Tax Law Commons^™

Now You Have It, Now You Don’T: Taxing Crypto, Part 1, Reuven S. Avi-Yonah

Articles

The latest rise in the value of bitcoin has rekindled the debate on whether cryptocurrencies perform a useful function. For example, a recent article in the Financial Times argued: Have we learnt the lessons from the disastrous 2022 crash in digital assets? To judge from recent action in the crypto market, the answer appears to be no. Since hitting bottom after FTX collapsed into bankruptcy with a $9bn-ish hole in its balance sheet in November 2022, crypto market values have roughly tripled. Bitcoin’s price rose above $70,000 this week to touch record highs. A new wave of enthusiasm is growing, …

The International Tax Revolution: Introduction, Christine Kim, Reuven S. Avi-Yonah

Law & Economics Working Papers

(This book chapter, Introduction, is included in the forthcoming book, titled THE INTERNATIONAL TAX REVOLUTION, which the Cambridge University Press will publish in 2024-25.)

The past decade has witnessed the creation of a new international tax regime (ITR). Since the advent of globalization in the 1980s and digitalization in the 1990s, the original ITR ceased to function as intended. The main problems were the increased mobility of capital related to intangibles, a relaxation of capital controls, and increased tax competition. The outcome was a significant fall in tax revenues that threatened the social safety net of the modern welfare state. …

Littlejohn’S Unjust Tax Sentence, Reuven S. Avi-Yonah

Articles

On May 1 Charles Littlejohn began serving a five-year prison sentence for unauthorized disclosure of tax information. His crime is described by the Department of Justice as follows: According to court documents, Charles Littlejohn, 38, of Washington, D.C., while working at the IRS as a government contractor, stole tax return information associated with a high-ranking government official (Public Official A). Littlejohn accessed tax returns associated with Public Official A (and related individuals and entities) on an IRS database after using broad search parameters designed to conceal the true purpose of his queries. He then uploaded the tax returns to a …

Should U.S. Tax Law Be Constitutionalized?, Reuven S. Avi-Yonah

Articles

Moore is the first Supreme Court case involving a constitutional challenge to a federal income tax law since Macomber, which was decided more than a century ago. Whatever way the Court rules, other such cases are likely to be brought and some of them may reach the Court. Moore won’t be the last case of its kind.

The Case For Targeted Location Incentives, Reuven S. Avi-Yonah

Articles

Both the global intangible low-taxed income provisions of the Tax Cuts and Jobs Act and the substance-based income exclusion of pillar 2 provide incentives to shift real investment to lowtax locations. Under GILTI, a 10 percent return on tangible assets of the subsidiaries of U.S. multinationals (qualified business asset investment) is exempt from tax. Under pillar 2, the top-up tax calculation excludes 10 percent of payroll costs and 8 percent of the carrying value of tangible assets in a jurisdiction.

Can Investment Treaties Defeat Pillar 2?, Reuven S. Avi-Yonah

Articles

In their excellent recent Tax Notes International article, “Using Investment Treaties to Prevent Pillar 2’s Revocation of Promised Tax Incentives,” Javier Rubinstein, Lauren Friedman, and Tamsin Parzen make an interesting new argument about the interaction between bilateral investment treaties (BITs) and pillar 2. They argue that an investor benefiting from an existing BIT can rely on it to prevent the imposition of a qualified domestic minimum top-up tax (QDMTT) even without resorting to treaty arbitration. This argument is problematic, however, because it does not fully address the likely reaction of other countries that are not party to the BIT.

Rethinking Taxing Excess Profits, Reuven S. Avi-Yonah, Tamir Shanan

Articles

This article discusses the application of excess profit taxes (EPTs, also referred to as windfall taxes) that have gained renewed interest and popularity over the past several years. The revival of these windfall taxes gained renewed interest following the COVID-19 outbreak, which led to a sharp price increase in corporate revenues of medical equipment and within pharmaceutical industries. However, the revival of such taxes was also used following the recent rise in energy prices mainly in Europe, leading to a sharp increase in corporate revenues of energy corporations and the recent surge in borrowing interest rates that was not accompanied …

Building The Gateway: Why The Two Pillars Need Each Other, Reuven S. Avi-Yonah, Ajitesh Kir

Law & Economics Working Papers

There is a reason the OECD proposed two pillars for its gateway to a better tax future. A gateway requires both pillars, and neither can stand without the other. Pillar 2 is a fait accompli, but it needs countries to implement Pillar 1 as well. Pillar 1 is not going forward in the absence of a Multilateral Tax Convention, but it can be implemented unilaterally, although that would require overriding existing tax treaties.

What Matters In Moore, Reuven Avi-Yonah

Articles

Why does the pending Moore case in the Supreme Court matter? The obvious answer is that if the Court decides that realization is a constitutional requirement for an income tax, the holding will have significant implications for the existing income tax regime. Depending on how broad the decision is, it could enable constitutional challenges to subpart F, the global intangible low-taxed income regime, partnership and subchapter S taxation, and sections 275, 877A, 1256, and 1259, to name just a few. And even if most or all of these challenges are ultimately decided against the taxpayers (for example, because realization does …

Taxing Fat Cats Abroad, Reuven S. Avi-Yonah

Articles

On January 12 the IRS announced that it was able to collect $482 million from a new initiative focused on taxing millionaires: The IRS has ramped up efforts to pursue high-income, high-wealth individuals who have either not filed their taxes or failed to pay recognized tax debt, with dozens of revenue officers focused on these high-end collection cases. These efforts are concentrated among taxpayers with more than $1 million in income and more than $250,000 in recognized tax debt. In an initial success, the IRS collected $38 million from more than 175 high-income earners. The IRS last fall began contacting …

The Case Against Expensing R&E, Reuven S. Avi-Yonah

Articles

On January 16 Senate Finance Committee Chair Ron Wyden, D-Ore., and House Ways and Means Committee Chair Jason Smith, R-Mo., introduced a bipartisan tax package that would revive the child tax credit and modify three provisions in the Tax Cuts and Jobs Act. Under the proposal, the 30 percent limit on interest deductions would be relaxed by including depreciation and amortization in calculating deductible interest, expensing of corporate investment would be extended, and expensing of research and experimentation would be restored in lieu of amortization.

European Union/Oecd/International - Klaus Vogel Lecture 2023: The Past, Present And Future Of Destination-Based Income Taxation., Reuven S. Avi-Yonah

Articles

A significant obstacle to the unilateral adoption of the OECD’s Pillar One are tax treaties since many countries cannot override tax treaties unilaterally. In his Klaus Vogel Lecture for 2023, Professor Reuven Avi-Yonah asks what are the chances for adopting a true multilateral convention for income taxation?

Pillar 2 And The United States: What's Next, Reuven S. Avi-Yonah

Articles

January 1 marked the official effective date of the 15 percent global corporate minimum tax imposed by pillar 2 as part of the G-20/OECD/ inclusive framework base erosion and profitshifting 2.0 project. Pillar 2 went into effect in Australia, Canada, the EU, Japan, Norway, South Korea, and the United Kingdom, with more countries expected to adopt it soon, including low-tax countries like Barbados, Ireland, Luxembourg, the Netherlands, and Switzerland. Critics have argued that pillar 2 violates tax treaties, customary international law, or bilateral investment treaties. But it seems unlikely that legal challenges against it will succeed. Most of the countries …

The Global Corporate Minimum Tax And Mne Home Countries, Reuven S. Avi-Yonah

Other Publications

This Perspective explores the implications for the home countries of large MNEs of the agreement reached by over 140 countries in 2021 to enact a corporate minimum tax of 15%. It argues that the corporate minimum tax complements the trend to reduce the negative impact of unfettered globalization on labor, and it protects the ability of home countries to finance a robust social safety net. Home countries should adopt the corporate minimum tax, and that includes the US, which last year failed to adapt its Global Intangible Low-Taxed Income approach to the corporate minimum tax.

Taxation And Corporate Governance, Reuven S. Avi-Yonah, Ariel Siman

Law & Economics Working Papers

In recent years, legal and economic research has shown a growing interest in the interaction between corporate governance and taxation. Some specific aspects have drawn more interest, particularly the tax rules related to the remuneration of directors, measures taken by management in the context of market for corporate control, and the double taxation of inter-corporate dividends. However, there is still little legal literature on many other aspects of the interplay between the two systems, and several authors have identified this gap in the literature and the dire need for further study in this “fertile area of research.” The aim of …

Why Did The Irs Win? A Remarkable Year In Tax Litigation, Part 2, Reuven S. Avi-Yonah

Articles

In my previous column, 2023 was a remarkably good year for government litigators in tax cases. That column focused on two transfer pricing cases (3M and Coca-Cola). This column will focus on two other government victories (YA Global and Liberty Global).

Reimagining The Deduction For Employee Compensation, Daniel Schaffa

University of Michigan Journal of Law Reform

U.S. businesses pay trillions of dollars in employee compensation, a substantial fraction of which is deductible for tax purposes. This deduction reduces the taxable income of businesses, ultimately lowering business tax burdens by hundreds of billions of dollars. With a few exceptions, the tax code confers the same deduction to a business for every dollar of employee compensation, regardless of whether that compensation goes to an employee earning millions or an employee earning minimum wage. This is consistent with a pure Haig-Simons income tax, under which any business expense incurred ought to be deductible dollar-for-dollar. But many, if not most, …

Closing The Billionaire Borrowing Loophole Would Strengthen The Progressivity Of The U.S. Tax Code, Edward Gellis Fox, Zachary Liscow

Other Publications

The vast majority of Americans are concerned that some wealthy people don’t pay their “fair share” of federal taxes. They’re right to be bothered: Loopholes in the U.S. tax code allow some billionaires to pay taxes equal to only 1 percent of the increases in their wealth, which tax textbooks across the country consider “income.”

How is this possible? The low effective tax rate arises in part because U.S. billionaires with large stock portfolios and other appreciated assets can borrow money using their considerable financial assets as collateral and then pay little to no taxes on the cash they use …

The Dividend Puzzle Redux, Reuven S. Avi-Yonah

Articles

The news that Meta will for the first time pay a dividend to its shareholders has prompted discussion of whether dividends will make a comeback as a major component of investor returns for high-flying corporations. Before this latest development, the largest U.S. companies (that is, the digital giants) tended to engage in stock buybacks and did not usually pay dividends.

Is Treasury Bound By The Arm's-Length Standard?, Reuven S. Avi-Yonah

Articles

In December 2023 Abbott Laboratories petitioned the Tax Court to reverse $417 million in section 482 deficiencies. The petition addresses many issues, but as Tax Notes contributing editor Ryan Finley pointed out in his excellent recent article, the most important one relates to the issue of whether stock-based compensation should be included in the pool of costs covered by a costsharing arrangement. This is the same issue that taxpayers have litigated repeatedly, with the most recent case, Altera, resulting in an IRS victory in the Ninth Circuit. If Abbott wins, the case is appealable to the Seventh Circuit, potentially setting …

Corporate Taxpayers And Frivolous Arguments, Part 1, Reuven S. Avi-Yonah

Articles

In two recent cases, corporate taxpayers have made legal arguments that seem on their face to be frivolous.

The first example, as Robert Goulder explains in his excellent recent column, is the argument made by Liberty Global (LGI) involving the source of the gain on the sale of a foreign subsidiary. LGI sold the shares of a Japanese subsidiary for a gain of $3.25 billion, of which $438 million was dividend income under section 1248. The issue was the source of the remaining $2.8 billion gain. LGI argued that it should be foreign source despite the explicit source rule for …

Can The United States Curb Its Debt?, Reuven S. Avi-Yonah

Articles

After the upcoming presidential election, the United States is almost certainly going to have a president who is barred from running for reelection, regardless of the outcome in November. This situation has never happened before and it presents an important opportunity for fundamental tax reform.

Try Again: The Problems Of Befit, Reuven S. Avi-Yonah

Articles

In September 2023, the European Commission proposed the directive Business in Europe: Framework for Income Taxation (BEFIT) for corporate income taxation of large groups (COM(2023) 532 final (Sept. 12, 2023)). This is the latest iteration of the EU’s effort to harmonize corporate taxation within the single market. But like its predecessor the Common Consolidated Corporate Tax Base, BEFIT suffers from flaws that undermine its stated goals. The EU can do better, especially given that pillar 1 of the base erosion and profit-shifting’s project 2.0 shows the way forward.

What Is The Best Candidate For A Post-Moore Constitutional Challenge?, Reuven S. Avi-Yonah

Articles

On December 5, 2023, the Supreme Court heard oral arguments in Moore, the case challenging the constitutionality of the mandatory repatriation tax enacted in 2017 (section 965). Most of the justices' questions focused on the potential collateral consequences from requiring realization as a constitutional matter, and the majority seemed inclined to avoid the constitutional issue by focusing on the fact that the income in Moore was realized and that section 965 simply followed a long list of precedents by attributing this corporate income to shareholders in a closely held corporation.

Effects From Moore: Does The Corporate Tax Require Realization?, Reuven S. Avi-Yonah

Articles

This paper explores the history of the corporate tax as an excise versus income tax and explains potential effects from the Moore and Altria cases.

Taxation And Corporate Governance, Reuven S. Avi-Yonah, Ariel Siman

Articles

Legal and economic scholars have examined the intersection between corporate governance and taxation; however, recent legal scholarship has generally focused on the interplay between director compensation, management measures in the face of the market for corporate control, and the double taxation of inter-corporate dividends. Other aspects of the relationship between corporate governance and taxation have received limited attention. This article aims to fill this gap in the literature. First, this paper discusses the corporate agency problem and the existing justifications for the corporate tax. Second, this paper argues that the corporate tax can be justified on the ground that it …

Fifty Years Of 'Cut To Grow': How Changing Narratives Around Corporate Tax Policy Have Undermined Child And Family Well-Being, Reuven S. Avi-Yonah, Emily Divito, Niko Lusiani

Articles

What follows in this report is an assessment, though not exhaustive, of the central worldviews and set of assumptions driving key US corporate tax reform moments in history—and their consequences for the well-being of children and families in the US. Though political narratives of all kinds are never cleanly chronological (and this remains true of those pertaining to corporate taxation and well-being policies), we aim to build on existing understanding of how dominant narratives come to be and how they, to the extent that they do, drive corporate tax policy outcomes in the US. Looking back over the past 50 …

Corporate Taxpayers And Frivolous Arguments, Part 2, Reuven S. Avi-Yonah

Articles

In my previous column, I discussed the Liberty Global cases and argued that the taxpayer’s positions were frivolous or lacked economic substance. I also argued that a corporate tax director who knows that a return position is frivolous or that a transaction has no economic substance should “just say no.” Until the day arrives that most tax directors take this view (I am not holding my breath), the IRS must rely on a combination of the uncertain tax position schedule and penalties under section 6662.

Answering The Right Questions In Rawat, Reuven S. Avi-Yonah

Articles

The Rawat case, which is currently before the D.C. Circuit, has generated a huge amount of commentary. The problem is that much of this commentary has focused on the partnership tax issues in the case and not on the international tax issue, which is the source of the relevant income. In my opinion, the international tax issue should be dispositive.

Should Digital Services Taxes Be Creditable?, Reuven S. Avi-Yonah

Articles

The impending collapse of pillar 1 of the OECD’s base erosion and profit-shifting 2.0 project means that many countries are likely to join Austria, France, Italy, Spain, and the United Kingdom in enacting digital services taxes. There is a moratorium on new DSTs that has been extended until the end of 2024, but any extension beyond that is unlikely because the elimination of DSTs was premised on pillar 1 coming into effect, and that cannot happen without U.S. ratification of the multilateral tax convention (MLC). It is safe to predict that there will not be 67 votes in the Senate …