Federal Tax Research Articles

United States: highlights of legal and tax differences of statutory foundations and private foundations

Abstract The article approaches the analysis of foundations primarily from an entity classification and tax point of view. First, the authors address the various options how a foreign foundation can be classified under U.S. tax law. Subsequently, the authors take a closer look at U.S. statutory foundations, which now exist under the laws of New Hampshire and Wyoming. In a third section, they explain the concept of a private foundation, which under U.S. federal tax law refers to a tax-exempt charitable organization. These private foundations are compared with statutory foundations with regard to their legal and tax law differences. The authors come to the conclusion that the ability to tailor a statutory foundation to meet specific needs using an entity with legal personality is very likely its greatest attribute that founders find attractive.

Work Hours & Income Tax Cuts

We investigate how income tax reductions affect work hours. Our empirical strategy relies on the fact that, in states where taxpayers can deduct federal tax payments from state taxable income, federal tax changes are dampened. We study 2003 tax reforms (JGTRRA) that dramatically reduced federal tax rates on dividends and capital gains, and moderately reduced rates on ordinary income. Difference-in-Difference analysis indicates that work hours decreased most among high income and wealthy taxpayers who were most directly affected by the tax reductions. The decrease in hours was larger for residents of states in which the effective tax reductions were larger. Conversely, we find possible evidence that larger ordinary income tax rate reductions in the 1980s, accompanied by effective tax increases on capital gains, had the opposite effect and induced an increase in work hours. These results suggest that the effect of tax reductions may depend on the type of income targeted.

Menstrual Activism, Insider-Outsider Alliances and Agenda-Setting: An Analysis of the Campaign to End the “Tampon Tax” in Canada

ABSTRACT The article examines the role of insider-outsider alliances and framing strategies in the campaign to end the “tampon tax” in Canada. Drawing on Kingdon’s Multiple Stream Framework (MSF) and feminist policy studies, the study aims to explain how and why efforts to remove the federal sales tax on menstrual products succeeded in 2015 when previous attempts had failed. By mapping developments in the problem, policy and politics streams, the study shows how outside activists worked with political insiders to take advantage of emerging opportunities in the broader political and policy systems, successfully moving the issue of the tampon tax onto the government’s agenda. The article concludes with suggestions for future research in feminist policy studies and menstruation studies.

Особый режим налогообложения российских ИТ-компаний: от выбора преференций до налогового маневра в отрасли

IT industry is noticeably distinguished by the tax support provided to it in the Russian economy. Nowadays software companies are treated as main contributors to national technological breakthrough being one of the main priorities of federal tax policy. Tax maneuver of 2021 significantly changed well-known tax rules, but some of novelties became a logical development of previously implemented measures. We systematize them by following our classification that introduces three main phases, all of which provided a qualitative update of the previous taxation framework, and for analysis consider particular reliefs as a unified, specific tax regime integrated in the general taxation system. The purpose of the article is to identify priorities and evaluate effectiveness of mechanisms designed to stimulate IT companies, including a preliminary assessment of valid perimeter and performance of the maneuver. Obtained results indicate that the tax regime initially given to software business had a bad design, an extremely narrow scope of beneficiaries and, due to this, a little effect on the IT industry; modernization of that design with the revision of basics was necessary at least in order to stop the decline of IT industry in the part of small companies. However, the main trend of recent tax policy demonstrates a strengthening of sustainable business with comparative fall of competitiveness of beginning entrepreneurs. In sum, the tax maneuver has a positive economic impact but covers, according to our estimates, less than 20% of IT companies.

ОЦЕНКА ВОЗДЕЙСТВИЯ ПЕНСИОННОЙ РЕФОРМЫ НА УРОВЕНЬ БЛАГОСОСТОЯНИЯ НАСЕЛЕНИЯ

In connection with the strengthening of payment discipline, the President of the Russian Federation decided to transfer the right to administer insurance premiums from extra-budgetary funds to the Federal Tax Service. This decision led to drastic changes in the system of legislation on insurance premiums. All these problems have become significantly relevant in the light of the change in the retirement age: for men – at 65, for women – at 60. Of course, at the same time, a large number of benefits and changes are provided that do not relate specifically to the increase, for example, an increase in pension payments by 1 thousand rubles. per month, However, most of the questions arecaused by the problems of realizing private interests, achieving world standards of a decent life for pensioners. In connection with the above, the problem of pension reform in the Russian Federation becomes particularly relevant. The relevance of the study of the impact of raising the retirement age on the level of poverty lies in the fact that to date no single mechanism and a single methodology has been adopted to determine the causes of the increase in poverty of the population. The article describes the author's application of statistical data, correlation and regression analysis to consider the etymology of poverty, the essence of pension reform and to assess the impact of changes in retirement age on the level of wealth of the population.

The Initial Cost of a Construction in Tax Accounting: Fiscal Uncertainty and a Mechanism for its Elimination.

The problem of the lack of legislative certainty regarding the formation of the initial cost of a construction object in tax accounting made it possible to identify the purpose of the article - the analysis of fiscal uncertainty regarding the formation of the initial cost of a construction object and the search for a mechanism to eliminate it. Achieving this goal required solving a number of tasks, including: analysis of existing rules and approaches to determining the initial cost of a construction object in tax accounting; identification of tax risks of uncertainty of including costs in the initial cost of a construction object for construction companies; development of a methodical approach to determining the initial cost of a construction object. The object of scientific work is a set of socio-economic relations that arise in the process of applying tax legislation on tax accounting in construction. The subject of the study is the initial cost of a construction object in tax accounting. The novelty of the work lies in identifying the problematic aspects of the current approaches to determining the initial cost of a construction object in tax accounting, as well as in proposing measures to eliminate them. The main conclusions of the study can be considered as follows. There is no direct relationship between the types of construction costs that form the initial cost and the construction object. Three categories of costs for construction companies have been identified in terms of inclusion in the initial cost of a construction project: those that do not cause uncertainty, that are controversial, and that are not reflected in the clarifications of the authorities. It is proposed to create an electronic service of the Federal Tax Service of the Russian Federation, containing three subsections (analytical tools, methodological tools, consulting services). The service will significantly reduce the degree of fiscal uncertainty in determining the initial cost of a construction project for construction companies.

The Effect of Value-Added Tax on the Economy of the United Arab Emirates

The value-added tax is considered modern, as it is a major source of government resources, as the economies of developed countries in Europe and the economies of Latin American countries depend heavily on it, and thus it is a pivotal element of the tax system for both developing and transforming economies, where modern methods in tax legislation tend to Towards transferring the tax burden from the sectors of wealth production to place it in the sectors of their use, i.e. reducing taxes on income to increasing spending. The tax is applied to most transactions made on goods and services, except for the exceptions approved by the Federal Tax Authority, and the burden is borne by the consumer. Therefore, a slight increase in the cost of living can be expected, and this varies according to the lifestyle of individuals and their spending behavior. Not all companies will be required to register for the tax, only those whose revenue exceeds the revenue threshold. The study made the following recommendations: Preparing sufficient human resources in order to carry out the burdens of implementing the value-added tax and its calculations. And the opening of accounting institutes and university departments related to accounting and tax principles to localize these professions. The Federal Authority has opened offices for it or permanent branches in government places such as local economic departments known by traders to provide its advisory services directly and personally, in order to support small projects and avoid fines.

The Confusing World of Cryptocurrency and Tax Compliance Issues

Subtitle A, of the Internal Revenue Code (IRC), contains regulatory provisions regarding the federal taxes imposed on the income of both individuals and corporations. The IRC guidance is intended to provide a determination of all income that must be reported on tax returns and potentially could become subject to an income tax. A new form of currency, known as cryptocurrency appeared on mainstream trading platforms beginning in 2009. Bitcoin initially was the most widely recognized digital currency but other virtual currency versions soon followed. Initially, taxpayers mistakenly believed that cryptocurrency transactions were not subject to Subtitle A of the IRC. Therefore, crypto transactions were assumed to be non-taxable and non-reportable for tax purposes. However, within a few years of the introduction of Bitcoin into the US economic system, the Internal Revenue Service (IRS) introduced tax guidance pertaining to cryptocurrency transactions. In 2014, the IRS responded with Notice 2014-21 as the popularity of Bitcoin grew exponentially. The IRC guidance stated that cryptocurrency must be treated as property for federal tax purposes. The tax implication of the IRS guidance was that cryptocurrency transactions would result in either a gain or loss for tax purposes on Schedule D. This guidance resulted in a recognition that all cryptocurrency transactions would be subject to federal income tax.

Unified tax payment: main features

The article is devoted to the peculiarities of the introduction in the Russian Federation of a new procedure for paying mandatory payments to the budget by organizations and individual entrepreneurs — the features of the introduction of a unified tax payment were investigated. The Federal Law 29.11.2021 № 379-FZ “On Amendments to Part One of the Tax Code of the Russian Federation” was analyzed, which introduces the concept of “single tax payment” and makes changes for business entities in the issue of transferring tax payments. The terms of transition to this payment, the sequence and features of the set-off of funds for various taxes, as well as the possibility of returning funds with excessive transfer of funds, are disclosed. Examples of distribution of unified tax payments for various taxes and procedure for sending mandatory notifications to the inspectorate of the Federal Tax Service are given.

As the Water Grinds the Stone: Comparison of Represented and Self-represented Appellant Populations in the Federal Court of Appeal

This article reports a quantitative and statistically reliable population investigation of 552 Federal Court of Appeal proceedings that were appeals by represented and self-represented appellants who, in 2016 or 2017, appealed decisions of the Federal Court or Tax Court of Canada. Appeals by the Crown, non-Crown represented appellants, and self-represented appellants exhibited markedly different frequencies at which appeals were granted, and patterns for how appeals were terminated. Nearly half of Crown appeals were granted, but less than one in twenty self-represented appellants had any degree of success. While 70% of appeals conducted by lawyers completed the appeal process, less than 40% of self-represented appellant proceedings resulted in a full appeal panel hearing. Incomplete appeals by self-represented appellants usually terminated prior to the appeal record stage, and typically were either abandoned or discontinued. The time required to complete appeals for represented and self-represented appellants is similar. The high observed frequency of problematic litigation records for self-represented appellants supports the hypothesis that a “Distillation Effect” is concentrating abusive litigants in appellate forums.
 High resolution investigation of self-represented appellant subgroups revealed differences within the overall self-represented appellant population. Self-represented appellants emerging from the Federal Court and Tax Court of Canada are different populations. The former were much more likely to have an abusive litigation history, while the latter voluntarily discontinued appeals, and were never subject to Federal Court of Appeal vexatious litigant management steps. Self-represented appellant proceedings that terminated prematurely or that were conducted by persons who are subject to court access restrictions had significantly more filed documents and docket records. Litigation management steps did not reduce the Registry and Court workload resulting from self-represented appellants subject to court access restrictions. These observations challenge modelling self-represented litigants as a single population with uniform characteristics.

Democracy Avoidance in Tax Lawmaking

The Tax Cuts and Jobs Act was the most significant tax law in more than three decades, but the strategy for getting it enacted included a variety of maneuvers to avoid public scrutiny. As a result, many taxpayers did not know how they would be affected until they filed their own tax returns more than a year later. This Article identifies this lack of transparency as part of a persistent pathology of avoiding and constraining democratic inputs and responsiveness in U.S. federal tax lawmaking. Indeed, some scholars and policymakers have sought to channel tax lawmaking away from democratically grounded decisions and towards prescribed outcomes, justifying these moves with strands of public choice theory that are expressly critical of democratic decision making. I critique this democracy avoidance approach to tax lawmaking, and make the case that tax law should be a product of mechanisms that provide greater transparency, accountability and responsiveness to advance democratic legitimacy.
 I propose four reforms to tax lawmaking in the U.S. Congress to make resulting tax laws more democratically legitimate. One proposal is to require Congress to consider (and publicize) precisely how a proposed change in tax law is expected to affect different typical taxpayers, including taxpayers from each congressional district. This would allow actual taxpayers observing the lawmaking process to anticipate their treatment under a proposed law and in turn demand greater responsiveness to their real interests from their representatives. Other proposals build on this approach, calling for transparency as to the reasons why legislators support particular provisions and a radical—but, I argue, entirely achievable—reworking of the types of analysis produced in the federal tax legislative process for consumption by non-experts.

U.S. Federal Income Taxation of U.S. Branches of Foreign Banks: Selected Issues and Perspectives

An earlier version of this article was presented to the Tax Club in New York in December 1993.The title of this article notwithstanding, the United States does not in fact tax the U.S. branches of foreign banks; branches are not regarded as distinct entities for most federal income tax purposes. Rather, the United States taxes foreign corporations (including banks) that are engaged in a trade or business within the United States on taxable income that is effectively connected with the conduct of that U.S. trade or business.But the story is not so simple. Various provisions of the Code and Regulations-including especially Regulations section 1.882-5, providing for the determination of the deductible interest expense of a foreign bank attributable to its U.S. trade or business, the branch profits tax, and the branch level interest tax-treat U.S. branches of foreign banks as separate entities, to one degree or another. Also, most income tax treaties provide that there should be attributed to a U.S. branch (a permanent establishment) the business profits that it might be expected to earn if it were a distinct and separate entity.Moreover, in recent years, the nature of international banking has evolved considerably. Many banks now actively trade and deal in foreign currencies; in interest rate and foreign currency forward and futures contracts, options, and swaps; and in various equity- and commodity-derivative products, as well as in securities. These activities have resulted in a tremendous expansion of the volume and type of transactions involving multiple branches of these banks, both in providing financial products to customers and in hedging the risks assumed by the banks. The involvement of multiple branches in these transactions takes a variety of forms, including transactions between branches (such as swaps, sales of property, loans, and forward contracts) and joint efforts to provide products to customers. These developments have placed considerable pressure on the concepts that traditionally have been applied in determining the amount of a foreign bank's taxable income for U.S. federal income tax purposes, including the extent to which a branch should be disregarded as a separate entity.

Should We Give Away the Annual Exclusion?

United States gift tax law imposes on the transferor a tax at rates of up to fifty percent on property transfers made during the transferor's lifetime for less than full and adequate consideration in money or money's worth. The tax is calculated on the basis of the fair market value of the property transferred, determined as of the time of the gift. The gift tax is a supplement to the federal estate tax, which is imposed on transfers of property at death at rates up to fifty percent. If there were no gift tax, the estate tax could be substantially avoided by making lifetime gifts. Neither lifetime gifts nor testamentary bequests of property are subject to income tax in the hands of the transferor or the transferee.There are several exceptions to the gift tax, one of which is the annual exclusion. The annual exclusion permits an individual to make gifts of up to $10,000 a year to any number of persons without incurring any gift tax. The annual exclusion is available only if the donee is given a present right of possession or enjoyment as to the value with respect to which the exclusion is claimed. As is demonstrated below, the annual exclusion can be used, both directly and indirectly, to permit very large amounts to escape the federal transfer tax system. Yet, at the same time, the annual exclusion is not large enough to protect some types of transfers that should be protected from gift tax. In addition, as it is currently designed and used, the annual exclusion injects vertical inequity into the transfer tax system and contributes to horizontal inequity that exists in the system.

Lingering Partnership Classification Issues (Just When You Thought It Was Safe To Go Back Into the Water)

This article discusses the federal income tax law relating to the classification of entities as partnerships for federal income tax purposes, with a focus on the practical problems that lawyers often encounter in distinguishing partnerships from associations under the four factor test set forth in Regulations section 301.7701-2. Partnership classification issues arise with respect to both general and limited partnerships formed under state partnership statutes and certain partnership-like foreign entities. Moreover, the recent proliferation of other types of entities seeking partnership classification, such as "master limited partnerships," limited liability companies, business trusts, common law trusts and grantor trusts with partnership "fallback" positions, has focused renewed attention on those issues and raised still more classification issues. The Internal Revenue Service's recent published rulings have addressed some of these issues, but a number of issues remain.

Assumption of Contingent Liabilities on Sale of a Business

This article discusses the federal income tax consequences of a buyer's assumption of contingent liabilities in a taxable sale of the assets of a trade or business. Although judicial precedent remains scarce, several articles written over the past few years have considered this issue. Nevertheless, the matter remains unsettled both as to the theoretically correct result and, perhaps, more importantly, as to what is required to achieve a workable solution.Since the Treasury apparently considers the treatment of contingent liabilities to be ripe for a regulation project, my hope here is to clarify the issues and to present the options in a comprehensive and orderly manner so as to facilitate a decision. Although I do not describe current law in detail, I indicate where the possible approaches might differ from existing precedent and, therefore, to what extent it might be necessary to seek legislation. A solution is made more difficult, in some circumstances, by the reintroduction of a substantial difference between the rates applicable to ordinary income and capital gains.

Reassessing Sales and Liquidations of Partnership Interests after the Omnibus Budget Reconciliation Act of 1993

Subchapter K of the Internal Revenue Code has historically afforded considerable flexibility in determining the federal income tax consequences of the retirement or withdrawal of a partner from a partnership. In general, the departure of a partner can be structured either as a purchase of the retiring partner's interest by the remaining partners or as a liquidation of the partner's interest by the partnership. Although these two transactions are essentially similar in economic consequences, they have been governed by two separate sets of provisions in Subchapter K, often resulting in significantly different tax consequences. The sale of a partner's interest is governed primarily by sections 741 and 751(a), whereas the liquidation of a partner's interest by the partnership is governed primarily by section 736.Under sections 741 and 751(a), the sale of a partnership interest generates capital gain or loss to the selling partner, except to the extent that he or she is being compensated for an interest in certain ordinary income items of the partnership-namely, its unrealized receivables and substantially appreciated inventory. The purchasing partners receive few, if any, immediate tax benefits. Under section 736, by contrast, the liquidation of a partner's interest by a partnership could result in significant immediate tax benefits to the remaining partners. Specifically, under section 736(a), certain payments for a retiring partner's share of the partnership's good will and unrealized receivables would give rise to an immediate deduction or its equivalent for the remaining partners and usually result in ordinary income to the retiring partner. Payments for the partner's share of other partnership property would be treated under section 736(b) as a distribution from the partnership to the partner, resulting in no deduction for the remaining partners and, for the most part, generating capital gain or loss for the retiring partner.

Demystifying LIFO: Towards Simplification of Inflation-Adjusted Inventory Valuation

The last in, first out (LIFO) method of inventory accounting has been available to taxpayers for more than 50 years. The basic concept of LIFO is relatively simple: it reverses the normal assumed flow of costs (first-in, first-out or FIFO) by matching the costs of the latest purchases or production against current-year sales. During periods of rising costs, LIFO generally results in lower taxable income than the FIFO method because current-year increases in inventory costs are charged to cost of goods sold, rather than accumulated in ending inventory. Thus, LIFO provides protection from the effects on taxable income of rising inventory costs (hereinafter "inflation").Like many other aspects of federal income tax law, the practical implementation of LIFO has often proved to be a complex task. Particularly difficult issues have arisen over the fundamental concept of measuring costs on a comparable basis over time for inventory affected by stylistic, technological, or other changes. The tax law currently lacks objective, determinate standards for ascertaining the proper LIFO cost of inventory items that change. Current standards rely on concepts of similarity, involving fine distinctions that are difficult to apply consistently and resulting in costly and burdensome controversies, with little promise of more determinate results. Moreover, efforts to simplify LIFO have not freed taxpayers from mystifying complexity in this area, as the available simplified methods are far from simple and are not viable alternatives for many taxpayers.

"Tax reconstruction" in tax legal relations.

The relevance of annual legal changes and the novelty of the application of such norms and definitions in tax legal relations, which are absent in law, predetermines the need to study such a scientific phenomenon as "tax reconstruction". The purpose of the study is regulators that allow protecting the interests of taxpayers by identifying the limits of the impact of public law on the subjects of such legal relations. The methodology was the application of system analysis and synthesis, induction and deduction, a conceptual approach to achieving a reasonable balance of public and private interests in tax relations. The scope of application is the methodology for protecting the interests and rights of taxpayers in tax legal relations, despite the fact that regulators for the protection of public interest are defined. The results will make it possible to apply regulators to protect the interests of taxpayers during in-house and on-site tax audits, practically clarify and understand the application of local documents of the Federal Tax Service of Russia, develop legal steps in the course of protecting rights and interests during control measures. Recommendations and proposals drawn up in the form of a conclusion will allow taxpayers – legal entities in particular, to develop a strategy and a line of legal protection in the course of conducting in-house and on-site tax audits against them. We believe it is correct to apply in legal regulation not only the norms but also the principles of law, both general and sectoral.

Modern trends in the development of small businesses taxing

The article is devoted to assessing the role and determining the directions of improving the efficiency of the tax administration system in order to develop the activities of small and medium-sized businesses and the development of individual entrepreneurial initiative in the Russian Federation as priorities of the national economy. The study includes two parts: the first is devoted to the identification of modern trends in the tax administration of small businesses, the second - the directions of their development. The research methodology includes general scientific and private scientific methods of cognition, including analysis and synthesis, induction and deduction, method of comparison, generalization, analysis of dynamic series, graphical method of data representation and visualization. The scientific novelty of the study consists in the comprehensive development of proposals to improve a number of mechanisms and tools for tax administration of small businesses, ensuring the effective implementation of state policy in the field of small and medium-sized business development, contributing to the activation of individual entrepreneurial initiative. The scope of application of the research' results: The Government of the Russian Federation, the Ministry of Finance of the Russian Federation and the Federal Tax Service, the Ministry of Economic Development of the Russian Federation, other interested public authorities and management bodies can use the results of the study in determining ways to develop tax administration in the Russian Federation in terms of stimulating the activities of small and medium-sized businesses.

Benefits and Burdens of Subchapter S in a Check-the-Box World

The Treasury's issuance of the check-the-box regulations (CTB) in late 1996 has intensified debate about whether there should be a single federal income tax regime for all private business firms (PBFs), including passthrough entities, whose equity interests are not publicly traded. This revived concern for parity in tax treatment among the various forms of passthrough entities arose because the CTB regulations generally allow a business entity with two or more owners to be taxed as a partnership for federal income tax purposes, regardless of its organizational structure and corporate-like characteristics under state law. Before the CTB regulations, unincorporated entities were required to maintain at least two noncorporate characteristics in order to avoid the double tax regime of Subchapter C. Revenue Ruling 88-76, which permitted limited liability companies (LLCs) to achieve partnership tax status under the former regulations, inspired state legislatures to jump on the LLC bandwagon by adopting LLC statutes and amending existing LLC statutes to conform to liberalized federal income and transfer tax interpretations. All states now have limited liability company laws, and many have added the limited liability partnership (LLP), which is a hybrid form of organizational structure, between the LLC and the limited partnership (LP), intended primarily for professional service organizations. The primary benefit of the LLP is that it insulates partner-members in professional service organizations from vicarious liability for malpractice errors and omissions.