They're Falling Like Flies

Camp is not seeking re-election.

With Baucus to China and Camp now retiring, the two forces behind the drive for tax reform are now gone.

The issued their proposals and said "good luck boys - it's up to you to get it done."

Fat chance.

The Red-Face Test

Does it even exist anymore?

The advance sheets today let me to this case, involving a scheme to generate tax losses to offset gains recognized on an unrelated transaction. In this case, the company implementing the scheme was wholly-owned by a tax advisor that had sold the scheme to other clients:

Petitioner admits that courts have consistently found similar tax avoidance schemes lacking in economic substance. However, petitioner attempts to distinguish its transaction. First it attempts to differentiate the economics of its transaction....

Petitioner also attempts to distinguish its transaction on the basis that it did not initiate the scheme on the advice of a tax shelter promoter. Courts have often found that a taxpayer's involvement with a tax shelter promoter indicated that tax avoidance primarily motivated a disputed transaction. [cases] Petitioner argues that the absence of a promoter in this case demonstrates that its transaction represented legitimate tax planning. We disagree. Mr. Haber is a tax shelter promoter. He did not need to consult a third-party promoter, because he knew the scheme well enough to execute it himself.

The guy who argued this case before the Tax Court is a senior partner at a major international law firm.  He's been practicing longer than I have.  It's shocking to me that he actually made such a stupid argument.

Unbelievable.

David Cay Johnston on IRS Dysfunction

Via DDay comes this article by David Cay Johnston in Tax Analysts regarding a revolt happening at two IRS offices in New York, where a veteran lawyer has sent a letter to the Senate Finance Committee complaining about mismanagement there:

Jane Kim, a 10-year veteran chief counsel attorney for the Small Business/Self-Employed Division, wrote that "a sustained pattern of abuse" by chief counsel's supervising lawyers in Manhattan and Long Island, has led to "gross waste of government resources, gross mismanagement, violation of labor laws, and active abuse and retaliation against employees."

The complaint depicts a workplace culture in which favored employees are given light workloads, while their colleagues who pick up the slack face discipline and retaliation if they chafe at unfair treatment. Meanwhile management turns a blind eye to the problems -- when it isn't actively making them worse.

As a result of that negligence, tax cheats often get away without paying, taxpayers needing help go unaided, and good employees suffer more stress in an agency already struggling to deal with budget cuts and public scorn.

The whole thing presents a rather sordid picture.  Having been in Ms. Kim's position, I can certainly feel for what she's going through.

But I wasn't at the IRS when I was in Ms. Kim's position.  I was in private industry.  The fact is, there are a lot of people who succeed in their careers by kissing up and shitting down.  That's just the way of the world.  It happens in government as well as outside of government.  I am sure that there are a lot of people out there in both government and private companies that have experienced this kind of crap.  And yes, it has as big effect on productivity and destroys the morale of people on the receiving end.

The good thing from the perspective of Ms. Kim is that she has an outlet - writing to her legislators.  People in the private sphere more often have no recourse at all but to quit.  My experience has been that most people in high management positions get there by kissing up and shitting down.  Complaints are viewed as breaking that rule, are frowned upon, and usually fall on deaf ears.

I wish Ms/ Kim the best as her complaint is acted upon.  But honestly, I don't hold much hope.  Senior managers aren't the only ones who succeed by kissing up and shitting down.  Politicians do too.

Bill Black on Corporate Lawyers - Tax Lawyers are Just as Bad

Via Yves, Bill Black has written a couple of postscriticizing a New York Times article about the indictments of  senior partners at Dewey & LeBouef, the law firm that went bankrupt in 2012.  His main criticism is the lede of the article itself: “4 Accused in Law Firm Fraud Ignored a Maxim: Don’t Email.” As Black explains:

The article’s hook is the ironic failure of top lawyers to follow their own advice that they purportedly “always tell their clients” on how to commit fraud with impunity by ensuring that there is no paper (or electronic) trail of “incriminating” evidence of their crime.

. . . .

What the Deal Book describes as corporate lawyers’ “cardinal rule” is clearly unethical and often a crime.  A corporate lawyer who counsels a “client” on how to commit a crime without being prosecuted by using fraud mechanisms that prevent the FBI from finding the “incriminating” evidence establishing the crime has made himself a co-conspirator who is aiding and abetting the fraud.

Ah, Bill, would that it were the case that lawyers recognize this fact. Unfortunately, this kind of thinking is all too common in the corporate world generally and the corporate bar specifically. And this is something that has been slowly eroding over a long period of time.

Sun Capital

The Supreme Court has denied certiorari in the Sun Capital case.

In Sun Capital, the First Circuit ruled that the hedge fund was engaged in a trade or business.  Sun Capital owned the majority of the stock of a company that was party to a multi-employer pension plan and went bankrupt.  Under the Employee Retirement Income Security Act (ERISA), members of a controlled group of trades or businesses are liable for the employer contributions of other members of the controlled group. By holding that Sun Capital was engaged in a trade or business, the court found it liable for the contributes owed to the plan by its bankrupt company.

The Sun Capital case has implications far beyond the ERISA issue. Finding that a hedge fund is engaged in a trade or business can severely impact its investors.  For example, a tax-exempt entity is exempt from tax on investment income (interest, dividends and capital gains) but not on income earned by engaging in an "unrelated trade or business."  The taxation of a foreign person differs depending on whether the income earned by the investor is trade or business income rather than investment income.  Hedge funds are partnerships, which are not separate taxable entities.  If the income of the partnership is trade or business income, then the partners have to report that income as trade or business income and pay tax accordingly.

If the government decided to push this theory beyond the ERISA area, literally tens of billions of tax could be at stake.

Thus far, the Treasury Department has been coy about whether they are inclined to push the issue.  Up to now, all we've heard is that they are studying the case.

We'll see....