The Art of the (Budget) Deal

By Daniel Hemel and David Herzig

Who Holds the Trump Card on Reconciliation?

Republicans on Capitol Hill are reportedly planning to use the filibuster-proof budget reconciliation process to repeal the Affordable Care Act and overhaul the tax code. Against that background, Sam Wice says that “the most powerful person in America” in 2017 will be Senate Parliamentarian Elizabeth MacDonough, the nonpartisan official who will “determine” how much of their agenda Republicans can pass through reconciliation. This, of course, is an exaggeration: like it or not, the most powerful person in America in 2017 will be Donald J. Trump, who will wield all the power of the imperial presidency. But Wice’s post helpfully directs our attention to the budget reconciliation process, the rules of which quite likely will determine whether the Republican leadership on Capitol Hill can repeal the ACA and reform the tax laws.

Yet while one should not underestimate the importance of reconciliation, one should also not overestimate the power of the Parliamentarian in the reconciliation process. As a formal matter, the Parliamentarian’s role is advisory; and as a practical matter, the Parliamentarian has little say over significant aspects of reconciliation. Other actors—most notably, Senate Budget Committee Chairman Mike Enzi (R-Wy.)—wield at least as much influence as the Parliamentarian. Most importantly, Enzi—not MacDonough—will determine whether the provisions in any reconciliation bill violate various rules against deficit-increasing legislation being passed via reconciliation. And unlike the Parliamentarian, the Budget Committee Chairman is very hard to fire.

Reconciliation measures can begin in either or both chambers. However, since the ultimate vote on the budget measure occurs in the Senate, we’ll focus on the Senate side of the reconciliation process for purposes of this discussion. On the House side, the Rules Committee Chair and the Budget Committee Chair will wield outsized influence as well. We expect Pete Sessions (R-Tex.) to stay on as House Rules Committee Chair; as for the House Budget Committee Chair, the race is on for a replacement to Tom Price, the Georgia Republican recently tapped as Trump’s Health and Human Services Secretary.

To understand why the Budget Committee Chair is as powerful as he is, a bit of background on reconciliation may be helpful. Continue reading “The Art of the (Budget) Deal”

Trump’s Emolument Tax Problem

By: David J. Herzig (photo from Vox.com)

When a businessperson who runs many active businesses runs and wins for President, clearly there would be many second order problems associated with inherent conflicts between running corporations and the country.  When President-elect Trump won the office, many of these conflicts have bubbled to the surface.

For example, to avoid a conflict of interest between benefiting one’s personal holdings and the Country’s best interests, assets of the President are placed in a blind trust.  As many have pointed out, this works only when the President does not know the nature of the holdings.  Putting existing businesses into a blind trust does not stop the President for knowing the underlying assets of the trust.  The conflict is not ameliorated by trust structure.  Nor, by the way, would it be fixed if President elect Trump divests but the family continues to own the assets.

For this post, I want to consider the current discussion related to the blind trust problem called emolument.  Many prior to the election probably have not heard much about the idea of emolument.  Larry Tribe and others believe that President elect Trump’s ownership of active business assets, even in a blind trust, would violate, Article I, Section 9, Clause 8 of the Constitution which prevents the President from accepting “presents” or “Emolument” from foreign states.  Others, like Andy Grewal, do not believe that mere ownership of assets triggers the Emolument Clause.

If the solution to the blind trust and Emolument Clause problems is a divesture of President elect Trump’s assets as many advocate, this would trigger (to borrow a catch phrase of President elect Trump’s) huuuuuuge tax problem.

Continue reading “Trump’s Emolument Tax Problem”

Cooking The Books Podcast on Trump’s Taxes

By: David J. Herzig

Today Pulitzer Prize winning journalist, David Cay Johnston, Phil Hackney, and I got together for a 30 minute podcast discussion regarding the recent NY Times follow-up article about Mr. Trump’s $916 million tax loss (“NOL”).

Here is link if you missed hyper-link above: http://share.sparemin.com/recording-5131

The topics ranged from the current tax reporting regarding Mr. Trump’s 1990s tax returns to the Trump Foundation to potential criminal sanctions against Mr. Trump.  It was fantastic to be a part of and I hope everyone listens.

Continue reading “Cooking The Books Podcast on Trump’s Taxes”

On Trump and Tax Opinions

Every so often, Brunson and Herzig carve out a day to swap long-winded emails, then those emails are published on the Internet.

Sam-

trump-returnI am sure you have seen by now the NY Times story about Donald Trump’s purported tax positions from the 1990.  The NY Times has been following up on a story they originally published about a month ago reporting that Mr. Trump reportedly had a $990 million net operating loss (“NOL”).  After the story, there was rampant speculation about the loss.

If Mr. Trump used exclusively all of his money to buy properties or casinos or whatever and those assets were used in a trade or business and those assets went down in value, Mr. Trump would suffer a real economic loss.  This real economic loss would then generate a real tax loss.  At the time, most tax experts thought that Mr. Trump may have used some of his money but all used loans.  I think I was quoted as saying this was likely given his prior statements about being the king of debt. Continue reading “On Trump and Tax Opinions”

Will the Supreme Court Hear a Retroactive Taxation Case This Term?

By: David J. Herzig

Earlier this year, the Washington Supreme Court held that the retroactive application of the legislature’s amendment to a Business & Occupation (B&O) tax exemption revising the definition of “direct seller’s representative” to conform to the Washington Department of Revenue’s interpretation of the exemption did not violate a taxpayer’s rights under due process, collateral estoppel, or separation of powers principle.

Like most states, Washington had a B&O tax for “the act or privilege of engaging in business activities.”  Under the original law, out-of-state sellers were exempt if they acted through a representative.  DOT Foods shows up in Washington and sells through a wholly owned subsidiary to avoid the B&O tax.

In 1999, the Washington Department of Revenue changed its interpretation of the statute to subject DOT and others to the B&O tax.  Dot challenged that change (215 P.3d 185 (Wash. 2009) “DOT I”)) and won.  DOT I applied for the tax periods 2000-2006.

DOT then sought a refund for the period Jan. 2005 – Aug. 2009 (not the time period of DOT I).  In the meantime, in 2010 the Washington State Legislature changed Wash. Rev. Code Sec. 82.04.423(2) in response to the DOT I ruling.  The statute both retroactively and prospectively changed the statute. Based on the statutory change, the Washington Department of Revenue rejected the refund claim.

For the period covered by DOT I, DOT and Washington agreed on a settlement for a 97% refund for B&O taxes paid.  For the May 2006 to December 2007 period (after DOT I), the refund request was denied.  DOT challenged the retroactive application under the theories of collateral estoppel, separation of powers, and due process.  DOT lost in the Washington Supreme Court and now has appealed to the US Supreme Court.

The test for whether or not retroactive tax legislation satisfies Due Process is United States v. Carlton, 512 U.S. 26 (1994).  Carlton  applied a rational basis test.  The Court stated retroactive tax legislation would not violate due process if, “legitimate legislative purpose furthered by rational means.”  According to the ACTC brief,   “The Washington Supreme Court ignored the unique circumstances of the Carlton case, which involved the correction of an obvious legislative error that was identified very soon after the statute was enacted and which the taxpayer was admittedly exploiting for its own benefit.”

Continue reading “Will the Supreme Court Hear a Retroactive Taxation Case This Term?”

Debate Prep: The Candidates’ Estate Tax Plans

By David Herzig

With the first Presidential debate tonight, we are sure (or at least I hope) to hear about various tax plans.  I would expect that the estate tax would be a topic of conversation since there is such a sharp contrast between the candidates.  The current reporting spins that Donald Trump wants to eliminate the estate tax; while, Hillary Clinton wants to tax the rich through a two-prong increase on the estate tax.  I thought it would be useful in advance of the debate to discuss the candidates’ actual estate tax plans. (If there is a PA for Lester Holt looking for some last minute questions for the candidates – scroll to the bottom and steal away no attribution needed!)

Currently, there is an estate (or death) tax. Unfortunately for the fisc, the tax accounts for less than 1 percent of federal revenue.  (See, Tax Foundation). What is amazing is that at other points in time, the tax actually raised revenue and effected many estates.  The primary reason for the drop in revenues even though overall net worth has increased, is related to the exemption amount available for taxpayers.  In 1976, the exemption amount per estate was $60,000 while today it is $5.45 million.  (I tackle a lot of these issues in my upcoming University of Southern California Law Review article).

Continue reading “Debate Prep: The Candidates’ Estate Tax Plans”

Trump, Churches and Politics

Photo: Evan Vucci/AP

By David J. Herzig

One of the leads in today’s news cycle was the Flint Pastor, Rev. Faith Green Timmons of the Bethel United Methodist Church, interrupting Republican Presidential Candidate Donald Trump during a speech at her church.

According to the story, Rev. Timmons, intervened during Mr. Trump’s speech  when he started attacking Democratic Presidential Candidate Hillary Clinton stating, “Mr. Trump, I invited you here to thank us for what we’ve done in Flint, not give a political speech, …”. To which Mr. Trump responded, “OK. That’s good. Then I’m going back onto Flint, OK? Flint’s pain is a result of so many different failures, …”.

I headed to Twitter to state that Rev. Timmons was doing the right thing protecting her churches charitable exemption by halting the political speech.  Quick blackletter law: churches, like other public charities, are exempt from tax under section 501(c)(3). But like all exemptions there are certain limitations, including an absolute prohibition on supporting or opposing candidates for office.  In IRS Publication 1828, the IRS position is clear,  “churches and religious organizations, are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office.”  (For a primer on the topic, my co-blogger Sam Brunson wrote for Surly here and for a full blown analysis see his work for University of Colorado’s law review here).  Churches can’t (although they often do) engage in political speech.  Maybe Rev. Timmons was attempting to protect the church’s exemption.

However, as Lloyd Mayer pointed out on Twitter, having a candidate appear at your church two months before the election might in itself be political speech regardless of the topic actually discussed.  This would be true unless the church gave the same amount of “air time” to the opponent.  Publication 1828 supports Professor Mayer’s view.  Statements made by the religious leader of the church at an official church function or through use of the church’s assets would be improper political campaign intervention.  Hosting only one candidate regardless of the topic would seem to be an endorsement of that candidate and thus improper political campaign intervention.

Continue reading “Trump, Churches and Politics”

Walmart and Puerto Rico

By: David J. Herzig

Everyone knows by now the dire financial problems facing Puerto Rico.  (My co-blogger Shu-Yi Oei wrote about the default in Surly here.)  In order to generate liquidity to pay debt and run government operations, Puerto Rico began to look to the deepest pockets for help.  If you are looking for a deep pocket, look no further than Walmart.  The question facing Puerto Rico was how to get more money out of Walmart without actually targeting the corporation (that would be unconstitutional.)

The territory, instead, tinkered with an old law to created a tax hikes which on the face seemed neutral.  However, the law, according to Walmart, targeted primarily the large retail corporation. The after-tax effect of the corporate alternative minimum tax change was to raise Walmart’s Puerto Rican tax liability to over 90% of its income.

How did we get here? Last year, Puerto Rico enacted Act 72-2015 (Act 72) into law. The key component of the act was an increase in the Tangible Property Component (TPC) of the corporate AMT.  According to prior reporting, “The TPC piece of the AMT imposes a tax on the value of property transferred to an entity doing business in Puerto Rico from a related party outside of Puerto Rico.”

Then last December, Walmart filed suit styled, Wal-Mart Puerto Rico Inc. v. Zaragoza-Gomez, 15-cv-3018, U.S. District Court, District of Puerto Rico (San Juan) challenging Act 72.  According to Walmart, the tax was unconstitutional violating the commerce clause.  Moreover, the new tax raised the company’s estimated income tax to “an astonishing and unsustainable 91.5% of its net income.”

In March of 2016, the District Court agreed with Walmart and in a 109 page opinion stated, “Puerto Rico’s AMT, on its face, clearly discriminates against interstate commerce.”  Part of the story told by bond holders, is that in the course of the trial, it came to light the government of Puerto Rico might have been misleading their bond holders and this law was a kind of hail-mary.  Per the UBS report, “In the course of the trial, senior officials of the García administration were obliged to provide sworn testimony. Judge Fusté’s subsequent written opinion provided information that had been either knowingly or inadvertently withheld from investors by the Government Development Bank.”  So, yes, the tax was targeted at Walmart.  Also, the government of Puerto Rico was also not disclosing to its bond holders the true economic conditions.

Late last week, the 1st Circuit agreed with the District Court.   The 1st Circuit concluded, “As to the merits of the Commerce Clause challenge, the AMT is a facially discriminatory statute that does not meet the heightened level of scrutiny required to survive under the dormant Commerce Clause.”

Continue reading “Walmart and Puerto Rico”

House Staffer is a Tax Protester?

By: David J. Herzig

Politico reported yesterday that “Isaac Lanier Avant, chief of staff to Rep. Bennie Thompson (D-Miss.) and Democratic staff director for the Homeland Security Committee, allegedly did not file returns for the 2009 to 2013 tax years.”

According to the Department of Justice Press Release, Mr. Avant has been a staff member of the U.S. House of Representatives since 2002.  In 2005, he filed a form with “his employer that falsely claimed he was exempt from federal income taxes.  Avant did not have any federal tax withheld from his paycheck until the Internal Revenue Service (IRS) mandated that his employer begin withholding in January 2013.”

This seemingly innocent story might get more torrid.  For starters, missing from the press release by Justice is that, as Richard Rubin pointed out to me, Mr. Avant’s employer was Congress.  Do you hear the can of worms opening?  I mean, who at payroll in Congress is green-lighting the stopping of withholding?  What did his form look like? Did he make up an official and name it – W-NONE?  How many other staffer’s did this?  How did he never get audited?  According the the press release and the story, Mr. Avant did not file tax returns for 5 years; I guess a matching program would not catch anything since he had no withholding.  But, one would think Congress would at least ensure that every employee has filed a tax return.

Not sure which awesome tax protester argument he is going with.  Personally, I hope it is that he is a sovereign citizen.  It would be great if the Democratic staff director of Homeland Security thought the U.S. laws did not apply to him.  I guess we will have to wait for the actual complaint.  For those interested, the IRS has outlined numerous frivolous tax arguments.

 [UPDATE 8/24/16 at 8:41 pm: It appears that a claim of Sovereign Citizen might really be in play.  According to the Panolian, a local Batesville, Mississippi newspaper, Mr. Avant is the son of Vernice Black Avant and the late Robert Allen Avant Sr.  In 2011, according to the Panolian, Mr. Avant’s mother, who is also a court clerk, filed an “11-page ‘Affidavit of Truth'”  “declaring that she is a “freeborn Sovereign” are meant to distinguish her as an individual, distinct from a corporation.”  “The affidavit cites participation in the use of bank accounts, Social Security numbers, driver’s licenses, vehicle license plates and tax returns as ‘under duress.'”]

Emmet Till and The Panama Papers

Photo AP.

By David J. Herzig

Yesterday (July 25) would have been Emmet Till’s 75th birthday.  Since high school I have been fascinated by his story and the impact he had on the Civil Rights movement. For those who don’t know, Mr. Till was born and lived in Chicago.  While visiting his relatives in Mississippi in 1955, at the age of 14, he was killed for allegedly flirting with a white women.  His killers (although an all white jury acquitted both men they both admitted to the killings in this Look Magazine article) were the husband of the woman, Roy Bryant and his half-brother J. W. Milam.

The death of Mr. Till is often credited with a mobilizing factor in the Civil Rights Movement.  For those interested, here is an excellent PBS documentary on the topic.

Thankfully, it did not take long to justify a post on a tax blog about a Civil Rights hero.  The son of one of Mr. Till’s killers name seems to show up in the Panama Papers.  According to the Clarion Ledger, “Harvey T. Milam of Ocean Springs, whose father, J.W., shot Till in 1955, appears in” the Panama Papers.  Apparently, Harvey had quite a scheme involving using off-shore insurance companies.  I may actually have to do some digging around to find out more about the alleged scheme.

Messi Sentenced To Jail for Tax Fraud

By David J. Herzig

In a statement today, the court (the decision is in Spanish) in the tax fraud trial of Lionel Messi and his father found them guilty with a sentence of 21 months.  Although, under the Spanish system Messi and his father will serve probation and not jail time.

The court rejected Messi’s side of the story.  He had been claiming that he did not know what he signed.  The court did not believe Messi and decided that he (my translations) “decided to remain in ignorance over time” in a situation that benefited him, “because he received returns of the funds”.

Because the strategy that they court thought Messi knew about and used was to a scheme to “create the appearance of assignment” of these rights to “companies located in countries whose tax legislation allowed opacity”.

Thus, the court added over 3.5 in Euros of fines (2 million for Messi and 1.5 for his father) for the scheme to conceal earnings from image rights.  Prior to the trial, Messi claimed to have paid the 5 million Euro tax deficiency.  Messi does retain appeal rights.

F.C. Barcelona issued this statement in support of Messi and his father.  As Shu-Yi pointed out to me, F.C. Barcelona might have it’s own agenda on tax schemes.  As the E.U. is about set to give a verdict against the Spanish clubs for violating the public spending provisions via tax breaks.  The opening of the inquiry stated, “Professional football clubs should finance their running costs and investments with sound financial management rather than at the expense of the taxpayer. Member states and public authorities must comply with EU rules on state aid in this sector as in all economic sectors.”

As a final thought, I do wonder, however, if that open probation affects his ability to travel via Visa to various countries, e.g., will Brexit matter for Messi?

More Merger Mayhem: Tax Lawyers Testifying

By: David J. Herzig

Great news, the awesome clerks at the Delaware Courts were nice enough to help me get my hands on the trial transcript.  I guess I have some heavy reading to do now.  My goal is to first look through the transcript to see if anything jumps off the pages.  My longer goal is to try to create a tax opinion using the transcript and any depositions if necessary. I would like to see whether I agreed with Cravath or L&W.   After all, the judge did not decide whether the transaction withstood a should opinion.  Rather, he plotted the various opinions and decided that there was not a sufficient cluster to consider a should opinion was warranted.

[As a quick aside, I can’t believe that all the documents are not readily available for free on the court web site.  The judge (chancellor) references the trial transcript in his opinion, yet, the supporting document is not available on-line for free.  I have free lexis access as an academic and can find portions of documents but not the docket or the document.  As a member of society, this certainly raises an access to justice problem. Thankfully, the clerks are super helpful and accommodated me.]

I also have received some thoughtful responses and theories about the case.  I will be wrapping them up into my opinion post later (sorry you have to follow me on twitter (@professortax) to know when it hits or better yet keep checking surlysubgroup.com).  But some of the best initial thoughts take into account some of my concerns.

First, I am still not sure why there was an out in the deal base on the should opinion. Continue reading “More Merger Mayhem: Tax Lawyers Testifying”

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”

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”