Introduction to the State of Federal Income Taxation: Rates, Progressivity, and Budget Processes

Many fundamental changes have occurred in our tax system in the past four years. These changes raise several important issues: Is it appropriate to decrease tax revenues in order to decrease the size of the government? What is the appropriate role of progressivity? What are the efficiency effects of recent tax cuts? How important is it to have a transparent budget process? Professor James Repetti introduces the speakers and commentators who address these and other issues in a Symposium on The State of Federal Income Taxation held at Boston College Law School on Friday April 16, 2004

Should We Tax the Gratuitous Transfer of Wealth?: An Introduction

The estate tax was enacted because of concerns about the impact of large concentrations of dynastic wealth on the political process. As discussed in this commentary, which reviews the Symposium articles by Paul Caron, David Joulfaian, and Jennifer Bird-Pollan, recent research by political scientists supports the legitimacy of these concerns. In addition, a significant body of studies suggests that inequality has a long-term negative impact on growth. Paul Caron observes in his article that progressivity in our tax system has been decreasing and that the estate tax was 60% or higher for fifty years (1934–1983), a rate much higher than the current 40%. David Joulfaian notes that the estate tax clearly contributes to the progressivity of our tax system. He finds that estate tax liability of a decedent is on average equivalent to doubling the income tax liability of decedents during the prior ten years. Jennifer Bird-Pollan explores the views on estate tax from a liberal, utilitarian, and libertarian philosophical perspective. This commentary notes some additional aspects of the estate tax that strengthen the utilitarian and liberal arguments in favor of the estate tax

Management Buyouts, Efficient Markets, Fair Value and Soft Information

Leveraged buyouts, particularly by a corporation\u27s management, provide unique opportunities for investors to realize extraordinary profits. In his Article, Professor Repetti examines the potential harm to shareholder interests when management effects a corporate buyout or bailout, and analyzes the effectiveness of current regulatory and common-law protection against that harm Professor Repetti concludes that the existing regulatory and common law schemes do not adequately protect shareholder interests and proposes as a solution that the Securities and Exchange Commission promulgate rules requiring enhanced disclosure in management buyouts

Textualism and Tax Shelters

A substantial debate about the approaches employed by courts to interpret statutes and regulations has developed during the last decade. Some have argued that the search for a statute\u27s meaning and purpose should focus on the text, itself, and should not include consulting legislative history. In contrast, others have argued that it is difficult to determine the meaning of a statute without consulting legislative history to determine the legislature\u27s purpose for the statute. The debate about the appropriate method for interpreting statutes underlies a crisis in the administration of tax law. The recent proliferation of tax shelters has at least in part been facilitated by the ascendancy of textualism. Our conversations with practitioners indicate that tax advisors have become more aggressive in structuring transactions that comply with the form of the tax statutes even though the transactions may be highly questionable in light of the legislation\u27s history or underlying purpose. The result has been a cottage industry where investment banks and accounting firms market tax shelters that triumph in form, but not substance, at the expense of the fisc. Because most tax shelter activity is hidden, it is difficult to ascertain its revenue impact. It is estimated that tax shelters reduced tax revenues by approximately $10 to$24 billion in 1999. In addition, practitioners and government officials worry that the use of shelters is eroding confidence in the tax system. Although the majority of courts have not adopted textualism, the legal community\u27s acceptance of textualism as a plausible method of interpretation has dramatically affected the practice of tax law. Taxpayers often invest in tax shelters based upon the opinion of counsel assessing the probability that the desired tax results from the transaction, if challenged, will be sustained. These opinion letters are essential to attract investors because they protect taxpayers from various penalties that otherwise might be imposed if the Service successfully challenges the transaction. Under the textualist approach, it is much easier for an attorney to write a favorable opinion for transactions that are designed to comply with the letter of the law, but not its spirit, for at least two reasons. First, the attorney is permitted to ignore, or at least downplay, any legislative history that would argue against, or undercut, the desired tax results. Second, under a textualist approach, it is arguable that various well-accepted judicial doctrines, such as the business purpose doctrine, are suspect. At the extreme, a textualist might argue that these doctrines are the product of judicial activism and either should no longer be followed, or at a minimum should not be extended into new areas of the law. Tax shelter promoters have exploited the move towards textualism by designing transactions that comply with the letter of the law, but that generate results clearly never contemplated by Congress or the Treasury. Some promoters believe that the more detailed and complex the underlying law is, the more likely it is that a transaction complying with the letter of the law will be respected. One area in tax law that is particularly detailed and complex is Subchapter K, the partnership tax provisions. Subchapter K also has several special rules not otherwise available in the Internal Revenue Code. It is, therefore, not surprising that Subchapter K has become the vehicle of choice for a wide variety of abusive transactions. Transactions are designed so that a partnership is created or joined just to take advantage of these special rules (reverse engineered transactions). In an attempt to stem the tide, the IRS adopted a general anti-abuse rule for Subchapter K. This rule requires that the provisions of Subchapter K be interpreted consistent with the intent of subchapter K. Oversimplified, the regulations assert that there is an overall legislative intent underlying Subchapter K, and if a partnership is formed or availed of in connection with a transaction to substantially reduce federal taxes in a manner inconsistent with this intent, the transaction may be recast. The regulations make clear that for a transaction to pass muster, doctrines that originated with the judiciary, i.e., the requirements of a business purpose, economic substance, and substance over form, must be taken into account. In addition, the regulations require that the purposivist method of statutory interpretation be used to interpret Subchapter K. The anti-abuse regulations caused an unprecedented furor within the tax bar. They have been severely criticized by academics and practitioners alike on a variety of bases, the most damning of which is that Treasury lacked the authority to promulgate the rules and that therefore they are not valid. Indeed, it is fair to say that there is a general consensus that the partnership anti-abuse regulations are an extreme example of administrative overreaching. We disagree. Although we do not endorse all the policy choices in the anti-abuse regulations, we believe that they are not only valid, but suggest a way in which transactions that are the product of reverse engineering can and should be attacked, both within and without Subchapter K. Initially, it may seem inappropriate for Treasury to instruct the judiciary on how and when the courts should apply judicial doctrines and what tools they should use in interpreting statutes. After all, as every law student knows, [i]t is emphatically the province and duty of the judicial department to say what the law is. Marbury v. Madison, 5 U.S. 137, 177 (1803). Where does Treasury get the authority to instruct a court as to which method of interpretation it should use to interpret a tax statute? On reflection, however, we believe that Treasury acted well within its authority under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) and was simply filling a gap in the statute left by Congress. The judicial doctrines that are implicit in the intent of subchapter K were well-developed when Subchapter K was first enacted in 1954 and continue to be applied in a variety of contexts by the courts. At that time, however, it was not clear exactly how and when these doctrines should be applied in the context of Subchapter K. There is little doubt Congress could have clarified this issue by statute. It could have insisted that these doctrines (or variations thereof) be applied with full force, or it could have forbidden their application altogether. Congress, however, chose not to address this issue, leaving a gap in the statute. Under current administrative law principles, this silence constitutes an implied delegation of authority by Congress to Treasury to fill that gap. In addition to being valid, we also believe that, as a general proposition, it is sound tax policy to use broad standards to administer the tax law. Historically this had been accomplished by the courts through the use of these judicial doctrines. Although the ascendancy of textualism cast doubt on the continuing viability of the doctrines, Treasury eliminated that doubt by promulgating these regulations (if valid), and requiring lawyers and courts to consider the intent of subchapter K. This approach allows the IRS to use broad standards to administer the tax law in place of a collection of narrow rules that must be constantly changed in a hopeless attempt to keep pace with the latest tax gimmick. To assure proper consideration of these doctrines by tax advisors, we recommend that the IRS amend its standards for practice to require advisors opining on the validity of tax shelters to apply the doctrines to the specific facts of the tax shelter in their opinion letter

Revitalizing the Estate Tax: 5 Easy Pieces

In a previous article, we argued that contrary to the state of the law over 35 years ago — when George Cooper wrote his seminal article on the estate tax (A Voluntary Tax? New Perspectives on Sophisticated Estate Tax Avoidance, 77 Colum. L. Rev. 161 (1977))—taxpayers today generally ‘‘can reduce the value of assets subject to transfer tax in many instances only if they are willing to assume the risk that the reduction may be economically real and reduce the actual value of assets transferred to heirs or, alternatively, in narrow situations if they are willing to incur some tax risk.’’ (The Estate Tax Non-Gap: Why Repeal a Voluntary Tax?, 20 Stan. L. & Pol’y Rev. 153 (2009)) In another article, we documented the dramatic increase in income and wealth inequality over the past 30 years and the accompanying adverse social consequences and long-term negative effect on economic growth. (Occupy the Tax Code: Using the Estate Tax to Reduce Inequality and Spur Economic Growth, 40 Pepp. L. Rev. 1255 (2013)) We argued that tax policy historically has played an important role in reducing inequality and that the estate tax is a particularly apt reform vehicle in light of the role of inherited assets among the very rich and the adverse economic effects of that inherited wealth. In this article, we advance five estate and gift tax reform proposals that would generate needed revenue, reduce inequality, and contribute to economic growth: (1) disallow minority discounts when the transferred asset or business is controlled by family before and after the transfer; (2) maintain parity between the unified credit exemption amounts for the estate and gift taxes; (3) reduce the wealth transfer tax exemptions to $3.5 million, increase the maximum tax rate to 45 percent, and limit the generation-skipping transfer tax (GSST) exemption period to 50 years; (4) restrict the ability for gifts made in trust to qualify for the gift tax annual exclusion; and (5) impose a lifetime cap on the amount that can be contributed to a grantor retained annuity trust (GRAT). This article was presented on January 17 at a symposium in Malibu, California cosponsored by Pepperdine University School of Law and Tax Analysts. Twenty of the nation’s leading tax academics, practitioners, and journalists gathered to discuss the prospects for tax reform as it is affected by two crises facing Washington: dangerously misaligned spending and tax policies, resulting in a crippling$17.4 trillion national debt; and the IRS’s alleged targeting of conservative political organizations. A video recording of the symposium is available online

\u3cem\u3eTaft v. Bowers\u3c/em\u3e: The Foundation for Non-Recognition Provisions in the Income Tax

Taft v. Bowers is a Supreme Court decision that is rarely studied in law schools or discussed by scholars. Yet, it is a case of vast significance. In the Taft decision, the Supreme Court confirmed that Congress may create non-recognition exceptions to the income tax that merely defer the recognition of income, rather than permanently exclude it. If the Taft case had been decided differently, it is likely that the number of non-recognition provisions in the Internal Revenue Code ( Code ) would be significantly reduced

The Appropriate Roles for Equity and Efficiency in a Progressive Individual Income Tax

Increased focus on economic efficiency in formulating tax policy, at the expense of achieving equity, has resulted in decreased rate progressivity in our individual income tax. This decrease has exacerbated inequality. There are several explanations for the intense focus on efficiency and reduced emphasis on equity. Predictions of efficiency gains from low individual income tax rates appear more certain than equity gains from progressive tax rates. Efficiency gains seem measurable, while equity gains appear intangible and unquantifiable. In addition, distributive justice, which underlies and shapes tax equity, exists in many abstract forms, some of which may not require progressive tax rates. This Article argues, however, that the emphasis on efficiency is misplaced. Inequality imposes measurable costs on the health, social well-being, and intergenerational mobility of our citizens, as well as on our democratic process. This is corroborated by significant empirical analysis. In contrast, empirical analysis shows that anticipated efficiency gains from low individual tax rates are speculative. A consensus exists among economists that taxes within the historical range of rates in the United States have little or no impact on labor supply. Moreover, economists cannot agree whether the myriad empirical studies on savings indicate that progressive tax rates decrease, increase, or have no impact on savings in the United States. The clear harms arising from inequality and the uncertain harms arising from progressive tax rates, strongly support always giving equity at least equal weight with efficiency in formulating tax policy. But given the high level of inequality in the United States and the currently low and flat tax rate structure, equity should be given more weight than efficiency at this time. Emphasizing equity in a progressive individual income tax will contribute to the health and economic mobility of our citizens, as well as the stability of our democracy