Law Commons^™

Unbundling Social Security From The Payroll Tax, Henry Ordower

All Faculty Scholarship

To preserve social security as a welfare program primarily for older individuals and to ameliorate the distributional inequity of funding social security across income and wealth levels, this article recommends unbundling the benefit side of social security from its longstanding payroll tax funding mechanism. The article recommends replacing the payroll tax revenue with a budget allocation from general revenues accompanied by both revenue raisers and benefit limitations. Income tax rate increases linked to repeal of the FICA tax and tax expenditure limitations would enhance income tax revenue. Modifying social security benefits from their current overinclusive, entitlement structure for all to …

Common Sense Recommendations For The Application Of Tax Law To Digital Assets, Linda M. Beale, Jeremy Bearer-Friend, Jennifer Bird-Pollan, Samuel D. Brunson, Luís Calderón Gómez, Bryan Camp, Adam Chodorow, Mark Cochran, Lin William Cong, Matthew Foreman, Phil Gaudiano, I. Richard Gershon, Nathan C. Goldman, Jillian Grennan, Megan Justice, Young Ran (Christine) Kim, Herbert I. Lazerow, Tao Li, Lawrence Lokken, Omri Y. Marian, Orly Mazur, Stephanie Hunter Mcmahon, Tyler Menzer, Matt Metras, Ann M. Murphy, Henry Ordower, Amanda Parsons, Daniel Rabetti, Alex Raskolnikov, Tracey M. Roberts, Kerry A. Ryan, Edward A. Zelinsky

All Faculty Scholarship

In response to the Joint Committee on Taxation’s July 2023 request for comments on application of various Internal Revenue Code sections on digital assets, we propose a consistent set of rules to apply current law to digital assets. We highlight that the underlying economics and characteristics of transactions should be the primary concern for the application of rules and the valuation of digital assets. We believe any digital asset rules should (1) treat classes of digital assets with unique characteristics differently based on their economics, (2) minimize incentives for users to engage in tax-motivated structuring of transactions, and (3) allow …

Block Rewards, Carried Interests, And Other Valuation Quandaries In Taxing Compensation, Henry M. Ordower

All Faculty Scholarship

In this article, Ordower contextualizes block rewards litigation with historical failures to tax compensation income paid in kind. Tax fairness principles demand current taxation of the noneconomically diluting block rewards’ market value.

Reversing The Fortunes Of Active Funds, Adi Libson, Gideon Parchomovsky

All Faculty Scholarship

In 2019, for the first time in the history of U.S. capital markets, passive funds surpassed active funds in terms of total assets under management. The continuous growth of passive funds at the expense of active funds is a genuine cause for concern. Active funds monitor the management and partake of decision-making in their portfolio companies. Furthermore, they improve price efficiency and managerial performance by engaging in informed trading. The buy/sell decisions of active funds provide other market participants reliable information about the quality of firms. The cost of active investing is significant and it is exclusively borne by active …

Decoupling State Income Tax From Federal: Current Taxation Of Unrealized Gain, The New York Proposal, Henry Ordower

All Faculty Scholarship

A proposal decouples NY from federal tax computations to tax billionaires on unrealized appreciation. If enacted, the proposal generates basis discontinuities across borders but enhances state revenue and may prove attractive to many states. The article reviews how states seek to enhance revenues and considers issues of cross-border taxation and the fundamental right to travel.

New York’S Proposed Mark-To-Market Tax Decouples From Federal Tax, Henry Ordower

All Faculty Scholarship

A proposal decouples NY from federal tax computations to tax billionaires on unrealized appreciation. If enacted, the proposal generates basis discontinuities across borders but enhances state revenue and may prove attractive to many states. The article reviews how states seek to enhance revenues and considers issues of cross-border taxation and the fundamental right to travel.

Steiner V. Utah: Designing A Constitutional Remedy, Michael S. Knoll, Ruth Mason

All Faculty Scholarship

In an earlier article, we argued that the Utah Supreme Court failed to follow and correctly apply clear U.S. Supreme Court precedent in Steiner v. Utah when the Utah high court held that an internally inconsistent and discriminatory state tax regime did not violate the dormant commerce clause. Unfortunately, the Supreme Court recently declined certiorari in Steiner, but the issue is unlikely to go away. Not every state high court will defy the U.S. Supreme Court by refusing to apply the dormant commerce clause, and so the Court will sooner or later likely find itself facing conflicting interpretations of …

The Village Of Billionaires: Fair Taxation And Redistribution Amid Relative And Absolute Poverty, Alexis Brassey, Henry Ordower

All Faculty Scholarship

Tax justice and principles underpinning the international tax regime are in vogue. The idea that companies and individuals need to pay their "fair share", not just in the domestic sense but also the international sense, is now a mainstream position. This paper explores the problems relating to what might constitute a "fair share" by setting out what is meant when this expression is used. A reasonable assumption is to consider taxation as the means by which the state funds public services and in some jurisdictions, contributes to greater equality within society. Those goals, however, give rise to competing claims. This …

Avoiding Federal And State Constitutional Limitations In Taxation, Henry Ordower

All Faculty Scholarship

This article reviews some federal and state constitutional law challenges to tax legislation in the US and considers how taxing and other revenue raising legislation tends to withstand constitutional challenge.

Part I of this article examines instances in which the Supreme Court reviewed state taxing laws for conflict with the Constitution and overruled its earlier decisions in similar cases. One case involving a poll or capitation tax worked its way through the courts as the Constitution was being amended to prevent the states from using a poll tax in the future. Another case from 2018 resolves a longstanding tax collection …

Exploring The Impact Of Taxation On Immigration, Henry Ordower

All Faculty Scholarship

Rules governing admission of immigrants to stable, developed countries vary widely among countries, yet wealthy immigrants with capital to invest and highly educated immigrants receive favorable admission decisions from immigration authorities more frequently and quickly than do conflict and economic refugees who will become part of a substantially fungible labor force. As preferred immigration destination countries limit the number of immigrants they will admit — the U.S. certainly does —, admissions are likely to follow a hierarchy based on expectations that certain immigrants will contribute significantly to the economy and welfare of the destination country in a manner that distinguishes …

The Dormant Foreign Commerce Clause After Wynne, Michael S. Knoll, Ruth Mason

All Faculty Scholarship

This Essay surveys dormant foreign Commerce Clause doctrine to determine what limits it places on state taxation of international income, including both income earned by foreigners in a U.S. state and income earned by U.S. residents abroad. The dormant Commerce Clause similarly limits states’ powers to tax interstate and foreign commerce; in particular, it forbids states from discriminating against interstate or international commerce. But there are differences between the interstate and foreign commerce contexts, including differences in the nationality of affected taxpayers and differences in the impact of state taxes on federal tax and foreign-relations goals. Given current Supreme Court …

Uniform International Tax Collection And Distribution For Global Development, A Utopian Beps Alternative, Henry Ordower

All Faculty Scholarship

Under the guise of compelling multinational enterprises (MNEs) to pay their fair share of income taxes, the OECD and other multinational agencies have introduced proposals to prevent MNEs from eroding the income tax base of developed economies by continuing to shift income artificially to low or zero tax jurisdictions. Some of the proposals have garnered substantial multinational support, including recent support from the new U.S. presidential administration for a global minimum tax. This Article reviews many of those international proposals. The proposals tend to concentrate the incremental tax revenue from the prevention of base erosion into the treasuries of the …

Capital, An Elusive Tax Object And Impediment To Sustainable Taxation, Henry Ordower

All Faculty Scholarship

Sustainable taxation requires stability and predictability. Sustainable taxation is a tax or taxes that collect sufficient revenue to support the governmental goods and services the society needs and wants. The taxes must provide for 1) even-handedness -- something akin to horizontal equity, 2) distributional fairness -- a concept emerging from notions of vertical equity, 3) transparency in application so that the populace understands and accepts the tax and the need for it and 4) collection mechanisms that do not favor some societal groups, especially those with resources to secure creative tax advisors, over others who lack the resources. Narrow base …

Complexity Cubed: Partnerships, Interest, And The Proposed Regs, Walter D. Schwidetzky

All Faculty Scholarship

New section 163(j) strictly limits business interest expense (BIE) deductions to large (and possibly not-so-large) taxpayers. Generally, BIEs may only be deducted to the extent that they do not exceed 30 percent of adjusted taxable income plus business interest income. Section 163(j)(4) requires partnerships to calculate this limitation at the partnership level. In this report, I focus on how section 163(j) applies to partnerships. Given my focus, I leave to others a more comprehensive review of section 163(j) as a totality,1 as well as the coverage of S corporations. I will tend to give fairly short shrift to the portions …

The Tcja And The Questionable Incentive To Incorporate, Part 2, Michael S. Knoll

All Faculty Scholarship

The Tax Cuts and Jobs Act (TCJA) has put the question should a business be organized as a passthrough entity or as a corporation at center stage. The TCJA eliminated much of the tax disadvantage from using the corporate form, but did Congress go so far that it advantaged corporations relative to pass-through entities? Some prominent commentators say yes. They argue that the federal income tax now encourages individual owners of pass-through businesses to restructure their business as subchapter C corporations, and they predict that the TCJA will lead to a cascade of incorporations. The principal driver of the shift …

The Tcja And The Questionable Incentive To Incorporate, Michael S. Knoll

All Faculty Scholarship

The Tax Cuts and Jobs Act (TCJA) has put the question should a business be organized as a passthrough entity or as a corporation at center stage. The TCJA eliminated much of the tax disadvantage from using the corporate form, but did Congress go so far that it advantaged corporations relative to pass-through entities? Some prominent commentators say yes. They argue that the federal income tax now encourages individual owners of pass-through businesses to restructure their business as subchapter C corporations, and they predict that the TCJA will lead to a cascade of incorporations. The principal driver of the shift …

Tax Treatment Of Legal Fees Under 2017 Tax Cuts And Jobs Act, Fred B. Brown

All Faculty Scholarship

This article describes the deductibility of legal fees for federal income tax purposes after the 2017 Tax Cuts and Jobs Act, and provides a recommendation for reforming the current rules.

In Defense Of The Pip Regulations, Walter D. Schwidetzky

All Faculty Scholarship

The section 704(b) allocation Regulations contain a highly complex safe harbor, the substantial economic effect rules. If an allocation fails to comply with the safe harbor, it will only survive scrutiny if it is in accordance with the "partners' interests in the partnership" (PIP). Given the complexity of the safe harbor, one might expect the PIP Regulations to be similarly complex, but nothing could be further from the truth. The PIP Regulations are, by tax standards, concise and straightforward. Some have argued that the PIP Regulations do not provide enough guidance, and that a more complex and comprehensive set of …

The Tao Of The Dao: Taxing An Entity That Lives On A Blockchain, David J. Shakow

All Faculty Scholarship

In this report, Shakow explains how a decentralized autonomous organization functions and interacts with the U.S. tax system and presents the many tax issues that these structures raise. The possibility of using smart contracts to allow an entity to operate totally autonomously on a blockchain platform seems attractive. However, little thought has been given to how such an entity can comply with the requirements of a tax system. The DAO, the first major attempt to create such an organization, failed because of a programming error. If successful examples proliferate in the future, tax authorities will face significant problems in getting …

Marginal Rates Under The Tcja, Reed Shuldiner

All Faculty Scholarship

In this report, Shuldiner argues that although the Tax Cuts and Jobs Act appears to offer an across-the board reduction in individual marginal tax rates augmented by an additional 20 percent reduction in rates on unincorporated business income, the situation is significantly more complex.

Was The Amt Effectively Repealed?, Reed Shuldiner

All Faculty Scholarship

The individual alternative minimum tax (AMT) was a much disliked feature of the tax law prior to the Tax Cuts and Jobs Act (TCJA). Yet, despite repeated promises to repeal the AMT as part of tax reform, the TCJA dropped AMT repeal in favor of increasing the AMT exemption and its phaseout threshold. The question raised by this development is whether the AMT changes should be viewed as yet another stop-gap tweak of the AMT or whether the changes should be viewed as returning the AMT to its roots as a tax on high-income taxpayers using excessive loopholes. In this …

Stategraft, Bernadette Atuahene, Timothy Hodge

All Faculty Scholarship

Although sometimes difficult to detect, governmental power abuses can have detrimental impacts. Property tax assessments provide an effective lens to examine this phenomenon because, given the complexity of calculating property tax assessments, it is difficult for citizens to know when local government has exceeded its legitimate taxing authority and crossed into the realm of illegal extraction. Michigan is an ideal case study because it protects property owners by making assessment-related power abuses more visible through a unique state constitutional provision: property tax assessments cannot exceed 50 percent of a property’s market value. Abuses have persisted nevertheless. Between 2011 and 2015, …

Abandoning Realization And The Transition Tax: Toward A Comprehensive Tax Base, Henry Ordower

All Faculty Scholarship

The Tax Cuts and Jobs Act of 2017 imposed a tax, the “transition tax,” on as much as 31 years of undistributed, accumulated corporate income. This article focus on that transition tax as it evaluates thefunction and constitutionality of the tax and considers whether the transition tax might serve as a model for addressing the broader problem of deferred income in the United States. The article views the transition taxas joining the expatriation tax and other mark to market inclusion provisions in abandoning any pretext that there is continued vitality in the realization principle as something more compelling than any …

Before International Tax Reform, We Need To Understand Why Firms Invert, Michael S. Knoll

All Faculty Scholarship

A wave of corporate inversions by U.S. firms over the past two decades has generated substantial debate in academic, business, and policy circles.

The core of the debate hinges on a couple of key economic questions: Do U.S. tax laws disadvantage U.S.-domiciled companies relative to their foreign competitors? And, if so, do inversions improve the competitiveness of U.S. multinational firms both abroad and at home?

There is unfortunately little, if any, empirical work directly determining whether U.S.-based MNCs are currently tax-disadvantaged compared to their foreign rivals, or measuring the amount by which (if any) U.S.-based MNCs improve their competitive position …

The Negative Capital Account Maze, Walter D. Schwidetzky

All Faculty Scholarship

Outside Hubert I and Hubert II, there has been little discussion of negative capital accounts in the tax context and almost no discussion in the nontax context. Nontax law, however, is critically important. This report provides an integrated discussion of the application of tax and nontax law to negative capital accounts.

One of the challenges in writing this report is that it requires a discussion of both the at-risk rules of section 465 and the debt allocation rules of section 752. Complex issues involving sections 465 and 752 and their interaction are worthy of their own articles. Indeed, others have …

Taxation, Competitiveness, And Inversions: A Response To Kleinbard, Michael S. Knoll

All Faculty Scholarship

In this report, I argue that the inversion situation is more nuanced, complex, and ambiguous than Edward D. Kleinbard acknowledges, and I challenge Kleinbard’s claim that U.S. multinationals are on a tax par with their foreign competitors.

Partnership Tax Allocations: The Basics, Walter D. Schwidetzky

All Faculty Scholarship

This article endeavors to help practitioners who are not partnership tax allocation experts identify when they should consult with those with that expertise. The partnership-allocation Treasury Regulations have been called "a creation of prodigious complexity ... essentially impenetrable to all but those with the time, talent, and determination to become thoroughly prepared experts on the subject." This article is written for those, to date at least, without that time and determination. At the same time, the article provides an introduction to the partnership tax allocation rules for those contemplating making the requisite investment of time and determination.

The term "partnership," …

Temporary And Proposed Section 752 Regulations: Progress Or Regress?, Walter D. Schwidetzky

All Faculty Scholarship

In October, 2016, the Internal Revenue Service issued temporary and proposed regulations under Internal Revenue Code Sections 752 and 704 (“the 2016 Regulations”). The author reviews and analyzes these regulations, and concludes that the 2016 Regulations properly deny economic risk of loss for unduly remote bottom dollar guarantees. He also concludes, however, that the IRS exceeded its regulatory authority when it also denied economic risk of loss on bottom-dollar guarantees where the risk to the guarantor was not remote. In addition, he observes that the 2016 Regulations lead to an inappropriate disjuncture with Section 465 and create rules that are …

Perspectives On The Tax Avoidance Culture: Legislative, Administrative, And Judicial Ambiguity, Henry Ordower

All Faculty Scholarship

Henry Ordower discusses the effect that legislating economic incentives through the tax system has on taxpayer behaviour and explores the resulting difficulty in drawing the line between legitimate and objectionable tax avoidance. He argues that while the attempts to separate the two types of tax avoidance – attempts such as enacting general anti-avoidance rules (GAARs) and following general principles of economic substance – may be partially successful, subsidies delivered through the tax system will inherently limit their effect. The lack of clear delineation between legitimate tax planning and objectionable tax avoidance enables an even firmer embedding of “the culture of …

Out Of Ferguson: Misdemeanors, Municipal Courts, Tax Distribution And Constitutional Limitations, Henry Ordower, J. Onésimo Sandoval, Kenneth Warren

All Faculty Scholarship

The matter of police and municipal courts as revenue producers became increasingly prominent following Michael Brown’s death from a police shooting. This article considers the use of misdemeanors, especially traffic violations, for the purpose of collecting substantial portions of the annual operating budgets in municipalities in St. Louis County, Missouri. The article argues that the revenue raising function of traffic offenses has displaced their public safety and traffic regulation functions. The change in function from public safety to revenue suggests that the governing laws are no longer valid as exercise of policing power but must be reenacted under the taxing …