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Wednesday, November 26, 2014

Inflation adjustments in the tax law

Our federal tax system includes numerous dollar amounts, such as for the standard deduction amount, personal exemption amount, credits, where different tax rates start and end, and defining the parameters of a "small taxpayer."  Some of these amounts are adjusted for inflation and others are not. Should they all be? That's a good question.

I think where the tax rates of the graduated rate system start and end should be adjusted annually for inflation. This prevents "bracket creep" where a taxpayer is pushed into a higher tax bracket just because their income increased by the rate of inflation (yet their buying power and sense of wealth remained the same). The same logic calls for adjusting the standard deduction and personal exemption amounts.

Our federal income tax is not consistent regarding the need to prevent bracket creep for all taxpayers. The corporate rate structure is not adjusted for inflation. Also, the definition of "small taxpayer" such as a corporation with $5 million or less of gross receipts, is not adjusted for inflation.  They should be.

Also, dollar penalties should be adjusted for inflation to ensure they remaining meaningful penalties.

One place where I think inflation adjustments are not warranted is for thresholds for filing information returns. For example, if a business pays a contractor $600 or more for the year, the payor needs to issue Form 1099-MISC. This measure helps ensure that the contractors properly report their income. If the threshold is raised annually for inflation, fewer 1099-MISCs would be filed and the tax gap would increase.

The Tax Foundation has an interesting map showing which states adjust the income tax brackets for the effect of inflation. I'm surprised so many do not adjust.  Not adjusting for inflation generally means that the state will collect more revenue each year. Not sure that is the reason some states do not adjust the tax brackets, perhaps their system has just always been that way.

Not adjusting for inflation has caused problems at the federal level for the highway trust fund (see my post of 5/6/14).

What do you think? Should all dollar amounts  in any tax system be adjusted annually for the effect of inflation?

Friday, November 21, 2014

EU's New VAT "MOSS" - Relevance for MFA?

On January 1, 2015, the EU's new approach for charging and collecting VAT on B2C sales of e-services and digital goods begins. The key to the approach is that all businesses will charge based on the customer's location (destination basis). That makes sense for a consumption tax, but has its challenges.  One key one is knowing where the customer is, which is not always easy to determine for digital goods relative to physical goods.

One administrative simplification is the Mini One Stop Shop or MOSS. This allows a business to register in one country for filing purposes. The business still has to collect the appropriate VAT for the country where the consumer is, but rather than quarterly filing in each country, the business just files in the MOSS country. That country makes sure the funds get to the right country (and handles the currency translation since not all EU countries use the Euro).

As I learned more about the MOSS, I was intrigued as to whether this model might help for collection of sales tax from remote sellers, such as if the Marketplace Fairness Act is enacted.

I have more on this in a recent article on this topic in BloombergBNA's Weekly State Tax Report (11/21/14).  I hope you'll take a look. I provide some background on challenges of taxing digital goods, the old and new EU VAT regimes for these items and how the MOSS (and some other VAT B2C aspects) might be relevant for the MFA.  Yes, I know that few states tax digital items, but I suspect more will start to do so to address eroding sales tax bases and the MOSS is relevant for not only digital goods, but for any consumption tax items (in the EU, it will just be for e-services, digital and broadcast; but that could change later).

What do you think?

Sunday, November 16, 2014

The Election, 114th Congress and Fate of Tax Reform

What does the change in majority party in the Senate for the 114th Congress mean for tax reform, and perhaps for any tax legislation?

An op ed in the Wall Street Journal on November 5, 2014 by Congressman Boehner and Senator McConnell, states that the Republican controlled Congress will address many challenges including "The insanely complex tax code that is driving American jobs overseas."

What might that mean?  A few possibilities:
  • Nothing. Complexity is not a bi-partisan issue. There is no contrary argument to the statement that our federal tax law is too complex.  So, why hasn't the complexity been addressed in recent years rather than only making the law more complex?
  • Action on expired provisions.  I think we may see the 113rd Congress extend all of the 57 expired provisions for one year (through the end of 2014) and then the 114th Congress will decide which it really wants and which it will keep temporary. I'd be surprised if any will lapse other than the two that related to specific disasters.
  • Comprehensive tax reform.  A lot of work has been done on this topic in the past four years - hearings, working groups, proposals and even Congressman Camp's legislative language for revenue-neutral reform with lowered rates for both individuals and corporations. I think reform is easier for a second term president.  And, there is some common ground - the desire for simplification, international reform (although not entirely common ground), a lower corporate tax rate, and some administrative reforms to reduce the tax gap and reduce identity theft.  
We'll see.

What do you think?

Saturday, November 8, 2014

Premium Tax Credit Saga - New Developments and Dilemmas

On Friday (11/7/14), the US Supreme Court granted cert in King v. Burwell, 759 F.3d 358, No. 14-1158 (4th Cir., 7/22/14). This is the case where the court found valid, the IRS regulations allowing individuals to claim a premium tax credit (PTC), even if they obtain coverage on a federal exchange rather than a state exchange. In contrast, in Halbig v. Burwell, 758 F.3d 390, No. 14-5018 (DC Cir., 7/22/14), a divided court found the IRS regulation invalid. The King and Halbig decisions were issued on the same day in July.

In September 2014, the Eastern District Court of Oklahoma issued a decision, State of Oklahoma v. Burwell, No. CIV-11-30-RAW (ED Ok, 9/30/14), finding the regulations invalid.

The DC Court of Appeals vacated its July decision, agreeing to hear the case en banc. Now, with the US Supreme Court agreeing to hear the case, there is no need for the DC appeals court to rehear the case.

So, perhaps we'll have resolution of the issue by mid-2015, after most 2014 returns claiming the PTC have been filed. Given the millions of individuals involved and significant dollars, even if the Court finds the regulations invalid, it doesn't seem likely that the government will be able to get money back from those who obtained insurance on the federal exchange (because their state did not have an exchange) and claimed a PTC. In addition to the practicality issues, there would be equity issues: (1) if people had known they were not eligible for a PTC, they may not have purchased the insurance in the first place, and (2) the unfairness of people in a state with an exchange getting subsidized health insurance when people in a state without an exchange may not (meanwhile, employees in all states who have employer-provided coverage get the longstanding subsidy of the income exclusion for employer-provided health insurance). The second equity issue might raise an equal protection challenge* although I think it would be a weak one because perhaps Congress had a plausible reason for only allowing a PTC on a state exchange because it wanted to encourage states to set up exchanges and manage more of the health care system.

There is also an issue here for return preparers. The Halbig case which the government lost was vacated; the King case which the government won still stands, although the Court will hear the case. The Administration says the PTC is available to anyone who purchased insurance on any exchange in 2014 (Dept of Justice release of 7/22/14). Thus, it seems that now, anyone eligible for the PTC can claim it on their 2014 return. What if the government loses the US Supreme Court case? Unless the Administration says otherwise, it would then seem that 2014 returns filed after that date could not claim the PTC and individuals would have to repay what they obtained in advance.  Would there be an obligation to amend 2014 returns? What should practitioners tell those individuals? Practitioners serving individuals who are otherwise PTC-eligible, but in states without an exchange face filing dilemmas. It would be helpful for the IRS to provide specific guidance for 2014 to address this issue.

For more on the litigation, see my 10/18/14 blog post.

What do you think about all of this?

* A recent case included a helpful summary of the equal protection issue at the federal level: “A tax classification is “constitutionally valid if `there is a plausible policy reason for the classification, the legislative facts on which the classification is apparently based rationally may have been considered to be true by the governmental decisionmaker, and the relationship of the classification to its goal is not so attenuated as to render the distinction arbitrary or irrational.” Id. at __, 132 S. Ct. at 2080 (quoting Nordlinger v. Hahn, 505 U.S. 1, 11 (1992)). There is deemed to be a plausible policy reason “if `there is any reasonably conceivable state of facts that could provide a rational basis for the classification.” Id. at __, 132 S. Ct. at 2080 (quoting FCC v. Beach Commc'ns, Inc., 508 U.S. 307, 313 (1993)). Moreover, “because the classification is presumed constitutional, the 'burden is on the one attacking the legislative arrangement to negative every conceivable basis which might support it.” Id. at __, 132 S. Ct. at 2080-2081 (quoting Doe, 509 U.S. at 320).” Field, TC Memo 2013-111.


Thursday, October 30, 2014

Damages: Deductible?

It's a fact of life that businesses get sued. Even if they win, there are legal and related fees. What if they lose and have to pay compensatory and perhaps also punitive damages? Perhaps also some fines to the government?  What is deductible for tax purposes? A recent case from the First Circuit Court dealt with an action involving the False Claims Act with total damages of just over $486 million!

I've got a short article in the AICPA Corporate Taxation Insider about the case, Fresenius Medical Care Holdings, Inc., No. 13-2144 (1st Cir. 8/13/14).  I also had a blog post (8/29/14) about this case a few weeks ago, noting the challenging vocabulary used by the judge and a few quotes from Shakespeare he included.

This topic also raises an important consideration for tax reform purposes.  Should any of these damages be tax deductible?  Arguably, compensatory damages (for making the injured party whole), seem to be a part of business - accidents will happen, mistakes will be made.  But should all mistakes be deductible or would it be greater punishment to deny a tax reduction for the damages?  I note two legislative proposals at the end of the article.  On a related topic, President Obama proposes to deny a deduction for punitive damages (FY2015 Greenbook, page 101).

Here is the article:
  To be or not to be compensatory, AICPA Corporate Taxation Insider, 10/30/14

What do you think a business should be allowed to deduct and not deduct regarding various damages?