Word v. WordPerfect v. PDF

Several years ago, there were horror stories in various legal periodicals about confidential material that was disclosed to the opposing side in sensitive negotiations. It seems that counsel for one side had sent drafts of documents via email in Word to his client. The client made changes and comments in the Word file and emailed them back to the attorney. The attorney incorporated the changes and emailed them to the opposition.

The opposition, by use of the "track changes" feature in Word was able to see the history of the document beginning with the original draft, moving through the opposing party's changes and comments, and concluding with the draft actually submitted. This gave the opposition some fairly good insight into the other side's negotiating posture and strategy.

Apparently, some people never learn from the mistakes of others. It appears that the Mehlis Report, produced as a result of the investigation as to who was behind the assassination of former Lebanese Prime Minister Rafik Hariri, did not intend to set forth the names of those behind the killings. Instead, the final report was intended to only refer to "senior Lebanese and Syrian officials" as those who decided to assassinate Hariri. However, the change was made in the same Word document which, in an earlier iteration, had set forth the names of the officials involved. By using the "track changes" feature, the names were publicly revealed. The complete story is set out in Mark A. LeVine's (no relation) posting on his blog at the History News Network.

This is but one reason to (i) use WordPerfect rather than Word or (ii), at the least, send out only documents that have been converted to pdf.

A History Lesson

Via TaxProf, I found the article, Estate Taxation Is Integral to Income Taxation, by Richard J. Joseph a senior lecturer at the University of Texas at Austin. The article notes several historical points of which I was unaware. These points shed light on numerous issues in the current debate over the structure of the entire US tax system, not merely the debate over the attempt to repeal the estate tax.

• "Until enactment of the modern income tax, the principal source of federal revenues had been customs duties." Like a sales tax or a value added tax, tariffs are essentially regressive and fall disproportionately on the working poor.


• On the other hand, at the time, "[s]tate governments derived their revenues primarily from taxes on tangible property. Because the wealthy increasingly shifted their investments from real estate to stocks, bonds, and other intangibles, many managed to escape state levies." Combine the first point (regressive sales taxes) with the second point (regressive property taxes) and you have a fairly accurate description of our current state and local tax system. (Yes, there are state and local income taxes, but they constitute a small portion of the total revenue stream for states and localities.)


• The income tax was intended to move the federal government to a progressive revenue source and away from reliance on tariffs which are, by nature, regressive.


• "The income tax, however, still left major gaps in the system. The tax reached only accretions to wealth, not the mass of wealth itself. Further, it exempted those accretions resulting from gift and inheritance."
  


• "Cordell Hull, chief architect of the 1913 income tax. . . . suggested that the income tax is deficient because it reaches only 'earned income,' that is, wages, salaries, and profits." Hull's remedy was the estate tax "because it is capable of reaching 'unearned income,' principally in the form of inheritances." (I had not known that Hull had played such an important role in the tax arena, knowing him only (Only?!) as Franklin Roosevelt's Secretary of State, his efforts to create the United Nations, and his participation in the Breton Woods trade conference.)

I suspect that we have reached a point where major changes in the US tax system are inevitable. In weighing the merits of any changes, it is important to know both the economic and historic context of the tax system. No part of the federal tax system, be it the personal income tax, the corporate income tax, FICA/SECA, or estate and gift taxes, stands in isolation from any other part. Moreover, the federal tax system has to take account of the inherently regressive nature of the state and local tax structure which, for a variety of reasons, is resistant to reform.

Republicans and Steve Martin

In one of his most famous monologues, Steve Martin explained how to become a millionaire:

You.. can be a millionaire.. and never pay taxes! You can be a millionaire.. and never pay taxes! You say.. "Steve.. how can I be a millionaire.. and never pay taxes?" First.. get a million dollars. Now.. you say, "Steve.. what do I say to the tax man when he comes to my door and says, 'You.. have never paid taxes'?" Two simple words. Two simple words in the English language: "I forgot!" How many times do we let ourselves get into terrible situations because we don't say "I forgot"? Let's say you're on trial for armed robbery. You say to the judge, "I forgot armed robbery was illegal." Let's suppose he says back to you, "You have committed a foul crime. you have stolen hundreds and thousands of dollars from people at random, and you say, 'I forgot'?" Two simple words: Excuuuuuse me!!"

Apparently the Republicans who control Congress have taken a page from Martin's book. This from the CBO in its analysis of Reconciliation Recommendations of the Senate Committee on Finance:

Section 6112 . . . would postpone payments for Medicare Part A and B benefits for six business days at the end of the fiscal year 2006. The provision would postpone—until October 2, 2006—payments that would otherwise be made by Medicare carriers and fiscal intermediaries during the period from September 22 through September 30, 2006. This provision would shift spending from 2006 to 2007 but would not affect total spending over the 2006-2010 or 2006-2015 periods.

In other words, in order to mask the federal deficit prior to the November, 2006 elections, the Republicans are going to shift expenses from one fiscal year to another to make the deficit appear smaller than it actually is.

Altogether now: Well, excuuuuuse me!!"

From the IRS

IRS Newswire

IR-2005-130

October 28, 2005

2006 Inflation Adjustments Widen Tax Brackets, Change Tax Benefits

WASHINGTON ? Personal exemptions and standard deductions will rise, tax brackets will widen and individuals will be able to make larger tax-free gifts in 2006, thanks to inflation adjustments announced today by the Internal Revenue Service.

By law, a variety of tax provisions must be revised each year to keep pace with inflation. As a result, more than three dozen tax benefits, affecting virtually every taxpayer, are being modified for 2006. Key changes affecting 2006 returns, filed by most taxpayers in early 2007, include the following:

• The value of each personal and dependency exemption, available to most taxpayers, will be $3,300, up $100 from 2005.


• The new standard deduction will be $10,300 for married couples filing a joint return, $5,150 for singles and $7,550 for heads of household. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.


• Tax-bracket thresholds will increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15% bracket from the 25% bracket will be $61,300, up from $59,400 in 2005.


• The annual gift tax exemption will be $12,000, up from $11,000 in 2005.
  

Revenue Procedure 2005-70, containing a complete rundown of inflation adjustments, is posted on the IRS Web site and will appear in Internal Revenue Bulletin 2005-47, dated Nov. 21, 2005.

Foreign Windfall

In one of my posts on Sunday, I discussed the one time windfall from the temporary reduction in taxes repatriated from foreign sources. A comment posted in response argued that:

The reason billions and billions are being repatriated is because those earnings were left offshore (with a very low effective tax rate attached) and, absent an amnesty like this or a dire need at the US level, would never have come back onshore to be taxed. Taking 5.25% of something is better than 35% of nothing.

Well, no actually.

According to the Congressional Budget Office analysis of the American Jobs Creation Act of 2004 (here), the particular provision in question, "increas[es] receipts in 2005 by about $2.8 billion and reduc[es] receipts thereafter." In other words, the net effect of the provision, over time, is to decrease revenues, since offshore profits do ultimately get repatriated.

The analysis does not break out the precise amount by which receipts are decreased by this one particular provision. However, this provision of the Act, together with the three other provisions in the international tax area, were expected to "increase revenues by about $1.3 billion in 2005, and reduce revenues by about $12.1 billion over the 2005-2009 period and $42.6 billion over the 2005-2014 period."

I Want An Argument

Man (played by Michael Palin)--Argument is an intellectual process. Contradiction is just the automatic gainsaying of any statement the other person makes.

FactCheck.org has a report concerning charges and countercharges in the NJ gubernatorial race between Jon Corzine and Doug Forrester. The report is disturbing. Not because Forrester, the Republican candidate demagogues the tax issue. After all, we're used to that from Republicans. No, the troubling aspect of the "debate" is that Corzine allows Forrester to succeed because Corzine tries to beat Forrester at Forrester's own game rather than making a strong argument that supports Corzine's own votes on tax issues.

Corzine's voting record on tax issues is one of voting in favor of motions, amendments, etc., that would blunt the basic thrust of the Republican tax program which was (and is) to cut taxes for the wealthy (except when the goal of cutting taxes for the wealthy interferes with the Republican goal of cutting taxes for the extremely wealthy). Thus, Corzine voted for a proposal that:

[W]ould have provided an average tax cut of $569 per household in 2003, while the plan approved by Senate Republicans would have averaged $692 per household . . . . And – for those making more than $1 million per year – the Corzine cut would have been only $815 on average, while the version favored by Senate Republicans produced an average cut of $73,790.

On the estate tax front, Corzine supported an increase in the lifetime credit equivalency to $3 Million, but opposed outright repeal of the estate tax.

Corzine's record, then, can fairly be described as one in which he opposed tax cuts for the extemely well-off, but in which he favored tax cuts for working people, the middle class, and even some who might reasonably be called upper class.

Of course, Forrester's ads attack Corzine's efforts to oppose giveaways to the wealthy as votes in favor of raising taxes. Rather than hitting Forrester's attack head-on, Corzine argues that he actually voted to lower taxes. Thus he allows the debate to be framed as one in which the voters must choose which candidate is most in favor of cutting taxes. The "debate," such as it is, quickly devolves into a shouting match.

Perhaps it is Pollyanish of me, but I believe that American voters are capable of understanding a real debate, not a psuedo-debate that is nothing more than a string of soundbites. I believe that candidates for public office can articulate real arguments, detailing how public monies can be used responsibly and, just as importantly, favoring cutting (and raising) taxes in ways that are equitable. Thus, Corzine should, without equivocation, say that all tax cuts are not equal. Tax cuts that are extraordinarily regressive are bad. Those that increase progressivity are good, but only insofar as there is enough money raised via taxes to pay for the essential government services that we need.

In other words, engage in argument, not mere contradiction.

Beer Bash

The WSJ is reporting (subscription required) that:

Just as U.S. companies are repatriating huge sums from overseas under a special one-year tax break -- more than $200 billion and counting -- they are using more cash than ever to buy back their own stock.

* * * * *

Companies say repatriation and buybacks are unrelated, and they have good reason to say so. Among the few things forbidden under the American Jobs Creation Act of 2004, which established the tax break, is using the money for buybacks. The same prohibition applies to dividends and executive pay.

* * * * *

Cash is fungible and companies aren't required to isolate the profits brought back or pledge to spend more than they normally would on things like training or buying machinery. So even though the tax break was meant to encourage certain activities, above all hiring, it ultimately frees money to be used however a company sees fit.

Kimberly Clausing, an associate professor of economics at Reed College in Portland, Ore., who studies taxation of multinational corporations, likens it to a student getting $20 from a grandparent to buy schoolbooks. "You buy $20 in books, but it frees up your spending, so you probably spend it on beer," she says.

Of course, the repatriation coupled with the massive stock buy-backs will cause a temporary, one-time uptick in income tax revenues, reducing the predicted deficit. The Bush Administration will then point to this aberration as evidence that its tax cuts are generating additional revenue and reducing the deficit. In fact, the uptick will be caused by accelerated recognition of income, not the creation of additional income or wealth. And, over time, the increase will be offset in subsequent years by reduced amounts of taxable income and tax revenues.

I will link back to this post as soon as the first Bush apologist makes this predictable, but false, argument.

Follow John Mitchell's Advice

John Mitchell, Nixon's Attorney General, once said, "Watch what we do, not what we say." The Republicans in Congress seem intent on rehabilitating Mitchell's reputation by proving that, at least that one time, he was correct.

One of repeated themes of the right wing attack on the federal tax system is that the cost of compliance is too high. While most of that attack has been focused on the complexity of the federal tax system, one would think that the conservative crocodiles would at least attempt to maintain a semblance of consistency by supporting an effort that would reduce the costs of compliance. One would be wrong.

Tax Analysts reports:

The Senate on October 20 passed its fiscal 2006 Treasury funding bill, which included a controversial measure to bar the IRS from creating its own tax return preparation software.

The measure, originally authored by Sen. John Ensign, R-Nev., would ensure that the IRS can't compete with private industry tax software providers and could affect the future of the agency’s "Free File" initiative. The IRS and private industry are currently negotiating over an extension of the program, under which private tax software companies provide free tax return filing services for low-income taxpayers. Some Washington observers have speculated, however, that the IRS could be looking into developing its own free software.

The IRS declined to comment on the situation.

The bill matches President Bush's request of $10.7 billion for the IRS in fiscal 2006, a 4.3 percent increase from the agency's fiscal 2005 total budget of $10.2 billion.

National Taxpayer Advocate Nina Olson, who is not involved in the Free File negotiations, expressed concern about where the proposal might leave taxpayers. Olson has publicly backed installing a free tax return template on the IRS Web site.

"If Congress now prohibits the IRS from spending funds to provide free tax preparation and filing software directly to taxpayers, the IRS will lose all of its leverage in negotiating a new agreement with industry," she said. "Industry might benefit, but taxpayers would lose."

One Democratic Senate staff member familiar with the issue told Tax Analysts that the measure was one the "most contentious" issues surrounding the bill. The staff member echoed Olson's sentiments, saying that the measure, if enacted, would weaken the IRS's power in negotiations over a new agreement.

I believe that this once John Mitchell was right. By their actions, Congressional Republicans have made it clear that their blather about reducing tax compliance costs should not be taken seriously. The argument is offered not for its merits, but to obscure the intent of their effort to undermine the federal tax system.

Connie Mack Should Have Listened To Abraham Lincoln

"Better to remain silent and be thought a fool than to speak out and remove all doubt."

Abraham Lincoln

I wish I could have been the first to blog about former Senator Connie Mack III's interview in today's NYT Magazine, but others, notably Paul Caron at TaxProf, beat me to it. Mack's own words show him to be, at the least, a fool.

With respect to the estate tax, he repeats the arguments, conclusively shown to be false, that (i) the estate tax falls especially heavily on family farms and (ii) that the tax is imposed on wealth that has already been subjected to income tax. (Here, his comments are a real gem: "[the] individuals who have accumulated [the assets subject to the estate tax] have paid taxes on them many times in their life [sic]." As I said, both propositions are false.

Mack attempts to immunize himself from a charge that he's a knave by claiming that he's really a fool. ("I don't know what the percentage breakdown [i.e., the way that the estate tax falls upon different groups based upon wealth] is."). This from the guy who chairs the President's Advisory Panel on Federal Tax Reform that is charged with developing a package of reforms of the federal tax system that are allegedly intended to allow, inter alia, for the:

• Sharing the burdens and benefits of the Federal tax structure in an appropriately progressive manner, and


• Promoting long-run economic growth and job creation, and better encourage work effort, saving, and investment, so as to strengthen the competitiveness of the United States in the global marketplace.

Mack goes on to dimiss the budget deficits created by tax cuts, saying that we can get the cash needed to fund the government by borrowing it from the Chinese. (I'm not kidding. Read the interview.)

Let's recap for a moment: Mack first admits that he does not know the facts concerning the distributional affects of at least one part of the tax system. He then shows that he lacks even a hint that large deficits weaken the competitiveness of the United States in the global marketplace.

The substance of Mack's remarks reveal him, at the least, to be a fool, if not a knave. However, nothing illustrates his stupidity quite as much as the fact that he offered his comments with the knowledge that they would be published. The interview has removed all doubt as to the weight that his conclusions as to tax reform should be afforded.

Estate Tax Snapshots

The Economic Policy Institute has issued two analyses of the estate tax with dramatic, but easy to understand, charts.

The first, Death and taxes (part I): who pays the estate tax and how much, concludes:

The basic exemption allowed [by the estate tax] shielded estates under $1 million in value from any tax whatsoever. The highest average rates do not exceed 17% and apply to estates between $5 and $20 million, which comprised less than 8% of all estate tax returns.

The second, Death and taxes (part II): Wealthiest estates account for most of revenue generated by estate tax, shows:

The top 3.1% of returns filed accounted for 39.5% of revenues collected. This chart shows that if the bottom three-quarters of current estate tax filers were exempted from the tax entirely, only 18.3% of the revenue would be lost.

The average rates of tax themselves overstate what might be called a typical rate of tax. The Congressional Budget Office found that in 2000, the average rate of estate tax, among those who pay any tax, was 18.5%, but for the median estate of this group, the average tax rate was a significantly lower 10.6%. A tiny number of very large estates can push the average well above the median.

Another widespread concern is that the tax is burdensome on small businesses and farms. The recent report from the Congressional Budget Office provides new analysis of this question. Current law provides a variety of special breaks for estates that qualify as including the assets of a family-owned business. It turns out that the average size of estates in such returns exceeds the overall average size of estates. The estates of farmers are about 90% of the size of both average and median estates. Thus, the breaks amount to perverse, preferential treatment for relatively large "family business" estates, or for "family farm" estates that are close to average or typical size.

The EPI analysis is supported by an analysis offered by the IRS, Which Estates Are Affected by the Federal Estate Tax?: An Examination of the Filing Population for Year-of-Death 2001. Significantly, the report finds that in 2001 estate tax decedents bequeathed almost $13 Billion to charitable institutions.

Additionally, the report reveals the lie that the estate tax overly burdens closely held businesses and farms:

In the aggregate, liquid assets--including State and local bonds, Federal savings bonds, other Federal bonds, cash, and cash management accounts--were sufficient (with a ratio greater than 1) to meet reported tax liabilities in all but two gross estate categories.

The two categories in which liquid assets were insufficient were those that encompassed estates with a value of more than $5 Million and less than $20 Million. Yet, "the majority of estates with an estate tax liability, 71.4 percent, reported liquid assets that exceeded estate tax liabilities."

It must be remembered that the IRS report covered returns for decedents dying before 2002. With respect to those estates, the maximum amount shielded by the lifetime credit was only $675,000. This year, the amount is $1.5 Million and, for decedents dying after December 31 of this year, increases to $2M. Thus the burdens on smaller estates reflected in the report have been substantially eliminated.

A hat tip to TaxProf for the links to the EPI report.

Snarky Argument Against Estate Tax Repeal

Up until now, the posterchild for those opposing estate tax repeal has been Paris Hilton. Now, it appears that she will have at least nominal competition from Elizabeth Paige Laurie, Wal-Mart heiress. According to CNN.com:

Laurie, the granddaughter of Wal-Mart co-founder Bud Walton, has returned her degree [from the University of Southern California], nearly a year after Elena Martinez told ABC's "20/20" that she had written term papers and done assignments for Laurie for three-and-a-half years.

"Paige Laurie voluntarily has surrendered her degree and returned her diploma to the university. She is not a graduate of USC," the school said in a statement dated September 30 but not widely disseminated until the school newspaper wrote about it late last week. "This concludes the university's review of the allegations concerning Ms. Laurie."

USC spokesman James Grant said Wednesday the university had no further comment. Laurie had been given a bachelor's degree by the USC Annenberg School for Communication in May 2004.

After the homework allegations surfaced last November, the University of Missouri changed the name of what was then Paige Sports Arena.

Laurie's billionaire parents, Bill and Nancy Laurie, had received naming rights in exchange for donating $25 million toward the building's construction. Nancy Laurie is Walton's daughter.

The Walton family has been prominent in the estate tax repeal movement and generous in their financial support for such groups as Grover Norquist's "American's for Tax Reform Foundation." See here.

All is not for naught, however. It appears that Ms. Laurie's expenditures actually did promote the cause of higher education:

Martinez said she dropped out of USC because she couldn't afford the tuition. She said she learned a great deal by doing Laurie's class work.

Disregarded Disregarded

The Service has promulgated proposed regulations that would eliminate disregarded entity status for purposes of federal employment taxes and certain excise taxes. As explained in the notice of proposed rulemaking:

A disregarded entity would be regarded for employment tax purposes, and, accordingly, become liable for employment taxes on wages paid to employees of the disregarded entity, and be responsible for satisfying other employment tax obligations (e.g., backup withholding under section 3406, making timely deposits of employment taxes, filing returns, and providing wage statements to employees on Forms W–2). The owner of the disregarded entity would no longer be liable for employment taxes or satisfying other employment tax obligations with respect to the employees of the disregarded entity. The disregarded entity would continue to be disregarded for other Federal tax purposes. The proposed regulations contain an example illustrating the interaction of the income tax provisions and employment tax provisions. For example, the proposed regulations illustrate that an individual owner of a disregarded entity would continue to be treated as self-employed for purposes of Self Employment Contributions Act (SECA) taxes (section 1401 et sequitur).

(Emphasis supplied.)

The proposed regulations, if adopted, would apply to wages paid on or after January 1 following the date the regulations are finalized or, in the case of excise taxes, to liabilities imposed and actions first required or permitted in periods on or after the January 1 following the date of finalization of the new regulations.

With respect to employment taxes, the new regulations mean that for an owner to become liable for a failure to withhold or pay income taxes withheld from employees' salaries or the employees' share of FICA or FUTA, the liability is based on IRC § 6672. Owners would have no liability for the employer's share of FICA or FUTA, except in instances of transferee liability.

Under the proposed regulations, the relationship of LLCs to their single members would more closely approximate the relationship of S corporations to sole shareholders. The remaining difference in the employment tax area would be that owners of S corporations can be employees subject to withholding while sole members of LLCs cannot be employees for withholding tax purposes.

Did Grover Norquist Commit Tax Fraud?

As of today, my answer to the question posed in the caption is "I don't know." However, a story in yesterday's Washington Post raises the question.

The story, How a Lobbyist Stacked the Deck, relates how cash moved in a pre-arranged plan from a Jack Abramoff client, eLottery, to a Norquist related entity, then to a group in Virginia Beach called the Faith and Family Alliance, and then came to rest in the hands of a lobbying firm run by Ralph Reed, Century Strategies. In order to conclude that Norquist did commit tax fraud, several subsidiary questions have to be addressed.

First, what Norquist entity received the Abramoff/eLottery cash? The Washington Post identifies the entity as "Norquist's foundation, Americans for Tax Reform (ATR)." However, there are two Norquist entities with similar names, Americans for Tax Reform and Americans for Tax Reform Foundation. The distinction is described on the ATR website as follows:

[Americans for Tax Reform] is a nonprofit, 501c(4) lobbying organization. Contributions to Americans for Tax Reform are not tax deductible. The Americans for Tax Reform Foundation is a 501c(3) research and educational organization. All contributions to the Americans for Tax Reform Foundation are tax deductible.

If the cash found its way into the 501(c)(4) entity, Norquist, though sleazy, probably did not commit tax fraud. However, if the cash went into the foundation, as the Post story seems to indicate, we have to follow the story further.

Section 501(c)(3) organizations can engage in some lobbying, but the amount is limited. They cannot engage in political activity. The IRS explains the differences here.

To determine whether a 501(c)(3) is engaged in excessive lobbying, it can elect to have its activities tested using one of two tests. If an organization is found to have engaged in lobbying in excess of the applicable limitation, it is subject to an excise tax and, under certain circumstances, may lose its tax exempt status entirely. If a 501(c)(3)'s tax exempt status is revoked (and a revocation can be retroactive), all of its income is subject to taxation. Finally, the managers of a 501(c)(3) that is found to have exceeded the lobbying limitations rule may be personally subject to financial penalties if they acted knowing that the the expenditures would likely result in the loss of the organization's tax-exempt status.

If the ATR Foundation was the conduit for the Abramoff/eLottery cash, how was it reported? So far as I can determine, the Faith and Family Alliance is a Section 527 organization. If that is the case, any payments by the ATR Foundation to that organization are a violation of the rules under 501(c)(3) and could cause it to lose its 501(c)(3) status. See here ("none of [an] IRC 501(c)(3) organization's assets can be used to set up or operate [an] IRC 527 organization").

(Note: There's another angle on this. A 527 organization is required to include the name of the connected organization (i.e., a 501(c)(4) organization) in its name. See 11 C.F.R. § 102.14(c). Here, it is clear that the Faith and Family Alliance was "operating as a shell." Under the circumstances, the use of the shell by ATR without including the name of ATR constituted a violation of this requirement, even if it was only the 501(c)(4) ATR that was the conduit for the funds.)

It is also possible that, assuming that the money was funneled through the ATR Foundation, Norquist could contend that the cash was being used in a lobbying effort. In tax parlance, this is an application of what is known as the "step transaction doctrine." Usually tax authorities seek to apply that doctrine to collapse a chain of transactions that, in form, are beneficial to the taxpayer, but which, when one examines the substance of the chain, show up in a different, less favorable, light. On occassions, taxpayers have successfully been able to apply the step transaction doctrine to their benefit. However, for this argument to make any sense (i) ATR Foundation must have reported the cash that found its way to Reed's organization as a lobbying expenditure and (ii) the total amount of lobbying expenditures during the year in question cannot have exceeded the amount allowable under the test that ATR Foundation elected to have apply.

Thus, the questions that have to be answered are as follows:

1. Did the cash flow through ATR Foundation or ATR the 501(c)(4) organization?


2. If it flowed through the foundation, does the cash payment from the foundation constitute a prohibited political activity merely because the Faith and Family Alliance was a 527 organization or can ATR Foundation apply the step transaction doctrine to argue that the transaction constituted a lobbying expense?


3. Even if the transaction constituted a lobbying expense, how was it reported? If the payment was not reported as a lobbying expense or noted as a prohibited political expenditure, tax fraud was arguably committed.


4. Assuming correct reporting, did the $150,000 payment cause the ATR Foundation to exceed the limitations on lobbying expenditures?


5. Finally, if the money flowed through ATR the 501(c)(4), why didn't the Faith and Family Alliance include the ATR name in its name?

The Abramoff affair widens.

Update

The front group through which Norquist's ATR funneled the cash, the Faith and Family Alliance, apparently never reported the contribution. The only report that the FFA ever filed with the IRS can be found here. That report, which likely covered a period prior to the date that the ATR transferred the cash, was signed under penalties of perjury by FFA's President, Robin Vanderwall. Mr. Vanderwall is presently serving a seven year sentence in the Virginia prison system for soliciting sex with minors via the Internet.

The lack of reporting raises a serious issue for Norquist regardless of whether the money was funneled through the ATR 501(c)(3) or the ATR 501(c)(4). Specifically, if FFA was used by Norquist with the intent to avoid the public reporting of the contribution, a crime was likely committed. If Norquist knew, when the payment was made to FFA, that FFA was merely a shell organization and would likely never file any further additional reports with the IRS, it can be inferred that he chose the FFA as a conduit with the specific intent to avoid disclosure. In other words, that he intentionally evaded obligations imposed by the Internal Revenue Code.

Administrative Matters

Currently, there are at least four ways to have postings to this weblog automatically sent to you--via RSS using an aggregator such as Bloglines or via email through Bloglet, FeedBlitz, or, in a few cases, through a listserve that I maintain.

In about a week, I will discontinue the listserve that I maintain. For those of you currently using that listserve who want to continue to receive postings via email, I recommend subscribing via FeedBlitz, using the subscription block on the right side of this page.

Coming Event

On November 5, Jeff Nusinov and I will be giving a presentation on Adobe Acrobat at the MSBA's 7th Annual Solo and Small Firm Practice Conference. You can download a copy of our speakers' outline and other presentation material here. (It's an 8 mg file, so it will take a bit to download.)

I've been to conferences in previous years and they have all offered a lot of bang for the buck.

Tea Leaves

Yesterday, the CBO issued a report on the federal deficit, Long-Term Economic Effects of Chronically Large Federal Deficits. The report begins its analysis with the core problem facing this country:

Since fiscal year 1960, the federal government has recorded budget deficits averaging 2.1 percent of gross domestic product (GDP), and those deficits have been especially large in each of the past three years. Depending on the course of policy and the economy, deficits may moderate as a share of GDP over the next decade. But looking farther ahead, the demand for federal budgetary resources is expected to rise steadily under current law as the baby boomers retire and become eligible for Social Security and Medicare.

The CBO report concludes:

Federal deficits reduce future living standards by slowing the accumulation of national wealth as they lower national saving. Deficits reduce national saving by shifting resources into public and private consumption through increases in federal spending and cuts in federal taxes. Those impacts on national saving can occur even if financial market prices, such as interest rates, are not significantly affected. Deficits also can lower labor productivity by reducing domestic investment, although capital inflows from abroad tend to mitigate that effect.

Of course, this is what many of us have been saying since the Bush Administration began its orgy of deficit spending. However, the report has special resonance as we await the issuance of the report of the President's Advisory Panel on Federal Tax Reform. Preliminary comments on leaks (trial balloons?) from that Panel have focused on whether the recommendations will find sufficient political support to be enacted. I think that, once the report is actually issued, the focus of analysis should be on the equity of the Panel's recommendations. For the Panel's report to pass even a cursory analysis, it must, either explicitly or implicitly, acknowledge that the Bush Administration's tax cuts disproportionately benefited the extraordinarily wealthy while simultaneously undermining the nation's economy. My guess: That's not in the cards.

Kelo and Corruption

The blogosphere, particularly the right side, has waved around a story reported by the Newark Star-Ledger, as proving that Kelo was wrongly decided. For a liberal (but incorrect) perspective, see Kevin Drum here. For a right wing perspective, see The Queen of All Evil, here.

The story can be condensed quickly. Good Citizen Segal spends ten years and $1.5 Million acquiring a six acre parcel in Passaic, New Jersey. He wants to build a ninety townhouse development project on the property.

Corrupt Assemblyman Cryan, who is head of the township's Democratic Party, had been the beneficiary of a fundraiser hosted by the Evil Cousins Maulti. Three days later, the five-member township committee of Passaic voted unanimously to authorize the municipality to seize Good Citizen Segal's land through eminent domain and name its own developer.

Good Citizen Segal sued the township, and on Sept. 7 a Superior Court judge in Union County issued a temporary restraining order prohibiting the township from hiring its own developer. Six days later, the township committee unanimously voted to start negotiating -- but not sign a contract -- with the company owned by the Evil Cousins Malti. Corrupt Assemblyman Cryan is alleged to be in control of the township committee.

There are two possibilities here, neither of which undermine Kelo.

Perhaps everything that I just said about the affair is true. That is, Segal is a good citizen, Cryan is a corrupt assemblyman, and the Maltis are evil, and the story illustrates the use of governmental power to cheat a citizen, take his property, and give it to developers who paid off the political decisionmakers. I don't know whether any of these assumptions are, in fact, true. That is, I don't know whether Segal is a good citizen, Cryan is a corrupt assemblyman, the Maltis are evil, or that any of the other statements are true. But, for the sake of argument (or, as lawyers would say, "assuming arguendo that these statements are true"), so what?

All that this would mean is that if there is govenmental power, it can be used corruptly. One cannot argue against either the concept of government or certain governmental practices simply by pointing to specific cases of abuse unless those cases are a natural, unavoidable outgrown of the governmental practice at issue. That is, one must show that government, at its core, or some specific governmental process is inherently corrupt.

Government contracts might (and sometimes are) awarded to people who have bribed the contract officer. (Bribery of contracting and purchasing officers happens in the private sector as well.) The proper responses to such cases are (i) awarding contracts only as a result of a process of open, competitive bidding, and (ii) maintaining sufficient prosecutorial and investigative resources to police anti-corruption laws. No one would argue that because there are instances of corruption, there should be no government contracts. Thus, the anti-Kelo forces could only find succor in the Star-Ledger story if it showed some systemic flaw in Kelo. Not only is this not the case, but the Star-Ledger story shows that the exercise of Kelo-type condemnation powers does not inevitably lead to unfettered corruption and abuse: The matter is currently the subject of a judicial review.

There is a second possibility.

As related by the anti-Kelo commentators, there is something of an air of a "just-so story" about this matter. However, in the story itself, it is reported that Mr. Segal "met with Cryan . . . and other local officials 'scores of times' over the past five years to discuss the project." In other words, it appears that Mr. Segal wanted to have the aid and assistance of the local government to develop the property, but the parties simply couldn't come to terms. It is unclear whether this failure to come to terms was due to differences in price, the nature of the development, or otherwise. That being the case, it would seem that the township committee not only was within its rights to shop around the deal, but it would have derelict in its obligations to the township if it had not done so.

Due process does not require that Mr. Segal be allowed to do anything he wants with the property. There are all sorts of governmental restrictions (e.g., zoning code, building code, etc.) that are widely accepted. In the event of a taking of Mr. Segal's property, due process requires that he be given fair recompense for his property. Kelo does not change this. Kelo merely re-affirms what had really been existing law, namely that the scope of what constitutes an allowable governmental interest that will justify a taking is, of necessity, very broad. There is nothing in the Passaic story that would indicate that the Supreme Court's conclusion in Kelo was in any way incorrect. At worse, it offers an illustration of garden variety corruption, not some new variant that demonstrates an inherent flaw in the decision.

Making Baloney Out of Lemons

The IRS issued the SOI Tax Stats - Individual Income Tax Rates and Tax Shares for the years 1985 through 2003. Upon reviewing the statistics, Representative Jim Saxton, Chair of the Joint Economic Committee declared, "These IRS data show the steeply progressive nature of the Federal income tax."

It is difficult these days to determine where any Republican official falls on the knave/fool continuum, but you can be certain that, depending on your perspective, Saxton likely ranks either very high or very low.

Table 5 of the report shows that in 1985, the top 1% of all taxpayers had only 10.03% of the adjusted gross income reported to the IRS. In that year, the top 5% of all taxpayers had 22.67% of AGI.

By 2003, the percentages had grown to 16.77% and 31.18%, respectively. In other words, the top 1% of all taxpayers increased their share of the personal income by an astonishing 60% and the top 5% increased their share by almost 43%. Yet, over the same period, the personal income tax burden shouldered by the top 1% increased by only about 54% and that borne by the top 5% increased by about 38%.

In other words, over the last 18 years, the rich not only got richer, but paid a lower percentage of the total personal income tax burden. But wait, that doesn't tell the whole story.

In 1985, the ratio of income taxes to social security taxes, which is to say the ratio of personal taxes paid by everyone and those paid only by working Americans, was 1.265 to 1. By 2003, the ratio had narrowed to 1.106 to 1. Thus, personal income taxes contributed a lower proportion of the income that funded the federal government. This means, of course, that, taken as a whole, the decline in progressivity was even more pronounced than the figures for the income tax burden would indicate.

TaxProf has a great roundup of tax news from the non-technical media. Among the articles cited is David Cay Johnson's NYT article on the IRS statistics, At the Very Top, a Surge in Income in '03, which got the stats right:

After falling for two years, the share of income going to the richest slice of Americans - the top tenth of 1 percent - grew significantly in 2003 while the share going to 99 percent of Americans fell, tax data released yesterday showed.

At the same time, the effective income tax rates paid by the top tenth of 1 percent fell sharply, declining at more than 10 times the rate reduction for middle-class taxpayers, the new report, by the Internal Revenue Service, showed.

Johnson notes that the IRS "data tend to understate incomes for those at the very top because of different rules for reporting wages and capital gains, meaning the actual disparity was larger than the official data show." He then points out that:

Other data show that among major world economies, the United States in recent years has had the third-greatest disparity in incomes between the very top and everyone else. Only Mexico and Russia, among major economies, have greater disparity.

Johnson was well on his way to an "A" in tax policy, but blew honors by quoting Bruce Bartlett "a fiscally conservative Republican tax expert" to the effect that "the tax code remains effectively progressive." Of course, to reach that conclusion Bartlett simply ignored social security taxes. In other words, to Bartlett, an elephant is like a rope.

To get the top grade, Johnson should have made it clear to his readers that all taxes on personal income have to be taken into account in order to determine the degree to which the tax system is progressive.

This brings us back to Rep. Saxton. Is he a knave or a fool?

You Can Hide, but You Can't Run

Much has been written about offshore trusts as vehicles to shield assets from creditors. A tax case from the Southern District of Florida casts a shadow over the use of these offshore trusts for asset protection purposes.

The case, U.S. v. Grant, involved an attempt to shield assets from a $36 Million tax lien levied against Raymond and Arline Grant. In 1983 and 1984, the Grants had created two trusts, one with its situs in Bermuda, the other in Jersey, off the coast of England. Raymond was the settlor of both trusts, with Arline as the beneficiary of one, and Raymond of the other. Raymond died in January, 2005, and Arline became the beneficiary of both trusts.

The taxes at issue grew out of tax shelters that the Grants had entered into and related to years 1977 through 1982, and 1984 through 1987. The taxes were assessed in 1991 and 1993. A final judgment for the taxes was entered in March of 2003. Thus, the trusts were probably created prior to the time much of the tax liability arose. Of course, assets may have been placed into the trusts after it would have become apparent to the Grants that there was a potential of a mamoth tax liability. The opinion does not present any facts as to when assets were actually transferred.

The Government moved to repatriate the funds held in the Grants' offshore trusts in order to pay down a portion of the tax liability owed by the Grants, arguing that the trusts constitute property of the taxpayer which, under federal statutes, can and should be repatriated to the United States. In opposition, Arline argued that the Government does not have the right to order repatriation of offshore trust accounts and that ordering repatriation would violate the laws of the countries in which the trust are held. Arline also argued that she didn't want to repatriate the funds and, that because she had discretion as trustee to repatriate the funds, she couldn't be forced to do so. (The "I won't dance, don't ask me" defense.)

The Court categorized the issue before it as follows:

The only issue here is whether, for purposes of repatriation, the corpus of a trust is any different than funds held in an ordinary offshore bank account, or for that matter, any offshore asset of a taxpayer. Therefore the query must be: is this a trust over which the beneficiary lacks any control, such that the beneficiary is simply that and nothing more, and regardless of what she does or says, she lacks the power to repatriate these assets to the United States?--or, does the beneficiary retain such control that she has the power vested in her in some way by the terms of the trust to repatriate the corpus? If she has such power, then this asset is no different than any other asset.

Needless to say, the Court was not impressed with Arline's arguments. In one paragraph, the Court summarized its analysis as follows:

The owner of an asset cannot avoid the impact of a lawful court order requiring repatriation by saying, "I choose not to do so," any more than any person can avoid the impact of any court order acting directly against his person by saying, "I choose not to do so." The fact that such a person may decide to exercise his will to not make such a choice does not insulate him from the court's power and authority to lawfully order such a choice against the person's desire not to do so. That is the nature and essence of the court's power to act upon the person. The consequences of disobeying such an order are clear. Likewise, if the Defendant here has the power to change trustees or to repatriate assets, she cannot avoid the obligation by saying, "I choose not to do so," without incurring the dire consequence of such an avowed choice. The only question at issue is whether Ms. Grant has the power to effect a repatriation of the trust assets; if so, the court can order her to perform such acts which will in fact result in repatriation, to the same extent it can order any person owning or controlling an offshore account to repatriate the assets to the United States.

Examing the provisions of the two trusts, the Court had no difficulty finding that Arline had the ability to repatriate the assets in the trusts. Accordingly, it recommended granting the Government's motion and ordering Arline Grant to either appoint a trustee in the United States for the trusts, or, alternatively, to otherwise repatriate the assets held in the trusts.

The Grant opinion is only a "Report and Recommendation" by magistrate judge. It has to be formally adopted by the District Court Judge, who could elect to either modify the opinion or reject it altogether. Of course, appeals to the the 11th Circuit Court of Appeals or even the Supreme Court are possible. However, my guess is that the decision will stand. If there is a "formally published" opinion in the case by the District Court or the Circuit Court, the case could mark the beginning of the end of the smoke and magic industry of offshore trusts.

No Comment

I follow a policy of not commenting on this blog about cases that either I or my firm are involved with or with respect to issues that are involved in matters where we are counsel. However, that policy is not violated where I note, without comment, an opinion in a case that I have been involved with.

Today, the Court of Appeals of Maryland handed down the opinion in the case of Comptroller v. Citicorp International Communications, Inc. I acted as local counsel for the taxpayer. The question before the Court was whether a fee paid by the taxpayer to terminate an equipment lease was subject to Maryland sales tax which is levied upon lease payments. The Court agreed with the taxpayer that a payment to terminate a lease was not a payment under the lease and was thus not a taxable sale subject to sales tax. Judge Wilner filed a dissent.

I don't think that it violates my "no comment" rule to state that Mike Pearl of Morrison Foerster ably pulled the laboring oar for the taxpayer.

Tax Effects of Katrina

Via TaxProf, there is a link to an article by Martin A. Sullivan, Katrina's Stealth Impact on the Budget.

The central thesis of the article is that Katrina is likely to have tax and economic effects for all years going forward and that these effects have not been fully appreciated. Sullivan calculates, for instance, that if Katrina causes a mere 0.5% reduction in GDP growth for one year, it will result in a loss of tax revenues of about $165 Billion over ten years. This assumes, however, that the economy does not rebound in subsequent years in an amount equal to the reduction in GDP growth in the first year.

To take account of the rebound effect, Sullivan uses a WSJ.com poll that surveyed 56 economists. In essence, their collective prediction was for that the significant negative impact of Katrina in 2005 would only be partially offset by a "minutely positive" rebound in 2006. Applying these concensus estimates, Sullivan calculated that the revenue loss to the Federal government would be in excess of $100 Billion over 10 years. As a result "future deficits will be larger than advertised."

Sullivan does not examine the effects on the three states that suffered the most from Katrina. It is reasonable to conclude that, over the next 10 years, the revenue loss to these states and the local governmental untis within them will be nothing less than devastating.

Reality Seeps In

Apparently, the reality of the budget situation is beginning to sink in even on the true believers. This from Tax Analysts:

Senate Republican Conference Chair and Finance Committee member Rick Santorum, R-Pa., told reporters on September 30 that, with deficits mounting, he believes the money to extend capital gains and dividends tax cuts would be better spent on Gulf Coast recovery.

"In my opinion, that’s where we should be focused," he said.

Democratic complaints and the growing costs of Hurricane Katrina have already left several other Republicans squeamish about moving this fall's $70 billion tax package, but Santorum is the first defector from among the 51 Republicans who voted for the budget in the first place.

The reconciliation instructions provided in the budget allow for the Senate to move the tax package with only a majority vote, but without Santorum, even 50 votes could be a stretch. Centrist Sens. Susan M. Collins, R-Maine, and Olympia J. Snowe, R-Maine -- often bellwethers for the prospects of controversial tax and budget issues -- both voted for the budget in the spring but are now questioning the proposed tax bill. Collins recently told Tax Analysts that she plans to "take a hard look" at the deficit outlook before deciding whether to support tax cut extensions, while an aide for Snowe said "everything is open right now."

Santorum argued that because the rate cuts on capital gains and dividends do not expire until 2008, the limited resources available this year should be used on more pressing issues. He made clear that he still supports the tax cuts, but that there is plenty of time to extend them before they expire. Senate Finance Committee Chair Chuck Grassley, R-Iowa, has been pushing to include two-year extensions of the capital gains and dividend cuts in the tax bill to put them on a parallel track with the other 2001 and 2003 tax cuts set to expire in 2010.

Even without Santorum, however, Grassley is placing hurdles in the path of his own tax bill. He has repeatedly warned that if the senators blocking his Katrina healthcare bill kill the measure, he will not have the votes to move a separate spending reconciliation bill.

"He figures there’s no sense bringing up a bill that will go down in flames," a Senate Finance Committee spokeswoman told Tax Analysts.

Now, I'm waiting for the White House to suggest something more constructive to encourage conservation than car-pooling and turning your computer off at night (a suggestion probably aimed more at reining-in liberal bloggers). Anyone for a good stiff gasoline tax?