An Amicus Brief on Behalf of the Commissioner in Altera

Susie Morse (Texas) and Steve Shay (Harvard) recently blogged on Procedurally Taxing about the amicus brief they spearheaded and in which I joined, along with Dick Harvey, Ruth Mason, and Bret Wells. The brief, which is available on SSRN, is one of two amicus briefs arguing in favor of the Commissioner’s position before the Ninth Circuit in Altera Corp. v. Commissioner.

In Altera, the U.S. Tax Court invalidated under section 706(2)(A) of the Administrative Procedure Act (APA) a transfer-pricing regulation–Treas. Reg. § 1.482-7(d)(2)(2003)–on the ground that the regulation was arbitrary and capricious. The regulation required commonly controlled taxpayers wishing to benefit from a safe harbor applicable to cost-sharing agreements to include stock-based compensation as an expense. The Tax Court found that requirement arbitrary and capricious because of evidence Treasury received in the notice-and-comment process that parties not under common control did not share stock-based compensation costs.

Our brief argues in part that, as Treasury stated in the Preamble to the regulation, cost-sharing agreements between uncontrolled parties are not sufficiently comparable to controlled-party transactions to constitute reliable evidence under the standards of Code section 482. In a nutshell, that is because (1) stock-based compensation is an economic cost, (2) transacting parties can adjust another provision of their agreement to achieve the same result, and (3) unrelated parties might prefer not to take on the risk of a counterparty’s stock–a concern that doesn’t arise in controlled-party transactions. The brief argues that Treasury’s actions, including its explanation in the Preamble, were sufficient as a matter of administrative law. Susie and Steve’s excellent blog post on Procedurally Taxing provides more detail.

Flying, an Alpaca Farm and Baseball Cards – What do they have in common?

By: Diane Ring

In teaching Basic Income Tax, I have found that teaching students about the lines between engaging in a trade or business, profit seeking, and hobbies helps them become comfortable using facts in tax analysis and argument. It confirms for students that tax law is a type of law demanding factual and legal analysis – facts do matter and they are not self-evident. Thus, in anticipation of my next class, I have been collecting (thanks to Tax Notes and the BNA Daily Tax Report) new examples of taxpayer failures to convince a court that their activity was, in fact, for profit. It turns out the pool is quite large, but some personal favorites have risen to the top . . . Continue reading “Flying, an Alpaca Farm and Baseball Cards – What do they have in common?” →

Alcatraz!

Early in the Alcatraz Cellhouse Audio Tour, my wife pointed out one of the pictures in D-Block: right next to people imprisoned for narcotics offenses, conspiracy to kidnap, and murder was Mickey Cohen, in Alcatraz for tax evasion.

Tax evasion! Alcatraz was a pretty harsh punishment for not paying your taxes. Unless, of course, you weren’t really sent to Alcatraz for not paying taxes, Which, of course, Cohen wasn’t. Neither was the inmate at the other side of the picture: Al Capone. Continue reading “Alcatraz!” →

Tax Analysts’ 2016 Student Writing Competition

By: Francine J. Lipman

Tax Analysts’ announces 2016 student writing competition winners as follows:

Continue reading “Tax Analysts’ 2016 Student Writing Competition” →

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?

It’s Complicated.

By: Shu-Yi Oei

I’ve been thinking a lot about movies lately, partly because this pesky sign appeared outside my house a couple of days ago, and partly because of the Louisiana film tax credit, which has been all over the local news.

film sign 2

A couple of days ago, an Associated Press article reported that Louisiana’s motion picture industry was down by 90% this year as filmmakers moved production to states with more generous tax incentives. (I guess that puts the filming outside my house in the 10%?). It was also reported that Governor John Bel Edwards and the Louisiana Economic Development agency are going to commence an examination of the film tax credit and its economic impact in Louisiana. As the news reports indicate, the decline in movie production activity is undoubtedly due to the fact that, facing a state budget deficit, legislators placed caps and limitations on the credit in legislation passed last year. The most material change was an aggregate $180 million cap on the credit for tax years 2015-18, which will then sunset. RS: 47:6007(C)(1)(d)(ii). As a result, movie production has reportedly moved to states with more generous film tax incentives.

The Louisiana film tax credit is a complex beast, and I can’t cover all its intricacies here. But some broad policy points are worth mentioning. Continue reading “It’s Complicated.” →

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” →

Improving Tax Compliance in a Globalized World

By Jennifer Bird-Pollan

I have spent the past two days in the beautiful “free city” of Rust, Austria. (Among other things, Rust is known as a haven for storks, including those in the photos below. Most buildings in the old town have stork nests on their roofs.)

I am in Rust to attend a conference organized by the Institute of Austrian and International Tax Law of the Vienna University of Economics and Business. The Institute organizes a conference in Rust every year using the same model. Organizers first issue a call for contributors, each of whom writes a country report on the year’s topic, answering a series of questions prepared by Institute staff, describing the situation in his or her home country. Contributors and participants include representatives of tax authorities, tax law and economics academics, practicing tax attorneys and accountants, and representatives of international organizations, among others. The reports are circulated to participants in advance of the conference, and all are expected to prepare themselves by reading the country reports before arriving. The two day conference then consists of the reporters presenting 3 minute “input statements” on a variety of topics, followed by discussion among the almost one hundred participants. Here we are discussing an input statement from the Russian reporter, Professor Danil Vinnitskiy:

Rust Conference

As indicated in the title of my post, this year’s topic is tax compliance, and it has been fascinating to hear about the approaches of various governments including Kazakhstan, Indonesia, Norway, Russia, Germany, Nigeria, Croatia and many more. Discussions have covered questions including the measurement of the tax gap, FATCA and other information exchange programs, inter-agency information exchange, and withholding procedures, among other things. For those interested in learning more about these matters, the reports will ultimately be published in the coming months.

Professors Michael Lang and Alexander Rust host the conference, along with others from the Institute, and they understand that hard conference work should be accompanied by some opportunities to talk informally with other participants. The informal events typically include a local wine tasting, a sunset dinner boat trip on the lovely Neusiedlersee, and many coffee breaks with opportunities for discussion with others.

Rust dinner Rust sunset

Having attended the Rust conference twice now, I can highly recommend it to others. Keep an eye out for the call for participants for the 2017 conference!

Updates on the Williams/ETE Merger

By: David J. Herzig

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

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

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

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

The EU, Robots, and Star Trek

By Diane Ring

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

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

State Tax Reform Amidst Cajun Sausage Making

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

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

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

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

Tax Lawyers Kill $38 Billion Merger

By: David J. Herzig

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

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

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

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

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

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

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

According to the opinion here was the proposed deal:

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

Tax Times @ ABA Section of Taxation

By Francine J. Lipman

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

Law School Loans, REPAYE, and Taxes [Updated]

By: Sam Brunson

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

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

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

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

IRS Scrutinized Mostly Conservative Nonprofits: Evidence of Targeting?

By: Philip Hackney

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

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

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