ataxingmatter

Michigan State: GOP pushing tax cuts over education and other needs

2012-05-26T17:00:08-07:00

Michigan is run by the Republican Party, and it looks like the state's government is set to continue policies that cut taxes for busineses and cut income taxes--all of which primarily benefits the better off--while drastically cutting back on things that the state should be funding, such as public higher education.

The first budget under Gov. Snyder gave business a tax cut o $1.8 billion by eliminating the Michigan Business Tax and replacing it with a corporate income tax that doesn't apply to most businesses. The GOP dominated legislature and government coupled the tax cut for business with an increase in taxes on pensioners and a reduction in some personal tax credits and deductions, so that individuals will now pay $1.4 billion more in 2013 than in 2012. Michigan has a flat individual income tax, which is scheduled to be cut from 4.35% to 4.25% next January. The House speaker, Jase Bolger, wants to accelerate the cut, moving it up to July, which would cost the state about $96 million. Typical taxpayers making $50,000 would see only $23 more in their pockets from that cut.

Meanwhile, the state is cutting its support for public education. Significant cuts were made to K-12 education and public colleges and universities are dealing with multiple years of cutbacks to support for higher education. Part of the way that cutback has happened has been in making funding provided to universities one-time. Money allocated in that way can't be used for anything permanent but only for gap filling, making it very hard for long-term planning necessary to support classes and research. Wayne State University, located in Detroit and serving the southeast region and with many students who try to work and go to school and thus take longer than students from well-heeled middle class families, suffers particularly from that kind of funding. It generally means more use of part-time faculty rather than hiring of new tenured faculty.

Now, you may be one of those people who think that's just fine. There's been a lot of criticism of tenure lately, and many people who think tenured faculty don't really work hard. But funny thing. When Wayne did some studies of student success to try to determine what factors make a difference, it learned that students do best when they are taught by tenured faculty rather than adjuncts! That's likely because tenured faculty are committed to the institution, are around more to deal with students beyond the classroom, and have an interest beyond just the subject matter of the class, bringing their research and scholarship into the classroom.

What if Michigan took the $96 million that Bolger wants not to collect and instead used it to fund public education and to build a state of the art surface rail system for the city of Detroit? I'd gladly give up my tax cut for that, and I expect many another Detroiter would too. The problem, of course, is that the rest of the state doesn't understand how important it is to help Detroit and to create modern public transportation systems. In the long run, the entire state would benefit and it would be well worth the additional tax dollars.

But I'm not holding my breath.

EITC: Mulligan (economic theory) vs. Seto (empirical evidence)

2012-05-24T13:22:46-07:00

TaxProf today noted the article in the New York Times about the EITC: Casey Mulligan, Do Tax Credits Encourage Work? New York Times ( 2012). Mulligan, an econ prof at the University of Chicago (home, of course, to Milt Friedman's "free" market theories) noted that the EITC "could" discourage work.

The earned-income tax credit is often said to encourage work, but it may do just the opposite. ...

The chart below shows the credit’s schedules for the 2011 tax year as a function of annual earned income for a given family situation (other family situations have the same basic shape). The schedule shown illustrates [a] mountain-plateau pattern ... an increasing portion for the lowest incomes, a flat portion, a decreasing portion and then finally a flat portion of zero.

... For the same reasons that the credit encourages more work among people who might otherwise earn close to zero during a year, it can also influence some people to work less — those with earnings at or slightly above the downward-sloping or “phase-out” portion of the schedule, where people lose about 20 cents of their credit for every additional dollar earned during a year. In other words, for households on the downward-sloping portion of the earned-income tax credit schedule, the credit acts as an extra 20% tax on the income they earn in that range. The work-encouraging potential of the credit occurs only on the upward-sloping portion. ... [emphasis added]

Now, Mulligan surely knows that this theory about whether the credit encourages or discourages work is just that--a theory. Much of the assumptions about when people will stop working and substitute leisure don't seem to hold up in practice, partly because there are so many other factors at work besides the rather simplistic assumptions in freshwater economics (such as the joy of working, status of work, self-esteem of work, etc.). Nonetheless, Mulligan can't help adding another line that makes the overall comment suggest that he thinks the EITC will on the whole discourage work.

[I]t is more common for families to be on the part of the earned-income tax credit where it acts as a tax, rather than a reward to additional work.

Of course, when economists talk, policy makers often listen. This is a good example of when they should say--huh? and get a second opinion. What we should care about as a tax policy matter--which, I remind you, is distinct from what we might care about purely as a question of economic "efficiency"--is whether the EITC will generally work to encourage those who otherwise have tended to be left out of the work force but should be in it and whether the potential negative effect at the drop-off would be likely to be genuinely detrimental to that group or rather impact groups for whom the difference may not matter so much.

Ted Seto, a fellow tax prof in sunny California, commented on the Tax Prof item to point out the important empirical evidence that the EITC is mostly working as we want it to.

For a useful summary of recent empirical work, see Nada Eissa & Hilary W. Hoynes, Behavioral Responses to Taxes: Lessons from the EITC and Labor Supply, published in 2006 by NBER...

"The overwhelming finding of the empirical literature is that EITC has been especially successful at encouraging the employment of single parents, especially mothers. There is little evidence, however, that the EITC has reduced the hours worked by those already in the labor force. The empirical literature on married women is somewhat smaller but again consistent in its findings. The studies show that the EITC leads to modest reductions in the employment and hours worked of married women."

The latter problem -- the one area identified in which the EITC does seem to have a negative effect on paid work -- is not an EITC problem at all. It's the same secondary worker problem Ed McCaffery has written about, (Taxation and the Family: A Fresh Look at Behavioral Gender Bias in the Code, 41 UCLA LAW REVIEW 983 (1993)), and it affects secondary workers up and down the income range.

Offers in Compromise made easier

2012-05-22T21:41:50-07:00

The IRS has announced more flexible offer in compromise terms, in an effort to make it easier for financially distressed taxpayers to get a "fresh start" by erasing their tax liabilities, and may also result in less time taken for the process (2 years instead of 3-5 years). See IR-2012-53 (may 21, 2012). See also Form 656-B, Offer in Compromise Booklet, and Form 656, Offer in Compromise and Interim Guidance Memorandum

The main changes include:

Revising the calculation for the taxpayer’s future income.

Allowing taxpayers to repay their student loans.

Allowing taxpayers to pay state and local delinquent taxes.

Expanding the Allowable Living Expense allowance category and amount

The revision to calculations of future income are significant. In the past, the Service attempted to look forward 4 years. Now, if the liability will be paid within 2 years, the Service only looks one year ahead. Further, permitting delinquent federal taxpayers to repay student loans and pay local and state taxes due seems a worthy step. If there isn't enough money to pay all of the federal taxes, it makes sense to allow the taxpayer to pay local taxes due. States and municipalities are still suffering from the recession, and this will be a small measure of benefit there as well as to the individual taxpayers.

Calculating the Cost of Bailouts

2012-05-20T13:41:26-07:00

A recent New York Times includes a piece on the Treasury's study of the various bailouts or "rescues" of distressed financial and other institutions. Gretchen Morgenson, Seeing Bailouts Through Rose-Colored Glasses, New York Times (May 19, 2012).

The Treasury study, The Financial Crisis Response--in charts (April 13, 2012), is positive about the way that government handled the bailouts.

Collectively, these programs --carried out by both a Republican and a Democratic administration--were effective in preventing the collapse of the financial system, in restarting economic growth, and in restoring access to credit and capital. They were well-designed and carefully managed. Because of this, we were able to limit the broader economic and financial damage. Although this crisis was caused by a shock larger than that which caused the Great Depression, we were able to put out the financial fires at much lower cost and with much less overall economic damage than occurred during a broad mix of financial crises over the last few decades.

Reading that, one might conclude that everybody now is sitting fairly pretty, and that it was all done in a very upfront, fair and damage-free way. That ignores the fact that the bank bailouts treated the banksters with kid gloves--letting managers continue to receive their customary overcompensation and allowing banks generally to continue their predatory practices even while the taxpayers were providing them extraordinarily low-cost financing with practically no strings attached. Meanwhile, ordinary Americans--especially those in the lower half of the income distribution--suffered enormously. Congress--at the behest of the banksters--refused to enact mortgage clawback provisions in bankruptcy, the one law that would have done wonders at saving families and neighborhoods from unprecedented deteroioration and blight.

To be fair, the report does include a bevy of charts that attempt to show how the crisis played out for the banks, the economy in general, and ordinary Americans (unemployment, depressed home sales market, etc.). But then the Treasury goes on to claim the following:

[T]he latest available estimates indicate the financial stability programs are likely to result in an overall positive financial return for taxpayers in terms of direct fiscal cost. These estimates are based on gains already realized and on a range of different measures of cost and return for the remaining investments outstanding. These estimates do not include the full impact of the crisis on our fiscal position. And they do not include the cost of the tax cuts and the emergency spending programs passed by Congress.

Now, it is good to know that at least the "direct fiscal cost" of the bailouts is likely to be positive. But note the gaping hole between that amount and the overall true cost of the bailouts--the "impact of the crisis on our fiscal position" and "the cost of the tax cuts" and "the emergency spending programs." Now, at least the emergency spending programs generated economic activity and made real differences for individual people a good number of whom one can assume weren't in the top 1%. The tax cuts are a big cost item and one that may well not have had the benefits assumed, except for those that went to the lower and lower-middle income working classes (such as the payroll tax relief). And the impact on our fiscal position is ongoing and still strongly felt, as we struggle to rebalance an economy that already consumed too much from outside and produced too little here at home. So how much comfort can we take from the idea that the direct fiscal cost may be significantly less than some had initially expected it to be?

Here's where the Times story comes in. Morgenson notes that "As the battles over financial regulationrage in Washington, it’s crucial that American taxpayers understand the costs associated with rescuing behemoth institutions." We cannot take wise action for or against reduction in size of banks or other issues unless we are dealing with full information about the crisis and its aftermath. That won't be easy in the politicized environment in which the Obama administration understandably wants to showcase how its efforts have helped the economy and the GOP seens intent on a "my way or the highway" approach to governance that cares more about winning a race than about doing what's good for the people.

Morgenson reports on an interview with Edward Kane, Boston College finance professor and economist, who thinks that the public needs to see a more thorough cost-benefit analysis of the TARP and other expenditures. Kane calls the analysis "deficient" (one might even say misleading) for counting as gains the interest income the Fed made from holding Treasuries (this is like money passed from mom to dad to put in the allowance jar for the kids--in other words, Treasury interest is paid by the US fisc to the Fed, and the Fed's profits are paid into the US fisc, so it's all the same pot). But the bigger deal is a genuine evaluation of the opportunity cost of the subsidy provided to bailout recipients.

The programs provided enormous amounts of money at below-market terms for extended periods, he said. Had those guarantees been priced at their true market value — what a private investor would have charged to lend during those dire days — taxpayers should have received far higher returns. Morgenson, Seeing Bailouts Through Rose-Colored Glasses

Charles Calomaris, a Colombia Business School prof and NBER research associate who worked with Kane on the study, noted the cost-benefit concern.

“We are not saying that the benefits weren’t there,” Mr. Calomiris said. “We’re not saying that it wasn’t worthwhile to create these programs. Maybe it was, maybe it wasn’t. But it requires a fuller analysis of what the benefits were.” Morgenson, Seeing Bailouts Through Rose-Colored Glasses

Nurses Support Financial Transactions Tax

2012-05-18T11:13:16-07:00

Perhaps the JPMorgan Chase debacle has caught enough attention to alter the debate. JPMorgan of course claimed to be entering a type of hedge that would be permitted under the Dodd Frank reforms. ( Apparently there were hedges on overall portfolio positions, and then those hedges were themselves hedged writing credit default swaps.) The authors of the legislation beg to differ, noting that the statute was drafted to permit hedges of specific asset but not portfolio-wide heding practices that become almost indiscernible from speculative "bets" on the direction of markets. Perhaps there will be one good result of the $2 billion plus and growing loss that JPMorgan encountered on its complex trades--regulators may finally quit paying so much attention to the banks' "trust our judgement" lobbies and start making it less possible for banks that get federal support to bet with other people's money in big ways that can cause systemic risk. This seems to be a no-brainer--we need to more tightly regulate the activities of commercial banks and prevent them from gambling with huge bets that can swing the marketplace and place the entire system in jeopardy. That means banks will need to accept more staid profit scenarios--and the compensation for managers and traders should be downsized as well. They made fortunes out of wrecking the economy. They should be content with reasonable compensation when they do good jobs, and salary cuts--or being fired--when they don't.

Another action that might help to calm the too-reckless bankers and their desire for super-high profit margins would be to enact a financial transactions tax. It seems that lots of GOP candidates and economists think sales taxes make sense for ordinary folk--from Herman Cain's 9-9-9 plan (that would eventually convert to a flat national sales tax) to the GOP push to cut income tax rates in states in favor of sales taxes. But when it comes to a financial transactions tax, all of a sudden the same folks seem to change their minds, suggesting that such a tax on financial transactions would discourage investment in the capital markets and be bad for America.

There are some singificant factors in favor of a financial transaction tax that would reap a few pennies from each transaction. First, it would raise much needed money from a group that generally can afford the cost. Second, it could act to discourage flash trading, where computer-run programs arbitrage the markets in a way that only those with the sophisticated programs can take advantage, leaving ordinary folk out in the cold. Third, it could be one factor in returning everyone to more prudent approaches to investment--investing for the long term, rather than profiting from arbitraging tiny differences in multiple trades.

The National Nurses United organization has taken out a full page ad in the New York Times in favor of a financial transactions tax. Here's part of the text:

"I pay a sales tax every time I make a purchase. We all do--but not the financial services industry, the bankers who sunk [sic] our economy. A financial transaction tax would cost banks and investment firms just pennies on the dollar for transactions such as stock trades, like a sales tax. Those pennies would add up to create jobs and fund vital programs and services in this country--education, healthcare and rebuilting our deteriorating infrastructure. The big banks will never miss this money, while the revenue generated will provide a better life for millions of Americans. "

Maybe the nurses are on to something. But don't look for Congress to act on this anytime soon.

Ten tax tricks (non-rich need not apply)

2012-05-12T22:43:00-07:00

Back on tax day in April, Bloomberg.com ran a good story on the tax tricks the rich can use to reduce, defer or avoid altogether federal income taxation. Jesse Drucker, How to Pay No Taxes: Ten Strategies Used by the Rich, Bloomberg.com (Apr. 17, 2012).

As Drucker notes, the very very wealthy at the top of the income distribution have made out extraordinarily well in the last decade as to amount of taxes paid.

For the 400 U.S. taxpayers with the highest adjusted gross income, the effective federal income tax rate—what they actually pay—fell from almost 30 percent in 1995 to just over 18 percent in 2008, according to the Internal Revenue Service. And for the approximately 1.4 million people who make up the top 1 percent of taxpayers, the effective federal income tax rate dropped from 29 percent to 23 percent in 2008. It may seem too fantastic to be true, but the top 400 end up paying a lower rate than the next 1,399,600 or so.

They don't even necessarily have to cheat to do it. They just use the tried and true tax reduction methods built into the system for their benefit--like "monetizing" their wealth through borrowings that they don't pay back in their lifetimes, but are paid out of the estate (which can sell stocks with the step up in basis resulting in no taxes).

That’s because those figures fail to include the additional income that’s generated by many sophisticated tax-avoidance strategies. Several of those techniques involve some variation of complicated borrowings that never get repaid, netting the beneficiaries hundreds of millions in tax-free cash.

The article lists ten common ways the rich avoid taxes.

1. The no-sale sale (borrowing against stock, combined with puts and calls, so that the rich guy can either pay back the cash or hand over shares, years after the sale is actually conducted. (Drucker notes that Philip Anshultz used one of these deals and ended up with the tax court saying he owed $94 million in back taxes. But the deals are still going strong.)

2. the skyscraper shuffle (using tiered partnerships to borrow against partnership property, move the loan into a subsidiary and then distribute the subsidiary to liquidate a partner, letting him cash out of a real estate partnership and avoid taxation, retaining ownership of the entity with the cash and deferring taxes indefinitely)

3. the estate tax eliminator (leaving stock earnings to kids and avoiding the estate tax with a GRAT)

4. the estate freeze (using an intentionally defective grantor trust and debt to freeze the value of an estate--and avoid estate taxes on future appreciation--by moving assets out of the estate tax free for the benefit of beneficiaries and benefiting from valuation discounts due to the use of the trust)

5. The option option (receiving options rather than shares as compensation so that the tax bill won't be due til the options are exercised)

6. the bountiful loss (purchasing identical underwater shares and using puts and calls to protect against any risk of further loss, and then selling the old shares to realize the loss--with just enough of a time window to avoid the wash sale rule--while retaining the same property in the form of the new shares)

7. the friendly partner (selling real estate by forming a partnership with the buyer, taking out a loan collateralized by the property, and ultimately distributing the cash to the seller who retains an interest in the partnership)

8. the big payback (buying various life insurance products that completely escape t income tax and, if owned by the appropriate type of trust, also the estate tax)

9. IRS Monte Carlo (converting traditional IRAs to Roth IRAs, especially in sets so that you can take advantage of the 21-month "change your mind" period selectively as it benefits you)

10. the venti (having a chunk of your big CEO compensation paid through a deferred compensation plan where earnings grow tax-deferred for years or decades).

What's the moral of this tale? That Congress could easily stop every one of these tax avoidance schemes if it wanted to. And it should want to, so that the ultra-rich don't continue to have access to schemes that allow them to avoid taxation that are simply not available to ordinary people.

US inequality is getting worse

2012-05-11T03:37:00-07:00

The Congressional REsearch Service released a report in March showing that US inequality is getting worse. Linda Levine, US income distribution and mobility: trends and international comparisons, Congressional Research Service (Mar. 7, 2012).

Here's an excerpt from the summary provided in the report itself.

Approaching three years into the recovery from the 2007-2009 recession, the unemployment rate remains over 8%. The persistent difficulty of many of the workers who lost jobs to find reemployment has meant reduced incomes for them and their families. A historically slow rebound in the labor market appears to be partly responsible for some groups’ focus on the distribution of the benefits of economic growth and for some policymakers’ interest in redistributing income through the tax code, for example. Varying perceptions about a trade-off between economic growth and income equality appear to underlie longstanding congressional deliberations about such policy issues as the progressivity of income tax rates, the tax treatment of capital gains, and the adjustment of the federal minimum wage. If income were equally divided across households, each quintile (fifth) would account for 20% of total income. The Congressional Budget Office and others have documented that the bottom fifth has long accounted for much less than 20% of total income. The bottom quintile’s share of income has remained little changed for the past few decades at less than 4%, according to U.S. Census Bureau data. In contrast, the income shares of the top fifth and the top 5% of households appear to have trended upward. The top fifth’s share of total household income rose from 42.6% in 1968 to 50.2% in 2010; the top 5%’s share, from 16.3% to 21.3%. (Estimates derived from
federal income tax data suggest that those at the very top of the income distribution have experienced greater gains.) The middle class, defined as the middle 60%, received a
disproportionately smaller share of the total economic pie in 2010 (46.5%) than in 1968 (53.2%).

***

Based on the limited data that are comparable across nations, the U.S. income distribution appears to be among the most uneven of all major industrialized countries and the United States appears to be among the nations experiencing the greatest increases in measures of inequality. Three leading explanations are put forth for these cross-country differences: (1) other advanced economies devote a larger share of national output to transfers, which tends to equalize income across households; (2) the progressivity of tax rates varies by country and thus has different effects on the distribution of after-tax income; and (3) equality in the distribution of earnings,
which account for most household income, varies substantially across countries.

So Inequality is increasing and mobility in the US economy is diminishing, as the rich get richer and the middle class gets poorer and the poor stay poor. Because so many Americans have believed the hype about "free markets" pushed by the right and the Chicago School economic perspective, they don't understand the failures of the "free market" theory --for example, that it cannot accurately predict much of anything about the economy,and that its policy dictates are likely to be total failures since they are based on assumptions that simply don't hold for actual societies (like infinite lifetimes, 100% consumption of incomes, a unitary preference and other nonsense). They echo the radical right's rhetoric antagonistic to redistribution in favor of those who are disadvantaged by the growing inequality, and blithely miss the way tax policy and spending policy redistributes upwards in ways that contributes to the increase in inequality. Americans are also lulled into complacency about the harm of increasing inequality by the American myth that everybody that has the will to take the risks can be a self-made millionaire. Thus, they miss any opportunities to force Congress to bring the oligarchy under control through wiser tax policy and legislative initiatives focused on addressing genuine public needs through democratic egalitarianism.

The worm in Apple (and the US tax code)--offshoring of US Profits

2012-05-10T03:26:00-07:00

Citizens for Tax Justice has focused on Apple's ability to lower its US effective tax rate by offshoring its profits to tax havens. See, e.g., Robert McIntyre, What Apple Pays in Taxes and Doesn't, NY Times Letters to the Editor, CTJ, How to end Apple's offshore shenanigans, May 4, 2012; [hat tip Paul Caron at Tax Prof]. Here's the key idea in both the letter and the report.

Since Apple’s profits stem mainly from its U.S.-created technology, most, if not all, of these untaxed profits are almost certainly United States profits that Apple has artificially shifted offshore.

If we treat all of the untaxed portion of Apple’s offshore profits as really U.S. profits that were artificially shifted to offshore tax havens, then Apple’s U.S. tax rate is much lower than Apple reports. Under this approach, Apple’s 2008-10 effective federal tax rate comes to only 13.4%, and its effective federal tax rate over the last six years (2006-11) was only 12.1%. (Likewise, Apple’s revised effective state tax rate in 2008-10 was only 3.6%, instead of the 8.0% we reported in our state corporate tax study issued last December.) CTJ report.

How does CTJ know that Apple parks its profits offshore in tax havens where they are subject to minimal taxes?

Apple says that if it told its foreign subsidiaries to pay Apple the whole $54 billion offshore amount as a dividend, then Apple would owe $17 billion in U.S. federal income taxes. That reflects a $19 billion tax at 35 percent, less a $2 billion foreign tax credit (the sum of all the foreign income taxes that Apple has ever paid). Which means, with a little more arithmetic, that about 90 percent of the $54 billion in accumulated offshore profits has never been taxed by any government. Id.

This is a genuine problem for the US in the age of digitized information. Companies easily "sell" their most important intellectual property to offshore affiliates, for prices that are set by modeling and that fail to capture the obvious--that no price would actually be sufficient to purchase the company's valuable intellectual property away from it, since the IP is in fact the basis for the company's business. So companies offshore their profits to post-office boxes in tax haven countries and claim that the US Is no longer the source of their profits, even though the IP was invented in the US, is still used in the US and still results in most of the sales actually in the US.

There are at least two possible solutions. One would be to deny companies the ability to treat the IP they use to create their products as sold for tax purposes, and to permit only licensing for royalties to actual factories in countries that are not tax havens. Another would be to end the deferral on "active business" profits offshore. It makes no sense because it incentivizes companies to offshore as much of their business as possible.

Nothing like a ministerial exception to get rich quick in the good ole US of A

2012-05-09T03:33:00-07:00

I've long opposed the concept of religious freedom that suggests that ministers shouldn't have to pay social security taxes to the government on their incomes or get their housing provided without treating the fair rental value as income or that religious institutions should be allowed to discriminate against their employees in ways that other institutions can't. I'm obviously not in sync with Congress--which provides the "parsonage exclusion" and the Social Security exemption or with the Supreme Court --which found a ministerial exception allowing religious institutions to discriminate against employees as long as they had some kind of ministerial function (very broadly defined, apparently) or with many religionists in this country who think all this is hunky dory, as revealed by the hoopla raised by the right about the idea of employees of religious institutions being entitled to receive health care related to procreation. But ultimately the way the tax system subsidizes religion and the way our constitutional system has been interpreted to overtly cater to religion is a problem: it results in government affirmatively favoring religious over nonreligious ideas. I'm not sure that a nation that truly believes in religious freedom--for every religion and for no religion--could allow religious workers to be exempt from some taxes or religious institutions to violate its general laws.

So when I see news stories about the lavish lifestyles of families that run religious institutions like their own kingdoms (with inherited titles), I am even more convinced that we need to crack down harder on tax exempt organizations that pay for lavish lifestyles for their principals. The New York Times had an article on Saturday about the Crouch family, founders of the so-called "prosperity gospel" and Trinity Broadcasting Network and owners of twin sets of luxury homes paid for by their devoted followers and occupied tax free in their "ministerial" capacity and recipients of a luxury lifestyle provided to them as managers of a tax exempt organization. See Erik Eckholm, Family Battle Offers Glimpse Inside a Lavish TV Ministry, New York Times (May 4, 2012), at A1.

The cynic in me thinks they are ripping off not only their followers--prosperity for the gospel preachers and getting along as usual for the rest--but also the rest of us taxpayers in this great country of ours.

The family controls the network and just fired the granddaughter and her husband. Brittany Koper says the network has been engaged in all kinds of financial improprieties, and that it was a memo she wrote calling attention to the financial improprieties which got her fired, which of course the church founders deny. Koper has two pending lawsuits, and she accuses the family of stealing millions to buy real estate and cars, violating the IRS rules on tax-exempt organization "excess compensation" and maybe state and federal rules on false bookkeeping and self-dealing. The family pays itself with multiple luxury homes and vacation homes, corporate jets, and "thousand-dollar dinners with fine wines", all out of tax-exempt monies. The granddaughter is pretty convincing: "My job as finance director was to find ways to label extravagant personal spending as ministry expenses." Id. Since the governing board for TBN includes only members of the family, there's an assured lack of checks and balances.

And guess what--granddaughter's job as finance director made her a "minister" able to benefit from the payroll tax exemption and the parsonage provision. The TBN network pulled another stunt that demonstrates why the exemption for ministers from taxation makes no sense at all--it merely labelled scores of employees as "ministers"--chauffers, sound engineers, performers at the entertainment park (Holy Land Experience") and others all avoind paying social security on their salaries and are able to live in rent-free "parsonages". The suit by Koper alleges that the network provided "parsonages" for the founders' son Matthew and wife Laurie and separate houses for their adult sons, remodeled (at company expense) to include a putting green and indoor basketball court.

The Crouches claim "almost no personal assets" but essentially enjoy the benefit of all the assets of the tax-exempt organization and the luxurious lifestyle that affords them. While Janet Crouch remodeled the religious theme park, she lived in a suite of rooms in a luxury hotel in Orlando--renting a room for herself and one for two Maltese dogs and her clothes for two years, according to a former employee and the Crouch's granddaughter. The lawsuit claims that the tax exempt organization also paid for luxury dining for the couple and their son, running tabs of $300,000 apiece a year.

A representative of the company denies some of the stories and justifies others as part of the success of the ministry. The company representative also claimed that the granddaughter stole company money and was fired for embezzling, though there are no criminal charges outstanding. Her father Paul was also fired from the company.

Not sure what the answer is, folks, but we should recognize that the kind of subsidy we are now providing to various religious institutions is likely far from what the founders' envisioned and has little to do with guaranteeing religious freedom to individuals. Somehow we need to limit the scam of people making millions through tax exempt organizations, in the name of religion, and avoiding paying tax on the "parsonage allowance" just because somebody lalso enjoying that label agrees to lavel them a minister. Congress should just eliminate the Code provision providing the parsonage allowance and the Social Security exemption and that would solve a great deal of the mischief. Either through legislation or regulation we should require that every tax exempt organization have a majority of board members who are genuinely independent--neither members of the family of founders nor employees nor "ministers" but capable of standing up to power. For religious organizations in particular, because of the increased sensitivity to the idea of government audits and oversight, the rule should be that no "minister" of the church can serve on the board and the board must be elected by the members of the religious organization at large. As for the rest, it would take a constitutional overhaul to remove the "ministerial exemption" recognized by the Supreme Court recently for institutional discrimination against employees that are labeled by it "ministers".

Contingent Fee Regulation in Circular 230

2012-05-08T16:48:21-07:00

Circular 230 governs those who "practice before the IRS", defined broadly to include representation and submission of documents , including preparation of significant portions of returns or amended returns.

Recent amendments have limited the circumstances in which contingent fees can be charged. Karen Hawkins, the Director of the Office of Professional Responsibility (fondly known by its acronym of OPR) indicated today in a Tax Talks session that OPR has become aware that contingent fees continue to be charged for filing amended returns, particularly in the case of refundable tax credits, such as the R&D credit. She announced that OPR would be focusing on those practitioners. BNA Daily Tax RealTime, May 8 at 7 pm. I expect there will be more information on this issue at the Standards of Tax Practice Committee meeting at the ABA Tax Section's annual meeting this week in DC.

OPR's discussion of this issue comes at a time when at least one practitioner is upset that he can no longer make the kinds of lucrative deals for contingent fees with respect to some of the work he used to do. Ryan LLC has filed a complaint (http://www.ryan.com/Assets/Downloads/Complaint.pdf) claiming that the contingent fee regulation in Circular 230 violates due process and the First Amendment rights of practitioners who want to charge contingent fees.

Certainly, many practitioners have complained about the constraints in Circular 230 on the use of contingent fees and even those who support some regulation of such fees may differ with the particulars included in the regulations. It cannot be denied, however, that in some contexts contingent fees can incentivize overly aggressive advocacy that may shortchange the attorney’s duty to uphold the integrity of the law. It seems doubtful that a due process or First Amendment challenge to the constitutionality of the Treasury Department’s authority to regulate such payment schemes under its general authority to regulate practice before the IRS would succeed.