By: Benjamin M. Leff

Last week I posted some preliminary thoughts about a Universal Basic Income (UBI), arguing that it doesn’t make much sense to talk about a UBI outside the context of reforming the tax code, because a UBI without tax reform is just a mind-bogglingly large tax cut. After the post, I got a tweet from Daniel Hemel about the effect of such reform on marginal rates: “Totally agree w/your UBI analysis, though to keep effective TR constant we would have to raise marginal TR on middle class.” He’s right that to talk about a UBI in the context of fundamental tax reform without talking about marginal rates is silly.

First, a quick primer on marginal rates for non-tax readers. Continue reading “Universal Basic Income and Marginal Rates” →

Minnesota Dogs Breathe (Woof) a Sigh of Relief: Pet Trusts Now Legal

By Diane Ring

Perhaps you heard a chorus of joyous barking across the state of Minnesota recently — now you know why. Until just over two weeks ago, every state in the U.S., plus Washington, D.C., recognized statutory pet trusts, except Minnesota. But on May 22, 2016, the Minnesota Governor signed legislation approving pet trusts. The legislation, which had been sponsored in the House by Rep. Dennis Smith and in the Senate by Sen. Scott Dibble, allows the creation of a legally enforceable trust that provides for the care of an animal that was alive during the grantor’s lifetime. The terms of the trust can be enforced by a person appointed in the trust, or if no one is appointed, the court may appoint someone. Moreover, anyone having an “interest in the welfare of the animal” may petition the court to appoint someone to enforce the trust or remove the person so designated in the trust document. The trust would terminate on the death of the last surviving animal (or 90 years if shorter). Any remaining proceeds would be distributed pursuant to the trust’s terms, or if the trust fails to specify, then to the “grantor’s heirs-at-law determined as if the grantor died intestate domiciled in [Minnesota] at the time of distribution.”

This all seems pretty straightforward, so why was Minnesota the last state? Continue reading “Minnesota Dogs Breathe (Woof) a Sigh of Relief: Pet Trusts Now Legal” →

Teaching Tax – At Home and Abroad

by Jennifer Bird-Pollan

I’ve just finished my sixth year of teaching tax at the University of Kentucky, which is longer than I’ve done any other professional task, but I still feel like I’m a beginner. I have started to develop strong classroom preferences (students may not use computers in my classes, I prefer lots of participation, and I prefer textbooks that elucidate concepts, rather than trying to hide the ball). But at the same time I have many more questions about the best way to do this work (what should I cover and leave out, given the time constraints? how can I encourage students to prepare seriously ahead of time, while still giving robust answers to student questions in class?). I am eager to hear from others, both my co-bloggers and visitors, what they think about these issues, and I plan to devote future blog posts to some of my thoughts about these questions. However, having just finished teaching “International Aspects of U.S. Tax Law” at the Vienna University of Economics and Business for the second time, I thought I’d focus here on some of the differences I have observed teaching U.S. income tax law abroad. Continue reading “Teaching Tax – At Home and Abroad” →

Tying the IRS’s Hands. Even Tighter

By Sam Brunson

Yesterday, the House Committee on Appropriations reported H.R. 2995 to the House of Representatives. H.R. 2995, the Financial Services and General Government Oversight Appropriations Bill for FY 2017, if passed, would continue the trend of reducing the IRS’s budget, this time by $236 million.

It is undoubtedly worth looking at what exactly the bill does, but I’m interested in an amendment added yesterday by Rep. John Culberson (R-TX). Section 135 of the bill would make it even harder than it already is for the IRS to audit churches. Continue reading “Tying the IRS’s Hands. Even Tighter” →

Teaching Tax: On Clickers and Laptops

By Sam Brunson

I’ve used clickers in class ever since I started teaching. In fact, thanks to Paul Caron’s tireless advocacy, I’ve known I was going to use clickers since before I entered academia.

And, like Paul, both I and my students[fn1] have found clickers tremendously helpful in the classroom. In my experience, they do three main things:

They force all students to actively engage with the class. It’s easy enough to sit back in class and passively absorb (or not) the content. Sure, whomever I call on has to actively engage, but I can only call on a small portion of my class on any given day. But clicker questions allow students to not only listen, but actually answer, at least a handful of questions.
They tell me how well the students grasp what I’m teaching. If most of the students get the right answer, I know my explanation and the discussion were helpful. If a significant portion get it wrong, I know that I need to go back and address it again (and, depending on the answers they choose, I may be able to figure out where I or they went wrong).
They tell my students how well they grasp what I’m teaching. If most of the students get the problem right, a student who gets it wrong knows that she may need to go back and review the topic. Or ask a question. Or do something else.

But I have a problem: Continue reading “Teaching Tax: On Clickers and Laptops” →

Should the IRS Penalize Trump Foundation Political Contribution?

By: Philip Hackney

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The news yesterday was focused in part on the fact that in 2013 the Florida AG Pam Bondi personally solicited a political contribution from Donald Trump. And, shortly thereafter the Donald J. Trump Foundation (“Foundation”) made a $25,000 contribution to a political organization called And Justice for All that supported the reelection effort of Pam Bondi for AG of Florida. Bondi’s office ultimately dropped any investigation into Trump University. Bondi denies the allegation that she ended an investigation in exchange for a political contribution. She says her office was never investigating Trump U in the first place. She does acknowledge, however, that her political organization should not have accepted the donation from a charitable foundation. She claims she tried to refund the contribution in March.

The claims against the AG are obviously a serious issue and should be looked at, but I of course see things through a bit of blinders. I see a nonprofit behaving badly. The level of negligence here and misuse of a private foundation frankly drives me crazy. As discussed below, the Foundation’s excuse is that it made a mistake and did not know what it had done. In this post I examine all of the tax code violations involved, and I look at the Foundation’s excuse and try to assess whether it is believable and whether it matters. Continue reading “Should the IRS Penalize Trump Foundation Political Contribution?” →