Tax Law Commons^™

Bankruptcy’S Corporate Tax Loophole, Diane Lourdes Dick

Faculty Articles

Imagine you are a company with a failing business that is drowning in debt. On the bright side, you also possess a very valuable asset. This asset is unique because, unlike most assets, if you liquidate the business through a Chapter 7 bankruptcy, it will be extinguished and its value will not be realized by any shareholders or creditors. On the other hand, even if you substantially liquidate the business using Chapter 11, you can, thanks to an extraordinary ambiguity in the law, preserve this valuable asset. Even better, you can direct the value of this asset to your preferred …

The Taxation Of Intellectual Capital, Lily Kahng

Faculty Articles

Intellectual capital-broadly defined to include nonphysical sources of value such as patents and copyrights, computer software, organizational processes, and know-how-has a long history of being undervalued and excluded from measures of economic productivity and wealth. In recent years, however, intellectual capital has finally gained wide recognition as a central driver of economic productivity and growth. Scholars in fields such as knowledge management, financial accounting, and national accounting have produced a wealth of research that significantly advances the conceptual understanding of intellectual capital and introduces new methodologies for identifying and measuring its economic value. This article is the first to analyze …

Path Dependence In Tax Subsidies For Home Sales, Lily Kahng

Faculty Articles

At a time of looming fiscal crisis and virtual unanimity that tax expenditures must be curtailed, tax subsidies for homeownership stand out as among the most costly and unfair of these expenditures. As a result of tax subsidies for homeownership, the government foregoes billions of dollars in revenue each year, most of which benefits wealthy taxpayers. Moreover, subsidies for homeownership encourage overinvestment in housing and underinvestment in other business sectors, which impedes economic productivity, jobs creation and the ability of U.S. businesses to compete in the global marketplace.

Scholars and commentators have analyzed extensively the tax subsidy for home mortgage …

Embracing The Queen Of Hearts: Deference To Retroactive Tax Rules, James Puckett

Faculty Articles

The Supreme Court's decision in Mayo Foundation for Medical Education and Research v. United States underscored the importance of a uniform approach to judicial review of administrative action; accordingly, the Court clarified that tax administration is generally subject to the same review as other kinds of administrative action by other federal agencies. Tax guidance from the IRS and Treasury Department serves an important role in clarifying the tax law so that taxpayers may report their tax liability accurately and plan their affairs. Meanwhile, aggressive attempts by a relatively small number of taxpayers to avoid tax liability by exploiting arguable ambiguities …

Costly Mistakes: Undertaxed Business Owners And Overtaxed Workers, Lily Kahng, Mary Louise Fellows

Faculty Articles

This Article advocates fundamental changes in the federal income tax base by systematically challenging conventional understandings of consumption and investment. As signaled by its title, "Costly Mistakes," this Article's thesis has to do with the disparate treatment of expenditures incurred by business owners and workers. Where the current tax law treats a business owner's expenditure as investment, the Article sometimes finds consumption and questions why the law should allow the expenditure to be deducted. Where the tax law treats a worker's expenditure as consumption, the Article sometimes finds investment and questions why the law does not allow at least a …

Investment Income Withholding In The United States And Germany, Lily Kahng

Faculty Articles

In a reversal from its historical roots, the United States income tax system now taxes income from labor significantly more heavily than income from capital. It does so not only facially, through explicit preferences for income from capital, but also more subtly, through more hidden features of the tax system – specifically, enforcement strategies. This article focuses on a prominent disparity in enforcement between the two forms of income: Wage income is subject to withholding while investment income is not.

In its critical examination of this disparity, the article first offers a brief history of withholding in the United States, …

Obesity And Unhealthy Consumption: The Public-Policy Case For Placing A Federal Sin Tax On Sugary Beverages, Jonathan Cummings

Seattle University Law Review

A growing body of research has established an empirical link between consumption of sugary beverages and numerous health problems. Yet, while few people disagree that reduced consumption of sugary beverages is a desirable goal for American society, many people disagree about how to reduce it. This Comment argues that a proposed sin tax on sugary beverages is sound policy, and Congress should implement the tax in order to combat and address the obesity epidemic because (1) consumers are subject to cognitive and informational defects that affect consumers’ abilities to make the best welfare-generating decisions, and (2) sugary-beverage consumption causes healthcare-related …

Zakat: Drawing Insights For Legal Theory And Economic Policy From Islamic Jurisprudence, Russell Powell

Faculty Articles

The rapid development of complex income taxation and welfare systems in the 20th century may give the impression that progressive wealth redistribution systems are uniquely modern. However, religious systems provided similar mechanisms for addressing economic injustice and poverty alleviation centuries earlier. Zakat is the obligation of almsgiving and is the third pillar of Islam - a requirement for all believers. In the early development of the Islamic community, zakat was collected as a tax by the state and the funds were distributed to a defined set of needy groups. As a theoretical matter, there are three insights that make zakat …

Rethinking Tax Priorities: Marriage Neutrality, Children, And Contemporary Families, James Puckett

Faculty Articles

Tax scholarship has long struggled with whether married taxpayers should be taxed differently from unmarried taxpayers. Currently, married taxpayers are subject to different tax rates than unmarried taxpayers, and may file a joint tax return. A married couple may pay a higher or lower amount of tax than an unmarried couple with the same total income, and a single person generally pays more tax on a given income than a married couple with a single earner with the same income. These outcomes are difficult to reconcile with a commitment to income tax progressivity, which in theory requires that higher incomes …

A Call For Judicial Restraint: Federal Taxpayer Grievances Challenging Executive Action, Debra L. Lowman

Seattle University Law Review

This Article calls upon the Supreme Court to stay the Judiciary's hand in taxpayer grievances concerning purely executive action. Parts II and III of the Article provide the relevant background material for an understanding of the subject matter. Specifically, Part I recounts the evolution of taxpayer standing, taking the reader from the Supreme Court's decision in Frothingham to its counterpoint decision in Flast. Part III summarizes the Seventh Circuit's unprecedented decision in Freedom. Part IV demonstrates that taxpayer standing as conceived by the Freedom court does not conform to the standing paradigm formulated in Flast, and moreover, …

Tax And Economic Policy Responses To The Medicaid Long-Term Care Financing Crisis: A Behavioral Economics Approach, Diane Lourdes Dick

Faculty Articles

This article contributes to the prominent dialogue surrounding the healthcare financing crisis. It does so by analyzing policy solutions using consumer choice theory.

The Rush To The Goblin Market: The Blurring Of Quill'S Two Nexus Tests, H. Beau Baez Iii

Seattle University Law Review

Part II of this Article begins with a brief introduction to sales and use taxes in the United States. Although these taxes are complementary in nature, they are treated differently for constitutional purposes. This Part then examines the Due Process Clause and Commerce Clause constraints on state taxation, which are animated by very different concerns. Next, this Part explores footnote eight in Quill to dispel the notion that Quill established a facts-and-circumstances test. The section concludes by discussing the problems lower courts have had in applying the Quill nexus tests. The primary problem encountered by the lower courts, exemplified by …

Circular 230 Opinion Standards, Legal Ethics And First Amendment Limitations On The Regulation Of Professional Speech By Lawyers, David T. Moldenhauer

Seattle University Law Review

Part II of this Article discusses the background, scope, and requirements of the Circular 230 rules. Part III discusses the ethical rules applicable to tax opinions, compares these rules to the Circular 230 opinion standards, and concludes that the Circular 230 standards impose substantially greater requirements on practitioners than, and in certain respects conflict with, the ethical rules. Part IV discusses First Amendment case law and commentary regarding professional speech, and proposes that professional speech regulations be analyzed by a model that defines permissible regulation of professional speech by reference to the role of the profession in society and accepted …

Innocent Spouses: A Critique Of The New Laws Governing Joint And Several Tax Liability, Lily Kahng

Faculty Articles

This article provides a framework for such interpretation and implementation of the new innocent spouse laws. The author presents an overview of the current tax law treatment of married joint filers under which joint and several liability is imposed unless relief is available under the new innocent spouse laws. The article then examines the tax rationales that have traditionally been offered for imposing joint and several liability. The author concludes that because the fiction of marital unity is deeply embedded in our tax system, joint and several liability for married joint filers is likely to remain the law. While it …

Clicks And Mortar: Taxing Multinational Business Profits In The Digital Age, Aldo Forgione

Seattle University Law Review

This Article argues that governments should abandon the treaty concept of permanent establishment and adopt international tax reforms that restore the primacy of "market country taxation of multi-national business profits promoted by domestic tax laws. Part I explores several emerging e-commerce issues that demonstrate the tension of introducing traditional tax norms to a digital environment. Part II reviews historical and recent developments in the international taxation of business profits and looks at the underlying trends and sentiments for reform of the existing system of global taxation of business income. Part III canvasses several prominent international tax reform alternatives proposed by …

Telford: Casting Sunlight On Shadow Governments—Limits To The Delegation Of Government Power To Associations Of Officials And Agencies , Leslie L. Marshall

Seattle University Law Review

This Note engages in three areas of analysis. Part II reviews the case of Telford v. Thurston County Board of Commissioner, which, for the first time in Washington State, confronted the issue of whether associations of state officials or agencies are the equivalent of agencies for purposes of the state Public Disclosure Act. Part III examines the broader implications of Telford: (1) whether the principles in Telford should be applied to other state safeguards and restrictions on government agencies, such as the state Open Public Meetings Act, (2) whether the constitutional requirement of one-person-one-vote should be applied to associations of …

Will Surfing The Web Subject One To Transient Tax Jurisdiction? Why We Need A Uniform Federal Sales Tax On Internet Commerce, Aaron G. Murphy

Seattle University Law Review

This Comment considers how Internet sales could be taxed if Congressional action is taken to remove the Commerce Clause impediments, which would leave only Due Process Clause limitations on Internet taxation. Though three potential solutions are addressed and analyzed for their potential treatment under the Due Process Clause, this Comment concludes that a federal uniform tax on Internet sales of goods will achieve the best balance of interests while avoiding Due Process problems. Part Two provides the reader with a basic description of the current law in the area of sales and use taxes and the problems the Internet poses …

Resurrecting The General Utilities Doctrine, Lily Kahng

Faculty Articles

This article examines the finance literature exploring the causes and consequences of takeovers and concludes that the policies underlying General Utilities repeal were misguided. This article finds that repeal of the General Utilities doctrine has made inefficient acquisitions more attractive while making efficient ones less attractive. Furthermore, repeal of the General Utilities doctrine has reduced the attractiveness of the most efficient means by which managers can divest themselves of the product of their past acquisitiveness. This article concludes that certain aspects of the doctrine should be reinstated.

Congress's Amendment To Section 104 Of The Tax Code Will Not Clarify The Tax Treatment Of Damages And Will Lead To Arbitrary Distinctions, Sharon E. Stedman

Seattle University Law Review

This Note examines the recent amendment of I.R.C. § 104 and argues that the amendment will not clarify the tax treatment of damages but will instead lead to inequitable results and arbitrary distinctions. Part I explores the policy justifications for the exclusion of damage awards from gross income and provides a brief overview of section 104. Next, in Part II, the article reflects upon the tax treatment of damages prior to the recent amendment. In doing so, Part II focuses on the relevant case law and revenue rulings. Turning toward the tax treatment of damages under the new amendment, Part …

A Step In The Right Direction: Washington Passes The Limited Liability Company Act, Jessica A. Eaves

Seattle University Law Review

This Article describes how and why the LLC Act was passed, and provides a general outline of the LLC form in Washington. Section II outlines the perceived barriers to operating a business in Washington state. Section III sets out a brief legislative history of the Act, including the attempts by the Washington State Trial Lawyers Association to block the legislation, and proposed amendments to the legislation. Section IV describes the specifics of the LLC entity by reference to the Washington Limited Liability Company Act. Section IV also presents the comparative advantages of LLCs to other business forms. Finally, Section V …

Filling Gaps In The Close Corporation Contract: A Transaction Cost Analysis, Charles O'Kelley

Faculty Articles

This article develops a more refined transaction-cost based theory which explains: why rational investors in jointly owned, closely held firms initially choose corporate form; why they leave the contractual gaps that they do; and how efficiency-minded judges should respond to postharmony disputes made possible by the form chosen and the gaps left. Professor O’Kelley’s theory takes into account not only the possibility that investors should have chosen partnership law, but also the advantages and disadvantages of organizing production as an implicit team, via long-term contracts between separate businesses or as a sole proprietorship. In explicating this theory of form choice, …

Howard V. United States: Who Should Be Responsible For The 100 Percent Penalty?, James E. Hungerford

Seattle University Law Review

The 100 percent penalty provision of I.R.C. section 6672 imposes a penalty that can far exceed the maximum criminal penalties for fraud or tax evasion. For this reason, the Internal Revenue Service (I.R.S.) should only assess the 100 percent penalty against persons who are clearly liable for the penalty. As Justice Rehnquist said in his dissent in United States v. Sotelo, the 100 percent penalty provision imposes a potentially crushing liability on corporate officials-a liability that is nondischargeable (in bankruptcy) in its entirety and virtually in perpetuity. This Note will discuss section 6672, including its purpose, history, and specific …

The Effect Of Tax Foreclosure Sales On Servitudes: Olympia V. Palze, Daniel W. Galvin

Seattle University Law Review

This Note analyzes the historical position taken by Washington courts regarding servitudes and tax sales prior to and subsequent to the 1959 statute dealing with easements. The Note next examines the Palzer holding, the degree to which it aligns Washington's position with that of the majority, and its limited support for future litigation involving other forms of servitudes.

The Parenting Tax Penalty: A Framework For Income Tax Reform, Charles O'Kelley

Faculty Articles

Part I considers the proper tax treatment of out-of-pocket parenting expenses such as the costs incurred in providing food, clothing, shelter, and other goods and services to children for their consumption. Part I first characterizes the principal design alternatives to the present flat dependency deduction. It then examines the dominant accretion definition of income and concludes that the current flat dependency deduction is more consistent with the accretion concept and our actual governing beliefs than any of the alternatives advocated by its critics. Part II considers the tax relevance of imputed income from self-performed services. It explains (1) how the …

Tax Policy For Post-Liberal Society: A Flat Tax Inspired Redefinition Of The Purpose And Ideal Structure Of A Progressive Income Tax, Charles O'Kelley

Faculty Articles

A flat rate comprehensive federal income tax could be achieved by replacing graduated rates with a single rate that applies to all taxpayers, eliminating many currently available deductions and credits, and treating as taxable income types of economic gain presently excluded from the tax base. The fact that Congress is seriously considering such radical changes makes it appropriate for tax scholars to reconsider longheld beliefs about the ideal structure of an income tax. This article analyzes the characteristics and underlying rationale of a progressive flat rate comprehensive income tax and reconsiders the nature and purpose of a progressive income tax. …

Reforming The Tax Treatment Of Divorce: Splitting The Benefits Of A Split, C. Garrison Lepow

Seattle University Law Review

The purpose of this Article is to consider the tax consequences of divorce, particularly those problems relating to property settlements. The tax consequences of alimony and child support are also considered. These problems have a long history that must be reviewed in order to understand both the present law and the current proposals which were considered by the House Ways and Means Committee during the last session of Congress. Unfortunately, the narrowness of the legislative proposals permits many of the problems to continue; the proposals change only the timing of the problem.

Serving Two Masters: Commercial Hues And Tax Exempt Organizations, Lawrence Zelenak

Seattle University Law Review

This article will describe the statutory and regulatory framework of section 501(c)(3), examine how the test has been applied, criticize the test, and suggest a test more in keeping with the language and the spirit of section 501(c)(3). The proposed test is this: If the questioned activity directly accomplishes an exempt purpose of the organization, and if all profits from the activity are used in a manner consistent with the organization's exempt purposes, 6 then the organization should be granted exempt status, whether or not the organization's activities are imbued with a "commercial hue."

The Constitutional Rights Of Corporations Revisited: Social And Political Expression And The Corporation After First National Bank V. Bellotti, Charles O'Kelley

Faculty Articles

The Supreme Court has addressed only a few occasions the extent to which corporations enjoy those constitutional rights so fundamental to private citizens. In this article Professor O'Kelley discusses the inherent difficulty in applying familiar constitutional principles to corporations and examines those cases in which the Supreme Court has either extended or denied to corporations various constitutional rights. Finding that two underlying conceptual doctrines -- the Field rational and the associational rationale -- have guided the Court in previous decisions in this area, he then applies these doctrines in an analysis of the recent Supreme Court decision in First National …

A Different Look At The Taxation Of Corporate Distribution And Shareholder Gain, Charles O'Kelley

Faculty Articles

The taxation of corporate distributions and shareholder gain is an area of the Internal Revenue Code which has fostered a seemingly never-ending yet never-successful attempt by the Courts and Congress to design a coherent, non-discriminatory regime. In this article, Professor O'Kelley sets forth a proposal for a logical system for treating corporate distributions to shareholders which would strengthen the double tax scheme, and eliminate its present loopholes.