ataxingmatter

Links worth reading

An Even Worse Financial System Than the One With Which We Began, Naked Capitalism, July 1, 2009.

Yves Smith has a disconcertingly dismal outlook on the reform on the financial system, , where he sets out Martin Wolf's concerns and "toughminded" proposals, as presented in the Financial Times.   Wolf notes that "the survivors [of the financial crisis] are an oligopoly of 'too-big-and-interconnected-to-fail' financial behemoths."   I agree that we need to understand that the political intransigence on enacting adequate reforms--including breaking up the "too big to fail" banks, enacting stringent controls of derivatives like credit default swaps, and forcing banks to rely on banking business rather than the exotic financial stuff they have engaged in that causes systemic risk-- amounts to acquiescence to the big financial institutions.  One of the commenters notes that part of the problem is accepting the corporatist dogma that we must retain a 'financialized globalist system', which leaves us unwilling to break up the "too big to fail casino banks". Another points out the consistent failure to recognize the importance of counterparty risk in evaluating whether derivatives like credit default swaps really make sense, even in the more vanilla versions.  Ultimately we need "Glass-Steagall on steroirds" but we aren't likely to get it from today's Congress.

Igor Barenboim, Loukas Karabarbounis, One Dollar, One Vote (SSRN Jun 1, 2009) and abstract displayed on Tax Prof, here.

My thesis in this blog, democratic egalitarianism, argues that a more egalitarian society is essential to the sustainability of democratic institutions, and that our economy has strong pressures that lead to redistribution of resources upwards towards the more affluent and not enough that balance with redistribution downwards towards the less affluent.  Tax can be a force for good, or bad, in that balancing act, so we should harness it to support rather than undermine democracy.  Accordingly, I argue, the estate tax should not only be retained but also strengthened, so that it helps prevent the accumulation of mega-fortunes that create dangerous plutocractic forces of power within the society.  Similarly, reforms to the AMT or the regular tax should build in more progressive structures rather than moving towards the flatter, national sales tax model pushed by the right, which favors capital over labor. 

In this context,this study by Barenboim and Karabarbounis provides some interesting insights.  These two authors have studied the relationsh8ip between inequality and redistribution in advanced OECD countries.   They conclude that countries with richer upper classes have less public spending for redistribution (used here, as it typically is, to refer to reallocation of resources in favor of lower classes) and vice versa.  "When the income of a group of citizens rises (relative mto mean income), aggregate redistributive policies tilt towards this group's most preferred public policy."  That sounds like another way of acknowledging that power comes to them that's got the green, and that power typically is used to get more of it.

Nina Olson, National Taxpayer Advocate Report to Congress: FY 2010 Objectives (June 30, 2009)

Ihave tended to view the NTA as overly partisan in support of taxpayers, even when the complaints of taxpayers to which she is responding are relatively weak.  But on some issues, the NTA has played an important role in calling attention to problems and pushing the IRS and Congress to take action.  One example, of course, is the use of private debt collectors, a practice that the NTA opposed from the beginning, with good reason.  An ongoing goal of the NTA is to make the offers-in-compromise program more accessible to taxpayers, and on the whole this works in the direction of greater compliance and more collection of tax revenues. 

I am strongly supportive of the NTA's advocacy of better regulation of "unenrolled tax preparers--the majority of tax return preparers today.  As the report notes, these preparers often prepare "inaccurate returns" and "even take[] positions that they know are not supportable", conduct which "usually results in understatements of tax." Report, at xiii.  the NTA proposes three steps for the IRS to take on this issue: (i) advocate for legislation to regulate tax return preparers; (ii) step up enforcement actions (earlier studies showed that penalties were rarely imposed and even more rarely collected); and (iii) require a preparer tax identification number on all returns, to permit identification of those who tend to submit inaccurate returns.

I think however, that the NTA also tends to adopt positions that are taxpayer favorable without justification in the underlying policies of the Code.  For example, the NTA may go somewhat too far in wanting the IRS to assess taxpayer's financial circumstances before pursuing the legal means available, sucn as liens, to collect on taxes.  Similarly, the NTA push to streamline the Offer in Compromise process may result in taxpayers thinking that they can easily compromise their actual tax liabilities by not paying, resulting in poorer compliance.  I'm not sure she has paid sufficient attention to the competing concerns in this area.

At any rate, the report is worth skimming for an understanding of the various issues and the role that the NTA plays in the tax system.

Robert Reich, What Can I Do?, Robert Reich's Blog, Jun 25, 2009.

To paraphrase (with admittedly some coloring of my thoughts--you can read  the Reich piece for his own words), Reich notes that we can't just expect the Obama administration to do the right thing, or Congress either, for that matter (I'd say,  we can almost expect them not to), unless we the people push them enough towards the hard decisions that need to be made. 

What are those issues, from my perspective, that we should be writing Obama, Baucus (in particular), Rangel about?:--creating a REAL public option on health care (not these finky little state-based "coop exchanges" or any of the half-baked schemes to look like a public option while ceding the field to the same old private insurance system that fails us by weeding out sick people and refusing to pay claims for people that it does ensure);--raising taxes on the rich in spite of the right-wing hullabaloo that taxes will cause GDP to go down instead of up;--ensuring that we tame the Wall Street greed that landed us in systemic risk by breaking up the "too big to fail" institutions before they fail again, etc.

While you are at it, you might want to look at his "Why the Critics of a Public Option for Health Care Are Wrong", Jun 23, 2009.  The AMA, Big Insurance and Big Pharma are against the public option, so odds are it has something they don't want to ever see come to light.  What?  An effective reform that would prohibit them from continuing to make rent profits and force them to undertake major reforms.  Got it?  They don't want a public option because they fear (know?) it will work.  What do we the people want? Health care that works.  Guess that makes it clear where Congress should go, doesn't it?

Divorced One Like Bush, Deja Vu Health Care Reform: Hillary Care is the Wrong Feeling, Angry Bear, Jun 29, 2009.

When we started talking (again) about genuine health care reform that would reduce costs and ensure universal care, many of us were optimistic that, this time around, Congress would recognize that the private system of health insurers/HMOs that make money by denying care (including by fooling their insureds about what care they are obligated to cover) is broken beyond repair.  Surely, we thought, the greedy insurers won't be successful in blocking the needed reforms yet again.  This time, we can finally move our system towards the ones in Canada and european countries that have achieved better health care at a cheaper price than ours. 

Now, it's not looking so good.  Business lobbyists have announced that they will step away from the table if we don't stop talking about a public option.  (Why don't we just say--step away and good riddance?)  The GOP talk machine is making the same old noises about how a real public option will destroy "choice" and lead to rationing care.  (Why don't the people understand that going bankrupt when you can't pay your medical bills is not a very valuable choice, or that health care is rationed today by what economic class the sick person is in?)

DOLB tells us we've seen all this before.  Not in the nineties, when Hillary was pilloried by the private health insurance lobbyists who used mcCarthy like tricks to scare ordinary taxpayers into thinking that single-payer public option would be disaster.  But back in 1971, when Nixon and Ehrlichman deided that supporting HMOs like Kaiser Permanente made a lot of sense, because he'd be "running this Permanent deal for profit" and could do it, too, because "[a]ll of the incentives are toward less medical care--because the less care they give them, the more money they make."  Read it, and weep.

Mark Thoma, The Purely Rational Economic Man is Indeed Close to Being a Social Moron (discussing and excerpting Daniel Little's "Polanyi on the market") Economist's View, July 2, 2009.

More debunking of the notion of economic rationality and markets as the organizational principles of human economic behavio and the corollary that it is "natural" for people to be motivated primarily by their own self interest.  A good read.

Roni Deutsch, How Offshore Tax Evasion Affects You, The Tax Lady Blog, Jun 29, 2009

Roni provides a good summary of the detrimental impact on ordinary taxpayers of a few  greedy taxpayers' offshore tax evasion antics.

How do the big banks hurt us, let me count the ways

Have you gotten those credit card announcements--we're changing the terms of your credit card, increasing our fees for this and that, increasing the rate we charge, permitting ourselves to charge you more if you do this, etc.? This from banks that pay .015% interest on deposits these days and charge 6.5% interest on any loans they make.  I have a fairly decent credit score, pay all of my credit cards off in full when I receive the bill, and reconcile my checkbook to the penny each month.  Yet I've gotten smacked with huge late fees by my credit card company --because it dates the bill one date and then apparently waits about a week to mail the bill, and has the due date for the payment about two weeks from the date on the bill.  You have to put the check in the turnaround mail to get it to the bank on time.  Then I called the bank and complained--and sure enough, they took the fee off.  Another card sent me out a notice that they were increasing the interest charge on their accounts across the board--mine would go up from the old rate  to a much higher new rate.  I called and told them I would discontinue my use of their credit card if they did that.  Without a hint of delay, the person on the phone said--We'll reduce your new rate.  But what about all those people who don't take the time (and it does take time) to call?  And what about the ridiculous rate, even with the "reduction"?  Of course, credit card issuers are raising their rates now because the relatively puny law enacted by Congress will soon make it harder to do so.  See Trejos, Credit Card Issuers Raising Rates Ahead of New Law, Washington Post, July 2, 2009.  As Mahoney (D-NY) notes, it's these "capricious actions" that required congressional action in the first place.  Banks are raising their rates just to get even, I suspect, and because, quite simply, they can get away with it.

Credit cards, of course, are just one of the areas where banks are displaying a lack of corporate citizenship.  The NY Times had an article on the banks' fee increases--even in a recession, which is a new low for the banks. And even when they are being bailed out in mega form by the taxpayers, also a new low for the banks.  Dash, Bank Fees Rise as Lenders Try to Offset Losses, NY Times, July 1, 2009. There's a great graphic, at this link, showing the increases in bank revenues from overdraft fees (from about 15B in '97 to about 37B in '09).  In other words, the banks that engaged in foolish, speculative, risky lending and betting on the markets out of, mainly, plain old-fashioned greed are now raping their customers to recoup the money they lost in their greediness. 

Banks hardly lend to little guys--and some of them discriminate when they do, as the  Spitzer-Cuomo case on racially discriminatory lending practices, now allowed to go forward by the Supreme Court, demonstrates.  Banks lobby against bills that would permit mortgage loans to be modified in bankruptcy, the most obvious good solution to the housing crisis that exists.  They lobby against bills that would place strict limits on the kinds of obscene manuverings that banks do with credit cards.  In fact, they tend to lobby against any legislation that protects the consumers that are supposed to be the lifeblood of the bank, their customers. 

The problem is that the banks have come to view themselves--the brokers, bankers, managers and CEOS as the most important people in their universes.  They'll apparently do anything to make money.  Including in deciding to whom they should lend: big bucks count, social responsibility is something to brag about but not bother to do.   See, for example, BankSecrets' tally of Citibank's socially irresponsible loans to polluters, arms manufacturers and other bad guys, at this link. 

Banks are so busy making money for themselves (owners and managers) that they've forgotten that they exist by the grace of the state.  The state needs to remind them.  Definitely by creating a consumer protection agency.  But also byy cutting them down to size.  By breaking up the "too big to fail" banks by whatever means it takes to do so.  By pursuing anti-trust.  Reinstating Glass-Steagall boundaries.  Regulating them under a single, powerful banking agency--including hedge funds and the rest of the shadow banking system.  Controlling leverage.  Limiting fees (come on--$25 for a copy of your record, that costs them 10 cents to print out?  $39 for a payment that arrived a day late because they mailed the statement a week before the payment was due?).  Placing stringent restrictions on banks' ability to gamble with exotic derivatives for their own benefit.  In fact, by placing stringent restrictions on exotic derivatives period--like banning the exotics, allowing only the most plain vanilla derivatives (interest rate swaps, etc.), and requiring those to be traded over an exchange.  Requiring full, public reporting of bank positions in stocks, debt, and derivatives. 

Now, that would be bank reform. 

The Estate Tax: a British perspective

One of the joys of trolling the internet is finding serendipitously a well-written piece that makes some good points in a way that hasn't been so refreshingly stated before.  I consider the post on "Bad Conscience" about the inheritance tax to be such a piece.  The Fairness of Inheritance Tax, Bad Conscience, July 1, 2009.

Here's an excerpt:

The bequeathing of wealth, property, money etc creates imbalances in society. It results in some people – those who had rich parents – having more than others. In this world, having more property, wealth and money means (generally) having an easier, better, less stressful and more pleasurable life.  That, after all, is why people usually want money, property and wealth.  However (as Tim Horton explained on Newsnight) at present in the UK the top 50% of people own 93% of the wealth, and the bottom 50% own just 7%. That’s some serious inequality.  So point number one: allowing unmitigated inheritance tax can only reinforce this inequality.

***

[Let's] turn to fairness .... It is a simple, uncontroversial fact that nobody deserves to be born to their parents. I no more deserved to be born to my middle-class, financially prudent and well-employed parents than Joe Bloggs deserved to be born to a single mother on a sink estate. That’s because birth is a lottery – nobody is responsible for who their parents were.  So the brute fact is, nobody deserves to inherit money from their parents. Why? Because it is a fact of arbitrary chance that somebody was born to parents able to leave them large sums of money, rather than financially imprudent parents leaving nothing but debts.

***

But that’s not the end of the matter, for there is more to politics and the settling of social distributive questions than just the issue of who deserves what and whether or not distributions are fair. Here we must remember that the anti-inheritance tax proponents have a strong case when they say that leaving an inheritance behind is important to the lives of parents and children.

***

These two things need to be traded-off against each other. The state can correct for the first by taxing inheritance. This adjusts for the unfair reward of material distributions allocated by the lottery of birth, and can be used to compensate those who were unlucky enough to be born to parents who couldn’t or didn’t leave them an inheritance. This is fair because receiving inheritance and the accruing benefits is itself fundamentally unfair.

However, the state must recognise that leaving inheritance is important to peoples’ lives. Thus the state must certainly not impose a 100% inheritance tax: people must be allowed to leave something to their children, if their lives are going to go well.

The real question is therefore where to draw the line between these two competing demands. How much unfair, undeserved social and material inequality are we prepared to allow in the name of allowing people’s lives to go well by leaving inheritances for their children?

The author suggests that the current 325,000 pounds (in the UK) is too high.  So I'm sure he would agree with my suggestion that the proposal for a $7 million exemption for US couples is way beyond the appropriate threshold, as is a rate of tax of only 45%.  Congress needs to consider these kinds of arguments in dealing with the estate tax and maintain a lower exemption and a higher tax rate over the long term.

(hat tip to the Tax Justice Network, which had a piece linking to this posting.  The Tax Justice Network is a new addition to my tax blogroll, at left.  It was founded by a variety of groups, including our own Citizens for Tax Justice.)

More on UBS: DOJ memo in favor of summons enforcement

The pending summons case in Southern District of Florida has taken another step forward this week.  The DOJ has asked for documents identifying the US taxpayers that have held "undeclared" accounts at UBS in Switzerland between 2002 and 2007--i.e., accounts over which U.S. taxpayers had authority and for whom UBS did not posses an appropriate FormW-9 and did not file accurate Forms 1099.   The government thinks there are 52,000 such accounts.  When Switzerland tentatively agreed to a new tax treaty that apparently calls for somewhat improved information exchange, some speculated that the Department of Justice might settle its summons case without pursuing the additional 52,000 account names.  That speculation has been proven wrong, since DOJ has now filed its memorandum in the case calling for enforcement.  Memorandum of Law in support of Petition to Enforce 'John Doe' Summons, DOJ, June 30, 2009 (on BNA--not yet available on Pacer).

The government presents as key facts that it is investigating non-complying US taxpayers, that UBS violated the law and helped US taxpayers evade their taxes (--i.e., committed and facilitated tax evasion, knowingly aiding US customers in structuring accounts to avoid disclosure and to evade US taxes, knowing done within the US and therefore knowingly having exposed UBS to US Jurisdiction, keeping hidden a profitable business with compensation practices that encouraged the brokers' illegal conduct in the US, and regular travel to and from the US to conduct business, using stealth), and that the US-Swiss tax treaty doesn't provide an avenue for the IRS to obtain the documents sought.

Tidbits of interesting facts here.

• in 2004, a training session for brokers admitted that the cross-border broker services could trigger long-arm jurisdiction rules.  As far back as 1999, UBS's private banking department in New York acknowledged the risk that UBS's unlicensed brokerage services to US customers was subject to US jurisdiction.
• 45-60 UBS brokers traveled 2-3 times a year to the US , for 1-3 weeks each trip, to meet with 3-5 clients daily, resulting in about 3800 client visits in 2004.  They used encrypted laptops to hide client information and claimed the US trips were pleasure and not business to fool US authorities.
• A form letter used with the US clients originally stated that "I would like to avoid disclosure of my identity to the US Internal Revenue Serivce under the new tax regulations" but was changed because clients thought it amounted to an admission of tax evasion.
• UBS referred clients to accommodating lawyers who would help them form offshore companies to avoid securities investment restrictions that UBS was supposed to enforce under the QI agreement.  UBS selected these companies after a competitive presentation "on the structures/vehicles that you recommend to U.S. and Canadian clients who do not appear to declare income/capital gains to their respective tax authorities."

The DOJ argues that the IRS has broad summons authority and has proven its prima facie case.  International comity favors enforcement, esepcially given the importance to the investigation of the documents, the degree of specificity, the origination of information, the lack of alternative means, and the extent to which noncompliance would undermine important US interests.  It claims that the comity arguments raised in favor of UBS lack merit--enforcement won't implicate decisions reflected in the tax treaty, US banking privacy interests don't weight against enforcement, and the "revenue rule"  (that one country will not collect taxes for another country) isn't at issue here and doesn't apply.  The treaty doesn't preempt the statutory authority, since Swiss bank secrecy law can't prevent the US from investigating US citizens whose violations of US law were aided by a Swiss bank doing business openly within the United States.  Nor does the Qualified Intermediary Agreement with UBS, which "UBS secretly and consistently violated with impunity".  Case law that supports enforcement is not distinguishable as UBS claims, and there is no good faith argument favoring UBS.

Here is an excerpt of the argument against UBS's claim that the treaty information exchange is the exclusive means by which the IRS may obtain information in UBS's records.

In essence, UBS argues that it may come into the United States, violate the laws of the United States with impunity for seven years, and help thousands of its U.S. customers violate the laws of the United States--evading hundreds of millions of dollars in U.S. income taxes in the process.  And as long as it maintains the records of its wrongdoing--and the identities of its lawbreaking U.S. customers--in Switzerland, UBS argues that the IRS is powerless to obtain those records.  This proposition not only defies the law, it defies logic and common sense as well.

As noted above, Congress gave the IRS very broad authority to obtain information through its summons power.  The treaty at issue here does not abrogate tht power, either explicitly or implicitly.  Accordingly, no court has ever ruled that the IRS may not use its summons power to obtain information that it might be able to request under this treaty, or any other similar tax treaty.  Nor should this Court.

...It is well settled that a treaty can only preempt inconsistent U.S. legislation if the treaty is clearly inconsistent with that legislation and, in entering the treaty, the United States clearly intended the treaty to preempt the legislation.

As for UBS's good faith argument, the DOJ memorandum makes short shrift of it. 

The notion that UBS has always acted in 'good faith' to comply with U.S. law--and to help its customers comply with their obligations under U.S. law--bears all the hallmarks of an eleventh-hour confession, made in the hopes the sinner will be absolved from the full consequences of his wrongdoing.

***

In the real world, good faith demands full, not partial, compliance with our obligations.  In the real world, compliance comes before one is caught.

The memo  lists the activities of the bank in illegally trolling for US clients and the fact that it did nothing to stop the practices until it had been contacted by the DOJ about the illegal business.

If it's crazy, someone in Congress will propose it....home office deductions

There is a provision in the Code which generously permits taxpayers who have an office at home used exclusively as their principal place of business to deduct an allocated portion of the costs of their home for that office.  Almost 3.2 million returns claimed the deduction for 2005.

I suspect that the provision is abused a good bit by claims made for amounts much beyond the amount that should be allocated to the office.  Anecdotal evidence abounds of home office deductions being essentially "made up out of whole cloth" by tax preparers or of taxpayers claiming almost all of their home is "used exclusively" for their business, when in effect they merely have a small storage area and desk for the business use.  Others claim a home office deduction when they actually work at their employer's place of business.  All of those amount to cheating.

Yet Nina Olson, the "national taxpayer advocate, has said that "it is questionable whether most taxpayers who are eligible to take the deduction actually do so" and recommended a standard deduction.

On March 16, John McHugh (R NY) and 28 co-sponsors introduced HR 1509 to create an election to permit taxpayers who are permitted a deduction under section 280A to take instead a new standard deduction for home offices (lesser of $1500 or 100% of the taxpayer's gross business income "derived from such [home office] use").  Elections generally aren't good ideas in tax codes.  This one certainly wouldn't be.  It just creates a new $1500 deduction that every business that can't substantiate an even greater home office deduction, even if the actual cost is more like $50.  In other words, this election merely gives a taxpayer with a lower cost an option to deduct a larger cost; it's an outright tax cut.  We have too many provisions already that let businesses deduct fictional costs, in the name of "simplification" or "stimulus". 

And on June 25, one representative--Gonzalez (D TX) and two senators--Snowe (R Maine) and Conrad (D ND)-- introduced yet another bill (S. 1349 and H.R. 3056) that is put out under the gloss of being a "simplification" measure.  It  adds a new "de minimis rule for personal activites conducted in the home office business space.  That's equally nutty, to put it mildly.  Taxpayers already read the rule leniently.  If you add a subjective measure for de minimis use, many more taxpayers will abuse the rule.  

Banks and the financial crisis

The financial crisis has entailed massive government support for banks and even for  companies like GE that are primarily not banks but are bank holding companies (GE owns a couple of small regional banks and has received enormous support through TARP). 

The public has not been too happy with the need to provide that kind of massive support to banksm while the banks continue their outsize compensation packages, increase lending costs for small businesses and individuals, and refuse to support legislation to permit modification of mortgage loans in bankruptcy.  (The inability of Congress to enact bankruptcy modification of mortgage loans is the most vivid evidence of the stranglehold that banks and insurers and other financial institutions have over Congress; it apparently takes relatively small campaign donations to guarantee a Congress that willingly puts big financial institution wishes above the views of ordinary Americans.)

So in that context, it is refreshing--and surprising--to see a divided Supreme Court today hand down a decision that will permit states to continue to use the courts to protect the little guys against national banks.  Andrew Cuomo won his case.  Cuomo v. Clearing House Association, LLC (No. finding that states can sue national banks to enforce the state's fair lending laws, in spite of a Controller of the Currency ruling that federal regulations preempted such state actions). Cuomo called the decision "a huge win for consumers" that will protect them "from predatory financial practices."  The American Bankers Association whined that regulation of banks would "make it more difficult [for national banks] to serve consumers."  See Cuomo vs. Clearing House Represents Victory for Taxapyers, Center for Responsible Lending (Jun 29, 2009); Court Allows States to Challenge National Banks, Washington Post (Jun 29, 2009)

Elliot Spitzer originally began the investigation of racially discriminatory lending practices, sending letters of inquiry asking for non-public information about mortgage policies and practices.  The Office of the Controller of the Currency and the Clearing House Association (formed by various national banks) sued to enjoin the AG's investigation and enforcement, claiming that the National Bank Act 12 USC section 184(a), as interpreted by the OCC in 12 CFR 7.4000(a)(2)(iv),  barred the states from enforcing their state predatory lending laws against national banks.  The AG argued that the OCC regulation violated the administrative procedure act and that the banks activities showed racial disparities that "established a prima facie case under the federal Fair Housing Act." 

The District Court agreed with the OCC that the investigation was preempted and with the Clearing House Ass'n that the Fair Housing law didn't create an exception. See 394 F. Supp 2d 620 (SDNY 2005). and 396 F.Supp. 2d 383 (SDNY 2005).  The Second Circuit deferred to the OCC under Chevron but held that the district court did not have jurisdiction on the FHA claim.  510 F.3d 105 (2d Cir. 2007).  The Supreme Court granted cert on Jan. 16, 2009.  The Cornell website includes a discussion of the various amici arguments in the case (with links to particular briefs), and the SCOTUS wiki includes even more.  Cuomo argued that the banking act did not intend to limit State enforcment of state banking laws, but rather was designed to prohibit the states from supervising the national banks through examinations.  Amici for Cuomo added that states have been more effective than the OCC in protecting consumers, and that the current crisis demonstrates the importance of such protection.  The Supreme Court affirmed in part, reversed in part today, with Scalia delivering the opinion of the court, joined by Stevens, Souter, Ginsburg and Breyer (ie, the liberal four + Scalia).  Thomas concurrent in part and dissented in part, with Roberts, Kennedy and Alito.  Supreme Court docket sheet.

Folks, if the banks want to serve consumers, they know how to do it.  The big banks are just using consumers as a shield on this issue, like they used the threat of higher mortgage rates as a shield on the bankruptcy modification of mortgage loans. It is very hard to believe that the big banks really give a damn (pardon my English) about the ordinary consumers. 

Of course, the case may not mean much, as the effort to cahnge financial services regulation proceeds.   But the Obama plan (for establishing a new agency that is charged with protection consumers) would cut back on preemption of state law, making the federal law "act as a floor, not a ceiling", according to a June 29 statement from the administration.

State Revenue Problems--New Jersey

Recently, I blogged on Angry Bear and A Taxing Matter about Michigan's fiscal crisis, brought about in large part by the financial meltdown and consequent business and job losses.  I suggested that Michigan should move away from its flat income tax to adopt a progressive rate, peaking at less than 8% for multimillionaires. 

The progressive rate is wise for three reasons: 

• tax revenues are needed because budgets simply can't be cut enough (especially during a recession when additional services for the vulnerable are needed) and it is in fact, possible to milk a producing cow and not possible to squeeze blood from a rock (the feasibility rationale);
• those at the top of the income distribution have a greater ability to pay the revenues needed, and have less use for each additional dollar they earn than those at the bottom (the ability to pay rationale); and
• those at the top of the income distribution receive most of the benefits of the state that are funded by taxes (the benefits received rationale).

New Jersey has adopted, at least as a temporary one-year change, the proposal for making income tax more progressive.  It's budget stop-gap measure calls for a one-year increase in the state income tax applicable to those making more than $400,000 a year (about 61,000 New Jersey residents) and limitation on the property tax deduction based on income (a $5000 cap for those earning between 150 and 250 thousand, and a zero allowance for those earning above 250 thousand).  The income ceiling for those eligible for New Jersey's property tax rebate program will continue to decline, to $75,000 from last year's $150,000.  Other taxes will go up--lottery winnings above $10,000 will be taxed; cigarettes, wine and liquor will be more expensive.  See, e.g., Chen, New Jersey passes Budget Fueled by $1 Billion in Tax Increases, NY Times, Jun 26, 2009.

The result is that the burden will mainly be borne by those making more than $82,000, and will be about $3000 more for families making half a million a year with $20,000 in annual property taxes.  And New Jersey won't be making the cuts to education and health care that other states are.

More on Swiss Banking Secrecy--guilty plea from American taxpayer who hid accounts

Story to date., in brief (see prior postings for more detail, including here and here).

 Last year, a former employee of the Lichtenstein bank revealed to various countries secret bank accounts held by their citizens in Lichtenstein.  The IRS engaged in a much more substantial effort to uncover the names of US taxpayers that might be hiding assets abroad in order to escape taxation from the income on those assets, especially in Switzerland and Lichtenstein.  It turned out the UBS, a Swiss bank, had been illegally engaging in US-based solicitation of wealthy Americans' business.  It was hawking the Swiss bank's ability to act as go-between to set up offshore dummy vehicles in which assets could be hidden without tracing to the taxpayer because of Swiss banking secrecy laws.  To avoid prosecution, UBS eventually agreed to pay a fine and turn over fewer than 300 names of US taxpayers with such accounts.  The US government has issued a summons for the names of holders on an additional 52,000 accounts, but so far the bank has refused, claiming it would violate Swiss law.  At the same time, the Swiss and US tax authorities have been negotiating a new tax treaty.  While it is purported to provide somewhat better information sharing than the current treaty, most disucssions suggest that it will remain far short of a real information sharing provision.  But there have been rumors that the agreement on the treaty might be enought to "buy" the U.S.'s dropping the legal case for the 52,000 names.  The Justice Depart. says not, however.

The new information.

Yesterday, Florida millionaire accountant (so he knew better) Steven M. Rubenstein of Boca Raton was the first person to plead guilty, to a charge of filing a false tax return that failed to reveal secret accounts, stemming from the UBS revelation of some of its accountholders in the plea deal.  He'll face prison time, plus back taxes, fines and penalties.  Rubenstein is said to be cooperating with authorities, which could make it easier to finger additional tax evaders or provide information against UBS If it is determined to have violated its settlement.  Rubenstein notes that UBS "helped him set up" an offshore coropration and handled gold sales worth $2 million and  securities trades worth $4.1 million over the seven years he had the accounts.  The US attorney said that "[m]ore prosecutions are expected to follow." U.S. Dept. of Justice, UBS Client Pleads Guilty to Filing False Tax Return (Jun 25, 2009);  Lucoff & Voreacos, UBS Client Rubinstein Pleasds Guilty Over Tax Return, Bloomberg.com, Jun 25, 2009; Florida UBS Client Steven Michael Rubinstein Pleads Guilty to Tax Fraud, Post Chronicle (Jun 25, 2009).

Washington Metro and its Sale-Leasebacks--not just a drain on the federal fisc, but also a matter of life and death?

As all are undoubtedly aware, the Washington Metro experienced its worst-ever subway crash, resulting in nine deaths.  The crash involved an older model of rail car, one that the NTSB had asked the Metro system to phase out.  The system hadn't done so--and didn't plan to until 2015--, because they had entered into sale-leaseback arrangements on their assets, leaving them essentially with no option to upgrade without an infusion of cash from another source.  See Vaughn, Metro Delayed Upgrades Because of Tax Shelter, Wall St. J. (Jun 25, 2009); Henchman, D.C. Metro SILO Contract may have obligated them to run outdated railcars, Tax Foundation Tax Policy Blog (Jun 25, 2009).

Here's a couple of paragraphs from the Journal article.

Metro, the light-rail transit system of the District of Columbia that reaches into parts of Maryland and Virginia, was one of dozens of public-works agencies nationwide that entered into the leasing deals, known as sale-in, lease-out, or SILO, transactions. Under the deals, foreign banks bought railcars or other equipment from the public agencies, claimed millions in depreciation tax benefits, and then leased the equipment back to the agency.

Metro had entered into such an arrangement with 16 banks. It has unwound agreements with Bank of New York-Mellon, SunTrust Bank, Belgium's KBC Bank, Regents Bank and Norlease Inc. Metro reaped more than $100 million from the deals, which it used for capital investments, Ms. Kissal said.

In other words.  Metro entered into these sale-leaseback (SILO) transactions in respect of its assets with banks that wanted to lower their tax bills.  The municipality was acting as an accommodation party to the banks, much as foreign banks like Deutsche Bank, ABN-Amro and others have acted as accommodation parties to US corporations that want to reduce their US taxes. (See, e.g., GE's Castle Harbour deal--litigated under the name of "TIFD"--in which foreign banks arranged their financings, noted as such on the bank's books, to look like partnerships so that GE could refresh its depreciation deductions on fully depreciated equipment.  The banks were effectively paid a higher rate of interest than they would otherwise have commanded, as the fee for serving as an accommodation party in the tax shelter deal.). 

How did these deals work? Municipalities and their agencies are exempt from federal taxes so they don't get to use depreciation deductions to decrease federal income taxes.  But if a tax-exempt person (or, a person with lots of net operating losses that is therefore "tax indifferent")  "sells" its assets to a taxable bank (with a wink-wink-nod-nod) and then leases its assets back, the bank becomes the new "owner" of the assets.  The bank usually funds the "purchase" with a nonrecourse loan.  If recognized as the tax owner for federal income tax purposes, the bank can now claim depreciation deductions on the assets.  So the bank has rental income but interest deductions and depreciation deductions that result in a taxable loss in the early years of the transaction, resulting in lower taxes.  The tax-exempt person uses most of the money it receives to defease its obligations under the lease and other documents, but is left with a "profit" on the deal, amounting to a fee paid by the bank for helping it lower its tax liability--i.e., the fee amounts to a sharing of the tax benefit.

For a broad description of the world of sale-leasebacks as financings, see this GE Commercial Equipment Financing, Sales-leasebacks: Benefits and Challenges for both Healthy and Underperforming Companies, 2001.  For a description of SILO transactions between banks and municipalities, see, e.g.,  Luitjens, Sale in-Lease out (SILO) Transactions, Federal, State and Local Governments Newsletter, Jun 2004, at 3; Sandra Yip,  Credit Implications of IRS Scrutiny of LILO/SILO Transactions and proposed Accounting Guidance for U.S. Banks, Moodys, Feb. 2006 (has a good chart showing banks that entered into SILO deals).  

Congress took away the tax benefit of entering into new SILO transactions with tax-indifferent parties in the 2004 American Jobs Creation Act 2004, section 847.  After that, Treasury issued Notice 2005-13 to identify existing SILO transactions as "listed transactions" under the reportable transaction rules and to inform taxpayers that the government would challenge the purported tax benefits of taxpayers who had entered into SILO transactions prior to the 2004 Act .   The IRS developed a settlement initiative and settled with about 2/3 of the US corporations that had claimed tax benefits from SILO transactions (often for foreign rail or sewer systems).   See IRS Sees Strong Response to LILO/SILO Settlement Offer (Oct. 21, 2008).  The settlement initiative allowed banks keep 20% of the disallowed deductions if they got out of the SILO agreements by the end of 2008. The lowering of AIG's credit rating in the financial crisis last fall provided the foreign banks a useful trigger by causing a technical default by the municipalities whose obligations under the contracts were guaranteed by AIG.  See Transit Agencies in Bind Due to SILO Deals and AIG Collapse, Tax Foundation (Oct 30, 2008) (noting that the Washington Metro authority had sought an injunction in 2008 against a Belgian bank that was demanding $43 million in termination fees for the SILO deal it had financed because of the AIG collapse and technical default,, and including a list of transit agencies that entered into SILO transactions).

The Tax Foundation notes that "most of the agreements are now in a holding pattern, with transit agencies continuing to make payments and negotiating with the foreign banks that technically own the railcars purchased with public funds." DC Metro Silo contract (Jun 25, 2009).

(hat tip--Tax Prof and Concurring Opinions).

More on Jenkins & Gilchrist Shelters--attorney liable in connection with tax opinion

The Fifth Circuit upheld an attorney's liability to an investor for his opinion in connection with the investor's entering into a Jenkens & Gilchrist/ Bank One digital options tax shelter for generating artifical losses, but reversed the district court's RICO award of $6.43 milllion to the investor.  Ducote Jax Holdings LLC v. Bradley, No. 08-30037 (5th Cir. Jun 19, 2009) (unpublished decision). 

The court confirmed that the attorney, Bradley, was liable under RICO and various state law claims for negligent representation, fraud, civil conspiracy and breach of fiduciary duty.  The attorney admitted that he spent very little time on the project, though he got paid $25,000 (ultimately by the promoters).  Lesson here--don't think you can get something for nothing--i.e.,  don't give an opinion when you really don't do any work on which to base the opinion.

The complaint alleged that the investor (various Ducote enterprises) had been induced to participate in the tax strategy by documents with misleading representations, including that the IRS wouldn't assess any peanlties.  The investor claimed "extensive monetary damages consisting of unexpected tax liability, fees and commissions paid to the Bank One Enterprise, as well as interest and penalties which the [IRS] will likely seek."  Id. at 2.  Ultimately, the investor was subject to a tax assessment of $3.14 million, a penalty of $315,000, and interest of $500,000, after paying fees to Jenkens & Gilchrist and Bank One of more than $1 million.  Attorneys fees for the litigation were about $650,000.  In other words, they were out about $5 million for fees and taxes.  (But the taxes were due anyway.)

The investors had gotten about $2.85 million in a settlement with the defendants.  The district court found the attorney liable and awarded about $5 million in damages (which included the $3 million in taxes assessed against the investors), minus the settlement amount paid, yielding about $2.14 million.  That figure was then trebled under RICO. 

Bradley contested the damages, claiming he didn't cause the tax liability.  The investors countered by claiming that if they had been informed about the problems with the tax shelter they used, they "would have employed another tax management or deferral strategy and therefore would not have incurred a tax liability of over three million dollars" but never really explained how they would have been able to do so, according to the 5th Cir. opinion.  The court said the appropriate damage measure would be the difference between the amount of money the investors had to pay the IRS versus the amount they would have paid if the attorneys had advised them correctly.  Id. at 14.  Accordingly, the court subtracted the tax assessment from the damage award (prior to trebling), leaving no damages from the violation.