Tax Law Commons^™

Tax Reporting As Regulation Of Digital Financial Markets, Young Ran (Christine) Kim

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FTX’s recent collapse highlights the overall instability that blockchain assets and digital financial markets face. While the use of blockchain technology and crypto assets is widely prevalent, the associated market is still largely unregulated, and the future of digital asset regulation is also unclear. The lack of clarity and regulation has led to public distrust and has called for more dedicated regulation of digital assets. Among those regulatory efforts, tax policy plays an important role. This Essay introduces comprehensive regulatory frameworks for blockchain-based assets that have been introduced globally and domestically, and it shows that tax reporting is the key …

The Historical Origins And Current Prospects Of The Multilateral Tax Convention, Reuven S. Avi-Yonah, Eran Lempert

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This article has three aims. First, it surveys the pre-BEPS efforts to create a multilateral tax convention (MTC) from the 19th century onward, and explains why these efforts have failed, leading to an international tax regime dominated by unilateralism and bilateralism. Second, it contrasts the success of multilateralism in investment and trade law. Third, it examines the BEPS era efforts to create an MTC and suggests that, while there has been more convergence of the tax laws of countries, a fundamental divergence of interests persists that will likely doom any such efforts to failure. The article concludes that, at this …

The Commerciality Of Non-Profit Hospitals Requires Them To Be Taxed: Bringing The Debate To A Conclusion, Edward A. Zelinsky

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It is now time to conclude our prolonged debate about the tax-exempt status of nonprofit hospitals. The contemporary nonprofit hospital is a commercial enterprise, materially indistinguishable for tax purposes from its profit-making, taxed competitor. The federal income tax and the states’ income, sales and property taxes should treat all hospitals alike, regardless of whether such hospitals are nonprofit or for-profit enterprises. In the interests of equity and efficiency, these similar institutions should be taxed similarly.

As a political matter, nonprofit hospitals will continue to defend their tax-exempt status. Like any other lucrative, vested interest, nonprofit hospitals will continue to fight …

Whirlpool’S Subpart F Position Was Inconsistent With Congressional Intent, Jeffery M. Kadet

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I believe that Whirlpool took an untenable position on allocation in its 2009 tax filings. The Tax Court in its Whirlpool decision corrected this position using a reasonable approach that used the taxpayer’s own accounting. Now, in their article, Yoder et al. have labeled the Tax Court’s approach a “fundamental flaw” while championing Whirlpool’s position. Considering this situation, it is critical that Treasury and the IRS add appropriate guidance to reg. section 1.954-3. This would clarify that in the case of sales to related or unrelated persons, with no locally based sales personnel and where group personnel in other locations …

Taxing Digital Platforms, Andrew Hayashi, Young Ran (Christine) Kim

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The proliferation of digital services taxes (DSTs) in Europe is generally understood as a way for those countries to claim taxing rights over the profits of large digital platforms such as Google, Facebook, and Amazon. Under prevailing norms of international income taxation, these businesses had been able to avoid paying taxes in countries where they had no physical presence, even if they had many users in those countries. But the rise of big tech has generated a set of regulatory and political challenges, and tax is only one of these. The adoption of DSTs is not only about the fair …

Digital Tax Arithmetic., James R. Hines Jr.

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More than 20 countries recently adopted digital services taxes, with many others threatening to do so. The Organisation for Economic Co-operation and Development (OECD) is attempting to convince countries to withdraw their digital taxes in return for an international agreement to implement its Pillar One proposal that would let countries tax prorated shares of the profits of foreign firms with local sales. This paper identifies incentives that countries have to impose inefficiently high rates of digital taxes and calls attention to shortcomings of the OECD’s formulary apportionment alternative. Diverging interests and the inflexible nature of the multilateral bargaining process make …

Microsoft's Cost-Sharing Arrangement: Frankenstein Strikes Again, Stephen L. Curtis, Reuven S. Avi-Yonah

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This paper performs a forensic analysis of Microsoft Corporation’s transfer pricing cost sharing arrangement based on forensic economic analysis of public and information, including Microsoft’s SEC and foreign country regulatory filings, documents disclosed during a recent federal court trial, materials published by Microsoft, and information from former insiders interviewed for this paper, and other sources. The paper finds that Microsoft appears to have violated U.S. transfer pricing laws in 2009 and later years, in ways that caused its transfer pricing cost sharing arrangement with its Irish, Singaporean and Puerto Rican affiliates under U.S. tax laws to be invalid. However IRS …

Too Good To Be True: Private Placement Life Insurance Policies, Luís C. Calderón Gómez

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In this article, Calderón Gómez examines a tax avoidance scheme involving private placement life insurance policies — large policies that potentially allow wealthy taxpayers to move their traditionally tax-inefficient investments in private equity and hedge funds into a life insurance policy and accumulate, borrow against, and pass on those investment gains effectively tax free — and sketches some possible alternatives to stop the abuse of these policies.

The Utpr And The Treaties, Reuven Avi-Yonah

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On December 15, 2022, the Council of the EU unanimously adopted a directive implementing pillar 2 of the OECD/G-20/inclusive framework base erosion and profit-shifting 2.0 project. Given that the United Kingdom is also going ahead, and several other countries (for example Australia, Canada, New Zealand) are likely to go ahead, this step renders it likely that pillar 2 will come into effect outside the United States. It therefore becomes important to address the interaction between the UTPR (now known as the undertaxed profits rule) and tax treaties, even though both EU directives and national legislation in the United Kingdom can …

What Would Surrey Say? The Long Reach Of Stanley S. Surrey, Reuven Avi-Yonah, Nir Fishbien

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Stanley S. Surrey died in 1984, two years before the enactment of the Tax Reform Act of 1986, which gave us the Internal Revenue Code of 1986 as amended. Historians have recently discovered Surrey’s work through his memoirs, published in 2022, and several articles based on the memoir and on the unpublished Surrey papers at Harvard Law School. There is no doubt that Surrey was a towering historical figure during his “Half-Century with the Internal Revenue Code.” As his protégé Donald Lubick, who served as Assistant Secretary for Tax Policy in both the Carter and the Clinton Administrations, stated, Surrey …

The Utpr And The Credits, Reuven S. Avi-Yonah

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Critics of the UTPR (formerly known as the undertaxed payments rule) of the G-20/0ECD/ inclusive framework base erosion and profit shifting project's pillar 2 have focused on the potential impact of the top- up tax on U.S. environmental credits enacted in the Inflation Reduction Act(IRA, P.L.11 7-169) and on credits to encourage domestic chip manufacturing in the Creating Helpful Incentives to Produce Semiconductors and Science Act (the CHIPS Act, P .L. 117-167). They argue that Congress's ability to effectively implement its chosen policy goals is undermined because the UTPR - when applied to other parts of U.S. multinational enterprises - …

Individual Mobility And The Corporate Tax, Reuven S. Avi-Yonah

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The COVID-19 pandemic greatly increased the ability of individuals to move to their preferred location on the globe and continue to work remotely. This phenomenon has significant implications for individual income taxation because if they are U.S. citizens, these individuals are subject to two global residence-based tax regimes.

Pillar 2 And The Credits., Reuven S. Avi-Yonah

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The international tax provisions of the Build Back Better Act (BBB) passed by the House of Representatives represent a reasonable compromise. They are consistent with the OECD’s Pillar Two statement, and they represent a significant move toward the implementation of the single tax principle (STP). In what follows, we will discuss the proposed changes and how they fit in with the new international tax regime (ITR). We will also address the possible interactions with the ITR if BBB is not enacted.

Reforming The Exit Tax, Reuven S. Avi-Yonah

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Code Sec. 877A was enacted in 2008 to impose a significant price on U.S. cit-izens who expatriate. But the price is not right. The quarterly data on expatri-ations (published in the Federal Register since 1998) show an increasing trendsince 2008. For example, 3,422 Americans expatriated in 2022, and the averagesince 2013 was 3,239. By comparison, between 1998 and 2012, fewer than1,000 Americans expatriated each year. This paper will discuss why the increasehappened and what Congress can do about it.

Taxes, Administrative Law, And Agency Expertise: Questioning The Orthodoxy, Scott Schumacher

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One of the foundations of administrative law is that federal agencies and their employees are experts in their respective fields. In addition, the many judgments and decisions made by these experts are based on a thorough record after extensive factfinding. As a result, so the theory goes, courts, particularly courts of general jurisdiction like the United States District Courts, should give deference to the determinations made by these experts. But what if the facts underpinning this foundation are not true in all cases? Should courts nevertheless provide deference to decisions by agencies when it is evident that an agency's determinations …

Constitutional Review Of Federal Tax Legislation, Reuven S. Avi-Yonah, Yoseph M. Edrey

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What does the Constitution mean when it says that “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States” (U.S. Const. Article I, Section 8, Clause 1)?

The definition of “tax” for constitutional purposes has become important considering the Supreme Court’s 2012 decision in National Federation of Independent Business v. Sebelius (“NFIB”), in which Chief Justice Roberts for the Court upheld the constitutionality of the individual mandate of the Patient Protection and Affordable Care Act (“ACA”) under the taxing …

A New Framework For Taxing Cryptocurrencies, Reuven S. Avi-Yonah, Mohanad Salaimi

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This Article explores the tax law challenges associated with the taxation of cryptocurrencies and offers proposals to address such challenges. The Article addresses the proper tax treatment of different cryptocurrency transactions and activities. It examines various aspects associated with the taxation of cryptocurrency through its life cycle, starting from earning cryptocurrency, through its disposal or exchange. The Article also examines the tax treatment of two special crypto events, hard forks and airdrops. Specifically, this Article describes a proposal to tax cryptocurrencies based on their unique features. It argues that various ways of earning or receiving crypto tokens (for example, mining …

State Digital Services Taxes: A Good And Permissible Idea (Despite What You Might Have Heard), Young Ran (Christine) Kim, Darien Shanske

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Tax systems have been struggling to adapt to the digitalization of the economy. At the center of the struggles is taxing digital platforms, such as Google or Facebook. These immensely profitable firms have a business model that gives away “free” services, such as searching the web. The service is not really free; it is paid for by having the users watch ads and tender data. Traditional tax systems are not designed to tax such barter transactions, leaving a gap in taxation.

One response, pioneered in Europe, has been the creation of a wholly new tax to target digital platforms: the …

Whose Debt Is It Anyway?, Luís C. Calderón Gómez

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Every year, companies issue hundreds of billions of dollars of debt with a feature carrying unclear tax consequences. So do individuals, who frequently tie their most significant financial asset to this type of instrument. Yet this instrument is not an exotic or innovative financial derivative, but is simple vanilla debt with two or more borrowers, or “co-obligated debt”. Co-obligated debt poses a conceptual problem for the law because it does not fit neatly into the simple and dyadic legal framework underlying the law’s conception of debt, where one creditor lends money to one borrower in exchange for a direct promise …

The Psychology Of Taxing Capital Income: Evidence From A Survey Experiment On The Realization Rule, Zachary Liscow, Edward G. Fox

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We conduct the first survey experiment to understand public attitudes about the capital gains realization rules. These rules requires that assets usually must be sold before gains on them are taxed and thus makes taxing capital income much harder. We have three main findings. First, respondents strongly prefer to wait to tax gains on stocks until sale: 75% to 25%. But the flip side is that there is surprisingly strong support for taxing gains on assets at sale or transfer, including at death, in areas where current law never taxes those gains. Second, these stated views change only modestly when …

A New Framework For Taxing Cryptocurrencies, Reuven S. Avi-Yonah, Mohanad Salaimi

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This article describes a proposal to tax cryptocurrencies based on their unique features.It argues that while various ways of earning or receiving crypto tokens (for example, mining in proof-of-work (PoW) protocols like bitcoin and staking in proof-of-stake (PoS) protocols like ether) generate taxable income, the tax results should take into account positive and negative externalities. It also claims that because of its volatility, crypto should not be taxed until tokens are exchanged for real-world items like fiat currency or goods and services. Finally, this article argues that when crypto tokens are exchanged for fiat currencies or goods and services, they …

A New Framework For Digital Taxation, Reuven Avi-Yonah, Young Ran (Christine) Kim, Karen Sam

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The international tax regime has wide implications for business, trade, and the international political economy. Under current law, multinational enterprises do not pay their fair share of taxes to market countries where profits are generated because market countries are only allowed to tax companies with a physical presence there. Digital companies, like Google and Amazon, can operate entirely online, thereby avoiding market country taxes. Multinationals can also exploit existing tax rules by shifting their profits to low-tax jurisdictions, thereby avoiding taxes in the residence country where their headquarters are located.

Recently, a global tax deal was reached to tackle these …

Is Bitcoin Prudent? Is Art Diversified? Offering Alternative Investments To 401(K) Participants, Edward A. Zelinsky

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Whether 401(k) plans’ investment menus should feature “alternative” investments is a fact-driven inquiry applying ERISA’s fiduciary standards of prudence, loyalty, and diversification. Central to this fact-driven inquiry is whether the alternative investment class in question is broadly accepted by investors in general and by professional defined benefit trustees in particular. A similarly salient concern when making this inquiry is the financial unsophistication of many, perhaps most, 401(k) participants. Accounting for these considerations, this Article concludes that REITs, private equity funds, and hedge funds can, with limits, today be offered as investment choices to 401(k) participants, but that cryptocurrencies (including Bitcoin), …

Incentivizing Innovation, Xuan-Thao Nguyen, Jeffrey A. Maine

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This Article advocates for a new approach to incentivizing innovation through the design of ex post tax incentives for research and development (R&D) investment. In contrast to many nations, the United States relies largely on ex ante tax incentives, namely a tax deduction and tax credit for qualified R&D spending. Fundamental design flaws exist with these ex ante incentives; moreover, innovation occurs continuously and yields results at the back end of the innovation cycle. An appropriate framework should take into consideration the key players in the innovation landscape. These players are often treated differently under the tax laws such that …

Minimum Taxation In The United States In The Context Of Globe, Reuven S. Avi-Yonah, Mohanad Salaimi

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The introduction of the minimum tax in Pillar II of the OECD/G20/IF framework was generally seen as a response to the U.S. Tax Cuts and Jobs Act (TCJA) of 2017. The TCJA included both a minimum tax on outbound income (the Global Intangible Low-Taxed Income, or “GILTI”) and a minimum tax on inbound income (the Base Erosion Anti-Avoidance Tax, or “BEAT”). These were seen as the precursors to the IIR and the UTPR. Thus, unlike Pillar I which was perceived as a device to impose more tax on the U.S. digital giants, Pillar II was seen as more consistent with …

The Beat And The Bits: Can The United States Be Sued Over The Beat?, Reuven S. Avi-Yonah

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On December 21, 2020, the government of India announced that it will appeal an arbitration award of $5.6 billion issued in favor of Vodafone PLC by the Permanent Court of Arbitration (PCA) in the Hague. The award resulted from the decision of India to impose capital gains tax on Vodafone (as withholding agent) for its acquisition of a Cayman Islands subsidiary from Hutchison, which held the Indian telecommunication assets of the Hong Kong-based Hutchison group. The Indian Supreme Court had decided that no tax was due, but the Indian government passed legislation to overturn that decision retroactively. This, the PCA …

The Parallel March Of The Ginis: How Does Taxation Relate To Inequality, And What Can Be Done About It?, Reuven S. Avi-Yonah

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The United States currently has one of the highest levels of inequality among industrialized economies. In addition, numerous scholars have shown that social mobility in the United States is significantly lower than it was in the period between 1945 and 1970, when inequality was declining. The combination of these trends is dangerous because it risks transforming the United States into a society where small elites capture most of the gains, a pattern in which growth cannot be sustained over time. The level of inequality in the United States after taxes and transfers are taken into account is much lower, but …

First Impressions Of The International Tax Provisions Of Bbb: A Reasonable Compromise., Reuven S. Avi-Yonah

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U.S. critics of Pillar 2 of the Organisation for Economic Co-operation and Development (OECD)/Inclusive Framework (IF) Base Erosion and Profit Shifting (BEPS) 2.0 project have focused on the impact of the Undertaxed Profits Rule (UTPR) on tax credits such as the ones included in the Inflation Reduction Act (IRA) and the Creating Helpful Incentives to Produce Semiconductors and Science (CHIPS) Act. In fact, those credits are unlikely to be affected because they are refundable. But this raises a broader question of why the line between qualifying and non-qualifying credits should be drawn at refundability. This article addresses this question and …

A New Framework For Digital Taxation, Reuven S. Avi-Yonah, Young Ran (Christine) Kim, Karen Sam

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The international tax regime has wide implications for business, trade, and the international political economy. Under current law, multinational enterprises do not pay their fair share of taxes to market countries where profits are generated because market countries are only allowed to tax companies with a physical presence there. Digital companies, like Google and Amazon, can operate entirely online, thereby avoiding market country taxes. Multinationals can also exploit existing tax rules by shifting their profits to low-tax jurisdictions, thereby avoiding taxes in the residence country where their headquarters are located.

Recently, a global tax deal was reached to tackle these …

A Study Of Tax Lawyers Discussing Duties, Michael Hatfield, Michelle Kwon

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This Article reports the first qualitative empirical study of U.S. tax lawyers. We interviewed women lawyers who were tax planning specialists. Though this is the first such study of U.S. tax lawyers, this methodology has been used often to study the professional ethics of other tax practitioners around the world. We had three research questions that we sought to answer through dynamic conversations on topics such as the distinctions between good and bad tax plans and good and bad tax lawyers and also the joys and stresses of tax practice. Our first research question was as to the make-up of …