Taxation-Federal Commons^™

Legal Ethics And Federal Taxes, 1945-1965: Patriotism, Duties, And Advice, Michael Hatfield

Articles

This article is devoted to exploring the legal ethics writings by tax lawyers in a pivotal period of income tax history: 1945-1965, the first two decades of the federal income tax as we now know it. Although the income tax began in 1913, it was World War II that created the modem mass income tax: in 1939 there were 3.9 million individual income tax taxpayers but by 1945 there were 42.6 million. This period was also one of significant progress in the administration of the income tax: the Internal Revenue Code was re-organized in 1954 and, following widespread corruption scandals, …

Too Close To Home: Limiting The Organizations Subsidized By The Charitable Deduction To Those In Economic Need, Shannon Weeks Mccormack

Articles

The charitable deduction allows taxpayers to deduct amounts donated to organizations pursuing statutorily designated purposes from their otherwise taxable income. By lowering the after-tax cost of giving and encouraging taxpayers to donate more than they otherwise would, the charitable deduction subsidizes a broad variety of organizations. Some of these organizations provide widespread societal benefits, while others provide narrower benefits that remain closer to the taxpayer-donor’s home. To evaluate these current laws, this Article focuses on efficiency criteria, which limit subsidized organizations to those with donor support that does not cover the costs needed to optimally provide goods and services. Existing …

Taking The Good With The Bad: Recognizing The Negative Externalities Created By Charities And Their Implications For The Charitable Deduction, Shannon Weeks Mccormack

Articles

The tax code allows taxpayers to deduct amounts donated to an extremely broad variety of organizations deemed to create societal benefits — that is, positive externalities. But many organizations that may receive tax-deductible contributions also cause harms. Both the tax code and subsidy theory, one of the most utilized scholarly theories developed to analyze the deduction from an economic and morally neutral perspective, fail to properly account for these negative externalities. In order to do so, one needs to look beyond the economic models utilized by subsidy theorists. For instance, there should be some limit to the types of harms …

Tax Shelters And Statutory Interpretation: A Much Needed Purposive Approach, Shannon Weeks Mccormack

Articles

Few are unaware that the Tax Code and Regulations provide a detailed, complex (and lengthy) set of rules. It is hardly surprising (or new) that taxpayers attempt to avoid these rules to lower their taxes. Courts and lawmakers have long grappled to identify abusive transactions and strip taxpayers of the associated tax savings. The transactions have, however, changed dramatically over the last decade making the task much more challenging. The rapid proliferation of aggressive and diverse tax shelters has created what many refer to as a tax shelter war. In general, tax shelters refer to transactions carefully designed to fit …

Federal Tax Consequences Of Virtual World Transactions, G. Martin Bingisser

Washington Journal of Law, Technology & Arts

This article discusses the tax consequences of transactions involving Massive Multiplayer Online Role Playing Games (“MMORPGs”). MMORPGs have recently grown in popularity and developed significant economic activity. Virtual goods used in these games are traded for both real and virtual currency. While few dispute that a sale of virtual goods for real currency is a taxable event, more complex tax issues arise concerning transactions that occur solely within virtual worlds. This article analyzes the tax consequences and policy issues surrounding such transactions.

Fifth Circuit Survey: Taxation, Michael Hatfield

Articles

During the survey period, the Fifth Circuit decided nine federal tax cases. Four of the nine cases were appealed from district courts. The remaining five were appealed from the Tax Court. Three of the Tax Court's five decisions (60%) were affirmed, and three of the four district court decisions (75%) were affirmed. Thus, the Fifth Circuit affirmed most of the lower court decisions (66%). Interestingly, only three of the decisions (33%) favored the taxpayer—EC Term of Years Trust v. United States; Garber Industries, Inc. v. Commissioner; and Estate of Baird v. Commissioner—even though the Fifth Circuit …

Ignore The Rumors—Campaigning From The Pulpit Is Okay: Thinking Past The Symbolism Of Section 501(C)(3), Michael Hatfield

Articles

This Article is enough to ruin many Thanksgiving family dinners. It is about American religion, politics, and taxes. Mostly it is about taxes. As I will explain, this is what sets it apart from the contemporary legal scholarship exploring the campaign restrictions on tax exempt churches. This Introduction identifies the problem addressed in the article, then introduces the contemporary legal scholarship and the alternative approach this article takes.

Part I of this Article introduces the reader to the legal context of "the problem" of churches being unable to campaign if they choose to be Tax Exempt under Section 501 (c) …

Beyond The Little Dutch Boy: An Argument For Structural Changes In Tax Deduction Classification, Jeffrey H. Kahn

Washington Law Review

One of the most active disputes in tax law today is the question of the proper tax consequences for a successful plaintiff, a portion of whose taxable damage award is paid to his or her attorney pursuant to a contingent fee arrangement. At issue is whether the plaintiff is taxable on the portion of the award that is payable to the attorney. One aspect of this problem was resolved prospectively by the adoption of the American Jobs Creation Act of 2004, but the problem continues to exist in other areas. The United States Supreme Court resolved a split in the …

The Bonds Of Joint Tax Liability Should Not Be Stronger Than Marriage: Congressional Intent Behind § 6015(C) Separation Of Liability Relief, Svetlana G. Attestatova

Washington Law Review

Spouses who file joint tax returns are jointly and severally liable for any resulting tax deficiency. In the past, only innocent spouses—those with no knowledge of the tax understatement—could qualify for relief from such liability. In 1998, Congress expanded existing innocent spouse relief and added two new forms of relief—the separation of liability and discretionary relief provisions. Codified at 26 U.S.C. § 6015(c), separation of liability relief allocates items that give rise to a deficiency to each spouse as if they had filed separate returns, and is only available to spouses who are divorced, separated, or living apart. However, a …

Protecting The Tax-Exempt Status Of Housing Developers Participating In Low-Income Housing Tax Credit Partnershps, Marni Hussong

Washington Law Review

The Low-Income Housing Tax Credit (LIHTC) is an important source of federal funding for developers of affordable housing for low-income persons. Although for-profit and nonprofit developers compete for credits, the federal government reserves ten percent of the credits for nonprofit, tax-exempt developers. Exempt developers often sell the credits to for-profit investors, forming a partnership through which the exempt organization develops the housing and the investors receive tax benefits in exchange for capital contributions. The partnership formation, however, may jeopardize the tax-exempt status of the nonprofit organizations and result in the partnership losing the LIHTC. To maintain exempt status, the Internal …

Capitalizing The Target's Transaction Costs In Hostile Takeovers, David J. Roberts

Washington Law Review

In A.E. Staley Manufacturing Co. v. Commissioner, the Court of Appeals for the Seventh Circuit held that costs a corporation incurred to resist a hostile takeover were analogous to costs incurred to defend a business against attack and thus qualified as ordinary and necessary business expenses deductible under Internal Revenue Code section 162. Alternatively, the court held that those costs associated with abandoned capital transactions qualified for loss deductions under section 165. This Note argues that although the court reached approximately the right result in this case, its primary reliance on a defense of business rationale for deductibility under …

Sierra Club V. Commissioner And The Royalty Exemption To The Unrelated Business Income Tax: How Much Activity Is Too Much?, Katherine A. Vanye

Washington Law Review

In Sierra Club v. Commissioner, the Ninth Circuit decided that royalties are payments for the right to use intangible property and are by definition "passive." The court applied this definition and held that Sierra Club's income from renting its mailing list was a royalty payment and thus exempt from taxation. This Note argues that while the court reached the correct conclusion, it did not propose a clear standard to guide future cases. Two alternative approaches could be adopted: (1) ancillary versus significant services; or (2) comparative value of property and services. These alternatives will provide clearer guidelines and enable …

Kochanksky V. Commissioner: The Assignment Of Income Doctrine, Community Property Law, And I.R.C. § 1041, Sarah Dods

Washington Law Review

In Kochansky v. Commissioner, the Ninth Circuit held that an attorney was fully taxable on a contingent fee he agreed to split with his spouse at divorce, reasoning that the assignment of income doctrine requires that income be taxed to the person who earns it. This Note observes that in applying the assignment doctrine, the Kochansky court erred by failing to determine the extent of the spouse's community property interest in the contingent fee; community property income must be taxed one-half to each spouse, regardless of which spouse earns it, which spouse collects it, and when it is collected. …

Taxing Contingency Fee Attorneys As Investors: Recognizing The Modern Reality, Robert M. Amkraut

Washington Law Review

In the 1995 case of Boccardo v. Commissioner, the Ninth Circuit changed the tax treatment of advances made by attorneys working on contingency fee arrangements. The court held that, in a specific type of contingency fee arrangement, costs paid by an attorney are deductible as ordinary and necessary business expenses. This decision not only challenges assumptions underlying decades of case law and centuries of legal ethical tradition, but it also undermines the tax accounting principle of matching expenses with related income. This Note summarizes the traditional rationales for prohibiting attorneys from deducting such costs and analyzes the Boccardo decision. …

Pro-Choice Taxation: Consistent Tax Treatment Of Stock Redemptions At Divorce, Richard E. Fogg

Washington Law Review

The Ninth Circuit and the Tax Court have disagreed on the circumstances in which nonrecognition of gain under § 1041 of the Internal Revenue Code may extend to a spouse who redeems stock at divorce. This conflict is representative of a larger problem surrounding the question of which spouse to tax on the redemption of stock incident to divorce. This Comment examines the tension between the policy underlying § 1041 and the temporary regulations, and identifies the tension as the cause of inconsistent judicial decisions. This Comment also proposes an amendment to the Code that provides both certainty to the …

Corporate Redemption In The Context Of Martial Dissolutions: I.R.C. § 1041 And Arnes V. United States, Thomas Monaghan

Washington Law Review

In Ames v. United States the Ninth Circuit held that Temporary Treasury Regulation § 1.1041-IT, A-9 extended nonrecognition treatment to an ex-wife whose 50 percent interest in a corporation was redeemed pursuant to a divorce settlement, thereby leaving her ex-husband as the sole owner of the corporation. In doing so, the court not only contradicted the precedential treatment of bootstrap stock acquisitions but also misapplied its own interpretation of this regulation. This Note argues that a transaction such as that in Ames falls outside of the scope of the regulation and, therefore, the precedent surrounding bootstrap acquisitions should have controlled.

Taxation Of Punitive Damages: Interpreting Section 104(A)(2) After The Revenue Reconciliation Act Of 1989, Craig Day

Washington Law Review

The Internal Revenue Service and the courts have wavered on whether punitive damages are taxable under the Internal Revenue Code. Just after the Fourth Circuit boldly declared that punitive damages are taxable, Congress amended section 104(a)(2) to tax punitive damages in cases where no physical injury is involved. Neither the courts nor the Internal Revenue Service have answered the question whether punitive damages in cases that do involve physical injury are taxable. This Comment examines the language of the amended statute and the policies leading to its enactment, and proposes that punitive damages be taxed without regard to the nature …

Tax-Free Security: Federal Income Taxation Of Customer Deposits After Commissioner V. Indianapolis Power & Light Co., 110 S. Ct. 589 (1990), Alisa Eid

Washington Law Review

In Commissioner v. Indianapolis Power & Light Co., the Supreme Court held that a taxpayer receiving a customer deposit to secure future payment for goods or services may exclude that deposit from income if the taxpayer obligates itself to refund the deposit and if the customer retains the right to cancel service at any time. Because these conditions characterize virtually all security deposits, the Court's rule will allow taxpayers to exclude most security deposits from income. This Note examines the Court's decision and suggests that the Court's rule should not be extended to any situation where either the obligation to …

Beyond The Fruit Tree: A Proposal For Revision Of The Assignment Of Income Doctrine—Caruth Corp. V. United States, 865 F.2d 644 (5th Cir. 1989), Traci A. Sammeth

Washington Law Review

The Supreme Court developed the assignment of income doctrine to solve the question of who the proper taxpayer is under section 61 of the Internal Revenue Code. The question arises when individuals transfer income that rightly belongs to them without declaring the income for federal tax purposes. The assignment doctrine attributes income, for tax purposes, to the earner or practical owner of the income notwithstanding that person's assignment of the income. However, the Supreme Court's development of the doctrine has been inadequate, as exemplified by the recent decision of the Fifth Circuit Court of Appeals in Caruth Corp. v. United …

A Tax Deduction For Direct Charitable Transfers: The Case Against Davis V. United States, 861 F.2d 558 (9th Cir. 1988), David L. Herron

Washington Law Review

Monetary transfers to charitable service providers may be deductible either as charitable contributions or as unreimbursed expenses. Whether a charity must possess the transfer to establish the charity control necessary to effect a charitable deduction is an unresolved issue. Using direct transfers to Mormon missionaries in Davis v. United States as an example, this Note concludes that direct transfers to service providers should be deductible and proposes a test for determining when charity control is sufficient without possession.

Income Taxation Of Distributions Made By Alaska Native Corporations: An Ambiguity In Need Of Clarification, Meade Emory, Robert A. Warden

Washington Law Review

In 1971, Congress passed the Alaska Native Claims Settlement Act ("ANCSA") to provide compensation for extinguishing Native land claims in Alaska. ANCSA created a system of village corporations that received money and land as compensation, and are to distribute the compensation to shareholders. The Internal Revenue Service ("IRS"), despite legislative history to the contrary, is now asserting that corporate tax principles apply to the distributions because of ambiguous language contained in ANCSA. This assertion makes distributions to shareholders taxable as dividends to the extent of the corporations' accumulated and current earnings and profits. The IRS stance will result in excessive …

The Taxation Of Prizes And Awards—Tax Policy Winners And Losers, Bruce I. Kogan

Washington Law Review

This article evaluates whether the recent emasculation of the exclusion for bona fide public achievement prizes or awards was justified. In order to accomplish the task, the article will begin by setting forth the applicable statutory provisions and tracing their historical development. Second, the policy implications of new section 74(b) will be analyzed in depth. Next, the article will offer an alternative that would effectively deal with the problem of compensatory employer to employee awards, while retaining the long standing policy of using tax incentives to encourage humanitarian or public contribution. The article concludes by arguing that Congress' shift to …

The Taxation Of Prizes And Awards—Tax Policy Winners And Losers, Bruce I. Kogan

Washington Law Review

This article evaluates whether the recent emasculation of the exclusion for bona fide public achievement prizes or awards was justified. In order to accomplish the task, the article will begin by setting forth the applicable statutory provisions and tracing their historical development. Second, the policy implications of new section 74(b) will be analyzed in depth. Next, the article will offer an alternative that would effectively deal with the problem of compensatory employer to employee awards, while retaining the long standing policy of using tax incentives to encourage humanitarian or public contribution. The article concludes by arguing that Congress' shift to …

The Alternative Minimum Tax For Individuals: Present Problems And Future Possibilities, Kerry Sean Bucklin

Washington Law Review

This Comment addresses the problems presented by the revised alternative tax. First, the alternative tax is described in the context of the 1986 Tax Reform Act. Second, the new provisions of the alternative tax are analyzed to show that even with them, the alternative tax still does not tax all economic income. Third, the inefficiency and inequitable nature of the alternative tax are examined. Fourth, short and long-term solutions to the current alternative tax problems are proposed.

The Alternataive Minimum Tax For Individuals: Present Problems And Future Possibilities, Kerry Sean Bucklin

Washington Law Review

This Comment addresses the problems presented by the revised alternative tax. First, the alternative tax is described in the context of the 1986 Tax Reform Act. Second, the new provisions of the alternative tax are analyzed to show that even with them, the alternative tax still does not tax all economic income. Third, the inefficiency and inequitable nature of the alternative tax are examined. Fourth, short and long-term solutions to the current alternative tax problems are proposed.

Divorce, Taxes, And The 1984 Tax Reform Act: An Inadequate Response To An Old Problem, Roland L. Hjorth

Washington Law Review

This article analyzes in detail the provisions of the 1984 Tax Reform Act relating to property settlements and cash payments made pursuant to divorce. It concludes that the provisions relating to property settlements are, on balance, beneficial, but that the changes relating to alimony and child support are almost totally devoid of merit. The article recommends that sections 71 and 215 be amended to provide that all cash payments made pursuant to divorce should be income to the recipient if those payments meet the formal requirements of new section 71(b). Even if the payments are income to the recipient, however, …

Constitutional Protection For Creative Tax Shelter Promoters: Ninth Circuit Restricts The Government's Arsenal Of Power—United States V. Dahlstrom, 713 F.2d 1423 (9th Cir. 1983), Cert. Denied, 104 S. Ct. 2363 (1984), Beryl N. Simpson

Washington Law Review

In United States v. Dahlstrom, the Ninth Circuit Court of Appeals reversed the criminal tax fraud convictions of five tax advisers. The defendants had been convicted for developing and promoting a program in which a United States taxpayer shifted taxable income to a controlled trust in a tax-haven country. The Ninth Circuit held that, as a matter of law, the promoters of the foreign trust arrangement could not be convicted of counseling fraud because the particular scheme had not yet been declared fraudulent. Through its decision the court has restricted the government's campaign against abusive tax shelters, and placed a …

Sufficiency Of A Separation Agreement For Tax Purposes—Jacklin V. Commissioner, 79 T.C. 340 (1982), Kay Brown

Washington Law Review

In Jacklin v. Commissioner, the Tax Court addressed a dispute concerning the deductibility of alimony payments under a separation agreement that did not specify a dollar amount. Under this agreement, the payor spouse was to pay to the recipient spouse whatever funds were necessary to sustain the standard of living which she had previously enjoyed. The court held that this agreement was sufficiently precise under section 71(a)(2) of the Internal Revenue Code to allow the payor spouse to deduct the payments. This Note explores the legal tensions created by the court's decision. It asserts that the decision blurs the line …

Compliance With The New Continuity Of Business Enterprise Regulation, John J. O'Donnell

Washington Law Review

Many questions unanswered by the new regulation have already been dealt with in these older forms of continuity of enterprise requirements. This article will discuss the major unanswered questions of the new regulation, examine how the older forms of continuity of enterprise have dealt with such issues, and consider the propriety of applying the older-form decisions to the new reorganization-enterprise continuity regulation. The result will be some guidance, although unfortunately no guaranteed methods, on how to avoid being forced to litigate the validity of the regulation itself.

Federal Income Tax—Amoritization And The Expansion Sports Franchise—First Northwest Industries Of America, Inc. V. Commissioner, 70 T.C. 817 (1978), Roberta Reiff Katz

Washington Law Review

This note will first discuss past taxation practices of professional sports franchises. It will explain the "mass asset theory" as it has been applied to intangible assets outside the sports context and then examine the conflicting positions of the IRS and the Sonics as to the theory's applicability to the expansion franchise. Next, it will discuss the Tax Court's reasons for deciding not to apply the theory in First Northwest and suggest that the Ninth Circuit should similarly conclude that the theory is inappropriate in the context of expansion franchises. Finally, the note will explain the primary problem that results …