STUMP » Articles » Taxing Tuesday: Suck it Up, Buttercup - the IRS Is Gonna Block "Cleverness" » 12 June 2018, 04:37

Where Stu & MP spout off about everything.

Taxing Tuesday: Suck it Up, Buttercup - the IRS Is Gonna Block "Cleverness"  


12 June 2018, 04:37

So, looks like we’re in the bargaining phase of various states trying to wheedle their way around the IRS, before the official guidance is given.


For the next one, I want to introduce you to Betteridge’s law of headlines:

Betteridge’s law of headlines is an adage that states: “Any headline that ends in a question mark can be answered by the word no.” It is named after Ian Betteridge, a British technology journalist, although the principle is much older.

There are reasons this occurs, of course — it’s mainly the oldest form of “click bait” – asking a question that’s provocative… but provocative only if the answer is “yes”.

So here’s the headline: The Week in Public Finance: Can the IRS Stop States’ Tax Reform Workarounds?

Well, see, before I quote from this article, I want to point out the key phrase in the IRS notice:

Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.

A headline in keeping with Betteridge’s Law would have been:

Can State Legislatures Change Federal Tax Law?

Okay, that’s not quite so kicky.

So let’s go to the article. Here are the parts where they want to show that the answer is no:

It’s no surprise, says Jared Walczak, a senior analyst at the conservative-leaning Tax Foundation, that the IRS is striking back. “The IRS was never going to be fooled by these workarounds.”

But whether the agency can legally thwart such efforts is a point of debate.

Walczak argues that the agency has both case law and “substantial leeway” on its side, including the U.S. Supreme Court’s so-called substance-over-form doctrine. That doctrine states that for federal tax purposes, a taxpayer is bound by the economic substance of a transaction — even if the transaction itself varies in its legal form. In other words, “if a payment is made regarding tax liability,” Walczak says, “it doesn’t matter what you call it, you’re paying state taxes.”

Others, however, question the effectiveness of the agency’s targeted approach.

There are other ways to respond and work around the cap, says Indiana University tax law scholar David Gamage, who co-authored a paper on the topic. Some states, such as New York, are considering increasing payroll taxes, which are paid by the employer but have unlimited deductibility. The proposed regulations make no mention of these other efforts. “In the long run,” Gamage says, “the IRS doesn’t have the power to shut down everything that would be described as a workaround.”

Ooooh, look at him. He co-authored a paper.


Has he represented clients in tax court? Let’s check out his faculty page bio:

Professor David Gamage is a scholar of tax law and policy and also of health law and policy. He has written extensively on tax and budget policy at both the U.S. state and federal levels, as well as on tax theory, fiscal federalism, and the intersections between taxation and health care.

Gamage has authored or co-authored over forty scholarly articles and essays. His scholarship has appeared in a range of journals, including the peer-edited Tax Law Review and Public Finance Review, and the flagship law reviews of the University of Chicago, the University of California, and Northwestern Law Schools. His textbook, Taxation: Law, Planning, and Policy, is published by LexisNexis and by Carolina Academic Press.

From 2010 through 2012, Gamage served as special counsel to the U.S. Department of the Treasury, Office of Tax Policy. In that position, he administered the individual income tax portfolio of the Treasury Department’s Tax Legislative Counsel, and he oversaw the drafting of all individual income tax regulations and executive branch initiatives related to the individual income tax. Gamage’s position primarily involved the implementation of the tax provisions of the Affordable Care Act (“Obamacare”). Since returning to academia in 2012, Gamage has served on a tax reform commission for the State of California and has regularly advised other state and federal policymakers on tax and health policy.

So, essentially, he’s a policy advisor. His scholarly papers are unlikely to help people pulled up in tax court, eh?

I did dig into his c.v., and I see he was admitted to the D.C. bar. Oh, and I see that he puts his GPA on his c.v., too….except for his law degree. That’s sweet.

But looking at his actual professional history, it looks like he had all of 2 years corporate-anything experience, and the rest was either academic, or working for the government.


Back to the original piece:

Meanwhile, there’s concern that the proposed IRS regulations could inadvertently affect the large number of state agencies with a charitable arm. Taxpayers have long been able to make a tax-deductible contribution to these quasi-government causes. For example, Maryland and Massachusetts have environmental trusts run by a state agency. And many conservative states offer school voucher tax credits, a dollar-for-dollar tax cut for donations to a nonprofit that gives out the vouchers.

The existing practice — which served as a precedent for blue-state lawmakers to cite when approving the workarounds — creates a sticky situation for the IRS. “It might be possible to craft a rule that has exceptions for the prior structure and simply shuts down what New York has done,” says Gamage. “But that would just be an invitation for New York to change its rule to meet the new guidance.”

I agree with him on that. Again, I wouldn’t be surprised if what ends up happening is that those prior deductions are struck, and everybody gets equally screwed. You’re welcome.

If the new regulations are broad and also impact the full deductibility of existing quasi-government charities, it will almost certainly invite a lawsuit. But Walczak says that might just delay the inevitable. “It’s politically valuable for some states to be seen fighting this as long as they can,” he says. “That doesn’t increase their chances of success.”

There are going to be lawsuits either way. But just because they let various groups get away with it for a time doesn’t mean they’ll continue to do so.

It all goes back to principles.


Ah, tax twitter, my favorite twitter of all… excepting otter twitter:


Okay, enough of that, back to tax!

Okay, Seattle. What the hell. You’re a bunch of clowns.

(I didn’t check the math)

Deep thoughts on tax and war:


Grab bag:

Hmmm, I’ll have to try that one later.