Tax Law Blog | IRS Tax Attorneys

The first thing on ,new president elect, Obama’s plate will be jump-starting the ailing U.S. economy, economists and tax experts say. “Most bets are out the window until we get the economy and the financial markets straightened out,” said William Gale, an economist.

Though a ballooning deficit has some expecting the government to increase revenues by hiking taxes soon, many economists say stimulating the economy, even if it means a record-level deficit, is more important now, for the short-term, than balancing the budget.

If Obama’s administration and Congress follow that line of thinking, then tax hikes may well wait. But spending probably won’t. The economic crisis likely means another fiscal stimulus package, many economists said. But unlike the fiscal stimulus earlier this year, a new bill probably won’t include direct rebates to a broad swath of taxpayers.
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The new Census Bureau data on income and poverty reveal that many of the economic trends in this country are a lot more favorable than America’s detractors seems to think. In 2007, overall real median family income increased to $50,233, up $600 from 2006. The real median income for intact families — mother and father in the home — rose to $78,000, an all-time high.

Although incomes fell sharply in the U.S. after the dot-com bubble burst in 2000 (and still haven’t fully recovered), these latest statistics reflect a 25-year trend of upward economic mobility. More important, Barack Obama is wrong when he states on his campaign Web site that the economic policies started by Ronald Reagan have rewarded “wealth not work.” Based on this false claim — that the rich have benefited by economic growth while others have not — he intends to raise tax rates on high-income individuals.

To be sure, there has been a massive amount of wealth created in America over the last 25 years. But tax rates were cut dramatically across the income spectrum, for rich and poor alike. The results?

When all sources of income are included — wages, salaries, realized capital gains, dividends, business income and government benefits — and taxes paid are deducted, households in the lowest income quintile saw a roughly 25% increase in their living standards from 1983 to 2005. (See chart nearby; …) This fact alone refutes the notion that the poor are getting poorer. They are not.
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The Obama campaign has released this detailed tax plan, along with this summary, key facts, and comparison with the McCain tax plan.  The tax plan has attracted a lot of attention in the media and blogosphere:

U.S. News & World Report:  With Polls Close, Obama Blinks on Taxes, by James Pethokoukis:

This is a pretty big change for Obamanomics.

1. It will increase capital gains and dividend tax rates, to 20%, only for families making over $250,000. Before, Obama was hinting at rates as high as 28% for everyone.
2. On the issue of the Social Security income cap, he’s now considering a plan that would make folks earning over $250,000 pay in the range of 2% to 4% more in total (combined employer and employee) payroll taxes. Previously, there were hints at increases of from 6% to 12%.

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Professor Burke proposes extending the look-through rules of under § 1(h)(9) to partnership distributions as well as sales of partnership interests to prevent conversion of unrecaptured § 1250 gain and potentially indefinite deferral.

The proposal addresses flaws in the distribution rules as illustrated by Countryside Limited Partnership v. United States allowing tax-free treatment of a distribution of recently-acquired nonmarketable securities to a redeemed partner, coupled with shifting of basis from the securities to depreciated real property held by the partnership. Corresponding changes would be necessary to the regulations under §§ 751 and 755 when a disproportionate distribution reduces the distributee’s share of unrecaptured § 1250 gain in retained partnership property. The proposal flows from Professor Burke’s earlier commentary on Countryside.
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In August 2007, a federal court in Rhode Island quashed an IRS summons seeking tax accrual workpapers pertaining to a taxpayer’s investment in abusive tax shelters. The court held in United States v. Textron that the documents at issue were protected under the work-product doctrine, which immunizes from discovery documents prepared “in anticipation of litigation” so long as the prospect of litigation was “objectively reasonable” and the documents would not have been prepared “in substantially the same manner” irrespective of the anticipated litigation. The government has appealed the decision.

This article argues that tax accrual workpapers never deserve work-product protection, because they are prepared for regulatory rather than for litigation purposes. It also argues that in preparing tax accrual workpapers, it is not objectively reasonable for a taxpayer to anticipate litigation, because the nexus between the two events is so attenuated and fraught with contingencies that one leads to the other only a fraction of the time.

If affirmed, Textron threatens effective tax enforcement. It expands the work-product doctrine beyond its historical role of protecting the adversarial process, and it swallows the attorney-client privilege, effectively cloaking from discovery not just all legal advice but all advice pertaining to potential litigation, no matter how attenuated. In addition, the decision protects precisely the kind of abusive tax avoidance that Congress and the Treasury Department have fought to root out and punish. In the end, the decision destroys the IRS summons power, prevents the IRS from performing its regulatory function of verifying a taxpayer’s self-assessed liability, undermines recent anti-shelter efforts, and protects abusive tax avoidance.
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New York City property tax owners will find out over the next few months whether they will get a 7 percent property tax cut for the second year in a row, Mayor Michael Bloomberg said on Monday.

New York City’s economy is sliding with Wall Street’s profits and the independent mayor tried but failed to persuade the Democratic-led City Council to take back that property tax cut in the new budget that started on July 1. He and the Council agreed they might have to address that issue again in the coming months.
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The Senate today passed, by a 72-13 vote, the housing stimulus bill (H.R. 3221, The American Housing Rescue & Foreclosure Prevention Act).  The House on Thursday had approved the measure by a 272-152 vote after President Bush earlier in the day dropped his veto threat and urged Republicans to support the bill.  There are four main tax cuts in the $15.1 billion tax package:

* Refundable tax credit for first time home buyers (10% of the purchase price, up to a $7,500 credit)
* Additional standard deduction for real property taxes for non-itemizers ($500 single/$1,000 joint)
* Expansion of Gulf Opportunity Zone incentives
* Temporary increase in the low-income housing tax credit

The major tax increases in the package are:

* Information returns for merchant payment card reimbursements
* Delay implementation of worldwide allocation of interest until 2011
* Modification of the § 121 exclusion of gain on sale of a principal residence

Contact IRS Tax Attorney Ken Sheppard. He is an Experienced Tax Lawyer who services all 50 states.

Cross-border tax disputes are usually channelled through the “mutual agreement procedure”, an informal negotiation between the tax authorities of the states involved. Arbitration has been suggested as an alternative, and is starting to be instituted. Arbitration will probably be a good “stick” against over-long mutual agreements, but it also seems to exhibit “carrot” features, such as finality, independence and greater taxpayer support.

This article describes the developments and analyses the options that countries face. In the Australian context, the transfer pricing litigation environment and the FIN 48 accounting standard are considered, and the author calls on the Australian government to invite submissions on the prospect of arbitration clauses in Australia’s tax treaties.
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Winghunter was asking about a version proposed earlier this year by Fred Thompson, a plan which mimics one first put out by the House Republican Study Committee. But the idea is essentially the same: Individuals would figure their liability under both the regular income tax and a simplified lower-rate alternative and pay whichever is less.

TPC has concluded that such a Thompson-like tax system would reduce federal tax revenues by an eye-popping $7 trillion over 10 years. But, getting back to Winghunter’s question: What would that do for the economy?

The short answer is nothing good. A conventional lower-rate structure would boost growth, but only if it is financed, either by spending reductions or tax increases. It happens that CBO has just released a report that looks at the economic effects of a much more modest plan—permanently indexing the Alternative Minimum Tax and extending the 2001 and 2003 tax cuts. It estimated that unless these tax cuts are paid for, deficits would reach 5 percent of GDP by mid-century and 18 percent by 2082. Eighteen percent of GDP happens to be about what we collect in total tax revenues each year. Hello Argentina.

In this study, CBO director Peter Orszag says the economic consequences of such a flow of red ink are literally unimaginable. As he put it, “projected deficits would grow to levels well beyond the range for which economic models have been developed.” Diane Rogers over at economistmom.com has a nice take on this.

Of course, some on the Right may try to dismiss Orszag’s analysis since he used to work in the Clinton Administration and at The Brookings Institution—a think tank Winghunter dismisses as “liberal.”

Trouble is, Orszag’s analysis is essentially identical to what CBO was saying 5 years ago, when its director was Doug Holtz-Eakin, a highly-respected conservative economist who is now John McCain’s chief economic adviser. This is what he said about the impact of tax cuts that are not financed:

“Sustained and rising budget deficits would affect the economy by absorbing funds from the nation’s pool of saving and reducing investment in both the domestic capital stock and foreign assets… As a result, the growth of workers’ productivity would gradually slow, real wages would begin to stagnate, and economic growth would tend to taper off. If that situation continued long enough, rising deficits could actually lead to a sustained contraction of the economy.”

So, no problem. All we need to do is find a way to cut $700 billion-a-year from the $3 trillion federal budget. Until we do, it is pretty clear that tax cuts of this magnitude are nothing but bad for growth.
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Tax policy directly affects the amount of wealth individuals can accumulate during their working years and, for a given amount of wealth, the living standards they can enjoy in retirement. Traditionally, Social Security benefits, tax-favored defined benefit plans and retirement saving accounts, and savings accumulated outside tax-favored accounts have been viewed as the “threelegged stool” of sources of retirement income. How tax policies evolve in the future will affect retirement income from all three sources.

Recent tax changes have affected the second and third sources of retirement income. Tax changes enacted in 2001 and made permanent in 2006 expanded access to and increased the amounts people can contribute to tax-preferred individual retirement accounts and employersponsored retirement saving plans. Tax changes enacted in 2003 and extended in 2005 reduced tax rates on capital gains and dividends through the end of 2010, thereby increasing after-tax returns outside tax-favored retirement saving accounts. Tax provisions affecting the treatment of Social Security benefits have not changed since 1993, but the share of Social Security benefits included in taxable income is continually increasing under current law because the threshold levels for inclusion of benefits in income are not indexed for inflation.

This study uses a microsimulation model of individuals’ lifetime earnings, pensions, and nonpension assets, both actual and projected, to simulate the effects of potential tax policy changes on the retirement income of boomer cohorts. The simulations take account of the two ways that tax policy can affect retirement—by changing accruals of wealth in the years before retiring and by changing the taxation of income following retirement. Changes in the tax treatment of saving, both inside and outside tax-favored accounts, affect the rate of wealth accumulation before retirement and the after-tax income that wealth produces following retirement. In contrast, taxation of Social Security benefits affects only after-tax income in retirement. The effective tax rate on Social Security benefits does, however, depend on income from other sources and therefore is also affected by policy changes that affect the pre-retirement buildup of assets.

Previous analyses of the distributional effects of income tax provisions, including tax incentives for retirement, examine how they affect a cross-section of the taxpayer population in a given year. (See, for example, Burman et al. 2006.) While these studies show, for example, how tax law changes benefit people of different incomes in different years, they do not show how the law changes affect wealth accumulation of individuals in the same cohort with different lifetime incomes or different future retirement incomes. In contrast, this study examines how changes in income tax rules that remain in place over a number of years will affect the distribution of aftertax income of boomers at retirement.

(End of excerpt. The entire paper is available in PDF format.)