Tax Law Commons^™

Periodic Adjustments — The Dialogue Continues, Reuven S. Avi-Yonah, Jeffery M. Kadet

Articles

Michael McDonald has continued an important dialogue that requires more attention from both taxpayers and the government. In reply to our recent article, McDonald has expressed his disagreement with a number of issues that each of us has adequately covered. We'll just have to agree to disagree on those matters, some of which will eventually play out in the courts. In this article, we will cover a few issues that McDonald has raised that we believe will be useful to this ongoing dialogue.

Can A Corporate Wealth Tax Happen?, Reuven S. Avi-Yonah

Articles

Economists Emmanuel Saez and Gabriel Zucman. They argued that a wealth tax would be a key policy tool to reduce wealth inequality and effectively tax the rich, could raise significant revenue, and could be enforced effectively. Other academics, like Wojciech Kopczuk, Natasha Sarin, Jeffrey Pennell, and Robin Morgan are more skeptical. In the legal literature, there has been an extensive discussion over whether a wealth tax can be constitutional. In Moore, the majority There have been numerous proposals recently to institute a wealth tax in the United States, either in addition to existing taxes or in lieu of some of …

Coca-Cola Redux: The Problematic Absence Of Comparables, Reuven S. Avi-Yonah

Articles

On June 25 a three-judge panel of the Eleventh Circuit Court of Appeals heard oral arguments in Coca-Cola v. Commissioner. It is very hard to predict outcomes from oral arguments, but two of the judges asked questions that suggested they were open to accepting the taxpayer’s “bait and switch” argument. They also seemed receptive to the treaty argument. Interestingly, there was less focus on the taxpayer’s marketing intangibles argument, which I regard as the better one.

Data Centers As Engines Of Corporate Tax Base Restructuring, Reuven S. Avi-Yonah, Domenico Imparato, Karen Sam

Articles

Globalization has eroded the corporate income tax by undermining both source-and residence-based taxation. Before the 1980s, large capital-exporting countries could impose relatively high tax rates on multinationals and extend taxation to low-taxed foreign income earned through controlled foreign corporations, as exemplified by the U.S. adoption of subpart F in the Revenue Act of 1962. That regime supported corporate tax revenues that reached roughly 25 percent of total U.S. receipts in the mid-20th century.

Globalization changed that equilibrium. Multinational corporations gained the ability to arbitrage national tax systems by relocating and reporting profits in low-tax jurisdictions. Active income largely escaped source …

Implicit Support And The Arm’S-Length Standard, Reuven S. Avi-Yonah

Articles

The ongoing U.S. Tax Court litigation Eaton Corp. v. Commissioner raises significant questions regarding the application of the arm’s-length standard to intra group financing. Eaton concerns interest deductions claimed by Eaton US, the U.S. subsidiary of Eaton PLC, on intercompany loans from Eaton Rest of World (Eaton RoW), a foreign affiliate owned by Eaton PLC, and deductions for fees paid to Eaton RoW by Eaton US for guaranteeing Eaton US’s third-party debt. The IRS disallowed approximately $296 million in interest deductions and $237 million of guarantee fee deductions.

The principal issue is whether the arm’s-length standard requires consideration of implicit …

Taxing Ai In The Wake Of The Emergence Of Agentic Ai, Reuven S. Avi-Yonah, Herbert Snitz

Articles

This article addresses taxation measures to regulate AI agents (i.e., AI that is not fully under the control of humans, including both ANI and AGI). In each case, the focus is on what the agent’s capabilities would be, not on how it becomes capable of successfully performing its tasks (though the latter would likely be relevant to important philosophical questions, e.g., might robots achieve sentience or consciousness, and if so, would they have rights?). Regarding mirroring what we human beings can do, the hallmark of AGI is that it will not be task-specific (like ANI), but will possess broad capabilities, …

Periodic Adjustments — Treaties And Other Issues, Reuven S. Avi-Yonah, Jeffery M. Kadet

Articles

In his May article, Michael McDonald, a former managing director at Ernst & Young and current adjunct professor at the University of Virginia School of Law, criticized the IRS’s recently announced method for applying the commensurate with income (CWI) requirement that addresses the widespread underpricing of intangibles.1 His analysis questioned the IRS’s interpretation of section 482. McDonald argues that, until 2025, Treasury and the IRS applied CWI in a manner consistent with the arm’s-length principle despite congressional misgivings about the arm’s-length principle that were not only expressed in the legislative history of the Tax Reform Act of 1986 but were …

Taxation And Birthright Citizenship, Reuven S. Avi-Yonah

Articles

Under the 14th Amendment, individuals who are born in the United States are U.S. citizens and citizens of the state where they reside if they are “subject to the jurisdiction” of the United States. The debate surrounding birthright citizenship focuses on the meaning of jurisdiction in this context. The majority view is that it just means territoriality jurisdiction, so that anyone born within the United States is automatically a citizen regardless of the immigration status of their parents. The minority view is that jurisdiction is related to political allegiance (nationality jurisdiction), which is why children born to diplomats, members of …

Liberty Global And The Revival Of Economic Substance, Reuven S. Avi-Yonah

Articles

On April 21 the Tenth Circuit issued its long-awaited opinion in Liberty Global. By a 2-1 majority, the panel upheld the decision of the district court that a tax shelter used by Liberty Global had to be disregarded under the economic substance doctrine (ESD). This decision is the third victory of the government in ESD cases, following Patel and Otay. But it is the most significant because it strikes a decisive blow against tax shelters built on a literal application of the statutory text but ignore Congress’s purpose in enacting that text. Patel established that the ESD can be relevant …

Tiger Global And Treaty Interpretation, Reuven S. Avi-Yonah, Poonam K. Sidhu

Articles

The Indian Supreme Court’s Tiger Global decision has prompted extensive commentary, which has been generally critical. In particular, critics have noted that the decision marks a retreat from the permissive attitude toward treaty shopping adopted by the Indian Supreme Court in 2004. And critics have argued that the decision creates uncertainty because it applies the Indian general anti avoidance rule to an existing treaty in a fashion that amounts to a treaty override. Similar arguments were made against India’s application of the primary purpose test (PPT) to the Mauritius treaty. In our opinion, these critiques are exaggerated.

Can The Corporate Tax Be Delegated?, Reuven S. Avi-Yonah

Articles

In Learning Resources Inc., the Supreme Court held by a 6-3 majority that President Trump lacked the authority under the International Emergency Economic Powers Act (IEEPA) to impose tariffs. The main rationale was that tariffs are taxes and that IEEPA only authorized the president to “regulate” imports, not to tax them. In his majority opinion, Chief Justice John Roberts wrote: But the facial breadth of “regulate” places in stark relief what the term is not usually thought to include: taxation. The U.S.

Code is replete with statutes granting the Executive the authority to “regulate” someone or something. Yet the Government …

Aggressive R&D Consulting Companies Fail To Align With The Purpose Of R&D And R&E Tax Incentives., Emily Belanger

Michigan Business & Entrepreneurial Law Review

Research and development (R&D) credits and research and experimentation (R&E) tax incentives have recently experienced legislative changes and litigation related to the questionable methods deployed by R&D consulting firms. Proponents of research tax incentives tout their potential to produce positive externalities and innovation. Critics have pushed back, questioning whether research tax incentives are successfully achieving their purpose. The shifting landscape, litigation over aggressive tax claims, and debatable success of tax incentives signal a need to reassess whether research tax incentives are properly claimed in the United States. This paper proposes stronger regulation of R&D consulting firms to ensure research tax …

Should The Ordinary Income Rate Apply To Carried Interest?, Reuven S. Avi-Yonah

Articles

In 2008 professor Victor Fleischer published a famous article entitled “Two and Twenty: Taxing Partnership Profits in Private Equity Funds.” The article explained that: Private equity fund managers take a share of the profits of the partnership as the equity portion of their compensation. The tax rules for compensating general partners create a planning opportunity for managers who receive the industry standard “two and twenty” (a two percent management fee and twenty percent profits interest). By taking a portion of their pay in the form of partnership profits, fund managers defer income derived from their labor efforts and convert it …

The Largest Tax Fraud?, Reuven S. Avi-Yonah

Articles

On October 1, 2020, the Department of Justice indicted Robert T. Brockman on 39 counts of federal tax evasion and related charges.1 The department’s press release explains: The charges stem from an alleged decades-long scheme to conceal approximately $2 billion in income from the IRS as well as a scheme to defraud investors in the software company’s debt securities. . . . According to the indictment, Brockman, a resident of Houston, Texas, and Pitkin County, Colorado, used a web of offshore entities based in Bermuda and Nevis to hide from the IRS income earned on his investments in private equity …

Should Single-Sales-Factor Formulas Be Constitutional?, Reuven S. Avi-Yonah

Articles

On October 28, 2025, Florida sued California in the Supreme Court over its application of a single-sales-factor (SSF) formula to exclude large out-of-state asset sales. But Florida couched its critique in much broader terms, seemingly attacking the validity of the SSF altogether. Florida Attorney General James Uthmeier (R) stated that: California has created a tax system that punishes economic freedom. We will not tolerate California over-taxing revenue earned in Florida. The Newsom regime is obviously attempting to punish business owners who have fled California due to its disastrous policies. Given that multitudes of California businesses and residents are moving to …

Three Bites Of The Apple, Jeffery M. Kadet, Philip L. Jezzi, Brian J. Visalli, David G. Chamerlain, Stephen L. Curtis, Reuven S. Avi-Yonah

Articles

In her latest letter, “A Second Bite at the Apple,” Kimberly Blanchard repeats her recent criticisms of the September 2024 EU Court of Justice decision concerning two Irish-incorporated Apple subsidiaries. Her letter title, which of course inspired the title of this article, and her explanations recall the 1967 MGM comedy Three Bites of the Apple, in which a helpful stranger offers elaborate explanations for why taxes need not be paid. In the film, and perhaps in this exchange as well, the relevant question is who ultimately benefits from the arrangement.

This exchange began with professor Philip Laroma Jezzi article reassessing …

Frankenstein’S Drugs: Did Gilead Sciences’ Bahamas Tax Caper Create A Multibillion-Dollar Periodic Adjustment?, Stephen L. Curtis, Reuven S. Avi-Yonah

Articles

With about 182 million infections worldwide at the time, the potential value of a cure for the hepatitis C virus (HCV) was staggering.2 The company behind this drug, Pharmasset Inc., was a startup in Princeton, New Jersey, with 42 researchers and $127 million in the bank, churning through $66 million per year with no commercialized products and no codevelopment or commercialization partners. The “Pharmasset combo” was an extremely effective nucleotide analog that could treat HCV-infected individuals across genotypes, known as PSI-7977 (later renamed GS-7977), also called sofosbuvir, the active pharmaceutical ingredient (API) found in multiple current drugs used to treat …

Digital Services Taxes And The Wto, Reuven S. Avi-Yonah, Doron Narotzki

Articles

In an excellent Tax Notes article, Claudio Cipollini argues that the United States has adopted a paradoxical stance regarding digital services taxes. On one hand, the United States has repeatedly characterized DSTs as discriminatory trade barriers that unfairly target U.S. technology firms. On the other, it has systematically obstructed appointments to the Appellate Body of the WTO, leaving the dispute settlement mechanism effectively inoperative and ineffective. Cipollini presents this as a “missed WTO route,” suggesting that a functioning WTO system would primarily serve U.S. interests by disciplining European DSTs under the General Agreement on Trade in Services (GATS).

This article …

Can The Eu’S Foreign Subsidy Regulation ‘Discipline’ U.S. Subsidies?, Reuven S. Avi-Yonah, Jennifer Farrell, Domenico Imparato

Articles

Stress Test for Anti-Subsidy Rules Recently, globalization has taken a markedly different turn in the form of renewed prominence of state intervention in the economy and a resurgence of industrial policy favoring domestic firms. Even the emergency measures deployed during the COVID-19 pandemic cannot serve as a reliable benchmark: These were primarily aimed at keeping businesses afloat or preventing foreign acquisitions through financial assistance (for example, domestic handouts) or “golden power” regulations.

A New Tax Shelter Wave, Reuven S. Avi-Yonah

Articles

There have been two tax shelter waves in recent memory: The first one ended in 1986, and the second in 2006. We are now amid a third one. The first wave lasted from around 1970 to 1986. It was based on mass marketed shelters sold to individuals with nonwage ordinary income like lawyers, accountants, physicians, and dentists, who were subject to high tax rates. The basic structure of the first wave of tax shelters depended on the Supreme Court’s misguided opinions in Crane and Tufts, which held that the amount realized from the sale of encumbered property included nonrecourse debt.2 …

Tax Laws And Proportionality: Analyzing Implementation And Advocating For Reform, Moshe A. Jaffe

SJD Dissertations

The application of judicial review to tax legislation presents unique challenges and inconsistencies. This study contends that the proportionality doctrine, widely used in numerous legal systems, offers the best framework for reviewing the constitutionality of tax laws. By examining the implementation of proportionality in countries such as Germany, Israel, and Canada, this research argues that adopting this doctrine—excluding the Stricto Sensu sub-test—could provide a more consistent and fair method for judicial review of tax legislation. Specifically, this approach avoids the indeterminacy and subjectivity often associated with open-ended balancing, while still ensuring that tax measures serve legitimate aims and employ means …

How The U.S. Constitution Shapes International Tax Law: Instrument Choice In Tax Agreements, Noam Noked, Young Ran (Christine) Kim, Reuven Avi-Yonah

Articles

The U.S. Constitution’s Treaty Clause, which requires Senate approval by a two-thirds vote for treaties, has significantly influenced the development of international tax law. This Article examines the implications of Senate supermajority requirements on bilateral and multilateral tax treaties and agreements, alternative instruments, relevant international tax standards, and global tax governance.

Historically, tax treaties have been approved exclusively as Article II treaties requiring Senate approval. The difficulty of entering into treaties with the United States has influenced the instrument choice and design of U.S. and international tax standards. To address this challenge, several U.S. and international tax reforms have employed …

From Relic To Relevance, The Resurgence Of Tariffs, Reuven S. Avi-Yonah

Articles

Modern legal scholarship has largely relegated tariffs to economic analysis, overlooking their legal and policy significance. This Article challenges that view by examining tariffs as a potential pillar of fiscal policy, exploring their viability as a revenue source alongside or in place of traditional income and corporate taxation. While historically central to U.S. government funding, tariffs’ importance diminished with the rise of income taxation and trade liberalization. However, their recent resurgence as a tool for trade protection raises broader questions about their role in national economic strategy.

This Article critically assesses the feasibility of a tariff-based tax system, drawing on …

The End Of Territoriality?, Reuven S. Avi-Yonah

Articles

The One Big Beautiful Big Act (OBBBA) of 2025 is generally consideredto be a continuation of the Tax Cuts and Jobs Act (TCJA) of 2017.1Thatis definitely true as far as the individual tax provisions are concerned, be-cause the OBBBA merely made permanent the TCJA provisions with minorchanges, such as increasing the cap on the state and local tax deduction from$10,000 to $40,000. For the corporate tax, the OBBBA continued some of thechanges in the TCJA (such as expensing) while relaxing others (such as amorti-zation of research and experimentation (R&E) expenditures and a stricter limiton interest deductions) without changing the overall …

Progressive Tax Rates As A Response To Algorithmic Tacit Collusion, Reuven S. Avi-Yonah, Lior Frank

Articles

This article suggests a tax-law-based approach to curtailing the harm that might be posed by algorithmic tacit collusion in response to the inability of antitrust laws to offer viable solutions. It suggests that progressive corporate tax rates, including higher tax rates, could alleviate the harm caused by algorithmic tacit collusion (“alleviate” because our tax-based approach would not entirely solve the problem of pricing algorithms’ ability to imitate prices of other algorithms without any form of agreement or communication). As we show, progressive and higher tax rates can lead to a redistribution of wealth and ultimately mitigate algorithmic supracompetitive pricing harm. …

Repealing Reorgs, Reuven S. Avi-Yonah

Law & Economics Working Papers

Under the Supreme Court's opinion in Moore, it is likely that realization is essential for defining income as a constitutional matter. Therefore, when a transaction involves realization, it should presumptively be taxable unless there are very good reason for nonrecognition of gain. Given this reality, there are good reasons for Congress to consider repealing tax-free reorganizations and the other nonrecognition rules of the corporate tax, primarily for non-tax reasons. Acquisitive A, B, and C reorganizations and acquisitive section 351 transactions typically are used for large public corporations to acquire startups, which encourages monopolies. Triangular mergers raise corporate governance concerns …

The Forgotten Weapon: Section 891 And The Origins Of U.S. Retaliatory Tax Policy, Reuven S. Avi-Yonah, Gianluca Mazzoni

Articles

The original version of the One Big Beautiful Bill Act (P.L. 119-21) included section 899, which would have imposed retaliatory taxes on individuals and corporations from countries that apply “discriminatory or extraterritorial” taxes to U.S. corporations, defined specifically to include digital services taxes and the undertaxed profits rule of pillar 2.

However, on June 26 Treasury Secretary Scott Bessent announced that a compromise was reached on the UTPR, and as a result, section 899 was removed from the OBBBA. Now that section 899 is gone, section 891 is the most important part of the United States’ legislative armory against “discriminatory …

A Core Proposal For Budget Caring - Will The E.U. Adopt A Progressive Corporate Tax?, Domenico Imparato, Reuven S. Avi-Yonah

Articles

On 16 July 2025, the European Commission unveiled its proposed EU budget for the 2028–2034 period, representing a nearly EUR two trillion fiscal commitment for the bloc’s taxpayers – both individual and corporate. As leaked by some media outlets in the days leading up to the official announcement, the EU budget would introduce a new mechanism known as the ‘Corporate Resource for Europe’ (CORE). In the Commission’s proposal, CORE is described as a ‘financial contribution’ from the corporate sector, intended to become part of the European Union’s system of own resources. In practical terms, however, it would function as a …

Facebook Decision Enables Irs To Seek - Cwi Enforcement Against Meta, Stephen L. Curtis, Reuven S. Avi-Yonah, David G. Chamberlain

Law & Economics Working Papers

In this report, the authors explain how the Tax Court's recent decision in the Facebook transfer pricing case - although widely viewed as a victory for the taxpayer, Meta Platforms Inc.- could instead be a Pyrrhic victory because it enables the IRS to pursue a potentially substantial periodic adjustment against the company. The views expressed in this report are solely the authors' and do not necessarily reflect those of any other person or institution.

Should Tax-Free Triangular Mergers Be Eliminated?, Reuven Avi-Yonah

Articles

The tax advantages of reverse triangular mergers under section 368(a)(2)(E) are well known. They enable the acquiring corporation (P) to use up to 60 percent cash consideration to acquire the stock of target (T) through a merger with a controlled subsidiary (S), with T surviving. This amount of boot is higher than what is allowed under a B or C reorganization. Because it is a triangular merger, it avoids exposing the assets of P to the liabilities of T (unlike a direct merger), and because it is equivalent to a stock acquisition, it avoids having to transfer assets, which is …