The Florida Tax Review, one of only a few faculty-edited academic law reviews, publishes articles, essays, and book reviews by leading legal academics, practitioners, and economists. FTR is sponsored by the Graduate Tax Program of the University of Florida Levin College of Law.
Are Nonprofit Tax Exemptions and Deductions “Federal Financial Assistance”? Should They Be?
Two recent federal court decisions have reignited the debate over whether “Federal financial assistance” as used in four federal anti-discrimination statutes includes the tax benefits enjoyed by most nonprofit organizations. Both courts concluded that it does. While an appellate court reversed one decision, and the other case settled without appellate review, these holdings create significant uncertainty. And this uncertainty affects the more than 1.8 million tax-exempt nonprofits, many if not most of which do not receive federal financial assistance through other channels and so could safely conclude these statutes do not reach them, absent these decisions. This uncertainty is also magnified by recent Trump administration assertions that nonprofits and other private entities receiving federal financial assistance must conform to that administration’s views of what constitutes illegal discrimination. This Article first considers whether the two recent decisions were correct in deciding that federal financial assistance in this context includes nonprofit tax benefits and determines that the weight of authority strongly supports the conclusion that they were not. More specifically, it reviews the relevant statutory language, existing regulatory and other administrative guidance, and court decisions and commentary addressing this issue to reach the conclusion that “Federal financial assistance” as used in Title VI, Title IX, the Rehabilitation Act and the Age Discrimination Act does not include the exemption from federal income tax enjoyed by most nonprofits and, for charities, the eligibility to receive tax-deductible contributions. This Article also considers the contrary arguments asserted by courts and commentators and explains why none of those arguments are persuasive. This conclusion does not end the matter, however, as those same arguments suggest that Congress should expand the reach of these anti-discrimination statutes to include nonprofits that enjoy federal tax benefits, to the extent Congress can do so within its constitutional authority. While Congress’s spending power does not support such an expansion, its taxing power could do so if Congress chose to make compliance with these statutes a condition for receiving those tax benefits. Adding such a condition would not subject affected nonprofits to the procedural and penalty provisions of those statutes, but it would mean an otherwise eligible nonprofit that violated the substantive requirements of these statutes would no longer qualify for those tax benefits and could, if Congress chose, face other tax-related burdens. But while Congress could exercise its taxing power to condition nonprofit tax benefits on compliance with these anti-discrimination statutes, it should not do so for several reasons. First, the likely harm to the pluralism of the nonprofit sector outweighs the benefits of requiring tax-exempt nonprofits to comply with these statutes. Second, engaging in the discrimination prohibited by these statutes does not undermine the public-benefiting nature that federal tax law requires for tax-exempt charities to enjoy their tax benefits given the freedom Congress has provided to charities to define public benefit in this context. Third, the administrative burden of such a condition on both tax-exempt organizations and the now depleted IRS would be substantial and, for some smaller tax-exempt organizations, overwhelming.
In Connelly v. United States, the Supreme Court resolved a long-standing dispute over how to treat redemption obligations when valuing a decedent’s shares in a closely held company. The Court held that redemption obligations do not offset corporate-owned life insurance proceeds obtained to fund a redemption, upsetting a long-standing practice. While the Court undoubtedly reached the right conclusion, it (1) failed to address important arguments the parties and amici raised; (2) assumed away the effects of discounts, premiums and different valuation techniques, which would have complicated the analysis without changing the conclusion; and (3) muddied the water somewhat by leaving open the possibility of a different outcome where companies use operating assets to fund a redemption. This Article lays out the various authorities that bear on this question, sets forth additional grounds supporting the Court’s conclusion, including the arguments the Court sidestepped, addresses the complexities avoided by using a simple hypothetical and explains why the reasoning applies equally to situations where operating assets are used to fund a redemption. Finally, the Article identifies different ways taxpayers can use insurance to fund redemptions while avoiding the results in Connelly.
State Tax Discrimination and Internal Consistency
The contours of the U.S. Supreme Court’s dormant Commerce Clause doctrine of internal consistency, which asks whether a state tax intrinsically overreaches in imposing a burden upon interstate commerce, are difficult to understand. This is despite the fact that a determination that a state tax violates internal consistency can have significant state fiscal consequences. This uncertainty was suggested again by the recent case, Zilka v. Tax Review Board City of Philadelphia, for which the Supreme Court later denied certiorari. See 304 A.3d 1153 (Pa. 2023), cert. denied, 145 S. Ct. 1045 (2025). The parameters of the internal consistency doctrine should not be so obscure. The doctrine would be more logical and understandable if it were primarily utilized, not as a stand-alone test, but as a tool to evaluate state tax discrimination, i.e., whether a state has impermissibly sought to favor local businesses over businesses based in other states. This Article explains how this approach would be more firmly grounded in the Court’s current approach to the dormant Commerce Clause and, for example, would be consistent with the Court’s “undue burden” balancing inquiry as recently reconsidered in National Pork Producers Council v. Ross, 143 S. Ct. 1142 (2023). This Article also sets forth how this analysis would comport with the Supreme Court’s prior internal consistency cases, including Comptroller of the Treasury of Maryland v. Wynne, 575 U.S. 542 (2015), and recent state court cases applying the internal consistency test.
The Chilling Effect of SFFA v. UNC/Harvard on Race-Based Affirmation by Tax-Exempt Charities
Recently, the Supreme Court decided in SFFA v. Harvard/UNC that colleges are restricted in their use of race-based affirmative action in admissions. Post-SFFA, many have incorrectly suggested that this means that race may never be considered in admissions. This Article asserts that this expansive view of SFFA is incorrect and leads to a chilling effect on affirmative action by colleges. However, instead of simply asserting that SFFA permits some considerations of race in admissions, the Article goes further by arguing that SFFA does not even apply to admissions by some private colleges. For instance, private colleges that are recipients of federal financial assistance (FFA) must abide by SFFA because of Title VI, which is essentially synonymous with the Equal Protection Clause. But what if a private tax-exempt actor decided to forgo FFA? Could such private actor then lawfully use race-based affirmation action in light of SFFA? The Article concludes that, even after SFFA, colleges may continue to consider race in admissions to a limited extent. Further, private tax-exempt charities that don’t receive FFA are not subject to SFFA’s restrictions. Thus, private charities may use race-based affirmative action in admissions—even if such use goes beyond what’s permitted by SFFA.
By its own account, the federal government spends more than $500 billion every year to subsidize retirement savings in 401(k) plans, IRAs and similar arrangements. That figure is larger than the annual budget of every government agency other than the four largest. The theory behind this massive subsidy is that it gives workers at all income levels an incentive to save money that they would otherwise spend, thereby enhancing retirement security, reducing old-age poverty and easing dependence on Social Security. But the theory is wrong. The retirement tax subsidy is anything but egalitarian. Less than five percent of the subsidy goes to households in the bottom 40 percent of the income distribution scale, and more than 60 percent goes to households in the top 20 percent. And among higher-income households, the subsidy generally does not encourage saving. Instead, the affluent respond to the subsidy primarily by moving assets from taxable investment accounts to tax-exempt retirement accounts. In short, the federal government spends more than half a trillion dollars every year to provide windfalls to higher-income households with little meaningful increase in retirement security for lower-income and middle-income households. It is time to acknowledge that the retirement tax subsidy is a tax shelter, nothing more and nothing less, and to reset tax policy accordingly.
The OECD has spent the last fifteen years working on the design and implementation of rules for the taxation of income derived from international transactions, rules that are supposed to both increase corporate tax revenues and minimize “destructive” tax competition. Pillar Two, the second part of the two-part “Inclusive Framework,” was released in July of 2021. It is designed to force countries to impose a minimum tax on income derived by large multinational enterprises. Pillar Two–compliant taxes have been enacted by most of the countries in the European Union, Japan, South Korea and other economically important countries, but not by the United States. Reacting to President Trump’s continued opposition to Pillar Two and the threatened imposition of a retaliatory tax on investors from countries imposing certain elements of the minimum tax regime on U.S. investors, the OECD agreed to exempt U.S.-parented groups from parts of the Pillar Two regime, and instead allow U.S. domestic minimum tax rules to exist on a “side-by-side” basis. However, this concession will not eliminate the economic incentive for the United States to conform many of its tax rules to fit the Pillar Two template. As this Article explains, such conformity could actually advance the President’s and Congress’s nationalist economic and political agenda because in many respects Pillar Two is a “paper tiger.” It leaves plentiful opportunities for countries including the United States to engage in tax and economic competition.
This Article examines whether Article 12 of the OECD Model Tax Convention should be redrafted to tax royalties where value is created in an increasingly IP-driven and digitalized economy. It traces the historical evolution and current structure of royalty provisions in the OECD, U.N. and U.S. Model Conventions, highlighting inconsistencies between formal source rules and the underlying economics of royalty income. Building on an economic concept of value creation, the Article argues that royalties are best understood as active, business-related income generated through research and development, IP protection and market exploitation across multiple jurisdictions. It then proposes a reallocation of taxing rights—through an expanded permanent establishment nexus and, ultimately, a move toward formulary apportionment—to better reflect countries’ contributions to the royalty value chain.
Nearly 40 years ago I wrote Interest in Disguise: Taxing the Time Value of Money. The article showed that if the party’s marginal tax rate is constant, since the present value of the amount included or deducted may not change, deferral (or acceleration) of income or expense does not necessarily affect the tax impact. However, there seems to be surprisingly little recognition of the widespread impact of the insight that the timing of income and deductions may not affect value. There are several academic proposals suggesting that recognition of present value equivalence can improve understanding of the impact of the tax law and might lead to better ways to measure income that may be more administrable or less controversial. These include such disparate issues as depreciation deductions, achieving uniform taxation of corporate and partnership income, comparison of the impact of gift and estate tax and the determination that income tax exemption for fees received by a non-profit for goods or services can, nevertheless, correctly measure income. However, as far as I am aware, there is little or no research in this area. Further, only in very limited situations has Congress or the IRS relied on present value equivalence to achieve their desired result. Moreover, the effect of present value equivalence is poorly understood. For example, for Roth IRAs to be truly equivalent to traditional IRAs, as it is often claimed, the minimum distribution requirement must apply equally to both. The essential purpose of requiring distributions is to limit the advantage of continued tax exemption for the plan’s earnings, not to prevent delay in the taxation of the distribution. Importantly I have only very recently understood that despite deferral of unrealized gains, the return to basis remains fully taxed unless there is a basis step-up at death or a charitable contribution. Only the return to the reinvestment of the untaxed appreciation is benefited by deferral. The tax, which is now due on sale, can instead be collected over time by an annual tax on the return to basis. If we are able to do so, we could eliminate the step-up in basis at death without a tax at death while otherwise retaining the benefit of deferral. Time Value also showed that the key to whether deferral was advantageous is often the effective tax rate on investment income, which in some situations can be exempt from tax. This Article clarifies the conditions, which are now often ignored, or at least not emphasized, for investment income to be exempt under an income tax as compared to a consumption tax. It also offers a more detailed description of when a surrogate tax on the counterparty is likely to occur. The goal of this Article is to increase understanding of the potential impact of present value equivalence. My hope is that consolidating what I have learned over the last 40 years in one place will increase understanding of these ideas and thereby stimulate interest in the possible additional use of present value equivalence to better measure taxable income.
Congress, long divided, has been in gridlock for decades. The result has been regulatory ossification. Existing statutes lack the flexibility to manage the country’s many technological, social, environmental, sectoral and market challenges. However, without a Senate supermajority vote to override the filibuster, new legislation fails. While the budget reconciliation process has provided one of the few pathways around the filibuster, that process is limited to budgetary outlays and revenue measures. Consequently, a “tax trench” has been worn from Congress repeatedly pushing major regulatory and public benefits legislation through the process as tax provisions. Now, the tax trench is set to deepen. Following a spate of cases decided in 2024, the U.S. Supreme Court has placed a series of checks on federal regulatory authority, discretion and enforcement capacity. In Loper Bright Enterprises v. Raimondo, the Court overturned Chevron U.S.A. Inc. v. National Resources Defense Council, Inc., holding that the courts must interpret regulations pursuant to the standards set forth in the Administrative Procedure Act, rather than deferring to executive branch expertise. In Corner Post v. Board of Governors of the Federal Reserve System, the Court held that the statute of limitations under the Administrative Procedure Act begins tolling when the plaintiff faces an injury, effectively eliminating the time-bar for claims that an administrative agency has exceeded its authority in setting regulations, and possibly a broader swath of challenges. In Securities & Exchange Commission v. Jarkesy, the Court held that defendants are entitled to a jury trial before an Article III court when administrative agencies seek to enforce civil damage claims that are “legal in nature.” Nevertheless, tax legislation continues to provide a pathway through this gauntlet of new hazards. This Article makes three contributions. First, it reviews the foregoing cases and their impacts on existing regulation: limits to executive branch interpretive authority, uncertainty within the administrative process and impediments to enforcement. Second, it identifies, within each of the recent U.S. Supreme Court cases that have curtailed administrative authority, certain tax exceptions to these limits. Finally, it argues that these tax exceptions may permit regulatory action or public benefits in the form of tax legislation to pass scrutiny.
The Supreme Court’s decision in Loper Bright Enterprises. v. Raimondo overturned Chevron deference. In doing so, Loper Bright loosed chaos into many areas of administrative law, including tax. Indeed, the majority opinion in Loper Bright undid Chevron but left open the question of what the actual standard of review is, namely, whether it is de novo or Skidmore applies. Tax too will suffer some of the chaos, especially as courts work out the matters. But both the positive citation in the opinion of Skidmore along with some of the language supporting long-standing regulations that are contemporaneously promulgated with the statute’s enactment will help, intimating a slight revival of the old National Muffler test. Additionally, some of the discussions on giving agencies more leeway on delegated matters should also help in the tax area. Furthermore, given the messy and technical nature of tax law, many judges may be willing to allow the IRS’s and Treasury’s interpretations to stay in place unless a hot-button political matter is involved. But expect there to be major fights. One area where we could see some of these matters play out is in transfer pricing, which is a huge and complicated regulatory area. Treasury’s moves toward things like formulary appointment and away from the arm’s-length standard will likely get struck down as ultra vires. In the end, while Loper Bright creates significant chaos now, some of it will eventually wane. And in the end while there will be some stability restored and generally a decent range given to the agencies, expect some bumpiness in the coming years.
The Decline of Chevron, the Rise of Loper Bright and the Shifting Sands of Tax Law
The repeal of the Chevron deference doctrine has triggered what some may argue is a seismic shift in how tax law may be interpreted and applied, which may have far-reaching implications for taxpayers, the Internal Revenue Service and the federal government. This Article examines the evolving landscape of U.S. federal tax law in the wake of the Loper Bright decision, specifically focusing on the tax and economic consequences for key tax areas such as the General Anti-Abuse Rule and the complicated foreign tax credit and transfer pricing regimes, as well as the rules that characterize financial instruments or equity investments and the technical measurement and accrual of interest and OID rules. By removing the automatic deference previously afforded to the federal agencies in general and the IRS in taxation, courts may now be open to take a far more active role in interpreting ambiguous tax statutes, which could introduce further uncertainty on one hand, but also perhaps new opportunities for taxpayers. This Article argues that the repeal of Chevron deference could potentially result in inconsistent rulings, heightened litigation and a redefined balance of power between the judiciary and regulatory agencies. As the U.S. administrative legal system enters this new era, the U.S. federal tax system may follow, and all parties involved must navigate an increasingly unpredictable legal environment, with long-term consequences for innovation, compliance and tax strategy.
Have Your Cake and Eat It Too, Using Apportionment to Preserve Congress's Tax Power
The Constitution provides Congress with extremely broad taxing power, and the Supreme Court has recognized that this power is “virtually without limitation.” As budget deficits and income inequality in the United States increase, policymakers are examining options to tax wealth, either through a wealth tax or through taxes on untaxed capital gains. Opponents of these measures have turned to the apportionment requirement in the Constitution and argued that these taxes are not “income taxes” and instead are “direct taxes” that must be apportioned among the states. They further argue that since these taxes cannot be apportioned fairly, any wealth tax or tax on untaxed capital gains would be unconstitutional. This Article argues that contrary to common beliefs that apportioning a tax is realistically impossible, Congress could pass a direct tax and then apportion the tax among the states. In modern times, Congress can design a system to apportion taxes that is both administrable and fair. Recognizing that apportionment is possible, though in some cases complicated, preserves Congress’s taxing power and allows Congress to debate the actual merits of a particular tax policy.
Foreword to Volume 28, Number 2 of Florida Tax Review.
Moore v. United States was expected to rule on the constitutional necessity of the tax-law realization requirement originating from Eisner v. Macomber, a potential impediment to progressive tax reform efforts aimed at shutting down the planning techniques of Buy Borrow Die. The various opinions in Moore, however, provided no definitive answer to this core question, instead leaving many more questions. Amid the lingering uncertainty, we argue that various responses to the problem of wealthy Americans’ not needing to pay any taxes remain possible after Moore. An incremental, “mix-and-match” approach to progressive tax reform may best suit the problem and the times.
The Supreme Court’s decision in Moore v. United States avoided enshrining realization as a constitutional requirement for taxing income. But four Justices were in favor of doing so, and the majority opinion explicitly avoided deciding the issue. Thus, it is quite plausible to imagine that a future case would garner five votes in favor of constitutionalizing realization. This Article addresses the question whether Congress can do anything preemptively to contain the “blast radius” of such an explosive decision and limit the ensuing “fiscal calamity.”
Charles and Kathleen Moore and the Coming Tax Armageddon
The Supreme Court decided last term, against predictions, that U.S. shareholders could be taxed on the undistributed earnings of their foreign corporation. The Court expressly did not decide the “Armageddon question,” whether a wealth tax or mark-to-market tax would be constitutional. In the coming Armageddon, the Court needs to reverse the error in Pollock v. Farmers’ Loan & Trust Co., which said that the Constitution “prevent[s] an attack upon accumulated property by mere force of numbers.” That is exactly wrong. Apportionment of direct tax in fact was written to reach the wealth of the states using the labor of the population of a state to measure state wealth. The Founders, sitting as Justices in the early Supreme Court, held that if apportionment was not constructive, then the tax was therefore not a “direct tax” for which apportionment was required. The Pollock Court imposed its private, ideological conclusion on words it did not understand, ignorant of the history and rationale for the words. The Supreme Court retreated from its error in Pollock over the next 25 years with the legal fiction that all taxes that came before the Court were excise taxes. The Sixteenth Amendment, allowing an income tax, was in context the last nail in the coffin. Eisner v. Macomber resurrected Pollock from the dead with an inappropriately narrow definition of income, requiring that income be severed from capital. That defines a consumption tax, not an income tax. To consume bread from a loaf, one must slice, break or sever the bread from the loaf. But bread left in the loaf is fine savings, available for future consumption or for an emergency. “Income” includes both consumption and savings. When the appropriate case reaches the Supreme Court, the Court needs to reverse Pollock, and Macomber with it, to allow the Democracy to tax wealth as the Constitution was written to allow.
Reassessing Corporate Philanthropy from a Tax Perspective
U.S. corporations make and deduct charitable contributions in excess of $20 billion annually. This Article reassesses corporate philanthropy from a tax perspective, asking first whether the federal tax subsidy for corporate philanthropy is greater than the subsidy for the alternative stakeholder philanthropy, as some commentators have previously found. The answer: it depends. The relative degree of subsidy depends on corporate and individual tax rates, obviously, but also on the incidence of corporate philanthropy, i.e., who bears the cost, which is generally unclear, as well as other details, such as whether individual stakeholders itemize deductions. At current tax rates, however, any outsized subsidies for corporate philanthropy result to a large degree from the constriction in itemizing that followed from the 2017 Tax Cuts and Jobs Act). And many would view the effective restoration of individual deductions for charitable contributions as a positive feature of corporate philanthropy rather than as a bug. Moreover, from a policy perspective, corporate philanthropy provides numerous advantages over individual philanthropy that have not been discussed or emphasized in the literature. Corporate philanthropy mitigates the inequitable “upside-down” effect of the individual deduction for philanthropy that disproportionately favors charities supported by high-income taxpayers and may mitigate the windfall arising from stakeholder contributions of appreciated securities. Corporate philanthropy also is highly responsive to tax incentives, often provides utility to multiple stakeholders, and even transfers a portion of the cost of U.S. philanthropy to non-U.S. stakeholders. There is, in short, much to like about corporate philanthropy from a tax (and non-tax) policy perspective.
Towards an Understanding of Tax Complexity
The study of tax complexity has reached consensus on two things. First, complexity pervades the U.S. tax system. And second, it is not always clear what tax complexity means. Indeed, it is common practice for tax complexity scholarship to note the absence of a universal tax complexity definition and then conduct its inquiry without one. A universal definition of tax complexity has proven elusive because tax complexity means many different (although often related) things. This has made the tax policy analysis of complexity challenging. As an alternative to a definition, this Article proposes a framework with four elements for considering tax complexity—(1) an activity, (2) something that changes the ease with which that activity may be understood, (3) an effect on the person trying to understand that activity and (4) additional structure isolating the key tradeoffs and identifying what normative inputs are necessary to compare policy options. This Article demonstrates how much (if not all) of the tax complexity literature fits into this framework and how this framework may improve tax policy analysis. Ultimately, this framework facilitates clearer discussions of tax complexity and comparisons between tax systems in complex environments.
The 2017 law known as the Tax Cuts and Jobs Act (TCJA) enacted a tax on private, non-profit college and university endowments for the first time. Institutions with at least 500 tuition-paying students and endowments of $500,000 or greater per student now have to pay a 1.4% tax on their endowments. But like all taxpayers, colleges and universities may be tax averse or seek reductions in their tax burdens. That is, colleges and universities may try to avoid the tax through taking action to ensure they do not meet the threshold. Such actions include increasing the size of their student bodies, increasing student aid to ensure a small number of tuition-paying students, and spending down their endowments. Colleges may also attempt to offset taxed revenue by increasing other revenue streams. Examples of such behavior include increasing revenue from auxiliary services, admitting more “ full-pay” students who do not need financial aid, reducing financial aid for tuition-paying students (perhaps even while increasing the number of students who receive enough aid to become non-tuition paying), and admitting fewer low-income students. All of this would be economically rational behavior, but it could produce negative effects for higher-education stakeholder groups, such as students and their families. In this Article, we assess the ramifications of the TCJA’s endowment tax for college and university revenue-seeking behavior. We use a national-level dataset and a quasi-experimental statistical model known as the “Synthetic Control Method,” which is underutilized in legal research, to examine institutional behaviors in the wake of the TCJA’s passage. We find that individual institutions—such as Northwestern University, Duke University and Vassar College, among others—may have changed their admissions, enrollment and revenue-generating behaviors to reduce their overall tax burden, offset losses in revenue or avoid the tax. We suspect that this is evidence of firm behavior to game the endowment tax imposed by the TCJA.
Judges and judicial systems have become more specialized in response to increasing legal complexity. While the theoretical literature has discussed judicial specialization extensively, deliberating its pros and cons and its implications—arguably an appealing background for empirical investigation—few empirical studies have attempted to quantify the relationship between judicial specialization and case outcomes. This Article fills that lacuna. It analyzes a hand-coded dataset of tax cases in which rulings were made by both specialized tax judges and generalist judges in Israeli District Courts. Its main finding is that specialized tax judges are more inclined than generalist judges toward the Tax Authority. It also finds that women judges and judges who worked in the private sector before their nomination are more inclined toward the Tax Authority than men judges and judges who were part of the public sector before taking the bench.
This Article explores the evolving intersection of carbon offset credits, U.S. federal tax law and clean energy tax incentives, emphasizing the complexities faced by businesses in navigating these areas. As carbon offset credits gain prominence in corporate sustainability strategies, their tax treament remains ambiguous, with companies encountering varying interpretations under sections 162 and 263. The analysis in Part II suggests that carbon offset credits purchases are likely to be generally capitalized, subject to rare exceptions. This conclusion is drawn from notable legal precedents, including Welch v. Helvering, Jenkins v. Commissioner and INDOPCO v. Commissioner. These cases provide insight into how courts may approach the deductibility versus capitalization debate, including especially what constitutes "ordinary" and "necessary" expenses in the context of carbon credits. Historically, and likely in the future as well, these "reputation enhancing" expenditures constitute capital outlays designed to benefit the business ofver long periods of time. However, in an era where environmental sustainability is prioritized, not only culturally but also explicitly through the Code, outlays resembling a musician's "reputation preserving" outlay may find a "Swift exception" to traditional capitalization rules. Nevertheless, "expenses" apparently similar in nature both in domestic and foreign contexts are consistently treated as capital outlays, and carbon credits are likely no exception. The Article also examines the role of clean energy tax credits—particularly sections 45Q and 45V—in the carbon capture and hydrogen production by present challenges regarding the stacking of credits, as discussed in Part III. The prohibition on combining section 45Q and 45V credits creates strategic decision points for project developers, impacting the financial feasibility of clean energy initiatives. Finally, Part IV considers the potential shift toward a mandatory federal carbon compliance program in the United States, highlighting the increasing importance of accurate tax reporting and strategic planning. As federal policies continue to evolve, businesses must align their tax strategies with broader environmental and corporate governance goals to navigate this dynamic and challenging landscape effectively.
Reviving the Value Creation Principle in International Taxation
This Article aims to clarify the value creation principle and its role in shaping international tax policy that aligns taxation with the location of economic activity. It examines recent developments in international taxation, including aligning taxation with the place of substance, taxing “excess returns” and allocating taxing rights to market jurisdictions, each addressing different aspects of value creation. The Article advocates for a balanced profit allocation method that considers both supply-side and demand-side factors, offering a comprehensive approach to developing a fair and effective international tax framework.
Reforming Business Taxation by Introducing a Resident Owner-Based Business Income Tax (ROBIT)
Fighting corporate tax avoidance is not a suitable method to save the integrity of the corporate tax. Rather, more fundamental reform is needed focusing on taxing the individual shareholders at residence. For this purpose, this Article proposes a resident owner-based business income tax (ROBIT). The ROBIT retains taxation at the entity level but provides for reduced flat tax rates for all business enterprises, taxation only of the rent by introducing an ACE regime, and exemption of inter-company dividends. At the level of the individual shareholder, dividends and capital gains are taxed as ordinary income. Integration takes place via an imputation system for domestic taxes and (short of reciprocity) deduction of foreign taxes or alternatively through a withholding tax on dividends and capital gains. To curtail deferral, capital gains are taxed by charging interest for the holding period until realization for nontraded assets and for traded assets by taxing them on a mark-to-market basis. Some additional measures are also proposed especially referring to the residence taxation of individuals. By earmarking the revenue from the enactment of the ROBIT to redistributive purposes, reform can happen and will be sustainable. Support can also come from corporate managers if windfalls for existing shareholders are avoided through phased-in reform. The ROBIT will attract and boost investment and all the positive externalities that it brings. Some emigration of individuals as a reaction is possible, but it can be addressed by regional cooperation which is easier as regards individual taxation. Finally, the ROBIT is superior compared to other proposals for corporate tax reform, especially destination-based corporate tax proposals.
The Association Between Fairness and Judicial Decision-Making
Empirical literature on judicial decision-making has not yet considered the association between the normative value of fairness and judges’ decisions. Using a sample of tax cases at the Tax Court of Canada (2010–2019) containing 4,420 disputes, we investigate whether a litigant is significantly more likely to obtain a favorable outcome if there is a reference to fairness in the court judgment. Compared to disputes without a mention of fairness in the court judgment, disputes with any mention of fairness have a 51% greater likelihood of a successful outcome. Notably, even when a court judgment mentions fairness not clearly in favor of the taxpayer, taxpayers are still 28% more likely to obtain a successful outcome than taxpayers without a mention of fairness. Together, these findings show that fairness is strongly associated with judicial outcomes and suggest that fairness considerations may influence judges. Furthermore, analysis of the subsample with fairness references reveals that two dimensions of fairness significantly and positively affect the likelihood of a taxpayer winning a tax dispute (procedural fairness and interpretive fairness), and one dimension of fairness significantly and negatively affects the likelihood of a taxpayer winning a tax dispute (outcome fairness). These results show the contextual and normative importance of fairness.
This Article reports the results of a new survey of 726 U.S. adults designed to gauge people’s intuitions about tax law. Survey respondents consider several scenarios. In each scenario, the survey describes two ways that parties to a transaction can achieve their non-tax objectives. The two available routes are equivalent from a non-tax perspective. The survey asks respondents to provide their best guess about whether the two routes will produce the same or different U.S. federal income tax consequences. The survey asks respondents to rate on a five-point scale how confident they are that their answer is correct and to explain why they select their chosen response. They are also asked whether, in their opinion, the options should receive the same or different tax treatment, and they are asked to rate the strength of their opinion on a five-point scale. In general, this study’s results show that many respondents harbor form-driven intuitions about tax law. That is, they expect the form of a transaction will dictate its tax outcome. The results point to what may be a side effect of tax law’s failures—in some contexts—to appropriately tax transactions and its tendency to benefit the well-advised. In particular, non-experts expect tax law to contain “loopholes” even in cases when it does not. The results demonstrate the propensity of tax law to trap unwary taxpayers, in that, in many scenarios, respondents’ best guesses about tax outcome diverge from actual law. The results underscore the need to clearly prompt taxpayers when reporting of non-cash income is required and suggest that, absent such prompting, lack of compliance may be attributable not just to willful evasion but also to a failure to understand what tax law requires. The results reveal information about perceptions of the (un)fairness and complexity of tax law. Finally, the results offer one additional justification for closing actual tax “loopholes”—the prospect that doing so might exorcise phantom ones.
The Impact of SEC v. Jarkesy on Civil Tax Fraud Penalties
On June 27, 2024, the U.S. Supreme Court issued its decision in Securities and Exchange Commission v. Jarkesy. It held that when the SEC sought a $300,000 civil penalty against Mr. Jarkesy for securities fraud, the Seventh Amendment entitled him to a jury trial in an Article III court. The week before, the Tax Court, an Article I court, issued a decision upholding the IRS’s imposition of a $6.3 million civil penalty against a taxpayer for tax fraud. No jury was available. That has been true since 1862: no jury has ever been available to taxpayers facing fraud penalties, unless they pay first. This Article considers whether Jarkesy now requires adjudication of civil tax fraud penalties in an Article III court with access to a jury. That question is more nuanced than it might first appear. The answer depends on how one balances government administrative needs against individual liberty interests. Jarkesy inverts prior teachings on how courts should perform that balancing. The Article first reviews why courts have found the pay-first structure of tax administration constitutional. That case law, however, mostly involves collection of taxes, not penalties. It then considers whether the result in Jarkesy, the logic by which it reached that result, and recent changes in tax administration together open a plausible path for a different conclusion as to the imposition of tax fraud penalties.
Global tax hubs are the black boxes of the international tax regime (ITR). The driving forces of their strategic interaction with other building blocks of the ITR remain undertheorized. This Article offers the first theory of tax hubs as a two-sided global marketplace. It argues that tax hubs are the matchmakers of the ITR. Indeed, international investors, tax hubs and endpoint jurisdictions play different yet interrelated roles within the same ecosystem, i.e., the two-sided platform. The theory is positive rather than normative. It aims to explain how the creeping marketization of the ITR, as part of international law, has been frequently instrumented worldwide over the last century. The Article provides a stress test to the theory’s explanatory power and its limitations. Antitrust law and economic concepts form the conceptual framework of this piece.
Review of: Wei Cui, The Administrative Foundations of the Chinese Fiscal State. Cambridge University Press, 2022. Pp. xiv, 288.
The Role of Marriage in the Internal Revenue Code
This Article offers a new descriptive account of the role of marriage in the federal tax system. It first outlines an economic frame that explains both why marriage is economically valuable—marriage produces large amounts of untaxed surplus—and why its legal structure is as it is—drawing on both Coase and the theory of numerus clausus. The Article then suggests that most federal tax rules that turn on marriage can be understood as solutions to one of two interrelated problems: “entanglement” and “relative indifference.” By “entanglement,” I refer to the fact that the daily activities of spouses are commonly so intertwined as to make standard rules for their taxation impossible to apply, even if we wanted to. By “relative indifference,” I refer to the fact that entangled spouses often do not care who owns what, owes what, earns what or pays what to the degree they would if they were not interpersonally committed. As a result, they are often able to engage in tax avoidance behaviors that atomistically motivated actors would find unattractive.
Wealthy parents have found an ingenious way to magnify their children’s assets without paying gift tax. Rather than transfer assets to the children directly, a parent may encourage her children (or trusts for the children’s benefit) to borrow funds as needed to make investments. The parent stands behind that debt by making a personal guarantee, assuring the lender of repayment and thereby allowing the children to borrow and invest far more than they otherwise could. The Internal Revenue Service clearly believes that such guarantees should be treated as gifts but has hesitated to press that position or develop a framework for doing so. This Article provides that framework, drawing on analogous corporate tax cases to show the way. For gift tax purposes, when a person guarantees a loan to a related party, the loan would be recharacterized as a loan from the lender to the guarantor, followed by a second loan on the same terms from the guarantor to the ultimate borrower. Each loan would then be tested under existing doctrines to see whether it should be respected as debt. In most cases, the second deemed loan (from the guarantor to the ultimate borrower) would not be respected as debt, because the ultimate borrower lacks the income or resources to justify the extension of credit. As a result, the second deemed loan would be recharacterized as a gift to the ultimate borrower rather than a loan. This framework would severely curtail the use of guarantees to grow dynastic wealth.