Federal Tax Returns Research Articles

November 2022 Placement Ads

November 2022 Placement Ads

Relighting the Charitable Deduction: A Proposed Public Benefit Exception

"Let no man’s ghost say his training ever let him down."Throughout the country, firefighters risk their lives on a daily basis to keep the public safe. It is, therefore, imperative they receive the best possible training. One invaluable training method is live burn training, in which a structure is set on fire providing firefighters with “a level of realism that is unsurpassed.” Fire departments, both career and volunteer, as well as numerous municipal departments conduct various training exercises, including roof ventilation, domestic violence exercises, simulated meth lab explosions, room-to-room fire practice, firefighter survival techniques, arson investigation training, rescue techniques, and/or firefighter down techniques, through the donation of homes that are finally burned to the ground as part of live burn training.For over thirty-five years, relying on a United States Tax Court case, many believed a taxpayer could claim a charitable deduction for the donation of the taxpayer’s home to the local municipality for live burn training, while still retaining ownership of the underlying land (live burn donation). In 2004, however, the Internal Revenue Service (the Service) established a task force, charged with the sole purpose of extinguishing live burn donations, and requested that local municipalities not cooperate with taxpayers in executing the requisite paperwork in claiming a charitable deduction for a live burn donation. In 2009, the deductibility of a live burn donation was thrust into the public spotlight as the media publicized the Service’s attack on the charitable deduction claimed by Kirk Herbstreit, an ESPN commentator and former Ohio State quarterback, for the donation of his home to the local fire department. Soon after, in 2010, the live burn donation was back in the headlines as it was exposed that Oregon gubernatorial candidate, Chris Dudley, claimed a deduction on his 2004 federal income tax return for a live burn donation so he could build a new residence on the land. Consequently, in recent years, there has been much confusion and debate on whether live burn donations qualify for charitable deductions.

Summaries of Articles

Summaries of Articles

Implications of a Mortgage Interest Credit for the United States

The US mortgage interest deduction (MID) allows homeowners to deduct the interest paid on their mortgages from their federal tax returns, provided that they itemize deductions. Since the benefit depends on a taxpayer’s marginal tax rate, which increases with income, the MID is an “upside-down subsidy” that becomes more valuable for higher-income homeowners. I analyze the implications of converting the US MID to a mortgage interest credit (MIC) and evaluate the effects on federal revenue and the distribution of income. I argue that a MIC could be better targeted at low- and middle-income taxpayers on the margin of homeownership while also being more progressive and less expensive than the current MID.

The Evolving Distribution of Giving in the United States

I compute the share of U.S. household giving accounted for by the American tax units donating the largest amounts over the 1960–2012 period from repeated cross-sectional samples of federal income tax returns. The share of donations accounted for by a minority of top donors rose sharply over this period. Donor concentration has risen both because the largest gifts have grown larger and because more households give little or nothing in any given year.

Uncivil Obedience

Scholars and artists have long been interested in socially engaged artworks, particularly those involving civil disobedience. But what of the opposite approach? What of radical adherence? In the 1970s, California-based artist Lowell Darling realized a series of creative endeavors exploiting uncivil obedience, characterized by a conspicuous and hyperbolic compliance with established laws, rules, and mandates. Following the disallowance of proposed deductions to his 1969 federal income tax return, Darling—by way of projects such as the fictional Fat City School of Finds Arts—deconstructed the so-called hobby loss rule of the U.S. Tax Code by rigorously and ironically fulfilling those factors said to indicate a profit-seeking intent. In 1978, Darling mined the intricacies of electioneering norms and campaign finance by staging an insincere run for governor of California. In these projects, Darling mobilized a kind of legal medium for creative expression, manifesting a mode of art-making that departed from expectations about how art and law might interact and intersect within art practice.

Comment on “The impact of the tax cut and jobs act on the spatial distribution of high productivity households and economic welfare”, by Daniele Coen-Pirani and Holger Sieg

As part of the Tax Cut and Jobs Act (TCJA) of 2017, a $10,000 cap on state and local tax deductions (SALT) was imposed for federal tax returns. The authors first show that this increased the relative tax burden of the highest earners in high tax states by 3%. Motivated by this fact, the authors develop a spatial equilibrium model where individuals choose to live in “superstar” cities, which offer higher chances of becoming a highly productive worker but have higher taxes, or ordinary cities, where it is less likely to become a high type worker but taxes are lower. In their model, one’s income profile is determined when young. Therefore, there is an incentive to live in the superstar city when young, to increase the chance of becoming a high type. After one's income profile is fixed, the high types have an incentive to move to the ordinary city due to the tax differentials. They calibrate this model to understand the effects of the SALT deduction cap as part of the TCJA. The results depend on the extent of the endogeneity of the productivity advantage in the superstar city.

PASS-THROUGH ENTITY RESPONSES TO PREFERENTIAL TAX RATES

We consider the question of how pass-through businesses respond to differentials in tax treatment across sources of income. In particular, we use federal tax return data from partnerships and S cor...

The Underground Economy in the U.S.A.: Preliminary New Evidence on the Impact of Income Tax Rates (and Other Factors) on Aggregate Tax Evasion 1975-2008

This empirical study seeks to identify determinants of the underground economy in the U.S. in the form of aggregate federal personal income tax evasion over the period 1975-2008, with a specific focus upon the impact of higher federal income tax rates on tax evasion. In this study, we use the most recent data available on aggregate personal income tax evasion, data that are derived from the General Currency Ratio Model and measured in the form of the ratio of unreported AGI to reported AGI. Most other studies of federal income tax evasion for the U.S. do not use data this current. It is found that the impact of increases in the federal income tax rate on aggregate personal income tax evasion may, on balance, be ambiguous, possibly suggesting that the income effect is negative and outweighs the positive substitution effect for the representative taxpayer. It is also found that the degree of aggregate personal income tax evasion may be an increasing function of the percentage of federal personal income tax returns characterized by itemized deductions and a decreasing function of the Tax Reform Act of 1986 (during the first two years of implementation), the ratio of the tax free interest rate yield on high grade municipals to the interest rate yield on ten year Treasury notes, and higher audit rates of filed federal income tax returns (as a measure of risk from tax evasion) by IRS personnel. Finally, unpopular wars may provide a secondary benefit for and therefore act as an inducement for greater tax evasion.

Getting Around the State and Local Tax Deduction Limit

The 2017 tax bill put a cap of $10,000 on the deduction for state and local taxes, while retaining existing rules for charitable donations. It has been suggested that states could enact 100% state tax credits for people who donate money to the state, so taxpayers could donate instead of pay taxes and thus still be able to deduct as much as they want on their federal tax returns. I disagree, and argue that under the past and present Tax Code these donations would and should be treated as quid pro quo items, since the recipient transfers something of value to the donor.

Federal Income Tax Treatment of Charitable Contributions Entitling Donor to a State Tax Credit

This paper summarizes the current federal income tax treatment of charitable contributions where the gift entitles the donor to a state tax credit. Such credits are very common and are used by the states to encourage private donations to a wide range of activities, including natural resource preservation through conservation easements, private school tuition scholarship programs, financial aid for college-bound children from low-income households, shelters for victims of domestic violence, and numerous other state-supported programs. Under these programs, taxpayers receive tax credits for donations to governments, government-created funds, and nonprofits. A central federal income tax question raised by these donations is whether the donor must reduce the amount of the charitable contribution deduction claimed on her federal income tax return by the value of state tax benefits generated by the gift. Under current law, expressed through both court opinions and rulings from the Internal Revenue Service, the amount of the donor’s charitable contribution deduction is not reduced by the value of state tax benefits. The effect of this Deduction is that a taxpayer can reduce her state tax liability by making a charitable contribution that is deductible on her federal income tax return. In a tax system where both charitable contributions and state/local taxes are deductible, the ability to reduce state tax liabilities via charitable contributions confers no particular federal tax advantage. However, in a tax system where charitable contributions are deductible but state/local taxes are not, it may be possible for states to provide their residents a means of preserving the effects of a state/local tax deduction, at least in part, by granting a charitable tax credit for federally deductible gifts, including gifts to the state or one of its political subdivisions. In light of recent federal legislation further limiting the deductibility of state and local taxes, states may expand their use of charitable tax credits in this manner, focusing new attention on the legal underpinnings of the Full Deduction Rule. The Full Deduction Rule has been applied to credits that completely offset the pre-tax cost of the contribution. In most cases, however, the state credits offset less than 100% of the cost. We believe that, at least in this latter and more typical set of cases, the Full Deduction Rule represents a correct and long-standing trans-substantive principle of federal tax law. According to judicial and administrative pronouncements issued over several decades, nonrefundable state tax credits are treated as a reduction or potential reduction of the credit recipient’s state tax liability rather than as a receipt of money, property, contribution to capital, or other item of gross income. The Full Deduction Rule is also supported by a host of policy considerations, including federal respect for state initiatives and allocation of tax liabilities, and near-insuperable administrative burdens posed by alternative rules. It is possible to devise alternatives to the Full Deduction Rule that would require donors to reduce the amount of their charitable contribution deductions by some or all of the federal, state, or local tax benefits generated by making a gift. Whether those alternatives could be accomplished administratively or would require legislation depends on the details of any such proposal. We believe that Congress is best situated to balance the many competing interests that changes to current law would necessarily implicate. We also caution Congress that a legislative override of the Full Deduction Rule would raise significant administrability concerns and would implicate important federalism values. Congress should tread carefully if it seeks to alter the Full Deduction Rule by statute.

Trends and Levels of Income Inequality in Wisconsin, 1919-1941: The Effect of Using Different Data Sources

Long term measures of income inequality must grapple with the challenges presented by incomplete historical records. In this paper we examine one such problem affecting the quality of federal income tax return data in the period between the two World Wars, which form the basis for the widely used Piketty-Saez (2003) inequality series for the United States. To test the accuracy of IRS records in estimating historical top income shares, we compare them to a parallel series of independently tabulated state income tax returns in Delaware and Wisconsin, two states with unusually thorough records from this period. These state data sources offer a combination of advantages over the IRS including broader tax base coverage, more thorough income bracket records, and lower and more stable tax rates over time. By comparing estimates to federal IRS data, we find that state tax records yield highly different levels and patterns for the evolution of top income concentration. These findings attest to the high sensitivity of modern distributional estimation techniques to issues of quality with their underlying data sources, and suggest that the federal tabulations as found in Piketty-Saez systematically overstate the concentration of top incomes during the interwar period.

Un-Fortunate Sons: Effects of the Vietnam Draft Lottery on the Next Generation’s Labor Market

We examine whether the considerable shock generated by the Vietnam draft lottery affected the next generation’s labor market. Using the universe of US federal tax returns, we link fathers from draft cohorts to their sons’ adult outcomes and find that sons of fathers randomly called by the draft have lower earnings and are more likely to volunteer for military service. Our results demonstrate that malleable aspects of a parent’s life course can influence children’s labor market outcomes and provide sound evidence that policies that only directly alter the circumstances of one generation can have important long-run effects on the next. (JEL J22, J31, J45)

Un-Fortunate Sons: Effects of the Vietnam Draft Lottery on the Next Generation's Labor Market

Can shocks to one generation propagate to the next? To answer this question, we study how the Vietnam draft lottery affected the next generation's labor market. Using the universe of federal tax returns, we link fathers from draft cohorts to their sons' outcomes and find that sons of fathers randomly called by the draft 1) have lower earnings and labor force participation than their peers, and 2) are more likely to volunteer for military service. These findings highlight the strong role family plays in human capital development and occupational choice. More generally, our results provide sound evidence that malleable aspects of a parent's life course can influence children's labor market outcomes and that policies that only directly alter the circumstances of one generation can have important long-run effects on the next.

Unintended Consequences of Linking Tax Return Disclosures to Financial Reporting for Income Taxes: Evidence from Schedule UTP

ABSTRACT This study exploits the implementation of IRS Schedule UTP to examine how linking tax return disclosures to financial reporting for income taxes affects firms' reporting decisions. Using confidential tax return data and public financial statement data, I find that after imposition of Schedule UTP reporting requirements, firms report lower financial reporting reserves for uncertain income tax positions, but do not claim fewer income tax benefits on their federal tax returns. The reduction in reserves is concentrated among multinational firms and firms with larger reserves prior to Schedule UTP. These findings suggest that some firms changed their financial reporting for uncertain tax positions to avoid Schedule UTP reporting requirements without changing the underlying positions. In contrast with prior studies, this evidence represents a permanent, rather than a temporary, tax-induced reporting change. My results imply that linking tax return disclosures to financial reporting can have unintended effects on firms' reporting decisions.

Effects of a Tax‐Time Savings Intervention on Use of Alternative Financial Services among Lower‐Income Households

Alternative financial services (AFS) such as check cashing and payday loans may help unbanked households meet transaction and credit needs, yet often at a very high price. Saving tax refunds can help low‐ and moderate‐income (LMI) households build emergency savings as a way to reduce dependence on AFS and cope effectively with irregular cash flows and financial shocks. This study examined the impact on AFS use of message‐based interventions encouraging LMI households to save their refunds when they electronically filed their federal income tax returns. We found that 3 out of 18 interventions resulted in statistically significant reductions in credit‐related AFS use with small effect sizes. None of the interventions resulted in reduced transaction‐related AFS use. Other factors—especially prior AFS use and financial shocks—were strong predictors of AFS. Financially vulnerable households may need additional opportunities and protections to reduce dependence on AFS.

Un-Fortunate Sons: Effects of the Vietnam Draft Lottery on the Next Generation's Labor Market

We study how randomized variation from the Vietnam draft lottery affects the next generation’s labor market. Using the universe of federal tax returns, we link fathers from draft cohorts to their sons and offer two primary findings. First, sons of men called by the lottery have lower earnings and labor force participation than their peers. Second, they are more likely to volunteer for military service themselves. Similar but smaller effects are uncovered for daughters. Our findings demonstrate that manipulating parental circumstances can alter children’s outcomes and, more specifically, are consistent with two separately operating channels: (1) parental inputs as important determinants of human capital development and (2) intergenerational transmission of occupation.

Tax Deductibility of Donations to Tax Exempt Organizations: A Tax Treatment Guide for Each IRC 501(c) Subsection

This guide is meant to be a user-friendly summary of the tax deductibility of individual donations to tax exempt organizations. It addresses each of twenty IRC 501(c) subsections. Students, taxpayers, and some practitioners assume that if an organization is tax exempt under a subsection of IRC 501(c), then individual donations to those organizations will be tax deductible on an individual’s federal income tax return. This is not always the case. Actual tax treatment excerpts from IRS Publication 557, Tax-Exempt Status for Your Organization, follow the summary guide.The Exhibit for this paper are available at the following URL: http://ssrn.com/abstract=2654773

Smoothing State Tax Revenues Over the Business Cycle: Gauging Fiscal Needs and Opportunities

The high degree of fiscal stress experienced by state governments in the 2001 and the 2007–2009 recessions has prompted renewed discussions of alternative approaches to stabilizing state finances over the business cycle. Prompted by evidence of increased state tax revenue cyclicality in the aggregate, this study explores state-specific patterns so as to inform policymakers in individual states. It finds that while elasticity levels continued to differ across states, most states experienced greater cyclical sensitivity in the 2000s than in the 1980s and 1990s. In addition, during the 2000s personal income tax receipts varied more over the business cycle than sales tax receipts in most states that imposed both forms of taxation. This trend represented a departure from the patterns of the prior two decades, when sales tax receipts were more cyclically sensitive than individual income tax receipts in the majority of states. Cross-section regressions reveal that the main source of variation in income tax elasticities across states during the 2000s was the cyclical sensitivity of their residents’ incomes as reflected on their federal income tax returns. By contrast, state-specific features such as the tax treatment of capital gains or the progressivity of tax rates did not account for significant differences in revenue elasticities across states. In addition, state departures from the federal definitions of adjusted gross income and taxable income, on the whole, did not contribute to increased revenue volatility over the business cycle. The findings are used to evaluate the efficacy of alternative measures that could be used to help stabilize state revenues, including reforms of state tax and stabilization trust structures.

The Underground Economy in the U.S.A: Preliminary New Evidence on the Impact of Income Tax Rates (and Other Factors)on Aggregate Tax Evasion, 1975-2008

This empirical study seeks to identify determinants of the underground economy in the U.S. in the form of aggregate federal personal income tax evasion over the period 1975-2008, with a specific focus upon the impact of higher federal income tax rates on tax evasion. In this study, we use the most recent data available on aggregate personal income tax evasion, data that are derived from the General Currency Ratio Model and measured in the form of the ratio of unreported AGI to reported AGI. Most other studies of federal income tax evasion for the U.S. do not use data this current. It is found that the impact of increases in the federal income tax rate on aggregate personal income tax evasion may, on balance, be ambiguous, possibly suggesting that the income effect is negative and outweighs the positive substitution effect for the representative taxpayer. It is also found that the degree of aggregate personal income tax evasion may be an increasing function of the percentage of federal personal income tax returns characterized by itemized deductions and a decreasing function of the Tax Reform Act of 1986 (during the first two years of implementation), the ratio of the tax free interest rate yield on high grade municipals to the interest rate yield on ten year Treasury notes, and higher audit rates of filed federal income tax returns (as a measure of risk from tax evasion) by IRS personnel. Finally, unpopular wars may provide a secondary benefit for and therefore act as an inducement for greater tax evasion. JEL Codes: G18, G28, H26 Keywords: tax evasion; substitution effect; income effect; incentives; disincentives