International Tax Reform by Means of Corporate Integration

This Article focuses on a single organizing question, namely: how should a dividend paid deduction regime be designed so that it achieves acceptable international tax outcomes? By focusing on the international tax implications attendant with a dividend paid deduction regime, the author is not attempting to minimize the broader benefits of achieving shareholder-corporate integration, but in today’s era, the overwhelming tax policy problem that must be solved rests on finding a solution to the systemic international tax challenges that face the country. The article sets forth three major systemic international tax policy challenges that plague the extant U.S. international tax regime and then provides analysis for how a properly designed dividend paid deduction regime can solve each of the international tax challenges. But, even though a properly designed dividend paid deduction regime provides a means to address systemic international tax challenges, such a regime still must address the inbound Homeless Income problem. Furthermore, the methodology for calculating the foreign tax credit limitation will need to be adjusted under a dividend paid deduction regime so that foreign earnings that are distributed as a dividend are not able to create a double tax benefit. And, Congress must be concerned with inappropriate shareholder efforts to cross-credit the shareholder withholding tax against the shareholders residual U.S. tax liability on other non-dividend income. Thus, significant design issues must be addressed in order for a dividend paid deduction regime to appropriately handle the systemic international tax problems that plague the United States

Revisiting Section 367(d): How Treasury Took the Bite Out of Section 367(d) and What Should Be Done About It

Section 367(d) seeks to prevent residual profits related to U.S. developed intangible assets from migrating out of the U.S. tax jurisdiction via the outbound contribution or transfer of intangibles to a foreign corporation. There has been a great hue and cry over the outbound migration of intangibles in recent years, which by implication has created significant agitation about whether section 367(d) is effective. For at least a decade, the Treasury Department and IRS have identified section 367(d) as an area in need of regulatory reform, and recent comments by government officials indicate that guidance may be forthcoming in the future. Concurrently, the Obama administration has proposed amendments to section 367(d) and the U.S. subpart F rules to address outbound migration of intangible value. The debate over the efficacy of section 367(d) to prevent IP migration is being waged along two fronts. As to the first front of this debate, the central question is whether a fatal loophole (a “goodwill loophole”) exists within the architecture of section 367(d) that allows the outbound migration of intangible value under the protective cloak of “goodwill” with the consequence that a substantial portion of the ongoing residual profits related to the transferred goodwill items escape the application of section 367(d)’s super royalty obligation. In Subparts II.A. through II.B., this Article addresses why this “goodwill loophole” that has received so much attention is nonexistent. All that is needed is for the courts to correctly apply section 367(d) as it should be applied, and once this is done the “goodwill loophole” should be defrocked of all of its purported cloaking capabilities. The second front in this ongoing debate about the efficacy of section 367(d) to prevent IP migration concerns the role that cost sharing agreements play in facilitating the outbound migration of residual profits away from the U.S. functions that create the high-profit potential intangibles. Section 367(d) is clear on its face as to what should be the correct outcome in these instances, but the Treasury Department’s existing cost sharing regulations create a “cost sharing loophole” that provides the means for substantial profit-shifting. In Subpart II.C., infra, this Article sets forth how the Treasury Department should amend its existing Treasury regulations in order to close this inappropriate “costs sharing loophole.” Moreover, as an entirely separate debate, the Treasury Department and IRS have retrofit section 367(a) and (b) as a means to attack the tax-free repatriation of cash from foreign subsidiaries in transactions that utilize the recovery of high stock basis. Part III addresses how section 367(a) and (b) have been substantially altered and how section 367(d) is now being rethought in light of this expanding omnibus strategy that is redefining the contours of all of section 367. Calm reflection about the contours of section 367(d) is needed because the raging debate about section 367(d) threatens to run it off the road and into a ditch. This Article seeks to provide illumination of the way forward so that section 367(d) achieves its intended purpose

The Foreign Tax Credit War

The government has been involved in a sustained war against objectionable foreign tax credit transactions. This war has caused the U.S. foreign tax credit regime to be riddled with complexity that spawns incoherent outcomes. The complexity contained in section 901 was created due to a legitimate concern: the threats posed by objectionable transactions that artificially generate excess foreign tax credits represent real policy problems. Since at least 1975, Congress and the Treasury Department have been convinced that the cross-crediting of excess foreign tax credits arising from “objectionable transactions” required a response in addition to simply relying on section 904. Thus, it is understandable that Congress and the Treasury Department would seek to redefine the foreign tax credit eligibility standards in response to transactions that generate foreign tax credits in objectionable ways. However, the historical record indicates that Congress and the Treasury Department ran roughshod over section 901 and used a scorched earth approach in their war against objectionable foreign tax credit transactions. The result is that the U.S. foreign tax credit regime is a “byzantine structure of staggering complexity.” In the rush to enact reforms, ill-conceived provisions were enacted that should not have been enacted. Objectionable foreign tax credit transactions needed principled responses, and principled responses were enacted in the midst of a scattergun attack on these objectionable transactions. However, the United States must have a principled foreign tax credit regime that balances the need to prevent international double income taxation with the need to prevent abusive transactions. This Article addresses the disallowance provisions that have been added to section 901 as part of the government’s war against objectionable foreign tax credit transactions and assesses which of those provisions serve a continuing policy objective and which do not. This Article argues that U.S. tax law would be greatly improved if section 901 embodied a principled approach and if redundant provisions that create incoherent outcomes were removed

The Foreign Tax Credit War

The government has been involved in a sustained war against objectionable foreign tax credit transactions. This war has caused the U.S. foreign tax credit regime to be riddled with complexity that spawns incoherent outcomes. The complexity contained in section 901 was created due to a legitimate concern: the threats posed by objectionable transactions that artificially generate excess foreign tax credits represent real policy problems. Since at least 1975, Congress and the Treasury Department have been convinced that the cross-crediting of excess foreign tax credits arising from “objectionable transactions” required a response in addition to simply relying on section 904. Thus, it is understandable that Congress and the Treasury Department would seek to redefine the foreign tax credit eligibility standards in response to transactions that generate foreign tax credits in objectionable ways. However, the historical record indicates that Congress and the Treasury Department ran roughshod over section 901 and used a scorched earth approach in their war against objectionable foreign tax credit transactions. The result is that the U.S. foreign tax credit regime is a “byzantine structure of staggering complexity.” In the rush to enact reforms, ill-conceived provisions were enacted that should not have been enacted. Objectionable foreign tax credit transactions needed principled responses, and principled responses were enacted in the midst of a scattergun attack on these objectionable transactions. However, the United States must have a principled foreign tax credit regime that balances the need to prevent international double income taxation with the need to prevent abusive transactions. This Article addresses the disallowance provisions that have been added to section 901 as part of the government’s war against objectionable foreign tax credit transactions and assesses which of those provisions serve a continuing policy objective and which do not. This Article argues that U.S. tax law would be greatly improved if section 901 embodied a principled approach and if redundant provisions that create incoherent outcomes were removed

Disposable Personal Goodwill, Frosty the Snowman, and \u3ci\u3eMartin Ice Cream\u3c/i\u3e All Melt Away in the Bright Sunlight of Analysis

The current rage in dispositional tax planning for closely-held C corporations is to bifurcate the sale transaction into two components comprising: (a) a sale by (i) the target C corporation’s shareholders of their target C corporation stock or (ii) the target C corporation of its assets; and (b) a sale by some or all of the target C corporation’s shareholders of “personal goodwill” associated with the business conducted by the target C corporation. The documented purchase price paid for the first component of the transaction (either the stock of the C corporation or the assets of the C corporation) is based on a fair market value determination that excludes consideration of the personal goodwill component of the transaction. If successful, this tax planning technique allows the selling shareholders to report only shareholderlevel capital gain on the personal goodwill component of the transaction and allows the buyer to claim that this portion of the purchase price is allocable to an acquired intangible, i.e., goodwill, that is amortizable over fifteen years under § 197. More specifically, from the selling shareholders’ perspective, if the first component of the transaction involves a sale of the target C corporation’s assets, the portion of the purchase price attributable to the personal goodwill component of the transaction does not bear the burden of a corporate level of taxation. From the buyer’s perspective, if the first component of the transaction involves a purchase of the target C corporation’s stock, the portion of the purchase price attributable to the personal goodwill component of the transaction is not capitalized into the stock. This planning is premised on the position that certain goodwill associated with the target C corporation’s business can be, and is in fact, owned for tax purposes, by one or more shareholders. If all goodwill associated with the target C corporation’s business activities were in fact owned for tax purposes by the target C corporation, then the personal goodwill component of the transaction is properly viewed as a sale by the target C corporation of such goodwill creating a corporatelevel gain, followed by a distribution from the target C corporation to the shareholders, which in turn creates a shareholder-level gain. If, however, the personal goodwill can be, and in fact is, owned by the selling shareholders and can be, and in fact is, sold by the selling shareholders to the buyer for tax purposes, then its disposition is not subject to corporate-level taxation. Although this planning has garnered much attention recently and could provide significant tax benefits if effective, we believe it deserves further scrutiny before being accepted as an appropriate component of dispositional tax planning for closely-held businesses. This planning technique also highlights the continuing horizontal equity problems associated with the current tax law’s treatment of closely-held businesses. In Part II of this article, we discuss the place that this tax planning technique occupies within a historical context. In Part III, we set forth a substantive discussion of the issues raised by the technique. In Part IV, we discuss the tax policy implications that are raised by the existing application of the corporate income tax regime. Finally, in Part V, we discuss some final thoughts about the implications of the analysis contained in this paper

Abandoned but Not Forgotten: Improperly Plugged and Orphaned Wells May Pose Serious Concerns for Shale Development

This Article addresses the intersection of oil and gas law and environmental law on a topic that has profound significance for the nation’s oil industry and for the environment. In this regard, the Permian Basin is experiencing a renaissance that has fundamentally impacted oil production in the United States. Horizontal drilling and hydraulic fracturing now allow the industry to produce in the Permian Basin’s unconventional shale formations in ways that were unimaginable a decade ago. But, the hot shale plays within the Permian Basin exist above conventional fields that are littered with a century’s worth of abandoned wells. Fracturing new wells near improperly abandoned wells creates a risk of environmental pollution as the fracturing of the shale allows hydrocarbons to migrate within the formation, potentially to an improperly abandoned well. The American Petroleum Institute (API) recognizes the environmental pollution risks associated with hydraulically fracturing close to an abandoned well and has set forth a detailed report on the best practices that an operator could employ to mitigate this risk, but that proposal overly relies on operator discretion and judgment and lacks transparency to potentially affected parties. The Environmental Defense Fund has issued a model regulatory framework, but that report overly relies on operator actions and bright-line standards. A growing number of state agencies in oil producing states around the nation have issued regulations, but there is considerable divergence in the adopted standards. The academic work on this topic is sparse to non-existence. Thus, this Article fills an important void in the literature at an important moment. The goal of any regulatory regime should be to ensure sustainable energy development occurs in a manner that adequately addresses the environmental concerns posed by modern development activities. Because contamination and collateral consequences of pollution can have far-reaching impacts, the public has a vital public policy interest that the regulatory regimes that govern this development require the industry to utilize best practices. The Article proposes that the regulatory agency should use its expertise and operator supplied information to make a fact-based determination of the area of fracturing interest as part of the permitting process for any new well that will be hydraulically fractured. The regulatory agency then would utilize its existing data on well locations to determine what existing wells are sufficiently close to the new well that will be hydraulically fractured and then will set forth requirements for the operator to investigate that well. The regulatory agency can then set forth a remediation proposal for the operator to perform. The Article uses the State of Texas as a model for its suggestions. The framework set forth in this Article also affords operators with an opportunity to provide their solutions to any regulatory concerns, and also provides other affected parties an opportunity to participate in the well permit process. Thus, the proposed regulatory framework sets forth a transparent and objective regime that does not solely rely on the business judgment of operators. Moreover, by requiring this analysis to be done in a scientific manner and by providing an opportunity for notice to be given to affected parties, the proposal also provides an opportunity for potentially affected parties to take precautionary steps on their own wells. Currently, Texas does not have any explicit requirements with respect to investigation of close proximity abandoned wells in its well permitting process, and the failure to require an upfront investigation creates an unnecessary environmental risk that could be mitigated if addressed upfront

Income Tax Treaty Policy in the 21st Century: Residence vs. Source

The United States has repeatedly attempted to stop tax base erosion for almost the entire post-World War I era, and yet the same problems exist today. The need for fundamental tax reform is front-page material in the major newspapers with the US transfer pricing rules and US multinationals portrayed as public enemy #1. The OECD this month issued a report entitled "Addressing Base Erosion and Profit Shifting," and in a competing fashion several important developing countries have initiated their own pact to develop cooperative strategies on these issues outside of the framework of the OECD and UN. The attached manuscript studies the historical record and sets forth a competing model for dealing with these matters which pre-dated the existing model treaties and transfer pricing paradigm. This earlier paradigm was offered by the International Chamber of Commerce’s but was prematurely abandoned by the League of Nations in favor of the existing paradigm. In light of the fact that the existing paradigm has failed so miserably, the earlier proposal should be re-considered