Tomorrow morning, I'm flying to Detroit, thence by wheels to Ann Arbor where I will give a talk at the University of Michigan Law School. It will be in re.my recent Tax Notes article, "Tne New Non-Territorial U.S. International Tax System," part 1 of which is available here, and part 2 here.
This is actually the first of 5 occasions on which I'll be discussing the paper, and/or issues within its purview, within the next couple of months. The other 4 occasions are as follows:
1) this Friday, October 26, at a Fordham Law School conference entitled The Future of the New International Tax Regime, registration & other info available here.
2) Monday, November 5, Copenhagen Business School, International Tax Conference: Recent Developments in International Tax Law, registratrion and other info available here.
3) Friday, November 16, National Tax Association Annual Meeting, in New Orleans, 1:45 pm session on a panel entitled Legal Perspectives on the TJCA.
4) Tuesday, December 11, faculty seminar at Bar-Ilan Law School, Tel Aviv.
I'll also be back in New Orleans on January 5, participating in an American Association of Law Schools annual meeting panel entitled "The 2017 Tax Changes, One Year Later." But here I suspect the paper would be somewhat misdirected in terms of what I anticipate being asked to discuss.
It's always good for business if you can standardize your talks and keep giving the same thing. (At the cost of its being boring for you, and for any repeat audience members.) But in this set of instances I'll be speaking to some rather distinct audiences, besides which my speaking times will vary from 13 minutes to 50. So I will certainly have to do a lot of customizing.
As it happens, the topic remains of current interest to me, as I have in mind the plan of writing a short book updating my 2014 publication, Fixing U.S. International Taxation. I see what's happened since then as affirming and even vindicating the analysis in that book, which I feel in retrospect substantially anticipated what policymakers and scholars would increasingly realize are the real topics of interest in international taxation. (And the book is far less about saying "This is the answer" than "These are the questions.") But there's a need for an update - and I'm doing a fresh (although much shorter) book, rather than a new edition - because the law has changed, the debate has moved forward, and there are lots of new developments to discuss.
So I will have the new enterprise in mind as I discuss the by now months-old article with these various audiences.
Tuesday, October 23, 2018
Friday, October 19, 2018
2019 NYU Tax Policy Colloquium, Phase 1
We now have pretty much finalized our lineup of speakers for the spring 2019 NYU Tax Policy Colloquium, which I will be co-leading with Lily Batchelder. It looks like this:
I called it above "Phase 1" of the 2019 NYU Tax Policy Colloquium because we are planning to switch to the fall semester, and hence will have 14 more sessions in September - December 2019 (and then again in September rather than January 2020, etc.)
1.
Tuesday, January 22 – Stefanie
Stantcheva, Harvard Economics Department.
2.
Tuesday, January 29 – Rebecca
Kysar, Fordham Law School.
3.
Tuesday, February 5 – David
Kamin, NYU Law School.
4. Tuesday,
February 12
– John Roemer, Yale University Economics and Political Science Departments.
5.
Tuesday, February 19 – Susan
Morse, University of Texas at Austin Law School.
6.
Tuesday, February 26 – Li
Liu, International Monetary Fund.
7.
Tuesday, March 5 – Richard
Reinhold, Willkie, Farr, and Gallagher LLP.
8.
Tuesday, March 12 – Tatiana
Homonoff, NYU Wagner School.
9. Tuesday,
March 26
– Michelle Hanlon, MIT Sloan School of Management.
10. Tuesday,
April 2
– Omri Marian, University of California at Irvine School of Law.
11. Tuesday,
April 9
– Steven Bank, UCLA Law School.
12. Tuesday,
April 16
– Dayanand Manoli, University of Texas at Austin Department of Economics.
13. Tuesday,
April 23
– Sara Sternberg Greene, Duke Law School.
14. Tuesday,
April 30
– Wei Cui, University of British Columbia Law School.
All sessions will meet from 4:00 to 5:50 pm in Vanderbilt 208, NYU Law School.I called it above "Phase 1" of the 2019 NYU Tax Policy Colloquium because we are planning to switch to the fall semester, and hence will have 14 more sessions in September - December 2019 (and then again in September rather than January 2020, etc.)
Tuesday, October 09, 2018
Domestic mischief
How might this have happened? Garbage cans get knocked over rather often in our house, and all resident humans deny responsibility.
'
The only lead we have to go on is that this individual was found very near the crime scene. Name Gary, age about 6, known to enjoy playing with rolled-up pieces of paper, which he will even, on occasion, fetch repeatedly (well, up to a point) like a dog.
'
The only lead we have to go on is that this individual was found very near the crime scene. Name Gary, age about 6, known to enjoy playing with rolled-up pieces of paper, which he will even, on occasion, fetch repeatedly (well, up to a point) like a dog.
Thursday, October 04, 2018
Broader implications of Trump's tax cheating
My NYU colleague, Lily Batchelder, looks at issues broader than a particular individual's criminality, in an NYT op-ed today.
Wednesday, October 03, 2018
Altera amicus brief
A number of law professors, headed by Susan Morse of the University of Texas Law School, have filed an amicus brief in the Altera case. I am a signatory, not because I participated in writing it (although I did review it before adding my name), but as a gesture of agreement and support. More particularly, this is an important IRS regulatory case, at least in its broader implications, I believe the government's side in the case is clearly correct, but that the weight of self-interested businesses and people in the tax bar taking the other side requires countering by the considered views of people who care about the proper functioning of the tax system, without having economic stakes to consider. One wouldn't want the court to be deceived about where, in my view, the weight of thoughtful opinion actually lies
The amicus brief is available here.
I blogged about an earlier Altera amicus brief here. Quick background: the case involves transfer pricing, or more particularly use of the cost-sharing regulations to enable U.S. companies to report as arising in tax havens the value of intellectual property (for foreign sales) that was developed by employees of U.S. companies working in the United States. The Tax Court held for the taxpayer, on grounds I personally found ridiculous although there are those who view it more charitably than I do (based largely on what I would call formalistic misunderstanding of how to apply rules that are meant to yield accurate, rather than absurdly manipulable, income allocations). The Tax Court decision also had implications potentially undermining, not just IRS reg authority when being exercised completely reasonably, but also the use of Treasury preambles to new regulations as genuinely explanatory, rather than litigating, documents.
Clint Wallace and Susan Morse took the lead in preparing amicus briefs two years ago that may conceivably have influenced the Ninth Circuit's initial decision (by a 2-1 panel vote) in the government's favor. But one of the majority opinion's two signatories, Judge Reinhardt, had died before the opinion was issued. So it was decided, understandably I suppose, that a new judge had to be appointed to reconstitute the three-judge panel and decide it all over again.
The Morse et al amicus brief is arguing for the good guys in the "all over again" stage.
The amicus brief is available here.
I blogged about an earlier Altera amicus brief here. Quick background: the case involves transfer pricing, or more particularly use of the cost-sharing regulations to enable U.S. companies to report as arising in tax havens the value of intellectual property (for foreign sales) that was developed by employees of U.S. companies working in the United States. The Tax Court held for the taxpayer, on grounds I personally found ridiculous although there are those who view it more charitably than I do (based largely on what I would call formalistic misunderstanding of how to apply rules that are meant to yield accurate, rather than absurdly manipulable, income allocations). The Tax Court decision also had implications potentially undermining, not just IRS reg authority when being exercised completely reasonably, but also the use of Treasury preambles to new regulations as genuinely explanatory, rather than litigating, documents.
Clint Wallace and Susan Morse took the lead in preparing amicus briefs two years ago that may conceivably have influenced the Ninth Circuit's initial decision (by a 2-1 panel vote) in the government's favor. But one of the majority opinion's two signatories, Judge Reinhardt, had died before the opinion was issued. So it was decided, understandably I suppose, that a new judge had to be appointed to reconstitute the three-judge panel and decide it all over again.
The Morse et al amicus brief is arguing for the good guys in the "all over again" stage.
The NYT's Trump tax fraud story
In an alternative reality that I very much wish was our actual one, today's lead story in the New York Times, "Trump Engaged in Suspect Tax Schemes As He Reaped Riches From His Father," would be a political bombshell. In our actual reality, it may get drowned out, but it shouldn't.
Suppose that this story were about any other twenty-first century major party presidential candidate, premised on his or her having been elected. That is, suppose we had this story about either actual President George W. Bush or Barack Obama, or hypothetical Presidents (because they lost the elections) Al Gore, John Kerry, John McCain, Mitt Romney, or Hillary Clinton. This would be a bombshell story - tax fraud connived at by the president! Talk of impeachment by the other party. Demands for investigations, etcetera.
But in the world we find ourselves living these days, it risks being just another story. We've got credible suspicions of obstruction of justice and collusion with a hostile foreign power to hijack an election. There are immigrant children living in prison camps. We have a Supreme Court nominee who has been accused of sexual assault and perjury. There are Emolument Clause issues that may involve corruption, bribery, and the outright sale of foreign policy favors, etcetera, and on and on. Against that background, investigative journalism that appears to show decades of tax fraud is a bit like someone's kitchen oven exploding in Pompeii on the same day as the Vesuvius eruption. It gets lost in the din.
This whole environment, by the way, has tended to discourage me from commenting actively here on current politics. If you've read this blog for long enough, you may recall that I was a bit harsh at times on Mitt Romney during the 2012 campaign. But this was premised in part on the fact that I actually expected better from him. Plus, while he engaged in some quite aggressive tax planning that seemed open to question and audit challenge, it was well within the bounds of what well-advised people in his industry, working with the leading firms, were doing.
I don't believe that the same can be said of the tax maneuvers described in today's NYT article. Consider the discussion of All County Building Supply and Maintenance, using padded bills to transfer millions of dollars from Fred Trump to his children. As described in the article, fraud is the only word for it. Likewise, while self-serving, somewhat lowball valuations are nothing new in the estate and gift tax planning field, there is a limit. Reputable taxpayers, advised by reputable firms, don't claim values that are only 5 or 10% of the lawful number. And they don't set up clearly sham corporations, although there might be a case where the IRS claimed sham and the taxpayer had opinions from reputable (but well-compensated) tax lawyers explaining why they believed it had economic substance.
There will be a tendency for cynical people to say: "All very rich people do this." I don't think that's correct, at least to anything like this degree. It's partly about very rich people's self-interest. Why commit fraud with all its downside risk, when there are plenty of lawful tax planning opportunities that can significantly reduce one's liability anyway? (If not to the same degree.) And likewise, practitioners in the leading firms generally don't get engaged in this stuff, which would be bad for their professional reputations (and which they might personally find offensive).
In this regard, recall the Panama Papers. Not a whole lot of outright tax fraud by rich Americans was revealed therein - it was more about rich people from other countries. Or the enactment of FATCA to address secret offshore bank accounts. This was generally thought to be about people with high-flying (or mid-flying) cash businesses, not about the names in the New York social register, if such a thing still exists, or Page Six of the New York Daily News.
So if Trump's peer group is very rich people, what the NYT article describes does not appear to be anywhere near "par for the course." On the other hand, if his peer group is criminals - and he has, of course, expressed outrage about Al Capone's being convicted of tax fraud - then this is indeed the sort of behavior about which one would tend to suspect that they're all doing it.
What about very rich people in NY real estate? Here I think it is well beyond the norm, but I admit that I don't know with the same degree of confidence. I am certain that these people are not using people from the leading law firms to engage in tax fraud, but that doesn't rebut the possible existence of a norm more dishonest than that which is followed by rich people generally. I recall, for example, that Jared Kushner's dad was jailed on tax fraud charges, among others.
But I don't think it would be much of a moral defense of Donald Trump to say that rampant criminality and blatant tax fraud were common among NYC real estate tycoons, even if this proved to be the case (and again, my point here is just that I can't say from personal knowledge that it ISN'T the case). It would still be exceptional for people at his wealth level
How could the IRS have missed all this? I don't know the answer to that, but if the Trumps were extreme outliers compared to the peer groups that the tax authorities had in mind, that might offer a partial explanation. Auditors may not try so hard to look for things that they don't expect to find. They're presumably not asking, for example, whether Jeff Bezos got paid $100 in cash to mow someone's lawn and then didn't report it. And while they may audit GE and question its transfer pricing, they're probably not looking for off-the-books transactions in which GE was paid cash and didn't report it. So analogously, by transgressing peer group norms (at least, as defined by the tax authorities), the Trumps may have benefited from the auditors' assuming relatively normal behavior.
What are the tax consequences today? I'd like to hear from estate and gift tax lawyers about that, as it's outside my area of personal expertise. But what I believe to be the case is as follows. Say Fred Trump filed a fraudulent gift tax return in 1990, or fraudulently failed to file. The fraud means that the tax return remains open, and this may support collecting the amount due from the beneficiaries, without any need to prove for this purpose that they were engaged in the fraud. But again, this needs verification from someone who knows more directly about all that.
Last point, are there income tax implications? Suppose that, having in mind here All County, $X was fraudulently diverted from Fred Trump to a company owned by his children. It's treated as a payment for goods, or perhaps alternatively as a salary payment, whereas in fact it's just a concealed gift via the markup. In this scenario, the correct income tax treatment would be that Fred doesn't deduct it (or has higher gross income) and All County doesn't include it, by reason of its actually having been a gift. But if their marginal tax rates are the same, the net effect on their combined income tax liability might be a wash. E.g., if both sides had a 40 percent marginal rate at the time, then Fred would have paid .4X too little in tax, and All County .4X too much. But it would be interesting to know more about All County's tax planning, e.g., did it actually report the transaction consistently with this, if so did it deploy tax shelter losses to offset it, etc.
But here's a further income tax angle suggested by the article. It says that, by age 3, Trump was earning $200,000 per year (in current dollars) from his dad's real estate empire. If this was being treated as salary, and being deducted by the father and included by the toddler-aged Trump, it could potentially have been criminal income tax fraud. A three-year old generally can't perform services of sufficient economic value to support that salary. And there would be a purported income tax saving from the child's having been able to benefit from the lower tax brackets with the respect to the amount at issue. But that's not to answer the separate question of what would be the IRS's legal recourse today, as the crucial fraud part would have been the deduction on Fred's return, since Donald's return would have involved over-reporting, not under-reporting, of taxable income.
Suppose that this story were about any other twenty-first century major party presidential candidate, premised on his or her having been elected. That is, suppose we had this story about either actual President George W. Bush or Barack Obama, or hypothetical Presidents (because they lost the elections) Al Gore, John Kerry, John McCain, Mitt Romney, or Hillary Clinton. This would be a bombshell story - tax fraud connived at by the president! Talk of impeachment by the other party. Demands for investigations, etcetera.
But in the world we find ourselves living these days, it risks being just another story. We've got credible suspicions of obstruction of justice and collusion with a hostile foreign power to hijack an election. There are immigrant children living in prison camps. We have a Supreme Court nominee who has been accused of sexual assault and perjury. There are Emolument Clause issues that may involve corruption, bribery, and the outright sale of foreign policy favors, etcetera, and on and on. Against that background, investigative journalism that appears to show decades of tax fraud is a bit like someone's kitchen oven exploding in Pompeii on the same day as the Vesuvius eruption. It gets lost in the din.
This whole environment, by the way, has tended to discourage me from commenting actively here on current politics. If you've read this blog for long enough, you may recall that I was a bit harsh at times on Mitt Romney during the 2012 campaign. But this was premised in part on the fact that I actually expected better from him. Plus, while he engaged in some quite aggressive tax planning that seemed open to question and audit challenge, it was well within the bounds of what well-advised people in his industry, working with the leading firms, were doing.
I don't believe that the same can be said of the tax maneuvers described in today's NYT article. Consider the discussion of All County Building Supply and Maintenance, using padded bills to transfer millions of dollars from Fred Trump to his children. As described in the article, fraud is the only word for it. Likewise, while self-serving, somewhat lowball valuations are nothing new in the estate and gift tax planning field, there is a limit. Reputable taxpayers, advised by reputable firms, don't claim values that are only 5 or 10% of the lawful number. And they don't set up clearly sham corporations, although there might be a case where the IRS claimed sham and the taxpayer had opinions from reputable (but well-compensated) tax lawyers explaining why they believed it had economic substance.
There will be a tendency for cynical people to say: "All very rich people do this." I don't think that's correct, at least to anything like this degree. It's partly about very rich people's self-interest. Why commit fraud with all its downside risk, when there are plenty of lawful tax planning opportunities that can significantly reduce one's liability anyway? (If not to the same degree.) And likewise, practitioners in the leading firms generally don't get engaged in this stuff, which would be bad for their professional reputations (and which they might personally find offensive).
In this regard, recall the Panama Papers. Not a whole lot of outright tax fraud by rich Americans was revealed therein - it was more about rich people from other countries. Or the enactment of FATCA to address secret offshore bank accounts. This was generally thought to be about people with high-flying (or mid-flying) cash businesses, not about the names in the New York social register, if such a thing still exists, or Page Six of the New York Daily News.
So if Trump's peer group is very rich people, what the NYT article describes does not appear to be anywhere near "par for the course." On the other hand, if his peer group is criminals - and he has, of course, expressed outrage about Al Capone's being convicted of tax fraud - then this is indeed the sort of behavior about which one would tend to suspect that they're all doing it.
What about very rich people in NY real estate? Here I think it is well beyond the norm, but I admit that I don't know with the same degree of confidence. I am certain that these people are not using people from the leading law firms to engage in tax fraud, but that doesn't rebut the possible existence of a norm more dishonest than that which is followed by rich people generally. I recall, for example, that Jared Kushner's dad was jailed on tax fraud charges, among others.
But I don't think it would be much of a moral defense of Donald Trump to say that rampant criminality and blatant tax fraud were common among NYC real estate tycoons, even if this proved to be the case (and again, my point here is just that I can't say from personal knowledge that it ISN'T the case). It would still be exceptional for people at his wealth level
How could the IRS have missed all this? I don't know the answer to that, but if the Trumps were extreme outliers compared to the peer groups that the tax authorities had in mind, that might offer a partial explanation. Auditors may not try so hard to look for things that they don't expect to find. They're presumably not asking, for example, whether Jeff Bezos got paid $100 in cash to mow someone's lawn and then didn't report it. And while they may audit GE and question its transfer pricing, they're probably not looking for off-the-books transactions in which GE was paid cash and didn't report it. So analogously, by transgressing peer group norms (at least, as defined by the tax authorities), the Trumps may have benefited from the auditors' assuming relatively normal behavior.
What are the tax consequences today? I'd like to hear from estate and gift tax lawyers about that, as it's outside my area of personal expertise. But what I believe to be the case is as follows. Say Fred Trump filed a fraudulent gift tax return in 1990, or fraudulently failed to file. The fraud means that the tax return remains open, and this may support collecting the amount due from the beneficiaries, without any need to prove for this purpose that they were engaged in the fraud. But again, this needs verification from someone who knows more directly about all that.
Last point, are there income tax implications? Suppose that, having in mind here All County, $X was fraudulently diverted from Fred Trump to a company owned by his children. It's treated as a payment for goods, or perhaps alternatively as a salary payment, whereas in fact it's just a concealed gift via the markup. In this scenario, the correct income tax treatment would be that Fred doesn't deduct it (or has higher gross income) and All County doesn't include it, by reason of its actually having been a gift. But if their marginal tax rates are the same, the net effect on their combined income tax liability might be a wash. E.g., if both sides had a 40 percent marginal rate at the time, then Fred would have paid .4X too little in tax, and All County .4X too much. But it would be interesting to know more about All County's tax planning, e.g., did it actually report the transaction consistently with this, if so did it deploy tax shelter losses to offset it, etc.
But here's a further income tax angle suggested by the article. It says that, by age 3, Trump was earning $200,000 per year (in current dollars) from his dad's real estate empire. If this was being treated as salary, and being deducted by the father and included by the toddler-aged Trump, it could potentially have been criminal income tax fraud. A three-year old generally can't perform services of sufficient economic value to support that salary. And there would be a purported income tax saving from the child's having been able to benefit from the lower tax brackets with the respect to the amount at issue. But that's not to answer the separate question of what would be the IRS's legal recourse today, as the crucial fraud part would have been the deduction on Fred's return, since Donald's return would have involved over-reporting, not under-reporting, of taxable income.