US Tax Research Articles

Stiftung Case Resurfaces

Readers will recall the case of the foreign charity that was denied recognition of exemption by the IRS on the grounds of violation of the organizational and operational tests (Priv. Ltr. Rul. 201947020) (summarized in the February 2020 issue). The case is now before the US Tax Court (The Joachim Herz Stiftung v. Commissioner).

Responses of US-based Sikh Nonprofits to the Farmers’ Movement

The farmers’ movement has attracted the attention and support of Sikh diaspora communities. In this compilation, we illustrate some of the responses of four US-based Sikh nonprofits: the Jakara Movement, Sikh American Legal Defense and Education Fund (SALDEF), Sikh Coalition, and United Sikhs. All four are 501(c)(3) organizations under the US tax code. The material has been collected from the organizations’ websites and their email communications. During this period, these organizations have continued to pursue their other objectives and activities, including general support to the Sikh community for protection of civil rights, guidance on health and safety during the pandemic, and various community-building, educational and outreach efforts. Each organization has its own distinctive character, though they also share many of the same goals and foundational values. They typically act independently, but will also come together or promote each other when the situation demands.

Preference responsibility versus poverty reduction in the taxation of labor incomes

We study the tax schemes that maximize social welfare functions built on axioms of responsibility for one’s preferences (the requirement that the social welfare function should treat identically agents with the same wage, independently of their preferences) and poverty reduction. We find zero and negative marginal tax rates on low incomes at the optimum and bunching at the income level of the most hardworking minimum wage households. When preferences are iso-elastic, we derive the optimal tax formula, which we calibrate to the US economy. Our formula approximates the shape of the current US tax function for households with at least one child. This result suggests that a fairness-based approach, and these axioms in particular, can help close the gap between the recommendations of optimal tax theory and actual policies.

Оцінка міжнародної конкурентоспроможності системи оподаткування прибутку підприємств України

The article is devoted to assessing the international competitiveness of the corporate income tax system based on the approach of the US Tax Foundation, which develops International Tax Competitiveness Index of the corporate income tax (ICI) and takes into account the level of income tax rates, cost recovery, tax incentives and complexity of tax law. According to the analysis of the international ranking of OECD countries, Estonia, Latvia, Lithuania, and Hungary had the highest ICIs in 2019-2020. The main factors that have had a positive effect on their competitiveness are the low top marginal income tax rate, unlimited loss carryback and carryforward, no restrictions on the list of assets subject to depreciation, as well as the use of accelerated depreciation, which allows companies to compensate for a larger share of the initial value of assets, LIFO inventory or at least inventory by the weighted average cost method, no Patent Box; no tax credit for R&D, and low corporate income tax complexity. The calculation of the ICI for Ukraine, based on the approbation of the methodological approach of the Tax Foundation, found that in 2019-2020 Ukraine with a total score of 55.07 took 24th place out of 35 OECD countries. The author characterizes the main components of Ukrainian corporate income taxation in terms of their impact on international competitiveness; in addition, ways to increase ICI are substantiated.

Improving the Business Case for CCS in the Electric Power Generation Industry

Supporting new, high impact energy and environmentally friendly initiatives has been a regular and important component of US tax policy. A production tax credit (PTC) of up to 2.3 cents per kWh (now reduced) was available for electricity generated by wind. Solar photovoltaic projects receive a 30% investment tax credit (ITC). These tax credits, along with state-level renewable performance standards, have significantly increased investments in renewables and supported their growth in the electricity generation sector. A similar opportunity now exists for supporting accelerated installation of large-scale Carbon Capture and Storage (CCS) in the US electric power generation industry. Section 45Q of the US tax code represents a first, but still insufficient, step for covering the costs of using CCS with electric power generation. It provides a $50 per metric ton (mt) tax credit for captured CO2 stored in geological formations and a $35 per mt tax credit for captured CO2 used and stored with enhanced oil recovery. However, the 45Q tax credits contain limitations, including-- a rapidly approaching “commence construction” deadline, limited years for claiming the tax credit, a tax credit level insufficient for economically viable installation of CCS by natural gas-fueled power plants, and little support for first-of-a-kind (FOAK), higher CO2 capture rate facilities. In a previous paper (Esposito, et al., 2019), the authors illustrated the basic arithmetic for assessing the economic viability of CCS in the electric power generation industry with availability of the Section 45Q tax credits, including an extensive look at the business case for installing CCS by coal-fueled power plants. This paper discusses a series of modifications to the Section 45Q tax credit, as well as additional steps, that would improve the business case for installing CCS on natural gas-fueled power plants. The paper addresses the following topics: • Extending the Commence Construction Date for the Section 45Q Tax Credit. Given a fast-approaching deadline, the paper provides a series of arguments for extending the “commence construction” date for eligibility for the Section 45Q tax credit. • Increasing the Time Period for Eligibility for the Section 45Q Tax Credit. The paper examines how the business case for CCS would be improved by increasing the time of eligibility for the Section 45Q tax credit to 20 years from the current 12 years. • Increasing the Value of the Tax Credit for Natural Gas-Fueled Power Generation. The overall CO2 capture costs at a natural gas-fueled plant are about 60% as much as at an equivalent generation capacity coal-fueled power plant. However, the volume of CO2 produced from a natural gas-fueled power plant is about 40% as much as from a coal-fueled plant. As such, the per-ton costs of capturing CO2 at a natural gas power plant are 1.5 times higher than the per-ton costs of capturing CO2 at a coal-fueled power plant. Since the Section 45Q tax credit rate was designed to approximately cover the cost of CO2 capture at a coal-fueled power plant, it needs to be increased by about 50% to cover the cost of CO2 capture at a natural gas-fueled power plant. • Providing Incentives for Higher Capture Rate, FOAK Plants. The paper also examines how a more robust set of incentives, including modified Section 45Q tax credits and other options, could help overcome the barriers facing first-of-a-kind (FOAK), high (95%+) CO2 capture rate plants. • Providing Section 48A Investment Tax Credits for Natural Gas-Fueled Power Plants. The paper examines how expansion of the eligibility for the Section 48A investment tax credit could support installation of CCS at natural gas-fueled power plants.

The International Transmission of US Tax Shocks: A Proxy-SVAR Approach

We investigate the international propagation of tax rate shocks originating in the USA using a global vector error correction model. We identify shocks to corporate and personal income tax rates by using narrative series as external instruments, following the proxy-SVAR methodology. The main results are the following: (1) In terms of fiscal multiplier, domestic effects of corporate tax shocks are stronger than those of personal income tax shock; (2) spillovers are in most cases positive and significant, albeit of small size; (3) the boost to exports in recipient economies, stimulated both by stronger US demand and, to a lesser extent, by real exchange rate depreciation, is the main transmission channel; and financial channels (through long-term interest rates) also play a role.

Cross-Border Effects of A Major Tax Reform — Evidence from the European Stock Market

We analyze the effects of the major US tax reform of 2017 on European firms. Although foreign firms that are active in the respective country should be directly affected, other foreign firms could ...

Summaries of Articles

Summaries of Articles

Coke Concentrate: A Recipe for Understanding the IRS’s Biggest Win in 40 Years

The US Tax Court’s opinion in The Coca-Cola Company & Subsidiaries v. Commissioner changes the direction of US transfer pricing jurisprudence. The authors explain the critical factual and legal determinations that allowed the court to reach its conclusions.

BUREAUCRACY IN THE UNITED STATES OF AMERICA: A Review of Corporate Policies in the Period of Governance Donald Trump

One of the policies for corporations that reap the pros and cons of Donald Trump's administration is the Tax Reform Act, known as the Tax Cuts and Jobs Act (TCJA)2018. Important points of the Act are: 1) changing the Corporate Income Tax rates from 35% to 21% and a drastic reduction that gives tax discounts of up to 60%. 2) change from worldwide to a territorial system. The tax reform was carried out because Trump saw the US tax system was no longer competitive. After all, it had a high corporate income tax rate of 35% and adopted a worldwide tax system. Pros and cons in discussing this law are that the outcome of the political process contained in the Act is not the same as the initial points put forward by Trump. Using literature studies from various libraries, this paper reviews the characteristics of the bureaucracy in the United States, by looking at the phenomenon of policies issued to corporations during Donald Trump's administration. This paper concludes that the characteristics of bureaucracy in the US tend to dominate institutions; the level of importance is different for each stage. Bureaucracy is seen as an instrument of power for the elite in running the government.

Selected US Tax Developments: Impact of US Tax Proposals on Canadians Investing in the United States

Proposed US legislation would impose a number of new tax rules affecting foreign investment in the United States. In this article, the authors highlight the proposals most likely to affect Canadian investors.

Tax Treaties, the Constitution, and the Noncompulsory Payment Rule

US Tax treaties have been regarded as self-executing since the first treaty (with France) was ratified in 1932. Rebecca Kysar has argued this raises a doubt on whether the treaties are constitutional, because tax treaties (like other treaties) are negotiated by the executive branch and ratified by the Senate with no involvement by the House, and all tax-raising measures must originate in the House under the Origination Clause (U.S. Const. Art I, section 7, clause 7). Her preferred solution is to make tax treaties non-self executing, but that would reverse the universal practice since 1932, and is therefore unlikely. Moreover, tax treaties are generally precluded from raising revenue by the Saving Clause (Art. 1(4)). But Kysar’s argument raises another question in regard to the noncompulsory payment rule (Treas. Reg. 1.902-2(e)(5)). Under the noncompulsory payment rule, a US taxpayer who is entitled to a treaty benefit and does not avail itself of the benefit may not get a foreign tax credit for the excess of the withholding tax levied over the treaty rate (Treas. Reg. 1.902-2(e)(5), Example 6). But this means that the treaty raises the taxpayer’s US taxes over the amount it would pay in the absence of a treaty, which in turn raises the constitutional issue invoked by Kysar. The paper concludes by questioning whether the noncompulsory payment rule is worth the complexity it imposes on both taxpayers and the IRS.

How Does Removing the Tax Benefits of Debt Affect Firms? Evidence from the 2017 US Tax Reform

Despite extensive efforts, the impact of the tax benefits of debt on firm decisions is an open question. The 2017 US tax reform creates an opportunity to directly estimate the effects. The reform limits the tax advantage of debt for all firms except for small businesses with average sales below $25 million. I use the exception threshold in a regression discontinuity design and show that corporate debt declines nearly dollar for dollar as the present value of the tax benefits of debt shrinks, but equity financing is not affected. Treated firms decrease their investments and hiring, consistent with the rise in the cost of external financing. The effects are similar in public and private companies. Although the new law disproportionately reduces the tax benefits of debt in small firms, the evidence suggest that the estimates likely provide a lower bound for the effects in large companies. Overall, I document a first-order role for tax incentives that affect the cost of capital in shaping corporate financial and real policies.

The Effect of Legislated Tax Changes on the Trade Balance: Empirical Evidence for the United States, Germany, and the United Kingdom

Using a narrative account of quarterly discretionary changes in tax liabilities from 1974Q4 to 2018Q2 in a VAR setting, we study whether legislative tax changes affect the trade balance in the United States, Germany, and the United Kingdom. As legislative tax changes we consider (i) all changes, (ii) personal income tax changes, (iii) business tax changes, (iv) indirect tax changes in Germany and the UK, (v) spillovers of US tax changes into Germany and the UK, and (vi) asymmetric reactions after tax hikes and cuts. Generally, we find that after a reduction in aggregated tax liabilities, imports and exports in the US and Germany react quite similarly: imports tend to rise; exports do not change much. Consequently—and fostered by growing output—the net-exports-to-GDP ratio decreases. We find no clear net effect in the UK. Instead, UK imports only increase after cuts to indirect taxes. However, employing normal variations of the tax changes as a yardstick, the economic magnitude of the estimated effects on the trade variables is not particularly large. Thus, there remain doubts as to whether tax policy is an effective in-strument for addressing trade imbalances.

Selected US Tax Developments: New Proposed Regulations Under the Section 1061 Carried Interest Rules

The Tax Cuts and Jobs Act of 2017 added new section 1061 to the Internal Revenue Code. That provision added a three-year holding period for fund managers holding "carried interests" to qualify for long-term capital gain treatment. On August 14, 2020, the Internal Revenue Service published proposed regulations that provide much-needed guidance. As proposed, however, the new rules are quite complex and include a number of traps for the unwary. We discuss some of the key provisions of the proposed regulations and consider their impact for Canadian funds and their Canadian and US managers.

Stock Market Reactions to Legislated Tax Changes: Evidence from the United States, Germany, and the United Kingdom

We study the effect of tax policy on stock market returns in the United States, Germany, and the United Kingdom using GARCH models and a unique daily dataset of legislative tax changes during the period 1978 to 2018. We find that days of discretionary tax legislation during all stages of the process often matter for returns, both in terms of statistical significance as well as economic relevance. Further disaggregating the tax shocks shows that news about personal income tax cuts affects stock market returns positively, whereas business tax legislation is rarely influential. We find evidence of stock market spillovers, mainly from US tax changes to European stock markets. In several cases, we measure significant effects of changes in tax legislation on the days the changes are implemented. The US House Committee Report appears to be the most influential legisla-tive stage. During the financial crisis, stock markets were more responsive to tax legislation. Finally, S&P500 returns tend to react at earlier legislative stages than do DAX returns, whereas FT30 returns barely react on days of domestic legislative action.

C and S Corporation Banks: Did Trump's Tax Reform Lead to Differential Effects?

The US Tax Cuts and Jobs Act (TCJA) led to a drastic reduction in the corporate tax and improved the treatment of C corporations compared to S corporations. We study the differential effect of the TCJA on these types of corporations using key economic variables of US banks, such as the number of employees, average salaries and benefits, profit/loss before taxes, and net income. Our analysis suggests that the TCJA increased the net-of-tax profits of C corporation banks compared to S corporations and, to a lesser extent, their pre-tax profits. At the same time, the reform triggered no significantly differential effect on the employment and average wages.

The Impact of US Tax Compliance Law on the Disclosure of Bank Secrecy

The Impact of US Tax Compliance Law on the Disclosure of Bank Secrecy

Equity Compensation and the US Tax Consequences

Equity Compensation and the US Tax Consequences

Strategies to Engage Millennial Employees (A Multiple Case Study)

Grounded in Kahn’s employee engagement theory, the purpose of this qualitative multiple case study was to explore effective strategies used by leaders in the hospitality industry to improve Millennial employee engagement. The participants were 5 hotel leaders in Virginia who successfully engaged their Millennial workforce. Data were collected from semistructured interviews, company documents, and note-taking. Data were analyzed using Yin’s 5-step data analysis, member checking, and methodological triangulation. Four themes emerged: coaching through education, rewards that improve engagement, enhancing engagement through motivation, and communication that enhances awareness and receptiveness. The results of the study indicated that managers could use mentoring, communication, and incentives to engage millennial employees and decrease employee engagement barriers. The implications for positive social change include providing hospitality industry managers with a framework for understanding their Millennial workers that can potentially promote positive relationships and improve employee morale. Employee engagement strategies could potentially lead to an improvement in the societal workforce, reduce unemployment rates, and increase the US economy and tax base.