Tax and Changing Labor Markets: The OECD Weighs In

By: Diane Ring

Across the globe, policy makers are wrestling with the possibility that the nature of work is changing and that those changes might be positive or negative. One of the most prominent changes identified is the rise of “non-standard” work, essentially work that is not part of a traditional employer-employee relationship. The rise of the gig economy, and perhaps its even greater growth in the public imagination, have fueled concerns about the prospect of disappearing employment and its replacement with less stable and less desirable non-employee work options.

The degree to which this shift is taking place is an empirical question which has been difficult to pin down. As my co-author Shu-Yi Oei and I have explored in our paper, Tax Law’s Workplace Shift (forthcoming in the Boston University Law Review), data on the changing nature of work comes from empirical studies, which suffer from limitations due to the questions asked, the terminology employed, and comparability of studies over time and across databases. But regardless of any precise conclusions on the rate at which work is changing, there are valid reasons to be concerned and inquire about the impact of tax law on any such shifts. The OECD has begun to weigh in on these questions, releasing a new working paper entitled Taxation and the Future of Work: How Tax Systems Influence Choice of Employment Form, by Anna Milanez and Barbara Bratta (March 21, 2019).

The OECD Project

In this paper, the OECD tackles the question of whether tax considerations may be driving any increases in non-standard work. Using three labor scenarios—traditional employee, self-employed worker, and incorporated worker (e.g., a personal services corporation)—the paper asks how the tax burdens change across the three labor scenarios in eight test countries (including the United States).

In particular, the paper measures the “tax payment wedge” in each labor scenario in each country.

Payment wedge = total employment costs minus worker take home pay                                                                                  total employment costs

where total employment costs equal take home pay, income tax, employee social security contributions, employer social contributions, and payroll taxes minus any cash transfers (i.e. cash payments from the government to the worker, such as those made with respect to dependent children).

What did the OECD find across these eight test countries? Continue reading “Tax and Changing Labor Markets: The OECD Weighs In”

Zelenak: IU Tax Policy Colloquium, “The NCAA and the IRS” & Tax Sitcom Night

IMG_7047
Left to right: Tim Riffle, David Gamage, Leandra Lederman, Larry Zelenak, Kevin Brown

By: Leandra Lederman

On February 14, the Indiana University Maurer School of Law’s Tax Policy Colloquium hosted Larry Zelenak from Duke University School of Law. Larry presented his fun new paper, co-authored with his colleague Rich Schmalbeck, “The NCAA and the IRS: Life at the Intersection of College Sports and the Federal Income Tax.” Larry really hit this one out of the park, with a crowd that was nearly standing-room-only! Larry also hosted a terrific Valentine’s evening event, “Tax Sitcom Night,” featuring three classic sitcom episodes in which couples encounter the federal income tax together. I’ll discuss each of these briefly in this blog post.

Larry and Rich’s paper argues that the IRS has not done as much as Congress to cut back on “unreasonably generous tax treatment” of college athletics. The paper covers four principal topics, which Larry explained was a combination of Rich’s work on two issues and Larry’s on the other two. The four topics are:

  • The possible application of the unrelated business income tax to college sports;
  • the federal income tax treatment of athletic scholarships;
  • the recently changed tax treatment of charitable deductions for most of the cost of season tickets to college ball games; and
  • the new 21% excise tax of IRC § 4960 on compensation in excess of $1 million on certain employees of tax-exempt organizations.

Each of these topics is interesting in its own right, and together they make a strong case that the IRS, and Congress at times, have tilted the playing field in favor of college athletics at the expense of protection of the federal fisc. I won’t give a play-by-play of these four issues here, as the paper does a great job of it and is available on SSRN, but I will mention a couple of highlights. Continue reading “Zelenak: IU Tax Policy Colloquium, “The NCAA and the IRS” & Tax Sitcom Night”

Section 199A’s Workplace Shift

By Diane Ring

As we mark the one year anniversary of tax reform, the aftermath continues to dominate tax policy analysis. New § 199A, which my co-author, Shu-Yi Oei, and I initially explored here and here and here, continues to attract significant attention, both in terms of the provision’s likely substantive effects, and the legislative, regulatory, and political issues it raises.

One of the most compelling, yet underanalyzed, questions is how § 199A could impact labor and dramatically reshape work, the workforce, and the workplace. In a new paper posted on SSRN on December 3, titled “Tax Law’s Workplace Shift,“ Shu-Yi and I tackle these issues in detail. In brief, the paper explores the factors that will determine whether § 199A is likely to cause a workplace shift from employee to independent contractor arrangements, and, if it does, how such a shift should be normatively evaluated. Ultimately, we show how our evaluation of these § 199A workplace effects must depend on the types of workers and work at issue. Continue reading “Section 199A’s Workplace Shift”

The § 199A Regulations: Looking Toward Finalization

By: Leigh Osofsky
Professor of Law, UNC School of Law

As the holiday season approaches, tax practitioners and commentators are waiting for the arrival of a much-anticipated event: the finalization of the § 199A regulations. The Treasury Department has indicated that it is trying to finalize the regulations before the end of the year or shortly thereafter. Treasury has moved expeditiously with this monumental regulatory project for good reason: with the New Year comes the first tax filing season that will require application of § 199A (though those filing estimated returns may have already tried to apply the section). While the proposed regulations indicate that taxpayers may rely on the proposed regulations until the date that the final regulations are published in the Federal Register, it is nonetheless beneficial to have a bit more certainty regarding the operation of the provision as soon as possible going into filing season.

So, what can we expect of the final regulations? Much of what we saw in the proposed regulations – the basic regulatory approach – will likely stay the same. As Shuyi Oei and I catalogued in a recent article, Beyond Notice-and-Comment: The Making of the § 199A Regulations, Treasury put significant work into formulating the proposed regulations. Treasury engaged in extensive dialogue with interested constituencies prior to the release of the proposed regulations in addition to going through OIRA review. The proposed regulations offer a lengthy and detailed presentation of why Treasury chose particular approaches such as, for instance, a narrow reading of the critical “reputation or skill” clause from the statute. These types of fundamental decisions from the proposed regulations are thus unlikely to radically change.

This is not to say there will be no changes at all in the final regulations. Treasury has signaled it may make some changes to parts of the aggregation rules. And S Corp banks lobbied extensively both as part of the notice-and-comment period and outside of it to increase the de minimis threshold for the specified service trade or business (“SSTB”) characterization. If their lobbying effort is successful, the threshold will go up in the final regulations and allow more S Corp banks and similarly situated businesses to avoid classification in the undesirable SSTB category. This would be a real win for such banks, especially given that the statute itself does not explicitly provide for a de minimis exclusion from the SSTB category. Many other taxpayers pleaded for greater clarity, and, in particular, clearer exclusion from SSTB categorization, including in a slew of requests made as part of the notice-and-comment process. Shuyi Oei and I documented much of this dynamic in our recent work. However, Treasury is unlikely to grant the certainty requested by all, as the taxpayers making the requests are surely aware.

So, who will get a present in finalization and who will get a lump of coal? We will all find out soon enough. But my money is on few major changes and a lot of little ones around the edges.

Tax Panels at the 2019 AALS Annual Meeting

By: Shu-Yi Oei

The Association of American Law Schools will be holding the 2019 AALS Annual Meeting in New Orleans, LA from January 2-6, 2019. This year, I’m the chair of the AALS Tax Section. Your section officers (Heather Field, Erin Scharff, Kathleen Thomas, Larry Zelenak, Shu-Yi Oei)  are pleased to bring you four tax-related panels at the Annual Meeting. Two are Tax Section main programs, and two are programs we are cosponsoring with other sections. Details below.

We’re also organizing a dinner for Taxprofs (and friends) on Saturday, January 5. If you’re on the distribution list, you should have received an email about that and how to RSVP. If you’d like more details, please email me.

We hope to see many of you at the Annual Meeting!

Tax Section Main Program:  The 2017 Tax Changes, One Year Later (co-sponsored with Legislation & Law of the Political Process, and Trusts and Estates)
Saturday, January 5, 2019, 10:30 am – 12:15 pm

Moderator:
Shu-Yi Oei, Boston College Law School
Speakers:
Karen C. Burke, University of Florida Fredric G. Levin College of Law
Ajay K. Mehrotra, Northwestern University Pritzker School of Law
Leigh Osofsky, University of North Carolina School of Law
Daniel N. Shaviro, New York University School of Law
Program Description: Congress passed H.R. 1, a major piece of tax legislation, at the end of 2017. The new law made important changes to the individual, business, and cross-border business taxation. This panel will discuss the changes and the issues and questions that have arisen with respect to the new legislation over the past year. Panelists will address several topics, including international tax reform, choice-of-entity, the new qualified business income deduction (§ 199A), federal-state dynamics, budgetary and distributional impacts, the state of regulatory guidance, technical corrections and interpretive issues, and the possibility of follow-on legislation.

Business meeting at program conclusion.

New Voices in Tax Policy and Public Finance (cosponsored with Nonprofit and Philanthropy Law and Employee Benefits and Executive Compensation)
Saturday, January 5, 2019, 3:30-5:15 pm

Paper Presenters:
Ariel Jurow Kleiman (University of San Diego School of Law), Tax Limits and Public Control
Natalya Shnitser (Boston College Law School), Are Two Employers Better Than One? An Empirical Assessment of Multiple Employer Retirement Plans
Gladriel Shobe (BYU J. Reuben Clark Law School), Economic Segregation, Tax Reform, and the Local Tax Deduction
Commenters:
Heather Field (UC Hastings College of the Law)
David Gamage (Maurer School of Law, Indiana University at Bloomington)
Andy Grewal (University of Iowa College of Law)
Leo Martinez (UC Hastings College of the Law)
Peter Wiedenbeck (Washington University in St. Louis School of Law)
Program Description:
This program showcases works-in-progress by scholars with seven or fewer years of teaching experience doing research in tax policy, public finance, and related fields. These works-in-progress were selected from a call for papers. Commentators working in related areas will provide feedback on these papers. Abstracts of the papers to be presented will be available at the session. For the full papers, please email the panel moderator.

Continue reading “Tax Panels at the 2019 AALS Annual Meeting”

The Stages of International Tax Reform (Insights from this Weekend’s ABA Tax Section Meeting)

By: Diane Ring

Since December 2017, tax conferences in the United States have focused substantially on the H.R. 1 tax reform legislation. No surprise there — the 2017 changes are among the most significant in the past thirty years. But over the past five months, through attending numerous tax conferences featuring international tax practitioners, I’ve observed some interesting developments in the nature of the discussions and debates at these conferences. These changes are pretty revealing about the process of absorbing the true impact of the new tax law, particularly in international tax. This weekend’s ABA May Tax Section Meeting in Washington, D.C. highlighted some of these trends.

Continue reading “The Stages of International Tax Reform (Insights from this Weekend’s ABA Tax Section Meeting)”

Tax Implications of the Recent Dynamex Worker Classification Ruling

Heather Field
Professor of Law
UC Hastings College of the Law

Greetings from San Francisco, the epicenter of the gig economy, where workers-rights advocates are celebrating Monday’s California Supreme Court decision in the Dynamex case.  The ruling, which cites an article by my colleague Veena Dubal, is expected to make it harder for businesses in California to classify gig economy workers (and others) as independent contractors rather than employees.  As a result, these workers are more likely to be protected by rules about minimum wage, overtime, rest breaks, and other working conditions, although there are open questions about exactly how these rules will apply to gig workers.

But what is good for workers for employment/labor law purposes may not be so good for workers for federal income tax purposes.  As readers of this blog know, independent contractors can generally deduct their business expenses above-the-line and may be able to take the new Section 199A deduction equal to up to 20% of qualified business income (significantly reducing the effective tax rate). Employees, on the other hand, can do neither.  Thus, the employment/labor law win for workers in the Dynamex case may come with some unexpected and unwanted tax losses for these same workers.  This is especially true for workers with non-trivial amounts of unreimbursed business expenses (although the amount of a worker’s unreimbursed expenses may decline if the worker is classified as an employee because California Labor Code 2802 generally requires employers to reimburse significant business expenses of employees).

So, taking tax into account, is independent contractor status or employee status better for workers?  This question involves complicated employment/labor law and tax law tradeoffs. For example, despite the tax disadvantages of employee classification mentioned above, employee status can benefit workers for employment tax and tax compliance purposes.  Others (including Shuyi Oei here, Shuyi Oei and Diane Ring here, here and here, and Kathleen DeLaney Thomas here) have written extensively on worker classification/taxation topics, and at least some of them have additional articles forthcoming on these topics.  I will defer to them for more details as I am not an expert (at least right now) on worker classification or its tax implications.  But even I know that, when analyzing the implications of the Dynamex case, it will be important for commentators to consider the tax, not just employment/labor, consequences.

One possibility is that the Dynamex case will change California worker classification only for employment/labor purposes and not for tax purposes.  After all, the language of the ruling makes it clear that the issue addressed in the case is how to classify the workers “for purposes of California wage orders” (emphasis in original).  So the case does not technically have any impact on workers’ tax classifications.  Thus, a worker currently classified as an independent contractor for all purposes could be reclassified under the Dynamex standard as an employee for California wage order purposes but could remain classified as an independent contractor for tax and other purposes.  The applicable classification standards are different enough that, for some workers, it would be possible to have hybrid status.  But I am skeptical about whether businesses will do nuanced context-by-context worker classification determinations.  It is possible, particularly if workers (and scholars?) fight for hybrid worker status, but it seems more likely, at least to me, that businesses will just determine worker status based on the employment/labor standard and use that classification across the board.  Of course, a worker who believes they have been misclassified for one or more purposes could try to fight the classification, but that is a tough road.

Given the Dynamex decision, will worker classifications change, and if so, for which purposes?  I do not know.  We will have to wait and see how businesses react to the ruling.  Regardless of how businesses respond, I hope that, in analyses of the Dynamex decision and in future discussions about worker classification, commentators will be able to move beyond our legal silos, as Diane Ring recommends in a newly posted paper. This would advance a more holistic analysis that integrates labor, tax and any other relevant issues, and that approach could really help businesses and workers in our evolving economy.

Call for Papers: New Voices in Tax Policy and Public Finance (2019 AALS Annual Meeting, New Orleans, LA)

The AALS Tax Section committee is pleased to announce the following Call for Papers:

CALL FOR PAPERS
AALS SECTION ON TAXATION WORKS-IN-PROGRESS SESSION
2019 ANNUAL MEETING, JANUARY 2-6, 2019, NEW ORLEANS, LA
NEW VOICES IN TAX POLICY AND PUBLIC FINANCE
(co-sponsored by the Section on Nonprofit and Philanthropy Law and Section on Employee Benefits and Executive Compensation)

The AALS Section on Taxation is pleased to announce the following Call for Papers. Selected papers will be presented at a works-in-progress session at the 2019 AALS Annual Meeting in New Orleans, LA from January 2-6, 2019. The works-in-progress session is tentatively scheduled for Saturday, January 5.

Eligibility: Scholars teaching at AALS member schools or non-member fee-paid schools with seven or fewer years of full-time teaching experience as of the submission deadline are eligible to submit papers. For co-authored papers, both authors must satisfy the eligibility criteria.

Due Date: 5 pm, Wednesday, August 8, 2018.

Form and Content of submission: We welcome drafts of academic articles in the areas of taxation, tax policy, public finance, and related fields. We will consider drafts that have not yet been submitted for publication consideration as well as drafts that have been submitted for publication consideration or that have secured publication offers. However, drafts may not have been published at the time of the 2019 AALS Annual Meeting (January 2019). We welcome legal scholarship across a wide variety of methodological approaches, including empirical, doctrinal, socio-legal, critical, comparative, economic, and other approaches.

Submission method: Papers should be submitted electronically as Microsoft Word documents to the following email address: tax.section.cfp@gmail.com by 5 pm on Wednesday, August 8, 2018. The subject line should read “AALS Tax Section CFP Submission.” By submitting a paper for consideration, you agree to attend the 2019 AALS Annual Meeting Works-in-Progress Session should your paper be selected for presentation.

Submission review: Papers will be selected after review by the AALS Tax Section Committee and representatives from co-sponsoring committees. Authors whose papers are selected for presentation will be notified by Thursday, September 28, 2018.

Additional information: Call-for-Papers presenters will be responsible for paying their own AALS registration fee, hotel, and travel expenses. Inquiries about the Call for Papers should be submitted to: AALS Tax Section Chair, Professor Shu-Yi Oei, Boston College Law School, oeis@bc.edu.

Reform 2.0 – Some Passing Thoughts on S.B. 2687

Senator Ted Cruz has introduced S.B. 2687, described as a bill “to make permanent the individual tax rates in effect for taxable years 2018 through 2025.”  Speculation about the success of the effort has run the gamut (see here and here), but after last year’s holiday surprise, the new bill, which would lock in rate gains across the board, merits a quick read-through.  It is possible that Congress would pass this bill or a similar one. With the legislature having made corporate rate cuts permanent and individual rate cuts temporary, individual members may be motivated to respond to constituents’ distributive justice-based criticisms.

Notably, S.B. 2687 would make the increased estate tax exemption—previously $5 million, now $10 million—permanent.  Given that this Congressional love letter to the wealthy is paid for by permanently eliminating deductions for things like health care expenses, it might be a wish-list item for Republicans to use as a bargaining chip.  It affects a vanishingly small number of constituents, and allowing Democrats to win on this front might be face-saving enough to swing a vote or two.

Most of the proposed legislation is business as usual though.  The bill would, as advertised, make the new personal income tax rate cuts permanent.  It would permanently repeal the personal exemption and miscellaneous itemized deductions, and it would continue to limit the home mortgage interest deduction and the deduction for state and local taxes.  As I previously have written, repeal of the personal exemption might adversely affect large and non-traditional families, a possibility that the original reform and Senator Cruz’s subsequent effort would mitigate (but not eliminate) by doubling the child tax credit.  For more on that, see Shannon Weeks McCormack’s article here.

A couple of miscellaneous provisions in the bill are worth mentioning (and here, I am not claiming to be comprehensive).  The first would permanently restrict deduction of moving expenses under IRC § 217 to members of the armed forces who relocate in connection with active duty.  As long as we are re-upping this provision for Congressional consideration, why not add Americorp and Teach for America to it?  Moving allowances for these programs may not cover all of the participant’s cost, but like members of the armed forces, participants move on assignment in service to their country.  Adding Americorp and Teach for America to section 217 likely will not cost much—these young people don’t have high incomes, so their deductions are proportionately smaller— and their inclusion in section 217 signals the importance of their public service.  Our laws embody our values, and allowing the moving expense deduction for Americorps and Teach for America participants would more broadly express the government’s vision of personal sacrifice for the public good.

A second interesting provision of S.B. 2687 is permanent repeal of IRC § 132(f)’s exclusion for qualified bicycle commuting expense reimbursements.  Is it just me, or is this narrow repeal sort of peculiar?  From a nudge perspective, the exemption seems like a net good.  Biking is expensive, and people on the margins otherwise might choose to drive, causing pollution and diseases associated with a sedentary lifestyle.  On the other hand, we all know that in most cities, only the truly committed bike to work.  It’s dangerous; it requires a lot of gear and a funny hat; and at the other end, despite what people may tell you, you need a shower.  Cyclists don’t need a tax incentive; they are impervious to people who swear at them from the passing lane, and they will bike whether we pay them to or not.  In fact, the market appears to be so inelastic that Oregon taxes bicycles.  Maybe the fringe benefit for cyclists is not warranted on behavioral grounds.  But even if the section 132 allowance doesn’t change anyone’s behavior, allow me to park a final question in this spot.  Why single out this one small piece of the Code for elimination when, perhaps, all of section 132 is due for a tune-up?

Follow me on Twitter– @prof.hoffer

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”