Tax Blog/Blawg

Since codification of the economic substance doctrine in March 2010, taxpayers have expressed fears that IRS will assert the doctrine unpredictably, resulting in an in terrorem effect among taxpayers because of the lack of clear authorities interpreting the doctrine and the new 40% strict-liability penalty for falling on the wrong side of it.  To promote predictability in the exam processes, taxpayers have requested that Treasury or the IRS issue formal guidance instituting prescribed procedures to assert the penalty.  The government had declined these requests, but officials have promised queasy taxpayers that IRS will only assert the penalty after certain approvals.  For example, in September, LMSB Commissioner Heather Maloy issued a directive mandating that any assertion of the penalty during exam must be approved by the appropriate director of field operations.  Then, as reported by Tax Analysts, Associate Chief Counsel (Procedure and Administration) Deborah Butler said in October that Chief Counsel would review any notice of deficiency that applied the economic substance penalty before it was sent to the taxpayer.

Anyone who has been through an IRS examination knows that the principal focus is often on the Taxpayer’s "records," and whether they are complete and accurate.  If they are not, a victim runs the risk that the IRS will propose additional tax liabilities with respect to expenses that are not proven to the satisfaction of the IRS auditor, that various receipts which may come from inactive sources are treated as income, that a 20% negligence penalty will be applied on top of the tax, and that the IRS auditor will deliver to the taxpayer an "inadequate records notice."  It is important for a business to know exactly where it has been, as well as where it is, and those reasons alone should be enough to warrant keeping complete and accurate records, but the possibility of IRS adverse action offers several more.

Given this IRS’ fixation on the quality of taxpayer's records, how good do you think the IRS' own records of its activities are?  Would you assume that they are every bit as good as they expect a taxpayer's records to be?  The answer is "not exactly."

After much wrangling, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”) has been signed into law. Continuing a sad and growing habit of temporary tax legislation (previously discussed here), the Act extended a number of notable individual and corporate provisions.  The legislation was also notable for the provisions that it did not address – such as the a prospective repeal of the relatively new 1099 reporting requirements (previously discussed here).

As expected, the web has been alive with commentary.  A sampling:

• Business Spectator: Stalled R&D legislation stunts innovation (Australia).  As we discussed previously, temporary legislation makes for lousy tax policy, a problem that Australia seems to be experiencing right now.

• Forbes - Business in the Beltway: Taxes? Hold ‘Em!.  It seems that the pending deal on individual taxes will include a one-year extension of the R&D tax credit here in the U.S.

• BusinessWeek: German FinMin Defends Need for Euro.  Not technically about tax, but a breakup of the Euro could have significant, if temporary, implications for U.S. taxpayers.  Then again, Europe ...

TaxBlawg’s Guest Commentator, David L. Bernard, is the recently retired Vice President of Taxes for Kimberly-Clark Corporation, a past president of the Tax Executives Institute, and a periodic contributor to TaxBlawg.

My recent post titled The Repatriation Dilemma: Cash may be King, but is Earnings Per Share the Ace of Trump? discussed how taxes may be one of the reasons why cash is building in the balance sheets of corporate America. Specifically, the U.S. tax cost that may result from repatriating cash earned outside the U.S. in low-tax jurisdictions may simply be too high. While shareholders wonder why cash build-ups are not resulting in increases in share buy-backs and dividends, company executives “doing the math” conclude that spending up to a third of the cash in U.S. taxes to repatriate is not prudent.

The post triggered much interest. There have been phone interviews with both the Wall Street Journal and CFO Magazine regarding potential stories. A former Chief Tax Officer (CTO) recalled similar analyses and decisions during his “in-house” days, but did not take issue with the conclusion. Another reader lamented that it was just another example of how U.S. multinationals choose not to take part in the U.S. economy. (Hmmm, do you wonder if he or she purposely pays more tax than legally obligated?) In any event the level of interest in this topic suggested that a sequel is warranted.

As previewed by my earlier post, State Tax Notes today published an article in which I argued generally that claims that high state taxes discourage economic development may be flawed because they look at statistics selectively and fall prey to the fallacy that correlation implies causation.  In particular, I considered an article by Arthur Laffer which argued that the introduction of income taxes by various states over the past fifty years has in all cases led to a decrease of per capita income when compared to the United States average per capita income in the relevant period ...

At Chamberlain, we are very proud of our colleagues’ efforts on behalf of pro bono clients.  Two of our attorneys, Juan Vasquez, Jr. and Jaime Vasquez of the firm's Houston office, along with Peter Lowy of Shell Oil Company, recently argued a pro bono case in front of the Fifth Circuit Court of Appeals in Terrell v. Comm’r.

The Fifth Circuit reversed and remanded a U.S. Tax Court ruling which dismissed the taxpayer’s petition for lack of jurisdiction because she filed her petition more than 90 days after the IRS sent her a Notice of Final Determination.  Noting that the IRS was on ...

Recalling one of our first blawg posts, the topic of tax reform could be described in much the same terms as the codification of economic substance (prior to its codification, anyway): "a cousin of Bigfoot and the Loch Ness Monster – often spotted, but never confirmed."  Reform commissions come and go with nearly every presidential administration, and the current one is no exception.

The National Commission on Fiscal Responsibility and Reform has released its much-anticipated report proposing reforms intended to closing the yawning federal budget deficit.  The report, titled "The Moment of Truth," makes a variety of proposals, including a number of reforms to individual and corporate tax provisions.