ataxingmatter

Chamber of Commerce Sues Treasury on Inversion Regs

Back in April, the Chamber of commerce suggested that it might sue the Treasury Department for violating the Administrative Procedures Act (APA) over the new inversion regs that were issued in April (T.D. 9761, REG-135734-14).  See Fortune article (Apr. 6, 2016).   Well, now they have, not surprisingly in federal court in Austin, Texas, where business lawsuits against government regulations tend to get a favorable view.  See e.g., Business groups sue over new U.S. limit on tax-driven foreign buyouts, Reuters (Aug. 4, 2016); Liz Moyer & Leslie Picker, Tax-Avoiding Mergers Find Champion in U.S. Chamber of Commerce, N.Y. Times (Aug. 4, 2006); Alison Bennet, Businesses Launch First Suit Against Inversion Rule, Bloomberg BNA (Aug. 4, 2016); U.S. Chamber Sues So American Firms Can Move Overseas and Dodge Taxes, Underground.com (linking to Washington Post article).  The  U.S. Chamber of Commerce and the Texas Association of Business have initiated a suit against the Treasury Department over the new regulations .  The complaint, filed on August 4, 2016, is available on BNA at the following link: Chamber of Commerce of the U.S. v. IRS, W.D. Tex., No. 1:16-cv-00944.

 

The business groups claim that the regulations are making business harder for big companies to carry out transactions, referencing the proposed merger between U.S. drugmaker Pfizer and Ireland pharmaceutical company Allergan (both members of the Chamber of Commerce).  That merger, projected to save the U.S. company about $35 billion in taxes, fell apart immediately after the new regs were released. See Michael Merced and Leslie Picker, Pfizer and Allergan Are Said to End Merger as Tax Rules Tighten, NY Times (Apr. 5, 2016).  the lawsuit claims that Treasury did not have authority to issue the regulations and that there was insufficient notice to taxpayers under the Administrative Procedure Act.

 

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Related articles

Business groups sue over new U.S. limit on tax-driven foreign buyouts

Business groups sue over new U.S. limit on tax-driven foreign buyouts

Kuretskis Seek Certiorari at Supreme Court about Tax Court

Peter and Kathleen Kuretski submitted a 2007 tax return showing they owed almost $25,000 but they didn't pay a penny.  In the administrative process within the IRS, they sought approval of an "offer in compromise" where they would pay $1000 of the tax liability over five years and nothing more.  The IRS asked them to pay the full amount over a term of nine years, but they refused.  So they got a Notice of Deficiency and intent to levy, including penalties for nonpayment and interest on late payment.

At that point, they could have paid their tax liability and challenged the I tax liability through a refund action in district court (although on what basis isn't clear, since their own tax return admitted they owed it).  They chose instead not to pay and to challenge the IRS in Tax Court. They lost. Kuretski v. Comm'r, T.C. Memo 2012-262. 

They then appealed the Tax Court decision to the D.C. Circuit Court of Appeals and raised a new argument--that their case should be reheard in Tax Court because their judge might have been biased because the legislation establishing the Tax Court as an Article I court allows the President to remove Tax Court judges for cause.  They lost.  You can read the DC Circuit opinion at this link: 755 F.3d 929 (June 20, 2014).

In its decision, the DC Circuit Court considered the taxpayers' claim (not made in the court below) that the Supreme Court decision in Freytag, 501 U.S. 868 (1991) (summary with links to case on Justia, here) --which considered an Appointments Clause phrase referring to "Courts of Law" and "Department Heads" and concluded that the Tax Court was a "Court of Law" that exercises judicial power for Appointments Clause purposes-- requires that the Article I Tax Court must have the same independence from the Executive Branch that Article III courts have.  The DC Circuit looked at a number of other Article I courts and found the Tax Court not so different from them.  It pointedly distinguished Article III courts.

So the Kuretski's have filed a petition for certiorari which essentially claims that the Tax Court is --in spite of its jurisdictional limitations--equivalent to an Article III court. 

If the Kuretski's win, the result is

• the President's removal power set out in IRS section 7443(f) is unconstitutional, 
• the Tax Court's decision in their case (and presumably in any other Tax Court case) is improperly tainted by that never-exercised section 4773(f) removal power; and
• the Kuretski's should get a re-hearing under a judge no longer 'biased' by the improper removal power.

The Kuretski case has nothing to do with their expectation that they should not have to pay their tax liability--it is clear that they owe the taxes, the late payment penalty and the interest on the late payment, and they presented no statement for reasonable cause for not paying it (as required by regulations).  A rehearing before a new Tax Court judge (or the same judge who no longer faces the purported intimidation of the presidential removal power) will result in the same holding in that regard that the original Tax Court came to.  

Thus, the rationale for these years of litigation (and expense to taxpayers) is something else.  The Kuretski's will have gained some fame and at least 7 (maybe 8) years of nonpayment (a  time value of money benefit).  

But more importantly (and perhaps  more damagingly to the government's ability to collect taxes), a victory in the suit would appear to bolster use of separation-of-powers arguments to thwart efficient government procedures and eliminate existing differences between Article III courts and Article I executive branch adjudicative determinations, with potentially wide-ranging consequences for adjudication within agencies, turning the full force of zealous advocacy in adversarial proceedings on all agency hearings. 

The distinction between Article I and Article III courts certainly must mean something constitutionally.  It appears that a significant difference lies in the fact that Article III judges are protected from executive removal by a requirement for impeachment and conviction.  The Constitution does not seem to provide in its text such absolute independence to Article I courts, and Congress in legislating those courts has not opted to provide that protection to many Article I judges who exercise an executive branch version of judicial power. 

 

tax breaks for wealthy; corporate tax shouldn't be reformed away; seed patents are a real scandal

No time for lengthy commentary today, but worth calling attention to some noteworthy items.

(1)  The CBO released a new report detailing the income groups that benefit most from the various tax expenditures in the internal revenue code. No surprise that it finds that those in the highest income brackets receive an enormous amount of (not-needed) money from these tax subsidies.  

As one blog put it: "a whopping $2 trillion of that goes to folks who make more than $450,000 a year. In other words, 17 percent of all tax breaks goes to the top 1 percent. $2 trillion is about double the 10-year cost of the sequester." Bill Scher, $2 Trillion Wasted in Tax Breaks for Wealthy, Campaign for America's Future.org (May 30, 2013).

The wealthy enjoy tax breaks that have no relation to anything they produce but do relate to the fact that they are the primary owners of financial assets, such as the preferential rate for capital gains and the preferential rate for corporate dividends.  They also benefit much much more from any tax break they get than others do, especially when it comes to the mortgage interest deduction, the charitable contribution deduction or the exclusion for interest on tax-exempt bonds.  That's because they have more expensive homes, get bigger mortgages, have more financial assets that they can contribute to their pet projects for a FULL deduction of value (not just, as with most other property contributions, for their actual investment), and are about the only purchasers of tax-exempt bonds (the rates for which are generally set to attract the wealthiest buyers) and always itemize, whereas 70% of Americans just take the standard deduction. 

This $2 trillion is an economic waste--for some, its just more money to "invest" in offshore bank accounts and tax scams; for others, it just feeds Wall Street's private equity funds and "private banks" with more cash for casino capitalism bets and takeover gambles. As John Kominitsky, a commenter on the blog, notes "This is the "capital" Wall Street sucks up to fuel their Speculation Casino of derivatives (CDO's) high-speed computer trading, outsized "executive bonuses", and tax dodging off-shore accounts."  So the tax breaks for the wealthy (costly to ordinary Americans who have to make up the tax money needed) feeds the Wall Street casino capitalism monster (costly to ordinary Americans who lose their homes and livelihoods as Wall Street banks require bailouts and private equity firms make megaprofits off firing people).

 (2) The New York Times is on a roll on tax issues, seemingly reading more deeply than it had been doing for a while.  Today's editorial makes the valid point that there is no justification in today's economy for abolishing corporate taxes even if they were replaced with something else.  See editorial, No replacement for corporate taxes: the system needs to be reformed, not abolished, New York Times (May 31, 2013).

The editorial calls the "tax cut crowd" out on one of the arguments I've lambasted here for years--the idea pushed by corporate lobbyists (and people like Tim Cook in his recent congressional testimony) that since there is a good deal of corporate tax avoidance, we should just cut corporate taxes way back or even eliminate the corporate tax altogether, since we'll "obviously" never get sophisticated companies to pay more.This is wacky.  Rewarding tax avoidance by eliminating the broken corporate tax system altogether gets it backwards, as the Times notes.  The editorial makes six important points.

1. the corporate share of taxes has steadily declined, while corporations' use of the good things that the nation provides--the "social and economic foundation on which corporate success is built"--continues apace.
2. Ending the corporate tax just rewards the wealthy even more (who own most of corporate stock) and results in heavier burdens on everybody else

And, I would add, everybody else will carry that burden either by paying a larger share of taxes paid or by suffering from reduction in government services of particular importance to them, such as lower funding for education, for aid to the poor, for research, etc.   The wealthy can buy themsevles whatever they want, so are now more willing to let government shrivel.

3. cutting out corporate taxes means increasing the deficit

4. There's no justification for cutting out corporate taxes in order to replace that system with another one, like a value added tax.  That implies that it is reasonable to favor publicly traded corporations with all the benefits of US government without any of the obligations to pay for that benefit.

This is particularly unreasonable given the Supremes' decision that corporations have a right to spend their money to influence election campaigns for real people, and the right-wing's attempt to make a scandal out of the IRS scrutiny of groups that use 501(c)(4) status to conduct politicking in order not to have to reveal their donors, frequently major corporate owners like the Koch brothers and MNEs like Exxon Mobil. The idea of eliminating corporate taxes and passing the burden to less able to pay individuals is just another piece of the corporatist, class warfare agenda.

5. It also doesn't make sense to scrap corporate taxes if we decide to get rid of the preferential rate for dividends.  There is ample reason for raising the tax rate on capital investment income--it mostly goes to the wealthy, so the preferential rates for the wealthy exacerbates the growing inequality in this country, though, as the article notes, there is little political will even among Democrats to set the system aright.  But even so, eliminating the capital gains preference doesn't support eliminating the corporate tax--corporations don't have to pay dividends and shareholders get to choose when to realize taxable gains. Getting rid of the corporate tax would exacerbate the problem of corporations and shareholders controlling tax revenues through personal decisions.

6. We do need to reform corporate taxes--to prevent the ability of MNEs like Apple, Google and GE to pay ridiculously low or no US corporate taxes.  And that needs global cooperation.  So in the meantime we should require country by country reporting of profits and taxes.

 (3) This last item isn't a tax item, but it is something that is just about as pervasive as tax issues in our lives--the question of whether corporate giants should be allowed to "own" patents on living organisms, especially on self-replicating living organisms like seeds. 

I think the Supreme Court's recent decision in the Monsanto case is wrong. The current policy represents corporatism gone viral: it leaves farmers dependent on the few chemical giants that own the original genetically modified seed and all seeds that plants that sprout from it make.  It rips profits from farmers' hands and puts them in the hands of managers and shareholders of Monsanto and companies like it--a kind of class warfare by proxy. It leaves our agriculture, and our environment, at the mercy of a big corporation that has been steadily pushing us to overuse poisonous pesticides and herbicides that ruin our air, our water, and our land.  Congress needs to act to undo this patent determination.  See Kristina Hubbard, Monsanto's Growing Monopoly: what the Supreme Court got wrong: patents on self-replicating seed are unethical, dangerous and anti-competitive, Salon.com (May 30, 2013).

Related articles

$2 Trillion Wasted In Tax Breaks For Wealthy

NY Times on Corporate Tax Planning/Tax Avoidance

Wealthy benefit the most from top tax breaks, government study shows

The Supreme Court's corporate monsters--if money buys them "free speech" rights, can it help them avoid giving others human rights?

The Supreme Court decided in Citizens United that corporations could intevene to influence elections--giving money and aide to their selected candidates.  This was an inordinate broadening of corporate "personhood", claimed to be necessary under the warped First Amendment precedents of the Supreme Court that count "money" as speech and thus consider that  limitations on money spent to influence elections as a limitation on speech.

Yet most economists and tax professors argue against the corporate tax--which has been in place longer than the individual income tax--on the grounds that taxes distort and that the claimed "double taxation" of corporate income distorts the allocation of capital.   See, e.g., Tax Foundation, 2004 paper on integrating corporate and personal income taxes; seminal 1985 integration piece from NBER.  Much of the argument boils down to an a prior assumption that "only people can pay taxes."  

(Of course, we used to think that only people could engage in campaign speech or bribe politicians for quid pro quo policies or otherwise influence the course of society.  We were naive.) 

As a result of this "received wisdom" about economics and corporate taxes--mostly based on the mathematically correct but practically challenged Chicago School approach to understanding economic systems (by assuming away most of the real world, including life, death, and everything in between)-- corporate lobbyists and their allies in Congress have been pushing for decades to eliminate corporate taxation through integration of the corporate and individual tax schemes or at a minimum to drastically reduce the liability of corporations for federal income taxes. 

Every presidential candidate has one scheme or another to reduce corporate taxes, with even Obama falling prey to the continuing influence of the Wall Street facilitators like Timothy Geithner in the Treasury and Larry Summers.  See Citizens for Tax Justice, President's Framework Fails to Raise Revenue (pointing out that there is no reason not to fix the loopholes in corporate tax to help address the deficit without having to lower corporate rates, and noting that although Obama at least called for making his rate reduction framework for so-called corporate tax reform revenue neutral, his plan fails to raise about a trillion dollars to make up for the corporate taxes that it gives up).  As CTJ notes, many organizations have called for the opposite--to raise revenues from corporations that have been paying very little in taxes, especially since the 2003 Bush "reforms" that granted most of the items on corporations' wish list for tax cuts.

Last year, 250 organizations, including organizations from every state in the U.S., joined us in urging Congress to enact a corporate tax reform that raises revenue. These organizations believe that it’s outrageous that Congress is debating cuts in public services like Medicare and Medicaid to address an alleged budget crisis and yet no attempt will be made to raise more revenue from profitable corporations.  Id.

Nonetheless, most candidates call for making the corporate income tax territorial and thus making it even more lucrative for US multinationals to move more of their corporate businesses (and jobs) abroad.  Most call for reducing the rates on corporations to a historically unprecedentedly low level--making it even more likely that the US trade deficit and corresponding budget deficit will continue to grow, even at a time when these self-nominated fiscal "conservatives" are claiming that the current deficit requires monumental sacrifices from ordinary people in the way of reduced medical care and old age security (the effort to cut back drastically on the benefits payable under  Medicare and Social Security).  Most treat the owners of corporate equity as though they were some kind of revered engine of growth, when in fact they are usually merely rich people who are interested in reaping as high a profit as possible from sales of corporate shares but very little interested in entrepreneurship, and as likely to engage in quick trades (the profits of which go into their pockets and not into the working capital of the corproations) as to hold long-term based on analysis of corporate business fundamentals.  Most don't accompany their form of integration with eliminating the category distinction between capital gains and ordinary income. 

Most  "corporate reform" plans call for continuing most of the absurd provisions that have larded the pockets of corporate management over the last few decades, such as

• accelerated depreciation and expensing (including all the depletion allowances for the heavily subsidized oil and gas extractive industry, even while it complains about the petty little incentives put in place in recent years for environmentally sound energy generation--accelerated expensing creates "phantom" deductions that reduce taxable income well below economic profits), and
• the  "research & development" credit, which was first enacted as a stimulus that was to be in place for a very short period of time but has been extended in fits--even retroactively for several years--as corporations demand making every single "stimulus" tax break they get permanent. 

(As readers of this blog know, I see little merit in the R&D credit.  Corporations can already deduct way too much "phantom" expenses--excess interest expense that allows them to operate with too much leverage, facilitating equity firm buyouts by leveraging up the purchased entity to pay off the equity strippers.  Further, as with so many of the GOP's favorite programs of tax subsidies for multinationals and the upper crust, it hasn't bothered to conduct studies to see if the R&D credit indeed results in more research done in this country.  Clearly, a retroactively enacted credit does NOT incentivize research.  Probably the times it's been enacted without being retroactive haven't either--it takes extensive labs and equipment to do research, and such labs and equipment have to be purchased far ahead of when they pay off.  Most of the R&D that the credit supports is likely to be of the "tweak-a-patent" variety that seeks merely to find a way to extend a monopoly profit from a particular profit--something the patent law should frown upon.)

So the drumbeat for lower corporate taxes--at a time when corporations are paying less as a proportion of GDP than they did in the time of our most sustained economic growth--continues unabated from the right joined by only slightly less enthousiastic accompaniment at the White House and think tanks like the Tax Policy Institute.

Meanwhile, the Supreme Court, having anointed corporations with a kind of personhood that lets them intervene in elections even though they have no vote, has taken for consideration a case that challenges the rights of individuals to hold corporations accountable as people are held accountable for human rights violations.  The case is Kiobel v Royal Dutch Petroleum (2d Cir. 2010), in which Nigerian plaintiffs seek to hold Royal Dutch/Shell liable for violating the Alien Tort Statute (“ATS”), 28 U.S.C. § 1350, which upholds international norms of human rights. The Second Circuit held that US courts cannot entertain such suits, holding that jurisdiction under the Alien Tort Statute against corporations requires an international norm approving sanctioning corporations for torts and that requires more than the mere fact that most countries treat corporations under their domestic law as capable of committing torts.   The court in the Second Circuit opinion makes a point much like economists tend to make about taxes--essentially implying that "only people commit heinous acts". 

From the beginning, however, the principle of individual liability for violations of international law has been limited to natural persons—not “juridical” persons such as corporations—because the moral responsibility for a crime so heinous and unbounded as to rise to the level of an “international crime” has rested solely with the individual men and women who have perpetrated it.  Second Circuit in Riobel.

 

 

While people are the "deciders" of corporate decisions, nonetheless the corporate form permits corporations to engage in conduct that individuals alone cannot engage in--from amassing huge resources to carrying out massive enterprises that pollute and steal human dignity.  To ignore that reality of corporate wrongdoing, especially in an age that has anointed corporate personhood with rights that seem furthest from ones that corporate entities should be permitted to enjoy, would be folly. 

For further discussion of the implications of the case, see Peter Weiss, Should corporations have more leeway to kill than people do?, New York Times (Feb. 24, 2012).

Suffice it to say that this case raises the specter of full-blown corporatism overtaking the entire U.S. economic and social system.  If the Supreme Court accompanies its "personhood for free speech/election intervention rights" with "not people so can't be touched for human rights violations", there will be even fewer ways to hold multinationals accountable, and they will forge even stronger relationships with autocratic dictators who treat their citizens like slaves and their environments like garbage pits.   Meanwhile corporations will continue to intervene in our elections at will (usually the will of their ultra-wealthy managerial class), using the extraordinary power of the resources at their command.  

We will all be the worse for any decision that would allow multinationals to expand their quasi-sovereign rights without saddling them with a strong obligation to comply with international norms respecting human rights.  Rights without obligations are invitations to corruption.

Swiss Bank Weigelin Indicted

On Feb. 2, 2012, a grand jury in the Southern District of New York indicted Weigelin & Co, a Swiss bank founded in 1741 that provided various asset management and private banking services to U.S. residents without having any branch offices in the US, for helping US taxpayers hide more than a billion in secret offshore accounts.  See United States v. Wegelin, SDNY No.81-12 Cr.02(JSR) (2/2/12) (Download Wegelin indictment).  The Department of Justice has also seized more than $16 million from Wegelin's U.S. accounts under civil forfeiture laws.

 The indictment claims that more than 100 US taxpayers availed themselves of Weigelin's services to hide their assets, starting around 2002 and continuing through 2011.  In particular, it charges that the bank and its officers opened "dozens" of new undeclared accounts in 2008-09 after the investigation of UBS had brought attention to the issue.  The company's executive committee "affirmatively decided" to go after UBS's US clients, telling U.S. taxpayers that the bank's lack of U.S. branch offices would help prevent discovery.  In announcing this new policy of capturing UBS's illegal business, a bank executive noted that Weigelin was smaller and that it would be able to charge high fees for this business since taxpayers were now frightened about the prospect of criminal prosecution in the US if their accounts were discovered.

The bank used a variety of techniques to assist in the tax evasion objectives of its US taxpayer clients.  It helped them repatriate funds by drawing checks on a Stanford account held by the bank, and even extended this to assist clients of other offshore banks in repatriating their funds.   This was often done by conmingling the US taxpayers' funds with other funds, so that the IRS would have more trouble connecting the dots.   It set up their Swiss accounts in names of sham foundations and corporations--using Lichtenstein, Hong Kong and other jurisdictions' facilitative entities for this purpose. It used code names for taxpayers and numbered accounts rather than names whenever possible.  The bankers never mailed information to their clients' US addresses, but they did email and telephone them about their accounts (sometimes using personal email accounts rather than office accounts to further deter discovery).  After the bank started taking on clients that were fleeing UBS, it also changed its contact policies to require travel to the Swiss bank rather than email or phone contacts with US taxpayer clients.  The indictment notes that "various" of the bank's clients filed false 1040s and failed to file the required FBARs related to the accounts.  (We can probably expect to see more of these taxpayers facing criminal tax evasion charges as the months roll by.)

According to the indictment, the bank also solicited new US taxpayers for its asset management business, through Fed Ex and email and through a website (run by another firm, but paid for by the bank) advertising Swiss bank accounts that would not disclose information on tax evasion.  At least 70 US taxpayers moved their accounts from UBS to Weigelin in response to these solicitations.  As it became clear that voluntary disclosures by some US taxpayers was revealing information about other Swiss banks, Weigelin took measures to protect identities of advisers assisting US tax evasion, for example by removing client advisor names from records and listing merely "team international" on those records.

The indictment includes stories of US taxpayers who used the Weigelin bank to hide their assets.  One, a woman who inherited a UBS account in 1987, made a trip  with her husband to Switzerland when the UBS investigation became public and was advised to move her account to Weigelin, which she did.   When the couple wanted funds out of the account, they would call and notify the bank that they were going to Aruba. In Aruba, they would fax information to the bank.  The bank would arrange for checks (in amounts less than $10,000 each) on its Stamford account.  The couple became alarmed, however, when it learned that its account at UBS might be one of the 4500 or so disclosed under the agreement with the IRS.  Weigelin advised them not to worry, and not to voluntarily disclose the account, which held almost $2.5 million. 

Another accountholder mentioned had a larger account of about $30 million.

Of course, it would have been to the taxpayers' benefit to disclose, and the bank was acting to protect itself in persuading them not to disclose.  Surely accountholders should be able to recognize that there would be a conflict?  None of the taxpayers specifically mentioned disclosed voluntarily and, one assumes, all are likely to be under criminal indictment (ought to be at any rate).

 

Qualified Dividends or Mere Inclusions

Jim Maule has a good post on a recent case exploring the question of what constitutes a qualified dividend for the preferential rate provided (temporarily) in section 1(h)(11) treating dividends as net capital gains.  See Tax Complexity of the Dividend Kind, MauledAgain (Jan. 6, 2012) (discussing the decision in Rodriguez v. Comr.,, 137 T.C. No. 14 (2011)). 

The case touches on a recurring issue in tax law--the fact that there are straightforward provisions such as those governing the characterization of a payment to a shareholder as a dividend in section 301 and then much more complex provisions that may treat a tax item as "equivalent" to a dividend or may "deem" it to be a dividend.  The necessity of characterizing income is due to the preferential treatment accorded capital gains--a treatment that is both at the center of considerable complexity and hard to square with basic concepts of equity.

Maule's comment is on target:

The time, resources, effort, and energy invested by the IRS, by the taxpayers, and by the IRS in resolving this issue is but one of many examples of how the existence of special low rates for capital gains and dividends is wasteful. Taxpayers generally, and their advisors, not only try to find ways to bring income within the special low rates but also to structure their business activities in ways that they otherwise would avoid, simply to take advantage of special low rates. Repeal of these rates would not only allow removal of at least one-third of the Internal Revenue Code and a similar substantial part of the regulations, it would free taxpayers, the IRS, and the courts from a huge chunk of planning and litigation that consume far more of the economy than the special low rates contribute to it. Id.

Wesley Snipes--no new trial

Remember how actor Wesley Snipes used the 'income taxes aren't for anyone but foreigners' tax protestor stuff as justification for not filing tax returns and ended up with a three-year jail term?  He began serving the term in December 2010, so it will presumably be a while before his next vampire film in the Blade series comes out.

But he's still trying to fight the conviction.  He wanted to interview the jurors --since one former juror claimed that they compromised on the three counts of failing to file a tax return because they thought he wouldn't receive jail time for that--and he wanted a new trial.  The district court said no, among other things noting that evidence about jury deliberations is normally excluded and the fact that the former jurors waited two years to bring up the alleged misconduct (that some jurors had decided Snipes was guilty before the trial got underway) suggested the allegations might not be genuine.  Snipes appealed.  The circuit court of appeals says no.  See United States v. Wesley Snipes, No. 10-15573 (11th Cir. Sept. 6, 2011).

John Rogers loses his DAD/DAT tax shelter case

John Rogers, formerly a partner at Seyfarth Shaw in Chicago, lost his Tax Court case regarding the Distressed Asset Trust (DAT)/Distressed Asset Debt (DAD) shelters he sold to a hundred clients, for claimed tax deductions of more than $370 million.  See Tax Court Rules Against Chicago Lawyer's Distressed Debt Deals, San Francisco Chronicle, Sept. 1, 2011.  The judge found "no showing of reasonable cause or good faith on Rogers' part" but noted that his tax expertise "should have put him on notice that the tax benefits sought by the form of the transactions would not be forthcoming."

The shelters involved Brazilian consumer debt and were listed as tax avoidance transactions by the IRS in February 2008.  Rogers continued promoting the shelters even after they were listed, and failed to file the appropriate disclosures for listed transactions.  Accordingly, the Justice Department sued in federal court in November 2010 to prevent Rogers from continuing to promote the shelters, and that case is still pending. For information on the Justice Department's claims in the suit, see the release here and complaint here, describing these transactions as violating well-known tax doctrines of economic substance, substance over form, step transaction, and sham partnership.  The release describes the DAT/DAD transactions as follows:

In the DAT scheme, according to the complaint, a foreign business (typically a Brazilian retail company) essentially sells low-value, aged “distressed” debt, such as debt from bad checks, to Sugarloaf Fund, a U.S. entity that Rogers created and controls.   In return Sugarloaf Fund allegedly pays the foreign company 1 to 2 percent of the debt’s face value.   The complaint states that Sugarloaf Fund takes portions of the distressed debt and contributes them to multiple supposed “trusts,” also created and controlled by Rogers.   Rogers then allegedly sells the “trusts” to tax shelter customers for a price pegged to the tax loss to be generated by the shelter.   

 Rogers allegedly tells customers that the Brazilian companies are partners in Sugarloaf, and that the Brazilian companies made genuine partnership contributions to Sugarloaf, rather than sales of debt to Sugarloaf.   These statements are false or fraudulent, the complaint says, because the Brazilian retailers are insulated from any profit or loss, and do not intend to become partners in Sugarloaf.   Rogers also allegedly tells customers that the distressed debt has a value for federal tax purposes equal to its original face value, not what Sugarloaf paid for it, and that customers can take bad debt deductions equal to most or all of the debt’s face value, and can use those deductions to offset unrelated U.S. income. These statements also are false or fraudulent, according to the complaint, because the supposed built-in-losses were never preserved and passed on to the tax shelter customers.

One district court case involved taxpayer Michael Koretsky, for example, in an attempt to quash the IRS summons for Koretsky's appearance after Rogers had provided an affidavit on behalf of Koretsy in the matter, but the court found no grounds to do so.  See Bodensee Fund vs Treasury & IRS (E.D. PA, May 2008) (memorandum opinion and order)  here (describing the taxpayer's participation in two DAD transactions, resulting in claims of $39 million in losses in 2003 and $119 million in losses in 2004).

Citizens United and Concepcion: Big Money, Speech, Taxes, and Individual Freedom

[edited 4/28 to add Angry Bear link]

Money isn't speech. 

In spite of that, the Supreme Court continues to expand its initial holding that treated expenditures of money to purchase speech as equivalent to speech and therefore protected by the Free Speech clause in the Bill of Rights, literally giving away elections and issue education to the top dollar, which will generally be the wealthy elite and the big corporations that own and manage. 

This idea--that money is the same as the speech that money can buy--is at heart a radically anti-freedom idea.  By equating money with the speech that it can buy, the Supreme Court has ensured that genuine speech rights will wither away, and that money will be able to buy elections and legislation to suit the source of the money.  The Court failed to understand that while speech can be bought by money, that purchased speech is merely one mechanism for distributing speech.  Speech is much more than the purchased speech that is bought by money.  If you don't limit the ability of money to purchase election speech, you are in effect disenfranchising all other types of speech that can't compete with purchased speech.  By equating the speech itself with the money that purchases it and claiming that the Free Speech clause applied to the money expenditure, the Court empowered purchased speech and empower Big Money, while it disempowered individual speech and made non-purchased speech practically irrelevant.

Since the Supreme Court's Citizen United decision expanding on this "money can purchase speech, therefore money used to purchase speech is protected in the same way that speech is protected" idiocy, it has been quite clear that Big Business carries a gigantic Big Stick that influences elections through anonymous issue ads and direct campaign contributions. 

The people are misled, since the ads are often purportedly sponsored by groups with titles that suggest little people working for the common good. 

The politicians aren't misled, because they get the Big Money that will allow them to flood the airwaves with similar stuff and they know where it comes from.

The result is that Big Money, from the few super-rich and the big corporations that they own and manage, can heavily influence critical legislators on deregulation and tax provisions favorable to the rich and Big Business. 

• There is a reason that the fringe right elected to Congress in 2010 is pushing for repeal of the health reform and Dodd-Frank financial reform provisions--those reforms require Big Business to operate in ways that protect individual freedoms and limit the way that those Big Businesses can push their costs off into externalities to create socialization of losses, privatization of gains  (e.g., high premiums paid only to find delay or denial from health insurance companies, risky casino speculation in derivatives from interconnected banks that lay their losses off on the public while raking in cheap financing provided by the public). 
• There is a reason that Big Business got its wish list in the 2003 tax legislation pushed through by the Bush Administration, and then got more and more of its new wish lists in the following years Bush tax legislation and in the Republican  provisions fought for in the "compromise" on stimulus funding in the first year of the Obama administration.  Those tax provisions provide tax reductions for corporations that increased the deficit and required additional borrowing (including bonus expensing, the active financing exception permitting deferral of income for certain controlled foreign financing subsidiaries, new cross-crediting provisions that permitted U.S. multinationals to subsidize their foreign operations by reducing their US tax rate, and many others).

Imagine an issue ad by "People in support of Removing Bad Regulation" that puts out misleading, non-factual claims about how Big Business X (maybe a resource-extractive business) will be done in if the "bad" regulation is continued, and that all kinds of little people will be harmed if Business X is harmed.  The facts are otherwise.  Big Business X engages in extraordinarily harmful mining practices that level the mountains, leave toxic debris in streambeds, and put miners in harsh, unhealthy conditions that don't meet anybody's standards of a decent working environment while preventing unionization to allow collective bargaining and bombasting the region with warnings about how jobs would drop if any of these bad practices are regulated.  And Business X is actually providing all the funding for "Little People".  And Buiness X also contributes $400,000 to several  congressional politicians who are on key committees that oversee Business X's industry.  It engages in both of these activities anonymously. 

How would people react if they knew that Business X was funding the ads that appear to be from a local concerned citizens' grassroots organization and at the same time was contributing huge sums of money to key politicians voting on those issues.  They would be more likely to ask questions and more likely to doubt the veracity of the information in the ads, knowing the source of the money behind them.

So there has been a movement in support of individual freedom that demands that at the least we must have disclosure of the Big Money behind the purchased speech that has disemplowered the free speech of the people.  Yet, Senate Republicans defeated a Disclose Act proposal in Congress last year through the now common route of requiring a supermajority of 60% to get to a vote, even though 59% of the Senate voted for cloture.  See Open Congress on Senate bill; seel also Disclose Act (wikipedia). 

Now the Obama administration is apparently considering an executive order that would require those Big Businesses seeking federal contracts to disclose their purchase of direct or indirect campaign contributions.  In other words, when they buy election-related speech that clearly serves as a quo inviting a quid from the elected officials aided by such speech. they should disclose it so that we the public can evaluate whether they get the invited quid.

Big Business doesn't want to lose its anonymity--especially when it comes to getting the lucrative federal contracts even though it may be supporting fringe politicians who claim to want to cut government spending.   (And of course, Big Business will likely use its money to support those politicians who talk about cutting government spending but mean only cutting spending for programs that form part of the social net for vulnerable citizens, not cutting spending on lucrative military contracts or other lucrative federal spending programs that create instant billionaires, like Eric Prince and his Blackwater security contracts in Iraq).

Big Business doesn't want to engage in real speech, but in purchased speech that can be hidden from the public with the use of misleadingly labeled front groups like the fictitious organization in my hypothetical.  And it intends to use all the formidable weapons in its arsenal to ensure it can continue to pour money into election campaigns without revealing its role. So Josten, head of the U.S. Chamber of Commerce, a major organization supported especially by the U.S.'s biggest multinational corporations, says "all options are on the table" to ensure that Big Business can contribute anonymously.  See Lichtblau, Lobbyist Fires Warning Shot over Donation Disclosure Plan, NY Times, Apr. 26, 2011.  Josten threatens that "all options are on the table."  Big Business will apparently do almost anything to protect its right to spend to elect its politicians of choice while not letting real voters know what it is doing.

 Meanwhile, of course, the Supreme Court continues on its tear of decisions that uphold Big Businesses' rights to conduct business as they want, no matter what impact that has on the freedoms of individual citizens of this country that fought a revolution to ensure those freedoms.  AT&T Mobility v Concepcion is only the latest foray in this direction.  In this case, the Court holds that we little people have no right to join together in a class-action against corporations that have misled us, even when the contract through which we became the corporation's customers was a contract of adhesion and the relinquishment of the right to a class-action is an interpretation by the corporation of the arbitration "term of contract" that we signed to get the service that the corporation provides.  Contracts of adhesion are "take it or leave it" contracts.  Most customers don't have the ability, let alone the money, to figure out what the terms mean.  Even if someone did finally persevere and reject a contract of adhesion because the terms took away individual freedoms, that person would find no better contract at any other service provider, since they all incorporate essentialy the same corporate-friendly terms in their contracts of adhesion.

The Supreme Court's inability to understand that the constitutional protection of individual freedoms was intended to prevent just this kind of corporate tyranny will be costly for this nation.  I predict that more and more people will get angrier and angrier about the extraordinary empowerment of Big Business and the extraordinary disemplowerment of ordinary people through this kind of corporatist agenda. 

For another Bear's perspective on the AT&T case, see Beverly Mann, The Fine Print, Angry Bear, Apr. 28, 2011.  It begins this way:

It’s hardly a secret that Chamber of Commerce types have co-opted a bare majority of the Supreme Court as their proxy in their war against business litigation, and that the most potent categorical weapons are arbitration as a forced substitute for lawsuits and the effective elimination of class actions.

In a manipulative, far-reaching opinion that the Court issued Monday, the five corporate proxies killed both birds with one stone.

And it includes a good description of how this decision turns our past understanding of arbitration  on its head.

Breyer, though, writing for the four dissenters, pointed out that Congress’s actual stated purpose was to require courts to treat arbitration agreements as contracts, for the purposes of enforcing them and, when required under contract law, voiding them—and that that is what the text of the FAA says.

Scalia also said that class arbitration defeats the purpose of arbitration. Which I suppose is true if the purpose of arbitration, or at least arbitration as the only option under law, is to undermine any real threat of meaningful penalty for corporate wrongdoing.

The Supreme Court's Decision in In re Bilski:: does it allow tax patents or not?

[edited 12:58 pm to better organize the description of the two parts of the Court's opinion not supported by a majority, to note Scalia's joining Breyer's concurrence and to improve the description of Breyer's conclusion]

The Supreme Court handed down its decision in Bilski Monday, holding, as almost everyone had predicted, that the hedging process that was the subject of the Bilski claim was unpatentable.  Download Bilski at SCOTUS 08-964. The question for those of us following the case, of course, was not whether the Court would consider the claim patentable.  The question was on what  ground the Court would rest its decision and whether the decision would shed any light on the larger category of business method patents generally and tax strategy patents specifically.

The opinion of the Court was written by Justice Kennedy and joined by the four justices on the right--Alito, Roberts, Thomas and Scalia.   The opinion agreed that the Federal Circuit's "machine-or-transformation" test was a valuable clue to the question of process patents eligibility, but rejected the Federal Circuit's conclusion that it was the exclusive test for process patents.  The statutory analysis in the opinion was the kind of stretched, "ordinary meaning" dictionary and common usage based interpretation that becomes absurd quickly in the context of a highly technical statute such as the Patent Act.  Consistent application of that everyday definition of process would allow patenting of almost any novel human activity, including a series of steps to implement a tax planning strategy.  Further, the opinion treats a remedies provision (enacted in the wake of the State Street Bank case to protect those who might be accuse of infringing this new cateogry of business method patents approved by the court) as an amendment of the key patentability categories language rather than as the stopgap measure it was clearly intended to be  because of the Federal Court's condoning of business method patents.

The Court concluded that the hedging claim at issue was unpatentable under its exceptions for abstract ideas (not found directly in the statute, but claimed (awkwardly) to be consistent with the statute's "new and useful" language).  This is the place where the Court could have shed considerable light on patentability, since it is very unclear from prior precedent just how far the "abstract idea" exception extends.  But instead, this opinion created even more confusion.  While hedging in itself is an abstract idea, the application of a hedging algorithm to a particular commodity is not necessarily.  So it seems that there is something beyond mere abstract idea operating here, but the Court was either reluctant or unable to put its fingers on what it was. 

Interestingly, while it rejected the Federal Circuit's machine-or-transformation test as the sole basis for deciding process claims, it nonetheless encouraged the court to develop additional definitive criteria that would help narrow down the kinds of process claims that are patentable.  There is a good bit of language in the Court's opinion, in fact, that suggests that process claims should not be interpreted overly broadly, even though the patent law generally has been viewed as having wide scope.  The Court makes clear that the remedies provision in section 273 does not istelf suggest a broad reading of business method patentability.  The Court indicates as well that process claims require a test with a higher hurdle to prevent inappropriate claims from being treated as patentable, else the Patent Office would be "flooded with claims" that could place a "chill on creative endeavor" and literally stifle competition.  It encourages the Federal Circuit to come up with additional ways to define a narrower category of process claims based on the Flook, Benson and Diehr trilogy of cases that outlined the exceptions for "abstract ideas, laws of nature and physical phenomena" and yet approved an application of an algorithm in a rubber curing method.  It indicates that nothing in the opinion should be read as an endorsement of the lax State Street Bank test.  Nonetheless, it concludes that "the Patent Act leaves open the possibility that there are at least some processes that can fairly be described as business methods" that would be patentable.  In sum, that is weak support for business method patents and tax strategy patents in particular, but it certainly leaves the door open for some business method patents, particularly the computer programs that were the subject of several amicus briefs and, by extension, possibly some tax strategies that are dependent on application by computer.

Scalia, however, did not join in two parts of the opinion that (i) acknowledged the extreme rarity of business method patents until the 1990s under well-established principles  but nevertheless (ii) accepted the idea that "unforeseen innovations" such as computer programs might need to be treated as patentable in accommodation of "Information Age" technologies.  These parts of the opinion are the most supportive of the corporatist position favoring broad scope of business method patentability, but Scalia's tendency to rely on originalism may have made it hard for him to take this step.  That may be a good sign for those of us who think that business methods should not be patentable, and in particular that patent claims setting forth tax planning strategies for transactions designed to conform to legal requirements should never be patentable.

Stevens wrote a concurring opinion, in which Ginsburg, Sotomayor and Breyer joined.  That opinion relied on statutory analysis and the history of the patent laws to conclude that business methods should not be eligible for patentability as process patents.  The opinion notes the inconsistencies in Kennedy's arguments, and the ultimately conclusory holding that the Bilski claim was an unpatentable abstract idea.  It faults the majority opinion for weak statutory analysis, using the history of the British and US patent laws to establish the well-settled principle through the 1980s that business methods were not patentable.

Breyer also wrote a separate concurrence, in which Scalia joined, claiming to set forth the agreed views of all members of the Court that may not be obvious from the multiplicity of opinions, as follows:

1. Section 101 has broad scope, but it is limited by the three judicially created exceptions (laws of nature, physical phenomena, abstract ideas );
2. The machine-or-transformation test is a critical clue to patentable processes;
3. The machine-or-transformation test is not the sole test for process claims, but broadly speaking, process claims must be consistent with the function that the patent laws are designed to protect;
4. The fact that the machine-or-transformation test is not the exclusive test for patentability does not mean that State Street Bank applies--the test in that case (which approved business method patents generally) led to "truly absurd" patent grants;

Breyer concluded that the Court means NEITHER to "deemphasize" the machine-or-transformation test's usefulness NOR to suggest that there might be many patentable processes that would otherwise have been excluded by that test.  This conclusion implies that it would be rare for a claim to be patentable that did not satisfy the machine or transformation test.  Again, the fact that Scalia did not join in the Information Age discussion in Kennedy's opinion and did join Breyer here suggests his reluctance to accept patentability for (most?) business method patents.

The dissolution of the majority on the question of an expanded view of process patentability in light of "Information Age" technologies suggests that the Court might well reject tax strategy patents except perhaps in the cases where they are clearly interrelated with computer applications that cannot be treated as "mere post-solution activity."  In effect, this leaves the issue even more in limbo than before.  The machine-or-transformation test appeared to have loopholes that would allow computerized applications of tax strategies to be patentable, and the opinion of the Court appears to support that possibility.  Scalia's refusal to join the sections on Information Age technologies, however, pushes back against easy acceptance of patents based on legal strategies.  And certainly the four justices in the minority would not find tax strategy claims eligible for patentability.  This was the last case in which Justice Stevens will participate, so there is also the uncertainty of the new Justice's approach to these issues and ability to persuade others on the Court to his or her opinion.

The AICPA, which has spearheaded the tax practitioner and accountant community's lobbying against tax strategy patents, issued a release on Monday that noted the continuing uncertainty about patentability of tax strategies.  It called on Congress to enact a clear ban to resolve the issue once and for all.  AICPA Renews Call for Congressional Action to Ban Tax Patents, PRNewswire, June 28, 2010. 

Congress should act, but one suspects that the health and financial battles make enactment of the major Patent Reform Bill practically untenable for now.  That means that the most likely possibility for a ban on tax strategy patents would be through a dedicated bill dealing solely with that issue.  But you can bet that the IP bar will fight such a bill tooth and nail, as a toe in the door towards narrowing of patent law (and their turf), under the banner of "innovation" and "public disclosure."  Innovation is not an inherent good in finance or tax, and there is little merit to the public disclosure of tax strategies for helping people avoid even more taxes than they already do.  Meantime, we will remain in suspense as the Patent Office and Federal Circuit work through the Supreme Court's opinion.