Taxing R2-D2? ABA Tax Section Panel on Automation and AI

Kerry Ryan
Associate Professor
St. Louis University School of Law

I had the pleasure of attending the midyear meeting of the ABA Tax Section this past weekend in San Diego. The Tax Policy & Simplification committee organized an interesting panel entitled: “Taxing R2-D2: How Should We Think About the Taxation of Robots and AI.” The panel was organized and moderated by Surly’s own Leandra Lederman, and panelists included Shu-Yi Oei (Boston College), Roberta Mann (Oregon Law), and Robert Kovacev (Steptoe & Johnson LLP).

For those of you who read Shu-Yi’s post, you know that she is “deeply skeptical” of the “robot tax” frame. At best, it is misleading—no one is attempting to impose a tax on a “robot” (whatever that is?) per se. As Robert Kovacev succinctly put it: “robots don’t pay taxes, people pay taxes.” The key question is which people: owners, workers, and/or consumers? Roberta linked this question to the long-standing debate about who ultimately bears the burden of the corporate income tax.

At worst, the “robot tax” terminology captures (and perhaps amplifies) the fear (“the robots are coming!”) and angst driving much of this discussion. The underlying concern relates to the potential negative impact on labor of increased utilization of technology/artificial intelligence (AI)/automation in the production process. Experts disagree about whether, over the longer term, automation will reduce the number, or merely the type, of human workers. The unanswered question is whether this is just the next in a long line of technological shifts in the economy dating as far back as the Industrial Revolution, or whether AI/machine learning truly represents a technological tipping point.

What is clear is that the transition to this new automated workplace may lead to worker displacement (particularly for those in manual/routine jobs). Mass unemployment could negatively impact the tax base—fewer workers mean fewer taxpayers. Notice that any revenue loss would hit at the same time as funding demands increased for re-training and/or social protection programs (existing and/or proposed universal basic income) for displaced workers.

Assuming you believe there is a problem(s), what is the policy prescription? While most of the panelists agreed that tax has a role to play here, they disagreed as to the contours of that role. Should we plug the hole in the income tax base by shifting more of the tax burden onto capital, as opposed to labor? Do we attempt to tax work completed by robots in the same manner as comparable work by employees (see Bill Gates proposal)? Should we raise the overall level of taxation (under existing or new tax structures)? Do we view automation as imposing negative externalities on the labor market and impose some type of Pigouvian tax? Should we attempt to slow the pace of technological development, rather than workplace implementation, by reducing either direct funding or tax incentives for R&D and innovation (see South Korea)?

Many interesting questions with no easy answers. At the very least, we must resist allowing zeitgeist to drive the policy response, while at the same time affirming the legitimacy of the underlying concerns and working to minimize their negative consequences on workers and their families.

Tax Cuts and Jobs Act: §§ 1221(a)(3)/1235 Disconnect

Deborah A. Geier
Professor of Law, Cleveland-Marshall College of Law, Cleveland State University

Does the sale of a patent by its creator create capital or ordinary gain? Prior to the legislation commonly referred to as the Tax Cuts and Jobs Act (TCJA) enacted in late December, we had a clear answer: long-term capital gain (with some statutory limits). The TCJA has muddied the water significantly.

Prior to the TCJA, patents were not listed in § 1221(a)(3), which has long excepted self-created copyrights and self-created literary, musical, and artistic works from the definition of “capital asset” (with an elective “exception to the exception” for musical compositions in § 1221(b)(3), thanks to the Country Music Association). In addition, transferees of such assets also hold them as ordinary assets if their basis is determined by reference to the creator’s basis. The § 1221(a)(3) exception is premised on the analogy to labor income; although property is transferred, the property was created through the personal effort of the creator. While the same can be said of self-created patents, Congress provided them favorable treatment not only by failing to include them in the § 1221(a)(3) list but also by providing additional favorable rules in § 1235.

Section 1235 provides that the transfer of all substantial rights to a patent or an undivided interest in all substantial rights (other than by gift or bequest) to an unrelated party by certain “holders” generates long-term capital gain, even if the patent was held for less than one year and even if the consideration may look like (ordinary) royalty payments because contingent on (or measured by) use of the patent. The “holders” that can benefit from these favorable rules include patent creators (whether amateurs or professional inventors), as well as buyers of a patent from the inventor before the invention covered by the patent is reduced to practice, even if the buyer is in the business of buying and selling patents and even if he holds patents for sale to customers in the ordinary course of business, so long as the buyer is not the inventor’s employer. In Pickren v. U.S., 378 F.2d 595 (5th Cir. 1967), the Fifth Circuit extended application of § 1235 to unpatented secret formulas and trade names, though the taxpayers failed to transfer all substantial rights to the property and thus were denied capital gains treatment under § 1235.

Section 3311 of the House version of the TCJA would have repealed the § 1221(b)(3) election to treat self-created musical compositions as capital assets and—more important to the current discussion—would have added the words “a patent, invention, model or design (whether or not patented), a secret formula or process” before “a copyright” in the § 1221(a)(3) exception to the definition of a capital asset. Thus, a patent held by its creator or by a taxpayer whose basis is determined by reference to the creator’s basis would be an ordinary asset. Consistent with this change, § 3312 of the House bill would have repealed § 1235.

The Senate version of the TCJA contained neither provision. Continue reading “Tax Cuts and Jobs Act: §§ 1221(a)(3)/1235 Disconnect”

Update on the GOP Bill’s Tax on Graduate Tuition Waivers

Patrick W. Thomas
Professor of the Practice, Notre Dame Law School

Following up on my post on the taxation of graduate student tuition waivers in the GOP tax bill, there have been a few new developments. (By the way, my fellow Hoosier from the opposite end of the state, Michael Austin, along with Sam Brunson, have a great post on the proposed repeal of section 117(d) as it affects university employees and their dependents.)

First, it’s been confirmed that the intent of the House bill (if not necessarily the effect, per my post) is to tax graduate student tuition waivers, for those graduate students who work in a research or teaching assistant role. According to an article in The Verge, a spokesperson from the Ways and Means Committee explicitly indicated as much in an email. While Congressman Brady did release an amendment to the bill Monday (text here) and a subsequent amendment on Thursday (text here), none of the education provisions were affected. Additionally, the bill (incorporating Congressman Brady’s amendments) was reported out of Ways and Means on a party line vote on Thursday. Continue reading “Update on the GOP Bill’s Tax on Graduate Tuition Waivers”

How SALT Deduction Repeal Promotes State Capture of Federal Charitable Contributions

By Manoj Viswanathan, Associate Professor of Law, UC Hastings College of the Law

The current version of the GOP tax bill dramatically limits the deductibility of state and local taxes. For individuals, the deduction for state and local income taxes is eliminated entirely and the deduction for state and local property taxes is limited to the first $10,000. [fn.1] Though much has been said about the proposal, there has been little discussion about how eliminating the state and local tax deduction dramatically incentivizes (1) states to solicit charitable contributions in exchange for state tax credits and (2) taxpayers to make these charitable contributions.

Consider a taxpayer donating $500 to a tax-exempt private school in Arizona. Assuming the taxpayer itemizes, this reduces the taxpayer’s federal taxable income by $500 as per Sections 170(c) and 67(b)(4). Under Arizona’s School Tax Credits for Individuals program, this donation also entitles the taxpayer to a dollar-for-dollar $500 credit against state income tax liability. By donating the $500, the taxpayer has both saved $500 in state tax liability and obtained a federal charitable contribution deduction of $500. Continue reading “How SALT Deduction Repeal Promotes State Capture of Federal Charitable Contributions”

GOP Raises Taxes on Graduate Students … Or Does It?

Patrick W. Thomas
Professor of the Practice, Notre Dame Law School

We’ve all been poring over the GOP tax bill, released last week. On my initial read, I mainly looked at those provisions that affect my own practice in a Low Income Taxpayer Clinic: the expansion/restriction of the Child Tax Credit; the elimination of the dependency exemption; and the lack of any expansion in the Earned Income Tax Credit (paging Paul Ryan…). Selfishly, I also calculated the bill’s effect on my own taxes: a nearly 3% tax cut that I do not need!

Or so I thought. You see, my wife is a Ph.D. student in computer science who, like most students at the University of Notre Dame, receives a full tuition waiver, in addition to a stipend from the university. As I returned home on Friday, ready to put the tax bill out of mind for a couple hours, I saw a tweet from Claus Wilke, professor of integrative biology at the University of Texas:

Uh oh. Back to tax policy on a Friday night, it seems. And, perhaps, so long to that tax cut. Continue reading “GOP Raises Taxes on Graduate Students … Or Does It?”

Trump’s Back-to Basics Tax Plan: It’s Tremendous!

Aren’t we all wondering what President Trump’s big tax reform announcement will be tomorrow?  Loyola Los Angeles Tax LL.M. student Anosh Ali ventured a tongue-in-cheek guess in a short memo he wrote in Katie Pratt’s Tax Policy class.  We’ll see tomorrow how good a prognosticator Anosh is. 

Until then, at least we know that his Presidential ‘voice’ is spot on


TO:         President Trump

FROM:   Anosh Ali, White House Communications Specialist

RE:         Your tax reform press conference on Wednesday

DATE:    April 25, 2017

_____________________________________________________________________________________

You have asked me to prepare talking points for your tax reform press conference tomorrow. This memo includes general talking points and responses to hostile questions you are likely to get from the liberal media. Continue reading “Trump’s Back-to Basics Tax Plan: It’s Tremendous!”

The Insurance Market Regulations in the Republicans’ Health Care Bill: Crippling Obamacare, or Passing a Hot Potato to State Governments?

By David Gamage

On Monday, the House Republicans finally revealed their draft bill to “repeal and replace” the Affordable Care Act (#Obamacare or #ACA). The bill is titled the American Health Care Act, and commentators have been referring to it as either the #AHCA or #Trumpcare.

To assess the bill, it is helpful to think of it as consisting of four primary buckets:

  1. ending many of Obamacare’s tax provisions (read: large tax cuts for the very wealthy);
  2. phased-in cuts to Medicaid funding and scheduled devolution of Medicaid to the states (read: eroding the health safety-net program for the poor);
  3. transforming Obamacare’s other major health subsidies from being based mostly on income and health costs to being based more on age (read: the implications of this are actually less straightforward than what much of the commentary suggests, but that is a topic for another day); and
  4. other changes to Obamacare’s insurance market regulations (the subject of today’s blog post).

In this blog post, I will focus on the fourth bucket—the changes to Obamacare’s insurance market reforms other than the changes to the subsidies. Time permitting, I hope to write future blog posts on some of the other buckets.

What is most striking about the AHCA’s insurance market changes is how they keep the vast majority of Obamacare’s reforms in place. Right-wing groups have thus taken to calling the AHCA “#ObamacareLite”. Yet I consider this a misnomer. A more accurate label would be #ObamacareCrippled.

The AHCA’s changes do not really water down Obamacare, as the intended slur of “ObamacareLite” implies. Rather, the AHCA’s changes would likely cause Obamacare‘s framework for regulating the individual market to fall apart. If the AHCA bill were to be enacted in its current form, the result would likely be adverse-selection death spirals. The only real hope for saving the individual market would be for state governments to step up with new state-level regulations for supporting insurance markets within each state.

Continue reading “The Insurance Market Regulations in the Republicans’ Health Care Bill: Crippling Obamacare, or Passing a Hot Potato to State Governments?”

TaxSlayer: Technically Acceptable for VITA Returns?

Adam C. Mansfield
Staff Attorney, Legal Services for Students, University of Kansas

The first time I logged into the TaxSlayer training lab I knew that this tax season was going to be a problem. It became obvious when I typed “1040NR” into the form lookup box in the upper left corner of the TaxSlayer screen and the search came up empty. Next I tried “1042-S” and “8843.” Same result. Now I’m not some old fuddy-duddy that doesn’t like change.  I love working with new gadgets, software, or operating systems—as long as it does what it is supposed to do.

I work for Legal Services for Students at the University of Kansas. The main target population for our Volunteer Income Tax Assistance (VITA) grant is nonresident alien (NRA) students and scholars.  Every tax year we help hundreds of international students and researchers determine their residency status, calculate any applicable tax treaty benefits, and prepare their federal and state returns. In the past, TaxWise has worked just fine for this purpose.  I had no problem preparing a return for the student from Bangladesh who had income in both Kansas and Missouri or the Chinese student who has multiple 1042-S forms for scholarships and awards but still needs to apply treaty benefits to his or her wages. This year, TaxSlayer is just not up to the task.

I feel bad for Whitley, a member of TaxSlayer’s customer support squad, who is left with the task of informing me that they are aware of the “issue” that prevents their software from properly applying and reporting a tax treaty benefit on a nonresident alien return.  She proceeded to tell me that they could only handle “simple” state returns in conjunction with an NRA return.  This means that I can’t make any adjustments to the state return in order to properly apportion income. They are “working diligently to iron out the wrinkles.”  Not being able to prepare a pretty basic nonresident alien return is a little more than just a wrinkle. Continue reading “TaxSlayer: Technically Acceptable for VITA Returns?”

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”