When a Tax Strategy Benefits a Subnational Government

2014-polo-ao5-1-million-lineBy: Leandra Lederman

Usually we think of tax shelters and other tax strategies as the province of private parties. These shelters may involve accommodation parties, even foreign government infrastructure, such as transportation systems, but we tend to think of private parties as getting the tax benefits. We may not think as often about a subnational government bolstering its tax revenues at the expense of the national government, particularly via a cooperating private party’s transaction structure. But that’s what happened a few years ago in Spain.

There is a Volkswagen (VW) plant in Pamplona, a city in the autonomous community of Navarra. From 2007-2011, Navarra reportedly collected approximately 1.5 billion Euros in value-added tax (VAT) from Volkswagen for its cars manufactured at the plant there. If VW-Navarra (which is a subsidiary of SEAT) had shipped the cars directly from Navarra to Germany, presumably Navarra would have had to refund that VAT. (Cars shipped to Germany leave Spain “clean of VAT* (translation mine)).

Instead, according to an interview with Prof. Fernando de la Hucha in this El Diario article, the basic structure was that VW-Navarra sold the cars (although without physically moving them there) to a related Barcelona company, VAESA (Volkswagen-Audi España S.A.), which is located in the Catalunya region, not Navarra. VAESA then sold them to SEAT with the very low mark-up of 5 Euros per car. SEAT, which is also in Catalunya, then sold them to VW-Germany—the transfer abroad triggering entitlement to a refund. But because the cars were sold from a city outside the Navarra region, VW’s refund claim did not go to Navarra. Instead, the Spanish national government was the one that issued the refund, which is how Navarra benefitted. (Catalunya did not issue the refund because, unlike Navarra, does not have a fiscal agreement with Spain that allows it to administer and collect taxes—only Navarra and the Basque regions do). The result was that Volkswagen was refunded the taxes it paid but Navarra profited at the expense of the Spanish government. (Spain has a credit-invoice VAT. Technically, the amount that Navarra retained was the VAT that VW-Navarra paid, which was the VAT on its sales to VAESA minus the VAT its suppliers had paid.)

Here is a simple diagram of the transaction, along with a map of Spain’s regions. (Navarra is in the north, bordering France; Catalunya—that’s the Catalan spelling—is in the northeast, also bordering France.)
Spain Tax Blog Post Diagram--LLmap_spain

Continue reading “When a Tax Strategy Benefits a Subnational Government”

The Status of Judicial Anti-Abuse Doctrines if Code Section 7701(o) Were Repealed

As Daniel Hemel points out in a cross-linked post on Whatever Source Derived, if Congress repeals the Affordable Care Act (ACA), it is possible that Code section 7701(o) will go with it. (Section 7701(o) and its accompanying penalty were included in the ACA as a revenue raiser.) This raises the question of what repeal would mean for the economic substance doctrine specifically and for judicial anti-abuse rules more generally. This post makes three main points:

  1. Repeal of Code section 7701(o) is not a good idea. At a minimum, its potential repeal should be considered separately from the ACA, as it has no substantive link to the ACA.
  1. Repeal of the codified economic substance doctrine should not affect other judicial doctrines.
  1. Repeal of Code section 7701(o) would not eliminate the judicially developed economic substance doctrine. Daniel has provided a couple of arguments in support of that view, drawing on statutory-interpretation principles, and I add an argument based on the language of section 7701(o) itself.

First, anti-abuse rules are valuable. They help prevent taxpayers from engaging in artificial transactions designed to produce artificial tax benefits, such as non-economic losses used to offset unrelated income. Some of these transactions may not actually “work” under the technical provisions of the Code, Treasury regulations, or IRS guidance. However, abusive tax shelters typically are structured to take advantage of the literal language of the tax laws. If (and, ideally, only if) technical challenges fail, anti-abuse doctrines help prevent misuse of the tax laws. Continue reading “The Status of Judicial Anti-Abuse Doctrines if Code Section 7701(o) Were Repealed”

Rockefellers, Pratts and Private Cemeteries

By: David J. Herzig

The New York Times wrote about the Pratt Family burial plot. As Daniel Hemel pointed out there was also a tax story; apparently, the cemetery qualifies as a 501(c)(13) tax-exempt entity. So, when you combine tax and a Cleveland company, I was fascinated by the story. [1]

Because the cemetery is tax-exempt under section (c)(13), it can only benefit its members. This is contrary to the general rule for tax-exempts that you benefit everyone as opposed to just members. The question that the IRS had to address was how discriminatory could the cemetery be.  For example, whether both the Rockefellers and the Pratts could be buried in the cemetery. According to Daniel’s review of the rulings and regulations, “the Pratt family cemetery won’t lose its tax exempt status if it excludes the Rockefellers (or any other non-Pratts) from being buried there. But the family cemetery need not limit membership to Pratts in order to maintain its tax exemption.” All of which is true.

But, I wondered why does the family care so much about maintaining the tax exemption. I started to dig around to find the 990s of the cemetery. What if the tax-exemption were terminated? (As a certain President Elect has come to decide – sometimes the maintenance of tax-exempt entities are more trouble than they are worth).

Continue reading “Rockefellers, Pratts and Private Cemeteries”

The Amazing Section 1202

By: David Herzig

I was fortunate enough to present to the Chicago Estate Planning Council about a week ago.  I rearranged a presentation that I gave at the Notre Dame Tax and Estate Planning Institute. (As an aside, both of these forums are great sources of continuing cutting edge eduction for the practicing bar).  I spent the majority of the hour I was allotted describing section 1202 the Qualified Small Business Stock Exemption.  To my shock, most of the 300 in attendance either were not familiar with the provision or had not thought about it for a decade.  After a quick twitter exchange, I thought I would do a short post explaining the code section as well as why it should be used or at least discussed more.

First, can everyone in Silicon Valley please stop laughing. I get it. You have been using 1202 since the 1990s.  Almost every VC agreement requires the target to qualify as 1202.  For the rest of us, let me catch you up on why 1202 is maybe one the largest give aways in the tax code today.

The QBSB Election came in existence in 1993. Why was the section so forgettable?  Well, if I told you there was a tax credit if you formed a C corp that lowered your rate from 28% to 14% but still had an AMT phase-out – I probably lost you at C Corp.  Even if I had your attention, as capital rates lowered to 20%, the QSBS stayed steady at 14% so why set a C Corporation to save 6%? Yes, 6% is a large savings but, not, when the Code required that 7% of the amount excluded from gross income be treated as a “preference” item and subject to AMT.

Continue reading “The Amazing Section 1202”

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”

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?”

ClassCrits IX: The New Corporatocracy and Election 2016

Surly bloggers Sam Brunson, David Herzig and I (and Leslie Book over at Procedurally Taxing) are attending the ClassCrits IX conference hosted by Loyola University Chicago School of Law today and tomorrow. From the call for papers back in March:

As the U.S. presidential election approaches, our 2016 conference will explore the role of corporate power in a political and economic system challenged by inequality and distrust as well as by new energy for transformative reform.

There are some notable tax-related panels happening at the conference, along with other interesting panels relating to corporations and democracy:

Taxation, Social Justice and Development (Friday 10/21/16)

Doron Narotzki, University of Akron Business Administration
Corporate Social Responsibility and Taxation: The Next Step of the Evolution

Rohan Grey, Binzagr Institute for Sustainable Prosperity & Nathan Tankus, Modern Money Network
Corporate Taxation in a Modern Monetary Economy: Legal History, Theory, Prospects

Karl Botchway, CUNY Technology & Jamee Moudud, Sarah Lawrence Economics
Capacity Building, Taxation and Corporate power in Africa

Martha T. McCluskey, SUNY Buffalo Law, Corporatocracy and Class in State and Local “Job-Creation” Subsidies

Distributing Wealth, Law and Power (Friday 10/21/16)

Goldburn P. Maynard, Jr., University of Louisville Law
A Plea for Courts to Abolish the Judicially Created Right of the Wealthy to Avoid Estate Taxes

Victoria J. Haneman, Concordia University Law
The Collision of Holographic Wills and the 120-Hour Rule

Doron Narotzki, University of Akron Business Administration
Dark Pools, High-Frequency Trading and the Financial Transaction Tax: A Solution or Complication?

Robert Ashford, Syracuse University Law
Why Working But Poor?

Critical Perspectives on Tax Law (Saturday 10/22/16)

Shu-Yi Oei, Tulane University Law
The Troubling Case of Offshore Tax Enforcement

Les Book, Villanova University Law
Bureaucratic Oppression and the Tax System

Samuel Brunson, Loyola University Chicago Law
Avoiding Progressivity: RICs, Pease, and the AMT

David Herzig, Valparaiso University Law
Let Prophets Be (Non) Profits

Make Way for Ducklings?

Shu-Yi Oei 

Professor Charlotte Crane (Northwestern) presented Integrating a Fragmented Corporate Income Tax at BC Law School’s Tax Policy Workshop yesterday. Briefly, the paper is focused on recent proposals to integrate the corporate income tax, in particular, the yet-to-be-released Orrin Hatch proposal from the Senate Finance Committee. I’m no corporate tax expert, but the workshop afforded me the excuse to wade like a duckling through the recent literature…a nice break from other projects.

The corporate integration debate refers to the question of whether to eliminate the corporate double tax (i.e., the tax on both the corporation and its shareholders on the same underlying income) and replace it with a single layer of tax. Many have argued that this would reduce tax burdens, minimize economic distortions, and bring us closer to tax neutrality in investment decisions. Others have argued that corporate integration achieved through shifting the corporate tax to the shareholder level will enhance progressivity and fairness.

The integration debate has raged for decades, with important Treasury and ALI studies in 1992 and 1993, and a surge of recent academic and policy interest. There are various design possibilities, including: integration via a shareholder credit (a.k.a. imputation), integration via a dividend deduction paired with a shareholder withholding tax, integration via a shareholder dividend exclusion, flow-through taxation, and others. A couple of recent proposals: Toder and Viard have suggested eliminating the corporate tax and replacing it with taxation of shareholder dividends and gains at ordinary rates, with gains taxed on a mark-to-market (accrual) basis. And Gruber and Altshuler even more recently proposed pairing a lowered (15%) corporate tax rate with ordinary income taxation of shareholder dividends and capital gains (including an interest charge on deferred shareholder liabilities designed to minimize behavioral distortions).

Continue reading “Make Way for Ducklings?”

When your job is predicting the future

rainBy: Diane Ring

In a post earlier this week, I considered how the international tax conference I was attending (the annual worldwide meeting of the International Fiscal Association, IFA) had something in common with the Japanese anime and manga conference hosted in the adjacent venue. Soon the anime event ended and the tax conference continued, but with a new neighbor – the Meteorological Technology World Expo 2016. No costumes – but some interesting, though puzzling, equipment outside in the courtyard. I thought about the big task of meteorology—predicting the future. Turns out that in-house tax advisors have the same job, it’s just that instead of rain, they predict the tax implications of business decisions for the C-suite. But the tax advisors do it without the tech, and there is a lot to keep them up at night . . . Continue reading “When your job is predicting the future”

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”