ataxingmatter

Offshore tax havens and banking secrecy--France takes action

France has announced that it will begin later this month to implement a degree requiring banks operating in the country to regularly report to French tax authorities anytime their clients transfer funds to "uncooperative" jurisdictions.  The existing law--Article L.96A of the "Livre des procedures fiscales" (i.e., France's tax procedures code)--provides that banks operating in France have to supply on request information about transfers of funds abroad, such as name of sender, name of recipient, account numbers, banks involved, amounts.  Under that law, the government has already forced branches of Swiss banks to provide names of 3000 French taxpayers in Switzerland.  See France Pursues Tax Cheats Using Swiss Banks, NY Times (Aug. 30, 2009); But see Giles, Wegelin, Oldest Swiss Bank, Tells Customers to Sell U.S. Assets or Leave , Industry-News (Sept. 2, 2009) (in which head of the Swiss bank mentioned says he finds the French claim of acquiring 3000 French taxpayer's names "not credible" considering the trouble the US had to go to in order to get some 4450 names of the 52,000 accounts originally sought).  The decree merely provides for banks to provide the information regularly, without waiting until the government submits a request.

Education, taxes and the future of democracy in the US

Health care reform is the primary topic connected with future tax policy on people's minds these days, but maybe we should be focusing as well on a related human capital issue--support for accessible quality public education.

In general, I believe that we Americans need to recommit to public education as fundamental to the future of our democracy.  We have, in the past, consistently chosen to use our tax dollars to ensure that every child in this country gets a decent education--from grade school through university, as every state has public higher education institutions.  The idea is that education builds human capital, which enables our people to grow to their fullest potential, along the way developing ideas and products that make life better for all of us.

But one more fallout from Reaganism's regimen of privatization, deregulation, militarization and tax cuts has been the enormous harm done by the right-wing's insistence that taxation is just taking money from some to give to others (likening taxation to some  form of communism, and treating any program that has socialist rather than 'pure' capitalist aspects--including publicly funded education--as though it were somehow tainted with evil).  The right-wing fails to understand that taxation is the way that we all support a better society that benefits those who may pay more as much (or more!) as it benefits those who appear to be the direct recipients of some of the programming.  That failure--and the success of corporate and wealthy-donor funding of right-wing "think tanks" that spout propaganda to convince ordinary people to vote against their interests--has resulted in declines in public support for education.  We've got more "home schooling" where indoctrination in dogma passes for education and more for-profit "educational" institutions that enroll students by the hundreds without much care whether any student learns any skill that can be used, much less graduates with a degree that means anything.  We've forced state-supported colleges and universities to beg for corporate and wealthy donor dollars.  In the process, we've allowed them to cede some of the programmatic decisionmaking to satisfying the objectives of those corporate and wealthy donors. 

It's time we changed the "privatize and defund" view of public education and put our money behind grade schools to universities that provide the necessary liberal education for future productive citizens.

David Leonhardt points out that we have also perhaps focussed too exclusively on enrolling students in colleges and need to think more about insisting that students are able to graduate--especially lower-income students who face an uphill battle in making it through the four or more years to complete a college degree.  See Leonhardt, Colleges are Failing in Graduation Rates, NY Times, Sept. 8, 2009. I agree that we need to focus on ensuring that students complete college but I suspect this is more than just a product of the enrollment = dollars allure (each enrolled student equals more tuition revenue) or financial aid packaging or even failure of schools to care about graduation rates, though all of those are likely to be a factor.   The fact is, our economy is failing lower-income and lower-middle class students in many other ways as well--tuition at the best schools is too high because administrators are overpaid (it is not at all unusual for mid-level administrators in state-supported universities with limited resources to make more than $150,000 a year while their liberal arts faculty struggle on salaries of a third that much), opportunity costs of attending college are high (class schedules are set up for the convenience of the on-campus student and the faculty, making it difficult for poorer off-campus living students to participate fully), students who need to work or care for family members can't take advantage of on-campus living that might make the college experience more meaningful, and low-income families may not recognize the need for college education if they don't see ready job opportunities that might be available.  The decline in the real wage level for most ordinary Americans (other than the wealthy aristocrats at the top who continue to garner more of the wealth) makes funding college even harder.  And wealthy donors are more likely to make contributions (tax-deductible, of course) to support a winning football team or build a five-star basketball gym at their private alma mater than to support a supportive mentoring program for low-income students at a state university that is the primary educator of middle and lower income students in the state.

So, ultimately, our tax system is providing the most assistance to those who need it least.  It's wrong in lots of little ways that are tangentially relevant to education--for instance, the way we do charitable contributions.  Instead of making charitable contributions deductible only when they support programs that serve specified human capital needs (food for the starving, housing for the homeless, education for the underprivileged, capital projects for public schools from kindergartens to universities, basic university research), we let wealthy people give stock (getting a fair market value deduction) to name a stage for themselves (literally buying fame as a philanthropist, often good for business connections) in a performance hall that will be mainly patronized by themselves and other wealthy people. 

But it's also wrong in ways that are directly relevant.  Take the "section 529 plans".  That's a tax benefit for saving for college that was intended to make college more affordable for the middle class.  But it's not working that way.  As the government notes in its report released today on the plans, the tax-advantaged tuition savings plans--like so many other exclusions, credits and deductions from the charitable contribution to the home mortgage interest deduction and the various "savings" tax advantaged plans pushed by Repubicans as part of their tax cut dream packages--benefits mostly the upper crust and not the middle class.  See An Analysis of Section 529 College Savings and Prepaid Tuition Plans: A Report Prepared by the Department of Treasury for the White House Task Force on Middle Class Working Families, Sept. 9, 2009. 

Here are a few facts from the summary (with some comments interspersed, in this fuchsia font color):

savings in plans can reach up to caps of $224,465 to $368,600 depending on the state; BUT these limits are "per beneficiary per state" and nonresidents can usually participate, so a wealthy family could set aside accounts of $200,000 in several states, garnering a significant tax advantage [perhaps even with the penalty rates for uses for noneducation purposes?

There are lots of fees for advisor sold plans (periodic charges as percent of balances, loads as percent of balances or as percent of asset sales; fixed dollar maintenance fees, etc.) and even though investment options are usually just mutual funds, there are higher fees (manager fees, state fees)

Tax benefits "increase the effectiveness of saving by between 6 percent and 39 percent depending on the tax bracket of the saver, the length of the savings period, and whether there is a state deduction or credit for contributions." 

Account balances and annual contributiones appear to be skewed toward hgiher income families" because of the greater tax benefit for higher rate taxpayers, higher savings rates anyway for higher income households, and higher college attendance rates for higher income households.  The report actually asserts that the skewing of the tax benefits to high income families (which have also, of course, garnered the most benefit from the myriad Bush tax cuts that the Democrats apparently don't have the will to allow to lapse) might not be problematic:   if one thinks that the best way to help middle and lower income families is with direct student aid, then one might think that these plans are "naturally targeted to higher income families."  [I find the language finding it reasonable that Congress might have "naturally targeted" benefits intended to make college more affordable for the wealthy astonishing.  After all, the wealthy don't need help with affording college.  I have to go back to the enacting legislation.  Seems like I remember that the Republicans pushed these as being great for the "middle class".....]  The report then notes that it focuses on "making SEction 529 plans more accessible, effective and reliable for the middle class."  Maybe we should just eliminate section 529, and focus on making direct student aid more "accessible, effective and reliable" for the middle AND LOWER income classes!

• One of the recommendations (at least) is on target: the report calls for putting an effective limit per beneficiary across multiple state plans, which would limit tax benefits for high income families and at the same time free up money otherwise spent to aid wealthy children so that it could be spent on education resources targeted to low and middle income families.  But again, if limiting the money in this program is the best way to benefit middle and lower income families, why not just eliminate the program altogether?

lighthearted fare--or should we maybe consider enacting it?

Valuation is always an issue in tax.  If you can claim a lower value, you can reduce gain or increase loss--either way, a manipulative winner for taxpayers.    The mere fact that taxpayers would have something to gain by misstating value is disturbing.  Add to that the propensity, observed by anyone who cares to notice, for appraisers to give the people that compensate them the value that the payer expects.   Typical dialogue.  A: I need an appraisal of X property.  B: When do you need it.  A: one week, at the most.  B: what's the value you are aiming for (or some variant thereof.....

So are there any actions we could take to stop the gaming of the system with artificially inflated (or deflated) values?  William Turnier at the UNC School of Law proposes a solution, in a fairly recent working paper, Games, Lies and Taxes, UNC Leal Studies Research Paper NO. 1404589 (abstract on SSRN).  He suggests we give the IRS an option, on audit and at its election, to resolve a valuation dispute in one of two ways: (1) by purchaseing the property at the stated value for the assets claimed on the return or (2) by compelling the tapxyaer to enter into final offer arbitration with respect to the value of the asset.

Congress hasn't legislated anything like the Turner option.  Maybe our legislators need to start thinking more creatively.  It's clear that wealthy taxpayers and their advisers are extraordinarily innovative.  It's time Congress matched them--and gave the IRS some real tools to use.  Maybe we should give Turner's option or arbitration idea a try.

Plaintiff Discovery of IRS-collected tax opinions ruled out

The IRS has litigated a number of cases in the Son-of-Boss  tax shelters involving digital options on foreign currency described as listed transactions in Notice 2000-44. See, e.g., Jade Trading, LLC, 80 Fed. Cl. 11 (2007).  IN the course of the litigation, the IRS has apparently collected a number of tax opinions relating to the shelters.  One plaintiff partnership in its own Son-of-Boss tax shelter administrative proceeding relating to one of the shelters sold by (now defunct) Jenkens & Gilchrist sought to compel  production of all such tax opinions (in redacted form) collected by the government, as well as names and addresses of law firms and accounting firms that the IRS knows has issued such opinions.  (The IRS had already provided copies of two opinion letters that Jenkens & Gilchrist had issued for one of the parties--one of them was "nearly 150 pages" long.) See 3K Investment Partners v. Comm'r, 133 T.C. No. 6 (Sept. 3, 2009).

The partnership's position was that the tax opinion letters would provide evidence of a "general consensus of national law firms across the country" that would bolster the case that these tax shelters worked to achieve the tax reduction intended.  As the court notes, this is the "everybody's doing it" defense--it is a claim that since lots of people were doing it, it must be ok that this particular partnership did it.  The court makes short shrift of the claim.  It rejected (in a footnote) "any suggestion" that the collected opinions represented a "general concensus" among tax advisers about the tax consequences of a Son-of-Boss transaction.  Further, it noted that "Petitioner must establish the reasonableness of its position on the basis of the facts and merits of its own case....The legal analysis, conclusions, and recommendations that some tax advisers may have given other taxpayers are irrelevant to the reasonableness of the positions the partnership took on its return."  IN addition, the fact that the partnership didn't know there were other letters (or what firms produced them) when it filed its return means that the partnership cannot now use those letters to establish that it was acting in good faith.

The court held the materials were neither relevant nor likely to lead to plaintiff's discovery of admissible evidence.  The materials were also return information under section 6103(b)(2) and therefore not discoverable.