Taxation-Federal Commons^™

Risky Ventures: The Impact Of Irs Health Care Joint Venture Policy, Roger P. Meyers

University of Michigan Journal of Law Reform

IRS oversight of joint ventures between exempt and for-profit organizations has undergone substantial change over the past thirty years. This change has important consequences for the health care industry, where joint ventures have grown increasingly common. In the face of unclear guidance and aggressive enforcement of exemption-policing tools such as the private benefit doctrine and the control test, a hospital risks revocation of its tax-exempt status, or liability for unrelated business income tax, when it engages in a joint venture directly. It may be able to eliminate this risk by operating the same joint venture through a for-profit subsidiary; however, …

Xilinx And The Arm's-Length Standard, Reuven S. Avi-Yonah

Articles

On May 7 the Ninth Circuit decided Xilinx v. Commissioner. By a 2-1 majority, the panel reversed the Tax Court and held that costs of employee stock options must be included in the pool of costs subject to a tax-sharing agreement. The Xilinx decision is important for three reasons. First, cost sharing is probably the key element in current transfer pricing law because it is the principal way in which profits from intangibles get shifted from the United States to low-tax jurisdictions. Moreover, informed observers agree that the allocation of income from intangibles is the most important problem in transfer …

Obama's International Tax Plan: A Major Step Forward, Reuven S. Avi-Yonah

Articles

President Barack Obama last week personally introduced a set of proposals to reform U.S. international taxation that are the most significant advance toward preserving the income tax on cross-border transactions since the enactment of the subpart F rules by the Kennedy administration in 1962. (For prior coverage, see Doc 2009-10047 or 2009 TNT 84-1.) In essence, the Obama proposals introduce a 21stcentury version of the vision begun by Thomas Adams in 1918 and continued by Stanley Surrey in 1961: a world in which source and residence taxation are coordinated so as to achieve the underlying goals of the international tax …

Closing The International Tax Gap Via Cooperations, Not Competition, Reuven S. Avi-Yonah

Book Chapters

All three major goals of the Volcker task force — reducing tax evasion and loopholes, simplifying the code, and reducing corporate welfare — can be advanced by focusing on the international aspects of the tax gap. These aspects include both enforcement of existing U.S. law on U.S. residents earning income overseas (the evasion issue) and reforming deferral for U.S.-based multinational enterprises (the avoidance issue). To best advance the task force’s three goals, I would propose a change in each of these two major international areas.

Allocating Business Profits For Tax Purposes: A Proposal To Adopt A Formulary Profit Split, Reuven S. Avi-Yonah, Kimberly A. Clausing, Michael C. Durst

Articles

The current system of taxing the income of multinational firms in the United States is flawed across multiple dimensions. The system provides an artificial tax incentive to earn income in low-tax countries, rewards aggressive tax planning, and is not compatible with any common metrics of efficiency. The U.S. system is also notoriously complex; observers are nearly unanimous in lamenting the heavy compliance burdens and the impracticality of coherent enforcement. Further, despite a corporate tax rate one standard deviation above that of other OECD countries, the U.S. corporate tax system raises relatively little revenue, due in part to the shifting of …

Risks, Rents And Regressivity Revisited, Reuven S. Avi-Yonah

Articles

This article seeks to survey the debate in the United States about whether the tax base should be income or consumption, and then focus on some recent arguments that have been made in favour of a consumption tax. In the author's opinion, none of these arguments are convincing, and he would favour adopting a consumption tax in addition to, and not in lieu of, the existing income tax.

How Globalization Affects Tax Design, James R. Hines Jr., Lawrence H. Summers

Articles

The economic changes associated with globalization tighten financial pressures on governments of high-income countries by increasing the demand for government spending while making it more costly to raise tax revenue. Greater international mobility of economic activity, and associated responsiveness of the tax base to tax rates, increases the economic distortions created by taxation. Countries with small open economies have relatively mobile tax bases; as a result, they rely much less heavily on corporate and personal income taxes than do other countries. The evidence indicates that a ten percent smaller population in 1999 is associated with a one percent smaller ratio …

Enforcing Dividend Withholding On Derivatives, Reuven S. Avi-Yonah

Articles

The United States imposes a 30 percent withholding tax on dividends paid to nonresident aliens. However, this tax is rarely paid by portfolio investors because they can swap into U.S. securities, receiving payments to match both capital gain and dividends. Treasury has ruled that swap payments have an origin in the taxpayer’s residence so there is no withholding obligation on payments that match dividends. The proposal would impose withholding tax on dividend equivalents on the ground that there is no policy justification for a distinction between dividends, substitute dividends under securities lending transaction (which are treated as dividends and are …

Will The Tax Man Cometh To Coach Rodriguez?, Douglas A. Kahn, Jeffrey H. Kahn

Articles

There has been much in the news recently about coaches of major college sports teams moving to a new school and incurring an obligation to make payment to their old school under a buyout provision in their contract. The most recent example is the highly publicized move of Richard Rodriguez from West Virginia University to the University of Michigan. Coach Rodriguez had a contract with his former employer that required him to pay $4 million dollars to West Virginia if he left for another coaching position. After a suit was filed, it was reported that the parties agreed that the …

Corporate Taxation And International Charter Competition, Mitchell A. Kane, Edward B. Rock

Michigan Law Review

Corporate charter competition has become an increasingly international phenomenon. The thesis of this Article is that this development in corporate law requires a greater focus on corporate tax law. We first demonstrate how a tax system's capacity to distort the international charter market depends both upon its approach to determining corporate location and upon the extent to which it taxes foreign source corporate profits. We also show, however, that it is not possible to remove all distortions through modifications to the tax system alone. We present instead two alternative methods for preserving an international charter market. The first-best solution involves …

Federal Fairness To State Taxpayers: Irrationality, Unfunded Mandates, And The "Salt" Deduction, Brian Galle

Michigan Law Review

By sheer dollars alone, the largest impact of the Alternative Minimum Tax is to deny many taxpayers the deduction for the taxes they paid to their state and local governments under § 164 of the Internal Revenue Code. This Article provides a fine-grained analysis of the overall fairness of the state-andlocal- tax deduction--and, by implication, the fairness of its partial repeal through the Alternative Minimum Tax. I offer for the first time a close examination of how newly understood limits on taxpayer mobility and rationality might affect individuals' choices of bundles of local taxes and localgovernment services, which in turn …

Senator Mccain's Corporate Tax Proposals A Critical Examination, Reuven S. Avi-Yonah

Other Publications

Senator John McCain (R-AZ) has proposed two major changes to the corporate tax code: cutting the corporate tax rate from 35 percent to 25 percent and allowing corporations to deduct the full cost of investments in technology and equipment in the first year, an accounting process known as expensing. The first proposal aims to enhance U.S. economic competitiveness, create jobs, and increase wages. The second proposal aims in particular to boost capital expenditures and “reward investment in cutting-edge technologies.”1

The Proper Tax Treatment Of The Transfer Of A Compensatory Partnership Interest, Douglas A. Kahn

Articles

If a person receives property as payment for services, whether for past or future services, the receipt typically constitutes gross income to the recipient. If a person performs services for a partnership or agrees to perform future services, and if the person receives a partnership interest as compensation for the past or future services, one might expect that receipt to cause the new partner to recognize gross income in an amount equal to the fair market value of the partnership interest. After all, if a corporation compensated someone for services rendered or to be rendered by transferring the corporation's own …

Back To The Future? The Potential Revival Of Territoriality, Reuven S. Avi-Yonah

Articles

Since 1994, the trend in the United States and other developed countries appears to be to reduce the scope of residence jurisdiction and increase the emphasis on source jurisdiction. If this trend continues, these countries are likely to move toward territoriality and decrease the emphasis on their CFC rules. In the author’s opinion, the reason for this trend is political and economic, not legal. It is part of tax competition, specifically the competition to be the headquarters jurisdiction for multinationals. The author also thinks, however, that it is not necessary to go down this road because the solution to the …

Comment On Yin, Reforming The Taxation Of Foreign Direct Investment By Us Taxpayers, Reuven S. Avi-Yonah

Articles

In this excellent article, George Yin addresses an important proposal by the President's Advisory Panel on Federal Tax Reform. The Advisory Panel proposed that the United States should permanently switch from taxing the parent corporation of U.S. multinationals on worldwide income to a modified territorial regime under which dividends paid out of active business income would be exempt from U.S. tax.' The Joint Committee on Taxation made a similar recommendation.2

Third-Party Tax Administration: The Case Of Low- And Moderate-Income Households, Michael S. Barr, Jane K. Dokko

Articles

Using a unique household-level data set, this article investigates the taxfiling experiences and refund behavior of low- and moderate-income (LMI) households. We document households' tax-filing behavior, attitudes about the withholding system, use of tax refunds to consume and save, and the mechanisms by which households would prefer to receive their income. We also document the prevalence of the use of tax-preparation services and the receipt of tax refunds and refund-anticipation loans. Finally, we argue that there may be a role for tax administration to enable LMI households to make welfare-improving financial decisions.

Paying To Save: Tax Withholding And Asset Allocation Among Low- And Moderate-Income Taxpayers, Michael S. Barr, Jane Dokko

Law & Economics Working Papers Archive: 2003-2009

We analyze the phenomenon that low- and moderate-income (LMI) tax filers exhibit a “preference for over-withholding” their taxes, a measure we derive from a unique set of questions administered in a dataset of 1,003 households, which we collected through the Survey Research Center at the University of Michigan. We argue that the relationship between their withholding preference and portfolio allocation across liquid and illiquid assets is consistent with models with present-biased preferences, and that individuals exhibit self-control problems when making their consumption and saving decisions. Our results support a model in which individuals use commitment devices to constrain their consumption. …

All In The Family As A Single Shareholder Of An S Corporation, Douglas A. Kahn, Jeffrey H. Kahn, Terrence G. Perris

Articles

Subject to a few exceptions, a corporation that has elected to be taxed under subchapter S of chapter 1 of subtitle A of title 26 of the United States tax code is not taxed on its net income. Instead, the income, deductions, credits, and other tax items of an S corporation pass through to its shareholders on a pro rata basis. To qualify for subchapter S treatment, an electing corporation must satisfy the requirements that are set forth in section 1361, one of which is that the corporation can have no more than 100 shareholders. One aspect of that requirement …

Optimal Tax Compliance And Penalties When The Law Is Uncertain, Kyle D. Logue

Articles

This article examines the optimal level of tax compliance and the optimal penalty for noncompliance in circumstances in which the substance of the tax law is uncertain - that is, when the precise application of the Internal Revenue Code to a particular situation is not clear. In such situations, a number of interesting questions arise. This article will consider two of them. First, as a normative matter, how certain should taxpayers be before they rely on a particular interpretation of a substantively uncertain tax rule? If a particular position is not clearly prohibited but neither is it clearly allowed, what …

The Theory And Practice Of Tax Reform, Lawrence Zelenak

Michigan Law Review

On January 7, 2005, President Bush-flush with recent electoral victory- issued an Executive Order creating the President's Advisory Panel on Federal Tax Reform. The Order instructed the bipartisan Panel to recommend one or more plans for major reform of the federal income tax. The president did not, however, permit the Panel to begin its work on a blank slate. Instead, the Order required (among other things) that the Panel's proposals be revenue-neutral, simpler than current law, "appropriately progressive," and supportive of homeownership and charity. Although the Order contemplated that the Panel might offer more than one tax reform plan, it …

Why Was The U.S. Corporate Tax Enacted In 1909?, Reuven S. Avi-Yonah

Book Chapters

This chapter argues that the principal reason the US adopted the corporate tax in 1909 was to regulate corporate managerial power, and that in this regard the 1909 tax differed both from the 1894 corporate tax and from current conceptions of the tax as an indirect tax on corporation’s shareholders.

The United States has had a corporate income tax since 1909. Currently, this tax is under significant criticism, with several academics and practitioners calling for its abolition. It therefore seems appropriate in this context to try to determine what led to the enactment of this tax, and whether the original …

Corporate Taxation And International Competition, James R. Hines Jr.

Book Chapters

Many countries tax corporate income heavily despite the incentives that they face to reduce tax rates in order to attract greater investment, particularly investment from foreign sources. The volume of world foreign direct investment (FDI) has grown enormously since 1980, thereby increasing a country's ability to attract significant levels of new investment by reducing corporate taxation. The evidence indicates, however, that corporate tax collections are remarkably persistent relative to gross domestic product ( GDP), government revenues, or other indicators of underlying economic activity or government need. If this were not true- if corporate income taxation were rapidly disappearing around the …

Commentary, Reuven S. Avi-Yonah

Book Chapters

David Rosenbloom has delivered an important lecture on an important topic: whether exploiting differences between the tax system of two different jurisdictions to minimize the taxes paid to either or both ("international tax arbitrage") is a problem, and if so, whether anything can be done about it in a world without a "world tax organization." As Rosenbloom states, international tax arbitrage is "the planning focus of the future," and recently has been the focus of considerable discussion and debate (for example, upon the promulgation and subsequent withdrawal under fire of Notice 98-11). Rosenbloom's lecture is one of the first attempts …

The New United States Model Income Tax Convention, Reuven S. Avi-Yonah, Martin B. Tittle

Articles

On 15 November 2006, the United States Treasury released its long-awaited new Model Income Tax Convention (“New Model”), which replaced the 1996 US Model (“Old Model”). This article reviews some of the major differences between the New and Old Models, as well as some of the major differences between the New Model and the current (2005) OECD Model Tax Convention. The article also discusses some new trends in US treaty policy which are not reflected in the New Model. The article concludes by evaluating the New Model in light of the emerging trend to use tax treaties not just to …

Tax Consequences When A New Employer Bears The Cost Of The Employee's Terminating A Prior Employment Relationship, Douglas A. Kahn, Jeffrey H. Kahn

Articles

The next few months will be busy ones for moving companies that have NCAA basketball coaches as customers. In the past few months, several men's college basketball coaches have accepted jobs at different schools. Several of those coaches, who were still under contract at their former institution, had buy out provisions that allowed them to terminate their relationship for a set price. John Beilein is a prominent example of this since his buy out price was so high. Last season, Beilein was the head basketball coach at West Virginia University where he was under contract with the school until 2012. …

Dividend Policy Inside The Multinational Firm, Mihir A. Desai, C. Fritz Foley, James R. Hines Jr.

Articles

This paper examines the determinants of profit repatriation policies for US multinational firms. Dividend repatriations are surprisingly persistent and resemble dividend payments to external shareholders. Tax considerations influence dividend repatriations, but not decisively, as differentially-taxed entities feature similar policies and some firms incur avoidable tax penalties. Parent companies requiring cash to fund domestic investments, or to pay dividends to common shareholders, draw on the resources of their foreign affiliates through repatriations. Incompletely controlled affiliates are more likely than others to make regular dividend payments and to trigger avoidable tax costs through repatriations. The results indicate that traditional corporate finance concerns …

Federalism And The Commerce Clause: A Comparative Perspective, Reuven S. Avi-Yonah

Articles

The U.S. Supreme Court has on numerous occasions addressed the constitutionality of state taxes under the U.S. Constitution (most often under the Commerce Clause, but sometimes under the Equal Protection and Due Process Clauses). In general, the Supreme Court has granted wide leeway to the states to adopt any tax system they wish, only striking down the most egregious cases of discrimination against out-of-state residents. Thus, for example, the Court has generally refused to intervene against state tax competition to attract business into the state. It has twice upheld a method of calculating how much income of a multinational enterprise …

The Internal Markets Of Multinational Firms, Mihir A. Desai, C. Fritz Foley, James R. Hines Jr.

Articles

The rising economic importance of multinational firms has been accompanied by significant changes in their structure and functioning. Multinational firms, historically characterized as webs of autonomous subsidiaries spread across countries, now represent globally integrated production systems serving worldwide customers. These changes are manifest in the rising significance of intrafirm trade and financial flows for these firms. While there is extensive analysis of aggregate patterns in intrafirm flows of goods and capital, few firm-based studies examine the workings of the internal markets of multinational firms, largely because of the difficulty in accessing the necessary data. A number of our recent projects …

Tax Filing Experiences And Withholding Preferences Of Low- And Moderate-Income Households Preliminary Evidence From A New Survey, Michael S. Barr, Jane Dokko

Other Publications

The United States Federal income tax code has an enormous potential to shape the economic and financial decisions of taxpaying households. Tax rates, compliance laws, and the withholding system create incentives, as do the methods by which the Treasury collects tax receipts and disburses tax refunds. The role of third party service providers in this incentive structure is less well understood, even though tax preparation firms play important roles in our tax system. Nationally, more than half of taxpayers use paid preparers to submit their tax returns. Low- and moderate-income (LMI) households are among those who use the paid tax …

Taxation And Multinational Activity: New Evidence, New Interpretations, Mihir A. Desai, C. Fritz Foley, James R. Hines Jr.

Articles

In the midst of rapid integration and globalization, multinational firms still face tax systems that differ among countries, and these differences have the potential to affect major investment and financing decisions. This research covers a wide range of topics, including the impact of indirect taxes as well as of corporate income taxes, the sensitivity of financing decisions to tax rates, the effects of taxes on repatriation policies, the demand for, and impact of, tax havens, and the use of indirect ownership as a means of avoiding taxes. The behavior of US multinational firms as revealed by the evidence collected by …