On October 17 and 18, 2013, BCLBE and Crowell & Moring LLP co-sponsored a two-day seminar entitled “Managing Tax Audits and Appeals.” The seminar was held at Le Meridien hotel in San Francisco, and featured Crowell & Moring attorneys as well as three esteemed guest speakers.
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[Editor’s Note: The following post is authored by Foley & Lardner LLP]
Yes. You do. That was easy. But perhaps we have gotten ahead of ourselves and we should start at the beginning of the story. While Section 409A is a tax provision, its genesis was the perceived abuse of deferred compensation arrangements by rapacious executives in the Enron and WorldCom debacles. Like the “golden parachute” rules of Section 280G, Section 409A is intended to work some good old-fashioned social engineering magic through the tax code. It was quite handy that these rules also made the IRS happy as Section 409A works in part by reigning in the ability of employees to “manipulate” or select the year in which they would have to recognize taxable income from various types of deferred compensation schemes. You see, the IRS does not like taxpayers to have any flexibility when it comes to the timing of recognition of income. Section 409A succeeded in achieving some of its narrow objectives but as is often the case, in ways that likely went well beyond the specific concerns that the statute was originally intended to address. The treatment of stock options under Section 409A is one of those unfortunate extensions. Regardless, we now have to live with these rules.
[Editor's Note: The following update is authored by Kirkland & Ellis LLP]
The Foreign Account Tax Compliance Act (FATCA), enacted in 2010, imposed burdensome federal income tax reporting and withholding obligations on many business enterprises (including private funds and their portfolio companies), intended to prevent U.S. citizens and residents from avoiding U.S. income tax by hiding ownership of U.S. assets overseas. Read the rest of this entry »
A recent article by Dan Amiram, Andrew M. Bauer, and Mary Margaret Frank examines the issue of corporate tax avoidance as a product of incentives. The authors suggest that “corporate tax avoidance by managers is driven by the alignment of their interest with shareholders.”* The tax role of the manager is made clear by studying the “effects of corporate tax avoidance on shareholders’ after-tax cash flows” in both classical tax systems and imputation tax systems. The authors conclude that there is higher corporate tax avoidance in classical tax systems if managerial and shareholder interests are closely aligned. Read the rest of this entry »
What is a tax loophole? According to a recent front page story in the New York Times, a loophole is simply an area of the tax code, which if changed, would increase government revenue. But isn’t a loophole more? Berkeley Law Tax Professor Mark Gergen thinks so.
The Times story attacked the way corporations are taxed on the stock options they issue as compensation to employees. It was part of the “But Nobody Pays That” series, which explored “efforts by businesses to lower their taxes and the debate over how to improve the tax system.” Generally, under Section 83(a) of the I.R.C., stock options are taxed when the employee exercises the option by purchasing stock. Once exercised, the employee pays taxes on the difference between the exercise price and the market price as if it were regular income. At the same time, pursuant to Section 83(h) of the I.R.C., the company then deducts as an expense the amount claimed as income by the employee, lowering its income tax liability. According to the article, this deduction loophole has allowed the likes of Google, Goldman Sachs and Apple to drastically reduce their tax liability. The article was not the first place this has been pointed out either. In July 2011, Senator Carl Levin (D-MI) attempted to end this deduction by introducing the “Ending Excessive Corporate Deductions for Stock Options Act.”
Let the Delegation Continue: Supreme Court Reaffirms Deference to Administrative Agencies in Regulatory “Interpretation” of Statutes
On January 11th the Supreme Court handed down its decision in Mayo v. U.S. The decision reaffirmed the Court’s use of the Chevron standard, under which government agencies are given broad authority to make any “reasonable interpretations” of statutes so long as Congress does not specifically and clearly address the issue in the relevant legislation. The decision is significant because lower courts had previously spliton whether the Treasury Department, in implementing the Internal Revenue Code (IRC), was subject to the more exacting standard found in National Muffler. Under the National Muffler standard, government agencies’ only had the latitude to make interpretations that “harmonize with the plain language of a statute, its origin, and its purpose.”
In Mayo v. U.S. the plaintiff, Mayo Foundation for Medical Education and Research, was challenging a Treasury Department regulation that would classify medical residents (individuals that have recently graduated from medical school and seek additional instruction in a specialization) as employees. The Treasury Department implemented this regulation pursuant to a statutepassed by Congress, which exempted from consideration as employees individuals whose “services performed in the employ of… a school, college, or university… if such service is performed by a student that is enrolled and regularly attending classes at [the school].” Dating back to 1951 the Treasury Department had exempted students (including medical residents) from being classified as employees of schools, colleges, and universities, if their work was “incident to and for the purpose of pursuing a course of study.” However in 2004 the Treasury Department passed a regulationthat eliminated this exemption for “students” that worked 40 hours per week or more. Utilizing the Chevron standard, the Court in Mayo concluded that it was reasonable for the Treasury Department to change course and consider individuals working 40 hours or more per week as not “regularly attending classes.”