Facebook Tax Propaganda

A friend of mine sent me the following from a Facebook post and asked me if it was true:

It is utterly and completely false.  So much so I don't know where to begin.

Let's start with the easiest.

First, there is no "real estate transaction tax" under federal tax law.  None.

Second, about the claim that "the top income payroll tax went from 37.4% to 52.2%," I have no idea what the writer of this is referring to.  There is no such thing as an "income payroll tax."  Now, there is an income tax and there is a payroll tax, but they are separate taxes.  And even if you add up the top rates of both, they don't come anywhere near 52.2%.  So I have no idea what this person is talking about.

The other items I think I know what the writer is talking about.  But before I get into the details, let me just emphasize the following:

"These taxes were all passed solely with Democratic votes.  Not a single Republican voted for these new taxes." - utterly and absolutely wrong.

These taxes were all passed in the Affordable Care Act, aka Obamacare."  Utterly and totally wrong.

So let's take the remaining points in order:

1.  Medicare tax went from 1.45% to 2.35%.  This is partially true. Effective January 1, 2013 (not January 1, 2015), the medicare tax was increased by 0.9 percentage points for people making more than $200,000 ($250,000 for married couples).  The tax increase was passed as an amendment to the Affordable Care Act in 2010 as part of the budget reconciliation process that year.  The final bill (which was very large mostly had nothing to do with the ACA) was passed on a party-line vote.

Note that the vast majority of Americans are not subject to this tax increase: it affected 2.1% of tax returns filed in 2013 (the last year for which statistics are available).

2.  Top income tax bracket went from 35% to 39.6%.  This is correct, but

• it had nothing to do with the ACA, and
• It happened automatically - nobody voted for it.

Let me explain.  The Bush tax cuts in 2001 lowered the maximum rate from 39.6% to 35%.  However, they were scheduled to expire in 2011, at which time the rate schedules would revert back to those that existed prior to 2001.  Now this was an accounting gimmick.  The Republicans didn't want to say that they increased budget deficits until the end of time, so they put an expiration date on the tax cuts.

In 2010, a bill was passed extending the income tax rate cuts for two more years.  They were allowed to expire at the end of 2012.  Then, on January 3, 2013, Congress passed a bill that reinstated the Bush tax rates for everybody other than those whose incomes are greater than $400,000 ($450,000 for married couples).  That bill passed with bipartisan majorities in both houses.

Note that the vast majority of Americans are paying taxes at the same rates as under the Bush tax cuts.  Only 0.6% of returns filed in 2013 (the last year for which statistics are available) show tax imposed at the highest rate of 39.6%.

The funny thing about this was the whole process.  The Republicans refused to consider the tax bill until after the Bush tax cuts had expired.  That way, they could claim they gave everybody a tax cut.  If they had passed the bill during 2012 rather than waited until January 2013, they were vulnerable to people saying they had passed a tax increase.  Instead, they waited until January and called it a tax cut.

3.  Capital Gains went from 15% to 28%.  This is not correct:

• Capital gains went from 15% to 20%.
• it had nothing to do with the ACA
• it happened automatically - nobody voted for it.

The reduction of the capital gains rate from 20% to 15% was part of the Bush tax cuts as well.  Like those cuts, this rate reduction was scheduled to expire at the end of 2010.  This cut was also extended for two more years during 2010, but unlike the cuts on ordinary income rates (discussed in 2), this cut was allowed to expire at the end of 2012.

About that 28% rate, there is a category of capital gains that are taxed at a higher 28% rate (mainly art and other collectibles).  This was established in 1997, when under President Clinton the capital gains rate on items other than collectibles was reduced from 28% to 20%.  The special rate on collectibles was not affected by the Bush tax cuts - it never declined, and was never increased.  But there is no 28% rate on everything.  The tax rate on capital gains is 20%.

4.  Dividend tax went from 15% to 39.6%.  This is not correct:

• The tax on dividends went from 15% to 20%
• it had nothing to do with the ACA
• it happened automatically - nobody voted for it.

This story is essentially the same as for capital gains.  One of the Bush innovations was treat dividends on corporate stock the same way you treat capital gains. This resulted in a cut in the rate of tax on dividends from 39.6% to 15%.  But when the 15% tax rate on capital gains expired and went back up to 20%, the rate on dividends went to 20% as well.  It did not increase to 39.6%.

5.  Estate tax went from zero percent to 55%.  This is not only incorrect, it is crazy.

• The estate tax rate was 45% when Obama took office - it is now 40%.
• It had nothing to do with the ACA, 
• But for the actions taken by Obama (with, by the way, bipartisan support in Congress), the rate would have increased to 55%.

The estate tax story is effectively the same as the story for the income tax and capital gains tax.  In 2001, as part of the Bush tax cuts, the cuts were made to the estate tax as well.  The 2001 act reduced the top estate tax rate to 50%, and greatly increased the brackets and exemption amounts.  The top rate was scheduled to be reduced to 45% by 2009, then to zero in 2010.  But, like all of the Bush tax cuts, the estate tax cuts were scheduled to expire in 2011, so that the top rate would go back to 55%.

In 2010, Congress passed a bill that, among other things, provided a reinstated estate tax with a maximum rate of 35%.  That rate was made retroactively effective to the beginning of 2010.  This is the same bill that extended the Bush tax cuts on income, capital gains and dividends for two more years.  It was passed with bipartisan majorities in both houses of Congress (in fact, Republicans supported it more strongly than Democrats).

The rate was increased to 40% in the 2013.  That increase (which was in the same bill that limited the increase in the federal income tax to incomes over $400,000, as described in 2 above) was passed with bipartisan majorities as well.
  

Links: The Slow Death of the IRS

Two things I saw today:

An Emotional Audit: IRS Workers Are Miserable and Overwhelmed

The GOP's Campaign to Make You Hate the IRS is Kind of Genius

Look, the bottom line is, we are always going to have to pay taxes.  This has been going on since biblical times, and we have yet to come up with a society that doesn't have taxes associated with it. As a result, there will always be tax collectors.  The idea of abolishing the IRS is ludicrous.  We're just going to have to replace it with something else.  And that will be the case no matter what kind of tax system we have (income tax, sales tax, property tax, whatever).

And people have always had a love/hate - mostly hate - relationship with the tax collector.  This, too, has been going on since biblical times.  Funny how Jesus' attitude towards tax collectors was a lot different than Ted Cruz's.

Besides, the people who collect the taxes are not the ones we should be criticizing.  I am quite sure that our tax collectors are doing what Jesus said they should do:

12 Even tax collectors came to be baptized. “Teacher,” they asked, “what should we do?” 13 “Don’t collect any more than you are required to,” he told them.

Luke 3:12-13.

Your real beef is with those who give the orders.  That would be Congress.

And your, by the way, your state legislatures as well.  At least here in NY, I am sure mine are going to hell for laws like this one.

501(c)(6): This Should Prove Interesting....

Most people are familiar with Section 501(c) of the tax law, which lists a number of kinds of organizations that are exempt from income tax.  Most recognized charities are exempt under Section 501(c)(3), and of course social welfare organizations - the subject of the IRS "scandal" involving conservative political groups - are exempt under Section 501(c)(4).  Less well known is the exemption under Section 501(c)(6), which covers:

(6) Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.

This is the provision which results in the National Football League being exempt from federal income tax.  However, it's reach is far beyond the NFL.

Yesterday, Jason Chaffetz and Elijah Cummings, the chairman and ranking member of the House Oversight Committee, sent out letters to a number of sports organizations regarding their 501(c)(6) exemptions, including the National Football League, the National Hockey Leagem the US Tennis Association, the Women Tennis Association (WTA) Tour, the Association of Tennis Professionals (ATP) Tour, the National Lacrosse League, the PGA, the PGA Tour, the LPGA and the Professional Rodeo Cowboy's Association.  They specifically asked for "an analysis of what your organization's 2014 tax liability would be, if your organization were not exempt under 501(c)(6)."

I can't wait to see their answers.

A link to the letter to the NFL is here.

BTW, the NBA, Major League Baseball and Major League Soccer are not tax exempt organizations.

For more on the 501(c)(6) exemption, see this.

Sounds Like Retailers Have Taken Some Creative Tax Positions

The IRS came out with a directive last week on the Section 199 deduction.  Here's a link.  Section 199 provides a special deduction for ""Qualified Domestic Production Activities" equal to 9% of "Qualified Production Activities Income."  If your business is the "manufacture, production, growth or extraction" of tangible personal property (which includes computer software and sound recordings), you are eligible for this deduction.  Income from producing films, electricity, natural gas or potable water and from construction activities also qualifies for the deduction.

The purpose of the deduction is quite simple: to provide a lower effective tax rate on income from producing goods as distinct from income from services.  I won't go into a explication of the sordid history of this provision, except to say that its rationale was to reverse the migration of manufacturing activities from the United States to foreign countries.

Interestingly, architects and engineers who provide services with respect to the construction of property also get the deduction.  I guess the lawyers who draw up the construction contracts didn't have the heft to get the same benefit.  Of course, workers don't get the benefit, even though they are actually the ones doing the "producing."

Anyway, the IRS apparently saw a need to issue a notice to its auditors regarding what constitutes "production" for purposes of this rule.  The notice is a list of activities that are not production.  Apparently, some people were being quite creative:

(1) cutting blank keys to a customer’s specification;

(2) mixing base paint and a paint coloring agent;

(3) applying garnishments to cake that is not baked where sold;

(4) applying gas to agricultural products to slow or expedite fruit ripening;

(5) storing agricultural products in a controlled environment to extend shelf life; and

(6) maintaining plants and seedlings. 

Yes, some hardware store (can you guess which?) was taking the position that duplicating a key and adding color to a base paint was "production."  Little did I know that Congress wanted to encourage these kinds of activities by giving them a reduced tax rate!

Sometimes I hate the fact that I'm a tax lawyer, because so many of us are coming up with this sort of shit.

Tax Reform?

You know I'm starting to think this might happen.  The following update from Bloomberg BNA just crossed my desk:

"Members of the Senate Finance Committee's working group on overhauling international taxes say they are “making good progress,” though tax experts at a March 17 committee hearing on the issue said that much work still needs to be done.

Speaking at the hearing, Sens. Charles E. Schumer(D-N.Y.) and Rob Portman (R-Ohio), who co-chair the international-issues working group, sounded positive notes on their efforts to reach a bipartisan agreement.“We’ve reached a good deal of consensus here,” Portman said.

Witnesses ran down a litany of possible changes to international taxes meant to curb base erosion and profit shifting. Pamela Olson, U.S. deputy tax leader and Washington National Tax Services practice leader at PricewaterhouseCoopers LLP, said that the best way to stop BEPS is a lower corporate rate, though tax law should still contain anti-base erosion features."

I love this last quote by the PWC person.  Hey, if we cut the corporate tax rate to zero, there won't be any need for tax avoidance!

I guess I'm gonna have to start posting on this stuff again.

I'm Shocked - Shocked! - to Find There's Tax Avoidance Going On Here!

I must say I'm laughing my ass off.

Over the last week or so a controversy has been brewing involving Luxembourg and the tax games it has allowed multinational corporations to play by setting up paper subsidiaries in that country.
The background of this is that someone leaked Luxembourg tax rulings obtained by some 340 multinational companies to the International Consortium of Investigative Journalists, which has posted the rulings on its website.  The leak has created a storm of controversy, with officials from around the world vowing to take action to prevent tax avoidance through the use of Luxembourg as a tax haven.

Attention has focused on Jean-Claude Juncker, who is the current President of the European Commission and who, prior to assuming that post this year, had been either Prime Minister or Finance Minister of Luxembourg for over two decades.` Here is the latest from the Irish Times:

European Commission president, Luxembourg’s Jean-Claude Juncker, took political responsibility for his country’s tax practices on Wednesday, saying he would fight tax evasion with more automatic exchange of information between countries.

Juncker ( 59), who was the tiny Grand Duchy’s finance minister or prime minister for 24 years until the end of last year, has avoided the media since a network of investigative journalists reported last week that Luxembourg had granted sweetheart deals to some 340 multinationals allowing them to avoid billions of euros in tax.

The revelations put him under intense pressure to make clear his position on the tax deals and raised questions about whether they create a conflict of interest for him as commission chief.

“I am politically responsible for what happened in each and every corner and quarter (of Luxembourg),” he said, adding that while in line with Luxembourg and European laws, the tax practices may not have been ethical.

“It is true that sometimes when it comes to the application of different tax rules that are sometimes diametrically opposed that can lead to results that are not in line with ethical and moral standards that are generally applicable,” Mr Juncker said.

He explained that tax authorities in Luxembourg were independent of the government, but took political responsibility for the policies, which he said were a result of different tax regimes in EU countries.

“I am not the architect of what you could call the Luxembourgish problem,” Mr Juncker told reporters in a surprise appearance at a daily briefing of the European Commission.

“There is nothing in my past indicating that my ambition was to organise tax evasion in Europe,” he said.

The European Commission is investigating several tax schemes offered by Luxembourg to large multinational corporations to see if they broke EU laws on state aid.

“Everything that has been done has been in compliance with national legislation and international rules that apply in this matter,” Mr Juncker said.

“This state of affairs is due to the fact that we have to deal with the outcome of different standards. If there is no tax harmonisation throughout Europe ... then this can be the result.”

Please.

This kind of stuff has been going on for decades.  I know - I worked for years in the international tax group of one of the Big 4 firms (left there 10 years ago).  And it's not just Luxembourg.  The Netherlands is notorious for issuing these kinds of rulings.  So is Switzerland.  All of these countries engage in this sort of practice.  And the idea that they are doing it for reasons other than facilitating tax avoidance is just ludicrous.

As for the lack of tax harmonization in Europe, that is a feature, not a bug.

Everybody who is involved in tax administration, particularly when it involves multinationals, knows this kind of stuff is happening.  The idea that it is some big secret is hilarious.

Hahahahahahaha!  I'm having trouble getting myself up of the floor I'm laughing so hard.

As near as I can tell, this has nothing to do with countries being concerned about tax reduction schemes being carried out by multinationals.  It has everything to do with politics.  It's been clear from the outset that certain countries in the EU (namely the United Kingdom, but I'm sure there are others) were opposed to Juncker's elevation to EC president.  My guess is that this is a deliberate attempt to delegitimize him.

The real question is whether the fact that these kinds of arrangements are now becoming headlines will result in any real change in the way multinationals are taxed.

I seriously doubt it.

Qui Tam

Today's BNA Daily Tax Report has a story about a qui tam suit brought in NY against Vanguard.  The story is behind a firewall, but a related report at the Philadelphia Inquirer can be found here, and a post about it in the Tax Prof Blog is here.  A qui tam case is essentially a whistleblower case, where a person brings a lawsuit against someone for cheating the government.  Most states, and the federal government, have whistleblower laws that permit private parties to sue on behalf of the government if they discover wrongdoing.  The real party in interest is the government - it is entitled to the amounts recovered by the plaintiff - although the plaintiff is entitled to a percentage of the recovery.  While most such laws involve cheating in government government contracts (the first qui tam statute was passed by the federal government during the civil war to combat war profiteering), a few permit whistleblower claims that the party involved is cheating on their taxes.  The federal False Claims Act does not apply to tax obligations, but there is a separate statute that applies to tax cheating.  Here is a story about a tax whistleblower that received a nine-figure reward from the IRS.

Now I happen to personally know someone who filed a qui tam action in NY state court regarding what I would consider fairly egregious tax evasion by a private investment fund.  As in the Danon case described in the Inquirer article, the NY AG decided not to pursue the case.  Unlike the Danon case, the person decided to withdraw the complaint before it was unsealed.  I'll talk about why in a moment.

But first, the following passage from the BNA article is instructive:

Brian Mahany of Mahany & Ertl in Milwaukee, who represents Danon, told Bloomberg BNA that New York is the only jurisdiction in the U.S. that allows qui tam claims for unpaid corporate income taxes. Such actions are always filed under seal, he said, to allow the attorney general time to investigate or develop the case.

The fact that the attorney general has chosen not to intervene does not say anything about the merits of the case, Mahany said. Danon still can pursue the case on his own, though he could not settle with Vanguard without the state's stepping back in.

Goodman [of Horwood Marcus, a Chicago law firm, described by Bloomberg as a critic of tax qui tam actions] agreed that the attorney general's decision not to intervene does not necessarily say anything about the merits of the case. It often happens in qui tam actions that the AG decides to step in later, as the case progresses, he said.

And the calculation of whether to intervene is often political, Goodman said.

“They might think it's a great case, or they might back off because it's a contributor, a company involved in politics. Or they don't want to dismiss it because they don't want to be seen as soft on companies that are being aggressive in their tax positions.”

Goodman noted another factor the attorney general might consider: Many people in New York are Vanguard shareholders and if the case resolved in Danon's favor, it would mean their investments would be worth much less.

That is not an outcome that would endear any elected official to the voters.

As explained in the article, a qui tam case is usually filed under seal, with the AG and the state tax department given the opportunity to investigate the claim and take over the case if they feel it has merit.  In the case I am aware of, the investment firm involved was well-connected politically, and immediately upon learning of the suit pulled out all of the stops lobbying AG Schneiderman not to intervene in the suit.  The AG complied, notwithstanding the fact that he had trumpeted the creation of his Taxpayer Protection Bureau to crack down on what he described as "large-scale tax cheats."  Like I have stated numerous time, when a politically connected company has a tax problem, the first person they call is their lobbyist.  I am not at all surprised to hear in this instance that the AG has declined to intervene in the case.  In fact, to my knowledge, there has been only one case which has been unsealed that the AG has pursued - a case for sales tax evasion against Sprint.  My acquaintance's claim was filed before the AG announced his decision to take on the case against Sprint.  Obviously, Sprint hired the wrong lobbyist.

Now I am somewhat surprised that the plaintiff in this case, unlike the plaintiff in the case I am personally aware of, decided to pursue the action notwithstanding the AG's refusal to sign on.  The reason can be found in the comments to the Tax Prof Blog post, where the first commenter asked the following question:

Is lawyer whistle blowing a violation of professional ethics rules?

Now, my acquaintance had a background as a lawyer, but was not employed by the investment fund in that capacity.  Instead, he was part of the finance department.  As such, he was arguably not practicing law when he came upon the information regarding the tax evasion that was going on within the firm.  Nevertheless, there is clearly a reluctance to divulge confidential information when placed in that kind of position, particularly given the reputational issues.  As one person responding to this question stated:

At first glance, there does not seem to be any exception to the ethical obligation to maintain a client's confidences that would permit this lawyer to make these disclosures. Not that anyone with any sense would ever again trust him as their counsel.

In fact, as another commenter noted, it is not an ethics violation if the lawyer is seeking to stop an ongoing or future crime.  Nevertheless, anyone in a position of confidence who breaches that confidence, regardless of the justification, is probably destroying any chance he has of obtaining a similar position in the future.  My acquaintance decided the risk to his career was greater than the possible reward of pursuing the action, and therefor withdrew it.

Whatever else happens as a result of this case, Danon's career working as a high level tax attorney is undoubtedly toast.