A Taxing Blog

Friday, August 15, 2003
Buffett and Prop 13  
The WSJ has an article today (registration required) stating that Buffet "strongly suggested" that property taxes in California are too low. It would be a wonderful thing if he can convince Arnold to repeal Prop 13.

Someone asked me what Buffett would do if Arnold wins. I am obviously not positive what would happen but as Victor pointed out Buffett was against the Bush dividend rate cut and tax rate cuts so I don't think we will be seeing major tax cuts. However, Buffett also realizes that the US economy relies heavily on California so I don't think we will see major tax increases either. He may push to get rid of some of the endless regulations here that seem to just drive businesses away which I think would be a good thing. It would be nice to cut alot of spending as well.

I have mixed feelings on the recall. I agree with Victor that we did elect this guy and so we should be stuck with him but I can't think of a less competent person to run this state. I am 50/50 on the recall decision but either way, I am voting for Arnold (as you are allowed to do even if you vote no on the recall). Whatever happens, California needs some major changes so we can avoid this in the future and we can get rid of all these propositions that are on the ballet each year.

Thursday, August 14, 2003
Governor Aaaahnold and Buffett  
Tyler Cowen at The Volokh Conspiracy points out that Arnold's selection of Warren Buffett as an economic advisor is consistent with Cowen's prediction that Arnold will be a conservative populist --- Cowen points to Buffett's opposition to the Bush dividend tax cut.

I'm not sure what Buffett's help will mean for Arnold's tax policy --- having just moved here, I don't even know much about California tax policy, except that Prop 13 makes everything very complicated. I would guess, from what little I know, that Buffett is mildly progressive on state tax policy and will encourage Arnold in that direction. But I doubt that Arnold will mess with homeowners -- the one constiuency that even the Terminator cannot handle.

From a PR standpoint, selecting/recruiting Buffett is a coup. Can you think of another economic advisor whose name most voters would recognize?

It also suggests to me that Arnold -- despite his shortcomings -- may be quite good at surrounding himself with smart, experienced people. If it keeps going like this, we really will be calling him Governor Arnold in a few weeks.

I myself will be voting against the recall. "Do overs" are for the playground, not the ballot box.

Wednesday, August 13, 2003
Can Gigli be that bad?  
At least if that was the title of Victor's next paper (see below), he would have to cite to one of my articles. Perhaps in academia, like Hollywood, there is no such thing as bad publicity.

On foxnews.com, they have put up a partial transcript of an interview with Vernice Kuglin and her lawyer. Not very interesting and the judicial analyst gets his description of the Constitution wrong (the Constitution did allow direct taxation before the 16th Amendment, it just had to be according to population).

In case you thought he was kidding, my latest piece is on the taxation of a reality television candidate. I can confidently say it will be the greatest piece ever written on that subject. I will post a link to SSRN when I get it up there. Basically, it discusses whether a woman who won a prize on one show (For Love or Money) and then risks it all to win more money on a second show (For Love or Money 2) should be taxed on the first prize even if she loses it all on the second show.

Feline PRIDES  
I just finished reading Tax Notes Guru Lee Sheppard's most recent rant on the Feline PRIDES ruling, Rev Rul 2003-97. (Aug. 4 issue) (I can't get Tax Notes on line, so no link - sorry.)

[Readers not already familiar with debt/equity hybrids may wish to stop reading here.]

I'm of course not surprised that Sheppard disagrees with the ruling, which blesses most forms of PRIDES.

A Feline PRIDES is a debt/equity hybrid; it's basically a note stapled to a forward contract. The interest deduction for the issuer depends on how easy it is to undo the staple.

On the merits, I'm inclined to agree with the Service and Wall Street on this one. Taxprof David Weisbach reportedly agrees with Sheppard, as do some other taxprofs. Close question. But Sheppard also gets mad at the Service for issuing a Rev Ruling instead of a Rev Proc, arguing that taxpayer-favorable pronouncements that are clearly wrong on the law should be Rev Procs. Fair enough, but only if you agree that Feline PRIDES clearly run afoul of 163(l). I'm not so sure.

In particular, I disagree with Sheppard's point that having to double the bet is "economic compulsion." In order to separate the two pieces of paper -- the debt and the forward -- the holder has to put up collateral for the forward contract. This is economic compulsion only if the holder is forced to do this at times when it makes no economic sense to do so. If I have forced to buy a used Pinto for $30,000, that's economic compulsion. If I have the option of buying a Toyota that I've leased for 5 years for $12,000, that's not economic compulsion. It may or may not be a good buy at that point in time, but it's not economic compulsion. The PRIDES are closer to the Toyota than the Pinto.

If anything, it's possible the IRS gained some ground here by stipulating that the remarketing feature was "substantially certain" not to fail. This will make issuers nervous if they cap the interest rate on the remarketing -- and PRIDES with capped remarketings are the most offensive version.

So I actually think, given that most people already thought that the PRIDES "worked," that the IRS may have picked up some ground here.


I posted this morning on the absence of ad hominem attacks in the tax literature. Lee Sheppard is one exception --- she devotes three paragraphs of her column to calling herself a bitch. I have to disagree, Lee. A bit results-oriented at times, perhaps, but a wonderful asset for all of us tax readers.

Bush v Gore  
Bush v. Gore continues to get people really, really mad. I haven't read the articles, but check out the titles of this exchange between Nelson Lund and Larry Tribe:

"Carnival of Mirrors: Laurence Tribe's 'Unbearable Wrongness'"
Constitutional Commentary, Vol. 19, pp. 609-618, 2002
George Mason University School of Law

"'Equal Protection, My Ass!'? Bush v. Gore and Laurence Tribe's Hall of Mirrors"
Constitutional Commentary, Vol. 19, pp. 543-569, 2002
George Mason University School of Law

"The Unbearable Wrongness of Bush v. Gore"
Constitutional Commentary, Vol. 19, p. 571, 2003
Harvard Law School

"Lost at the Equal Protection Carnival: Nelson Lund's Carnival of Mirrors"
Constitutional Commentary, Vol. 19, p. 619, 2003
Harvard Law School

We rarely see this kind of ad hominem attack in the tax literature. Maybe I'll change this with my next paper, "Which is Worse: Watching Gigli or Reading Jeffrey Kahn's Paper?" (kidding, of course). Actually, Jeff's latest is a pathbreaking work in the emerging field of the Taxation of Reality Television Winners.

In fact, I just read a draft of Gregg Polsky's latest manuscript, where he argues that the IRS did not have the authority to enact the check-the-box regulations. This is exactly contrary to what I argued in my student note back in 1996. And yet Gregg presented my arguments fairly and never once called me stupid, or even unbearably wrong. I'll link to Gregg's paper when he gets it up on SSRN.

Tuesday, August 12, 2003
Victor beat me to the story (see below) but I suggested that in order to avoid this defense next time, the IRS should send postcards back to the people who ask such questions with the simple statement: "IRC section one". I am absolutely amazed by the verdict though and agree with Victor that responding to these inquiries is a waste of time.

Also, as noted in law.com story, the ABA voted to allow lawyers to breach the duty of confidentiality if the client uses the advice to commit a crime or fraud. Will this have any effect on corporate tax shelters? Unlikely.

Speaking of tax shelters, the ABA Journal had an article on tax shelters which they have posted here.

Tax Protester, er, Tax Honesty Case  
Here's a NYT article on Vernice Kuglin, the FedEx pilot who was acquitted of tax evasion despite failing to pay tax on the nearly $1 million she earned from 1996 to 2001.

According to the story, the jury seized on the fact that Kuglin wrote letters to the IRS questioning her duty to pay tax, and the IRS did not respond; her lawyer successfully argued that her letters were evidence of a lack of criminal intent. (Kuglin will still be found liable for the tax in the civil action which is sure to follow.)

I've always been at a loss about what to do about the tax protestors. Here, the IRS did not respond to Kuglin's inquiries, and the defense lawyer seized on this. But I really don't want to see the IRS devote much of its scarce resources to answering such letters. After all, a response is not going to change anyone's mind. The materials that the IRS puts out make clear -- to anyone who is inclined to listen -- that yes, Virginia, there is an income tax on individuals.

And unlike most white-collar crimes, stepping up criminal prosecutions of tax evasion is not an effective deterrent (at the tax protestor level). Moreover, the occasional acquittal adds a lot of fuel to the fire.

So I guess my suggestion would be that a better red flag system be implemented so that when someone like Kuglin claims 99 exemptions on her withholding form, an agent gets notified and gets on it immediately before it gets out of hand, as it obviously did here.

I also wonder if the IRS has the power to move in a civil action to take away professional licenses, in this case, Kuglin's pilot's license. This might be a more effective deterrent than a criminal prosecution. Perhaps the IRS will consider asking Congress to expand civil penalties in this direction.

Monday, August 11, 2003
Tax Policy and Global Warming  
The Bush administration isn't likely to endorse this paper on Tax Policy and Global Warming.

Alabama Tax Reform  
Taxblogger A Minority of One discusses two studies on the impact of tax reform in Alabama. Alabama, which currently has the most regressive state tax system in the country (I think), is considering reforms. The debate is really easier to think about in two parts: 1) whether the poor should pay less in taxes, and 2) whether an increase in government spending creates jobs, or is just a drag on the economy. On 1 -- I think that most sane people can agree that a single mother earning $13,000 per year should not be paying much, if anything, in taxes. In Alabama, under current law, she pays quite a bit, at least on a percentage basis.

2 is a harder question -- here, I agree that given Alabama's small budget, higher taxes are likely to lead to good government spending that will boost the economy. The question becomes harder for me in high tax states like New York, where I have little faith that additional dollars will be put to good use.

Warning: the Beacon Hill study discussed in the "Minority of One" blog contains "sentences" like this:

GAMS: Y(H) = E = SUM(F, A(H,F) * HW(H)/ SUM(H1, A(H1,F) * HW(H1) )* Y(F) *
( 1 - SUM(G, TAUFH(G,F) ) ) );

The problem with using economic models to predict the utility of tax raises (or cuts) is that there are so many variables, and so many variables that are hard to measure. We don't really know how the Alabama legislature is likely to spend the new funds, and we don't really know how (say) 100 new state troopers would affect the economy. On the other hand, the problem with NOT using economic models is that the alternative modes of argument might be even less productive.

Tax Attorney Superiority Complex  
A reader points out that I am guilty of Tax Attorney Superiority Complex, a common affliction among tax nerds, especially those who hail from snooty Biglaw New York firms. The symptoms are a generalized feeling of moral and ethical superiority over one's clients, non-tax colleagues, and, in particular, accountants. In the post I linked to above, I was talking about the troubles of Tax Court nominee Glen Bower, and I wrote that "I suspect this is a case of inadequate supervision over an aggressive accountant."

As the reader points out, it is also plausible that Bower fed his accountant inaccurate information. Why, then, did I conclude that it was the accountant, not the client, who was overly aggressive?

I don't know. Just a hunch, based on stories I've heard from friends about how their accountants suggest things like deducting the cost of their cable bill becuase they sometimes watch CNBC in the mornings. I have plenty of evidence, but most of it is anecdotal, and thus not likely to persuade anyone. In the case of Bower, I know that the rules for travel and entertainment expenses are complex, and that the accountant probably knows more than the client, and thus I doubt that Bower is to blame for the faulty returns (although he is guilty of inadequate supervision in any event). But this is just a hunch.

Joe Bankman and Stewart Karlinsky have a paper examining the culture of tax evasion among some accountants; I'll link to it if I can find it. To be clear, we are talking about a minority of tax accountants, but my sense is that the minority of unethical accountants is still a bigger number than the minority of unethical tax lawyers.

So I plead guilty to Tax Attorney Superiority Complex. If anyone has any evidence that might change my mind, I'm listening.

CEOs and Dividends  
I was disappointed this morning in a front page Wall Street Journal article by Ken Brown, "As Taxes Fall, Dividends Rise -- And Executives Reap Big Gains". (I've let my registration to the on-line journal lapse, so I can't link to it -- sorry.)

The article notes that the reduction in the tax rate on dividends from 38% to 15% greatly benefits CEOs, who receive a large amount of dividend income from the shares they own. The article notes that many companies, such as Microsoft, The Limited and Goldman Sachs, have increased dividends since the tax bill was passed.

The implication is that executives are unduly enriched by the reduction in the dividend rate, and are taking advantage of the new tax law to benefit themselves.

This doesn't make a lot of sense to me. True, the executives benefit with an increase in dividends, but so do all the other shareholders, who also get real cash in their pockets. The increase in dividends is good for corporate governance.

I'm pleasantly surprised at the increase in dividends -- when executives increase dividends, they reduce the value of their stock options, and so in a sense these executives are benefitting other shareholders at their own expense. We should be praising them for this.

Of course, I too am troubled by the enormous paychecks that executives get, which often seem out of proportion to the value they contribute to a company. But this is a result of executive compensation norms that have gotten out of control, not dividend policy.

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